& S ERVICE T RADE LIBERALIZATION Editors Aaditya Mattoo * Pierre Sauve +s-.*{ *X- - -26977 August 2003 |~~~~~~~~. '.. 4: 4 1 ::. ;7* , .. ; .- I,;' i. . C ........................... , X b wz t .,< r-q. r >~~~~~~~-.,.d v~ ~ " -'Y -, .. , *T,,_ , + s ._ <~~~~~~~~~~~~~~~~~~~~~~~~~~~~, . ,,* i I I DOMEESTIC REGULATION AND SERVICE TRADE LIBERALIZATION I I i I i i i DOMESTIC REGULATION AND SERVICE TRADE LIBERALIZATION Aaditya Mattoo and Pierre Sauve, Editors A copublication of the World Bank and Oxford University Press © 2003 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org All rights reserved. 1 2 3 4 5 06 05 04 03 A copublication of the World Bank and Oxford University Press. The findings, interpretations, and conclusions expressed here are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank cannot guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply on the part of the World Bank any judgment of the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is copyrighted. No part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or inclusion in any information storage and retrieval system, without the prior written permission of the World Bank. The World Bank encourages dissemination of its work and will normally grant permission promptly. For permission to photocopy or reprint, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750- 8400, fax 978-750-4470, www.copyright.com. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street NW, Washington, DC 20433, fax 202-522-2422, e-mail pubrights@worldbank.org. Library of Congress Cataloging-in-Publication Data has been applied for. Cover artwork done by Karine Anglade. ISBN 0-8213-5408-6 CONTENTS PART I INTRODUCTION 1. Domestic Regulation and Trade in Services: Key Issues 1 Aaditya Mattoo Pierre Sauve PART II HORIZONTAL PERSPECTIVES 2. Transparency in Domestic Regulation: Practices and Possibilities 7 Keiya Iida Julia Nielson 3. Addressing Regulatory Divergence through International Standards: 27 Financial Services Joel P. Trachtman 4. Regulatory Discrimination in Domestic United States Law: 43 A Model for the GATS? David W Leebron 5. Lessons for the GATS from Existing WTO Rules on Domestic Regulation 57 Joel P Trachtman vi Domestic Regulation and Service Trade Liberalization PART III SECTORAL PERSPECTIVES 6. Domestic Regulation and Trade in Telecommunications Services: Experience 83 and Prospects under the GATS Daniel Roseman 7. GATS Regulatory Disciplines Meet Global Public Goods: 109 The Case of Transportation Services Richard Janda 8. Regulatory Reform and Trade Liberalization in Financial Services 129 Stijn Claessens 9. Regulatory Reform and Trade Liberalization in Accountancy Services 147 Claude Trolliet John Hegarty 10. Strengthening WTO Member Commitments in Energy Services: 167 Problems and Prospects Peter C. Evans 11. Regulation of Health Services and International Trade Law 191 David Luff PART IV LOOKING AHEAD: THE GATS WORK PROGRAM 12. Domestic Regulation and Trade in Services: Looking Ahead 221 Aaditya Mattoo Pierre Sauve Authors and Their Affiliations 231 Index 233 ACKNOWLEDGMENTS We would like to thank the British government's This volume benefited greatly from the insight- Department for International Development, the ful comments of the discussants at the conference. Organisation for Economic Co-operation and Their contributions could unfortunately not be Development, and the World Bank for their gener- included in this volume for reasons of space but ous financial and administrative support. We are can be accessed through the OECD website. Our grateful to Anders Ahlind, Dale Andrews, David profound thanks are due to Johannes Bernabe, Hartridge, Ken Heydon, Bernard Hoekman, and Roberto Bosch, Thomas Chan, Elbey Borrero Del- Abdel-Hamid Mamdouh for their guidance on dif- gado, Ambassador Torbjorn Froysnes, Scott Gal- ferent aspects of the project. Kamal Saggi and Mau- lacher, Ulriche Hauer, Ambassador Alejandro Jara, rice Schiff provided valuable comments on the Hugo Cayrus Maurin, Malcolm McKinnon, Jan- manuscript. Julia Nielson made numerous contri- Peter Mout, Jose F. Poblano, Vincent Sachetti, butions and played a central role in organizing the Sebastian Saez, Sergio Rodrigues dos Santos, conference in March 2002 where the papers were Andrea Spear, and Pimchanok Vonkhorporn. first presented. Ann Katoh set up and managed the conference website with remarkable efficiency. Thanks are due to Susan Graham for being a superb production editor and Santiago Pombo- Aaditya Mattoo Bejarano for his wise guidance on the publication Pierre Sauve process. June 18, 2003 I i i Ii i I DOMESTIC REGULATION AND TRADE IN SERVICES: KEY ISSUES Aaditya Mattoo Pierre Sauve Background The General Agreement on Trade in Services Trade in services, far more than trade in goods, is (GATS) explicitly recognizes "the right of Members affected by a variety of domestic regulations, rang- to regulate, and to introduce new regulations on, ing from qualification and licensing requirements the supply of services within their territories in and procedures in professional services, procom- order to meet national policy objectives and, given petitive regulation in telecommunications, and asymmetries existing with respect to the degree of other network services, to universal access require- development of services regulations in different ments in health and education services. The quality countries, the particular need of developing coun- of regulation may strongly influence the social and tries to exercise this right." Despite such language economic effects of trade and investment liberal- and the deference to regulatory autonomy and ization, as the recent experience in financial ser- national preferences embedded in it, the interface vices so clearly demonstrated. between domestic regulation and trade and invest- Members of the World Trade Organization ment liberalization in services has spawned a lively (WTO) have agreed that a central task in the ongo- public policy debate, particularly in developed ing set of services negotiations will be to further countries. develop rules to ensure that domestic regulations The progressive liberalization, not deregulation, support rather than impede the opening of services of services trade is the goal of the GATS. A common markets to trade and investment. Because these misunderstanding in the public policy debate over rules are bound to have a significant effect on the the GATS is use of the terms "liberalization" and evolution of domestic services policy, it is impor- "deregulation" interchangeably, as if they were syn- tant that they be conducive to economically onyms. They are not, and it is simply wrong to rational policymaking while preserving the regula- equate regulations with trade restrictions. Services tory autonomy required to pursue and achieve liberalization, indeed, often requires regulation domestic policy objectives. or re-regulation, but such regulation, whether for The authors are grateful to Anders Anhlid, Ken Heydon, and Julia Nielson for helpful comments and suggestions in drafting this chapter. 2 Domestic Regulation and Service Trade Liberalization economic or social purposes, can be designed, prove particularly helpful in progressing negotia- implemented, or enforced in more transparent and tions under the GATS. efficient ways with positive overall effects in terms The book brings together a series of papers pre- of democratic governance. sented at the Third Services Experts Meeting The principal concern linked to loss of sover- organized by the OECD Trade Directorate and eignty is the consequent loss of a nation's freedom held in Paris in the spring of 2002. Its purpose is to regulate its service sectors in the manner it deems twofold. It aims, first, to provide analytical input, appropriate. Many service sectors are highly regu- based on the considerable experience of the World lated to ensure a certain level of quality, to protect Bank and the OECD and outside experts on trade- consumers or the environment, and in the financial related regulatory issues, to the ongoing WTO services sector, to ensure a country's financial stabil- round of services negotiations. Second, it seeks to ity. Governments are understandably cautious when generate greater awareness among sectoral special- agreeing to subject themselves to common rules in ists and policymakers of the opportunities offered such areas. Such regulatory precaution is reflected in by the services negotiations to promote and con- the GATS provisions that uphold the fundamental solidate domestic policy reforms in key service right of a government to regulate in order to pursue sectors. national policy objectives. An important challenge of the ongoing services It is certainly true that, as with any other legally negotiations will be to achieve better bridge build- bound undertaking in the WTO (or any other ing and improve lines of communication among international treaty), the GATS can affect the regu- trade negotiators and the broad and diverse com- latory conduct of member countries. But countries munity of domestic regulators. The sheer novelty, accept such disciplines because they deem them near universality, and technical complexity of the necessary to reaping the full benefits from interna- GATS, coupled with the lack in most countries of tional cooperation in a rules-based system. established channels of policy dialogue and con- Commitments under the GATS to grant market sensus building between trade negotiators and access in sectors where domestic regulation plays domestic regulators, contributed to an outcome an especially important role do not entail any that saw most WTO members err on the side of changes-and certainly no compromises-to regu- regulatory precaution during the Uruguay Round. latory standards or preferences. Those commitments This was generally true both of agreed framework in force to protect the public or to achieve universal rules and of liberalization undertakings under the access (e.g., in telecommunications or water supply) GATS. The fundamental changes in technology apply regardless of the nationality of the supplier. and in approaches to regulation that have taken Governments may also choose to impose additional root in recent years in many parts of the world requirements on foreign suppliers-something they afford a more congenial setting in which to nur- typically do, for instance, in the case of professional ture constructive and forward-looking dialogue licensing in medical services. between these two policy communities. More often than not, such a dialogue will need to involve Purpose of Publishing this Book competition policy officials, as became clear dur- ing negotiations conducted in the telecommunica- This volume is the product of an ongoing collabo- tions sector after the conclusion of the Uruguay rative project between the World Bank and the Round. Organisation for Economic Co-operation and Because regulatory policy in individual services Development (OECD) Trade Directorate, and its sectors is constantly evolving, the analysis con- objective is to contribute to the nascent policy tained in this volume offers an in-depth look at the debate by mobilizing leading expertise in academic, horizontal elements of the Article VI.4 work pro- policymaking, and negotiating circles around what gram and their implications across leading service is widely seen as the most complex agenda item in sectors. Such research aims to develop training services trade today. A greater degree of common material for capacity-building purposes in the ser- understanding among key stakeholders is likely to vices field. Domestic Regulation and Trade in Services: Key Issues 3 The Article Vl.4 Work Program unduly burdensome regulations at the national level may undermine the value of market access GATSArtcle I (ometic eguatin) i prvi- mi1tments freely entered into by a WTO mem- sional in nature. A central question then is how best com to strengthen disciplines without unduly curtailing ber. Article VI.4 spells out the objectives of possible national regulatory freedom. Of related interest is new disciplines that would aim to ensure that regu- latory requirements are, among other things: the question of determining the extent to which government regulations can be based on principles a. Based on objective criteria, such as competence of economic efficiency and good governance. From and the ability to supply a service the GATS perspective, a key issue is the extent to b. No more burdensome than necessary to ensure which regulatory principles can, amidst consider- the quality of the service able sectoral diversity, be pursued through the cre- c. In the case of licensing procedures, not in them- ation of meaningful horizontal (i.e., non-sector- selves a restriction on the supply of the service. specific) disciplines. Given the importance of the regulatory dimen- Pending the possible negotiation of disciplines sion in the liberalization process, Article VI on called for in Article VI.4, GATS Article VI.5 applies domestic regulation plays a key role in the opening those objectives to any new measures that may nul- of services markets. Coupled with Article XVI on lify or impair commitments made in member market access and Article XVII on national treat- country schedules. ment, Article VI can indeed be seen as the third Recognition of the unfinished nature of existing complementary dimension of a three-pronged framework provisions on domestic regulation led approach to effective access to services markets. to sectoral experimentation after the conclusion of Whereas Article XVI primarily addresses all (i.e., the Uruguay Round. This was the case in the discriminatory and nondiscriminatory) quantita- accountancy and basic telecommunications sectors tive restrictions affecting services trade and Article where complementary disciplines were developed XVII disciplines overtly discriminatory treatment that aimed at ensuring that trade and investment of foreign services and service providers, Article VI liberalization commitments were properly under- aims to discipline more opaque forms of protection ed by proc embedded in domestic regulatory conduct. friendly regulatory environments. Article VI requires that "in sectors where specific commitments are undertaken, each Member shall ensure that all measures of general application are A D administered in a reasonable, objective and impar- The draft disciplines on accountancy, which were tial manner." The article aims to create more trans- adopted in December 1998 and are due to be inte- parent domestic regulatory decisionmaking, imple- grated into the GATS at the conclusion of the cur- mentation, and administration. There is explicit rent negotiations, would apply only to those coun- recognition of the right of service suppliers to tries that made commitments on accountancy information on regulatory and administrative deci- services. The draft disciplines do not focus on the sions and to judicial and administrative review and substantive content of qualifications in accoun- appeals processes. In both respects, the GATS tancy but seek to ensure procedural transparency in champions principles of good governance. matters of licensing and qualification. One of the Unable to complete all aspects of the incipient most important elements of the disciplines is the GATS framework before the Uruguay Round's con- creation of a necessity test, which requires that clusion, services negotiators agreed on language in measures relating to licensing, technical standards, Article VI.4 calling for further work on disciplines and qualifications be no more trade restrictive than that would help ensure that regulatory measures necessary to fulfill a legitimate public policy objec- affecting services trade are reasonable, objective, tive. With regard to standards, for instance, the dis- and impartial. Work in this area is designed to ciplines require that they be prepared, adopted, or address the fact that nontransparent, unfair, or applied only to fulfill legitimate objectives, which 4 Domestic Regulation and Service Trade Liberalization are stated to include the protection of consumers, negotiations will likely need to address. These arti- the quality of the service, professional competence, cles focus on the following topics: and the integrity of the profession. It bears noting that the list of objectives is illustrative in nature, * How best to strengthen disciplines on trans- and not closed. A key unanswered question is parency while acknowledging the administrative whether these or similar disciplines could be appli- burden of potential new disciplines, particularly cable to other professions and indeed to services for developing countries more generally. * The links between international standardization efforts and market openness, with particular emphasis on lessons arising from ongoing Telecommunications Reference Paperefotinheiacalstr efforts in the financial sector The Agreement on Basic Telecommunications, * Some of the lessons of the GATT's Technical which was concluded in February 1997 and entered Barriers to Trade and Sanitary and Phytosani- into force one year later, saw the adoption of a ref- tary Agreements and their relevance for services erence paper that WTO members were free to trade include, in whole or in part, as legally binding addi- * Lessons arising from the development and use of tional commitments in their schedules. The refer- "necessity" tests in domestic regulatory practice. ence paper features a negotiated set of regulatory principles, including competition safeguards (to The second set of articles takes a sectoral look at guard against the abuse of market power by domi- the interface between domestic regulation and nant suppliers), interconnection guarantees, trans- services trade. In commissioning these articles, parency in licensing, independence of regulators, attention was given to choosing a sample of sectors competition-neutral universal service mechanisms, that illustrate both the broad categories of ratio- and fairness in allocating scarce resources such as nales for regulatory intervention in services mar- radio spectra or rights of way. kets and the possible market access effects of such Both the accountancy and telecommunications intervention. Attention was also paid to choosing experiments raise the still unresolved question of sectors in which some of the lessons arising from the desirability and feasibility of horizontal versus the outcome of negotiations on basic telecommu- sectoral approaches to the domestic regulation/ nications or accountancy may be most germane- market access interface. Key questions confronting and indeed possibly replicable-together with sec- services negotiators today, therefore, are to what tors that received relatively less attention in the extent can focusing on the various rationales for Uruguay Round. The sectoral papers address regulatory intervention provide the basis for devel- accountancy, energy, finance, health, telecommuni- oping meaningful horizontal disciplines on domes- cations, and transportation services. The broad tic regulation under the GATS, and where may it be aims of these articles are to: necessary to take a sector-specific approach? * Identify current perceptions on optimal regula- Issues Considered in this Volume tory policy in each sector * Examine the links between domestic regulation To help address many of the challenges raised above and trade, drawing on the experiences of and to launch a lively and fruitful policy debate selected countries among many of the key stakeholders of the ongoing Assess the degree to which and the manner in set of GATS negotiations, the series of articles by which the GATS can be harnessed to promote leading international experts contained in this vol- sound regulatory conduct while promoting a ume were commissioned and/or prepared by the progressive, orderly opening of markets World Bank and the OECD Trade Directorate. The Assess the possible implications of the GATS first set of articles deals with a number of horizontal disciplines on regulation for services that have to rulemaking issues that feature prominently in the date been minimally traded and that have strong GATS Article VI.4 work program or that have a regulatory frameworks to meet public policy central regulatory dimension that future services objectives. Domestic Regulation and Trade in Services: Key Issues 5 The following lists outline a number of key pol- the reference paper negotiated in the context of icy questions that readers are encouraged to bear in the Agreement on Basic Telecommunications mind as they deepen their understanding of the services replicable in other sectors? horizontal and sectoral dimensions of the interface between domestic regulation and trade in services. Questions to promote internationally Although some questions will be more relevant for harmonized or recognized regulation: some horizontal issues or sectors than others, all of How much scope is there for eliminating regula- them represent key considerations in ensuring that tory barriers to trade and investment through the GATS promotes sound regulation in the context mutual recognition and harmonization? of trade and investment liberalization without Are weak regulatory frameworks and poor stan- impeding governments' ability to pursue national dards of service quality likely to legitimize exter- policy objectives. nal barriers to trade and investment in services? What are the links between GATS Article VI Questions to ensure that the GATS maintains (Domestic Regulation) and Article VII (Recog- governments' regulatory freedom: nition), and how can disciplines in both areas * How can the GATS rules promote regulatory best be deployed in a complementary manner? reform without unduly limiting regulatory freedom? Questions to identify the constraints on * Are there any areas of services trade in which the regulatory reform and the needs of developing GATS regulatory disciplines should not apply or countries: should be minimal? * What are the constraints on policy reform, and how do these differ according to development Questions to ensure that regulation does not levels? nullify or impair the GATS commitments: * What particular challenges does the Article VI.4 * Where do regulations create unnecessary imped- work program pose for developing countries? iments to trade? * Does the administrative burden of possible new * Is it possible to highlight broad, common char- disciplines on domestic regulation call for spe- acteristics of such impediments that could, cial and differential treatment, progressivity in in turn, inform the development of possible application, or variable geometry between WTO disciplines? members at different levels of development? Have the procompetitive regulatory disciplines Questions to ensure that sound regulation embedded in the reference paper on basic underpins trade and investment liberalization: telecommunications services helped anchor reg- * Where is improved regulation necessary for suc- ulatory reform efforts and the adoption of best cessful trade and investment liberalization? regulatory practices in developing countries? * Is it possible to identify a hierarchy of procom- Should developing countries be encouraged to petitive or market access-friendly regulatory embed internationally recognized standards in petitires orn market spacc ofmoreorless- y eg tor their regulation of services markets? What type measures? Can one speak of more or less eco- nomically or socially "efficient" forms of regula- of technical assistance may be required to this tory interventions based on their possible effects end? on trade and investment? * How should countries approach the sequencing Questions to determine the types of disciplines • Ho shold cunties pproch he squening that should be developed under Article VI.4: of regulatory reform and trade and investment liberalization? Does the need for sequencing Is the scope of potential Article VI.4 disciplines vary across sectors? too broad? * What service sectors are most likely to require Should such potential disciplines apply solely to procompetitive regulatory disciplines as a com- scheduled sectors? plement to trade and investment commitments? VWhat are the limits of multilateral rules on To what extent are the disciplines contained in domestic regulation? 6 Domestic Regulation and Service Trade Liberalization * Does compliance by subnational governments * Which of the issues discussed in the first part of raise particular difficulties? the Third Services Experts Meeting do partici- * Would strengthened levels of regulatory trans- pants see as particularly ripe for more detailed parency, including those that allow for prior analysis? comment in the development of regulation, be likely to heighten the political legitimacy of reg- Given the dearth of relevant policy research in ulatory outcomes? this complex area, and the fact that discussions of * How has the accountancy profession reacted to this policy interface are still at an early stage in the the regulatory disciplines adopted by the sector? WTO, this publication aims to generate useful Are such disciplines, including those on "neces- input for ongoing discussions under the GATS sity," generally applicable in other professions? Article VI.4 work program. It should also help fur- Could they form the basis of possible horizontal ther the goal of greater coherence in policy reform disciplines? efforts-that is, to assist countries in designing * Where is an acceptable balance likely to be domestic regulatory frameworks that fulfill found between legislative (i.e., via positive rule- national policy objectives while being complemen- making) and adjudicative (i.e., via dispute settle- tary to, informed by, and supportive of trade and ment) approaches to the interface between trade investment liberalization efforts, whether at the liberalization and domestic regulation? WTO or in regional settings. TRANSPARENCY IN DOMESTIC REGULATION: PRACTICES AND POSSIBILITIES Keiya Iida Julia Nielson Executive Summary ies and includes additional material on disciplines in regional trade agreements and practices in devel- orasparenns o isionakin g rse lad tponnth int ro oping countries. Proposals for enhancing trans- dopn,essof adm istion,akn eremento new io parency under the GATS, including via practices at duction, administration an enformeofno the national level and notifications to the World amended regulations. In both social and Trade Organization (WTO), also are further devel- terms, it plays an important role in revealing the oped The chapter features the following elements: basis for, and the full range of possible costs and benefits of regulatory decisions and their imple- Benefits and costs of transparency in domestic mentation. Regulatory transparency is also an regulation important tool in preventing unnecessary barriers Regulatory disciplines at the multilateral level to trade for both goods and services, with open * Regulatory disciplines at the regional level processes resulting in better regulation, greater Regulatory practices at the national level compliance, and ultimately greater political legiti- Options for enhancing transparency under the macy. Participation by foreign parties also may GATS. assist in disseminating international best practices and provide early warning of any trade dispute that Detailed information on provisions in WTO may arise regarding a regulation. The chapter's aim agreements and regional trade agreements, as well is to synthesize and build on earlier Organisation as practices at the national level in both OECD and for Economic Co-operation and Development selected developing economies, can be found at (OECD) Trade Directorate studies of transparency www.oecd.org/ech. in domestic regulation (see TD/TC/WP[99]43/ FINAL and TD/TC/[2000]31/FINAL, available at www.oecd.org/ech) with a view to identifying good W T M regulatory practices and options for enhancing Transparency is an essential component in the transparency under the General Agreement on openness of decisionmaking related to the intro- Trade in Services (GATS). The chapter both draws duction, administration, and enforcement of new together a range of information from previous stud- or amended regulations. Regulatory transparency is 7 8 Domestic Regulation and Service Trade Liberalization an important tool in preventing unnecessary barri- and returns on their investment or commercial ers to trade for both goods and services. The cost presence; and (d) time and flexibility to adjust to and complexity of delivering services across bor- potential changes in regulation. Transparency also ders or of establishing commercial presence in a helps reveal hidden discrimination that can arise market underscore the importance of regulatory from administrative rules and procedures estab- transparency for trade in services. lished by the regulatory authorities. Transparency Transparency in regulation is not static, but enables foreign firms to find out whether these rather is part of the dynamic process of regulatory rules and procedures deviate from the founding, or policymaking. In both social and economic terms, it enabling, legislation. Because transparency permits plays an important role in revealing the basis for business and other parts of civil society to be better regulatory decisions and their implementation, and informed about such discretion, it creates addi- their full range of possible costs and benefits. Regu- tional incentives for bureaucrats to establish them latory transparency is conducive to both more fair within the mandate of legislation. Finally, regula- and more effective governance, improving public tory transparency makes it more difficult for regu- confidence in governmental and regulatory per- lators to be captured by regulated firms, which formance, and to economic efficiency, helping to helps protect the independence and autonomy that remove distortions that might otherwise undermine regulators need to do their jobs effectively. domestic policy objectives. For trade policy, trans- Transparency in applying regulations also parency in domestic regulation is a crucial tool in enhances predictability and accountability in the making policymakers, business, and civil society implementation of trade-related regulation. Although aware of the need for regulatory reform and trade the focus tends to be on rulemaking, enhanced trans- and investment liberalization, and the full range of parency (and thus predictability and accountability) their social and economic costs and benefits. in applying regulations would considerably facilitate In addition, transparency and openness in deci- trade in services by reducing unnecessarily burden- sionmaking are essential parts of public governance some administrative processes (e.g., in licensing in any democratic setting. Lack of transparency processes, procedures for administrative actions and reduces the information available to interested par- decisions, and review mechanisms for administrative ties and undermines their ability to participate decisions). meaningfully in policy processes (see Stiglitz 1999). The participation of various interests through open processes can lead regulatory authorities to reflect MD ltilsterl Le te carefully on the full range of alternatives before introducing or modifying regulations, and that This section of the chapter surveys existing regula- results in better regulation, greater compliance, and tory disciplines in the various World Trade Organi- ultimately greater political legitimacy. If foreign zation (WTO) agreements with a view to providing parties also have opportunities to be informed and the basis for discussion on possible enhancement of to participate, they may play a role in disseminating transparency disciplines under the GATS. Details of international best practices for achieving policy the provisions in each agreement can be found at objectives and in providing an early warning sys- www.oecd.org/ech. tem for trade disputes that may arise with respect to Different terms describing regulations are found new or modified regulations. across the WTO agreements-laws, decrees, regula- Furthermore, transparent trade-related domes- tions, procedures, requirements, administrative tic regulatory processes provide firms with more guidelines, administrative ruling of general appli- predictable conditions in foreign markets. When cations, administrative proceedings, decisions, or trade-related regulatory decisionmaking is trans- actions. To avoid any confusion and enable consis- parent, foreign firms are able to gain (a) informa- tent usage in this chapter, we use "legislative mea- tion on the conditions and constraints they will sures" when referring to laws to be finally enacted encounter in a market; (b) information on the by the legislative branch and "subordinate meas- measures they could take to comply with regulatory ures" when referring to decrees, regulations, proce- requirements; (c) a more accurate picture of costs dures, requirements, administrative guidelines, and Transparency in Domestic Regulation: Practices and Possibilities 9 administrative rulings of general application estab- "Members shall endeavour to provide an opportu- lished by regulatory authorities in the executive nity for comment, and give consideration to such branch within the legislative mandate. "Adminis- comments, before adoption") and the disciplines trative decisions" refers to any administrative pro- have not yet entered into force (they are expected to ceedings, decisions, or actions by regulatory come into force at the end of the current negotia- authorities in the executive branch within the leg- tions). The disciplines also require members to islative mandate. Although these distinctions are inform another member, upon request, of the useful, they should be approached with some cau- rationale behind measures in the accountancy sec- tion, given that these categories could vary among tor, in relation to legitimate objectives as referred to WTO members to reflect their differing legal and in paragraph 2 of the disciplines. These procedures constitutional systems. It also should be recalled in the TBT and SPS Agreements, the GATS, and the that the Reference Paper on Basic Telecommunica- accountancy disciplines are only required for mea- tions covers transparency on measures taken by sures that significantly affect trade. In summary, nongovernmental entities. three possible arrangements are identified in these The General Agreement on Tariffs and Trade agreements: (a) notification procedures through (GATT) and the GATS already require members to the WTO secretariat, (b) information exchanges publish legislative and subordinate measures before upon request by members, and (c) prior consulta- they are enforced. Disciplines in the GATT are tion as a domestic procedure. more specific than in the GATS, requiring that Regarding disciplines on administrative deci- measures be published promptly in a manner that sions, all agreements require uniform, impartial, enables relevant parties to become acquainted with and reasonable administration, an opportunity to them. Similarly the Sanitary and Phytosanitary appeal, and a review mechanism, with the degree of (SPS) Agreement specifically mentions a "reason- specificity varying among agreements. The GATS able interval" between the publication of a measure already incorporates some higher standard disci- and its entry into force, with consideration given to plines for "authorisation required for the supply of the difficulty developing countries may experience service," such as obligations to inform applicants of in adapting their products to the requirements of the decision concerning the application within a the importing members. reasonable period of time and to provide informa- Notification and comment procedures via noti- tion concerning the status of the application. fications to the WTO are found in both the Techni- Enhanced requirements are found in the TBT cal Barriers to Trade (TBT) and SPS Agreements, and SPS Agreements and the Disciplines for the with exceptions for emergency situations. Notifica- Accountancy Sector. These include (a) publishing tions should include a brief indication of the objec- the standard process period (TBT, SPS) or inform- tive of and the rationale behind the regulation. ing the applicant of the decision within, in princi- Notification and comment procedures are trig- ple, 120 days (Accountancy); (b) giving notice of gered when a technical regulation or a sanitary or the deficiencies in application (TBT, SPS, and phytosanitary measure is not based on an interna- Accountancy); and (c) transmitting results in a pre- tional standard or where no such standard exists. cise and complete manner so that corrective action This is likely to be the case most of the time with may be taken (TBT, SPS) or providing information regard to measures concerning services because on the reasons for rejection of application there are few international standards. (Work to (Accountancy). Although license procedures for develop international standards has been concen- trade in services are different from the conformity trated thus far in such professional services as assessment in the TBT Agreement and from inspec- architecture.) tion or approval in the SPS Agreement, these key The GATS also requires an annual notification elements could be shared and applied to both pro- to the Council for Trade in Services on new or cedures (see the section on options for enhancing changed measures. An obligation to conduct prior transparency under the GATS). consultation as a domestic procedure is only found Other types of disciplines on administrative in the Disciplines for the Accountancy Sector, but decisions found in the SPS and TBT Agreements the obligation takes a best-endeavors form (that is, and the accountancy disciplines are not included in 10 Domestic Regulation and Service Trade Liberalization the GATS; for example, (a) nondiscriminatory pro- agreements set a more specific period (120 days) in cessing of submission or application for both the provisions covering financial services, but this domestic and foreign parties, (b) avoidance of period could vary for other sectors (e.g., the Euro- unnecessary information requirements for applica- pean Union [EU] directive on telecommunication tion, (c) nondiscriminatory treatment of confiden- services sets the period at six weeks, with some tial information, (d) reasonable application fees, exceptions). and (e) reasonable requirement for authenticity of Most regional agreements have more detailed application materials. Although these disciplines disciplines on administrative decisions. They also facilitate trade in services by reducing burden- require that people directly affected by administra- some administrative process, they are more related tive decisions be provided a reasonable notice of to nondiscrimination and necessity in implementa- the nature of these decisions and that such people tion than to transparency. are afforded a reasonable opportunity to present Regarding the measures taken by local govern- facts and arguments in support of their positions ments and nongovernmental entities, WTO agree- prior to any final decision. Regarding the review ments generally require members to take such rea- and appeal on administrative decisions and actions, sonable measures as may be available to them to some regional agreements require that each party ensure their compliance with the agreements. establish or maintain judicial, quasi-judicial, or administrative tribunals or procedures and that Disciplines at the Regional Level such tribunals be impartial and independent of the office or authority entrusted with administrative Disciplines on transparency are also found in decisionmaking. They also require that parties to regional trade agreements. It is particularly useful the proceeding have the right to a reasonable to examine these agreements because some coun- opportunity to support or defend their respective tries, including developing countries, already make positions; and a decision based on the evidence and commitments to higher level disciplines on trans- submissions of record or, where required by parency in these regional frameworks than in the domestic law, the record compiled by the adminis- WTO. This section summarizes the situation trative authority. regarding disciplines on transparency across a Most regional agreements also require prior range of regional trade agreements. Information notification bilaterally between governments or regarding disciplines on transparency in a range prior consultation with interested parties or pre- of regional trade agreements can be found at publication as domestic procedures. For multilat- www.oecd.org/ech.1 eral disciplines this takes three forms: notification Like the GATT and the GATS, all regional trade among parties, information exchange upon request agreements require publication of legislative mea- through inquiry, and prior consultation as a sures and subordinate measures at the time of their domestic procedure. Although the measures to be entry into force. They also incorporate basic disci- covered by these consultations are broad, they plines on administrative decisions such as uniform, include some limiting wording, such as "to the impartial, and reasonable administration, and (maximum) extent possible,' "when so established opportunity for review and appeal of those admin- by laws,' or "make its best endeavours.' istrative decisions. Generally speaking, in addition It is also interesting to note that further, weaker to the horizontal disciplines, more specific and disciplines are found in regional agreements among detailed disciplines also are developed for specific developing countries. The agreement among sectors, such as telecommunications and financial Colombia, Mexico, and the Republica Bolivariana services. de Venezuela only requires an effort to publish any As for the GATS, obligations to inform appli- measures in advance and to offer the parties and cants of the decision concerning the application any interested bodies a reasonable opportunity to within a reasonable period of time and to provide formulate observations on the measure. Despite them with information concerning the status of the these reservations and some doubts about whether application are also included in the services provi- these provisions are fully implemented, it is signifi- sions. It should be noted that some regional trade cant that a few developing countries already make Transparency In Domestic Regulation: Practices and Possibilities 1 higher commitments on transparency than those analyze the problems and explore possible solu- commitments required by WTO agreements. tions with experts and with their constituents. In Regarding use of international standards, only earlier stages consultations tend to be limited to a the Free Trade Agreement between the EU and relatively narrow range of interests; regulatory Mexico refers to international standards being authorities may then build policies through pro- developed by international financial regulatory gressive dialogues with strongly affected parties. In organizations. some cases they also set up forums for consultation, such as advisory councils or committees compris- ing selected interests. In other cases, they draft a at the Natoonal Level policy recommendation, sometimes as a report of these forums, and set up notice and comment pro- This section provides an overview of the range of cedures for those reports to share their views with practices on prior consultation on subordinate outside parties. measures and legislative measures, and administra- Regulatory authorities could make these prelim- tive decisions and actions in implementation of inary consultations more transparent and nondis- measures, found at the national level in OECD criminatory by publishing reports on the substance members and selected developing countries.2 of consultations or by collecting views of both Detailed information on the regulatory processes domestic parties and foreign parties. These consul- found at the national level in OECD and selected tations should be as nondiscriminatory as possible, developing countries can be found at www.oecd. but it might be difficult for regulatory authorities org/ech. to eliminate all discretionary aspects arising in the preparation process. As is already the case in some of the reviewed countries, however, regulatory Practbordic nat Deaelment authorities could notify draft measures for public comment at a later stage to ensure that all inter- Overall the case studies indicate a trend toward ested parties are informed and given equal oppor- prior consultation for subordinate measures.3 tunity to comment. This practice would provide an Across various country practices, the extent to effective and credible safeguard against the possible which they incorporate three important elements abuse of selected participation in earlier stages of in prior consultation practices can be identified for consultation and ensure transparency and nondis- comparative analysis: transparency, nondiscrimi- crimination in prior consultation. In a few coun- nation, and accountability. tries, draft texts are also prenotified with statements of regulatory impact analysis, which describe the * Transparency means that the consultation proce- objectives of, rationale behind, alternatives to, and dures themselves should be open and accessible. benefits/costs of regulatory measures. * Nondiscrimination ensures that prior consulta- The studies also show that there are common tion procedures treat domestic and foreign par- types of measures excluded from prior consultation. ties equally in a nondiscretionary and impartial The following measures are often excluded because manner.4 prior consultation is perceived as impracticable, * Accountability mandates that regulatory unnecessary, or contrary to the public interest: authorities explain the factual and logical basis for their decisions by giving due consideration * Measures to cope with urgent problems of to comments received, although they retain ulti- safety, health, and environment arising or mate discretion in determining to what extent to threatening to arise consider and respond to a particular comment. Measures dealing with military and foreign affairs, which are required in the interests of It can also be observed that prior consultation national security or which merely meet an obli- takes different forms depending on the different gation under an international agreement stages of preparation. When regulatory authorities * Measures of a minor nature, which do not sub- introduce and modify measures, they first need to stantially alter existing regulations. 12 Domestic Regulation and Service Trade Liberalization Other categories of exceptions are found in inform applicants of the reason for denial of an some countries, but in most cases regulatory application. The procedures also ensure that, in the authorities are required to explain why they are case of suspension or revocation of license or other exempted from the prior consultation require- decisions adversely affecting a licensee, the licensee ments. Additionally, measures of a local govern- is given notice of the reasons by the regulatory ment and other self-governing subentities are also authorities and the opportunity to demonstrate typically carved out from prior consultation compliance with requirements or to defend his or requirements. her position. In other countries these disciplines are prescribed in specific statutes or guidelines but are not covered by horizontal regulations. Practices on Development of Legislative Measures Unlike practices on subordinate measures, wider Developing Countries differences in practices for legislative measures can Even in developing countries with limited adminis- be observed in the country studies, reflecting dif- trative capacity there now are greater efforts to ferent political systems or institutional structures. enhance transparency in policymaking, with public Although in parliamentary systems the executive notice and comment procedures recently adopted branch proposes draft legislative measures and to facilitate participation by citizens in the policy- could conduct prior consultation before the meas- making process. Developing countries also are ures are submitted to the legislative branch (as they adopting electronic means for these public notice do for subordinate measures), enactment of leg- and comment procedures as part of efforts to pro- islative measures may also be initiated from the mote e-government. This can help ensure transpar- legislative branch itself, based on political plat- ent and nondiscrimination processes in the pres- forms or election commitments.5 The draft of leg- ence of fewer administrative resources; however, islative measures is pre-announced in some coun- access to information might be more limited in tries to encourage the participation of citizens and developing countries because of a lack of technical other interested parties. infrastructure. Although committees or other Whatever the political system, however, when forums are set up to formulate regulatory measures the draft is submitted to the legislative branch, pub- in some cases, efforts also have been made to lic consultation inevitably takes the form of politi- enhance transparency by publishing recommenda- cal deliberation and citizens can participate in the tions and inviting comments from external experts discussion only through elected representatives and other market participants. The study so far (who usually must be nationals or citizens). could not find any constitutional constraints on Although in some cases public hearings could be such consultations. held in the legislative branch to seek comments Public notice and comment procedures are not from external parties, including foreign interests, as widespread in developing countries as they are in direct participation by foreign interested parties some OECD members. Because the developing generally is limited. economies often do not have the capacity to imple- ment horizontal schemes, those procedures are Practice on Administrative Decisionmore frequently conducted for specific sectors, such as telecommunications and financial services. Some OECD members have enacted horizontal They also are conducted for specific issues consid- administrative procedures legislation to impose ered to be more important in specific sectors, such disciplines on administrative decisions. Basically as universal service obligations and spectrum man- they require that regulatory authorities make rules agement. This also reflects particular commitments and procedures publicly known and make adminis- to greater transparency undertaken in accordance trative decisions within a reasonable time. In some with the GATS Reference Paper on Basic Telecom- countries regulatory authorities are required to munications. In the context of their limited admin- publish the standard period for processing applica- istrative capacity it is not altogether surprising that tions as a benchmark for a "reasonable time" and to developing country regulatory authorities tend to Transparency in Domestic Regulation: Practices and Possibilities 13 narrow the scope of prior consultation to specific defined very broadly as any measure whether in the regulatory issues in specific sectors. form of law, regulation, rule, procedure, decision, administrative action, or any other form (Article Options for Enhancing XXVIII). The following different types of measures Transparency under the GATS are referred to in the GATS: This section of the chapter explores some of the * Measures of general application that pertain to options open to WTO members for increasing or affect the operation of this agreement (Article transparency under the GATS. As indicated above, III.1 and III.4) the GATS contains a number of provisions relating * Laws, regulations, or administrative guidelines to transparency. that significantly affect trade in services covered A threshold question may be to what extent are by ... specific commitments (Article III.3) any further disciplines actually necessary or should * Measures of general application affecting trade the focus be on improving the implementation of in services in sectors where specific commitments existing obligations? A number of transparency are undertaken (Article VI. 1) issues arguably are more a matter of poor imple- * Administrative decisions affecting trade in ser- mentation of existing obligations than of the need vices (Article VI.2 [a]) for new obligations. But that also suggests there * Authorization required for the service on which may be scope to improve the implementation of a specific commitment has been made (Article existing obligations-for example, via the develop- VI.3) ment of standard form notifications. In other cases, * Measures relating to qualification requirements the scope and content of existing obligations could and procedures, technical standards, and licens- be clarified-for example, by giving greater preci- ing requirements (Article VI.4). sion to the types of information that could be made available under Article III and to the means by 'Whereas Article III.1 refers to "measures of gen- which members could provide access to that infor- eral application," Article III.3 is limited to "laws, mation. A number of proposals in this section are regulations or administrative guidelines" signifi- focused on improving and facilitating adherence to cantly affecting trade in services covered by a mem- existing transparency obligations. ber's specific commitments. Although many of the New obligations could also be considered, how- measures of general application are likely to take ever, including prior consultation and opportunity the form of laws, regulations, and administrative for comment before regulations are finalized. The guidelines, they need not directly regulate a partic- suggestions in this section include options for ular service and need only affect or pertain to the increasing transparency via the WTO (e.g., for operation of the agreement, rather than signifi- notifications and trade policy reviews) and through cantly affect trade in services. Such measures need domestic procedures as part of national regulatory only be published, not notified to the WTO (as is processes. Both means are necessary and can be the case for measures under Article III.3). Article mutually reinforcing. Finally, for all the options VI.1 also refers to measures of general application, presented WTO members can choose from along but unlike Article III.1 it is limited to sectors where the continuum of possibilities, from binding disci- specific commitments are undertaken. Article VI.I plines covering all sectors, to best-endeavors com- requires that, for sectors where specific commit- mitments adopted in full or in part only for some ments are undertaken, measures of general applica- sectors. tion affecting trade in services must be adminis- tered in a reasonable, objective, and impartial manner; but a more detailed prescription is laid TypesfMeasresCoered' theGAdown for the narrower range of measures in Article Before considering the possibility of enhanced dis- VI.4. Qualification requirements and procedures, ciplines, it is important to have a clear understand- technical standards, and licensing requirements in ing of the scope of measures to which those disci- Article VI.4 and Article VI.3 authorizations are plines could apply. In the GATS, "measure" is related mainly to licenses for services. "License" in 14 Domestic Regulation and Service Trade Liberalization this context should be interpreted broadly, with (where some difficulties for foreign traders can basically the same meaning as "authorization," also arise). Exclusion of subnational measures may because it includes the whole part of an agency per- also result in any additional transparency obliga- mit, certificate, approval, registration, or other tions falling disproportionately on those WTO form of permission. members with centralized political and regulatory Measures relating to restrictions on movement systems. However, the additional administrative of natural persons are given further definition. The burden for WTO members with federal systems Annex on Movement of Natural Persons states that that include measures at the subnational level must the agreement does not prevent a member from also be considered; indeed, subnational measures applying measures to regulate the entry or tempo- are excluded from a number of these countries' rary stay of natural persons in its territory, pro- prior consultation requirements. Nonetheless, vided that such measures do not nullify or impair transparency disciplines that require or encourage the benefits accruing to any member under the certain domestic practices or procedures could terms of a specific commitment. Discriminatory also encourage similar practices at the local or visa requirements per se are not regarded as nulli- regional level. fying or impairing benefits under a specific com- mitment. General requirements for transparency Possible Types of Disciplines under Article III apply to measures regulating the entry and temporary stay of natural persons. How- Horizontal versus Sectoral Disciplines Another ever, although regulations governing the issuance threshold issue is the extent to which any new of work permits and defining foreigners' ability to transparency obligations should be horizontal or work in individual areas fall under the GATS, gen- sectoral in application, and whether any horizontal eral immigration legislation may not fall there. rules should apply across the board to all sectors or only to sectors where specific commitments have Subnational Measures "Measures" under the been made. Existing transparency disciplines apply GATS also can be categorized by the level at which both across the board and only in sectors where they are taken: specific commitments have been made. Notwith- standing that fact, it may be worth considering * Central government measures whether any further disciplines on transparency * Local government measures should apply across all sectors, regardless of * Measures taken by nongovernmental entities. whether specific commitments have been under- taken. Given the benefits of transparency for both As described above in the discussion of disci- domestic governance and the development of effi- plines at the multilateral level, in recognition of cient domestic services, it can be argued that all members' different constitutional or institutional areas of the economy should benefit from greater constraints, and while including regional and local transparency, not simply those sectors where inter- government and nongovernmental bodies exercis- national trade commitments have been made. Fur- ing delegated power in its definition of "measure" thermore, transparency is increasingly recognized (Article 1.3[a]), the GATS stipulates that each as a fundamental principle of the trading system member shall take such reasonable measures as (like most-favored-nation status), and lack of may be available to it to ensure observance by transparency is seen to be a major barrier to trade. regional or local government bodies or non- Given the degree of unilateral liberalization being governmental bodies. It may be useful to examine undertaken by countries outside of the GATS whether transparency requirements should oper- framework, an annex on transparency applying to ate at the subnational level, given the difference in all sectors could serve countries' own interests in transparency practices between central govern- developing sound transparency practices to assist ment bodies and other bodies, the benefits of with smoothly functioning and orderly market transparency for both governance and trade, and development at the same time that they liberalize. the fact that the locus of services regulation in And having decided to open the market to foreign many federal systems is at the subnational level suppliers, it is in members' interests to provide their Transparency In Domestic Regulation: Practices and Possibilities trading partners with the information needed to Proponents of a sectoral approach also argue take advantage of the access granted. that not all service sectors are traded to the same There are also counterarguments, however- extent and not all encounter the same degree of notably that members might be more willing to problems with lack of transparency. Priorities for countenance additional transparency disciplines if which measures should be addressed by what type they applied only in areas where commitments had of enhanced disciplines may also differ among sec- been made. Similar arguments arise in relation to tors. Furthermore, because national regulatory the question of whether any new transparency dis- practices vary among sectors it is argued that it ciplines should apply horizontally or be developed may be difficult to develop a horizontal approach on a sector-specific basis. Proponents of a horizon- (e.g., administrative procedures laws or guide- tal approach to increased disciplines on trans- lines), especially for developing countries with parency note that transparency is usually consid- limited administrative capacity. Members may be ered to be a cross-cutting issue, a fundamental more willing to accept increased transparency dis- principle of the trading system that is not depen- ciplines if they are able to implement such disci- dent on sectoral specificities. They also point to the plines gradually, starting with sectors and mea- fact that, although services sectors themselves may sures of priority interest, rather than by an "all or be highly diverse, the fundamental requirements of nothing" approach. Arguably, members may be less transparency-such as making information avail- willing to convert unilateral liberalization into able in a timely and readily accessible fashion-do GATS commitments if they automatically assume not vary greatly among sectors. Similarly it is additional obligations with regard to transparency. argued that there is little justification for treating Horizontal and sectoral approaches to enhanced one sector more favorably than another in terms of transparency disciplines need not be mutually transparency, and that good regulatory practices exclusive, however. Another option could be a basic should be encouraged across all of government, not set of horizontal rules on transparency that could simply in certain relatively easy or noncontroversial be supplemented as necessary by sector- or mode- sectors. Horizontal disciplines also can prevent sec- specific rules, as applicable. Additional sector- toral special interests from blocking progress. These specific transparency requirements could be sched- arguments are underlined by the existence in a uled as additional commitments against the appro- number of WTO members of national horizontal priate sector. administrative procedures laws or regulations. Another approach would be to give members Horizontal transparency rules also are argued to the flexibility to inscribe standard new disciplines provide benefits in terms of an economy of negoti- on transparency in their schedules against some ating effort and the legal clarity and simplicity of sectors but not others. Alternatively, members obligations by their avoidance of a proliferation of could be allowed to accept common new rules in sector-specific disciplines. full or in part; that is, by selecting some of the disci- However, those who favor sectoral disciplines plines to inscribe in their schedules and leaving point to the particularities of various services others out. These last suggestions, however, also sectors-arguing that more detailed regulatory dis- raise the issue of the extent to which any new disci- ciplines, especially those beyond transparency, can- plines should be binding. not be uniform across sectors because of the nature of the sectors themselves and the administrative Binding Disciplines versus Best Endeavors New capacity of sectoral regulatory authorities. Given transparency obligations could take the form of the need to develop sector-specific rules to address mandatory disciplines or best-endeavor provisions. issues, such as interconnection, that arise only for Mandatory provisions could be formulated as an certain types of sectors, it is argued that it is better annex applying horizontally to all sectors and bind- to include tailored and specific transparency ing on all members. Alternatively, members could requirements in these rules-as was done in the choose to inscribe new transparency disciplines in Reference Paper on Basic Telecommunications and their schedules in sectors where they have made the accountancy disciplines-than to develop gen- specific commitments-that is, although the deci- eral transparency disciplines. sion to adhere to the increased disciplines would be 16 Domestic Regulation and Service Trade Liberalization voluntary, once inscribed in the schedules (per Arti- choose (see box 1). And the administrative burden cle XVIII additional commitments) they would of increased transparency may be reduced to the have the status of binding commitments. Members extent that any new disciplines focus on developing could be given the flexibility not to include all sec- procedures at the national level and on minimizing tors where they have made commitments, or not to additional notification requirements to the WTO. include all disciplines. A further option-that could Development of transparency practices at the operate either for all sectors or only for those where national level still requires resources but it provides specific commitments had been made-would be immediate and demonstrable domestic benefits, in for any additional disciplines to be worded on a addition to benefits for trading partners. Indeed, best-endeavors basis, providing members with a the nature of services trade suggests that many benchmark of best practice and with some flexibil- transparency procedures can be best operational- ity in implementation. In any of these options, ized at the national level, building on existing general transparency disciplines could be supple- administrative structures and practices. mented by additional sector- or mode-specific rules This flexibility can be further increased to the as appropriate. These options are summarized in extent that any new obligations take the form of box 1. general objectives, leaving scope for members to implement them within their existing administra- Reducing the Potential Administrative Burden tive structures. For example, specific time limits A key consideration in assessing whether, and to need not be set-timing requirements should be what extent, GATS transparency disciplines might stated generally in terms of the objective they are be augmented or specific means for implementing designed to meet-that is, a specific time limit (e.g., current obligations might be developed is the need six weeks) for prior consultation or application pro- to balance the administrative burdens of new trans- cessing need not be mandated if the period meets parency requirements against the benefits of the objective of being "sufficient to enable com- increased transparency. A number of options are ments to be received and taken into account" or, in open to WTO members with a view to ameliorating the case of applications, is "reasonable," "prompt," the administrative burden of increased trans- and "not an unnecessary barrier or restriction on parency requirements while garnering the benefits the supply of the service." Ideally, transparency obli- for domestic efficiency and governance, as well as gations should be objectives that members may for trade. achieve by a range of means appropriate to their Obviously the extent of the burden in terms of domestic systems and levels of development. the timing and form of implementation will be The degree of administrative burden associated determined by the type of disciplines that members with increased transparency disciplines will also BOX 1 Summary of Options for Possible Increased Transparency Requirements * linding genra disdcplines applying horizon- * "Best endeavors' disciplines applying only in tiy rs all sectors. sectors where specific commitments have * 0ndlg general discipines applying to alt been made. secto vi*e specific commitments have * Best endeavors" disciplines applyng only to been made, those sectors where members have specifi- * Biding general disciplines applying only to cally scheduled them. those sectors where members have specifi- * Flexibility to apply only some of the disci- calty scheduled them. plines (be they binding or 'best endeavors") * Binding sector-specific transparency rules to only some sectors. deeoped on a sector-specific basis. * Any of the above supplemented by additional * "Best endeavors" disciplines applying hori- sector- or mode-specific rules, as appropriate. zontally across all sectors. Transparency In Domestic Regulation: Practices and Possibilities 17 depend on the nature and scope of any provisions case may contribute to members' confidence in agreed to. Exceptions for measures of a relatively assuming additional obligations. minor nature or related to security, for example, As noted above, however, the relative adminis- may reduce the burden, as could the carve-out of trative burden of increased transparency provisions measures at the subnational level. In this regard it is and the need for special and differential treatment also worth noting the different types of measures are lessened in the context of obligations that are already referred to in the GATS and the different already best endeavors, or where members volun- disciplines that apply to them. Additionally, as in tarily opt to sign onto additional transparency obli- the SPS and TBT Agreements, special transparency gations for certain sectors. Similarly, the need for provisions could apply in emergency situations.6 special and differential treatment would also depend on how prescriptive any transparency obli- Special and Differential Treatment Members gations were. For example, if obligations specified also could consider whether special and differential exact time periods for processing of applications or treatment might be appropriate to address the par- responding to comments, there might be a case for ticular concerns of developing countries in the con- allowing developing countries additional time in text of their limited capacity to implement recognition of their more limited resources. How- increased transparency requirements. Possible spe- ever, obligations that are more general in nature- cial and differential treatment could take a number "a reasonable time"-arguably already contain suf- of forms: the content of obligations could be differ- ficient flexibility. Equally, obligations could avoid ent for developing countries, or, in the case of bind- containing specific technological requirements ing disciplines, those countries could be granted (e.g., requiring Internet publication) in the inter- transition periods. Although it could be argued ests of flexibility for developing countries. One fur- that, given the domestic benefits of transparency, ther possibility might be to include a general provi- there is little reason for differential levels of obliga- sion that members shall have regard to the level of tions, the limited administrative capacities of many development and administrative capacity of other developing countries need to be recognized. members in interpreting "a reasonable period" or Transition periods for binding disciplines could similar provisions. be set at a particular period (for example, 10 years) Specific technical assistance and capacity-build- with countries expected to implement the require- ing provisions also could be considered in the con- ments on a best-endeavors or "to the extent possi- text of any further transparency disciplines. ble" basis in the interim. Were additional trans- Notwithstanding their link to and importance for parency obligations to be inscribed in schedules for trade, programs to increase domestic capacity for sectors where specific commitments had been transparency in domestic regulation may be pur- undertaken, developing countries might also take sued most effectively and appropriately in the con- advantage of the flexibility already provided under text of general development cooperation programs the GATS to make "precommitments," that is, to aimed at developing domestic institutions and precommit (in additional commitments) to the frameworks for good governance. introduction of certain transparency practices in Although any increased transparency involves certain sectors at a later date. resources, these must be set against the benefits In the context of binding disciplines, introducing gained for governance, the domestic economy, and a "peace clause" could provide some flexibility. A trade by increasing the participation of stakehold- peace clause establishes a further period subsequent ers in regulatory decisionmaking. Additionally, to the implementation deadline during which no resources devoted to increased transparency are dispute action can be brought. It may be question- more likely to heighten the legitimacy and "neces- able whether this would be necessary, given that dis- sity" of regulatory measures. The more transpar- pute settlement procedures are unlikely to be ent the process of regulatory decisionmaking and brought against failure to implement transparency the greater the opportunities for input by inter- provisions; but such a clause may be helpful where ested parties at an early stage, the less may be the failure to adhere to transparency obligations might likelihood that trading partners will bring WTO arise in the context of a broader dispute, and in any disputes over the necessity of a given regulation. 18 Domestic Regulation and Service Trade Liberalization BOX 2 Summary of Ways to Reduce the Burden of Additional Transparency Provisions * Express any obligations in terms of general * Consider special and differential treatment objectives, with maximum flexibility for provisions for developing countries, including members to implement them in line with transition periods, a provision requiring their level of development and with existing members to consider another member's level administrative and regulatory systems. of development and administrative capacity • To the greatest extent possible, build on when interpreting "a reasonable period" or existing domestic structures and practices- similar transparency requirements, or the for example, by implementing requirements extension of a "peace clause" subsequent to at the national level rather than via notifica- the deadline for implementation. tion to the WTO. * Encourage developing countries to make pre- * Consider exceptions provisions-for exam- commitments on transparency in specific ple, ones related to measures of a minor commitments. nature or those related to security. Consider * Encourage a focus on transparency in domes- special provisions for emergency situations. tic regulation in general capacity building * Consider carving out certain types of mea- and development cooperation programs, sures or measures at a subnational level. including by drawing attention to the bene- fits for trade performance. Box 2 summarizes the ways to reduce additional vide comment on proposed new regulations. As the transparency burdens. analysis of regulatory measures at the national level indicates, prior consultation as a domestic procedure could be implemented for subordinate measures in oftranspencygatory Diferocen Stagline with the key principles of transparency and nondiscrimination. The question arises whether it Transparency is required at a number of stages would be feasible for regulators to be transparent throughout the regulatory process-that is, not just and nondiscriminatory throughout the process of after the measure has been adopted or the decision developing a regulation, especially at the first stage made but also in the decisionmaking process itself. where they tend to consult selectively with a rela- These stages are recognized in existing GATS obliga- tively narrow range of strongly affected interests. It is tions, which refer to the need to publish measures more conceivable for regulatory authorities to before they come into force (Article III.1) and the ensure transparency and nondiscrimination in the need for prompt consideration of applications in notice and comment procedure for the draft texts of the decisionmaking process (Article VI.3), as well as prospective regulation, which would usually occur to procedures for the review of administrative deci- later in the process of developing a regulation. sions affecting trade in services (Article VI.2). The Another question arises whether it would be fea- GATS also provides some guidance on how regula- sible for regulators to conduct prior consultation tions should be implemented (Article VI. 1 and for all types of measures. Exceptions for emergency VI.4). Proposals for increased transparency have measures could be considered in the case of possi- tended to reflect these three different stages: the ble GATS prior consultation requirements, along process of making the regulation; application proce- with exceptions for measures dealing with military dures pursuant to a regulation; and review or and foreign affairs and measures of a minor or appeals procedures subsequent to decisions having mechanical nature. It would also be important to been made. The three stages are considered below. continue in all relevant WTO disciplines related to prior notification and opportunity for comment Making the Regulation The focus of transparency (the TBT and SPS Agreements and the accountancy in the regulatory decisionmaking process has been disciplines) the current practice of focusing on on the opportunity for all interested parties- measures that may significantly affect trade.7 including foreigners-to be consulted and to pro- Although some of the regional trade agreements do Transparency In Domestic Regulation: Practices and Possibilities 19 not specifically exclude any particular type of ent sectors to reflect the different needs and capaci- measures from prior consultation, such obligations ties of regulatory authorities in different sectors. take a form ("to the extent possible") that gives the Although license procedures for trade in services parties the flexibility to exclude measures. In devel- are different from the conformity assessment in the oping countries and in some OECD members, TBT Agreement and from inspection or approval in prior consultation does not cover all measures and the SPS Agreement, these key elements could be is applied to specific types of measures in specific shared and applied to both procedures. sectors. Any discipline on prior consultation realis- Other types of disciplines on administrative tically needs to have some limits on the scope of its actions or decisions are found in the SPS and TBT application, taking account of the limitations Agreements and the accountancy disciplines authorities may face and the need to avoid overly but are not found in the GATS. They include burdensome procedures, especially in developing (a) nondiscriminatory processing of submission or countries.8 application for both domestic and foreign parties, Compared with the practices for prior consulta- (b) avoidance of unnecessary information require- tion on subordinate measures, there are wider dif- ments for application, (c) nondiscriminatory ferences among country practices for prior consul- treatment of confidential information, (d) reason- tation on legislative measures. Because consultation able application fees, and (e) reasonable require- is conducted in the legislative branch through ment for authenticity of application materials. elected representatives in any legislative framework, Although these disciplines also facilitate trade in it is difficult to envisage effective WTO disciplines services by reducing burdensome administrative in this area. processes, they are related more to issues of nondiscrimination and necessity than to issues of Making Applications Article VI.3 of the GATS transparency. requires authorities to make decisions within a rea- sonable time period and to provide information on Appealing and Reviewing Many of the suggested the status of applications, but more detailed proce- disciplines relating to the appeals stage of the regu- dural transparency requirements could be devel- latory process similarly relate less to transparency oped for the GATS (as exist in the TBT and SPS per se and more to other aspects of good regulatory Agreements, the accountancy disciplines, and practice, such as nondiscrimination (e.g., the abil- some regional trade agreements). Such require- ity to file complaints about inconsistent treatment ments could include: of foreign and domestic suppliers, nondiscrimina- tory sanctions in case of disciplinary procedures), * Making publicly available information on which fairness (e.g., disciplinary action may not be taken activities require a license and the criteria for on the basis of violations of rules that were not in obtaining a license effect at the time the relevant activity took place), * Publishing the standard processing period and the right of appeal (including against any sanc- * Providing information to applicants regarding tions imposed following a disciplinary hearing). all the documents and information they must However, elements related to transparency arise in supply in an application and notices of the defi- the case of regulatory enforcement procedures, ciencies in application where the access of foreign suppliers to informa- * Explaining the reasons for rejection of an tion can be particularly important. For example, application requirements could include informing the affected * Giving notice of the facts or conduct warranting party about any regulatory enforcement procedure; disciplinary action or sanctions and the nature giving that party the opportunity to be heard; and and extent of disciplinary actions, as well as pro- ensuring that party the opportunity to submit and viding a mechanism by which to respond to review evidence. Furthermore, procedures for dis- queries. ciplinary actions, including notification of viola- tions, responses by the affected parties, explanation These requirements could be included in hori- of decisions, and any procedures for appeal, could zontal transparency disciplines or tailored to differ- be made publicly available. 20 Domestic Regulation and Service Trade Liberalization Optionsfor Enhancing Transparency extensive the list of proposed practices to enhance transparency, the more likely that members would Tnhisasction examinspres smer p GAcTic optionsi- f take a voluntary approach to inscribing such addi- enhancing transpaenwicy underhte GAT is.itpnesid - tional disciplines in their schedules, and the more encoursgbothewaysinwhih dnth G S drispline might likely that they might seek additional flexibility encourage the development of transparent proce- readnsctsaddiipnsicle. dures at the domestic level, and ways in which GATS transparency provisions requiring notifica- Box 3 sets out examples of the sort of elements tion to the WTO might be made more effective. It that could be included in a reference paper on transparency (the list is by no means exhaustive). considers both the introduction of new obligations and ways to enhance the implementation of exist- They are suggested as horizontal disciplines, but ing obligations. without prejudice to the issue of whether sector- specific disciplines could be developed for some sectors. Improving Domestic Practices on Transparency: As noted above, consideration could also be Reference Paper on Additional Transparency given to creating any necessary sector-specific disci- Requirements Possible new transparency disci- plines to enhance the general reference paper plines could establish a list of best practices to be approach. Further study of the regulatory experi- implemented at the national level. Such a list could ence at the sectoral level would be needed to deter- take the form of an annex, applying across all sec- mine the extent to which different sectors required tors, or a reference paper that could be voluntarily sector-specific disciplines to enhance a horizontal inscribed against individual service sectors under reference paper. Article XVIII additional commitments and that Consideration could also be given to developing could be accepted in full or in part. The more specific disciplines for mode 4, given the special sit- BOX 3 Examples of Elements for a Reference Paper on Transparency . | 4 . IE9. ' ft'*d 'oWt'ce of any deficiencies in an * Prir c nent prqcedue t0 *e, !pilcatlon. InteresteO pa_W bljh- the ,sandard timeframe for the licens- * PffbSlk;oh *( aLso io4 process. - POWi.s the names of competent authorities t* 'kid -polfts foib fo cbmplaint. # vfltorq ;.&e stthe reasn for eiec- * qr pet ; p& t.lon of an authorization or appication. de no:r* - e n i Fe o conduct war- tibsoml* rantf disdipnary action or sanctions and Fe- N es0the -ature a fd extent of dscplinary actions, * if4*ft ; i*W) aa mechanrism to respond to * AN-xomrr1ent~ T~ *^. In y >tase of disciplinary. CtIonl inform the ~0~r.t~w~lt bemv p4~I~. ~ 2 d~q~paty about the pocedure. and pro- ;.- 1'..7'i,,.WQ,,...ty to-be heard nd to sub- .;. = eiew eviden ce. ' Specify ~~~ ~tin~~ ~ * M~ pubIlciy avadable the. notification of 'kihsOg -or i t along wi the responses by the Ik~nsing or ,i**IioQ~ *ft.4ted party and the expaunton of the JVn ltnsn . Transparency in Domestic Regulation: Practices and Possibilities 21 uation of measures affecting trade in mode 4; that of the general requirement that members publish is, that they are closely linked to broader immigra- "all relevant measures of general application per- tion policies and measures (as recognized by the taining to or affecting the operation of the Agree- Annex on Movement of Natural Persons). ment" under Article III. 1. Arguably, however, most of the areas of interest to Furthermore, notifications received do not mode 4-such as provision of information on sub- always provide the required information in an easy- stantive requirements and criteria and procedures to-use format. Standard form notifications (along for applications; prior consultation on measures the lines of the SPS and TBT Agreements) could be affecting mode 4 entry; timely responses for appli- developed to ensure greater consistency of infor- cations, or notification in the event of any delay; mation provided, as well as to allow for compara- provision of statement of reasons for denial of bility among members and to facilitate sharing of application and availability of review/appeals best practices. Standard form notifications do not procedures-could already be covered by a general add to existing obligations; rather, they facilitate reference paper on transparency. Given that general their implementation and could be considered (or immigration legislation does not fall under the improved) for some (but not necessarily all) GATS GATS (see note 5), the application scope of any notification requirements-for example, for Article transparency reference paper would have to be 111.3 and, in view of its importance for mode 4 identified carefully. Nonetheless, it is worth noting trade, Article VII.4. that in some OECD countries public notice and The standard form for Article 111.3 notifications9 comment procedures are applied to measures rele- could also include the name of the legislation/regu- vant to entry, stay, and work authorization of natu- lation or administrative guideline, a description of ral persons. For example, U.S. immigration rules the purpose of the measure, and a contact point for and regulations are subject to the Administrative further inquiries. Additionally, members could be Procedures Act (5 U.S.C. 553), and the Japanese asked to provide a brief assessment of the trade Ministry of Justice adopts public notice and com- effects of the measure. A standard form for Article ment procedures for its measures on immigration VII.4(b) could include the type of agreement, the control. parties to the negotiation, any industry advisory bodies involved or consulted, sectoral coverage, and Improving Transparency of Scheduled Commit- a contact person for further information or to ments: Standard Forms for WTO Notifications, express interest in participating in the negotiations. Economic Needs Tests, and Measures on Mode 4 OECD work also has proposed the development The level of notifications under the GATS has been of a standard form notification to provide addi- disappointing in general. In particular, there have tional useful information on the operation of eco- been relatively few notifications under Article 111.3 nomic needs tests (ENTs) (OECD 2001). A stan- (annual notification to the Council for Trade in dard form notification for ENTs could include Services by a member of the introduction of any criteria,10 duration of the measure, detail to rele- new, or changes to existing, laws, regulations or vant administrative procedures (including provi- administrative guidelines that significantly affect sion for explanation of decisions, review of applica- trade in services covered by its specific commit- tions), and review of the need to maintain the ENT ments). Some developing countries also have in question. It could also include information on pointed to the lack of notifications under Article costs and approximate processing time (with VII.4 (notification of mutual recognition agree- appropriate caveats as to the possibility of change). ments, including those under negotiation, to pro- A further useful inclusion might be the economic vide adequate opportunity for other members to or social policy objective sought by the ENT. It indicate their interest in participating in negotia- should be noted, however, that standard form noti- tions). In the case of Article III.3 it has been sug- fications under the TBT and SPS Agreements gested that greater precision regarding the meaning include only a brief and general description of reg- of "significantly affect trade in services" could help ulatory objectives (e.g., health, safety, environment, generate a greater number of notifications. Similar and so forth). Alternatively, the approach in the calls for clarity have been made regarding the scope accountancy disciplines (whereby, upon request, a 22 Domestic Regulation and Service Trade Liberalization member is required to inform another member of ing commercial and technical aspects of the supply the rationale behind domestic regulatory measures of services; registration, recognition, and the in relation to legitimate objectives) could be con- obtaining of professional qualifications; and the sidered. Indeed, some of the disciplines proposed in availability of services technology in members' box 3 also could help make ENTs more transparent, respective markets. especially because ENTs are often a feature of The WTO currently makes available on the licensing regimes. For example, clarifying the WTO Web site the postal addresses and telephone rationale behind the ENT and providing reasons and fax numbers of all GATS inquiry points that for the denial of an application or authorization have been notified. Inquiry points appear to be lit- could give potential service suppliers a better sense tle used, however, and often feature out-of-date of the general regulatory environment of the sector information. Although such contact points are in which the ENT applied and could flesh out the designed to serve as "one-stop shops" for informa- operation of the ENT in their specific instance. tion, in fact the range and diversity of services sec- Further study could explore the linkages between tors make it difficult for them to fulfill that role. achieving greater transparency for ENTs and the The contact point in the trade ministry (which nor- types of disciplines under consideration in the mally has responsibility for WTO matters) is WTO Working Party on Domestic Regulation. normally ill prepared to field questions on the A system of standard form notifications also transport or telecommunications sectors. One could be considered for mode 4 to cover the follow- option may be for members to nominate sectoral ing elements for each type of entry program related contact points-that is, nominated persons in each to GATS mode 4 entry: documentation required, of the relevant agencies at the domestic level who method of lodgment, processing time and applica- can provide information on particular service sec- tion fees (if any), length and validity of stay, sectors tors. A comprehensive list of these inquiry points where any special conditions apply, possibility of could be compiled by the WTO. Although any pro- and conditions for extensions (including availabil- posals to expand inquiry points would have to con- ity of multiple-entry visas), rules regarding accom- sider the potential costs for members, some coun- panying dependents, review and appeal procedures tries currently provide such sector-specific inquiry (if any), and details of relevant contact points for points as part of regional arrangements (Asia further information. This notification requirement Pacific Economic Cooperation [APEC] Individual could also take the form of a requirement to con- Action Plans require individual inquiry points for tribute to a Web site dedicated to providing infor- each service sector). Alternatively, trade ministries mation on the conditions applying to temporary with responsibility for GATS inquiry points could entry of service providers. Members would be establish their own network of contacts in other responsible for the accuracy of their information relevant ministries at the national level to facilitate and for ensuring that it is updated regularly. timely responses to sector-specific inquiries. Additionally, a special inquiry point for mode 4 Improving Inquiry Points GATS inquiry points could be considered. Given the importance of (mandated under Article III.4) are an avenue for immigration policy to mode 4, and the fact that for providing to other members specific requested purposes of implementation the relevant ministry information on all measures of general application is often the immigration authorities (in combina- or international agreements pertaining to or affect- tion with the labor market authorities), creating ing the operation of the agreement (per Article dedicated contact points within the trade or immi- III.1) and all matters subject to notification under gration ministries (or as a joint operation) could be Article III.3 (laws, regulations, or administrative considered. These contact points might also pro- guidelines that significantly affect trade in services duce an annual report outlining any information covered by a member's specific commitments). received about problems relating to mode 4, with a Additionally, Article IV.2 requires establishing con- view to the future refinement of procedures. Alter- tact points to facilitate the access of developing natively, members could simply be asked to create a country service suppliers to information concern- one-stop information point (e.g., a Web site or gov- Transparency in Domestic Regulation: Practices and Possibilities 23 ernment office) for information on mode 4 entry. opportunity to ask questions about the operation of Contact details for this point could be given to the any domestic transparency mechanisms. WTO and perhaps listed on the WTO Web site, with links to members' electronic schedules. The effectiveness of even the single inquiry point could be increased if members maintained a This chapter has sought to identify good regulatory consolidated code of regulations. These typically practices and options for enhancing transparency cover all government regulations (beyond those under the GATS. It began by outlining existing affecting trade in services as required by the GATS) transparency requirements under WTO agree- and are easily accessible to the general public-for ments for legislative measures, subordinate meas- example, via a Web site or government gazette. ures, and administrative decisions. The GATT and Consolidated codes at the national level can be use- the GATS require members to publish legislative ful in providing other WTO members and busi- and subordinate measures before those measures nesses with an accurate reading of measures in are enforced, and the GATS requires annual notifi- place at the market. Although perhaps less user cation of new or changed measures. WTO agree- friendly than an inquiry point, the information ments also include three types of prior consulta- conveyed can be more comprehensive. A consoli- tion: (a) via notification to the WTO (per the SPS dated list of regulations also would allow readers to and TBT Agreements); (b) via information select for themselves the measures that may have an exchange, upon request, among members; and impact on trade rather than having that decision (c) as a domestic procedure (per the Disciplines for made by the agency responding to the query. Such the Accountancy Sector, although this obligation is consolidated codes may be resource intensive to hortatory in nature and the disciplines themselves construct, but information and communications have yet to enter into force). For administrative technology is reducing the cost of preparing and decisions, WTO agreements require uniform, maintaining such codes. impartial, and reasonable administration, as well as a review mechanism and an opportunity to appeal. Improving the Breadth of Information Provided: Some agreements (e.g., the GATS, TBT/SPS Agree- Regulatory Transparency and the Trade Policy ments, and the Disciplines for the Accountancy Review Mechanism In keeping with the function Sector) also include greater disciplines. WTO mem- of the Trade Policy Review Mechanism (TPRM) as a bers usually are required to take such reasonable way of exploring the general context for, and formu- measures as may be available to them to ensure lation of, members' trade policies without exploring compliance with WTO disciplines by local govern- their implementation of particular WTO commit- ments and nongovernmental entities. ments (the TPRM is not linked to the Dispute Set- The chapter next turned its attention to disci- tlement System), trade policy reviews could include plines on transparency in selected regional trade a section on regulatory transparency. Although agreements. All the agreements studied require some might argue that domestic regulatory prac- publication of legislative and subordinate measures tices, strictly speaking, are not trade policies, such at the time of entry into force. They also require practices clearly affect trade, and their inclusion uniform, impartial, and reasonable administration would give trading partners a better understanding of administrative decisions, and an opportunity for of the context in which trade policy is made-one review and appeal. Many agreements also include of the purposes of the TPRM. Furthermore, trans- more detailed disciplines, including those for spe- parency underpins all WTO agreements and, cific sectors (e.g., telecommunications). Most of the indeed, the TPRM itself. Including a section on agreements studied also include prior notification transparency in domestic regulation in the trade between governments or prior consultation with policy review report prepared by the WTO secre- interested parties as a domestic procedure; how- tariat could disseminate information about best ever, this is generally only required "to the (maxi- practices among WTO members, and the format of mum) extent possible" or "when so established by trade policy reviews would offer other members the laws." Although transparency disciplines in regional 24 Domestic Regulation and Service Trade Liberalization agreements among developing economies tend to sectors. Horizontal disciplines also can prevent sec- be weaker than those in agreements among indus- toral special interests from blocking progress and trial countries, they sometimes exceed WTO can allow for economy of negotiating effort and requirements. clarity of obligations. Arguments for a sectoral The chapter also examined a range of practices approach include the facts that not all service sec- at the national level in both OECD and non-OECD tors are traded to the same extent and that priori- countries. Overall there seems to be a trend toward ties for disciplines could differ. Moreover, develop- prior consultation for subordinate measures, with ing countries with limited administrative capacity practices taking different forms at different stages may wish to focus on priority sectors and measures, of preparation. Certain types of measures generally and may be more willing to accept increased trans- are excluded from prior consultation: those relating parency disciplines on a sectoral basis. Horizontal to urgent problems of safety, health, and environ- and sectoral approaches need not be mutually ment or military and foreign affairs and national exclusive, however; a basic set of horizontal rules security; and those that merely meet an obligation could be supplemented by sector- or mode-specific under an international agreement or are of a minor rules, as appropriate. nature. In most cases, regulatory authorities must The administrative burden could be lessened, explain any exceptions. Measures of local govern- depending on the form of any further transparency ments and other self-governing subentities also are disciplines. The disciplines could, for example, often excluded from prior consultation. Practices (a) be formulated as general objectives, allowing vary more widely for legislative measures, reflecting maximum flexibility for implementation in line with different political systems or institutional struc- level of development and existing administrative and tures. Whatever the political system, however, when regulatory systems; (b) build to the greatest extent a draft measure is before the legislative branch, possible on existing domestic structures and prac- consultation takes place only through elected rep- tices; or (c) include appropriate exceptions and carve resentatives. Although public hearings are held in out subnational-level measures. Special and differen- some cases, direct participation by foreign inter- tial treatment for developing countries might also be ested parties is generally limited. considered-for example, through longer transition Some OECD members have horizontal adminis- periods, a requirement that members consider trative procedures legislation that imposes disci- another member's level of development and admin- plines on administrative decisions, but in other istrative capacity when interpreting "a reasonable countries those disciplines are prescribed in spe- period," or a "peace clause" subsequent to the imple- cific statutes or guidelines. Developing countries mentation deadline. are increasingly introducing public notice and Possible new transparency disciplines could comment procedures, but, given the countries' lim- establish a list of best practices to be implemented ited resources, the procedures tend to be focused on at the national level, taking the form of an annex, priority issues in specific sectors (e.g., universal applying across all sectors, or a reference paper that service obligations and spectrum management in could be inscribed voluntarily against individual telecommunications) rather than horizontal. sectors, in full or in part. Elements for inclusion in a The final section of the chapter considered a horizontal reference paper are suggested in this range of options for enhancing transparency under chapter, without prejudice to the development of the GATS, including via the WTO or domestic pro- sector-specific disciplines. Options for improving cedures. The section drew attention to a contin- the transparency of scheduled commitments were uum of possibilities, from binding disciplines cov- also considered, including the development of stan- ering all sectors, to best-endeavor commitments dard forms for notifications under GATS Articles adopted in full or in part for some sectors only. III and VII.4, economic needs tests, and for mode 4; Among the arguments raised in support of a hori- improvements to GATS inquiry points (either by zontal approach are the facts that, whereas services the creation of sectoral inquiry points or in the sectors may be diverse, requirements for trans- context of a central code of regulations); and spe- parency are not and that transparency should be cific focus on transparency of domestic regulatory encouraged across all sectors, not just high-profile regimes in WTO trade policy reviews. Transparency in Domestic Regulation: Practices and Possibilities 25 Notes 6. See Article 2.10 of the Technical Barriers to Trade Agree- ment and Annex B, Article 6, of the Sanitary and Phytosan- 1. It could be noted that, in addition to specific disciplines on itary Agreement for emergency cases. transparency, the structure of trade agreements can effect 7. Although both the TBT and SPS Agreements refer to regula- the overall level of transparency achieved. For example, in tions, which may have a significant effect on trade of other the case of services it can be argued that the "negative list- members, the accountancy disciplines refer to "measures, ing" approach to the scheduling of sector-specific commit- which significantly affect trade in accountancy services." ments (found in the North American Free Trade Agree- 8. For a more detailed discussion of possible limits on the ment and the Australia-New Zealand Closer Economic scope of potential disciplines on prior consultation, see Relations Services Protocol) delivers more in terms of OECD (2000). clarity and transparency than does a "positive listing" 9. A standard form is already in use for GATS notifications approach. and it covers the following elements: member notifying; 2. For countries that have been reviewed by the OECD, these article under which the notification is made; date of entry studies of regulatory practices at the national level often into force and duration; agency responsible for enforce- draw on the country reviews conducted under the OECD ment of the measure; description of the measure; members Regulatory Reform Project. Reports are available at for the specifically affected if applicable; and place from which Czech Republic, Denmark, Greece, Hungary, Ireland, Italy, texts are available. Japan, the Republic of Korea, Mexico, the Netherlands, 10. Although the scheduling guidelines (MTN.GNS/W/164/ Spain, and the United States, and reports on Poland and the Add. 1) state that members should indicate the main crite- United Kingdom are forthcoming. See www.oecd.org/ ria on which the ENT is based, few members have done so. regulatoryreform for additional information. 3. As noted previously, distinctions between subordinate and legislative measures may vary among WTO members in References view of their differing legal and constitutional systems. 4. It may also be interesting to consider discrimination OECD (Organisation for Economic Co-operation and between stakeholders at the national level, such as between Development). 2000. Trade in Services: Transparency in Domes- producer and consumer groups. tic Regulation: Prior Consultation. TD/TC/WP(2000)3 1/FINAL. 5. Note that this process is not limited to parliamentary sys- Paris. tems. In Mexico both branches can propose draft legislative . 2001. "The Scheduling of Economic Needs Tests in measures and the executive branch can conduct prior con- the GATS: Follow up Work, TD/TC/WP(2001)5/FINAL. Paris. sultation before the measures are submitted to the legisla- Stiglitz, Joseph E. 1999. "On Liberty, the Right to Know, and tive branch. Enactment of legislative measures also may be Public Discourse: The Role of Transparency in Public Life." initiated by the legislative branch itself. Oxford Amnesty Lecture, January 27, Oxford, U.K. --- - -- ADDRESSING REGULATORY DIVERGENCE THROUGH INTERNATIONAL STANDARDS: FINANCIAL SERVICES Joel P. Trachtman Executive Summary coordinate through them. Such a strategy could be The member states of the World Trade Organiza- analogous to the WTO approach to cooperation tion (WTO) must determine what types of actions, with the Codex Alimentarius and other organiza- if any, to take pursuant to the Article VI.4 work tions through the Sanitary and Phytosanitary program in order to discipline national regulation Agreement of the General Agreement on Trade in of financial services. One alternative is to defer to Services. This type of cooperation would result in other organizational structures, including plurilat- the hardening into semi-soft law of standards eral or multilateral functional organizations such as promulgated by organizations like the Basel Com- the Basel Committee, the International Association mittee, IOSCO, and IAIS. of Insurance Supervisors (IAIS), the International States must also determine whether to act verti- Organization of Securities Commissions (IOSCO), cally in specific sectors or horizontally across sectors. or the Organisation for Economic Co-operation It appears that the first initiatives will be vertical and Development (OECD); international financial until sufficient experience is gained to consider hori- organizations such as the International Monetary zontal proposals. Of course, broader standards, such Fund; or regional organizations such as the Euro- as "necessity," could be established on a horizontal pean Community (EC) or the North American Free basis, but they would adapt themselves to particular Trade Agreement. Organizations such as the Basel sectors and circumstances through dispute settle- Committee, IAIS, and IOSCO (standard-setting ment. Furthermore, states must determine what bodies, or SSBs) articulate "soft" law; that is, law types of specific rules, or what types of more general that is not binding in formal legal terms but that judicially applicable standards, to develop to may nonetheless have substantial binding force. enhance liberalization while adequately protecting A slightly different alternative to simply defer- regulatory values. Specific rules would include, for ring to these organizations is to cooperate with and example, specific harmonized regulation, or specific Many thanks to Dale Honeck, Gabrielle Marceau, Aaditya Mattoo, Julia Nielson, Joseph Norton, Pierre Sauve, Marc Steinberg, and other participants in the OECD-World Bank Services Experts Meeting held in Paris, March 4-5, 2002, for their advice in connection with this chapter. 27 28 Domestic Regulation and Service Trade Liberalization requirements of recognition. Judicially applicable where they bear the consequences of their own standards range from national treatment to necessity inefficient regulation, it may be best to avoid multi- to a balancing test. lateral legally binding action. Financial regulation is always an intervention- Another alternative is to defer to other organiza- an interference-in the free market. Of course, tional structures, including plurilateral or multilat- such intervention may support the free market or eral functional organizations such as the Basel may be designed to achieve other social goals. In Committee, the International Association of Insur- domestic societies a central government decides ance Supervisors (IAIS), the International Organi- about the scope of interference in the free market; zation of Securities Commissions (IOSCO), or the this contrasts with the circumstance in interna- Organisation for Economic Co-operation and tional society, whereby a variety of functional Development (OECD); international financial organizations have responsibility for varying organizations such as the International Monetary phases of the same question. Even in federal and Fund (IMF); or regional organizations such as the quasi-federal systems like those of the United States European Community (EC) or the North Ameri- and EC, a central government decides on the rela- can Free Trade Agreement (NAFTA). Organizations tionship between free trade in financial services such as the Basel Committee, IAIS, and IOSCO and regulation of financial services. In the EC this articulate "soft" law-that is, law that is not for- decision is reflected in single-market directives mally binding but that may nonetheless have sub- such as the Second Banking Directive. In the multi- stantial binding force. lateral system, institutions have not yet arisen that A slightly different alternative is to cooperate can make and enforce integrated binding law in this with and coordinate through these organizations, field. Although WTO law is somewhat more bind- rather than simply deferring to them. Such a strat- ing than many other types of international law, and egy could be analogous to the WTO approach to is intended to be binding whereas SSB standards cooperation with the Codex Alimentarius and are not, WTO law has not integrated a full range of other organizations through the Sanitary and Phy- social policies. tosanitary (SPS) Agreement. This type of coopera- tion would result in the hardening of standards Constructing the Article V1.4 Work promulgated by organizations like the Basel Com- Program for Financial Services mittee, IAIS, and IOSCO into semi-soft law. A second parameter to evaluate is whether to act The member states of the World Trade Organiza- vertically in specific sectors or horizontally across tion (WTO) must determine what types of actions sectors.2 It appears that the first initiatives will be to take pursuant to the Article VI.4 work program vertical until sufficient experience is gained to con- in order to discipline national regulation of finan- sider horizontal proposals. Of course, broader stan- cial services.' There are several parameters that dards, such as "necessity," could be established on a must be evaluated in order to determine the WTO's horizontal basis but they would adapt themselves to action. particular sectors and circumstances through dis- The first parameter is whether WTO action to pute settlement.3 discipline national regulation is required. Under Another parameter to evaluate is what types of current circumstances, the WTO should begin with specific rules, or what types of more general judi- a laissez-regler attitude, as expressed in the "pruden- cially applicable standards, should be developed to tial carve-out.' However, as in other areas of regula- enhance liberalization while adequately protecting tory standards, international discipline must be regulatory values (see Nicolaidis and Trachtman considered to address problems of hidden discrimi- 2000). Specific rules would include, for example, nation and of disproportionate regulation. Where specific harmonized regulation, or specific require- discipline is needed, the WTO must compare its ments of recognition. Judicially applicable stan- institutional capabilities with the alternatives. dards range from national treatment to necessity to One alternative is simple autonomous action by a balancing test. states, in the "market" of ad hoc diplomacy. Where It is obvious that action will not exclusively take states are not motivated by protectionism and one or the other of the above forms. Rather, it is to Addressing Regulatory Divergence through International Standards: Financial Servkes 29 be expected that a work program will use specific of social values, such as accuracy in allocation of tools, depending on specific circumstances, and capital, mobilization of capital, and financial stabil- that a combination of the types of devices ity.5 On the other hand, it must be understood that described above will likely be selected in any par- competition and broader markets can assist the ticular circumstance. Although we must begin regulator in achieving its goals in part by creating with vertical particularity, experience and negotia- the prerequisites for profitability and, conse- tion will show the efficiency of horizontal disci- quently, for sound financial services providers and plines of particular types. General judicially appli- stable markets. cable standards are more conducive to horizontal Thus we recognize that there may be tensions application than are specific rules of recognition between free trade goals on one hand and regula- or harmonization. tory goals on the other hand. This is natural: all reg- At a deeper level, the choices made will reflect a ulatory interventions are derogations from a hypo- degree of compromise of domestic regulatory val- thetical "free" market.6 This tension exists regardless ues. It is neither unnatural nor inappropriate to of the institutional form that it takes. In a rather compromise regulatory values, or perhaps domes- imprecise way, we may understand the WTO as the tic autonomy in implementing regulatory values, institutional embodiment of the "free" market, under some circumstances to achieve trade liberal- whereas international financial regulatory organiza- ization goals. The wisdom of doing so depends on a tions such as the Basel Committee, IAIS, and cost-benefit analysis of regulatory autonomy versus IOSCO are the avatars, or at least the representa- liberalization. Each circumstance will present a dif- tives, of regulation. (I refer to these three organiza- ferent cost-benefit profile, and so no overarching tions collectively as "standard-setting bodies" or policy advice can be developed. However, it is "SSBs.")7 This chapter will examine the tension important to construct institutions that can help between free trade and regulation in the context of set out the options, evaluate their costs and bene- the relationship, both actual and potential, between fits, and enable states to negotiate or otherwise to the WTO and the SSBs. work out suitable outcomes.4 Although there is a tension between free trade Liberalization will require some degree of goals and regulatory goals, both sets of goals are domestic deregulation, but it is essential to recall responsive to societal needs and may be pursued that international trade does not necessarily require together in a synergetic relationship. Thus the EC deregulation. Rather, it will be useful under some provides an example of a system of separate juris- circumstances to replace domestic regulation with dictions that have permitted free trade in banking, international regulation in the form of harmonized securities, and insurance services on the basis of standards and perhaps centralized coordination. mutual recognition, predicated on a particular level Thus coexisting and competing with the trade of "essential" harmonization (see Trachtman 1995). perspective on international movement of services, at least in the area of financial services, is a regula- tory perspective. The regulatory perspective is con- r atory Barries cerned about the possibility of regulatory arbitrage, or simply of regulatory failure, because of the limi- As the types of regulatory barriers that impede tations of national regulation based on national trade in services generally, and financial services in jurisdiction. Firms such as BCCI, Daiwa, Barings, particular, have already been catalogued, it will and now Enron have come to symbolize this type of serve here simply to refer to them (see Sauve and failure. The regulatory perspective is concerned Steinfatt 2001): more with the goals of regulation than with the goals of free trade and competition in financial Licensing requirements services, although free trade and competition may Local ownership requirements have important positive or negative effects on the Discriminatory regulation ability to achieve regulatory goals. Geographic Inefficient regulation deregulation to provide market access may necessi- Quantitative/market access restrictions: stock tate prudential re-regulation to ensure protection exchange seats and the like. 30 Domestic Regulation and Service Trade Liberalization Not all of these are subject to Article VI.4. Some ment." This language seems to deny the exception must be addressed and scheduled under Articles where there is an intent to evade other GATS com- XVI and XVII (see WTO Working Party on Domes- mitments. The regulatory exceptions included in tic Regulation 2001). the Telecommunications Annex do not include Of course, most states reviewed their schedules such a caveat (see Annex paragraph 5 [e] ). of concessions to be sure that they did not require In addition, one could expect that a measure them to modify their regulatory structures: the might be attacked on the basis that it is not prop- General Agreement on Trade in Services (GATS) erly or sufficiently "for prudential reasons." It is served more as an instrument of standstill than as difficult to predict how a WTO panel or the Appel- an instrument of active liberalization, at least in late Body would approach this requirement. How- connection with regulatory barriers to trade. More- ever, one possibility is that it might be treated the over, in the financial services field a prudential same as Article XX(g) of the GATT, which provides carve-out, contained in paragraph 2(a) of the an exception from other GATT disciplines for Annex on Financial Services provides that: measures "relating to the conservation of exhaustible natural resources." Earlier GATT dis- Notwithstanding any other provisions of [the pute resolution jurisprudence required that mea- GATS], a Member shall not be prevented from sures sought to be justified under this provision be taking measures for prudential reasons, includ- "primarily aimed" at such conservation. In United ing for the protection of investors, depositors, States-Shrimp, the Appellate Body appears to have policy holders or persons to whom a fiduciary abandoned the "primarily aimed at" test and duty is owed by a financial service supplier, or focused instead on the means-ends relationship9 to ensure the integrity and stability of the finan- between the measure and the goal pursued: "We cial system. Where such measures do not con- must examine the relationship between the general form with the provisions of [the GATS], they structure and design of the measure here at stake, shall not be used as a means of avoiding the Section 609, and the policy goal it purports to Member's commitments or obligations under serve, that is, the conservation of sea turtles."'0 By the Agreement. analogy, in order for a measure to benefit from the prudential carve-out of paragraph 2(a) of the Once this carve-out was negotiated, it was no GATS Annex on Financial Services, it would not longer thought necessary for financial services reg- need to be "primarily aimed" at prudential regula- ulators to continue to participate in Uruguay tion, but would be required to be "reasonably Round negotiations. However, in theory this carve- related" to the regulatory goal. This is just one of out is overly broad; it leaves undisciplined certain several possible ways that a WTO panel might prudential measures that may perpetuate regula- approach the prudential carve-out. tory barriers-in cases where the deadweight losses resulting from the barriers exceed the benefits of The WTO and the SSBs regulatory autonomy. Of course, its application depends on how the term "prudential" is defined, At the 1996 Singapore Ministerial Meeting, the and how it is used. WTO stated that "[w] e encourage the successful The prudential carve-out may be interpreted to completion of international standards in the limit the scope of action under Article VI.4 in the accountancy sector by IFAC, IASC and IOSCO."'"1 field of financial services insofar as most action This signals the WTO's deference, and in effect del- under Article VI.4 would address prudential mea- egation (at least in part and in political terms as sures. The scope of this prudential carve-out is opposed to legal terms), to these organizations. On unclear,8 especially as Annex paragraph 2(a) con- the other hand, in 1998 the WTO adopted the tinues to state, "Where such measures do not con- Accountancy Disciplines. So the WTO has, to form with the provisions of [the GATS], they shall varying degrees and with varying degrees of for- not be used as a means of avoiding the Member's mality, "delegated" to specific functional organiza- commitments or obligations under the Agree- tions the task of establishing standards to facilitate Addressing Regulatory Divergence through International Standards: Financial Services 31 the free movement of accountancy services. This dards and licensing requirements do not constitute particular delegation is not inconsistent with prior unnecessary barriers to trade in services. .. ." Such practice in other particular areas, such as food disciplines would ensure, among other things, that safety standards (Codex Alimentarius Commis- qualification requirements are "not more burden- sion) and general product standards (Interna- some than necessary to ensure the quality of the tional Organization for Standardization) (see service. " This, of course, is not a proportionality Sykes 1995, pp. 58-60). We can begin to see some requirement per se, but rather an agreement to evidence of a common institutional solution to the develop disciplines based on a proportionality stan- "trade and . . . problem" using informal "dele- dard. Given the indefiniteness of the proportionality gation" to specialized functional international standard, it is difficult to see this provision as organizations. The further question, however, is strongly binding in a legal sense. how will the WTO ensure that these organizations The Uruguay Round Decision on Professional reflect appropriately the trade perspectives that Services called for the work program under Article concern the WTO? This is an agency problem: to VI.4 dealing with professional services to be put the extent that these functional organizations are into effect immediately, and called for the establish- acting as agents of the WTO, how can the WTO ment of a Working Party on Professional Services ensure that they are faithful and diligent agents (now the Working Party on Domestic Regulation) whose incentives are congruent with those of the to develop "the disciplines necessary to ensure that WTO? The WTO, or more correctly its member measures relating to qualification requirements states, must review the structures and goals of and procedures, technical standards and licensing these organizations before determining the scope requirements in the field of professional services do of the delegation. Perhaps the best way to think of not constitute unnecessary barriers to trade." The these problems is to recognize that the member Decision on Professional Services also established states are the ultimate principals: these are multi- work in the accountancy sector of professional ple principal-multiple agent problems. services as a priority, calling among other things for establishment of disciplines referred to in Article The GATS Process VI.4 and for the use of international standards. It further called on the Working Party on Professional This section relies considerably on, and provides an Services to "encourage the cooperation with the rel- opportunity to particularize, the more general evant international organizations as defined under description of the GATS disciplines on domestic paragraph 5(b) of Article VI, so as to give full effect regulation contained in the author's "Lessons for to paragraph 5 of Article VII."'2 the GATS" (Chapter 5 in this volume). Except for the prudential carve-out, paragraph 10 of the Understanding on Commitments in Financial Ser- imitedgIncentivesforArticle 1.4aPositive vices, and certain less important differences, the Integration Resulting fromWeakNegative treatment of nondiscriminatory regulation of I financial services conforms with the general struc- As described in Chapter 5, "Lessons for the GATS' ture of Article VI. Article VI.5 provides little beyond a standstill to discipline nondiscriminatory regulation.'3 Thus Article VI.4 and theAccountancy Disciplines one would not expect substantial judicially applied disciplines on disproportionate domestic regula- Article VI.4, which appears to be applicable regard- tion. Of course, in the area of financial services this less of the member's commitments (although I is accentuated by the prudential carve-out. In some understand this is the subject of debate), is forward other contexts, such as the United States under the looking, calling on the WTO's Council for Trade in Commerce Clause, and the EC, judicial scrutiny of Services to develop any necessary disciplines "with a disproportionate measures has served as an incen- view to ensuring that measures relating to qualifica- tive for more specific legislative action (see, e.g., tion requirements and procedures, technical stan- Weiler 1991). 32 Domestic Regulation and Service Trade Liberalization The Understanding on Financial Services which is to promote information exchange among regulators. This chapter addresses the Basel Com- The ATS ndertandng o Finncia Serices mittee on Banking Supervision, the IALS, and the forms a template that some states have used for mOtCO Te organizions he much in com their financial services commitments. By its terms, the Understanding, where accepted in a member's mon with the Codex Alimentarius Commission, ' . ~~~~~~the International Standards Organization, and schedule, only replaces Part III of the GATS, which the Inter s tandrd ganizatin and includs onlythe naionaltreatmnt andmarke other "soft" or "semi-soft"'4 norm generators in the includes only the national treatment and market godsetr access provisions (and not the domestic regulation goos sector. .. . . ....................This section will describe the standard-setting provisions). Article 10 of the Understanding, bodies, with particular attention to the kinds regarding "nondiscriminatory measures'" is horta- of norms they produce and the process by which tory, calling on each member to "endeavour" to they prepare these norms. It will also examine the remove or to limit significant adverse effects on ypp remveorocnoadirsc atsor extent to which these norms call for, substitute for, financial service suppliers of nondiscriminatory or are themselves barriers to trade. This description regulatory measures. As such, it seems to add little will prepare us to speculate regarding the types of to the provisions of the GATS itself and the Annex relationships that the SSBs may have with the on Financial Services, recognizing that the pruden- WTO. tial carve-out of paragraph 2(a) of the Annex As we begin, however, it is worth noting that at would seem not to be overridden by this hortatory least the Basel Committee would not qualify as a language. "relevant international organization" under foot- note 3 to Article VI.5(b) of the GATS as its mem- Article VI, Article XC bership does not appear to be open to all members and the Line of Equilibrium of the WTO. Therefore its standards would not be Thus there are three possible sources of a rule of taken into account in determining whether a mem- necessity or proportionality that might be applied ber was in conformity with Article VI.5(a). IAIS to a domestic regulation under the GATS. First, and and IOSCO may be more likely to qualify. Thus least likely, is the "reasonableness" requirement, there may be a need to develop a multilateral bank applicable to scheduled sectors, under Article VI. 1 regulatory organization to fulfill this role under of the GATS. Second, is the weak discipline of Arti- Article VI.5(b). Of course, the prudential carve-out cle VI.5 itself, but weakened further by the pruden- would obviate this need wherever it applies. Fur- tial carve-out. Finally, in the event of a finding of thermore, recognition arrangements under Article violation, a measure might be exempted under VII would remain available. Article XIV. In the Shrimp case, the Appellate Body opined that determining whether a national mea- The Basel Committee sure complied with the textually similar chapeau of Article XX of the GATT required it to search for a The Basel Committee is the leading, and the exem- "line of equilibrium" between trade values and plary, SSB in financial services. It has been devel- other values (WTO Appellate Body Report 1998, oped principally to address the problem of adverse para. 17). externalities resulting from contagion. The SSB "Soft Law" Process History, Membership, and Purpose The Basel Committee was established by the central bank During the past few decades we have observed the Governors of the Group of Ten countries at the end rise of several forums used by domestic regulators of 1974, in response to two large international bank to coordinate their activities. These forums are failures. The committee's members are the central characterized by the "soft" nature of the norms they banks or other bank supervisory authorities of Bel- produce and the uncertain domestic authority of gium, Canada, France, Germany, Italy, Japan, Lux- the domestic regulators to make agreements. These embourg, the Netherlands, Spain, Sweden, Switzer- forums have a number of functions, not least of land, the United Kingdom, and the United States. Addressing Regulatory Divergence through International Standards: Financial Services 33 On its Web site (http://www.bis.org/bcbs/about Decisionmaking in the Basel Committee We bcbs.htm) the Basel Committee describes its formal might describe the Basel Committee as a "network" role as follows: that lacks its own formal legal authority, but which has the ability to coordinate and engage the formal The Committee does not possess any formal legal authority of its members (and of other states supranational supervisory authority, and its as well).20 Indeed, the Basel Committee has no for- conclusions do not, and were never intended to, mal constitution or by-laws and no staff of its own. have legal force. Rather, it formulates broad It makes decisions by consensus (see Zaring [1998] supervisory standards and guidelines and rec- citing Lichtenstein [1991]). When decisions are ommends statements of best practice in the made by consensus, there is less reason to be con- expectation that individual authorities will take cerned about compliance. There is also the possibil- steps to implement them through detailed ity that one or a few states can delay agreement. arrangements-statutory or otherwise-which are best suited to their own national systems. In IOSCO this way, the Committee encourages conver- gence towards common approaches and com- IOSCO is the leading SSB in the field of securities mon standards without attempting detailed har- regulation. Securities regulation includes a number monisation of member countries' supervisory of types of regulation, principally regulation of techniques. securities offerings (transaction regulation) and of broker-dealers or investment banks (institutional The committee reports to the central bank Gov- regulation). ernors of the Group of Ten countries and seeks the governors' endorsement for its major initiatives. In History, Membership, and Purpose IOSCO, addition, however, because the committee contains presently based in Madrid, is the leading multilat- representatives from institutions that are not cen- eral organization that addresses securities regula- tral banks, the decisions it makes carry the commit- tion (see Sommer 1996, p. 31; and Norton 1995). ment of many national authorities outside the cen- Like the Basel Committee, its members are not tral banking fraternity. These decisions cover a very states per se but regulators charged with the relevant wide range of financial issues. One important subject matter. IOSCO has broader membership objective of the committee's work has been to close than the Basel Committee, including a large number gaps in international supervisory coverage in pur- of developing countries. It has no charter or consti- suit of two basic principles: that no foreign banking tutive treaty but does have constitutive by-laws. establishment should escape supervision, and that Like the Basel Committee, IOSCO differs from the supervision should be adequate. To achieve these GATS because of the specificity of its focus and by objectives, the committee has issued a number of virtue of its emphasis on regulation rather than trade documents since 1975.15 as a motivation. Its institutional character is similar to the Basel Committee with respect to bank regulation Standards Promulgated by the Basel Committee (see Norton 1995): it does not legislate (as the GATS The Basel Committee has taken a leading role in may do under Article VI.4) in a legally binding sense developing capital adequacy standards for financial but issues consensual recommendations that its institutions (the "Basel Accord" ),'6 in organizing an members are bound, in an ethical or political sense, understanding of the allocation of supervisory to implement. IOSCO functions to assemble com- jurisdiction and responsibility with respect to parative information regarding national securities international banking organizations (the "Basel regulation and to provide a forum for cooperation Concordat"),'7 in developing minimum standards and coordination among securities regulators, culmi- for regulation of international banking organiza- nating in annual meetings. The comparative infor- tions (the "Basel Minimum Standards"),'8 and in mation that it assembles can be used as a basis for developing core principles for bank supervision efforts at harmonization, mutual recognition, or uni- (the "Basel Core Principles").'9 lateral law reform. 34 Domestic Regulation and Service Trade Liberalization IOSCO states its objectives as follows: information, and (e) investment management. The concerns of the Emerging Markets Committee, rep- To cooperate together to promote high stan- resenting emerging securities market regulators, are dards of regulation in order to maintain just, increasingly dovetailing with those of the Technical efficient and sound markets; to exchange infor- Committee. IOSCO generally adopts standards by mation on their respective experiences in order consensus (Guy 1992). to promote the development of domestic mar- kets; to unite their efforts to establish standards and an effective surveillance of international securities transactions; to provide mutual assis- History, Membership, and Purpose The IAIS, tance to promote the integrity of the markets by established in 1994, comprises insurance regulators a rigorous application of the standards and by and supervisors from more than 100 jurisdictions, effective enforcement against offenses.2' including all US. states and all EC member states.25 These include both local and national authorities, Standards Promulgated by IOSCO The 1998 as well as banking and other financial regulators, Objectives and Principles of Securities Regula- depending on the allocation of authority in the rel- tion22 plays a role in securities regulation parallel to evant state. For the United States it includes the the Basel Core Principles. In 1998 IOSCO also National Association of Insurance Commissioners issued International Disclosure Standards for because insurance is regulated by the states. It Cross-Border Offerings and Initial Listings by For- includes the European Commission as well as the eign Issuers.23 This document deals with cross- OECD. border public offerings-an activity that broadly The IAIS was formed for the following purposes: differs from cross-border banking because it is not subject to institutional regulation but to transac- * To promote cooperation among insurance tion regulation. regulators Of course, securities regulation and bank regula- * To set international standards for insurance tion differ and there are different motivations for supervision regulatory cooperation in the two fields. These * To provide training to members motivations, however, are largely based on (a) possi- * To coordinate work with regulators in the other bilities of adverse externalization resulting from lax financial sectors and international financial regulation of foreign-based financial institutions, institutions.26 (b) avoidance of perceived regulatory competition (which is most problematic in cases of externaliza- The IAIS issues papers and holds seminars on tion),24 (c) possibilities for regulatory economies of subjects related to insurance supervision. It is sup- scale in supervision and in compliance for private ported by a secretariat located at the Bank for Inter- actors, and (d) avoidance of protectionism. Factors national Settlements in Basel, is headed by an exec- (c) and (d) most engage the WTO. utive committee, and has three main committees: the Technical Committee, the Emerging Markets Decisionmaking in IOSCO IOSCO's work is done Committee, and the Budget Committee (IAIS 2000, through two main committees: the Technical Com- p. 5). The Technical Committee is responsible for mittee and the Emerging Markets Committee (for- developing standards. merly the Development Committee). The Technical Committee was, until the admission of Mexico in Standards Promulgated by IAIS The IAIS issues 1993, the exclusive province of developed country principles, standards, and practices papers. In securities regulators seeking to exchange informa- recognition of regulatory diversity among its mem- tion and coordinate their regulation. The Technical bers, these principles, standards, and practices are Committee has five working parties: (a) multina- not mandatory, but members are expected to tional disclosure and accounting, (b) regulation of report on their level of compliance (Pooley 1998). secondary markets, (c) regulation of market inter- The IAIS sets out principles that are fundamental mediaries, (d) enforcement and the exchange of to effective insurance supervision. These "princi- Addressing Regulatory Divergence through Intemational Standards: Financial Services 35 ples" form the bases for "standards," which focus of "soft law" principles or standards combined with on particular issues and describe best or most pru- statements regarding international supervisory dent practices. Periodically, insurance supervisors cooperation, including statements allowing home carry out self-assessments and provide informa- country regulatory quality to be assessed as a con- tion on those self-assessments to the IAIS secre- dition for licensing in a host country. tariat "so the IAIS can review the extent to which members are in compliance with the principles."27 Decisionmaking in IAIS The IAIS develops stan- The Insurance Core Principles state that "[t]he dards through its Technical Committee. Once a Insurance Core Principles comprise essential prin- standard is reviewed in the Technical Committee, it ciples that need to be in place for a supervisory sys- is sent to all members of IAIS for comment. The tem to be effective. Insurance Supervisors Should standard is then considered at an annual meeting Apply the Insurance Core Principles in the supervi- (Pooley 1998). sion of all insurers within their jurisdiction" (IAIS 2000, para. 1.2). Principles address issues such as asset and liability risk, capital adequacy, supervi- ACrItiqueofthe Basel Committee LS sion of cross-border operations, and cooperation with foreign regulators. The Basel Committee, IAIS, and IOSCO, like the The IAIS has issued Principles Applicable to the WTO, do not bring to bear the full range of societal Supervision of International Insurers and Insur- preferences and values of each of their members. ance Groups and Their Cross-Border Business For example, the Basel Committee is fundamentally Operations (Insurance Concordat), December unidimensional, focusing on the safety, soundness, 1999. These principles are modeled on the Basel and stability of the banking system.28 The WTO, on Concordat and the 1992 Minimum Standards for the other hand, is relatively unidimensional in the Supervision of International Banking Groups another way, resulting in measures like the pruden- and Their Cross-Border Establishments, and they tial carve-out. provide, for example, that no foreign insurer shall The WTO is relatively ignorant of the subject go unsupervised. They allocate supervisory author- matter and concerns of the SSBs, and, as shown in ity between host and home country authorities, the trade and environment sphere, lacks the formal depending in part on whether the entity is orga- equipment to provide an integrated policy nized as a branch or a subsidiary. Although not response. That is, an SSB might make policy in a requiring recognition per se, these statements are way that insufficiently reflects concern for free related to recognition because they allocate certain trade in financial services, whereas the WTO might supervisory jurisdiction to the home country regu- make policy in a way that insufficiently reflects con- lator. IAIS statutes provide that cern for safety, soundness, and stability. Thus it is not enough simply to incorporate by reference the In deciding whether, and if so, on what basis, to decisions of one forum in the other, nor is it accept- license or to continue a license of a subsidiary or able any longer for these forums to ignore one branch of a foreign insurer in its jurisdiction, another. There must be inter-forum negotiation the host supervisor may need to assess on a case- and compromise.29 by-case basis the effectiveness of the supervision Of course, it might be argued in response that of the foreign insurer in its home jurisdiction, the negotiation, compromise, and policy integra- consulting the home supervisor as necessary. tion take place at the level of the member state, and The assessment should take into account IAIS that each state will bring its integrated position to general supervisory principles and standards each forum in which it participates. However, these and the ability of the home supervisor to apply forums are not simply places of exchange; they sanctions to prevent corporate structures that must also be places of deliberation that can result in conflict with effective supervision. modified preferences. These forums lack the com- plete political system found in domestic society Thus IAIS follows a similar pattern to that that allows for the full exercise of deliberative exhibited in the Basel Committee context: a range democracy (see Porter 2001). 36 Domestic Regulation and Service Trade Liberalization The Trade Restrictive Impact of International or through Korea Beef32 or Asbestos33 balancing that Regulatory Standards referred to the SSB standard. In turn, it is important to note that the Basel Greaer olic inegrtionhasbecme ncesary Core Principles reflect, in substantial measure, because it is clear that international regulatory standards can have trade-restrictive effects, and prior U.S. regulatory policy (see Baxter and Freis 1999; Norton and Olive 2001). Thus we may under- greater liberalization can have adverse regulatory stand SSBs as veh for The m erayization effects. Thus the narrowly functional organizations that serve as avatars of these principles can harm and legitimation of unilateral policy. one another's ability to achieve its goals-can create adverse "cross-functional" externalities (see The SSB Process and the International Trachtman 2000). Financial Institutions For example, the Basel Core Principles are As the international financial institutions (IFIs), intended to serve as a basis for states to deny appli- principally the IMF and World Bank, have sought cations for branching or other entry from banking to deal with recent financial crises, they have turned organizations based in states that fail to comply increasingly to microeconomic factors in the form with the principles as a basis to restrain trade in of financial regulation, particularly bank regulation financial services. This seems appropriate, but there in the afflicted states. The IMF especially has grown may be a less trade-restrictive way to achieve the concerned about compliance with SSB standards. goals of financial integrity and stability. Further- "Consideration is being given to the gradual inclu- more, if the Basel Committee had considered the sion of standards in Fund conditionality" (Gianviti benefits of unencumbered trade in financial ser- 2000, p. 110). The eligibility criteria for the IMF's vices, they might have decided on a different for- Contingent Credit Lines include "a positive assess- mulation of principles. In this sense we might say ment of policies and progress toward adherence to that the Basel Core Principles are not terribly dif- internationally accepted standards."-4 ferent from the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes How the IMF Supports the Basel Core Principles and Their Disposal.30 Both Basel emanations serve The IMF, the World Bank, and other international as bases for states to restrict trade for regulatory financial institutions have, during the past decade, purposes, and both are valid expressions of public increased their focus on regulatory standards as policy, which must be integrated commensurate bases for sound financial sectors. They have devel- with international trade public policy. oped the Financial Sector Assessment Program (FSAP) and the Reports on Observance of Stan- The Unilateral Use of SSBs dards and Codes (ROSC) to provide assessments of members' compliance with SSB standards among The SSBs may be used as a basis for unilateral other things. In July 2001 the G7 made the follow- measures by states. For example, in its review of ing statements regarding the SSB standards: foreign banking organizations under the Foreign Bank Supervision Enhancement Act (FBSEA),3' the Authoritative information on observance of United States examines the extent to which the for- codes and standards should be fully integrated eign banking organization's home jurisdiction reg- into enhanced IMF surveillance under Article ulates in compliance with the Basel Core Principles. IV, increasing its effectiveness as a tool for crisis Thus the SSBs may support unilateral action, and prevention. This is a critical step, and the IMF SSBs may be enforced and implemented through should work expeditiously to implement it. The unilateral action. If Article VI.5(a) of the GATS work being taken forward in the Fund on the provided substantial proportionality-type restric- modalities for using codes and standards infor- tions, unilateral measures that complied with SSB mation to guide and inform surveillance is an standards might be protected by virtue of an inter- important step in this direction and we encour- pretation of the Shrimp-Turtle "line of equilibrium" age its early completion. Addressing Regulatory Divergence through International Standards: Financial Services 37 Work to assess compliance with, and to cymaking between the trade sector and the financial implement, codes and standards needs to take regulatory sector. As noted above, financial regula- full account of each country's unique develop- tion is always an intervention, an interference in the ment and reform priorities and institutional free market. Of course, such intervention may sup- characteristics. We agree that countries and the port the free market or may be designed to achieve Fund should continue to work, together with other social goals. In domestic societies, a central standard-setters as appropriate, to set priorities government decides about the scope of interference and establish action plans for compliance, in the free market; contrast this with the circum- within the framework of individual economic stance in international society where a variety of reform programs. The existing process for functional organizations have responsibility for assessing compliance, which allows for progres- varying phases of the same question. Even in federal sive implementation of key codes and standards and quasi-federal systems like those of the United according to country-specific economic circum- States and the EC, a central government decides on stances, provides an appropriate mechanism for the relationship between free trade in financial ser- facilitating prioritization.35 vices and regulation of financial services. In the EC, this decision is reflected in single-market directives The IMF and World Bank are encouraging com- such as the Second Banking Directive. pliance with SSB standards. Although these initia- tives do not make compliance mandatory per se, Soft Law, Hard Law, and Hardening Soft Law they provide some incentives for compliance. It might be worthwhile to compare the ROSC and In international society, institutions have not yet FSAP programs with the WTO's Trade Policy arisen that can make and enforce integrated, bind- Review Mechanism (TPRM). Both types of pro- ing law in this field. Although WTO law is some- grams provide enhanced transparency and third- what more binding than many other types of inter- party assessment. However, the programs have dif- national law-and unlike SSB standards, is fering motivations: financial stability on one hand intended to be binding-WTO law has not inte- and trade liberalization on the other. It would be grated a full range of social policies. useful to add market access to the concerns of ROSC and FSAP or, alternatively, for the WTO to add reg- The SPS and Codex Model ulatory policy to the concerns of the TPRM or to create a "regulatory policy review mechanism." As illustrated by the discussion in "Lessons for the GATS, the SPS Agreement shows one possible way The FSF and the WTO The Financial Stability forward. It provides quasi-legislative authority to Forum (FSF) recently prepared a report concerning Codex Alimentarius, the International Plant Pro- incentives to foster implementation of its stan- tection Center (IPPC), and the Office International dards, which include the leading SSB standards des Epizootics (OIE)-the World Organization for (FSF 2001). It is significant that no mention is Animal Health. It is possible that action under Arti- made in this report of the GATS. However, the FSF cle VI.4 could do the same for the SSBs. This would report shows that SSB standards are increasingly provide a way for SSB standards to attain quasi- used as metrics for assessing foreign banks and legislative authority, in addition to that provided by insurance companies prior to permitting them the IMF and other IFIs. Do the SSB standards market entry (FSF 2001, Annex IX). require greater authority? What is the trade interest in them? If the SSB standards could be agreed to as an exclusive basis for evaluation of the market Harnessing the SSB Process to. .. access suitability of foreign financial service Trade Liberalization and the WTO providers, this would presumably liberalize trade in to Regulatory Effectiveness financial services. Moreover, if the FSAP or ROSC The purpose of this section is to begin to analyze the process could be agreed to as an exclusive arbiter of utility and potential for greater integration in poli- compliance, it would further liberalize trade. 38 Domestic Regulation and Service Trade Liberalization Bringing Trade Negotiators to the SSBs: Until this type of treatymaking or other "legisla- Should the WTO Join the FSF? tive" action can be taken, it is still possible for SSB Trade negotiators do not take direct part in the standards to have effects in GATS dispute settle- work of the Codex Alimentarius, the IPPC, or the ment. How should the WTO's program under Arti- OIE, although there are significant informal rela- cle VI-4 of the GATS relate to the SSBs? There are tions between these organizations and the WTO. several parameters that are worth mentioning. Thus the standards promulgated by those organiza- First, if SSBs were judicially enforceable they tions are not as likely to take account of trade con- might be held to supersede WTO law. This would cerns as they would be if trade negotiators partici- be unlikely in WTO dispute settlement, as WTO pated. Of course, national representatives in these dispute settlement does not directly apply non- organizations may be briefed as to trade concerns of WTO law. Alternatively, WTO law produced under their states and may bring those concerns to bear. GATS Article VI.4 might supersede SSB standards. Thus it is possible to allow the cross-functional General WTO law could also come into conflict integration to take place in the member states. with SSB standards-a WTO panel could find that Under some circumstances, however, it may be compliance with SSB standards (e.g., rejection of a more efficient to engage in more direct cross-func- licensing application of a foreign bank) constitutes tional integration, for example, by inviting trade an illegal restriction on market access. Another negotiators to join in SSB meetings. This would possibility would be that the Article VI.4 process allow them more directly to discuss market access would incorporate SSB standards, possibly making issues relating to particular standards. Trade nego- them enforceable in WTO dispute settlement. tiators participating in SSB meetings could reflect on the trade incentives for harmonization, for Concluding Remarks recognition, or for allowing beneficial regulatory competition. Regulators often express concerns It is important to ensure that the SSBs, the IMF, and about a "race to the bottom," but from some stand- the WTO do not work at cross purposes. Each of points it is a race to greater market access and these organizations is intended to reflect a discrete greater efficiency (see, e.g., Kane 2001). set of social values. The question before us is to Alternatively, financial regulators could be what extent, and how, it would be useful to inte- invited to trade negotiations to bring a regulatory grate consideration of these values. Soft law and perspective. This would allow negotiators to move quasi-legislative processes may serve as an appro- beyond a prudential carve-out and actually engage priate way to begin to address the problems of on issues of the relationship between free trade in cross-functional integration. Managing the institu- financial services and regulatory reform. For exam- tional intersection of the SSBs, the IMF, and the ple, more detailed work could be done on the role WTO is a proxy for managing the substantive inter- and extent of essential harmonization as a predicate section of the policy goals they represent. for mutual recognition. It is important to mention that the process of harmonization and recognition has both winners Endnotes and losers. Not all states will benefit from every 1. This article uses the author's more general work on domes- market liberalization measure, or every instance of tic regulation under the GATS contained in Chapter 5, "Lessons for the GATS from Existing WTO Rules on regulatory reform. States may negotiate regulatory Domestic Regulation" (hereinafter, "Lessons for the reform through a "request-offer" system.36 This is GATS"). one of the institutional advantages of the WTO: it is 2. See Mattoo (2000): "a generic approach is to be preferred to a place where states are able to trade to compensate a purely sectoral approach for at least three reasons: it economises on negotiating effort, leads to the creation of one another for accepting a concession that will disciplines for all services rather than only the politically hurt the granting state less than it benefits the important ones, and reduces the likelihood of negotiations receiving state. These (presumptively) Kaldor- being captured by sectoral interest groups." 3. See WTO (2000), calling for a horizontal concept of neces- Hicks superior transactions result in enhanced sity and for disciplines to expand and interpret necessity aggregate welfare. for application to specific sectors. Addressing Regulatory Divergence through International Standards: Financial Services 39 4. It is also important to note that the distributive conse- 12. Article VII.5, as discussed below, calls for recognition based quences of particular arrangements must be addressed. The on multilaterally agreed criteria, requiring that states "work adoption of standards always helps some and hurts others. in cooperation with relevant intergovernmental and non- 5. OECD 2002, p. 3. Feketekuty (1988) argued that "[b]oth governmental organizations towards the establishment and trade policy and regulatory policy have a contribution to adoption of common international standards and criteria make to the smooth and efficient functioning of the world for recognition ..... economy." Consider the following 1993 exchange between 13. For a discussion of the application of the GATS to account- U.S. Congressman Barney Frank and John P. LaWare, ing standards, see Trachtman (1997, p. 63). member, Board of Governors, Federal Reserve System, in 14. I use the term "semi-soft" to refer to the circumstance where hearings on the Free Trade in Financial Services Act, a law the relevant norms are not formally binding in their origi- intended to impose a regime of specific reciprocity in con- nating organization but have taken on greater formal force nection with financial services liberalization in the U.S., in another organization-namely, the WTO-through the and which was opposed by the board of governors. Con- SPS Agreement. Although Codex Alimentarius standards gressman Frank is thinking of the proposed bill, which are not fully binding in the SPS Agreement context, the SPS would impose a rule of reciprocal market access, as a trade Agreement provides enhanced incentives for compliance. issue, and Mr. LaWare is considering it from a regulatory 15. From http://www.bis.org/bcbs/aboutbcbs.htm, visited perspective (U.S. House Committee on Banking, Financ- December 23, 2001. ing, and Urban Affairs 1993, No. 103-96, p. 8). 16. See Basel Committee on Banking Regulation and Supervi- sory Practices 1988. At the time of this writing, the Basel Congressman Frank: I am kind of taken aback when you Acod' si th prcs of ben revsed say the thing is regulation. Where our financial institu- . ' . t . * b tions are restricted, is safety and soundness the reason? 17. Basel Committee on Banking Regulation and Supervisory Mr. LaWare: It may very well be. Practices, Principles for the Supervision of Banks' Foreign Establishments, May 1983. The Basel Concordat has been 6. "There was nothing natural about laissez-faire; free mar- revised and supplemented. See http://www.bis.org/publ/ kets could never have come into being merely by allowing bcbscO04.htm#v3d2, visited December 23, 2001. things to take their course" (Polanyi 1944, p. 139). Polanyi 18. Basel Committee on Banking Regulation and Supervisory identified the "re-regulation" that follows upon market Practices, Report on Minimum Standards for the Supervi- expansion. sion of International Banking Groups and Their Cross Bor- 7. Of course, there are many potential standard-setting bodies der Establishments, June 1992. to consider. The Financial Stability Forum (FSF) itself is 19. Basel Committee on Banking Regulation and Supervisory one, and it refers to the following setters of financial stan- Practices, Core Principles for Effective Banking Supervi- dards: the Basel Committee on Banking Supervision, the sion, September 1997. Committee on the Global Financial System, the Committee 20. For a useful discussion and critique of the Basel Committee on Payment and Settlement Systems, the Financial Action process, see Matthews (1995). Task Force on Money Laundering, the International Associ- 21. See http://www.iosco.org/gen-info.html. ation of Insurance Supervisors, the International Account- 22. See http://www.iosco.org/docs-public/1998-objectives.html. ing Standards Committee, the International Federation of 23. See http://www.iosco.org/docs-public/1998-ntnl_disclosure_ Accountants, the IMF, the IOSCO, and the OECD. Infor- standards.html. mation is available at http://www.fsforum.org/Standards/ 24. See Trachtman (2001a). WhoAre.html. 25. See www.iaisweb.org, visited December 22, 2001; and Poo- 8. Australia has proposed clarification in the WTO Commit- ley (1998). tee on Financial Services (see WTO Committee on Finan- 26. See www.iaisweb.org, visited December 22, 2001; and Poo- cial Services [2000], para. 4). Other states have questioned ley (1998). the utility or feasibility of clarification. 27. See the U.S. National Association of Insurance Commis- 9. See WTO Appellate Body Report (1998), para. 137. sioners ("NAIC") response at http://www.naic.org/lwhats 10. WTO Appellate Body Report (1998), para. 141: "In its gen- new/NAIC_IAIS_%20Response.doc. eral design and structure, therefore, Section 609-Focusing 28. But see Scott and Iwahara (1994), which shows the compet- on the design of the measure here at stake, it appears to us itive aspects of the formulation of the Basel Accord. that Section 609, cum implementing guidelines, is not dis- 29. In formulating the Accountancy Disciplines, SSBs submit- proportionately wide in its scope and reach in relation to ted documentation and gave presentations on their activi- the policy objective of protection and conservation of sea ties to the WTO Working Party on Trade in Services. See turtle species. The means are, in principle, reasonably Honeck (2000). related to the ends. The means and ends relationship 30. Done at Basel, March 22, 1989. Of course, we could also between Section 609 and the legitimate policy of conserv- compare the Montreal Protocol on Substances That ing an exhaustible, and, in fact, endangered species, is Deplete the Ozone Layer, or the Convention on Interna- observably a close and real one, a relationship that is every tional Trade in Endangered Species of Wild Fauna and bit as substantial as that which we found in United States- Flora. Gasoline between the EPA baseline establishment rules and 31. Foreign Bank Supervision Enhancement Act of 1991, Pub. the conservation of clean air in the United States." L. No. 101-242, sections 201-215, 105 Stat. 2236-305 (codi- 11. See WTO (1996), para. 17. The IFAC is closely related to the fied at 12 U.S.C. sections 3101-3111). See Bhala (1994). IASB, but is concerned more with international auditing 32. See WTO Appellate Body Report (2001a). standards than with international accounting standards. 33. See WTO Appellate Body Report (2001a). The IASC is now the IASB. See http://www.iasc.org.uk/ 34. IMF Contingent Credit Lines: A Factsheet, available at cmt/0001.asp. http://www.imf.org/external/np/exr/facts/ccl.htm, visited 40 Domestic Regulation and Service Trade Liberalization January 2, 2002. The IMF refers specifically to the Basel OECD (Organisation for Economic Co-operation and Core Principles. Development). 2002. "Open Services Markets Matter." Paris. 35. G7 Statement on Strengthening the International Financial Polanyi, Karl. 1944. The Great Transformation. New York: System, July 7, 2001. Rinehart and Co. 36. For a similar argument relating to environmental regula- Pooley, George. 1998. "The IAIS: A Progress Report and tion, see Trachtman (2000). Some Thoughts for the Future." Journal of Insurance Regulation 16: 170-78. Porter, Tony. 2001. "The Democratic Deficit in the Institu- References tional Arrangements Governing Global Finance." Global Gover- nance 7: 427-39. Baxter, Thomas C., and James H. Freis. 1999. 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FSF (Financial StabilityForum). 2001."Final Report of the Fol- Sommer, A. A. 1996. "IOSCO: Its Mission and Achievement." low-up Group on Incentives to Foster Implementation of Stan- Northwestern Journal of International Law and Business 17: dards" August 21. . Sykes, Alan 0. 1995. Product Standards for Internationally Gianviti, Francois. 2000. "The Reform of the International Integrated Goods Markets. Washington, D.C.: Brookings Institu- Monetary Fund (Conditionality and Surveillance)." Interna- tion Press. tional Lawyer 34: 107-16. Trachtman, Joel P. 1995. "Trade in Financial Services under Guy, Paul. 1992. "Regulatory Harmonization to Achieve GATS, NAFTA and the EC: A Regulatory Jurisdiction Analysis." Effective International Competition.' In Franklin R. Edwards and Columbia Journal of Transnational Law 34: 37-122. Hugh T. Patrick, eds., Regulating International Financial Markets: . 1997. "Accounting Standards and Trade Disciplines: Issues and Policies. Boston: Kluwer Academic Publishing. Irreconcilable Differences?" Journal of World Trade 31: 63-98. Honeck, Dale B. 2000. "Developing Regulatory Disciplines in . 2000. "Assessment of the Effects of Trade Liberaliza- Professional Services: The Role of the World Trade Organiza- tion on Domestic Environmental Regulation: Toward Trade- tion." In Yair Aharoni and Lilach Nachum, eds., Globalization of Environment Policy Integration." In OECD, Assessing the Services: Some Implications for Theory and Practice. London: Environmental Effects of Trade Liberalisation Agreements: Routledge. Methodologies. Paris. IAIS (International Association of Insurance Supervisors). . 2001 a. "Institutional Linkage: Transcending Trade Task Force on Core Principles Methodology. 2000. "Insurance and. "American Journal of International Law 96: 77-93. Core Principles." October 10. . 2001b. "Regulatory Competition and Regulatory Kane, Edward J. 2001. "Relevance and Need for International Jurisdiction in International Securities Regulation." In Daniel Regulatory Standards." In Robert E. Litan and Richard Herring, Esty and Damien Gerardin, eds., Regulatory Competition and eds., Brookings-Wharton Papers on Financial Services. Washing- Economic Integration: Comparative Perspectives. Oxford, U.K.: ton, D.C.: Brookings Institution Press. Oxford University Press. Lichtenstein, Cynthia C. 1991. "Introductory Note to Bank U.S. House Committee on Banking, Finance, and Urban for International Settlements: Committee on Banking Regula- Affairs, Subcommittee on International Development, Finance, tions and Supervisory Practices' Consultative Paper on Interna- Trade, and Monetary Policy. 1993. 103rd Cong., 1st sess., tional Convergence of Capital Measurement and Capital Stan- November 9. dards." International Legal Materials 30: 967, 969. Weiler, Joseph. 1991. "The Transformation of Europe." 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Prohibition of Certain Shrimp and Shrimp Products. WT/DS58/ . 1995. Devising International Bank Supervisory Stan- AB/R, November 6. dards. London: Graham and Trotman/M. Nijhoff. . 2001a. European Communities-Measures Affecting Norton, Joseph J., and Christopher D. Olive. 2001. "A By- Asbestos and Asbestos-Containing Products. WT/DS135/AB/R, Product of the Globalization Process: the Rise of Cross-Border April 5. Bank Mergers and Acquisitions-the U.S. Regulatory Frame- . 2001b. Korea-Measures Affecting Imports of Fresh, work." Business Law 56: 591. Chilled and Frozen Beef WT/DS/161,169/AB/R, January 10. Addressing Regulatory Divergence through International Standards: Financial Services 41 WTO Committee on Financial Services. 2000. Report to the Zaring, David. 1998. "International Law by Other Means: Council for Trade in Services. S/FIN/5, November 24. The Twilight Existence of International Financial Regulatory WTO Working Party on Domestic Regulation. 2001. Organizations." Texas International Law Journal 33: 281-330. "Examples of Measures to Be Addressed by Disciplines under GATS Article VI.4." Informal Note by the Secretariat. Job (01)/62, May 10. I I I I i I REGULATORY DISCRIMINATION IN DOMESTIC UNITED STATES LAW: A MODEL FOR THE GATS? David W Leebron Executive Summary explores in general analytic terms the structure of This chapter examines, from an American legal legal tests for examining domestic regulation that prptvthsaddepodidomestic burdens international trade, and further considers pesetv,tesanad mlydi what lessons can be drawn for the GATS from the U.S. law to determine whether regulation unduly A eri can e e an perstie. interferes with trade. The ultimate purpose of the ' chapter is to aid in the consideration of various legal tests that might be used to implement the The United States Jurisprudence requirements of Article VI of the General Agree- ment on Trade in Services (GATS). That provision In many respects, the history of the American requires that the Council for Trade in Services Union stands in sharp contrast to the history of the "develop necessary disciplines" to ensure that European Union. Although economic concerns "qualification requirements and procedures, tech- played very prominently in the founding of the nical standards and licensing requirements do not United States, it was foremost a political union. constitute unnecessary barriers to trade in ser- The American economy entered the Industrial vices," are "based on objective and transparent cri- Revolution-not to mention the growth in manu- teria," and are "not more burdensome than neces- facture and trade of consumer products that fol- sary to ensure the quality of the service." This lowed it-after both political union and national chapter does not attempt to specify the test that identity had largely been forged through the Civil should be adopted for application under the GATS, War. American states were not without their incli- but rather seeks to discern whether U.S. practice nations toward protectionism, but for the most might serve as one source for the appropriate tests. part these were dwarfed by the rapid growth in the The chapter proceeds in two parts. The first part late 19th century of a truly national economy with presents the background and substance of Ameri- powerful multistate enterprises. Compared with can jurisprudence aimed at eliminating state (in the the European Union, this sequence of events sense of the individual states of the union) interfer- resulted in a perhaps diminished role for law in ence with national commerce. The second part creating and maintaining a national market. 43 44 Domestic Regulation and Service Trade Liberalization As elaborated below, the legal regime in the jurisprudence to the kind of simple test one might United States for disciplining state' regulation of incorporate into an international agreement or services is composed of three principle elements: statute. As one commentator (Lawrence 1998, the "dormant" Commerce Clause of the U.S. Con- p. 414) noted: stitution, the Privileges and Immunities Clause of the Constitution, and sectoral regulation establish- As it stands today, it is difficult to know with any ing national regulatory frameworks that have been certainty what approach the Court will use in adopted by Congress (and elaborated by federal viewing a particular state measure potentially agencies). More than many might expect, U.S. mar- affecting interstate commerce. The nub of the kets for services remain fragmented by state regula- matter is that the Court's current approach to tion, although discriminatory regulation generally dormant-commerce-clause cases is so scattered does not survive review by the courts. that nobody-not state legislators, not law stu- dents, not the academic authorities, not the lower courts, not, indeed, the Court itself- knows clearly what the Court's rules are con- The key provision of the Constitution addressing cerning the Dormant Commerce Clause.4 the regulation of both international commerce and commerce among the states is the Commerce Indeed, many commentators break down the Clause of Article 1, Section 8: " [Congress shall have Court's decisions not by analytical approaches but power] to regulate Commerce with foreign by subject matter areas. There are many reasons for Nations, and among the several States, and with the this confusion, not least among them the usual dif- Indian Tribes." Although explicitly only an affirma- ficulty in reconciling the notion of a national (or tive grant of power to the Congress, the clause was international) free market with the regulatory sov- ultimately interpreted to have a negative or "dor- ereignty of the constituent political units. And mant" component that implicitly forbids the states although the Commerce Clause has been acknowl- from undertaking actions that discriminate or edged to be aimed at creating a single national free excessively burden such interstate or foreign com- trade area, the Court has been reluctant to fully merce.2 This dormant Commerce Clause restric- embrace the kinds of economic analysis that con- tion is in addition to other provisions of the Con- cept truly requires. Features of the European stitution that ban state treaties, state tariffs, state Union, and even of the GATT, that are aimed at money, or state enactment of legislation or other eliminating barriers to trade are notably absent not actions that conflict with federal regulations. only from the U.S. Constitution but also from the Loosely speaking, it serves roughly the same role as decisions of courts applying the Constitutional Articles III and XI of the General Agreement on provisions. In many areas, state barriers to the Tariffs and Trade (GATT) (perhaps combined with national market remain substantial. Indeed, in Article XX) or Article 30 of the Treaty of Rome in some major areas, progress in creating the legal ensuring that a state regulation or discrimination frameworks for a national market has been does not interfere with a regime of free trade. achieved only recently, and primarily through con- Although widely accepted for more than a cen- gressional legislation. tury, the dormant Commerce Clause is not without The positive aspect of the Commerce Clause has its critics today. At least three members of the cur- been understood as a sweeping5 grant of power to rent Supreme Court (Justices William Rehnquist, the U.S. Congress to regulate commerce with foreign Antonin Scalia, and Clarence Thomas) have ques- nations and among the states, and accordingly has tioned the Constitutional authority for courts to been of much greater importance in achieving an review, in the absence of relevant federal regula- economic union. In numerous areas, Congress has tion, the permissibility of general state regulation established comprehensive regulatory schemes and under the Commerce Clause.3 strong administrative agencies to promulgate It is not an altogether easy task to reduce the detailed rules. Such agencies include, for example, Supreme Court's dormant Commerce Clause the Food and Drug Administration, the Federal Regulatory Discrimination in Domestic United States Law: A Model for the GATS? 45 Trade Commission, and the Securities and Exchange There are very few cases that survive such scrutiny, Commission. Under the Supremacy Clause,6 federal the only recent example being a prohibition by the statutes and regulations preempt any conflicting state of Maine on imported baitfish in order to pro- state regulation, and in many cases are held to pre- tect local Maine fisheries from parasites and other empt state action in an entire regulatory field. dangers.'5 In theory, a legitimate state interest Still, the courts'-in particular the Supreme might justify facial discrimination, but the interest Court's-interpretations of the negative Commerce would have to be compelling, the benefits of the Clause have played a substantial role in developing measure would have to substantially outweigh the the legal framework for a national market. Most of burden on interstate commerce, and there would the numerous decisions applying the dormant have to be no alternative measure that would sub- Commerce Clause address matters of state regula- stantially achieve those benefits without facial dis- tion and taxation, as states are clearly forbidden crimination. In short, the defender of such legisla- from applying the usual border measures.7 The dor- tion must sustain the burden of proving that the mant Commerce Clause has been held to prohibit measure at issue is virtually the only means by three basic kinds of state regulation: state regulation which the important legislative goals could be that is patently discriminatory, state regulation that achieved, and that the impact on interstate com- "has the 'practical effect' of regulating commerce merce is small compared with the benefits to be occurring wholly outside that State's borders,"'8 and realized by the regulation. state regulation that imposes "an undue burden on The Court has applied the prohibition on dis- interstate commerce."9 crimination both to restrictions favoring in-state purchasers and to those favoring in-state sellers or Discrimination In general, the Court's analysis in producers. States may also not use unilateral mea- such cases begins with an inquiry into whether the sures to counteract discriminatory measures of state or municipall' regulation at issue is discrimi- other states.'6 Both export and import restrictions natory. Facially discriminatory regulation-that is, aimed at encouraging local processing are virtually regulation that draws an explicit distinction per se unlawful.'7 States also cannot protect domes- between the treatment accorded local or in-state tic producers by restricting the establishment of products or producers and out-of-state products or facilities owned by foreign producers.18 In a major producers-is almost always invalidated. Statutes exception to these rules, the Court has repeatedly that discriminate "in effect" are, in theory, similarly sustained the notion that a state may discriminate disfavored, but the question of what constitutes when it acts as a "market participant," purchasing such a "discriminatory effect" is often murky." products for its own use or selling products as The Court captured the essence of its approach owner or producer.19 This deference to states has its to discriminatory regulation as follows: ground in the particular conception of American federalism. The existence of the states, with their Discrimination against interstate commerce in prerogative and duty to protect their citizens in favor of local business or investment is per se numerous spheres of activity, operates as a check on invalid, save in a narrow class of cases in which the inclination under the Commerce Clause toward the municipality can demonstrate, under rigor- a national market unburdened by state regulation. ous scrutiny, that it has no other means to advance a legitimate local interest.'2 Nondiscriminatory Measures The Supreme Court's approach to facially neutral, nondiscrimi- The strength of the state interest is unlikely to natory legislation is different, and to a large extent sustain facially discriminatory legislation.'3 As the reverses the burdens and presumptions applied in Court stated, "However important the state interest reviewing discriminatory legislation. The Supreme at hand, 'it may not be accomplished by discrimi- Court today applies to facially neutral regulation nating against articles of commerce coming from both a deferential balancing test and, in some cases, outside the State unless there is some reason, apart a least restrictive alternative test. On the former, the from their origin, to treat them differently."14 Court set forth the modern approach in the 1970 46 Domestic Regulation and Service Trade Liberalization seminal case of Pike v. Bruce Church, Inc. The Court Given the "strict scrutiny" applied to discrimi- declared: natory legislation and the deferential approach taken with regard to nondiscriminatory regulation, W'Vhere the statute regulates even-handedly to the distinction between these is critical. However, effectuate a legitimate local public interest, and the Court has been unable to provide very clear its effects on interstate commerce are only inci- guidance on this issue. In one case, the Court found dental, it will be upheld unless the burden regulation that prohibited ownership of retail gaso- imposed on such commerce is clearly excessive line outlets by integrated petroleum companies to in relation to the putative local benefits.20 be nondiscriminatory even though there were no such companies in the state that were subject to the The Pike v. Bruce Church test thus potentially prohibition.24 Similarly, the Court has not elabo- comprises four distinct inquiries in examining state rated to any great degree the distinction between regulation: incidental and direct regulation, and rarely relies on that distinction in deciding whether to uphold or 1. Is the purpose of the regulation a "legitimate" strike down state regulation. Two types of regula- local public interest? tion appear to merit stricter scrutiny, however, per- 2. Is the regulation "even-handed,' that is, nondis- haps because the effects are considered to be more criminatory? direct. These are burdens on the means of interstate 3. Is the effect on interstate commerce "only inci- commerce and regulations with extraterritorial dental"? application or direct effects. 4. Is the burden "clearly excessive" compared with the benefits? "Burdensome" Regulation The question of whether regulation impermissibly "burdens" inter- Neither the Constitution nor the Court's state commerce is distinct from the question whether jurisprudence list or limit the regulatory goals that it "discriminates" against such commerce. Thus in are legitimate for purposes of Commerce Clause recent years direct state regulation of the means of analysis. The only purpose that has generally been interstate commerce-highways and railways-has determined to be illegitimate under Commerce fared badly. For example, the Court invalidated a Clause analysis is straightforward economic protec- Wisconsin law prohibiting trucks longer than 55 tionism.2 Evidence that the regulation was moti- feet,25 an Iowa law banning 65-foot double tractor- vated by protectionism might be supplied by the trailers,26 and an Arizona law forbidding trains legislative history of the enactment of the regula- longer than 14 passenger cars or 70 freight cars.27 tion, including statements by public officials. How- Although commentators and sometimes the Court ever, it should be noted that some forms of state itself explain such cases in terms of discrimination,28 promotion of domestic industry have been upheld I believe the cases are better understood within the by the Court. In Pike itself, the Court declared that American context as cases involving direct regulation the state purpose "to protect and enhance the repu- of the means of conducting interstate commerce. tation of growers within the state" through packing Where such a burden is substantial, the state regula- and labeling requirements was legitimate, and that tion will be subjected to fairly strict scrutiny, rather an equally legitimate interest is "maximizing the than the more deferential approach taken with financial return to an industry within" a state. More respect to other facially neutral regulation that does important, over sharp academic criticism the not directly affect the means of commerce. It is inter- courts have upheld state subsidies that favor their esting to note that such cases typically involve what own industries,22 although discriminatory taxes would be regarded on the international level as trade and tax credits are prohibited.23 In short, a fine and in services. uncertain line has been drawn between positive Occasionally, the Court's Commerce Clause acts of promotion and encouragement of state jurisprudence has also emphasized the extraterrito- industry on the one hand and protection of such rial effects of state regulation. Where such regula- industry and discrimination against out-of-state tion by intent or effect directly regulates out-of- actors on the other. state conduct, it will generally be invalidated. The Regulatory Discrimination in Domestic United States Law: A Model for the GATS? 47 Court has treated extraterritorial impact as a par- est involved, and on whether it could be pro- ticularly pernicious burden on interstate commerce moted as well with a lesser impact on interstate that local benefits are unlikely to outweigh. This is activities.3 especially so in circumstances where irreconcilable conflicts would arise if multiple states took such an In most cases not dealing with the means of approach. The Court has also stressed extraterrito- commerce, the least restrictive alternative test is a rial effect in striking down some forms of price limited form of the balancing test. If there is an regulation.29 alternative means that would equally achieve the regulatory goals with a lesser burden on interstate The Weighted Balancing Test and Least Restric- trade, then at the margin the burdens of the mea- tive Alternatives The last element, the balancing sure outweigh its benefits. Thus the least restrictive test, has been severely criticized because such bal- alternative can be thought of as requiring a mar- ancing is perceived to be a legislative rather than ginal analysis in addition to the basic balancing. A judicial function, and because it is not at all clear measure that, as a whole, might otherwise have how one balances the benefits in achieving various been justified under the overall balancing test public policy goals against burdens on interstate (because the benefits exceed the burdens) might commerce. As Justice Scalia remarked, "both sides still be invalidated under the least restrictive alter- are incommensurate. It is more like judging native approach. whether a particular line is longer than a particular Beyond extraterritorial effects and regulation of rock is heavy."30 In fact, instead of the cost-benefit the means of commerce, however, there have been approach, many of the Court's decisions apply two comparatively few cases in which nondiscrimina- closely related forms of analysis: regulatory fit and tory regulation was found to burden commerce, least restrictive alternative. and thus invoke the weighted balancing test. Some In reviewing state regulation under Pike, the of the facially neutral statutes found to be discrim- Court often focuses on the question of regulatory inatory are those that effectively discriminate on fit-that is, how closely tailored the means chosen the basis of distance from the locus of the regula- were to the articulated goals of the legislation. In tion or transaction.32 Such statutes, although not that context, evidence that the statute is under- facially discriminatory, are more than merely dis- inclusive or over-inclusive sometimes appears to criminatory in effect; they are almost invariably determine whether it will survive the balancing test. found not to employ the least restrictive alterna- In many respects, the fit test is equivalent to a less tive. Perhaps the Supreme Court decision that restrictive alternative analysis, as making the regu- comes closest to striking down a neutral state law lation less discriminatory by either imposing the regulating products was the invalidation of a North burdens more on in-state actors or less on out-of- Carolina statute requiring apples sold in closed state actors does seem less restrictive of interstate containers to display only official United States trade. However, the test seems more aimed at the grades. The state of Washington believed that this issue of discrimination than the balancing of bene- regulation unfairly disadvantaged its apple grow- fits and burdens; it thus calls into question the ers, as they were not permitted to indicate the more state's true purpose in regulating in the particular rigorous Washington state grades. The Court way chosen. essentially found that the North Carolina legisla- The Court also apparently applies a least restric- tion deprived the Washington growers of the abil- tive alternative test in determining whether a bur- ity to make known their competitive advantage, den is "clearly excessive" in relation to the local ben- and in that sense that the statute was discrimina- efits. Following the quote above from Pike v. Bruce tory in effect. The case appears fairly unusual, and Church, Inc., the Court added: in fact emphasizes some requirement of discrimi- nation if a law is to be invalidated. More typical If a legitimate local purpose is found, then the perhaps was the case involving a Minnesota statute question becomes one of degree. And the extent banning the sale of milk in plastic disposable con- of the burden that will be tolerated will of tainers, while allowing it in paper containers. In the course depend on the nature of the local inter- absence of sufficient evidence of discrimination, 48 Domestic Regulation and Service Trade Liberalization the Court found that the burden was small com- Privileges and Immunities Clause With regard pared with the substantial interests asserted by the to services, an important restriction on states is legislature.33 their inability to regulate interstate immigration and emigration in any way, or to limit who may become a citizen of a state, or to discriminate on the basis of how long one has been a state resident Constitution 39 or citizen.39 State citizenship within the United Commerce Clause Perhaps it is surprising that States has long been little more than the choice and very few of the cases under the Commerce Clause, establishment of residence within a state by a resi- other than those involving regulation of trans- dent of the United States. The open market for portation, have addressed the question of services. services is also protected by the Privileges and Decisions applying the dormant Commerce Immunities Clause of the Constitution,40 which Clause make no distinction between goods and provides that "[t]he Citizens of each State shall be services in terms of the applicable legal standards. entitled to all Privileges and Immunities of Citizens In a case involving Florida restrictions on out-of- in the Several States." The Court has declared that state banks to establish Florida operations provid- the purpose of both this clause and the Commerce ing investment advisory services, the Court sug- Clause was "to create a national economic union.''41 gested that this fell within the per se rule against Although what constitutes a privilege or an immu- protectionist legislation, but ultimately ruled that nity is not altogether clear, the clause has often been 42 the legitimate purposes of the legislation failed to applied to economic activities. For example, the justify the discriminatory burden. In the Court's Supreme Court has repeatedly struck down state view, the legislation was poorly tailored to achieve attempts to limit bar admission to residents.43 The the asserted goals.34 One of the Court's most Privileges and Immunities Clause also protects res- recent Commerce Clause cases addressed property idents of a state who wish to obtain medical ser- taxation of nonprofit enterprises. The state of vices outside that state,44 and limits the ability of a Maine provided an exemption from such taxation state through regulation to favor the employment for charitable enterprises operated primarily for of its own residents.45 The impact of the Privileges people who resided in Maine. In effect this rule and Immunities Clause on opening state markets, discriminated against out-of-state purchasers of however, is limited by its inapplicability to artificial services.35 The Court's jurisprudence also makes persons (e.g., corporations) or aliens. clear that states cannot impose discriminatory When it has been determined that a regulation restrictions on the establishment of business discriminates against a noncitizen of a state, the test enterprises.36 to determine its validity is similar (but not identi- In addition, an important group of cases in cal) to that applied under the Commerce Clause: recent years has concerned state restrictions on waste disposal. On occasion, such restrictions have The [Privileges and Immunities] Clause does taken the form of limitations on the ability of not preclude discrimination against nonresi- waste disposal facilities to accept waste for disposal dents where (i) there is a substantial reason for from out of state or outside the municipality.37 the difference in treatment; and (ii) the discrim- Although some of these cases have been analyzed ination practiced against nonresidents bears a in terms of a restriction on trade in waste or haz- substantial relationship to the State's objective. ardous materials,38 they are better understood as In deciding whether the discrimination bears a involving discriminatory restrictions on out-of- close or substantial relationship to the State's state purchasers of services supplied by in-state objective, the Court has considered the availabil- waste disposal service providers or, conversely, as ity of less restrictive means.46 favoring in-state purchasers of scarce services over out-of-state purchasers. Despite the very strong "Substantial" in this context means not only public interest underlying such regulations, the legitimate, but also plausible. Dubious factual Court has struck them down under the rubric of assertions (e.g., that out-of-state lawyers would be per se discrimination. less ethical than in-state lawyers or less likely to Regulatory Discrimination in Domestic United States Law: A Model for the GATS? 49 keep up to date on matters of state law) will be con- power of Congress to create such a banking corpo- sidered and rejected by the courts. The substantial ration, but popular opposition and the rise of state relationship requirement is one of "fit," mandating banks led to a congressional decision to terminate that means chosen must be closely tailored to the the bank (twice) in the 19th century. A dual system ends sought, especially insofar as the means involve of state and federal banking regulation was created discrimination. at the time of the Civil War. Federal regulation see- sawed between the creation of national banks and the protection of state banks and state regulatory ofNationalnMarkets in the United States policy. The Federal Reserve Bank and more com- prehensive federal regulatory authority over banks In many respects, those two clauses of the U.S. were established early in the 20th century. Such reg- Constitution have turned out to be relatively weak ulation, however, was not used to create a national tools for forging a national market and overcoming market in financial services. Even into the early state regulation that burdens interstate commerce. 1990s, only six states allowed interstate branches. In One could certainly not conclude that the Com- 1994, however, Congress enacted legislation that merce and Privileges and Immunities Clauses effectively encouraged widespread interstate bank- played the preeminent role in breaking down state ing. In this historical context, the primary role of regulatory barriers to internal trade within the courts was in interpreting statutes enacted by Con- American market. Rather, the United States has gress or administrative rules and decisions issued responded to the emergence or potential emer- under statutory authority. General standards gence of national markets for services with detailed restricting state regulation, such as those under the sectoral regulation. In some circumstances, the fed- dormant Commerce Clause, played little role. eral government has acted aggressively to forge A similar story played out in telecommunica- national markets, and in others it has explicitly tions, except that the trend toward a national mar- allowed the states to maintain parochial legislation. ket (at least in telephony) was aided in large part by Even today in such areas as insurance and legal the Bell System's early attainment of national practice, it could hardly be said that there is a monopoly. As another example of Congress' favor- national market in the United States, or that the ing dual systems of regulation, the 1984 Cable Act judicial application of general constitutional created an environment in which both the Federal restrictions will be the means to achieve it. Communications Commission and local franchise Instead, in such areas as telecommunications authorities exercised aspects of regulatory control and financial services, the national government has over cable television. In some areas, such as broad- vacillated between efforts to create national mar- casting, Congress exercised its national authority kets and efforts to ensure the power of local gov- specifically to prevent the emergence of a national ernments to regulate in the local interest. Both pop- market by creating ownership restrictions on ular movements and major economic forces have broadcasting facilities. When Congress or federal influenced congressional approaches. National agencies did choose to assert regulatory authority authority has been exercised through powerful (albeit not always in furtherance of a national mar- administrative agencies, such as the Federal Com- ket), the courts generally sustained that authority. munications Commission, the Securities and In professional services as well, markets Exchange Commission, the Federal Reserve Banks, remained fragmented until relatively recently, with and the Federal Deposit Insurance Corporation. states continuing to exercise regulatory authority in These statutory and administrative schemes are licensing many such services. Both lawyers and too complex to describe in any detail here, but it accountants must qualify locally to practice in each was through the exercise of the positive Congres- state. Although, through a variety of measures, sional power to regulate that state barriers were national firms have emerged in both fields, state ultimately reduced. Financial services exemplify regulatory barriers to the cross-state border provi- this story. Early in American history Congress cre- sion of such services remain substantial. ated a national bank in the form of the Bank of the In almost all of these cases it can fairly be said United States. The Supreme Court upheld the that Congress responded to economic forces 50 Domestic Regulation and Service Trade Liberalization (national and international) and events rather than threshold requirements are for applying such actively leading the way in creating the necessary scrutiny, the more likely stricter scrutiny will be legal conditions for national markets in services. acceptable. On the other hand, the prohibition on discrimina- Although not articulated in these terms, this tory restrictions on ownership or investment, or approach is at the heart of the Supreme Court's any restrictions based on state citizenship or resi- approach to reviewing state regulation under the dence, has undoubtedly helped maintain a more dormant Commerce Clause. As discussed above, open environment for services. facially discriminatory regulation is subject to such strict scrutiny that the Court almost invariably regards such regulation as a per se violation of the Comparative Analysis Commerce Clause. Similarly, extraterritorial regu- The Analytical Schema lation and regulation that is likely to result in con- flicting state rules applying to a single circumstance Analytically, the task of examining regulatory bur- are subject to extremely strict scrutiny. Regulation dens on international (or, in the case of domestic that directly burdens the means of commerce or measures in the United States, interstate) trade can under which discriminatory effect is readily appar- be separated initially into three steps. First, what is ent, is subject to a demanding application of the the "prima facie" case of violation triggering cost-benefit and least restrictive alternative tests. scrutiny of the regulation? Second, what defenses Regulation that is neutral and only indirectly bur- or justifications are available to justify the burden- dens commerce is subject to very deferential some regulation? Third, are there, in effect, defenses scrutiny. It will be sustained unless the burdens on to such defenses, that is, claims that undercut the interstate commerce are clearly excessive in relation validity of or otherwise limit the defense?47 to the benefit, or unless there is a less restrictive Although this structure suggests that the plaintiff alternative. has at least the burden of production (i.e., raising the issue and perhaps presenting some preliminary evidence) on the first and last issues, and the defen- ThesCommee Clase dant has the burden on the second issue, this bur- P den of production does not necessarily dictate who When one compares the situation within the bears the burden of persuasion on that issue. Simi- United States with that of the European Union and larly, under the GATT the complaining country the WTO, it is apparent why there are fundamental must first establish a violation-for example, that problems in achieving agreement on the appropri- regulation or administrative action contravenes the ate standards for reviewing regulatory burdens on national treatment requirement of Article III.48 trade. The European Union began with a constitu- Then the country imposing the suspect rule can tive document aimed at achieving economic union, offer a legal justification, such as those contained in and provided the essential terms for quickly devel- the Article XX exceptions. The complaining coun- oping the legal framework of a free trade area and try, however, may assert that the justification is not customs union. The Constitution of the United "necessary" or is a "disguised restriction" on inter- States is much more rudimentary in its economic national trade. provisions, and the Court has only hesitatingly Even when it is not explicit, it is important to embraced economic theory in elaborating those keep this structure in mind because the acceptabil- provisions. As Larry Tribe has noted, "behind the ity of any legal test for trade-burdensome regula- Court's analysis stands an important doctrinal tion will depend on each of these three elements, theme: the negative implications of the Commerce how they interact with each other, and who bears Clause derive principally from a political theory of what burden of proof. The looser the requirements union, not from an economic theory of free trade. for what constitutes a violation or other triggering The function of the clause is to ensure national sol- mechanism, the more countries are likely to idarity, not necessarily economic efficiency."49 And demand that scrutiny of their measures be deferen- "although the Court's Commerce Clause opinions tial. Conversely, the more narrowly drawn the have freely employed the language of economics, Regulatory Discrimination In Domestic United States Law: A Model for the GATS? 51 the decisions have not interpreted the Constitution tion (Farber and Hudec 1994).3 On the other as establishing the inviolability of the free mar- hand, the WTO lacks the ability to invalidate ket."50 In some contexts, this leads to rather formal- national or state regulation in the way the Supreme istic distinctions. Thus although a state cannot dis- Court can. Although this point is often misrepre- criminate in taxation, it can choose to provide sented by opponents of the WTO, it is crucial to discriminatory subsidies.5' understanding and accepting the WTO's ability to Still, the Court has identified the creation of a scrutinize national legislation for trade-restrictive "national free market"52 as one of the goals of the effects. Constitution and the Commerce Clause, and the basic structure of analysis is certainly not unfamil- iar to those who have studied international eco- nomic agreements such as the GATT or the Treaty With these caveats in mind, important lessons can of Rome. It would be a great mistake, however, to be drawn from the American approach. First, the equate the issues within the United States with threshold question of discrimination has played an those facing the WTO, at least from a U.S. perspec- essential role in the Supreme Court's approach. The tive. Tests for ensuring that regulatory actions do complication posed by the WTO agreements is the not "unnecessarily" burden international trade can- role of negotiated market opening commitments not be evaluated apart from the institutional con- that could easily be undermined by both discrimi- text in which such tests are to be applied. It is one natory regulation and nondiscriminatory regula- thing, for example, to adopt such a test for unilat- tion that results in differential burdens (or, in the eral application by the relevant parties, and a com- words of the General Agreement on Trade in Ser- pletely different thing to suggest such a test for vices [GATS], "modifies the conditions of competi- application by an international dispute settlement tion.")54 It is doubtful, for example, that most of the body. In evaluating alternatives, then, we should market access commitments contained in Article focus on the dangers perceived in assigning the XVI of the GATS would be imposed on states by the judgments that must be made to an international courts under the rubric of the Commerce Clause. dispute settlement body. Legal tests that are GATS Article VI, on domestic regulation, is not accepted for application by the judiciary of a fed- explicitly limited to the context of negotiated com- eral state raise very different problems for interna- mitments. Article VI.4 in particular is aimed at tional tribunals. achieving in the services sector the broad kind of The jurisprudence of the dormant Commerce "horizontal" discipline provided with respect to Clause must be understood in the overall scope of goods by GATT Articles III, XI, and XX. The basic the Commerce Clause, that is, along with the posi- problem with services, of course, is that, in contrast tive grant of legislative power to the United States. to goods, regulation of providers and their qualifi- It is a question of jurisdictional allocation and not cations is generally regarded as necessary to achieve simply one of supervising potential protectionism. regulatory aims of safety and consumer protection. When state action is invalidated under the Com- For this reason, in addition to technical standards, merce Clause, for the most part the Court is simul- "qualification requirements and procedures" and taneously saying that such action should be under- "licensing requirements" are regarded as com- taken, if at all, by the federal government, or pletely acceptable tools for achieving regulatory possibly that the federal government should if it so aims. desires specify the conditions under which the How, then, can we ensure that such require- states can properly exercise such authority. More ments are "no more burdensome than necessary to broadly, in comparing the WTO context with the assure the quality of the service." From a U.S. per- United States, an important distinction is that spective, this test immediately appears to be over- under the dormant Commerce Clause democratic broad. Its literal terms do not require any threshold or local choice can be restored by Congressional showing of harm or discrimination. Such a broad action, whereas under the WTO the only means of reading would enable an international tribunal to recourse are continued violation subject to some determine that domestic regulations were "unduly form of retaliation or compensation, or renegotia- burdensome" for market participants or potential 52 Domestic Regulation and Service Trade Liberalization entrants apart from a particular impact on interna- With regard to the standard that regulations not tional trade. The European Communities in their be "more burdensome than necessary to ensure the submission on this issue took the position that quality of the service," two preliminary observa- "[d] omestic regulation measures under Article VI tions are in order. First, the part of the provision are non-discriminatory."55 Under the introductory regarding the purpose of such regulation-"to clause of Article VI.4, however, the aim is to disci- ensure the quality of service"-ought to be inter- pline "unnecessary barriers to trade." In my view, preted broadly. Quality in some circumstances is merely demonstrating that a regulation is ineffi- not only to be determined with regard to the ser- cient or burdensome would not be a sufficient basis vice delivered to the consumer, but also with regard for invoking disciplines adopted under Article to externalities and public-regarding goals.57 To VI.4.56 Rather, the challenged regulation must in take one of the simpler examples, shipping services some sense be more specifically a barrier to trade. might be regulated to ensure environmental quality This might be demonstrated by showing that the or to ensure that the means of transport are not regulation is discriminatory in effect or purpose, overburdened or damaged. Financial services and the question then becomes what the legal might be regulated not only to ensure the quality of requirements for demonstrating such effect or pur- the service to the customer, but also to ensure the pose ought to be. responsiveness of service providers to monetary As noted above, burdens on the means of inter- policy and other government goals. state commerce appear to be subjected to stricter Second, the clause does not by its terms incor- scrutiny under U.S. law. This principle is probably porate the kind of weighted balancing analysis not precisely applicable to the international con- found in the U.S. jurisprudence under the Com- text, or to the GATS in particular, unless such merce Clause. Although the provision in effect means are themselves the subject of international speaks to "burdens," those burdens are not to be commitments (as they might be under the GATS compared with the benefits of open trade, but agreements on telecommunications and trans- rather with what is necessary to achieve the regula- port). However, it might be worthwhile to focus tory goals. If an alternative regulation would special attention on national regulation that equally achieve the goals but with less burden on directly burdens the modalities of trade in services trade, then the less burdensome regulation must be under the GATS. Restrictions on investment, for used. example, or on travel to purchase or supply ser- There is therefore, in my view, no meaningful vices, or on telecommunications used as a means of distinction between the notion of"no more burden- delivering services, ought to be particularly disfa- some than necessary" and "least trade restrictive- vored when the result is a burden on trade. Such ness." If a measure is more burdensome than neces- restrictions, therefore, could be a basis for invoking sary, then by hypothesis there must be some disciplining tests adopted pursuant to Article VI.4. measure that would be less burdensome, and by def- This point about threshold requirements for inition that would be a less restrictive alternative. Or invoking tests that rely on balancing (proportional- perhaps put somewhat more conservatively, any for- ity), fit, or least restrictive alternative is critical. The mal or literal distinctions between the two tests are more demanding the threshold, the more exacting overwhelmed by the ambiguity that leaves a great the legal test for reviewing the regulation should be. deal of space for interpretation. Whereas under For the most part, then, the threshold requirement United States jurisprudence58 such a test appears to to invoke the scrutiny of a horizontal discipline be part of the overall cost-benefit approach, under should be a demonstration of discrimination (on the GATS it is a separately defined requirement either a national treatment or most-favored-nation whose terms appear to preclude such balancing. It basis), and not simply the exclusion of a potential would be possible (particularly in light of some provider from a market. Such discrimination could GATT panel jurisprudence interpreting "necessary" be either de jure (i.e., "facial") or de facto. As sug- in other contexts) to read "necessary" as meaning gested by the United States' domestic approach to "reasonable in relation to the benefits, but there is these issues, the level of scrutiny applied to the two no reason that "least trade restrictiveness" could not cases should not be the same. also be read in some broader fashion. Regulatory Discrimination in Domestic United States Law: A Model for the GATS? 53 At first blush, a least restrictive alternative test trigger a more searching scrutiny than nondiscrimi- appears to impinge very little on a state's ability to natory regulation without these characteristics. pursue its regulatory goals. A state is required to use Even when the U.S. courts do apply a balancing test, an alternative regulatory strategy only if that strat- it is strongly weighted in favor of the regulation egy would equally achieve those goals while bur- when there is no discrimination. Regulation will be dening or restricting trade to a lesser degree. A invalidated only if the burden on commerce is problem arises, however, when the alternative strat- "clearly excessive" compared with the local benefits. egy poses costs other than the ability to achieve the The U.S. approach has been described as con- original policy goals. For example, the alternative fused and unpredictable. This may be true, and it is strategy might be considerably more expensive. probably not possible to reconcile all of the con- One formulation limits this situation by requiring flicting values in a clear and certain test. Despite the that the alternative be "reasonably available."59 This carping of judges and academics alike, the Supreme puts one back in the realm of balancing tests in Court has created a sufficiently clear and stable which one of the factors to be balanced is no longer legal framework to support the development of zero. The distinction between this and the overall national markets in both goods and services with- balancing test (or proportionality test) is that only out unduly undermining the values of federalism marginal collateral costs are weighed.60 It is not and the advantages of local regulation. The entirely clear what those marginal collateral costs jurisprudence appears confused precisely because it are to be weighed against. If a purely marginal is nuanced. The Court's decisions require stricter analysis is to be applied, then they would be scrutiny when the core elements of a national mar- weighed against the benefits of the marginal ket are clearly threatened. diminution of trade restrictiveness resulting from In many respects, the circumspect U.S. approach adopting the alternative measure. on the domestic front is a caution to the drafters of international treaty obligations. It seems unlikely Conclusion that the United States would be willing to accept disciplines on local regulation greater than those it Many people may find it surprising that the legal has applied within its own borders to local regula- norms for enforcing the American common market tion by the states. However, tests such as "least are so undeveloped and uncertain. They are also, in restrictive alternative" and "no more burdensome some respects, less demanding and less sweeping than necessary" should certainly be acceptable than the corresponding legal standards for the from an American perspective, because these are European Union, and even to some extent than the the familiar vocabulary through which regulatory GATT. This is the result of many factors, including obstacles to free trade are disciplined in the the availability of federal regulation whereby Con- domestic context. And although legal tests used by gress chooses to take positive action to create domestic courts in the domestic context are not national markets. always appropriate in the international context, the Still, the basic tests applied within the United United States has accepted standards such as these States will be familiar to those who study WTO or in both regional and international trade agree- European Union law. These include balancing (cost- ments, including those under the World Trade benefit or proportionality) tests, least restrictive Organization. alternative requirements, and regulatory fit analysis. As always, the devil is in the details. Here the The main thrust of the U.S. approach is to ferret out challenge is to adapt the varying levels of scrutiny discrimination, and not to independently impose and burdens of proof that have been part of the requirements for the most open or efficient mar- U.S. approach to the specific context of the GATS. kets. The three primary exceptions to the discrimi- But, as suggested here, at least as much thought nation requirement (even if proved by indirect needs to be given to the threshold violations, the means) are burdens on the means of commerce, "prima facie" case, that must be established before potential for irreconcilable conflict among applica- such disciplining rules can be invoked. These might ble state rules, and extraterritorial effect.6' Each of include not only facial discrimination, but also these three potential or actual consequences will clear demonstrations of significant discriminatory 54 Domestic Regulation and Service Trade Liberalization effect and burdens on the means by which services Landfill, Inc. v. Michigan Dept. Natural Resources, 504 U.S. can be delivered across borders. Care in drafting 353 (1992); C&A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383 (1994). such "triggering" requirements and the burden of 12. C&A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 392 proof to be met by a complaining country should (1994). produce greater willingness to adopt serious 13. In one case the Court noted that the burden of justification in the presence of facial discrimination is "so heavy that scrutiny of domestic regulation that interferes with 'facial discrimination by itself may be a fatal defect,"' Ore- international trade in services. gon Waste Systems, Inc. v. Dept. Environmental Quality, 511 U.S. 93, 101 (1994) (quoting Hughes v. Oklahoma, 441 U.S. 322, 337 (1979). Endnotes 14. Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 36 (1980) (quoting Philadelphia v. New Jersey, 437 U.S. 617, at 1. For clarity in this chapter, unless explicitly stated otherwise, 626-627 (1978). "state" is always used in the sense of the individual states of 15. Maine v. Taylor, 477 U.S. 131 (1986). the United States. 16. Great Atlantic & Pacific Tea Co., Inc. v. Cottrell, 424 U.S. 366 2. The Supreme Court first struck down action as violative of (1976) (striking down a state statute restricting milk mar- the Clause in the absence of a pertinent federal statute in ket access to producers from states that provided reciprocal 1849. See Tribe (2000, p. 1047, n. 6) citing The Passenger access). See also New Energy Co. of Indiana v. Limbach, 486 Cases, 48 U.S. (7 How.) 283 (1849). Shortly thereafter, in U.S. 269, 274-275 (1988). Cooley v. Board of Wardens, 53 U.S. (12 How.) 299 (1851), 17. Pike v. Bruce Church, Inc., 397 U.S. 137, 145 (1970) (export the Court adopted a test that attempted to categorize the restriction in the form of a packing requirement). See also subject matter of regulation as "local" or "national," Dean Milk Co. v. City of Madison, 340 U.S. 349 (1951) depending on whether state diversity or national unifor- (ordinance requiring local pasteurizing and bottling of mity was required. milk). 3. See Camps Newfound/Owatonna, Inc. v. Town of Harrison, 18. H.P. Hood & Sons v. Du Mond, 336 U.S. 525 (1949). 520 U.S. 564,607 (1997) (Thomas, J., dissenting, joined by 19. Reeves, Inc. v. Stake, 447 U.S. 429 (1980) (upholding the Chief Justice Rehnquist and Justice Scalia); Bendix Autolite policy of a cement plant owned by South Dakota of selling Corp. v. Midwesco Enterprises, Inc., 486 U.S. 888, 895 (Scalia, preferentially to state residents during times of cement J., concurring in the judgment). shortage). 4. This view is not new. See also Eule (1982): "the onlything con- 20. Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970). See also sistently predictable about the Court [in its Dormant Com- Brown-Forman Distillers Corp. v. New York State Liquor merce Clause decisions] is its continued unpredictability." Authority, 476 U.S. 573 (1986) (regulation will be struck 5. At one time, the ability of Congress to exercise power under down "if the burden on interstate commerce clearly exceeds the Commerce Clause was thought to be nearly unlimited the local benefits"). Justice Scalia has expressed particular because virtually every aspect of daily life could be viewed criticism for the cost-benefit strand of analysis under the cumulatively as affecting or being affected by interstate dormant Commerce Clause. See CTS Corp. v. Dynamics commerce in some way. In 1995, however, the Supreme Corp., 481 U.S. 69, 95 (1987) (Scalia, J., concurring); Bendix Court inaugurated a series of decisions that ultimately Autolite Corp. v. Midwesco Enterprises, Inc., 486 U.S. 888, 897. defined some limits to congressional power under the 21. Philadelphia v. New Jersey, 437 U.S. 617,624 (1980) ("where Commerce Clause. United States v. Lopez, 514 U.S. 549 simple economic protectionism is effected by state legisla- (1995) (striking down federal law making it a criminal tion, a virtually per se rule of invalidity has been applied"). offense to possess a firearm in a school zone). 22. However, a state may not use a nondiscriminatory tax to 6. United States Constitution, Art. 6, clause 2: "This Constitu- fund a discriminatory subsidy. West Lynn Creamery, Inc. v. tion, and the Laws of the United States which shall be made Healy, 512 U.S. 186 (1994). in Pursuance thereof; and all treaties made, or which shall 23. New Energy Co. of Indiana v. Limbach, 486 U.S. 269 (1988); be made, under the Authority of the United States, shall be Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 the supreme Law of the Land; and the Judges of every State U.S. 564, 589 (1997). However, it should be noted that the shall be bound thereby, any Thing in the Constitution or Court has "never squarely confronted the constitutionality Laws of any State notwithstanding." of subsidies" (New Energy v. Limbach at 589), quoting West 7. A few cases have, however, upheld the power of the states to Lynn Creamery v. Healy, 512 U.S. 186, 199 (1994). exclude diseased or potentially diseased products. See, for 24. Exxon Corp. v. Governor of Maryland, 437 U.S. 117 (1978). example, Mintz v. Baldwin, 289 U.S. 346 (1933); Maine v. 25. Raymond Motor Transportation, Inc. v. Rice, 434 U.S. 429 Taylor, 477 U.S. 131 (1986). A state cannot, however, dis- (1978). criminate between in-state and out-of-state products in its 26. Kassel v. Consolidated Freightways Corp., 450 U.S. 662 restrictions on "noxious" articles. (1981). 8. Healy v. Beer Institute, Inc., 491 U.S. 324 (1989). 27. Southern Pacific Co. v. Arizona, 325 U.S. 761 (1945). 9. Dean Milk Co. v. City of Madison, 340 U.S. 349 (1951). 28. See, for example, Tribe (2000, p. 1073). 10. Many of the cases involve regulations not at the state level 29. See, for example, Brown-Forman Distillers Corp. v. New York but at more local levels, such as county or municipality. State Liquor Authority, 476 U.S. 573 (1986) (striking down 11. The Court has, however, ruled that municipal regulation state regulation requiring liquor producer selling to whole- that discriminates against both in-state and out-of-state salers to affirm sales price was no higher than lowest price commerce from outside the municipality is discriminatory sold in other states); Healy v. Beer Institute, Inc., 491 U.S. under the Commerce Clause. See Fort Gratiot Sanitary 324 (1989) (similar regulation regarding beer). Regulatory Discrimination in Domestic United States Law: A Model for the GATS? 30. Bendix Autolite Corp. v. Midwesco Enterprises, 486 U.S. 888, tutes the prima facie case in the absence of a violation of 897 (1988) (Scalia, J., concurring). GATT obligations. 31. Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970). 49. Tribe (2000, p. 1057), citing Baldwin v. G.A.F. Seelig, Inc., 32. See, for example, Minnesota v. Barber, 136 U.S. 313 (1890) 294 U.S. 511 (1935). (striking down a law requiring meat to be inspected by a 50. Tribe 2000, p. 1058. local inspector 24 hours before slaughter); Dean Milk Co. v. 51. See, for example, New Energy Co. of Indiana v. Limbach, 486 Madison, 340 U.S. 349 (1951) (invalidating municipal ordi- U.S. 269,278 (1988). nance requiring pasteurization within five miles of the 52. General Motors v. Tracy, 519 U.S. 278, 298 (1997). town center). 53. The Farber and Hudec article provides an excellent 33. Minnesota v. Clover Leaf Creamery Co., 449 U.S. 456 (1981). overview of the relationship between the legal approaches The decision stands in sharp contrast to the European deci- to disciplining discriminatory regulation under the Com- sion striking down aspects of Denmark's law on returnable merce Clause and the GATT. bottles. Commission v. Denmark, Case 302/86, [1988] ECR 54. General Agreement on Trade in Services, Article XVII.3. 4607. 55. WTO doc. S/WPDR/W/14, 1 May 2000, paragraph 8. 34. Lewis v. BT Investment Managers, Inc., 447 U.S. 27, 43-44 56. I do not, however, take this position with regard to sectoral (1980). disciplines, where it seems to be that the narrowing of focus 35. Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 and greater detail of obligations raises very different issues. U.S. 564 (1997). The Court rejected the argument that 57. Compare the GATS Annex on Telecommunications, para- "campers are not 'articles of commerce."' It concluded that graph 5(e); WTO Working Party on Professional Services, the "services that petitioner provides to its principally out- Disciplines on Domestic Regulation in the Accountancy of-state campers clearly have a substantial effect on com- Sector, S/L/64, December 17, 1998. It is not clear from the merce, as to state restrictions on making those services text of the GATS how the general exceptions of Article XIV available to nonresidents" (at 574). The Court recognized should apply to measures adopted pursuant to Article VI.4. that the discriminatory tax "functionally serves as an One could read Article VI.4 narrowly and allow the specific export tariff that targets out-of-state consumers by taxing requirements mentioned in Article VI.4 to be justified the businesses that principally serve them" (at 580-81). under Article XIV as well. Because Article XIV also adopts a 36. H.P. Hood & Sons v. Du Mond, 336 U.S. 525 (1949). "necessity" for its more general provisions, the conse- 37. Fort Gratiot Sanitary Landfill, Inc. v. Michigan Dept. of Nat- quences of a broad or narrow reading of "quality of serv- ural Resources, 504 U.S. 353 (1992); Philadelphia v. New Jer- ice" under Artide VI.4 (and measures adopted thereunder) sey, 437 U.S. 617 (1978). may be small. One important difference may be in the bur- 38. In Philadelphia v. New Jersey, for example, the Court based den of proof. If Article VI.4 is read narrowly, then an effec- its decision on the discrimination against "articles of com- tive violation would occur if a licensing or qualification merce coming from outside the State." 437 U.S. at 627. measure was not aimed at ensuring the quality of service. 39. Zobel v. Williams, 457 U.S. 55 (1982). The burden would then shift to the respondent to justify 40. United States Constitution, Article 4. the measure under the broader criteria of Article XIV. 41. Supreme Court of New Hampshire v. Piper, 470 U.S. 274, 280 58. See Pike v. Bruce Church, Inc. discussed above. (1985). 59. See Trachtman (2002) and compare the GATT Agreement 42. Toomer v. Witsell, 334 U.S. 385, 396 (1948) ("one of the on the Application of Sanitary and Phytosanitary Mea- privileges which the Clause guarantees to citizens of State A sures, article 5.6. is that of doing business in State B on terms of substantial 60. If such collateral costs are to be considered in determining equality with the citizens of that State.") On the other hand, whether a state is required to implement an alternative but the Court has held recreation not to be one of the privileges in some respects more costly measure, it is unclear whether so protected. Baldwin v. Montana Fish & Game Comm'n, both private and public costs are to be taken into account. 436 U.S. 371 (1978). 61. In nearly all cases, whenever one of these exceptions applies 43. Supreme Court of Va. v. Friedman, 487 U.S. 59 (1988); it can also be argued that there is a discriminatory effect. Barnard v. Thorstenn, 489 U.S. 546 (1989). 44. Doe v. Bolton, 410 U.S. 179 (1973) (involving abortion serv- ices). References 45. Hicklin v. Orbeck, 437 U.S. 518 (1978). 46. Supreme Court ofNew Hampshire v. Piper, 470 U.S. 274,284 Eule, Julian N. 1982. "Laying the Dormant Commerce (1985). Clause to Rest," Yale Law Journal 91: 425-85. 47. This is a common legal structure. For example, in a case of Farber, Daniel A., and Robert E. Hudec. 1994. "Free Trade battery, the plaintiff must first prove that the defendant and the Regulatory State: A GATT's-Eye View of the Dormant intentionally touched the plaintiff. Then the defendant can Commerce Clause." Vanderbilt Law Review 47: 1401-40. offer a justification, such as consent. In response, the plain- Lawrence, Michael A. 1998. "Toward a More Coherent Dor- tiff might prove the consent was invalid, perhaps because the mant Commerce Clause: A Proposed Unitary Framework." Har- plaintiff was incapacitated or under age. vard Journal of Law and Public Policy 21: 395-465. 48. As at least a technical matter, the complaining party must Trachtman, Joel P. 2002. "Lessons for GATS Article VI from demonstrate nullification and impairment of benefits the SPS, TBT and GATT Treatment of Domestic Regulation." under the agreement, but such nullification and impair- Paper prepared for OECD-World Bank Services Experts Meet- ment are presumed in the case of a violation. Under the ing, Paris, March 4-5. GATT, a party can also seek redress for nonviolation nullifi- Tribe, Laurence H. 2000. American Constitutional Law. Vol. 1. cation and impairment, and it is proof of that that consti- New York: Foundation Press. LESSONS FOR THE GATS FROM EXISTING WTO RULES ON DOMESTIC REGULATION Joel P. Trachtman Executive Summary regulatory autonomy in goods in connection with One of the most important and difficult issues in discussions of intensified approaches to domestic international trade is the relationship between regulatory autonomy in services. international trade liberalization and domestic reg- Under the Sanitary and Phytosanitary (SPS) ulatory autonomy. This issue has been addressed in Agreement, the Technical Barriers to Trade (TBT) a variety of ways in the goods sector, and is still Agreement, and the General Agreement on Tariffs being worked out according to a dynamic process and Trade (GATT), regulatory autonomy is con- of substantive and institutional change. Although strained. This chapter compares these three sources regulatory autonomy is needed to allow local regu- of WTO law relating to goods, and compares them lation to respond to local conditions, there are with the General Agreement on Trade in Services times when regulatory autonomy is abused as con- GATS, in order to advance an array of options for cealed protectionism or is not sufficiently moti- services negotiators and to suggest how negotiators vated to provide efficient regulation. Transparency might discriminate among these options. can help to reduce concealed protectionism, but it There seem to be no general, or horizontal, rea- cannot alone eliminate the more persistent and the sons to treat services regulation, as a whole, differ- more deeply embedded inefficiencies. ently than goods regulation. It may be that certain In relation to this tension between trade liberal- areas of services regulation merit special treatment ization and domestic regulatory autonomy, services of one kind or another. For example, the fact that trade is at least comparable to goods trade. Of much of financial regulation takes the form of insti- course there are significant differences between tutional regulation accentuates the kind of jurisdic- goods and services trade, and among services trade tional problem associated with the product-process sectors, but there are sufficient similarities to make distinction in the goods field. That is, the institution it worthwhile to study the approaches to domestic offering cross-border banking services may be Many thanks to Dale Honeck, Gabrielle Marceau, Aaditya Mattoo, Julia Nielson, Joseph Norton, Pierre Sauv6, Marc Steinberg, and other participants in the OECD-World Bank Services Experts Meeting held in Paris on March 4-5, 2002, for their advice in connection with this chapter. 57 58 Domestic Regulation and Service Trade Liberalization located (at least in formal terms) in Luxembourg, 3. Article XIV of the GATS contains inappropri- although it offers services in the United Kingdom. ately restricted regulatory goals (e.g., it does Although trade may be facilitated by a regime of not refer to "exhaustible natural resources," as mutual recognition (which in fact exists in the does Article XX[g] of GATT), and should be European Communities), and although it may expanded along the lines of paragraphs 2 and seem natural to allow a Luxembourg bank to be 25 of the Accountancy Disciplines to refer regulated by Luxembourg, there is the possibility more broadly to "legitimate objectives." The for adverse externalization (e.g., Bank of Credit regulatory goals referred to in Article VI.4(b) and Commerce International [BCCI]). There are should also be expanded beyond "quality of the also possibilities for races to the bottom, accentu- service.' ated by possibilities for externalization. 4. In the matter of "scientific basis"/risk assessment, Therefore, it seems worthwhile to evaluate the the SPS innovation of requiring states to go range of disciplines offered by the SPS Agreement, through a process of risk assessment to validate the TBT Agreement, and the GATT for horizontal their regulation could be considered for exten- adoption in the field of services. This can initially sion beyond the SPS area. If an explicit "rational be accomplished in selective sectors, on a trial basis, regulatory basis" requirement is imposed, a pro- as in the field of accountancy. Where standards like visional "precautionary principle"-type author- "necessity" or "proportionality" are to be used, it ity should also be provided, along the lines of would be wise to use consistent language, unless a Article 5.7 of the SPS Agreement. different meaning is desired. However, in this field, 5. The "prudential carve-out" in financial services there seems little reason to use different formula- seems too broad, although I recognize that it has tions for the same concept in different sectors. This been popular with member states. would appear to apply to areas like discrimination, 6. With regard to the equivalence/recognition necessity, proportionality, performance regulation requirement, Article VI.4 should be used to pro- rather than design regulation, requirements of vide for either horizontal or vertical require- recognition, reference to international standards, ments of equivalency. For example, paragraph and other, more general disciplines. More specific 19 of the Accountancy Disciplines requires some rules, such as harmonization of regulation, either level of equivalency. alone or as a prerequisite for specified types of 7. Both the SPS Agreement and the TBT Agree- recognition, obviously must be accomplished on a ment provide incentives for compliance with sectoral or even an issue-by-issue basis. The Euro- certain international standards. This also could pean Union provides a rich source of experience in be provided in services on either a horizontal or this area. Some more specific recommendations vertical basis. follow: This chapter provides a comparison among the 1. Consider replacing the national treatment lan- SPS, TBT, GATT, and GATS agreements that is guage of GATS Article XVII with language that organized by reference to different types of general specifically allows for justification of differential disciplines. Although these disciplines often work treatment, such as that of Article 2.3 of the SPS in synergy with one another, and so should not Agreement. simply be compared on their own, this is a first step 2. It is difficult to understand why the proportion- toward developing a taxonomy of disciplines. ality requirement of GATS Article VI.5 is so weak. Consider horizontally applying language such as that in paragraph 2 of the Accountancy Lessons for Services Trade Disipins.Itisworthwhile to explore the pro- Negotiatfions from the SPS, TBT, Disciplines. It is worthwhiletoexpand GATT Agreements posal made by the EC in its Communication on Necessity to provide a necessity test, with an One of the most important and difficult issues in additional proportionality defense. The weak- international trade is the relationship between ness of Article VI.5 places a premium on action international trade liberalization and domestic reg- under VI.4. ulatory autonomy. This issue has been addressed in Lessons for the GATS from Existing WTO Rules on Domestic Regulation 59 a variety of ways in the goods sector, and is still for adverse externalization (e.g., Bank of Credit and being worked out according to a dynamic process Commerce International [BCCI]). There are also of substantive and institutional change. Although possibilities for races to the bottom, accentuated by regulatory autonomy is needed to allow local regu- possibilities for externalization (Trachtman 2000). lation to respond to local conditions, there are Therefore, it seems worthwhile to evaluate the times when regulatory autonomy is abused as con- range of disciplines offered by the SPS Agreement, cealed protectionism or is not sufficiently moti- the TBT Agreement, and the GATT for adoption in vated to provide efficient regulation. Transparency the field of services. This can be accomplished ini- can help reduce concealed protectionism but it tially in selected sectors, on a trial basis, as in the cannot alone eliminate the more persistent and field of accountancy. Where standards like "neces- more deeply embedded inefficiencies. sity" or "proportionality" are to be used, it would be In relation to this tension between trade liberal- wise to use consistent language unless a different ization and domestic regulatory autonomy, services meaning is desired. The WTO's Appellate Body has trade is at least comparable to goods trade. Of incorporated the doctrine of effet utile in its course there are significant differences between jurisprudence and will seek meaning in any differ- goods and services trade and among services trade ences of language. In this field, however, there sectors, but there are sufficient similarities to make seems little reason to use different formulations for it worthwhile to study the approaches to domestic the same concept in different sectors, although evi- regulatory autonomy in goods in connection with dently there may be reasons to treat different sec- discussions of intensified approaches to domestic tors differently. This would appear to apply to areas regulatory autonomy in services (see WTO Work- like discrimination, necessity, proportionality, per- ing Party on Domestic Regulation 1996). formance regulation rather than design regulation, Under the Sanitary and Phytosanitary (SPS) requirements of recognition, reference to interna- Agreement (WTO 1994a), the Technical Barriers to tional standards, and other more general disci- Trade (TBT) Agreement (WTO 1994b), and the plines. More specific rules, such as harmonization General Agreement on Tariffs and Trade (GATT), of regulation, either alone or as a prerequisite for national regulatory autonomy is constrained. This specified types of recognition, obviously must be chapter compares these three sources of WTO law accomplished on a sectoral or even an issue-by- relating to goods, and compares them with the issue basis. The EU provides a rich source of experi- General Agreement on Trade in Services (GATS) to ence in this area. advance an array of options for services negotiators This chapter provides a comparison, organized and to suggest how negotiators might discriminate by reference to different types of general disci- among these options. plines. Although these disciplines often work in First, there seem to be no general, or horizontal, synergy with one another and so should not simply reasons to treat services regulation, as a whole, dif- be compared on their own, this is a first step toward ferently from goods regulation. It may be that cer- developing a taxonomy of disciplines. tain areas of services regulation merit special treat- ment of one kind or another. For example, the fact that much financial regulation takes the form of Comparison of the Disciplines of the SPS, TBT, institutional regulation accentuates the kind of jurisdictional problem associated with the product- To take advantage of the experience in goods, we process distinction in the goods field. That is, the first must develop a taxonomy of the instruments institution offering cross-border banking services available there.' Sources of discipline on domestic may be located (at least in formal terms) in Luxem- regulation include the SPS Agreement, the TBT bourg, although it offers services in the United Agreement, and the GATT itself. The original 1979 Kingdom. Whereas trade may be facilitated by a Standards Code, the predecessor to the TBT Agree- regime of mutual recognition (which in fact exists ment, was developed to provide disciplines on in the European Union [EU]), and whereas it may national technical regulations and nonbinding seem natural to allow a Luxembourg bank to be standards that were more specific than those pro- regulated by Luxembourg, there is the possibility vided under the GATT. 60 Domestic Regulation and Service Trade Liberalization In the decade following the 1979 Tokyo Round, the GATS could apply to the same set of circum- a consensus emerged that "the Standards Code had stances to which the GATT applied (WTO Appel- failed to stem disruptions of trade in agricultural late Body Report 1997). This section discusses products caused by proliferating technical restric- selected disciplines under the following categories: tions" (Roberts 1998, pp. 377, 380). Furthermore, of course, one of the great advances of the Uruguay * National treatment or most-favored-nation Round was to introduce greater disciplines on (MFN)-based antidiscrimination rules5 other types of agricultural protectionism, including * Necessity, least trade-restrictive alternative, or quotas and domestic price supports. To protect this proportionality requirements advance from potential regulatory defection, it was * Requirements for national measures to conform viewed as necessary to establish the SPS Agreement to international standards and to have it apply universally, not plurilaterally * Other requirements of harmonization (Roberts 1998). Of course, enforcement of the orig- * Regulation of regulatory goals and preservation inal Standards Code was weakened by the require- of national autonomy in goal setting ment of consensus to establish a panel and to adopt * Requirements for a scientific or other prudential a panel report-a weakness that was remedied by basis for regulation the Uruguay Round's Dispute Settlement Under- * Requirements for internal consistency across standing. Finally, the original Standards Code failed regulatory subjects to address measures regulating production and * Permission for "precautionary" action processing methods (PPMs).2 It is noteworthy that * Balancing tests the SPS Agreement imposes stronger disciplines * Requirements of recognition than the TBT Agreement precisely because it was * The distinction between regulation of products perceived that sanitary and phytosanitary standards (or services) as such, and regulation of their pro- were used more frequently for protectionist pur- duction processes, and related issues of the poses, and/or the value in trade liberalization was scope for regulation intended to protect extra- perceived as greater in the SPS field than in the TBT territorial values. field. It would be worthwhile to consider whether domestic regulation of services is more like the These disciplines work in varying combinations TBT field or the SPS field in these terms. within each of the various sources of World Trade The GATS was negotiated separately from the Organization (WTO) law. They also work together goods agreements, and neither the TBT Agreement from the broader perspective of general WTO law. nor the SPS Agreement applies to services,3 because They may best be understood as addressing, to negotiators thought the services sphere too hetero- varying degrees, one (or both) of two fundamental geneous for the application of general disciplines on questions: first, are the regulatory benefits suffi- standard-setting (see Self 1996). It is perhaps worth cient to justify the costs in terms of restraint of noting that Chapter 9 of the North American Free trade,6 and, second, is the restraint of trade inten- Trade Agreement (NAFTA) contains an integrated tional? The first question is the most difficult and standards "code" that applies to both goods and requires, in each case, the application of compara- services, but only to a limited range of services.4 tive institutional analysis (see, for example, Abbott Therefore, the SPS, TBT, and GATT agreements and Snidal 2001). on one hand and the GATS on the other hand each contain a number of different disciplines on Nondiscrimination: National Treatment national regulation. In general, these disciplines and MFN apply cumulatively: whereas application of the SPS Agreement excludes application of the TBT Agree- Obligations of nondiscrimination in internal regu- ment, and an SPS measure that is permitted under lation, including the application of internal regula- the SPS Agreement will be presumed to comply tion at the border, occupy a primary position in the with the GATT, other measures must generally GATT, and the SPS and TBT Agreements although meet the requirements of all applicable agreements. each document has slightly different formulations. In the Bananas case, the Appellate Body found that These obligations, although also important in the Lessons for the GATS from Existing WTO Rules on Domestic Regulation 61 GATS, are relatively untested as applied to services. tally, a determination about the nature and extent It might be argued that nondiscrimination is ade- of a competitive relationship between and among quately addressed under Article XVII of the GATS, products" (WTO Appellate Body Report 2001a, and requires no further evaluation here (see WTO para. 99). The Appellate Body rejected the panel's Working Party on Professional Services 1998). The finding that the goods that contained asbestos were border between Article VI on one hand and Articles like products with the goods that did not contain XVI and XVII on the other hand is expected to be asbestos. The Appellate Body examined the evi- based on the fact that Article VI deals with bona dence under four basic criteria: physical properties, fide regulatory measures (see Low and Mattoo end uses, consumer tastes and habits, and tariff 1999). As will be seen, nondiscrimination is not by classification. The Appellate Body determined that itself an easily applied test, and its application panels must examine the physical properties of requires elements of evaluation associated with products that affect the competitive relationship in necessity or proportionality tests, including the marketplace, including health risks.7 The Appel- implicit determinations of the bona fide nature of late Body resoundingly concluded, "carcinogenicity, regulation. or toxicity, constitutes, as we see it, a defining aspect of the physical properties of chrysotile asbestos GATT Article 111.4 It is appropriate to begin with fibres" (WTO Appellate Body Report 2001a, para. Article III.4 of the GATT, which provides as follows: 114). This type of "like-products" analysis is necessary The products of the territory of any contracting in any case of alleged discrimination. There is little party imported into the territory of any other reason to believe it would not be necessary to contracting party shall be accorded treatment no engage in like-products analysis under the antidis- less favorable than that accorded to like products crimination provisions of the SPS and TBT Agree- of national origin in respect of all laws, regula- ments, or under Article XVII of the GATS. tions and requirements affecting their internal sale, offering for sale, purchase, transportation, SPS Article 2.3 of the SPS Agreement provides as distribution or use. follows: "Members shall ensure that their sanitary and phytosanitary measures do not arbitrarily or This language has been interpreted in a number unjustifiably discriminate between Members where of GATT and WTO cases. Most recently, in the identical or similar conditions prevail, including Asbestos case, the Appellate Body emphasized the between their own territory and that of other fact that differential treatment may be acceptable so members. Sanitary and phytosanitary measures long as it is "no less favorable" (WTO Appellate shall not be applied in a manner which would con- Body Report 2001a, para. 100). Article XVII.3 of stitute a disguised restriction on international the GATS specifically provides that "[f]ormally trade." identical or formally different treatment shall be This language evidently departs from that of considered to be less favorable if it modifies the Article III of the GATT, adapting its operative lan- conditions of competition in favor of services or guage from the chapeau of Article XX of the GATT.8 service suppliers of the Member compared to like Recall that under the GATT these requirements of services or service suppliers of any other Member." Article XX would only apply where a violation of This is one way in which the bona fide nature of Article III (or another provision of the GATT, such regulation may be implicitly evaluated. as Article XI) was already established. The SPS To apply any nondiscrimination test it is neces- Agreement lacks a more basic prohibition of dis- sary to determine that two goods are in a similar crimination among products, along the lines of category (similar enough to deserve treatment "no Article III of the GATT. Notably, Article 2.3 does less favorable"): in WTO parlance, that the two not contain a reference to "like products," but goods are "like products." Discrimination consists rather simply prohibits discrimination among of treating like things differently, or different things member states, including the importing state. Note alike. In the Asbestos case, the Appellate Body found that Article 5.5 of the SPS Agreement restricts that "likeness" under Article III.4 is, "fundamen- "arbitrary or unjustifiable distinctions" between 62 Domestic Regulation and Service Trade Liberalization "different situations, if such distinctions result in but rather a concession to be bargained over is one discrimination or a disguised restriction on inter- of the distinctive features of the GATS. The core of national trade." a nondiscrimination obligation such as national In the Australian Salmon decision (WTO Appel- treatment is the comparison between the favored late Body Report 1998a; see also Pauwelyn 1999), good, service, or service supplier and the disfavored the Appellate Body found that an unexplained dis- one. Article XVII sets up the comparison as being tinction in the levels of protection imposed by Aus- one between "like" services or service suppliers, tralia resulted in disguised restriction on interna- referring on its face to the "like-products" concept tional trade, in violation of Article 5.5 of the SPS articulated pursuant to Article III of the GATT. Agreement and, by implication, of Article 2.3. It is What makes two services "like"? For example, is interesting that in the Australian Salmon decision the underwriting of a bond issue "like" a bank lend- the Appellate Body did not adopt the kind of bal- ing transaction? If so, why are different reserve ancing test it had used in the Shrimp decision requirements and capital requirements applicable? (WTO Appellate Body Report 1998c) to determine Does it matter for regulatory purposes that one whether the U.S. measure in the latter case consti- transaction is effected by a bank that accepts tuted arbitrary or unjustifiable discrimination pur- insured deposits? Similarly, is Internet telephony suant to the chapeau of Article XX. We discuss "like" standard telephone service? More fundamen- below the balancing test developed by the Appellate tally, is it permissible to make distinctions between Body in Asbestos and Korea-Beef in connection with services on the basis of the identity and structure of the application of the "necessity" test of Articles the service supplier as well as the way the service XX(b) and (d). appears to the consumer? Although it would be possible to apply to services something analogous TBT Article 2.1 of the TBT Agreement, following to the Border Tax Adjustments factors, it is not much more closely Article III (and the MFN clear that these parameters of likeness make sense requirement, Article I) of the GATT, requires "treat- even in the GATT. ment no less favorable than that accorded to like The Border Tax Adjustments report adumbrated products of national origin and to like products the following basic (but not exhaustive) parameters originating in any other country." However, it is of likeness: (a) the properties of the products, worth noting that the TBT Agreement has no (b) the end uses of the products, (c) consumer tastes, equivalent of Article XX, providing an exemption and (d) tariff classification (GATT Working Party under certain circumstances. Report 1970). This approach is intended to approxi- mate the competitive relationship between the rele- GATS Article XVII. 1 of the GATS provides that: vant goods-it is not as accurate or refined as simply testing cross-elasticity of demand. But the point is In the sectors inscribed in its schedule, and sub- that this test is relatively ignorant of factors that ject to any conditions and qualifications set out motivate regulation. The economic theory of regula- therein, each Member shall accord to services and tion suggests that regulation is necessary precisely service suppliers of any other Member, in respect where consumers cannot adequately distinguish rel- of all measures affecting the supply of services, evant goods-where the goods are in dose competi- treatment no less favorable than that it accords to tive relation. Thus a competitive relationship test for its own like services and service suppliers. likeness will often result in a finding that goods that differ by the parameter addressed by regulation are Thus national treatment under the GATS is not indeed like and should be treated the same. universal but is subject to the positive listing of the Under GATT Article III jurisprudence, regula- relevant service sector in the relevant state's sched- tion of production processes may not be "subject ule (see Mattoo 1997). In addition, it is subject to" Article III, and therefore would be an illegal within each listed sector to the negative listing of quantitative restriction under Article XI, unless an any exception to the national treatment obligation exception applies under Article XX. This "strong" in that schedule. Deciding that national treatment version of the product-process distinction is dis- should not be a general principle, as in the GATT, puted; another version suggests that regulation of Lessons for the GATS from Existing WTO Rules on Domestic Regulation 63 production processes remains "subject to" Article at least to some extent, in the territory of the service- III, but that differing production processes would importing state, and thus would more naturally be not ordinarily be sufficient to render two otherwise subject to the full territorial jurisdiction of that similar goods not "like" and that, therefore, less state.10 The need for commercial presence indeed favorable treatment of one of these "like" goods reflects the fact that a service is often "produced" and would violate Article III. "consumed" simultaneously and in the same place. In either version, the product-process distinc- We have a much less "natural"-and more diffi- tion serves as a kind of territorially based allocation cult-problem of allocation of regulatory jurisdic- of jurisdiction in which the product, which travels tion in connection with cross-border provision of to the importing state, is permitted to be regulated services, whereby production and consumption by the importing state. On the other hand, regula- need not happen in the same place. However, as tion of the production process, which is assumed to seems to be recognized in Article XVII, the import- take place in the exporting state, is either not "sub- ing state should not be prevented, prima facie, from ject to" Article III, and therefore unprotected from regulating the service provider in such cases. the strict scrutiny of Article XI, or violates Article The structure of Article XVII seems, on its face, III (and regulation by the host state is only permit- to indicate that a national service regulation ted if justified under Article XX). In Asbestos the imposed on a foreign service provider must meet Appellate Body was careful to point out that in two tests: it must provide treatment no less favor- addition to the need to determine the existence of able than that accorded domestic like services, and like products under Article 111.4 (which is, as it must provide treatment no less favorable than pointed out above, a question of market competi- that accorded domestic like service providers. tion) it is necessary to find that the imported prod- Therefore, even if the service providers are not uct is treated "less favorably." How this language "like," and there is thus no possible basis for finding would apply to an otherwise origin-neutral process illegal discrimination between them, it is still possi- regulation has not yet been addressed. ble that the services they provide may be "like," giv- The situation is quite different in the GATS, ing rise to a claim of violation of the requirement of where regulation of service providers is expressly national treatment. On its face this might seem an validated and subjected to the national treatment absurd result and might invalidate, for example, a criterion (see Mattoo 1997). Because in many ser- regulation that requires a bank to maintain reserves vices service provider-person or firm-may itself different from those maintained by an insurance be a part of the continuing nature of the service, a company prior to making a loan, because although different arrangement seems appropriate. That is, it the service providers are not "like," the services are. seems less obvious (if it is at all obvious in the Thus a better reading would separate the evalua- goods sector) that the service-importing state tion of treatment of services from the evaluation of should not have equal rights to regulate the service treatment of service providers. It simply would provider itself, even though on the territory of the evaluate regulation of services as services, by deter- home country. In other words, the process by which mining whether the regulation treats "like" services a service is "produced" (a loan issued, a professional alike, period. If this were the case, regulation of trained) may determine the actual characteristics of service providers would be evaluated to determine the ultimate service "product" (the loan, the train- only whether like service providers, as service ing, the advice, the treatment). This would validate providers, are treated alike." Using this interpreta- traditional institutional regulation of most types of tion there would be no violation of national treat- financial institutions, as well as regulation of the ment if like services were treated differently where structure of law firms or other types of service the reason for the difference in treatment is the reg- providers. ulation of the service provider as service provider. Furthermore, we must distinguish between the This is likely to be the interpretation that a WTO two main vehicles for trade in services: cross-border panel or the Appellate Body would apply. provision (including consumption abroad) and In effect, such an approach would replicate a commercial presence.9 In cases of commercial pres- kind of product-process distinction as a service- ence, the foreign service provider would be present, service provider distinction. But contrary to the 64 Domestic Regulation and Service Trade Liberalization more doubtful case of products, host state regula- regulatory categories are appropriately justified by tion of the "process" or the service provider-often nonprotectionist regulatory policy objectives- geographically located in the host state-would be hence, the relationship between national treatment validated (subject only to a strict national treat- and necessity. On the other hand, Article XVII.3 of ment constraint). Regulations applying to the ser- the GATS, defining "no less favorable" in terms of the vice, as such, would only be evaluated to determine conditions of competition, may limit this type of whether like services are treated alike, whereas reg- flexibility in the services context. ulations applying to the service provider, as such, would only be evaluated to determine whether like service providers are treated alike.'2 The WTO Dis- ecessitYaeast Trade-Restinctive pute Settlement Body would be required to distin- Prt guish between regulation of services and regulation Aside from antidiscrimination rules, the most of service providers. In addition, the analogy to important general discipline on domestic regulation products might be taken one step further to suggest in WTO law is the necessity test, which is generally stronger constraints on host state regulation of the interpreted as requiring the domestic regulation to service provider than on the service. Of course, be the least trade-restrictive alternative method of there is nothing in the GATS that would support achieving the desired policy objective. "Proportion- this treatment. ality" may include least trade-restrictive alternative As noted at the beginning of this section, analysis, but includes other tests as well. To provide GATT/WTO dispute resolution has been unable to the context for "necessity" and proportionality in provide a predictable, consistent approach to deter- the GATS it is necessary briefly to outline the way mining when products are "like." We cannot expect these concepts present themselves in the GATT, the GATS dispute resolution to do better. Thus, for TBT Agreement, and the SPS Agreement. example, we might ask whether two accountants with advanced university degrees from universities GATT XX(b) and (d) Of course, the exceptional in different states are "like service providers"? Are provisions of GATT Article XX only become rele- two banks from different states in which they are vant after a violation of another provision of the required to establish different levels of reserves "like GATT is found. This is a significant distinction service providers"? Similarly, are the loans provided from both the SPS and the TBT Agreements, which by these two banks "like services"? Under GATT apply requirements of least trade restrictiveness jurisprudence these questions cannot be answered independently. Under the GATT, of course, the least predictably or in the abstract but must be deter- trade-restrictive alternative requirement of Articles mined on a case-by-case basis. Although this XX(b) and (d) is a part of a defense to be made out jurisprudence results in a degree of unpredictabil- by the respondent with the burden of proof on the ity, the Appellate Body has now addressed several respondent. Under the SPS and TBT Agreements, cases, thus providing experience in how these mul- on the other hand, the same standard is framed as tiple factors are likely to be viewed and applied. The an obligation of the defendant, with the com- question for us is whether this situation of case-by- plainant required to make out an affirmative case. case analysis by the dispute settlement mechanism Thus the choice between these norms will have an is superior to a more discrete, ex ante specification effect on the allocation of the burden of proof (see that could be provided by treatymaking or other Howse and Mavroidis 2000). quasi-legislative process? Recall that the "necessity" qualifications con- Given the broad definition of "like products" pro- tained in Articles XX(b) and (d) of the GATT have vided by the Appellate Body in the area of goods, it is been interpreted to require the national measure to likely that WTO dispute settlement will place be the least trade-restrictive alternative reasonably increasing emphasis on the "no less favorable" com- available.'3 What is reasonable?"4 If the reasonable- ponent of national treatment obligations. This com- ness test amounts to a requirement that the least ponent may be interpreted as containing some ele- trade-restrictive alternative not be so costly as to ment of judgment, based on balancing or countervail the benefits of the regulatory measure, proportionality concerns, as to whether the domestic then it bears some resemblance to a truncated cost- Lessons for the GATS from Existing WTO Rules on Domestic Regulation 65 benefit analysis, excluding from its maximizing the extent necessary to protect human, animal, or analysis precise measurement of the benefits of the plant life. The interpretive question here relates to regulatory measure. If, alternatively, it amounts to a the significance of the term "applied." This term comparison that requires that the regulatory costs appears here, but also in the chapeau of GATT Arti- not be disproportionately greater than the trade cle XX. In the Shrimp case and the Gasoline case, the benefits, then it is a kind of proportionality testing. Appellate Body suggested that the chapeau's requirements relate not to the substance of the TBT Agreement Article 2.2 of the TBT Agree- measure itself but to the way in which it is ment adds a curious phrase to the necessity test: it applied-for example, whether it is applied in a provides that "technical regulations shall not be way that constitutes arbitrary or unjustifiable dis- more trade-restrictive than necessary to fulfill a crimination (see Howse 2000, citing Barcelo 1994). legitimate objective, taking account of the risks non- On the other hand, at least in the SPS Agreement, fulfillment would create."''5 On its face, the italicized Article 5.6, also imposing a "least trade-restrictive language appears nonsequacious: what part of alternative" requirement, does not limit itself to the necessity test analysis would consider the risks of manner in which a measure is applied, but nonfulfillment of the regulatory goals? However, if addresses measures themselves. The operation of the necessity test is thought of as a balancing or this distinction is unclear and its relationship to cost-benefit analysis test,'6 considering the poten- jurisprudence, as in the U.S. Section 301 case and tial costs of regulatory failure as part of its calculus, the U.S. Countervailing Duties in Respect of Export then this language may make sense. Cost-benefit Restraints case (holding that measures may violate analysis ordinarily would discount a risk by its WTO law even if they are not yet applied in a way probability in order to calculate its "cost." In addi- that violates a specific provision of WTO law), is tion, if the necessity test under this provision is also unclear. thought of as proportionality testing, the magni- tude and probability of risk become relevant. GATS Proportionality It is important to note that even if a state is otherwise found to violate the SPS Agreement On the other hand, the SPS national treatment obligation of Article XVII (or Agreement contains a necessity test subject to a other provisions of the GATS, such as Article VI.5), "reasonable availability" qualification, which its regulation might be permitted under the excep- requires that sanitary and phytosanitary measures tional provisions of Article XIV. Of course, Article be "not more trade restrictive than required to XIV would only apply where there was an original achieve their appropriate level of protection, taking violation of another provision of the GATS for into account technical and economic feasibility."'7 nondiscriminatory regulation. We will see that The related footnote indicates that this standard dis- there are few possibilities for finding an original ciplines two of the three components of regulatory violation. Article XIV parallels Article XX of the cost and benefit. First, it asks whether there is a reg- GATT, providing certain domestic policy excep- ulatory alternative that is significantly less restrictive tions from the otherwise applicable GATT obliga- to trade. Second, it asks whether that regulatory tions. The most relevant bases for exceptions under alternative is reasonably available. It declines to dis- Article XIV are for measures: cipline the extent to which the measure maintains its ability to meet the appropriate level of protec- * Necessary to protect human, animal, or plant tion; that is, it does not on its face require any reduc- life or health tions in protection, no matter how costly in trade * Necessary to secure compliance with laws or terms.'8 Given the Appellate Body's willingness to regulations that are not inconsistent with the do so, made evident in the recent Asbestos and provisions of the agreement including those Korea-Beef decisions, in the context of Article XX, relating to: the Appellate Body also might find a basis for doing (a) the prevention of deceptive and fraudulent so under the SPS Agreement. practices or to deal with the effects of a Article 2.2 of the SPS Agreement requires mem- default on services contracts bers to ensure that any measure is applied only to (b) safety 6 Domestic Regulation and Service Trade Liberalization Both of these clauses incorporate a "necessity" that this requirement-especially its reasonableness test, which has been interpreted in the GATT con- prong-may be employed and developed in WTO text to require that the national measure be the dispute settlement to impose substantive obliga- least trade-restrictive alternative reasonably avail- tions of proportionality in connection with domes- able to achieve the regulatory goal. As noted above, tic regulation. It is interesting that the relevant por- and as described in more detail below, in the Korea- tions of the New Shorter Oxford English Dictionary Beef and Asbestos cases the necessity test has been definition of "reasonable" includes "in accordance interpreted by the Appellate Body to require sub- with reason; not irrational or absurd," "proportion- stantial balancing. Least trade-restrictive alternative ate," and "within the limits of reason; not greatly less analysis in the EU has often turned to labeling or more than might be thought likely or appropri- requirements, which might be less applicable in ate."20 On the other hand, it must be noted that Arti- some service areas than they are in goods. However, cle VI. 1 disciplines the "administration" of domestic in areas such as consumer finance or insurance, regulation rather than the regulation itself. It is diffi- required notices to consumers are somewhat analo- cult to predict how this distinction will develop, gous to labels. especially in relation to the goods jurisprudence Furthermore, the exceptions under Article XIV under the chapeau of GATT Article XX, in some would only be available if the national measures cases relating to the manner in which measures are also met the requirements of the chapeau of Article applied. XIV, which requires that such measures "are not Article VI also includes procedural guidelines applied in a manner which would constitute a requiring that decisions in cases where the supply means of arbitrary or unjustifiable discrimination of a service requires authorization in the host coun- between countries where like conditions prevail, or try must be issued "within a reasonable period of a disguised restriction on trade in services...." The time," and that signatories establish tribunals and Gasoline and Shrimp/Turtle decisions of the WTO procedures to process potential complaints by for- Appellate Body have interpreted the same language eign service suppliers. in the context of Article XX of the GATT in a fairly Article VI.4 of the GATS calls on the Council for restrictive manner. In the Shrimp/Turtle case the Trade in Services (CTS) to develop any necessary Appellate Body applied a balancing test, evaluating disciplines to ensure that measures relating to qual- whether the national measure is appropriate to ification requirements and procedures, technical achieve the regulatory goal, whether it is the least standards, and licensing requirements2" do not trade-restrictive alternative reasonably available to constitute unnecessary barriers to trade in services. achieve the regulatory goal, and whether it is Prior to the agreement and entry into force of more applied equally to all member states. Given that the specific rules under Article VI.4, supervision on chapeau of Article XIV is identical to that of Article national measures is available under Article VI.5 in XX, one would expect similar scrutiny to be applied sectors in which the importing member has under- in services cases. taken specific commitments. For these disciplines to apply, two criteria must be satisfied: Nullification or Impairment and the Necessity Test under Article VI.5 Article VI (domestic reg- 1. The licensing or qualification requirements or ulation) primarily spells out general obligations for technical standards must nullify or impair spe- service sectors that have been included by contract- cific commitments in a manner that could not ing parties in their national schedules,'9 except for reasonably have been expected at the time the measures that are covered by reservations in these specific commitments were made. schedules under Article XVII (national treatment) 2. The measure must be (a) not based on objective and XVI (market access). and transparent criteria; or (b) more burden- In vague terms, Article VI. 1 provides that domes- some than necessary to ensure the quality of the tic regulations, applied in a sector that a member service; or (c) in the case of licensing procedures, has agreed to include under specific liberalization in itself a restriction on the supply of the service. commitments, must be administered in a "reason- able, objective, and impartial manner." It is possible Let us examine each of these criteria in turn. Lessons for the GATS from Existing WTO Rules on Domestic Regulation 67 Nullification or Impairment Nullification or tion of Sanitary and Phytosanitary Measures. Nei- impairment (N/I) has served as a central feature in ther the GATT nor these agreements include the GATT and WTO dispute resolution. Under GATT N/I requirement in the prohibition itself. There- Article XXIII redress pursuant to the dispute reso- fore, in connection with trade in goods, determina- lution system of the GATT is only available in the tion that a provision of a covered agreement has event of N/I. Where a provision of WTO law is vio- been violated results in prima facie N/I under Arti- lated, nullification or impairment is presumed.22 cle 3(8) of the DSU, and places the burden of rebut- On the other hand, it is possible, although infre- ting the existence of N/I on the respondent. In the quent, for N/I to serve as the basis for a successful context of Article VI.5 of the GATS, without N/I complaint in the absence of an actual violation of there is no violation. Without a violation there is no the GATT: so-called "non-violation nullification or prima facie N/I. Consequently, it will be for the impairment." Article VI.5 of the GATS incorporates complaining party to show nullification or impair- this concept. ment. This will make it more difficult for national In the leading nonviolation nullification or services regulation to be addressed under Article impairment case, Film (WTO Report of the Panel VI.5. 1998), the panel reviewed in detail the basis for cer- We may speculate as to why the GATS relies so tain U.S. expectations in order to decide whether heavily on the N/I concept in this context. Nonviola- the United States had "legitimate expectations" of tion N/I is an extremely vague standard, but one that benefits after successive tariff negotiation rounds. by itself has been difficult to meet. Thus, in the As the complaining party, the United States was absence of an ability to negotiate more specific disci- allocated the burden of proof of its legitimate plines on national regulation, nonviolation N/I pro- expectations. For the United States to meet this vides a modicum of more general discipline. It burden it was required to show that the Japanese might be viewed as a "least common denominator" measures at issue were not reasonably anticipated insofar as the parties could agree not to nullify or at the time the concessions were granted (WTO impair concessions earnestly made, but could not Report of the Panel 1998, para. 10.61). Where the agree on more pervasive, blanket restrictions on measure at issue was adopted after the relevant tar- their national regulatory sovereignty. Thus Article iff concession, the panel established a presumption, VI.5 is first and foremost merely a standstill obliga- rebuttable by Japan, that the United States could tion in the sense that only new regulatory measures not reasonably have anticipated the measure. subsequent to scheduling are likely to be disciplined. The import of this approach in the services con- text is clear. The complaining party must show that The Necessity Test Under this additional compo- the measures attacked were not reasonably antici- nent of the GATS Article VI.5 test we focus on the pated. Thus longstanding regulatory practices or requirement (incorporated from Article VI.4[b]) circumstances are protected. This means that the that the national measure not be more burdensome domestic circumstances as they are form a back- than necessary to ensure the quality of the service. ground for all concessions; as a matter of negotia- Even if it is possible to show that a national mea- tion strategy, members of the GATS must recognize sure nullifies or impairs service commitments, a this and bear the burden of negotiating an end to complainant would be required to show that the existing measures that reduce the benefits for which national measure does not comply with the criteria they negotiate. It is also clear, as described in more listed in Article VI.4, the most likely of which is the detail below, that Article VI.5 will not impose sub- necessity test examined here. stantial discipline on domestic regulation, which As described above, GATT dispute resolution will place a greater burden on Article VI.4 as a panels have taken a narrow view of what is "neces- source of discipline. sary" under Article XX of the GATT, which con- It is worthwhile to compare this structure with tains language upon which GATS Article VI.5 that applicable to goods under the GATT and is modeled (Thailand 1990). To be deemed neces- under the two WTO agreements applicable to regu- sary according to the traditional test the measure latory standards-the Agreement on Technical Bar- must be the least trade-restrictive measure reason- riers to Trade and the Agreement on the Applica- ably available to achieve the regulatory goal. In the 68 Domestic Regulation and Service Trade Liberalization context of Article VI.4(b), the reference is to mea- apply to national measures listed as exceptions sures "not more burdensome than necessary to under Articles XVI and XVII (negative list). They ensure the quality of the service." The last clause generally articulate further and tighten the princi- could be very interventionist. It could restrict not ple of necessity: that measures should be the least just the means to attain a given regulatory goal but trade-restrictive method to effect a legitimate even the types of regulatory goals that might be objective. In fact, these provisions replicate require- achieved, as when the regulatory goal is not to ments that have been imposed in the EU pursuant maintain the quality of the service but to avoid to European Court of Justice (ECJ) single-market some other externalization or regulatory harm by jurisprudence.25 They also replicate the approach of the service provider. For example, ignoring for a the EU's General System Directives on professions, moment the prudential carve-out, if a bank is codifying principles of proportionality26 or neces- required to maintain a particular reserve in relation sity. They have the following features relevant to to a loan, is that necessary to ensure the quality of this chapter: the service? Many types of service regulation might be subject to similar, inappropriate attack. This Necessity. Member states are required to ensure provision should be revised. that measures relating to licensing requirements Furthermore, in a placement comparable to the and procedures, technical standards, and qualifi- inclusion of the N/I criterion in the substantive cation requirements and procedures are not pre- prohibition, here the necessity criterion is included pared, adopted, or applied with a view to or with as a parameter of the substantive prohibition, in the effect of creating unnecessary barriers to addition to being included in the exceptional provi- trade in accountancy services. Such measures sions of Article XIV(c).23 Therefore, in order to may not be more trade restrictive than necessary make out a violation of Article VI.5 under this to fulfill a legitimate objective, including protec- clause, the national measure must be shown to be tion of consumers, the quality of the service, unnecessary in the sense described above. Then, for professional competence, and the integrity of the respondent to claim an exception under XIV(c) the profession. As will be clear from the discus- it will be required to show that it is necessary in the sion above, this necessity requirement is sub- broader sense defined there. One interesting ques- stantially stronger than that contained in Article tion involves the burden of proof. Under the prod- VI.5 of the GATS. ucts jurisprudence of the Appellate Body it appears Qualification Requirements. Member states that the complainant will be required to show the must take account of qualifications acquired in lack of necessity under Article VI.5, whereas the the territory of another member state on the responding state would ordinarily be required to basis of equivalency of education, experience, prove the affirmative defense of necessity under and/or examination requirements. Examina- Article XIV(c). This is at least an odd legal circum- tions or other qualification requirements must stance in which each side is allocated the burden of be limited to subjects relevant to the activities proof on the same issue at different phases. The for which authorization is sought. complaining state would be required to show that Technical Standards. Technical standards must the responding state's regulatory approach is be prepared, adopted, and applied only to fulfill "unnecessary" under Article VI.5, and the respond- legitimate objectives. In determining conformity ing state would be required to demonstrate its with this requirement of a member state's meas- necessity under Article XIV(c). ures, account must be taken of internationally In 1998 the CTS adopted the Disciplines on recognized standards applied by that member. Domestic Regulation in the Accountancy Sector This is an extension of GATS Article VI.5(b). (the "Accountancy Disciplines") (WTO 1998, pp. 10_ 11)24 developed by the GATS Working Party It is worth noting that the EU has stated that the on Professional Services (now the Working Party following should be considered in defining necessity on Domestic Regulation). These disciplines apply under Article VI.4: "A measure that is not the least to all member states that have made specific com- trade restrictive to trade will not be considered mitments in accountancy (positive list) but do not more burdensome/more trade restrictive than nec- Lessons for the GATS from Existing WTO Rules on Domestic Regulation 69 essary so long as it is not disproportionate to the an extreme interpretation of necessity as least objective stated and pursued" (WTO 2001, sum- trade-restrictive alternative analysis, stating in mary after para. 22). This is substantially more effect that no regulatory intervention on the part of lenient in respect to domestic regulation than the the importing country is necessary at all. The least definition of "necessity" developed in GATT/WTO restrictive alternative is to do nothing. We have seen jurisprudence. It would provide an additional this in the ECJ jurisprudence,27 and there are treaty defense for regulation that is not the least trade- provisions reflecting this concept in Article 4 of the restrictive alternative but is nevertheless "propor- SPS Agreement28 and Article 2.9 of the TBT Agree- tionate." The Appellate Body's jurisprudence in ment.29 Under this interpretation recognition may Korea-Beef and Asbestos may be understood as be mandated byjudicialfiat. somewhat consistent with this approach, adding Note that Article VII of the GATS and paragraph additional factors to the least trade-restrictive alter- 3 of the Annex on Financial Services, in contrast, do native test. However, it is not clear precisely what not require recognition but merely authorize it. "disproportionate" means in this context. It is likely Although a strong GATS standard of necessity that the EU meant to refer to proportionality stricto might eventually lead to such judicially required sensu (Emiliou 1996; Trachtman 1998), which asks recognition, this is unlikely to be the case under whether the means are "proportionate" to the current treaty language. But the necessity test might ends-whether the costs are excessive in relation to nevertheless mandate partial recognition of some the benefits. Proportionality stricto sensu might be regulations and not others, whereby partial recog- viewed as cost-benefit analysis with a margin of nition becomes the operational consequence of the appreciation because it does not require that the principle of proportionality. It is important to note costs be less than the benefits. A wider definition of that the Accountancy Disciplines require recogni- proportionality developed in the EU internal mar- tion of professional qualifications in accountancy. ket context includes three tests: (a) proportionality As noted above, the Accountancy Disciplines stricto sensu, (b) a least trade-restrictive alternative include a substantially enhanced necessity test, test, and (c) a simple means-end rationality test. At applicable within that sector. the same time that it adds proportionality to a least trade-restrictive alternative test, the EU seems to suggest that "the validity, or rationale, of the policy objective[s] must not be assessed" (WTO 2001, GATT The GATT contains no specific require- para. 17). The EU may intend that the "appropriate ments of harmonization. Before moving on, how- level of protection" selected by a member state ever, it is important to note that under certain cir- should not be questioned. cumstances necessity or least trade-restrictive alternative tests will require acceptance of either Recognition and Necessity Necessity has a com- another state's standard (recognition) or an inter- plex relationship with recognition. That is, a neces- national standard (harmonization). That is, the sity test, interpreted as a requirement that the other standard may be the least trade-restrictive national measure be the least trade-restrictive alter- means to achieve the regulatory goal. For example, native reasonably available to address the regula- Article XX of the GATT, in connection both with its tory concern, can either be an absolute requirement chapeau and with clauses (b) and (d), seems to pro- or a relative requirement. Thus a less restrictive vide some incentives for harmonization. In the option might make sense irrespective of the home Shrimp case, the Appellate Body suggested that for a regime, or conversely might only be justified in ref- national measure to be eligible for exemption under erence to the home country regulatory regime, as a the chapeau of Article XX, a state might be required complementary measure. Judgments based on the first to attempt to achieve its regulatory goals former assessment reflect a high degree of judicial through multilateral (or other non-unilateral) activism and are unlikely to be found legitimate. means. In the latter case, where the home country regu- latory regime satisfies the host country concerns, SPS and TBT Article 3.4 of the SPS Agreement necessity may require recognition. This would be requires member states, within the limits of their 70 Domestic Regulation and Service Trade Liberalization resources, to play a full part in relevant interna- from its penumbra of traditionally domestic regu- tional organizations in order to promote the devel- latory prerogatives in environment, health, labor, opment of international standards. Similarly, Arti- culture, tax, and so forth. cle 2.6 of the TBT Agreement provides that: At the Singapore Ministerial Meeting in 1996, the WTO (informally) referred certain trade- With a view to harmonizing technical regula- related labor issues to the International Labor tions on as wide a basis as possible, Members Organization; this referral was reaffirmed more shall play a full part, within the limits of their recently at Doha. Not to decide is to decide, how- resources, in the preparation by appropriate ever, and the WTO's abdication of authority has international standardizing bodies of interna- certain substantive results. Although this chapter tional standards for products for which they points to certain negative integration powers avail- either have adopted, or expect to adopt, techni- able in WTO dispute settlement to be exercised cal regulations. through the application of general standards, the WTO has much more limited powers of positive GATS on Harmonization Article VI.4 of the integration available to be exercised through the GATS provides a facility for harmonization but legislation of specific rules. Article VI.4 is a partial does not require it. Moreover, because of the weak exception. negative integration under Article VI.5, there are fewer incentives for harmonization under the SPS It is interesting to note that in the Uruguay GATS than under the SPS or TBT Agreements. As Round, in the area of sanitary and phytosanitary discussed more fully below, Article VI.5(b) of the measures, the WTO formally referred certain quasi- GATS requires that applying the disciplines of Arti- legislative authority to certain other functional cle VI.5(a) take into account relevant standards of organizations. That is, the definition of "interna- international organizations applied by the relevant tional standards" contained in Annex A to the SPS member state. Agreement appoints Codex Alimentarius (Codex), Article VII.5 of the GATS states, "In appropriate the International Office of Epizootics (OIE), and cases, Members shall work in cooperation with rel- the International Plant Protection Convention evant intergovernmental and non-governmental (IPPC) as quasi-legislators of these standards in rel- organizations towards the establishment and adop- evant areas. What do I mean by "quasi-legislators"? tion of common international standards and crite- First, under the terms of their own constitutive ria for recognition and common international stan- documents, the standards developed by Codex, dards for the practice of relevant services trades OIE, and IPPC for human, animal, and plant and professions." health, respectively, are nonbinding. Article 3.1 of the SPS Agreement, however, provides that "Mem- bers shall base their sanitary or phytosanitary Conformity with International Standards: measures on international standards, guidelines or Rules and LegistandardslAdjuation atsewherecommendations, where they exist, except as oth- erwise provided for in this Agreement, and in par- One of the core problems facing the WTO is the ticular in paragraph 3." Moreover, Article 3.2 states imbalance between its new (since 1994) dispute that SPS measures of WTO members that are in resolution authority on one hand and its extremely conformity with international standards, guide- limited legislative capacity on the other. The legisla- lines, or recommendations shall be "presumed to tive capacity of the WTO is limited by virtue of be consistent with the relevant provisions of this both legal constraints and a network of informal Agreement." In its Hormones decision the Appel- expectations and attitudes. Moreover, there are late Body found that the terms "based on" in Arti- substantial questions about the subject matter cle 3.1 and "in conformity with" in Article 3.2 have competence of the WTO-the extent to which the different meanings. "Based on" means simply WTO can or should address areas outside of its derived from, and provides greaL:; flexibility to "core competency" of international trade. Increas- members.30 On the other hand, reversing the ingly, the core of international trade is inseparable panel, the Appellate Body found that Article 3.2 Lessons for the GATS from Existing WTO Rules on Domestic Regulation 71 was a safe harbor but did not establish the con- activities and to coordinate with the "relevant inter- verse presumption: the panel erred in presuming national organizations." that measures that did not conform to interna- tional standards were inconsistent with the SPS TBT Article 2.4 of the TBT Agreement requires Agreement. members to use international standards as a basis So, although Codex, OIE, and IPPC do not by for their technical regulations, unless the interna- any means legislate in the normal, or full, sense, the tional standards are an inappropriate or ineffective norms that they produce have certain lesser bind- means to achieve legitimate objectives. This ing force-they provide incentives that guide con- requirement is less complex, and less subtle, than duct. They are safe harbors with characteristics that under the SPS Agreement. Article 2.5 provides similar to those used to guide conduct, for example, a presumption of compliance for standards that in U.S. tax or securities law regulations. The SPS conform to relevant international standards. Agreement provisions mentioned above provide important incentives for states to base their GATT The GATT does not specifically require the national standards on or conform their national use of international standards at all, although the standards to the Codex, OIE, and IPPC standards. least trade-restrictive alternative requirements Article 3.3 provides an important exception in cer- under Article XX may include a requirement to try tain circumstances, including situations in which a to create or use an international standard before state adopts a higher "appropriate level of sanitary applying a unilateral one (WTO Appellate Body or phytosanitary protection." This is a refined sys- Report 1998c). tem of applied subsidiarity, subtly allowing national autonomy subject to certain subtle con- GATS The GATS, like the GATT, does not specifi- straints, or incentives. cally require the use of international standards and Before the SPS Agreement, Codex standards had provides weaker incentives for the use of such stan- no particular binding force unless accepted for dards than does the SPS Agreement or the TBT application by national legislation.3' Given the new Agreement. As noted above, Article VI.5(b) quasi-legislative character of standards set by requires that account be taken of compliance with Codex, OIE, and IPPC (and other organizations), it international standards where a member state's is worthwhile to examine how these organizations compliance with Article VI.5(a) is being evaluated. adopt standards (Stewart and Johanson 1998). It This is a nod toward a safe harbor for states that may be that the phenomenon of strengthened comply with international standards, although it enforcement of standards by virtue of the SPS should provide only very modest incentive effects Agreement will give rise to modified standard- because of the weakness of Article VI.5(a). It does setting procedures.32 not provide a presumption of compliance, as do Codex Alimentarius standards are developed by Article 2.5 of the TBT Agreement and Article 3.2 of committees of government representatives under the SPS Agreement. one of two stepwise approaches: an eight-step full The Accountancy Disciplines require that tech- procedure, and a five-step accelerated method. In nical standards be prepared, adopted, and applied the final, adoption stage of both approaches, the only to fulfill legitimate objectives. In determining Codex Commission makes "every effort to reach conformity with this requirement of a member agreement on the adoption of standards by consen- state's measures, account must be taken of interna- sus" (Ontario Ministry of Agriculture, Food, and tionally recognized standards applied by that mem- Rural Affairs 2000). However, when "efforts to ber. This is an extension of GATS Article VI.5(b).34 reach a consensus have failed" (Ontario Ministry of Agriculture, Food, and Rural Affairs 2000), voting Rules and Standards: Relating Legislative Capac- does occur and decisions of the Commission are ity to Judicial Scrutiny In different legal systems "taken by a majority of the votes cast."33 and in different historical moments it may be bet- Article 3.5 of the SPS Agreement requires the ter for legislators or treatymakers to engage in WTO Committee on Sanitary and Phytosanitary more specific negotiations toward more specific Measures to monitor international harmonization rules, or to engage in more general negotiations 72 Domestic Regulation and Service Trade Liberalization toward more general "standards," for subsequent harmonization." In that context, the EU relied on application by a court (Trachtman 1999). It is pos- substantial judicial scrutiny, including judicially sible for a "legislative" act to provide either a broad required recognition under Cassis de Dijon and or a narrow mandate to a court. A narrow mandate other precedents, while engaging in "essential" har- will call for less discretion to be exercised by the monization to establish the further prerequisites court.35 for mutual recognition. Of course, in the trade area Not only do treatywriters delegate authority to recognition is consistent with complete regulatory dispute resolution tribunals; they also maintain market access. complex relationships with the dispute resolution These considerations apply in the GATS, process, both formal and informal. First, of course, although they are ameliorated by the limited possi- is the possibility of legislative reversal: if the bilities under Article VI.5 for judicial scrutiny of authors of the treaty become discontented with the nondiscriminatory regulation.37 It is at least possi- manner of its application, they may change the ble, however, that Article VI. 1 might be interpreted treaty. Furthermore, they may restrain dispute res- as a broad standard that could have the effect of olution. Second, and relatively unusual in general invalidating domestic regulation. Conversely, Arti- international law, is a formal "political filter" cle VI. 1 seems intended to apply to the manner of device. This political filter was much more impor- administration rather than to the substance. tant prior to the 1994 changes to WTO dispute res- It is worthwhile to note that in the Accountancy olution, but it still exists in attenuated form. Disciplines the CTS elaborated the standards of The fact that the "legislative" act in connection necessity and recognition rather than applying with sanitary and phytosanitary standards takes more specific rules for accountancy qualifications. place outside the WTO provides some interesting features. First, it may lend the WTO a degree of insulation from criticism. Second, it offers a leg- Appropriate Levls islative device that may evade the need for una- f gu G nimity, or at least consensus, within the WTO.36 Article 2.2 of the SPS Agreement provides that san- Amendments and decisions within the WTO have itary and phytosanitary measures must be based on varying formal requirements, up to and including scientific principles and may not be maintained effective unanimity for states to be bound by without sufficient scientific evidence, except under amendments, but these formal requirements form Article 5.7. This is possibly the greatest difference the background for informal consensus-based between the SPS Agreement and the TBT Agree- practices. Codex and other standard setters may ment (not to mention the GATT): the TBT Agree- provide opportunities for less rigorous adoption of ment does not explicitly regulate risk assessments measures. Third, it may be possible, subject to the or require scientific bases for regulation. While pro- difficulty of changing WTO law, to legislatively portionality or other standards applicable under override Codex or other outside sources of stan- the TBT Agreement, the GATT, or the GATS may dards. Fourth, this structure provides an opportu- implicitly require some scientific basis, this implicit nity for subject matter specialists rather than trade requirement can be expected to be significantly less specialists to take a leading role in formulating the rigorous than the explicit requirements of the SPS standards. Agreement. Finally, we may consider standard setting, or Article 3.3 of the SPS Agreement permits states positive integration, and its relationship to "adju- to introduce measures that result in a higher level dicative" scrutiny of national measures, or negative of protection than do international standards if integration. Negative integration provides some there is scientific justification or as a consequence incentives for states, including the direct incentive of a Member's appropriate level of protection. Note arising from the fact that an international standard 2 to this provision explains that a scientific justifi- may be viewed as the least trade-restrictive alterna- cation exists if, on the basis of scientific evidence, tive or may be privileged under the SPS or TBT the regulating state determines that international Agreement. We have seen this type of effect in con- standards are insufficient to achieve the appropri- nection with the EU's so-called "new approach to ate level of protection. Lessons for the GATS from Existing WTO Rules on Domestic Regulation 73 Artides 5.1 and 5.2 of the SPS Agreement impose cle 2.3 (see WTO Appellate Body Report 1997, para. a requirement of risk assessment, taking into 212). Because it requires discrimination or a dis- account available scientific evidence. These require- guised restriction it is not clear that it adds much ments were interpreted in each of the three cases beyond the requirement of national treatment in under the SPS Agreement: Hormones, Australia- Article III of the GATT or in Article 2.1 of the TBT Salmon, and Japan-Agricultural Products. A "risk Agreement. The GATS does not contain any similar assessment" is defined in Annex A to include not language. just scientific evidence but also evaluation of poten- tial biological and economic consequences (see Precautionary Principle Howse 2000, citing Barcello 1994). Furthermore, Article 5.4 of the SPS Agreement exhorts member The precautionary principle (see Geistfeld 2001), of states, when determining an appropriate level of course, has been the subject of extensive debate that protection, to take into account the objective of cannot be recounted here. It is worth pointing out, minimizing negative trade effects. Although Annex however, that the precautionary principle is stated A specifies that the "appropriate level of sanitary or in a very specific and limited form in Article 5.7 of phytosanitary protection" is that deemed appropri- the SPS Agreement. It is available to allow provi- ate by the regulating state, this is a requirement for sional measures where scientific evidence is insuffi- member states to engage in a rather complete bal- cient, where the member acts on the basis of avail- ancing test when establishing and maintaining SPS able information, and where the member seeks to measures. However, it is not itself a balancing test obtain the additional information needed for a for application by panels or the Appellate Body. more objective assessment of risk within a reason- These types of measures might be supervised more able period of time (WTO Appellate Body Report politically, for example, through the Trade Policy 1999). There is nothing similar in the GATT, the Review Mechanism. TBT Agreement, or the GATS, presumably in part The GATS does not have any explicit requirements because they lack a specific requirement for a risk relating to bases for regulation or appropriate levels assessment taking into account scientific evidence. of regulation. As noted elsewhere, the "reasonable- Lacking the specific requirement, they do not need ness" requirement of Article VI. 1 could be interpreted an exception for emergent circumstances. However, to do so if the reference to "administration" were read this leaves a degree of uncertainty because a meas- broadly. Also, in the leading sector of financial serv- ure taken without sufficient scientific basis might ices the Annex on Financial Services specifically pro- otherwise be found to be unnecessary or dispropor- vides that nothing in the GATS shall prevent a state tionate under applicable standards. from taking measures for prudential reasons.38 Although this contains an implicit requirement that Balancing the measure be for "prudential reasons," the only con- sequence of a failure of a measure to satisfy this To many commentators, the idea of balancing tests requirement is that it is not eligible for blanket pro- in contexts where domestic regulation is subject to tection from scrutiny. international scrutiny has been anathema. There are two likely reasons. First, balancing tests seem to some to accord too much power to courts. At least in the United States, however, it is not unusual for Article 5.5 of the SPS Agreement addresses an courts to be assigned, explicitly or implicitly, to bal- interesting theoretical issue: why do people accept ance under specified circumstances. Second, and greater risk in some circumstances than in others? even more intractable, balancing tests seem to It requires a regulating state to "avoid arbitrary or intervene too greatly in national regulatory auton- unjustifiable distinctions in the levels it considers omy.39 This intervention is considered excessive not to be appropriate in different situations, if such dis- because it might strike down domestic regulation tinctions result in discrimination or a disguised but because it might involve an international tribu- restriction on international trade." This provision nal in too extensive an inquiry into the costs and adds marginally, if at all, to the prohibition of Arti- benefits of domestic regulation. 74 Domestic Regulation and Service Trade Liberalization The GATT has no specific language authorizing cle XX(d), involves in every case a process of a balancing test in connection with domestic regu- weighing and balancing a series of factors which lation. The SPS Agreement and the TBT Agree- prominently include the contribution made by ment, while providing for least trade-restrictive the compliance measure to the enforcement of alternative analysis, also avoid specific reference to the law or regulation at issue, the importance balancing tests. Note that a necessity or least trade- of the common interests or values protected by restrictive alternative test, at least as conceived that law or regulation, and the accompanying before Korea-Beef and Asbestos, avoids evaluation of impact of the law or regulation on imports or the goal sought by the relevant domestic regulation, exports [WTO Appellate Body Report 2001b, as well as comparison between that value and the para. 164]. detriment to international trade caused by the domestic regulation. This statement constitutes a significant shift In Korea-Beef, the Appellate Body first examined toward a greater role for the Appellate Body in the definition of "necessity" under Article XX(d) of weighing regulatory values against trade values. It the GATT and found that it could be something less appears to be intended to speak beyond the Article than absolute indispensability. It is interesting that XX(d) context to all necessity testing, including that the Appellate Body stated that "a treaty interpreter under Article XX(b) and presumably under the SPS assessing a measure claimed to be necessary to Agreement, the TBT Agreement, and the GATS. secure compliance of a WTO-consistent law or reg- The Appellate Body found that the panel was ulation may, in appropriate cases, take into account justified in examining enforcement measures in the relative importance of the common interests or similar circumstances without, as Korea com- values that the law or regulation to be enforced is plained, imposing a "consistency" requirement. intended to protect" (WTO Appellate Body Report "Examining such enforcement measures may pro- 2001b, paras. 162, 163). This statement would vide useful input in the course of determining involve the Appellate Body in assessing the impor- whether an alternative measure which could 'rea- tance of national goals to a degree not seen, at least sonably be expected' to be utilized, is available or explicitly, before (see Trachtman 1999). Moreover, not" (WTO Appellate Body Report 2001b, para. it is potentially inconsistent with the principle, 170). The application of WTO-compatible mea- expressed in the SPS Agreement (and referred to sures to the same kind of illegal behavior suggested in the Asbestos case) that member states are permit- to the Appellate Body that a reasonably available ted to set their own appropriate levels of pro- alternative measure might exist (WTO Appellate tection. Finally, it is interesting that the Appellate Body Report 200 lb, para. 172). The Appellate Body Body refers to "common interests or values." Does confirmed the panel's conclusion that Korea failed this require, or prefer, a degree of homogeneity of to demonstrate that alternative measures were not purpose? reasonably available. Indeed, the Appellate Body sets up, rather It is interesting that in its decision regarding explicitly, a balancing test. It considers the degree to Asbestos, the Appellate Body referred to its decision which the measure contributes to the realization of in Korea-Beef to the effect that in determining the end pursued: "the greater the contribution, the whether another alternative method is reasonably more easily a measure might be considered to be available it is appropriate to consider the extent Inecessary"' (WTO Appellate Body Report 2001b, to which the alternative measure "contributes to para. 163). It would also consider the "extent to the realization of the end pursued" (WTO Appellate which the compliance measure produces restrictive Body Report 2001a, para. 172, citing Appellate Body effects on international commerce" (WTO Appel- Report 2001b, paras. 163, 166). This is a significant late Body Report 2001b). The Appellate Body's (and explicit) departure from the conventional statement will be breathtaking to some: understanding of "reasonably available,' which would consider the costs of the alternative regula- In sum, determination of whether a measure, tion but not the degree of its contribution to the which is not "indispensable," may nevertheless end. In fact, the degree of contribution to the end be "necessary" within the contemplation of Arti- seemed before to be inviolable: states were entitled Lessons for the GATS from Existing WTO Rules on Domestic Regulation 75 to complete accomplishment of the end reflected in other Members as equivalent, even if these mea- their regulation. This is not the ordinarily under- sures differ from their own or from those used by stood meaning of necessity as a search for the least other Members trading in the same product, if the trade-restrictive alternative reasonably available: exporting Member objectively demonstrates to the that formulation would not ordinarily involve an importing Member that its measures achieve evaluation, or any compromise, of the end pursued the importing Member's appropriate level of sani- (Trachtman 1999). Furthermore, the Appellate Body tary or phytosanitary protection." referred to Korea-Beef for the proposition that the The requirement of the SPS Agreement is more important the common interests or values stronger than the more hortatory obligation of pursued, the easier it would be to accept the national Article 2.7 of the TBT Agreement, which simply measure as necessary (WTO Appellate Body Report requires members to give positive consideration to 200 la, para. 172). accepting foreign regulation as equivalent if it ful- The balancing test for determining "necessity" fills the importing state's objectives. under Article XX(b) and (d) developed in these opin- The GATS contains no explicit requirements of ions will stimulate much discussion and controversy. recognition. Article VII authorizes and regulates Under the GATS a necessity criterion is applied plurilateral recognition regimes but imposes no in two places. First, Article VI.5(a) includes "neces- requirement of recognition. Articles VI.1 and VI.5 sity" as one of several tests for invalidation of may be viewed as containing potential implicit domestic regulation. As noted above, it will be diffi- requirements of recognition as set forth above but cult to satisfy all of these tests in real cases. Second, they are quite uncertain in their operation. As noted Article XIV(a), (b), and (c) each include the "neces- above, the Accountancy Disciplines require a degree sity" qualifier, as a prerequisite for eligibility for an of recognition of qualification requirements. exception to GATS prohibitions. It is possible that Article VII, however, does not exist in isolation the Appellate Body would extend its balancing from Article VI. These provisions work together to jurisprudence to the "necessity" tests in the GATS. provide a complex system for managed mutual As suggested above, however, there are few signifi- recognition (see Nicolaidis 1996, 1997). That is, the cant GATS prohibitions that would apply to invali- weak disciplines of Article VI.5, combined with date nondiscriminatory domestic regulation. Even potentially strengthened disciplines developed the product-process distinction does not seem to under Article VI.4, can provide incentives for apply in the GATS in a way that would indiscrimi- recognition under Article VII, or under other cir- nately invalidate process-based regulation. There- cumstances they can accomplish the same goals as fore, there will be little need for exceptions. Under those sought under Article VII. these circumstances (except in connection with the Accountancy Disciplines) it cannot be said today Product-Process Issues and Extraterritorial that "necessity" is an important discipline for Protection Issues domestic regulation under the GATS. Finally, an area of great importance is the territorial scope of application of the various exceptional mea- sures: that is, to what extent can a state take action Another discipline on domestic regulation that under its domestic law to protect health or other may serve as a parameter by which to distinguish "domestic" regulatory values outside its own terri- among GATT, the SPS Agreement, the TBT Agree- tory? In substance this is a choice of law or prescrip- ment, and the GATS is the requirement of recogni- tive jurisdiction issue. It has arisen explicitly in con- tion. The GATT contains no explicit requirement nection with the application of Articles XX(b) and or facility of recognition. As noted above, however, XX(g), and implicitly in the form of the product- it is possible that least trade-restrictive alternative process distinction. That is, the product-process dis- requirements under Article XX(b) or (d) could tinction tends to serve as a proxy for a territorial- require recognition. Article 4.1 of the SPS Agree- extraterritorial regulation distinction: production ment does require recognition: "Members shall processes occur in the exporting state and the prod- accept the sanitary or phytosanitary measures of uct arrives in the importing state. 76 Domestic Regulation and Service Trade Liberalization GATT The territoriality-extraterritoriality and Article XI, as occurred in the unadopted Tuna product-process issues have been important in the cases. However, given the interpretation that PPMs Tuna and Shrimp cases. They arise in connection are not "subject to" Article III and therefore are not with the relationship between Article III and Article protected from the strict scrutiny of Article XI, it XI of the GATT on one hand and in connection might be argued that PPMs would be subject to with the exceptional provisions under Article XX lesser scrutiny if they are covered by the TBT Agree- on the other hand. As discussed above, the product- ment. On the other hand, Article 2.1 of the TBT process distinction can be seen as a proxy for a rule Agreement may be viewed as incorporating the of territoriality. In the Shrimp case it is important jurisprudence of GATT Article III. that the Appellate Body specifically declined to rule on whether there is a territorial or jurisdictional GATS, the Product-Process Distinction, and Ter- limitation in Article XX(g)-whether the "extrater- ritoriality The problem of allocating territorial ritorial" nature of the U.S. measure removed it jurisdiction is even more difficult in connection from eligibility for an exception under that provi- with services than with goods. The service supplier sion. The Appellate Body was able to do so because and the service production often are inextricably the sea turtles at issue were migratory, migrating to embedded in the service. Therefore, the product- and from U.S. waters (WTO Appellate Body Report process distinction is less natural in services than in 1998c,para. 133). goods. As discussed above, Article XVII of the GATS overcomes this problem by referring to like SPS Annex A to the SPS Agreement contains a services and like service suppliers. Although it does definition of "sanitary and phytosanitary mea- not provide the possibility for discrimination based sures" that includes only measures that protect on the way the service is produced per se, that health within the territory of the regulating mem- would seem to be included in its review of discrim- ber. It therefore excludes from its coverage mea- ination on the basis of the identity of the service sures addressing health outside the regulating supplier. member's territory. It is curious that Article 1.5 of the TBT Agreement excludes from its scope of Conclusion application only sanitary and phytosanitary meas- ures as defined in Annex A of the SPS Agreement. The purpose of this chapter has been to outline cer- This leaves importing state regulation seeking to tain critical rules applicable under the GATT, the regulate processes and production methods in the SPS Agreement, and the TBT Agreement so as to exporting state, with the goal of protecting health compare them with coordinate provisions of the outside the territory of the importing state, outside GATS. the coverage of the SPS Agreement, but potentially This chapter has shown that the GATT is more subject to either the strict scrutiny of Article XI of laissez-regler than the SPS and TBT Agreements, at the GATT and/or the somewhat less strict scrutiny least for most purposes. The GATT's primary disci- of the TBT Agreement. pline is nondiscrimination. Article XX is only invoked after a finding of violation of, for example, TBT Annex 1 of the TBT Agreement defines Article III or Article XI. An exception to this obser- "technical regulation" as a "[d]ocument which lays vation exists in the case of PPMs: the GATT has down product characteristics or their related been interpreted to be subtly stricter in its processes and production methods, including the scrutiny-at least with regard to allocation of bur- applicable administrative provisions with which dens of proof-than might be the case under the compliance is mandatory." Early debates about this SPS or TBT Agreement, to the extent that PPMs are definition were motivated by a desire to include subject to either of those agreements. processes and production methods within the dis- Furthermore, the TBT Agreement is generally ciplines of the TBT Agreement to prevent them less strict in its scrutiny of domestic regulation from becoming barriers to trade (WTO Secretariat than is the SPS Agreement. For example, the TBT 1995). These discussions assumed that PPMs Agreement lacks an explicit requirement of a risk would not be subject to strict scrutiny under GATT assessment. Lessons for the GATS from Existing WTO Rules on Domestic Regulation 77 TABLE 5.1 Applicability of Disciplines on Domestic Regulation under WTO Agreements GATS Accountancy GATT TBT SPS GATS Disciplines Natioal Treatment / / / If scheduled; No change like services and like service providers Proportionality/necessity / (under XX) / w Weak Strengthened Internattonal standards Weak (under XX) / / strong Very weak Strengthened Other harmonization n.a. / / Weak No change RecognItlon Weak (under XX) / / Weak Strengthened Goals / (under XX) n.a. f Weak No change Scientific basis n.a. n.a. / n.a. No change Consistency n.a. n.a. / n.a. No change Precautionary n.a. n.a. / n.a. No change Balancing f (under XX) / / Very limited Strengthened Product/process; tenritoriality / (Ill) / / Service/service No change supplier Note: n.a. = Not applicable; / = the relevant discipline applies; XX refers to Article XX of GATT. But the greatest differences are between the pro- paragraph 2 of the Accountancy Disciplines hor- visions relating to goods on one hand and those izontally. This is the role of the Working Party on relating to services on the other. See table 5.1 above Domestic Regulation. Member states may decide for a summary comparison. Along a number of to respond to the recent Korea-Beef and Asbestos dimensions the GATS appears much more laissez- jurisprudence to restrict the scope of a balancing regler than the goods agreements. Although this test under these provisions. It is worthwhile to chapter does not provide the empirical support explore the proposal made by the EU in its Com- necessary to develop a list of "best practices" from munication on Necessity to provide a necessity the goods agreements to adapt to services, what fol- test, with an additional proportionality defense. lows is a list of goods disciplines worth considering In addition, it would be worthwhile to explore for adaptation to the GATS. Some of them might be the role of labeling, or notifications to service adopted pursuant to Article VI.4; others may consumers, in connection with necessity or pro- require amendments to the GATS itself. portionality analysis. The weakness of Article VI.5 places a premium on action under VI.4. "Softer" antidiscrimination norms. Consider Permissible regulatory goals. Article XIV of the replacing the national treatment language of GATS contains inappropriately restricted regu- GATS Article XVII with language that allows for latory goals (for example, it does not refer to justification of differential treatment, such as "exhaustible natural resources," as does GATT that of Article 2.3 of the SPS Agreement. This Article XX(g)) and should be expanded along change would respond to some of the concerns the lines of paragraphs 2 and 25 of the Accoun- expressed by the Appellate Body in paragraph tancy Disciplines to refer more broadly to "legit- 100 of the Asbestos decision. Of course, given imate objectives." The regulatory goals referred that application of Article XVII depends on to in Article VI.4(b) also should be expanded scheduling, states can establish appropriate beyond "quality of the service." exceptions in the scheduling process. "Scientific basis"/risk assessment. The SPS innova- Stronger necessity/proportionality discipline. It is tion of requiring states to go through a process of difficult to understand why Article VI.5 is so risk assessment to validate their regulation should weak. Consider applying language such as that in be considered for extension beyond the SPS area. 78 Domestic Regulation and Service Trade Liberalization Although a "scientific" basis may not be the cor- regulatory systems before they allow banks rect reference in the services field, a rational regu- located in those systems to establish themselves latory basis should be required. There are signifi- in the United States. At the same time, the cant questions about the burdens implementing U.S. has referred to the Basel Banking Principles, this type of requirement would impose on devel- and has "unilaterally multilateralized" its evalua- oping countries. If a "rational regulatory basis" tion. The Accountancy Disciplines require that requirement is imposed, a provisional "precau- member states take account of internationally tionary principle"-type authority also should be recognized standards of international organiza- provided, along the lines of Article 5.7 of the SPS tions in determining conformity with technical Agreement. standards. More narrow prudential carve-out. The pruden- tial carve-out in financial services seems too broad, although I recognize that it has been pop- Endnotes ular with member states. It could be improved 1. For an extended taxonomy, see Marceau and Trachtman by greater definition, which could be provided (2002). 2. We discuss below the extent to which this was actually through dispute settlement. It is worth consider- changed under the SPS Agreement and the TBT Agreement. ing, however, why financial services regulation 3. Although the SPS Agreement may apply to a limited range merits a prudential carve-out when the entire of health, food- and drug-testing, and certification serv- ices, this chapter will not consider these services. purpose of the SPS Agreement is to discipline 4. Article 915 of NAFTA defines the services covered by health regulation. At some point nongovern- Chapter 9 to include only land transportation and mental organizations will begin to criticize this telecommunications. free ride for financial regulation compared with 5. I recognize that WTO negotiators understand this as an free ride for financial regulation compared with i"Article XVII" issue, separate from other disciplines on the substantial burdens placed, for example, on regulation. Without wishing to dispute that view, I find it health regulation. This consideration could be necessary to discuss national treatment in order to provide improved by data regarding whether commit- an integrated framework for analysis. 6. For an analysis of several of these tests in comparison to ments have been undermined, or could be cost-benefit analysis, and a critique of cost-benefit analysis improved, by greater disciplines on nondiscrim- in this context, see Trachtman 1998. inatory regulation of financial services. 7. Note the inconsistency between this perspective and the Equivalencelrecognitio requirement. ArticleVA economic theory of regulation, which assumes that the rea- Equvalncerecgniio requ t Ason for regulatory intervention is that the health risks are should be used to provide for either horizontal not sufficiently reflected in the marketplace. or vertical equivalency requirements. For exam- 8. The chapeau requires that measures exempted under Arti- cle XX must not be applied in a manner that would consti- ple, paragraph 19 of the Accountancy Disci- tute "a means of arbitrary or unjustifiable discrimination plines requires some level of equivalency. States between countries where the same conditions prevail, or a should not be required to recognize other states' disguised restriction on international trade." regulation on a blanket basis, but equivalence 9. The GATS distinguishes among four modes of delivery, regulation on a allowing states to list different exceptions to liberalization anticipates a judicially supervised requirement under each mode. The advent of e-commerce is increasingly to recognize foreign regulation where the for- blurring the distinction between modes 1 and 2, and mode 4 eign regulation achieves the regulatory goals. can be seen as a variant on 3 for our purposes. The four modes are: (1) from the territory of one nation into the terri- * Icniefoitrainlsa ad.Bttory of another; (2) in the territory of one nation to a con- SPS Agreement and the TBT Agreement provide sumer in another nation; (3) by a service supplier of one incentives for compliance with certain interna- nation through commercial presence in the territory of tional standards. This also could be provided in another nation; and (4) by a service supplier of one nation through presence of natural persons of a nation in the terri- services on a horizontal or vertical basis. tory of another nation. This categorization is one of the keys * Relating unilateralism to multilateralism. Econo- to the evolutionary nature of the GATS: it achieves two mies like the United States will evaluate certain seemingly contradictory purposes by casting the widest net possible for liberalization while allowing nations to carve out types of foreign service providers before allow- areas to exempt from liberalization even within subsectoral ing them access to U.S. markets. For example, categories listed in their schedules. the 1993 Foreign Bank Supervision Enhance- 10. Of course, with a multinational corporation such as a bank, ment Act, repnigoteBCespecially one that operates through branches, it may be ment Act, responding to the BCCI crisis, serves difficult to regulate the corporation without regulating as a basis for U.S. regulators to evaluate foreign extraterritorially. Lessons for the GATS from Existing WTO Rules on Domestic Regulation 79 11. This approach may be inconsistent with the line taken by 25. This suggests that the EU jurisprudence can serve as a the panel in Canada-Certain Measures Affecting the Auto- source of principles for articulation through nonjudicial motive Industry (WTO Appellate Body Report 2000, para. means in other contexts. 10.248) to the effect that "like service providers" are 26. Proportionality, in the strictest sense, examines whether the providers who provide the same service. means are proportionate to the ends-whether the costs 12. This approach may be inconsistent with that taken by the are excessive in relation to the benefits. A wider definition panel in Canada-Certain Measures Affecting the Automo- of proportionality developed in the EU context includes tive Industry (WTO Appellate Body Report 2000, para. three tests: (a) proportionality stricto sensu, (b) a least 10.248) to the effect that "like service providers" are trade-restrictive alternative test, and (c) a simple means- providers that provide the same service. end rationality test. 13. United States-Section 337 of the Tariff Act of 1930, 36 27. See, for example, Case C-76/90, Sager v. Dennemeyer, 1991, B.I.S.D. 345, 392, paras. 5.25-5.27 (1990) ("It was clear to ECR 1-422 1. This case held that a national regulatory meas- the Panel that a contracting party cannot justify a measure ure is enforceable against a service provider only if the pub- inconsistent with another GATT provision as 'necessary' in lic interest at stake "is not protected by the rules to which terms of Article XX(d) if an alternative measure which it the person providing the services is subject in the Member could reasonably be expected to employ and which is not State in which he is established." This indicates a possibility inconsistent with other GATT provisions is available to it"); of judicially required recognition based on a necessity test, Thailand-Restrictions on Importation of and Internal although it is noteworthy that the definition of "public Taxes on Cigarettes, 37 BISD 200, 223 (1991) (citing the interest" is notoriously open-ended. See also the European Section 337 Panel Report). Commission interpretative communication concerning the 14. The SPS Agreement specifically (although not unambigu- free movement of services across frontiers, O.J. No. C334, ously) adds a reasonableness qualification (see note 17 9.12.1993, at 3. below). These provisions leave some ambiguity in light of 28. "Members shall accept the sanitary or phytosanitary meas- Article 2.2 of the SPS Agreement, which provides a neces- ures of other Members as equivalent, even if these measures sity test with regard to the application of sanitary and phy- differ from their own or from those used by other Members tosanitary measures, but lacks a reasonableness qualifier. trading in the same product, if the exporting Member 15. TBT Agreement, Article 2.2 (emphasis added). demonstrates to the importing Member that its measures 16. Indeed, Farber and Hudec (1994, pp. 1401, 1431) argue achieve the importing Member's appropriate level of sani- that both the Standards Agreement and the SPS Agree- tary or phytosanitary protection." ment "call for a balancing analysis similar to what one 29. "Members shall give positive consideration to accepting as finds in the opinions of U.S. courts in [dormant Com- equivalent technical regulations of other Members, even if merce Clause] cases." Moreover, in the recent Asbestos and these regulations differ from their own, provided they are Korea-Beef decisions, the Appellate Body seems to have satisfied that these regulations adequately fulfill the objec- found that the Article XX necessity test involves substan- tives of their own regulations.' tial balancing. 30. In the Hormones decision, the Appellate Body rejected the 17. SPS Agreement, Article 5.6, footnote 3, states the following: panel's finding that "based on" and "conform to" have the "For purposes of paragraph 6 of Article 5, a measure is not same meaning (WTO Appellate Body Report 1998b, para. more trade-restrictive than required unless there is another 165). measure, reasonably available taking into account technical 31. WTO Appellate Body Report (1998b), citing WTO Report and economic feasibility, that achieves the appropriate level of the Panel 1997, para. 8.65; FAO; see Victor 2000, pp. of sanitary or phytosanitary protection and is significantly 885-95. less restrictive to trade." This is necessity testing subject to a 32. Codex standards are generally adopted by consensus. "reasonably available" qualification. See also Article 2.2: Although the Codex Rules of Procedure provide for voting, "Members shall ensure that any sanitary or phytosanitary voting is generally not used. In the event of a vote, decision measure is applied only to the extent necessary to protect is by majority of states present at the particular session. human, animal or plant life or health." Compliance with Codex standards is voluntary (electronic 18. However, Article 5.4 of the SPS Agreement exhorts WTO mail message from Ellen Y. Matten, staff officer, U.S. Codex Members, "when determining the appropriate level of sani- Office, to Joel P. Trachtman, dated August 8, 2001). Fur- tary or phytosanitary protection, [to] take into account the thermore, under the Statements of Principle Concerning objective of minimizing negative trade effects." the Role of Science in the Codex Decision-Making Process 19. Article VI.2 is not conditioned upon scheduling. and the Extent to Which Other Factors Are Taken into 20. It is worth asking what is left out of this list of types of Account, "When the situation arises that members of measures. Was this provision intended to exclude any par- Codex agree on the necessary level of protection of public ticular type or method of regulation? One example might health but hold differing views about other considerations, be "onerous visa procedures." See WTO Working Party on members may abstain from acceptance of the relevant stan- Domestic Regulation (2001). dard without necessarily preventing the decision by 21. Dispute Settlement Understanding, Article 3(8). Codex." 22. For a useful discussion, see WTO Working Party on 33. Rule VI.2, Rules of Procedure of the Codex Alimentarius Domestic Regulation (1999). Commission (Procedural Manual, 11th Edition, FAO and 23. This is similar to Article 2.2 of the SPS Agreement and Arti- WHO, 2000). cle 2.2 of the TBT Agreement. 34. Accountancy Disciplines, para. 26. International standards 24. There is an interesting issue, beyond the scope of this chap- are those produced by relevant international organizations ter, regarding the legal status of this type of WTO "second- "whose membership is open to the relevant bodies of at ary legislation," both within the WTO and in member least all Members of the WTO" (Accountancy Disciplines, states. footnote 2). 80 Domestic Regulation and Service Trade Liberalization 35. In this context, the EU has made the following statement: Low, Patrick, and Aaditya Mattoo. 1999. "Is There a Better "New disciplines negotiated under Article VI.4 should Way? Alternative Approaches to Liberalization under the GATS." develop new levels of guarantee providing increased trans- In Pierre Sauve and Robert M. Stern, eds., GATS 2000: New parency, predictability and certainty for regulators and Directions in Services Trade Liberalization. Washington, D.C.: operators. Concepts, which are not open to clear applica- Brookings Institution Press. tion without the further evaluation of specifically relevant Marceau, Gabrielle, and Joel P. Trachtman. 2002. "TBT, SPS, criteria, might prove more valuable as overall guidelines and GATT: A Map of the WTO Law of Domestic Regulation." rather than adopted as general disciplines. It is the purpose Processed. of this work further to clarify Members' obligations and Mattoo, Aaditya. 1997. "National Treatment in the GATS: not to create an unpredictable mandate for dispute settle- Corner-Stone or Pandora's Box?" Journal of World Trade 31: ment procedures to do so " (WTO 2001, para. 6). 107-35. 36. Of course, there are dangers of lost democratic accounta- Nicolaidis, Kalypso. 1996. "Mutual Recognition of Regula- bility associated with some of these quasi-legislative mech- tory Regimes: Some Lessons and Prospects." In Regulatory anisms. See, for example, Porter (2001), Slaughter (2001), Reform and International Market Openness. Paris: Organisation and Zaring (1998). for Economic Co-operation and Development. 37. For a broader discussion, see Nicolaidis and Trachtman . 1997. "Promising Approaches and Principal Obstades (2000). to Mutual Recognition'" In International Trade in Professional Ser- 38. Similarly, the Annex on Telecommunications allows for vices: Advancing Liberalization through Regulatory Reform. Paris: limitations of access to include "measures necessary to Organisation for Economic Co-operation and Development. ensure the security and confidentiality of messages," Nicolaidis, Kalypso, and Joel P. Trachtman. 2000. "From restrictions on resale or shared use, requirements to use Policed Regulation to Managed Recognition: Mapping the specified technical interfaces for interconnection, require- Boundary in GATS." In Pierre Sauve and Robert M. Stern, eds., ments for the interoperability of telecommunication serv- GATS 2000: New Directions in Services Trade Liberalization. ices, approval by type of terminals attached to the network, Washington, D.C.: Brookings Institution Press. restrictions on interconnection of private leased or owned Ontario Ministry of Agriculture, Food, and Rural Affairs. circuits, and, last but not least, notification, registration, 2000. CODEX Alimentarius and CODEX Commission. . 39. For a more extensive analysis of the objections to balancing Pauwelyn, Joost. 1999. "The WTO Agreement on Sanitary tests, see Trachtman (1998). and Phytosanitary (SPS) Measures as Applied in the First Three SPS Disputes." Journal of International Economic Law 4: 641-64. Porter, Tony. 2001. "The Democratic Deficit in the Institu- References tional Arrangements Governing Global Finance.' Global Gover- nance 7: 427-39. The word "processed" describes informally produced works Roberts, Donna. 1998. "Preliminary Assessment of the that may not be available commonly through libraries. Effects of the WTO Agreement on Sanitary and Phytosanitary Abbott, Kenneth W., and Duncan Snidal. 2001. "Interna- Trade Regulations." Journal of International Economic Law 1: tional 'Standards' and International Governance." Journal of 337-405. European Public Policy 8: 345-70. Self, Richard B. 1996. "General Agreement on Trade in Ser- Barcelo, John T. 1994. "Product Standards to Protect the vices." In Terrence P. Stewart, ed., The World Trade Organization: Local Environment-the GATT and the Uruguay Round Sani- Multilateral Trade Frameworkfor the 21st Century and U.S. Imple- tary and Phytosanitary Agreement." Cornell International Law mentingLegislation. Washington, D.C.: American Bar Association. Journal27:755-76. Slaughter, Anne-Marie. 2001. "Global Government Net- Emiliou, Nicholas. 1996. The Principle of Proportionality in works, Global Information Agencies, and Disaggregated Democ- European Law: A Comparative Study. The Hague: Kluwer Law racy." Harvard Law School, Public Law Working Paper 018. Cam- International. bridge, Mass. . FAO (Food and Agriculture Organization of the United Stewart, Terence P., and David S. Johanson. 1998. "The SPS Nations. 2000. "The Procedures for the Elaboration of Codex Agreement of the World Trade Organization and International Standards and Related Texts." Available at www.fao.org. Organizations: The Roles of the Codex Alimentarius Commis- Farber, Daniel A., and Robert E. Hudec. 1994. "Free Trade sion, the International Plant Protection Convention, and the and the Regulatory State: A GATT's-Eye View of the Dormant International Office of Epizootics." Syracuse Journal of Interna- Commerce Clause." Vanderbilt Law Review 47: 1401-40. tional Law and Commerce 26: 27-53. GATT Working Party Report. 1970. "Border Tax Adjust- Thailand-Restrictions on Importation of and Internal Taxes ments." GATT Basic Instruments and Selected Documents on Cigarettes. 1990. DS10/R, GATT 37 BISD 200. 18S/97, December 2. Trachtman, Joel P. 1998. "Trade and ... Problems, Cost-Ben- Geistfeld, Mark. 2001. "Reconciling Cost-Benefit Analysis efit Analysis and Subsidiarity." European Journal of International with the Principle That Safety Matters More Than Money." New Law 9: 32-85. York University Law Review 76: 114-89. . 1999. "The Domain of WTO Dispute Resolution." Howse, Robert. 2000. "Democracy, Science and Free Trade: Harvard International Law Journal 40: 333-77. Risk Regulation on Trial at the World Trade Organization" . 2000. "Regulatory Competition and Regulatory Michigan Law Review 98: 2329-57. Jurisdiction." Journal of International Economic Law 3: 331-48. Howse, Robert, and Petros C. Mavroidis. 2000. "Europe's Victor, David G. 2000. "The Sanitary and Phytosanitary Evolving Regulatory Strategy for GMOs-The Issue of Consis- Agreement of the World Trade Organization: An Assessment tency with WTO Law: of Kine and Brine." Fordham International after Five Years." New York University Journal of International Law Journal 24: 317-70. Law and Policy 32: 865-937. Lessons for the GATS from Existing WTO Rules on Domestic Regulation 81 WTO (World Trade Organization). 1994a. Agreement on the . 1997. ECMeasures Concerning Meat and Meat Prod- Application of Sanitary and Phytosanitary Measures. Annex 1A, ucts (Hormones). Complaint by the United States. WT/DS26/ Results of the Uruguay Round of Multilateral Trade Negotia- R/USA, August 18. tions: The Legal Texts. April 15. . 1998. Japan-Measures Affecting Consumer Photo- . 1994b. Agreement on Technical Barriers to Trade. graphic Film and Paper. WT/DS44/R, April 22. Annex 1A, Results of the Uruguay Round of Multilateral Trade WTO Working Party on Domestic Regulation. 1995. Infor- Negotiations: The Legal Texts. April 15 mal note by the Secretariat on Negotiating History of the Cover- 1998. Disciplines on Domestic Regulation in the age of the Agreement on Technical Barriers to Trade with Regard Accountancy Sector. S/L164, December 17. to Labelling Requirements, Voluntary Standards, and Processes . 2001. Communication from the European Commu- and Production Methods Unrelated to Product Characteristics. nities and Their Member States: Domestic Regulation: Necessity WT/CTE/W/ 10; G/TBT/W/1 1, August 29. and Transparency. S/WPDR/W/14, May 1. . 1996. Informal note by the Secretariat on the Relevance WTO Appellate Body Report. 1997. European Communities- of the Disciplines of the Agreements on Technical Barriers to Trade Regime for the Import and Sale of Bananas. WT/DS27/AB/R, AB and on Import Licensing Procedures to Artide VI.4 of the General 1997-3, September 9. Agreement on Trade in Services. SIWPPSIW/9, September 11. . 1998a. Australia-Measures Affecting Importation of . 1999. "Application of the Necessity Test: Issues for Salmon. WT/DS18/AB/R, November 6. Consideration." Informal Note by the Secretariat. Job 5929, 1998b. EC Measures Concerning Meat and Meat Prod- October 8. . 1998c. United States-Import Prohibition of Certain . 2001. "Examples of Measures to Be Addressed by Shrimp and Shrimp Products. WT/DS58/AB/R, November 6. Disciplines under GATS Article VI.4." Informal Note by the Sec- . 1999. Japan-Measures Affecting Agricultural Prod- retariat. Job (01)/62, May 10. ucts. WT/DS76/AB/R, March 19. WTO Working Party on Professional Services. 1998. "Dis- .2000. Canada-CertainMeasuresAffectingtheAuto- cussion of Matters Relating to Articles XVI and XVII of the motive Industry. WT/DS139, 142/R, June 19. GATS in Connection with the Disciplines on Domestic Regula- 2001a. European Communities-Measures Affecting tion in the Accountancy Sector." Informal Note by the Chair- Asbestos and Asbestos-Containing Products. WT/DS135/AB/R, man. Job 6496, November 25. April 5. Zaring, David. 1998. "International Law by Other Means: 200 lb. Korea-Measures Affecting Imports of Fresh, The Twilight Existence of International Financial Regulatory Chilled and Frozen Beef WT/DS/161,169/AB/R, January 10. Organizations." Texas International Law Journal 33: 281-330. DOMESTIC REGULATION AND TRADE IN TELECOMMUNICATIONS SERVICES: EXPERIENCE AND PROSPECTS UNDER THE GATS Daniel Roseman Executive Summary ties; where telecom penetration rates are lowest and The General Agreement on Trade in Services rise quickly over time, the benefits would be great- (GATS) Annex on Telecommunications and the est because of network externalities. Reference Paper on procompetitive regulation, The implementation of GATS telecom obliga- together with the GATS' most-favored-nation obli- tions and regulatory disciplines generally has gone gation, provide members of the World Trade Orga- well, although some WTO members have been slow nization (WTO) with the basic elements of to implement their commitments. Everyone has "best"/procompetitive regulatory practices in the had difficulties devising effective interconnection telecommunications sector. The issues and princi- rules. Other problem areas in some countries have ples addressed and codified in the annex and Refer- been licensing and the independence of the regula- ence Paper were identified in the course of telecom- tor. Formal WTO dispute settlement procedures munications liberalization in the countries that have been invoked in only one instance to date. In were among the first to open their telecommunica- purely domestic disputes WTO obligations are tions markets to competition. The incorporation of rarely invoked in regulatory and judicial processes. these principles in a multilateral trade agreement The principal reasons are that trade obligations has enabled other countries to learn and borrow usually are not directly binding in domestic law, from the experiences of these first countries, thus and trade agreements leave considerable scope for sparing them considerable trial-and-error and each country to implement its obligations in the shortening their regulatory learning curves. The way it sees fit. Therefore, the applicable law and the presence of a procompetitive regulatory framework context of domestic disputes is domestic law. increases security of access and predictability, thus The disciplines of the annex and Reference Paper attracting investment in new service providers and are primarily relevant in the context of the transition permitting consumers and users to reap the bene- from monopoly to competitive markets. Technolo- fits of competition much earlier than if these coun- gies and markets are not static, and regulations- tries were to start on their own at the very begin- and trade rules governing domestic regulation- ning of reform. An important and positive effect of therefore should be revisited from time to time to liberalization is the growth of network externali- ensure both their effectiveness and their continued 83 84 Domestic Regulation and Service Trade Liberalization relevance. The ongoing GATS negotiations afford remove restrictions on foreign investment would the opportunity to reexamine issues that may have not of themselves bring about competitive out- been inadequately addressed in the annex and Ref- comes, especially in industries, such as telecommu- erence Paper and to address new challenges that nications, where there are significant economies of were unanticipated or left unresolved during the scale and scope, network effects, and positive exter- previous negotiations. If these negotiations are to nalities. Rather, a regulatory environment that make a qualitative difference, at a minimum they complements and supports the decision to permit will need to address the application of trade rules to competition would be needed. nontraditional telecommunications networks and services (i.e., cable television and wireless), inter- connection and unbundling, and licensing. Disci- Brief Background to the Negotiation plines on government procurement of telecommu- of Existing C ATS Obligations nication services (and subsidies) could also yield benefits in terms of competitive neutrality and The GATS rules governing regulatory measures in transparent, reasonable, and nondiscriminatory the telecommunications sector were developed in regulation, leading to enhanced competition and two steps: (1) with the Annex on Telecommunica- benefits to users. tions negotiated during the Uruguay Round, deal- The new negotiations also afford an opportunity ing access to and use of (essentially monopoly) to determine whether telecom-type trade disci- public telecommunications transport networks and plines can be negotiated for other service sectors. It services; and (2) with the Reference Paper devel- would be advisable to undertake a sectoral testing oped during the negotiations on basic telecommu- exercise, by means of which the principles and dis- nications, which provides procompetitive princi- ciplines elaborated in the Telecommunications ples to guide the development of regulations in the Annex and Reference Paper would be examined for context of competition in the supply of telecom their relevance and adaptability to other service transport networks and services. sectors. Consideration should also be given to From the beginning of the Uruguay Round it was employing a two-step approach in other sectors recognized that telecommunications would play a that deal with regulatory issues relating to access prominent role in the services negotiations, both as and use separately from the development of a regu- an important economic sector in its own right and as latory framework for actual competition in the a key enabler of other economic activities. In the supply of specified services. However, one must be 1980s the pressure to liberalize telecommunications wary of "one-size-fits-all" approaches that fail to markets was coming from big users of public recognize the specificities of individual sectors. telecommunications networks and services, espe- Unlike the General Agreement on Tariffs and cially from transnational corporations such as banks, Trade (GATT), the General Agreement on Trade in insurers, and manufacturers, but also from providers Services (GATS) is not so much about barriers at of value-added telecom services. Riding a wave of the border as barriers inside the boreer. Regulatory technological and market innovations (digitization, reform is one step further still beyond the removal convergence of telecoms and computing, the rapid of internal quantitative restrictions on market evolution of the telecommunications business "from access because it attempts to establish the eco- POTS to PANS"'), and the increasing globalization nomic, technical, social, environmental, and other of trade and investment, these users pushed for the terms and conditions under which market partici- right to exploit the possibilities made available by pants act. Although the GATS recognizes the "right new technologies to provide seamless and efficient to regulate," it also provides rudimentary regula- global intracorporate and value-added communica- tory requirements, as well as a basis for the negotia- tions that would enable them to operate more effec- tion of more detailed rules governing regulatory tively on a global basis and to exploit the "first- measures. This approach to trade liberalization was mover" advantages they had acquired in markets a result of lessons drawn in the countries that first that had already opened to competition, particularly opened their markets to competition. They learned in the United States but also to some extent in that commitments to liberalize market entry and to Canada, Japan, and the United Kingdom. Domestic Regulation and Trade in Telecommunications Services: Experience and Prospects under the GATS 85 The Uruguay Round offered these users an that the eventual agreement would contain specific opportunity to achieve on a multilateral basis what recognition of governments' continued "right to Canada and the United States had done in their regulate" (i.e., the ability to maintain existing mea- Free Trade Agreement (FTA) annex on computer sures and to introduce new ones affecting covered services and telecommunications network-based services whenever they might deem it necessary). enhanced services. However, although it was possi- At the same time, however, parties to the agreement ble in the FTA to paper over the slim regulatory dif- would undertake that such measures would be con- ferences between Canada and the United States by sistent with their trade obligations (e.g., there leaving key definitional issues to "the regulator hav- would be nondiscrimination, transparency, and ing jurisdiction," it was necessary to go further to reasonableness in the setting and implementation ensure some convergence on common regulatory of rules, regulations, and standards). standards among the participants in the Uruguay Although few countries were prepared at that Round. Thus the GATS Annex on Telecommunica- time to countenance competition in basic telecoms, tions would spell out in some considerable detail the common understanding emerged that it would key definitions, as well as rights and obligations on be desirable to put some telecom sector-specific access and use that impinge on domestic policy- rules in place on a multilateral basis that would rec- makers and regulators. ognize the need for flexibility by each country in the Basic telecommunications were essentially way it would respond to technological and market carved out of the Uruguay Round because of the changes, while ensuring against the development of reluctance of the United States to allow most- a patchwork of inconsistencies and discriminatory favored-nation (MFN) treatment to apply as long practices. The focus of the telecom negotiations as most other markets were closed to competition therefore came to be the users' agenda; that is, the in the provision of basic services. Notwithstanding development of a set of principles and rules to gov- U.S. protests, however, other industrial countries ern access to and use of public telecommunications were eager to engage in a negotiation that would transport networks and services (PTTNS-i.e., the provide governments with a lever to advance an basic networks and services of common carriers, agenda of telecom liberalization in the face of including voice and data transmission facilities and resistance from domestic interests that found com- services) in order to facilitate intracorporate com- fort in the old monopoly market structures. The munications and the sale of services to third parties process that worked out the deal to hold further (not only value-added services, but all others cov- negotiations on basic telecommunications made ered in members' schedules). clear that regulatory issues would be an integral The annex is all about regulatory issues. It was part of the efforts to ensure effective market access; "designed to supplement and strengthen the disci- that is, when specific commitments were given, plines" (Tuthill 1996: 91) of the GATS framework, they would not be nullified or impaired by the in particular Article III on transparency, Article VI absence of the necessary supporting domestic regu- on domestic regulation, Article VIII on monopoly latory disciplines. and exclusive suppliers, and Artide XI on business practices, so as to deal more adequately with what negotiators called "the specificities of the telecom- on Telecom Regulation munications sector." The annex supplements and amplifies the framework disciplines in a manner The sections that follow describe the core elements that liberalizes markets beyond any specific com- of the package of GATS rules in telecommunica- mitments given in the telecommunications sector tions services negotiated during the Uruguay Round because the benefits of the Annex apply automati- and the negotiations on basic telecommunications. cally to any sector in which a commitment is scheduled.2 The annex establishes minimum international standards of good regulatory behavior and sets During the Uruguay Round negotiations that cre- out agreed terms and conditions for transparent, ated the GATS, the consensus emerged fairly early nondiscriminatory, and reasonable access to 86 Domestic Regulation and Service Trade Liberalization and use of PTTNS once market access is granted Paragraph 2(b), at Canada's request, carved by a member to a supplier of scheduled services cable and broadcast distribution of radio and (enhanced telecom services, computer services, television programming out of the annex, in financial services, engineering, and so forth). The view of the development of dial-up video and so essence of the annex is the obligation to ensure forth. This creates a vacuum in terms of trade that market access commitments are not frus- disciplines governing the regulation of online trated by restrictions on access to and use of basic audio and video content, as well as uncertainty telecom networks and services. The annex created, about the application of the annex to cable com- in effect, additional commitments of a regulatory panies and other nontraditional telecom service nature, but these commitments are common to suppliers over whose networks scheduled ser- all members of the World Trade Organization vices (e.g., online information services) may be (WTO) and cannot be derogated from, except delivered. paragraph 5(g) for developing countries (compare Paragraph 3(b) defines "public telecommuni- below). cations transport service" as "any telecommu- The following is a brief summary of key nications transport service required, explicitly or provisions: in effect, by a Member to be offered to the public generally. Such services ... typically involv[e] the The footnote to Article 2(a) addresses the ques- real-time transmission of customer-supplied tion of the extent to which the GATS imposes information between two or more points with- obligations affecting the behavior of privately out any end-to-end change in the form or con- owned telecom carriers, as well as governments tent of the customer's information.' and governmental bodies. The issue was a mat- Paragraph 3(c) defines "public telecommunica- ter of equity and the symmetry of obligations tions transport network" (PTTN) as "the public among parties who were at different stages of telecommunications infrastructure which per- liberalization of their telecommunications mar- mits telecommunications between and among kets; it was a major sticking point between the defined network termination points.' These def- European Commission (EC) and the United initions establish which services (i.e., PTTNS) States. The EC, representing the interests of a are subject to the annex's requirements to afford large number of member states with state-run access and use on transparent, reasonable, and providers of telecommunications services, was nondiscriminatory terms and conditions. at the time embarking on a process to liberalize Article 4 builds on the GATS' transparency obli- telecoms in Europe; they wanted all parties to gations and requires that "all relevant informa- the negotiations fully accountable in the WTO tion ... is publicly available." Its specifics are tai- for the actions of all their service providers, lored to the circumstances of the annex. Article including private service providers operating in 4 enters into areas that would not be considered competitive markets (e.g., AT&T, MCI, and "measures" in some jurisdictions (e.g., specifica- Sprint in the United States). For their part, the tions of technical interfaces), and it requires the U.S. authorities were reluctant to allow trade creation of measures to govern such specifica- rules to impinge on actions of the Federal Com- tions where none would otherwise exist. munications Commission (FCC) vis-a-vis pri- Article 5 sets out the key obligations of the vate U.S. persons; they argued that the United annex. States offered a fully competitive market for Paragraph 5(a) requires access to and use of access and use where anyone having trouble PTTNS on nondiscriminatory and reasonable obtaining the PTTNS they require from a ser- terms and conditions, without the possibility vice supplier needs merely to turn to a competi- of an MFN exemption or reservation for tor for service or seek regulatory redress on the national treatment. The footnote clarifies that basis of U.S. domestic laws and regulations. The "non-discriminatory" means not only MFN and wording represents the extent to which the EC national treatment, but also "terms and condi- and the United States were able to reconcile their tions no less favorable than those accorded to perspectives. any other user of like PTTNS under like circum- Domestic Regulation and Trade in Telecommunications Services: Experience and Prospects under the GATS 87 stances"; that is, one may provide for different This is very important because it affects the abil- terms and conditions among different classes of ity of firms to provide their services and conduct users, but not within the same class, provided intracorporate communications as best suits that such differential treatment (including, for their own business strategies. example, the identification of different classes of Paragraph 5(c) elaborates on the rights to intra- users) is reasonable, not an arbitrary form of corporate communications and the movement discrimination, nor a disguised or unnecessary of information "within and across borders," and restriction on trade. Thus paragraph 5(a) intro- paragraph 5(d) establishes that these rights shall duced into trade policy a third meaning for the be subject only to an exception for "security and term "nondiscrimination" that was commonly confidentiality of messages" (old International understood by regulators, but new in a trade Telecommunication Union [ITU] language). agreement context. Those who had sought to prevent or impede * Paragraphs 5(b) to 5(g) set out the ways in cross-border data flows had lost. The EC's pro- which the obligations of 5(a) shall be imple- posal for an exception for the protection of per- mented. Paragraphs 5(b) and 5(c) set out the sonal privacy, which would override the obliga- rights of users, and paragraphs 5(d) to 5(g) set tion to allow the movement of information out the allowable exceptions. across borders, found its place in the broader * A paragraph calling, on a best-efforts basis, for GATS Article XIV on general exceptions. "cost-oriented pricing" for access and use was in Although recognizing that members may wish to the text until December 1993 when it was attach conditions to the use of telecommunica- removed at the behest of India. In the absence of tions by a service supplier, paragraph 5(e) per- this clause, it would still be possible to press a non- mits such conditions to be imposed only to the violation case for pricing that was so far out of line extent necessary: to "safeguard the public service that it effectively nullified or impaired the benefits responsibilities" of the network operator, includ- reasonably expected to obtain under the GATS. ing its universal service obligations (5 [e] [i]); to * Paragraph 5(b) establishes that the obligations of "protect the technical integrity" of the network the annex apply to access to and use of PTTNS (5[e] [ii]); and to prevent the user from supplying "offered within and across the border." Thus the a service for which the member has not made annex satisfied the demands of user industries any specific commitment (5[e] [iii]). Decried by for both a "right of non-establishment" and a some user representatives as a "regulators' bill of "right to connect," while taking into account the rights," this section nonetheless tightly circum- different modes of supply recognized in the scribed those rights. GATS. Paragraph 5(f) sets out, for greater clarity, an * Paragraph 5(b)(i) establishes the scope of termi- illustrative list of the kinds of conditions that nal equipment that can be attached to the net- normally would be permitted if they meet the work, and paragraphs 5(b)(ii) and 5(b)(iii) tests in 5(e), including restrictions on resale, establish the right to interconnect private net- mandatory standards, type approval of terminal works of leased lines or owned facilities using equipment, restrictions on interconnection with proprietary protocols. Because the term "equip- the public network, and licensing conditions. ment which interfaces with the network" was Paragraph 5(g) recognizes that some developing more liberal than some participating govern- countries may need to impose additional condi- ments had envisaged, its adoption added to the tions on access to and use of their public net- liberalizing effect of the annex. This was an works. Any such special conditions, however, effort to ensure that standards would not act as would have to be "consistent with their level of barriers to trade, but rather facilitate competi- development" and "specified in the Member's tion by ensuring maximum interconnectivity schedule" (i.e., negotiated beforehand and and interoperability. In this instance it was rec- bound). This provision was much less than the ognized that mandatory interface standards may "special and differential treatment" that some at times be appropriate, but internal network developing countries initially sought; nonethe- standards should be of the suppliers' choice. less, it has never been used. 88 Domestic Regulation and Service Trade Liberalization Reference Paper on Procompetitive tic to leap from monopoly to open, unregulated Regulatory Principles markets and then to expect the full benefits of lib- eralization to be realized. As with the Uruguay Round negotiations on the The Reference Paper sets out minimum stan- Telecommunications Annex, during the WTO dards for the measures that governments should negotiations on basic telecommunications negotia- take to ensure a procompetitive, transparent, rea- tors needed to take account of "the specificities of sonable, and nondiscriminatory regulatory envi- the telecommunications sector." Given the different ronment. In this way the document helps ensure focus of the negotiations (i.e., competition in the that former monopoly service providers do not supply of basic networks and services rather than subvert their governments' reforms. Like the Annex access to and use of the same), governments were on Telecommunications, it "supplements and confronted with a much more complex set of inter- strengthens" the GATS framework disciplines on ests to balance. In particular, the interests of suppli- transparency, domestic regulation, monopolies and ers were ascendant (both offensive and defensive) exclusive service suppliers, and restrictive business compared with the interests of users, and labor practices. The document is procompetitive, but it is unions were more vocal because of the greater neutral as to outcomes (i.e., it does not tip the bal- threat of job losses as a result of competition. For ance in favor of new entrants or incumbents). their part, governments by and large were coming to Although it establishes minimums to be fulfilled, recognize that state-owned monopoly service the Reference Paper leaves the details and the providers were an impediment to economic growth. choice of means to each member to decide. The Reference Paper is a tool for the negotiation The following is a brief summary of key of additional commitments (i.e., commitments provisions: beyond those on market access and national treat- ment) regarding regulatory measures concerning Under "Scope," the Reference Paper sets out basic telecommunications. Unlike the Annex on "definitions and principles on the regulatory Telecommunications, the Reference Paper attains framework for the basic telecommunications legal status only to the extent that WTO members services" (sic). It then sets out definitions of have incorporated it in their schedules of commit- users, essential facilities, and major suppliers. ments under the GATS. Thus, when the basic tele- Building on GATS Articles VIII (monopoly and com negotiations concluded in February 1997, of exclusive suppliers) and IX (business practices), the 69 WTO members undertaking commitments, Section 1 establishes minimum "competitive 63 members subscribed to the Reference Paper in safeguards." Members who subscribe to the obli- whole or in part. A further 5 members gave "late" gations must maintain "appropriate measures" commitments that included the Reference Paper, to prevent "suppliers who, alone or together, are and all countries acceding to the WTO since Febru- a major supplier from engaging in or continuing ary 1997 have adopted the complete Reference anticompetitive practices" (e.g., anticompetitive Paper. cross-subsidization, misuse of information from The objective of the Reference Paper was to competitors, and withholding necessary techni- ensure effective market access by means of addi- cal information). These competition safeguards tional commitments to put in place a procompeti- were inspired by competition law, but the Refer- tive regulatory regime to protect against the nullifi- ence Paper is sector specific in its prescriptions. cation and impairment of the benefits that WTO telecom trade negotiators understood that members could reasonably expect to flow from achieving effective market access would require market access liberalization. Committing to the establishing disciplines against anticompetitive Reference Paper enhances the value of, and adds behavior by private individuals. However, they security to, specific commitments on market access needed to strike a careful balance. On one hand, and national treatment in basic telecommunica- telecom policymakers and regulators were tions. This is important because the complex increasingly receptive to the idea that a telecom nature of telecommunications and the economies trade agreement would need to include safe- of scale and scope in the industry make it unrealis- guards against anticompetitive behavior. On the Domestic Regulation and Trade in Telecommunications Services: Experience and Prospects under the GATS 89 other hand, some competition authorities were anti-competitive per se." However, it qualifies very concerned that the incorporation of com- this right with the proviso that universal service petition policy principles in a trade agreement obligations be "administered in a transparent, could lead to conflicting interpretations of these non-discriminatory and competitively neutral principles when made pursuant to different manner and are not more burdensome than statutory authorities, and could compromise necessary for the kind of universal service their own relative independence. Thus, the Ref- defined by the Member." This provision bal- erence Paper steps into the competition law area anced the concerns of Canada and the United by seeking to deter private barriers to the devel- States, which had achieved virtually universal opment of efficient markets, in addition to gov- service largely by means of private operators, ernmental barriers to trade and investment. This with the scepticism of the Europeans and others constitutes an important contribution to the regarding the ability to achieve universal service development of the interface between trade and objectives without direct governmental inter- competition policy. ventions. Recognizing that the right to interconnect is the Licensing was a highly controversial subject, pit- most important competition safeguard in a net- ting the United States, with the FCC's slow- work industry,3 Section 2 creates a requirement moving and onerous ex ante licensing proce- for measures to permit interconnection of com- dures against those who were partial to a peting suppliers of public telecommunications light-handed regime that would deal with transport networks and services "at any techni- potentially anticompetitive behavior ex post cally feasible point in the network" (subsection market entry.4 Section 4 creates additional 2.2, chapeau), "under non-discriminatory terms transparency obligations by requiring the public [and] conditions" (subsection 2.2[a]), "in a availability of information regarding licensing timely fashion," and "on terms, conditions criteria, processing periods, and terms and con- (including technical standards and specifica- ditions, as well as the "reasons for denial of a tions) and cost-oriented rates that are transpar- licence." That is as far as negotiations were able ent, reasonable, having regard to economic fea- to go in this sensitive area. sibility, and sufficiently unbundled so that the * Section 5 requires the establishment of an supplier need not pay for network components "Independent Regulator"-independent in the or facilities that it does not require for the serv- sense that the regulator must be "separate from, ice to be provided" (subsection 2.2[b]), and and not accountable to, any supplier of basic "upon request, at points in addition to the net- telecommunications services" and that its proce- work termination points offered to the majority dures and decisions (e.g., licensing, competition of users, subject to charges that reflect the cost of safeguards, approval of tariffs, operating agree- construction of necessary additional facilities" ments, and the settlement of disputes) "shall be (subsection 2.2 [c]). impartial with respect to all market partici- * Sections 2.3 and 2.4 set out transparency pants." Establishing an independent regulator is requirements regarding the public availability of indirectly a liberalizing measure because it is interconnection procedures and agreements. effectively a precondition for greater trans- Section 2.5 supplements the Article VI.2 parency and nondiscrimination in regulatory requirement for local mechanisms to review decisionmaking processes and outcomes. and, if necessary, remedy administrative deci- - Section 6 requires that information regarding sions regarding domestic measures by creating and procedures for the "allocation and use of an obligation on members to maintain a body to scarce resources" (e.g., frequencies, numbers, resolve interconnection disputes among telecom rights of way) must be transparent and nondis- service suppliers. criminatory. This is necessary to ensure that the * Section 3 acknowledges "the right" of each incumbent, as the former sole user of such member "to define the kind of universal service resources, does not retain any undue advantage obligation it wishes to maintain," and it states in the marketplace by continuing to monopolize that " [s] uch obligations will not be regarded as spectrum, rights of way, and so forth. 90 Domestic Regulation and Service Trade Liberalization Impact of GATS Disciplines man (2002: para. 100) also noted the positive on Domestic Regulation "impact of liberalization [on] the growth of net- The negotiations themselves-during the Uruguay work externalities, which increase with higher tele- Round on the Telecommunications Annex and even com penetration rates and usage . . ; that is, where more so subsequently on basic telecommunica- telecom penetration rates are lowest and rise tions-acted as catalysts for reform. Their high pro- quickly over time, the benefits would be greatest, file invigorated and helped channel domestic debates due to network externalities." The Republic of in the direction of liberalization and procompetitive Korea is an excellent example of this phenomenon. regulation, raising the issue to the highest levels of ot only has it achieved industrial country pene- government in a large number of countries. tration rates during the past decade of liberaliza- In terms of impact on domestic regulation in the tion; it also leads the world in broadband usage. telecommunications sector, the first and most obvi- PricewaterhouseCoopers (PwC) undertook a ous impact of the GATS is that it provides the out- study for the Asian Pacific Economic Cooperation forum (APEC) that shows that some APEC lines of a regulatory framework for countries open- ing their telecom services markets, whether in whole economies have been slow to implement their ABT or by degrees (e.g., moving along the spectrum from commitments. PwC (2000) identified the need to: private line resale to liberalized terminal attachment, Improve transparency in most economies to resale of basic services and full facilities-based s in *Reduce the influence of incumbent operators in competition). Drawing on more than a decade of some cases experience with telecom liberalization in a handful Ensure the independence of the regulator from of industrial countries, negotiators from the operators Uruguay Round and the Group on Basic Telecom- Improve the responsiveness of regulatory munications (GBT) created documents that repre- authorities and the timeliness of their decisions sent a transfer of know-how to other countries, doc- Enhance regulatory methods, reporting require- uments that offer the opportunity to avoid years of ments, and information dissemination trial and error. These WTO/GATS agreements pro- Ensure effective competition safeguards and vide direction, as well as a degree of urgency, thanks enforcement to deadlines and the threat of binding dispute settle- Accelerate local loop competition ment. All operators in the market know that changes Further relax foreign ownership restrictions in are coming and that they must respond in some way. some cases. Investors receive assurances of greater security and predictability in a rules-based environment. Users This is happening to a large extent in the APEC and consumers receive greater choice and, at least in region, and in other regions of the world, but these long distance services, reduced prices. are tasks for the long term, particularly with respect Implementation of the GATS Annex on to the least-developed countries. Telecommunications and the WTO Agreement on These reforms are important for the develop- Basic Telecommunications (ABT) appears to have ment of both the telecommunications sector and proceeded generally quite well. Fink, Mattoo, and the overall economy. But they are not cost free, and Rathindran (2001: 13) noted that competitive mar- many developing countries lack the human and kets have contributed substantially to increased financial resources to implement them without service penetration rates, service quality, and labor external assistance. To this end PwC (2000) recom- productivity in Asia, but that "the creation of a sep- mended the following for APEC economies: arate regulator is a necessary rather than a suffi- cient condition for effective regulation." Roseman Greater assistance from multilateral agencies (2002: para. 90) noted that "the existence of inde- Adoption of best practices of other countries pendent and effective regulators that pursue pro- Exchanges of experts. competitive mandates is an important factor that helps to ensure that the benefits of liberalization These recommendations apply in other regions are not frustrated by incumbent operators." Rose- as well, particularly for small developing countries Domestic Regulation and Trade In Telecommunications Services: Experience and Prospects under the CATS 91 that do not possess individually the wherewithal to to interconnect and exchange traffic with interna- staff and finance a national regulatory body. tional Internet backbone service providers.6 The . Technical and financial assistance and coopera- only case in which WTO dispute settlement proce- tion are important for developing countries, in dures have been invoked is an ongoing dispute order to ensure that these countries have appropri- between Mexico and the United States relating to ate institutions and that their policymakers, regula- U.S. complaints about a lack of effective disciplines tors, and operators have the right mindsets and on the former monopoly, Telmex; failure to ensure skillsets to ensure successful implementation of timely, cost-oriented interconnection; and failure to telecom reforms. Every effort should be made to permit alternatives to the traditional method of provide a wide variety of training-for example, international call settlement.7 Formal consultations training to help key personnel understand the took place in Geneva, and the dispute was tem- implications of different technologies and regula- porarily resolved after the Mexican regulator, Cofe- tory models when it comes to implementing WTO tel, made clear that it would enforce its regulations commitments, such as cost-oriented interconnec- against anticompetitive behavior, and Mexican and tion, which are key to the regulatory framework. U.S. carriers agreed on new settlement rates.8 Sub- Furthermore, developing countries would do well sequently, however, the United States requested a to consider pooling human and financial resources panel over unresolved issues (United States Trade with their neighbors so as to reap the benefits of Representative 2002). The EU has threatened liberalization while amortizing the costs of a regu- recourse to a disputes panel over the alleged lack of latory authority over a larger market. With the sup- an independent regulator in Japan, but it has not so port of the World Bank, the member countries of far followed through. In addition, there have been a the Organization of Eastern Caribbean States number of complaints over delays in the United (OECS) are pooling resources into a new regional States regarding the licensing of foreign entrants body, the Eastern Caribbean Telecommunications and authorizing foreign acquisitions.9 Authority (ECTEL), which will provide technical WTO/GATS obligations, however, work not expertise, advice, and support for national regula- only when there are high-profile trade disputes. tions.5 Another approach is illustrated by the ITU's Indeed, one could argue that trade disputes arise Centres of Excellence, which provide technical when the obligations are not working well enough, assistance to developing countries on a regional in the sense of providing clear rights and obliga- basis without creating regional regulatory authori- tions. Although international pressures frequently ties. These two approaches are complementary. provide governments with the impetus necessary to To date there have not been a large number undertake telecom reforms, when a country sets of complaints over implementation of the WTO/ out on the path of competition and reform, if they GATS Agreement on Basic Telecommunications. are implemented in a manner that is consistent But complaints are inevitable in a competitive mar- with the disciplines of the GATS, there may be no ket, where incumbents, new entrants, and users further reference to international trade pressures or have competing ambitions and conflicting views- obligations. Rather, any change undertaken is done particularly over interconnection, whether over "for good domestic policy reasons.' unbundled local loop access or the pricing of inter- Most domestic regulatory battles are fought national carriage of Internet services. The European without reference to international trade obligations Union and the United States have complained when a country has implemented those obligations about high interconnection charges in Japan and in its domestic legal and regulatory framework. The have used the threat of WTO dispute settlement to principal reasons for this are: reduce those rates somewhat. There were also U.S. complaints about interconnection arrangements 1. The high-level generality of the provisions relat- and prices in Germany, which were eventually ing to regulatory matters in trade agreements; resolved by actions of the German regulator. A large these leave considerable scope for each country number of countries from the Asian Pacific region, to implement its obligations in the way it sees fit. South America, and Africa have complained about 2. The legal reality that trade obligations are not the large outpayments their service providers make usually directly binding in domestic law. 92 Domestic Regulation and Service Trade Liberalization An example of the first reason is the Reference As to the second reason why most domestic reg- Paper requirement for an independent regulator. ulatory matters are resolved without reference to This requirement is without prejudice as to international obligations (i.e., trade obligations are whether the regulator should be separate from the not usually directly binding in domestic law), the ministry that makes telecom policy. Some countries people in the regulatory trenches (regulators, min- tended to favor a regulator who is separate or at istries, courts, and industry participants) argue their arm's length from the government in order to insu- positions primarily on the basis of domestic laws, late regulatory decisions from political interference regulations, and precedents. Only in extremis will and to insulate government from pressures to make parties invoke international obligations to support day-to-day interventions in the market based on their positions on domestic regulatory matters. One political and economic pressures rather than in the example in which a Canadian company invoked the context of broad public interest; transparent WTO/GATS in front of the CRTC and the Canadian processes; economic, legal, and technical argu- Federal Court of Appeal was the case of North ments; and specialized expertise. Canada, the American Gateway, a small reseller engaged in inter- United Kingdom, and the United States had regula- national switched hubbing against the wishes of tors separate from their policy departments. Even- Teleglobe, to whom the right to allow international tually, the continental European members of the switched hubbing effectively had been delegated by Organisation for Economic Co-operation and the Government of Canada and the CRTC. Canada Development (OECD) also adopted this approach, had reserved in its schedule of commitments its as did Mexico. Japan and Korea, however, continue restrictions on the routing of Canadian traffic, and to perform telecom regulatory functions from Teleglobe sought to enforce its rights. In trade policy inside the policy ministry. In Korea's case, the Min- terms, however, the restrictions were fundamentally istry of Information and Communications (MIC) inconsistent with MFN and not capable of being is the major shareholder in Korea Telecom (KT) covered by any scheduled reservation. Ultimately and, with the Ministry of Finance and Economy, the CRTC ruled that it was in the public interest to MIC approves KT's tariffs for local services. In eliminate the routing restrictions, without making Japan's case, the Ministry of Public Management, specific reference to their incompatibility with Home Affairs, Posts, and Telecommunications Canada's trade obligations.'0 (MPHPT) is regulator and policymaker and the Another Canadian example is Covad Canada, Ministry of Finance holds the largest share in Nip- which used an interpretation of Canada's schedule pon Telephone and Telegraph, the former monop- of commitments and the Reference Paper to argue oly domestic service supplier. that the CRTC should change its policy on local The requirement for an independent regulator competition so that non-facilities-based suppliers is also without prejudice as to whether the inde- of digital subscriber line (DSL) services would pendent regulator should be a sector-specific reg- be allowed interconnection, access to unbundled ulator of telecommunication services or a regula- facilities, and co-location on the same terms and tor operating under the general economic laws of conditions as facilities-based suppliers." Roseman competition policy. Because of sensitivities in (2000) did not share the interpretation of Canada's some countries (notably New Zealand), the WTO trade obligations provided by Covad's counsel and did not impose any requirements to (re)introduce in a submission on behalf of an incumbent tele- sector-specific regulation. There were also sensi- phone company, Telus, argued that the CRTC's pol- tivities in some countries (notably the United icy was consistent with the provisions of the GATS States) that a negotiation on telecommunication Annex on Telecommunications that permits the services should not upset the balance of power and differentiation among different classes of users of jurisdiction (i.e., turf) between existing sector- PTTNS (in this case, between facilities-based and specific and general economic regulators (i.e., the non-facilities-based suppliers of DSL services), U.S. Federal Communications Commission, the where such differentiation can be justified in terms Federal Trade Commission, and the Department of the principles set out in GATS Article VI ("rea- of Justice). sonable, objective and impartial" administration of Domestic Regulation and Trade In Telecommunications Services: Experience and Prospects under the GATS 93 measures affecting trade in services). However, the Paper would probably be too general to provide CRTC looked at the domestic market and the rela- useful guidance in this dispute if it had direct effect tively slow development of DSL competition, and it in Canadian law. However, the Reference Paper can decided-without making any reference to the provide useful guidance to countries that have less question of WTO compatibility-that it was in the developed systems of law than Canada (or the public interest to grant Covad's request (CRTC EU).13 2000). This decision was accepted by all interested Korea offers an example in which the govern- parties without appeal. ment used the pressures of international telecom A French example is the dispute over the financ- negotiations and the obligations that flowed from ing of France Telecom's universal service obliga- them to strengthen its hand vis-a-vis domestic tions. The European Court of Justice found that interests to advance a program of liberalization and France was in violation of EU directives on compe- regulatory reform. Lee and Lie (2000: 2) noted that tition in the markets for telecommunications ser- "deregulation ... has succeeded in enhancing the vices and on interconnection with regard to ensur- overall performance in the market through the ing universal service and interoperability through promotion of competition." The WTO agreement application of the principles of open network pro- "facilitated contestability of the international ser- vision (European Court of Justice 2001). Nowhere vice market by allowing voice resellers to enter," in this decision does one find any reference to helped new mobile service providers to raise capital WTO/GATS obligations. It is unlikely that either of ("resulting in enhancing competition in the mobile the parties to the dispute felt it necessary to invoke sector"), and "accelerated the privatization of the provision in the Reference Paper, recognizing [Korea Telecom]" (Lee and Lie 2000, p. 18). From "the right" of each member "to define the kind of the perspective of industrial organization, Lee and universal service obligation it wishes to maintain," Lie (2000. p. 19) noted that the Korean market is on condition that "such obligations ... are adminis- now characterized by "homogeneity of service, fric- tered in a transparent, non-discriminatory and tionless entry and exit, no universal service obliga- competitively neutral manner and are not more tion enabling . . . cream-skimming, and price burdensome than necessary ... ," for the EU's own advantage of resellers over [facilities-based service directives are the applicable law and in this case providers]." They conceded that foreign investment they provided a sufficient (and more detailed) basis came at a price: the chaebols, which had been on which to resolve the dispute. national champions in the reconstruction of the A third and ongoing Canadian example is the country, had to cede "some rights of management" municipalities' fight against the CRTC's jurisdiction (Lee and Lie 2000, p. 27) in their mobile affiliates. over municipal rights of way.'2 This dispute has However, the result was "not only [to] improve worked its way up through questions of fees for their corporate governance system[s], e.g. rational pavement restoration and lost parking meter rev- decision making on investment, but also [to make] enue to become an important constitutional issue the mobile services market [flourish]" (Lee and Lie that may ultimately be referred to the Supreme 2000, p. 27). Foreign investment is now viewed less Court of Canada for resolution. So far, in the thou- suspiciously in Korea: "relics of the [old] protec- sands of pages of written submissions there have tionism ha[ve] been replaced by the positive way of been no references by industry participants or by thinking that [foreign direct investment] could federal, provincial, or municipal representatives to play a significant role in diluting [the] concentrated the Reference Paper, the relevant provision of which ownership of chaebols and securing a funding is broad but requires that "[a]ny procedures for the resource" (Lee and Lie 2000, p. 26). Korea has-in allocation and use of scarce resources, including ... the face of international trade and financial pres- rights of way will be carried out in an objective, sures-adopted a regulatory framework that is timely, transparent and non-discriminatory man- decidedly procompetitive, whereas Japan has been ner." Because sections 42-46 of Canada's Telecom- dragging its feet to the detriment especially of wire- munications Act set out in some detail the substan- line competition and consumers of wireline serv- tive law that the CRTC is to apply, the Reference ices'4 (excerpted from Roseman 2002). 94 Domestic Regulation and Service Trade Liberalization Scope for Further Competition second in areas that are not expressly covered by Safeguards and Regulatory WTO/GATS trade rules, where such rules could Disciplines in Telecommunications enhance the value of existing or future specific Trade commitments in the telecom sector. The Annex on Telecommunications and the Refer- ence Paper set out the rudiments of best (procom- Transparency petitive) practices in the regulation of telecommu- nications. These documents are primarily relevant The Annex on Telecommunications and the Refer- for countries as they make the transition from ence Paper have supplemented and strengthened the monopoly to competitive markets. However, the GATS framework disciplines of Artide III on trans- technologies and markets for telecommunications parency more than any other provision of the agree- services continue to evolve rapidly and to raise new ment. However, a major transparency obligation challenges and questions about whether and how to that still does not apply in the telecommunications regulate in domestic markets. Few people imagined sector is that of prior consultation on draft laws and during the basic telecom negotiations that, on one regulations, with reasonable notice and time for hand, soon after the basic telecommunications comments. Such a provision exists under the GATS negotiations would close, telephone companies for the accountancy sector, in regard to which the would begin converting their public, circuit- Working Party on Professional Services (now the switched voice networks to Internet protocol (IP) Working Party on Domestic Regulation) developed technologies. On the other hand, many expected the "Disciplines on Domestic Regulation in the the convergence of telecom and broadcasting tech- Accountancy Sector" in 1998; these Disciplines nologies and services to occur much faster than apply to all members who have scheduled specific they have done in practice. commitments on accountancy under the GATS.'5 The ongoing services negotiations provide gov- Properly, a right of prior consultation is relevant ernments, industries, and other interested parties an to all services sectors and therefore more a horizon- opportunity to review existing obligations in light of tal question than a sector-specific one. Indeed, a their experiences to date, with a view to updating number of interested parties have called for the them where necessary and anticipating changes in enhancement of GATS Article III with the inclusion markets where possible. Although there appears to of a provision on prior comment.'6 Because of the be little enthusiasm for a revisiting of telecom regu- heterogeneous nature of services and their regula- latory disciplines and competition safeguards in the tion, however, it may be more appropriate to deal WTO's new round-lest this cause the Reference with prior consultation on a sectoral basis, as has Paper to unravel or become "contaminated" by been done for accountancy. A determination as to extraneous issues-there are issues that will need to the preferability of a sector-specific or horizontal be addressed at some point, particularly because solution should result as much from negotiations telecom markets are not static and electronic com- as from specific testing of how the obligation would merce is likely to drive the next stage of negotiations play out in a number of sectors and scenarios. on telecom regulatory matters. Advocates of prior comment should take into For these reasons, this section will assume that account, and develop recommendations to deal further work on procompetitive regulatory disci- with, the increased administrative workload that a plines will be undertaken eventually during the prior consultation requirement would create, espe- new round to ensure the continued relevance and cially for developing countries.'7 A further consid- effectiveness of existing disciplines. In particular, eration that the advocates of prior consultation this section will highlight a number of areas where must address is the concern of those WTO mem- it is for consideration whether the negotiations bers whose constitutions, domestic laws, or both should aim to go beyond the existing GATS frame- forbid prior consultation with foreign parties; such work, the Telecoms Annex, and the Reference Paper members need to be convinced that it would be in in terms of the further development of a global reg- the broad public interest for the views of all inter- ulatory framework for telecommunications, first ested parties to be heard before new laws and regu- where implementation has been problematic and lations are enacted. Domestic Regulation and Trade In Telecommunications Services: Experience and Prospects under the GATS 95 Licensing to the Annex on Telecommunications apply to the During the basic telecom negotiations, Roseman full array of public telecommunications transport (1996) proposed the development of specific disci- networks and services: voice, data, video, wireline, plines to govern licensing in telecommunications. 18 wireless, terrestrial, satellite, local, long distance, or Although some of the problems addressed in that international communications, including Internet article have been ameliorated since the Agreement protocol-based communications, whereas the addi- on Basic Telecommunications, there continue to be tional requirements of the Reference Paper (that is, lengthy delays in licensing processes in some juris- cost-oriented interconnection at any technically dictions that are still wedded to ex ante licensing feasible point, sufficiently unbundled) apply only processes because these processes continue to be to a subset of suppliers of PTTNS namely "majo open-ended and regulators feel compelled to mod- suppliers" of "basic telecommunications services." ify their licensing criteria frequently-for example, Clearly, with so many networks and services- in response to extraneous (political) issues (see also not to mention interested parties-there are many Sidak 1997). complex aspects to this difficult and important Xavier addressed this issue in calling for the issue, and the Reference Paper's few short lines may streamlining of licensing procedures to deal with not provide the most effective guidelines to domes- potential anticompetitive behavior. He noted that tic regulators. Indeed, most jurisdictions have had "many countries are demonstrating [that] the con- and continue to have difficulties with interconnec- cerns can be addressed by appropriate regulatory tion pricing and the unbundling of network ele- safeguards and/or through regulation on the basis ments, albeit fewer difficulties with regard to of competition law" (Xavier 1998, p. 491). implementing long distance voice competition Fredebeul-Krein and Freytag (1999, pp. 630-31, than with providing competitive broadband data 641) identified a need for provisions that limit discre- services in the local loop.19 tion and prevent unduly onerous licensing condi- For example, the Reference Paper requires that tions. They noted the lack of specific guidelines for interconnection charges be "cost-oriented," given the interpretation of a "reasonable period of time" for that these charges can significantly affect the devel- processing license applications. In their view, an opment of a competitive market. As Intven (2000, upper limit for license fees would also be desirable. pp. 3-23) remarked in his Telecommunications Reg- It is possible that horizontal disciplines elabo- ulatory Handbook for the World Bank: rated pursuant to GATS Article VI.4 could deal with these problems, but such efforts should not The level and structure of interconnection preclude a priori the possibility of negotiating sec- ges areo.. major determinants of the viabil- tor-specific rules to deal with the issues listed there ity of operators in a competitive telecommuni- (namely, qualification requirements, qualification cations market. procedures, technical standards, licensing require- ments, and licensing procedures) in the telecom- The Yankee Group (2001a) also observed munications context. The key challenge may be to an impact on services-based and facilities-based amplify the principles of proportionality and competition: necessity (i.e., that domestic measures be "not more burdensome [or more trade restrictive] than neces- The level of interconnection charges will . sary to ensure the quality of the service"), have major impacts on the development of wholesale or retail markets and on decisions to invest in infrastructure. Interconnection and Unbundling There are many types of telecommunications net- The pricing of interconnection takes into works and services, and to the extent that they are account three basic cost elements: one-time start- interconnected, the economic and social benefits of up costs, costs of network elements that incum- investment in these networks and services will be bents make available to new entrants, and contri- greater. The obligations of transparent, reasonable, butions to the funding of universal service. Placing and nondiscriminatory interconnection pursuant too high a price on any of these elements, singly or 96 Domestic Regulation and Service Trade Liberalization in combination, can make it difficult or impossible First, the Canadian Radio-television and Tele- for long-term sustainable competition to take root. communications Commission does not mandate However, there may be considerable resistance interconnection "at any technically feasible point." to international convergence in costing/pricing Rather, it has taken an approach, based on network approaches. For one, there is frequently consider- efficiency considerations, that considers both the able regulatory history behind a country's chosen technical and economic aspects of interconnec- costing methodology.20 For another, there is no tion.23 For example, regarding local competition, industry consensus on this issue.2' Nevertheless, the CRTC (1997a, para. 31) has mandated the desig- Intven (2000, p. 3-29) identified a set of "Principles nation of a single point of interconnection (POI) in for Efficient Interconnection Price Structures," each exchange area as a gateway for the interchange which are not drafted in the language of interna- of traffic among local exchange carriers (LECs), tional trade agreements or the Reference Paper but finding that this would "provide ... greater network which could be used as a starting point for further efficiency for all local exchange service providers." discussions on cost-oriented interconnection.22 The commission then left the task of establishing Consequently, it may be worthwhile to explore the criteria for designation of gateway locations to the possibility of reaching an international agree- negotiations among industry parties,24 meeting in ment on costing/pricing principles and/or method- the context of the CRTC Interconnection Steering ologies for determining interconnection charges. Committee (CISC) and its various subcommittees Although this could be even more challenging for that deal with all forms of interconnection. trade negotiators than the opening of market Second, the CRTC's (1997a, para. 74) definition access during the basic telecom negotiations, it of "essential" required that three criteria be satisfied: may be desirable to negotiate such principles and methodologies in the WTO-in parallel with 1. The facility, function, or service in question work at the OECD and ITU-for the effort to must be monopoly controlled. agree on common principles could focus interna- 2. A competitive local exchange carrier (CLEC) tional and domestic debates and inspire changes requires it as an input to provide services. in the right direction. As Bigham (1997, p. 269) 3. A CLEC cannot duplicate it economically or observed: technically. While costing information does not resolve pol- Thus for facilities to be considered essential by icy debates over the appropriate pricing of tele- the CRTC, they must be monopoly controlled. This com services as competitive market structures is narrower than the Reference Paper concept of are promoted, such information does focus facilities that are "exclusively or predominantly pro- these debates on the size and direction of the vided by a single or limited number of suppliers." required changes. Third, regarding the unbundling of essential facilities,25 the CRTC in Telecom Decision 97-8 Another issue relates to interconnection stated: arrangements, and specifically to the Reference Paper provisions on interconnection "at any techni- ... either too narrow or too broad a definition of cally feasible point in the network" and "sufficiently an essentialfacility may impair the development unbundled that the supplier need not pay for net- of competition. If it is too narrow, competitors work components or facilities that it does not may not be able to enter the market because of require for the service to be provided." The ration- an inability to obtain the necessary network ale behind unbundling is to kick-start competition components. If it is too broad, giving overly gen- by lowering the economic and technical costs for erous access to ILEC [incumbent local exchange new entrants. A comparison of Canadian and U.S. carrier] inputs, CLECs [competitive local approaches illustrates the differing practices and exchange carriers] may not have sufficient performances between two OECD/WTO members incentives to invest in their own facilities, and and raises the question whether these provisions would enter and remain in the market primarily should be reconsidered or further elaborated, too. as resellers. The Commission is of the view that Domestic Regulation and Trade In Telecommunications Services: Experience and Prospects under the GATS 97 efficient and effective competition will be best it had listed was "necessary" for competitors to achieved through facilities-based competitive enter the market. The Court also required that the service providers; otherwise competition will FCC, in establishing a new list, address whether it only develop at the retail level, with the ILECs would "impair" a competitor's ability to provide retaining monopoly control of wholesale level service absent access to those UNEs.28 Subse- distribution [CRTC 1997a, para. 73, emphasis quently, the FCC (1999a) reevaluated its standard, added]. issued a revised policy framework, and removed The Commission is of the view that resale one of the seven UNEs from its list. This modest can promote the development of a competitive concession was followed a few months later with a market while allowing competitors time to con- further decision by the FCC (1999b) not to require struct their own facilities. While resale competi- ILECs to unbundle DSL access multiplexers, and a tion can help promote the development of a nondecision by the FCC not to mandate nondis- competitive market, it is the Commission's view criminatory third-party Internet service provider that the full benefits of competition can only be (ISP) access to cable networks. Rather than being realized with facilities-based competition motivated by the reasons set out in its reevaluation [CRTC 1997a, para. 237]. of the standard for the unbundling of network ele- ments, these subsequent decisions were motivated Accordingly, the CRTC has determined that only by the FCC's hands-off attitude toward the Inter- central office codes (NXX's), directory listings, and net, a desire to let cable companies maximize rev- local loops in certain bands are essential and, there- enue for reinvestment in their networks (to ensure fore, subject to mandatory unbundling.26 they had adequate incentives to invest in upgrading It is interesting that although there have been existing infrastructures), and a view that cable net- disagreements in Canada over the implementation works are private rather than public networks (i.e., of interconnection, they have been contained not PTTN/S).29 within the CRTC's CISC process, except for the dif- This discussion of interconnection and ferential treatment accorded facilities-based and unbundling has focused on the different approaches non-facilities-based suppliers (discussed above of Canada and the United States, but there are dif- with respect to Covad Canada and the regulation of ferences around the world. According to the OECD local competition), which the CRTC resolved (2001c, p. 15), Australia, Canada, Iceland, Japan, under its own procedures for regulatory relief. Oth- Norway, and the United States had all introduced erwise, the Commission's approach of providing local loop unbundling by October 2001, each in its for interconnection at any economically and tech- own way, whereas the Czech Republic, Hungary, nically feasible point seems to be accepted by inter- Korea, and Poland had made decisions to require ested parties. unbundling, but unbundling had not yet begun to In contrast, the U.S. Federal Communications be offered. The European Union adopted a regula- Commission's approach to unbundling has engen- tion requiring incumbents to offer unbundled local dered considerable controversy, while appearing to loop access as of January 2001, but implementation be fully consistent with the Reference Paper, rele- is inconsistent across the EU (OECD 2001c, p. 15). vant parts of which were inspired by the Telecom- New Zealand may introduce unbundling after a munications Act of 1996.27 In its First Report and review of telecommunications policies is concluded Order on Implementation of the Local Competition in 2003 (OECD 2001c, p. 15). Mexico and Turkey Provisions under the Act, the FCC (1996) set out a have to date adopted no policies or plans to intro- list of seven unbundled network elements (UNEs) duce local loop unbundling (OECD 2001c, p. 15), that ILECs must offer, whether they are essential or and Switzerland has no plans to implement not. This policy was challenged all the way to the unbundling for at least five more years ("Swiss Reg- Supreme Court, which directed the FCC to develop ulator" 2001). Nevertheless, these countries have a new standard to determine to which network ele- subscribed to the Reference Paper requirement of ments ILECs must offer unbundled access (U.S. "sufficiently unbundled." It would seem that a num- Supreme Court 1999). The Court noted that the ber of governments feel that zero unbundling is FCC had failed to show that provision of the UNEs "sufficiently unbundled." 98 Domestic Regulation and Service Trade Liberalization The Yankee Group (2001b) has compared the gation on mandatory interconnection and Canadian and U.S. situations and reached the fol- unbundling, the WTO's credibility risks being lowing conclusions: undermined if there is no attempt to clarify and improve these provisions. Perhaps the solution is to Unbundling has been a cornerstone of telecom- borrow a page from the CRTC and to bring the munications policy in the United States, rein- obligation into line with the concept of economic forced by the Telecommunications Act of 1996. and technical nonsubstitutability of facilities This market represents one of the few in the deemed essential, by amending the Reference Paper world where we have the opportunity to identify to read "at any economically and technically feasible some concrete outcomes of LLU [local loop point." The effectiveness of such an amendment unbundling]. Here, the jury may soon be in, would likely require agreement on costing/pricing with a negative verdict. Despite a long-standing principles, methodologies for determining inter- Federal Communications Commission (FCC) connection charges, or both in order to prevent commitment to unbundling, U.S. incumbents abuses and provide useful guidance to regulators retain the lion's share of local access markets. and service providers. On the flip side is the Canadian environment, Another cluster of issues looming on the horizon where local competition has developed quickly with regard to interconnection and unbundling to an impressive stage since LLU was mandated. relates to the transition from traditional, voice- Canada has taken an LLU path deliberately dif- centric wireline networks to a multinetwork (tele- ferent from that of the United States, including coms, cable, satellite, terrestrial wireless), multi- distinguishing urban and rural local loops. supplier, data-centric, IP-based environment. Canada also requires incumbent cable carriers There is the idea that members' commitments to allow access to their facilities for use by com- under the GATS and their domestic regulations petitive providers of high-speed services. Man- should be technologically neutral with regard to dating access to cable TV access lines in this way functionally equivalent services.3' However, this is sets Canada apart from most nations, which frequently not the case. It is not clear that the exist- have resisted this course to date.30 ing Reference Paper principles apply adequately to fixed-to-mobile interconnection, or whether new It is noteworthy that Korea enacted its statutory rules are needed. In any case, fixed-to-mobile and regulatory requirements for incumbent facilities- interconnection is subject to different rules and based service suppliers to provide unbundled net- rates than fixed-to-fixed interconnection in most work elements to their competitors when the country countries. was already well on its way to leading the world in Furthermore, in a multisupplier environment it broadband access penetration rates. The Telecom is not clear whether there will still be major suppli- Business Act was enacted there in December 2000 ers and essential facilities. It is possible that in such and the Government finalized the regulation setting an environment the Reference Paper would impose out the detailed requirements for unbundling, more regulation than is necessary to ensure com- including pricing, only in December 2001. petitive markets, or that it would unduly restrict The work of Bourreau and Dogan (2001, p. members'ability to choose the mix of services- and 182) lead them to favor a narrow conception of facilities-based competition policies best suited to unbundling: their individual circumstances. Moreover, if some (industrial) countries were to push for a text pro- Unlimited provision of unbundled elements viding for forbearance from regulation (and from may be inefficient and may destroy the incen- the terms of the Reference Paper) by regulators tives of entrants to develop their own access net- when certain criteria are met as to the sustainability works. of competition in a particular market, this would raise the question of the symmetry of obligations Given the range of actions undertaken by WTO between industrial and developing countries, for members subscribing to the Reference Paper obli- the latter are less likely to achieve in the near future Domestic Regulation and Trade in Telecommunications Services: Experience and Prospects under the GATS 99 a state of sustainable competition in their telecom- However, this would still not make broadband munications markets. Internet networks and services "public telecommu- nications transport networks and services," in the Definitions ofPTTNS and Basic Telecoms parlance of the Telecoms Annex, for unless the FCC decides otherwise, they are not "required ... to be It may be necessary to negotiate new definitions, or offered to the public generally." The CRTC defini- a new paper altogether, for the new data-centric, IP- tion of "public" as "offered to third persons for based environment. For example, the access and use compensation" would cause more service suppliers provisions of the Annex on Telecommunications to fall within the concept of PTTNS; some may apply to all public telecommunications transport consider this a progressive development, others a networks and services (PTTNS). The key elements regressive one. of the definitions of PTTNS are "public" ("required, Among those who view the Internet as a public explicitly or in effect, . . . to be offered to the public good, Lessig (2001) argued: generally") and "real-time" (not defined in the annex). In many jurisdictions, this definition allows The commons is under attack. Those who were cable, terrestrial wireless, and satellite networks and threatened by its potential have sought to con- services, as well as many new wireline service sup- tain it. Changes in the network's physical infra- pliers (e.g., Internet backbone providers), to escape structure and in the legal environment within the requirements of transparent, reasonable, and which the network exists threaten to destroy it. nondiscriminatory access and use. That leaves only The physical infrastructure is transforming as traditional, former monopoly, wireline suppliers cable companies, and soon telecommunications subject to the disciplines of the annex, and perhaps companies, persuade governments to free them not even these if their networks are based on tech- of traditional common carrier responsibilities. nologies (e.g., IP) that perform automatic caching As a result, companies can exercise more control and store-and-forward functions outside of certain over what runs along their wires and even decide engineering parameters that define "real-time" which content flows at what speed-something communications.32 Similarly, the Reference Paper called "policy routing." deals with basic telecommunications; if suppliers of Internet backbone networks and broadband Inter- Underlying sensitivities to the erosion of the tra- net services are not deemed to be basic, then the ditional common carrier concept is the question of provisions of the Reference Paper do not apply to the appropriate balance between public and private them either. This issue is relevant, for example, interests. These definitional lacunae create real to those people concerned about international opportunities for discriminatory behavior in the charging arrangements for Internet services and the marketplace, and they encourage service providers costs of interconnecting with Internet backbone to configure their networks and services so that they providers, as well as those who see the Internet as a will fall outside established definitions and obliga- public good. tions and thereby circumvent common carrier obli- In the context of the U.S. debate over third-party gations. Policy routing will enable "exclusive content access to broadband, Bar and others (2000, p. 498) partnerships" and "walled gardens" leading to "you- argued that these services are real-time services: can't-get-there-from-here" and the suboptimization of potential network externalities. Perhaps it is pos- ... Broadband internet is much more than a sible to devise a progressive and light-handed regu- faster version of the old narrowband internet. latory framework that aims to maximize network Rather, it enables real-time, bandwidth-intensive externalities as they are in the public interest. applications that would be impossible with dial- Clearly the Internet and IP technologies will up narrowband access, such as near broadcast have a major impact on how telecommunications quality video streaming, IP-based videoconfer- networks and markets function. If the GATS is to encing, or effective connections to a remote keep up to date and relevant in light of develop- LAN. ments in key sectors like telecommunications, it 100 Domestic Regulation and Service Trade Liberalization will be necessary to revisit and update key defini- rial reviews. Governments also need to establish a tions. Again, account should also be taken of the clear and transparent interface between the regula- fact that developing countries may feel that in the tor and other bodies whose responsibilities overlap new IP-based environment the existing obligations to some extent with the regulation of telecommu- fall more heavily on them than on industrial coun- nications (e.g., the general competition authority, tries; that is, the former will have less developed as well as consumer protection, privacy,34 and copy- networks and less competition, but they must right35 authorities). Revisiting the Reference Paper implement a regulatory burden of which the latter provisions on independent regulators would pro- largely will have largely freed themselves.33 Devel- vide an opportunity to spell out more clearly how oping countries will need to be encouraged to bear the interfaces should be drawn. that regulatory burden for it is ultimately in their As telecom markets are opened and competition own interest, and they will need to be given techni- becomes sustainable without the need for detailed cal assistance to do so effectively. Financial assis- regulatory interventions-in short, as telecommu- tance may also be necessary in light of the loss of nications becomes a "normal industry"-the scope international settlement inflows and the growth of for oversight by a general competition authority Internet interconnection outpayments. increases. However, there are a number of prob- lems with transitioning from sector-specific to general economic regulation under competition laws. The first is knowing when-and if-the tran- Given that governments in some jurisdictions sition to competition is complete and the sectoral retain ownership interests in former monopoly regulator's job is done. It is not merely a matter of telecom service providers, and that some of these establishing sunset provisions for sectoral regula- governments have not chosen to separate out the tions and regulators. Regulatory forbearance in regulatory body from the ministry that makes respect to particular aspects of the market is a step- telecommunications policy, it may be desirable to by-step approach that varies from country to coun- try to elaborate further rules to ensure the inde- try and from market segment to market segment. pendence of the regulator from undue political The theoretical and empirical basis likely does not influence. The United States Supreme Court (1999) exist at this time for the negotiation of common has, for example, submitted that rules to guide the evolution from sector-specific to general economic regulation. However, the devel- [a] truly effective regulator also must be pro- opment of such a basis would be appropriately tected from direct political influence from addressed in forums such as the OECD. The second industry or other government entities. major problem with transitioning from sector- specific to general economic regulation is that a However, a balancing act is clearly required. On telecom regulator has detailed, in-depth sectoral one hand, the regulator must be open to interven- knowledge and performs multifarious functions, tions by interested parties (including former which may include technical matters (e.g., spec- monopolies, new entrants, users, and consumers). trum allocation, number allocation, rights of way, The key is the transparency of these interventions interconnection, service quality, type approval, and so that no undue favors are given. On the other standards setting), as well as economic matters hand, mechanisms must be in place to ensure that (licensing, universal service, price regulation, and, the regulator is accountable and acts in conformity again, interconnection and rights of way). A com- with the relevant legislation, regulations, and judi- petition authority deals with a much narrower cial precedents-and, in some cases, in conformity range of issues, chiefly anticompetitive behavior with the temper of the times for there are indeed and mergers, and usually does not possess expertise circumstances in which it is appropriate for elected in the nitty-gritty technical details. It is not impos- governments to give direction to or impose their sible, however, to transplant such responsibilities views on regulatory bodies. Mechanisms for and know-how to a single overarching authority. accountability include procedural requirements for The third problem is that there are few cases of internal reviews, as well as for judicial and ministe- telecom liberalization without having a telecom Domestic Regulation and Trade in Telecommunications Services: Experience and Prospects under the GATS 101 regulator, and New Zealand's experience stands out competitively biased manner can be mitigated by as a particularly inauspicious one. means to ensure transparency and nondiscrimina- There is also the question of creating a broad tion in the calculation and application of contribu- communications regulator with a mandate span- tion rates. As Intven (2000, p. 30-31) advised: ning both telecommunications and broadcasting. As a result of convergence, certain cross-sectoral com- If [universal service obligation] or [access deficit monalities (in particular, a history of public service contribution] charges are established, it is responsibilities and universal service obligations) clearly a good practice to identify them as sepa- and favorable experiences in such countries as rate from interconnection charges. Blending the Canada and the United States, an evolution toward a two charges removes transparency from the more unified regulatory approach for the communi- interconnection process. cations industries is likely to be more common in the near future than an evolution toward regulation Limiting themselves to telecom regulatory under a general competition authority. responses to trade distortions possibly arising in the course of implementing universal service policies, Universal Service Obligations Fredebeul-Krein and Freytag (1999, p. 642) argued for a "more binding" agreement on regulatory prin- As the last two years have made abundantly clear, ciples, and they propose four further disciplines: investing in telecommunications infrastructure and services is not without risk. Investors will, for the 1. Criteria have to be developed to identify the foreseeable future, shy away from high-risk, low- maximum set of services for which costs may be return projects, particularly in underserved, low- taken into account of calculating any burden density, low-income rural and remote areas. This in associated with universal service obligations. turn will put the political objective of universal [This was addressed above in the context of service at risk. Many governments are concerned the recommendation to develop costing/pricing that the gap (the so-called digital divide) between methodologies and principles for calculating haves and have-nots is growing both within their interconnection charges.] societies and between industrial and developing 2. Rules have to be elaborated for determining the countries. Many countries also are considering universal service provider. means to ensure the universal availability of broad- [For example, would auctions for the right to band Internet access within their territory. Govern- bear the universal service obligations and to ments can be expected to try new measures to receive universal service funding be a solution ensure that companies have adequate incentives to where competition is not viable?] invest in building, maintaining, and upgrading 3. Requirements for funding schemes have to be infrastructures. specified in order to guarantee that financing As discussed above, the Reference Paper pro- universal service obligations [are] objective and vides minimum disciplines to ensure the competi- nondiscriminatory. tive neutrality of universal service obligation pro- [This would mean an amplification of the grams and mechanisms. An OECD secretariat disciplines of GATS Article VI. 1, which requires paper asserts that the inclusion of a contribution the "reasonable, objective and impartial" admin- deficit charge for purposes of funding universal istration of measures, and of Article VI.4 on service obligations would "make it impossible to qualification requirements and procedures.] achieve cost-oriented interconnection charges."36 If 4. Criteria have to be developed by which the costs this were so, then the inclusion of contribution of the universal service provision can be identi- deficit charges in interconnection fees would pre- fied and measured. sumably violate the commitment given under the [Again, the issue of costing methodologies Agreement on Basic Telecommunications by many arises.] WTO members to ensure cost-oriented intercon- nection. To some extent, the concern that universal There is a wide range of possible governmental service obligations might be administered in a actions in favor of universal service that would not 102 Domestic Regulation and Service Trade Liberalization fall under the disciplines of the Reference Paper, or Few developing countries can afford the luxury of other GATS disciplines. Notably, governments of subsidizing companies that bear universal ser- have budgets to subsidize the rollout of desired vice obligations, and the governmental sectors in telecommunications projects, and through their these countries do not generally possess sufficiently budgets they are also major buyers of telecommu- large budgets to stimulate the rollout of telecom nications services. For example, British authorities services and infrastructure with procurement con- are entering into public-private partnerships with tracts. Consequently, developing countries tend to British Telecom (BT) to increase demand for and rely on cross-subsidies from high-revenue to low- accelerate the rollout of DSL services in the United revenue routes, as well as privatization and licens- Kingdom ("BT Offers ADSL" 2001). Government ing processes, to implement their universal service procurement and subsidies can shape the develop- objectives. These countries have considerable flexi- ment of markets, however, and governments fre- bility under GATS Part III on specific commit- quently face temptations to make special deals on ments and under GATS Article VI.4 on licensing to behalf of local industries. International trade agree- limit their obligations to those that they can easily ments can prevent undue distortions and help gov- undertake. Some countries have subscribed to the ernments resist the pressures of special interests. Reference Paper minus cost-oriented terms and GATS Article XIII provides a basis for the negoti- conditions of interconnection so that their cross- ation of disciplines on government procurement, subsidy schemes do not fall afoul of the WTO, and but for now there are no GATS rules on government some have maintained a monopoly in telecom serv- procurement of telecommunications networks ices as a means to generate monopoly rents and as and/or services, and they are not likely to be negoti- an incentive to the service provider to build out the ated in that forum. Rather, the Agreement on Gov- network into low-profit areas. However, the com- ernment Procurement is more likely to be the venue petitive neutrality of universal service obligations, in the WTO context to negotiate such disciplines, cost-oriented interconnection, competitive mar- although its next step will likely fall short of that kets, and transparent, reasonable, and nondiscrimi- and be at most an agreement on transparency in natory licensing procedures are very important government procurement. Nonetheless, it will be a instruments that support the development of effi- step forward. As for subsidies, GATS Article XV cient markets and benefits to users. provides the basis to negotiate disciplines on service subsidies, but in the interim the only disciplines rel- evant to telecommunication services subsidies are Relevance of GATS Telecom the Reference Paper provision on universal service Regulatory Disciplines and GATS Article XVII (national treatment) that for the Regulation requires that all measures, including subsidies, of Other Network Services apply on a national treatment basis unless a mem- The GATS Annex on Telecommunications and the ber has reserved the right to discriminate in favor of Reference Paper are successes, and these successes locally owned or locally controlled service suppliers have created a "demonstration effect" for many and services in the grant of subsidies. The GATS governments and interested parties considering could usefully (but is unlikely to be used to) develop market access liberalization and regulatory reform disciplines to ensure that universal service policies in other sectors.38 There is some speculation do not result in discriminatory conditions of mar- whether it would be possible to replicate those suc- ket access or anticompetitive behavior by recipients cesses in other complex sectors, in particular in of government procurement contracts or sub- other network services (such as transportation, sidies,37 because unless disciplines on government energy distribution, postal services,39 and broad- procurement and subsidies are in place, the markets casting) that trade negotiators have failed so far to in industrial countries for telecommunication ser- liberalize and bring under detailed WTO disci- vices (and other services subject to universal service plines. This would mean distilling from telecoms obligations) will be less than fully contestable, even the essence of new provisions that would apply to with the benefit of commitments on market access specific sectors. Alternatively, others envisage and national treatment. adapting the telecom disciplines to all sectors. This Domestic Regulation and Trade in Telecommunications Services: Experience and Prospects under the GATS 103 would mean distilling the essence of the telecom ulatory principles of the annex and the Reference disciplines into language that would apply to all Paper are indeed relevant to other sectors and sectors as new horizontal disciplines, by means of whether they can be aggregated at a higher level of amendments to GATS articles or other generic generalization in amended GATS articles or in new means (e.g., additional commitments in members' cross-sectoral additional commitments, or whether headnotes to their schedules of commitments). it is necessary to tailor these principles to fit the These two approaches (sector-specific or cross-sec- needs of individual sectors. The key issues to be toral adaptations of the Annex on Telecommunica- examined for their relevance and adaptability to tions and Reference Paper) need not be mutually other sectors are definitions, transparency, licens- exclusive. ing, competition safeguards, interconnection and Feketekuty (1998) has, for example, proposed to unbundling, independent regulator, and universal strengthen Article VI on domestic regulation by service obligations. introducing a generic version of the "competitive Among the lessons learned by negotiators dur- safeguards" contained in the annex and the Refer- ing the Uruguay Round was that services are highly ence Paper: heterogeneous and "one size does not fit all," except at a high level of generalization. Another lesson was a general restatement of the competitive safe- that the circumstances of individual countries vary guards built into the Telecommunications markedly, and therefore it is necessary to allow flex- Annex of the GATS and the Agreement on Basic ibility in the assumption and implementation of Telecommunications Services. Such a provision obligations. Without testing against other sectors would help to ensure that monopoly providers ideas for an amended Article VI, or other amend- of essential services would not abuse their posi- ments to the GATS framework, or new cross- tion by charging unreasonable fees or by giving sectoral additional commitments, or whatever, it is themselves preferential access to essential ser- not clear whether the Telecoms Annex and Refer- vices in the competitive provision of down- ence Paper provide a useful model for market liber- stream products. This provision could apply not alization and regulatory reform in other sectors. only to "transport services" provided over elec- tric conduits or pipelines but also to a variety of Conclusion other monopoly inputs such as water. The GATS outcomes on telecommunications have This may be a good idea, particularly if it is been significant and substantive because they have broadened beyond competition safeguards alone, facilitated the globalization of trade and investment to deal with the other regulatory issues that the in telecommunications and the enhanced role of annex and the Reference Paper address. telecommunications as a key enabler for other eco- Despite its successes, the telecom accords under nomic activities. The annex and the Reference Paper the GATS are not perfect. Indeed, they are works in put pressure on governments to adopt best practices progress, as the discussion of new issues in the pre- in terms of market liberalization and procompeti- vious section demonstrates. Moreover, the further tive regulations. They demonstrate that the develop- one delves into the specifics of the telecommunica- ment and adoption of international standards for tions sector, and the more detailed and invasive the (or disciplines on) regulations can encourage trade obligations become, the less likely that they can be and investment. But they leave considerable scope easily adapted to the circumstances of other ser- for each country to decide how it will implement vices sectors, let alone the great generality of all liberalization and regulatory reform. commercially traded services. The annex and the Reference Paper, however, are In the absence of careful analysis and reflection not the last word on telecom reform. Rather, they by government officials, industry representatives, are products of their time: of what was negotiable, and other interested persons, the implications of and of the state of telecommunication services and the telecom model for other sectors are not obvi- networks, at that time. They are primarily relevant ous. For this purpose, a "sectoral testing exercise"40 during the transition from monopoly to competi- would be invaluable to show to what extent the reg- tive markets. However, technologies and markets 104 Domestic Regulation and Service Trade Liberalization are not static, and regulations and trade disciplines 8. It is doubtful that the United States would have been able to should be revisited and, if necessary, updated to pursue a dispute over settlement rates in the WTO, given the understanding of the Group on Basic Telecommunica- continue to play a procompetitive role in the con- tions that these "would not give rise to action by Members text of new technologies, networks, and services. under dispute settlement under the WTO" at least until Other sectors might benefit from similar there had been a review of the matter and a positive deci- sion to the contrary by the Services Council (SIGBT/4, approaches. The two-step approach employed by para. 7). telecom negotiators in dealing with regulatory 9. Deutsche Telekom's takeover of VoiceStream Wireless and issues relating to access and use separately from the PowerTel was the most high-profile case, but among others were license applications by Telesat and Iridium North matter of a regulatory framework for actual com- America. petition in the supply of telecom services may be a 10. Compare North American Gateway (1997), Call-Net Enter- key lesson for those seeking to negotiate interna- prises (1997), and CRTC (1997b). tional regulatory disciplines for other services sec- 11. Covad Canada Communications Inc. (2000); and Law Firm of Osler, Hoskin, and Harcourt to Johnathan Daniels, tors. But one must be wary of "one-size-fits-all" Covad Canada Communications Inc. May 5, 2002. approaches that fail to recognize the specifics of 12. Compare CRTC (2001a). individual sectors. For this reason, it would be 13. A further, case-specific reason why the Reference Paper may not have been invoked in this dispute so far is that, advisable to undertake sectoral testing exercises to with Canada's restrictive foreign ownership rules, there are determine whether the principles and disciplines no carriers under foreign control to argue that their trade developed for telecommunications under the GATS rights are being denied by the municipalities. are relevant and adaptable to other sectors. 14. Wireless interconnection charges in Japan remain notori- ously elevated, and wireline interconnection charges have been reduced only modestly under severe pressure from the United States. Endnotes 15. The provisions exist but the obligations have not yet entered into force. 1. That is, from "plain old telephone services" to "pretty awe- 16. See, for example, European Services Forum (2001, some new stuff," as some people quipped in those days. p. 4). 2. Because of the structure of the WTO agreements, manufac- 17. See the discussion in OECD (2001b). turers and other producers of goods do not benefit de jure 18. Compare Roseman (1996). from the Telecoms Annex. De facto, however, goods pro- 19. In this observer's opinion, this is because the focus of the ducers as well as suppliers of unscheduled services also basic telecom negotiations was on voice services, and long benefit because governments tend to liberalize the terms distance at that; the Internet was still too new in 1994-97 to and conditions of access and use for the benefit of all per- have been taken sufficiently into account so as to anticipate sons, not merely for the benefit of suppliers of scheduled the issues that it would pose for telecommunications and services. But only suppliers of scheduled services have the trade rules. benefit of their government's recourse to W'TO dispute set- 20. For extensive discussions of U.S. and Canadian costing tlement procedures. approaches, see Melody (1997b) and Bigham (1997). 3. For a theoretical regulatory discussion see Melody (1997a, 21. For example, the Business Industry Advisory Council p. 66): "Efficient interconnection is crucial to the effective (BIAC) to the OECD has been unable to bridge conflicting implementation of virtually all public policies permitting interests in this area among its members, who include users competitive opportunities in telecom... . Pro-active regula- and suppliers. Consequently BIAC addressed pricing for tion on interconnection is necessary for competitive mar- local loop access and access for value-added service kets to get established and to continue functioning effec- providers, including Internet service providers, in the fol- tively." lowing terms: "Several pricing models are used, and one 4. Compare Roseman (1996). should not be the prescriptive guiding principle" (BIAC 5. This author recommended such a pooling of resources 2001). among OECS member states in the context of a project in 22. For example, Intven went beyond the Reference Paper by the Caribbean on behalf of the WTO and World Bank in calling for interconnection charges to be based on long-run 1997-98. Undoubtedly others similarly observed the feasi- average incremental costs, including cost of capital, plus a bility of such a cooperative endeavour. For a summary of reasonable markup to cover forward-looking joint and the rationale for ECTEL and its role, see World Bank (2002, common costs, fixed costs to be covered by fixed charges, pp. 83-84). and variable costs to be covered by variable charges. 6. The issue of international charging arrangements for Inter- 23. Depending on the type of networks and services to be net services (ICAIS) is today's successor to the old account- interconnected, the CRTC provides for line-side intercon- ing rate problems. Although ICAIS may be "new," it evokes nection, trunk-side interconnection, direct connection many old issues-for example, definitions (of public net- from toll to local networks, tandem access connections, works, the Internet), access, interconnection, costing, anti- local access, cable access, co-location, and so forth, not to competitive behavior in third markets, as well as the digital mention arrangements that companies may work out divide and special and differential treatment, some of purely on the basis of commercial negotiations. which will be discussed later in this writing. 24. See CRTC (1997a, para. 34). One result of these negotia- 7. Compare Intven (2000, p. 1-23). tions is that there is one POI for all of Toronto. Domestic Regulation and Trade In Telecommunications Services: Experience and Prospects under the GATS 105 25. Defined in the Reference Paper as "facilities of a public form of regulatory asymmetry during a transitional phase, telecommunications transport network or service that (a) which would allow them to develop and grow outside tra- are exclusively or predominantly provided by a single or ditional obligations. This approach may enable small and limited number of suppliers; and (b) cannot feasibly be medium-sized enterprises, offering new technologies and economically or technically substituted in order to provide services, to provide competition for traditional industry a service." operators and foster market-based results. If or when mar- 26. See CRTC (1997a, para. 84). The CRTC found that local ket failures arise, competition policy could be employed to loops situated in small urban and rural areas meet the crite- reduce bottlenecks or curb abusive practices, without the ria set out in its definition of an essential facility. Signifi- need for sector-specific regulation or definitions and classi- cantly, the Commission recognized that even within urban fications that may quickly become outdated." areas, local loops not meeting the definition of essential 32. Compare ITU (2001, para. 4.20), which cross-references facilities cannot be quickly provided in significant numbers ITU-T Recommendations G1 14 and G131. in the early stages of competition. The Commission there- 33. In the old voice-centric world where accounting rates were fore required that these loops be subject to mandatory the norm, developing countries were the net recipients of unbundling and costed as essential facilities for a five-year international settlement payments. In the emerging IP- term. based environment, they are increasingly net payers. This 27. Indeed, with respect to interconnection, the words "at any change of circumstance raises questions of equity. technically feasible point in the network" appear in both 34. Perhaps more important than more competition rules for the Reference Paper and Section 251 of the Act. the development of efficient markets for, and the increasing 28. The FCC's methodology for determining cost-oriented uptake of, electronic commerce would be clear rules on con- interconnection and access is still being challenged in the sumer protection, privacy, and liability for illegal materials. courts (compare Pelofsky 2001). 35. It may be necessary in the WTO context to address the 29. The matter could be challenged still further in the U.S. trade implications of the WIPO Copyright Treaty and the courts. In the absence of a foreign-controlled ILEC or WIPO Performances and Phonograms Treaty. There is CLEC in the United States, however, a WTO challenge on considerable uncertainty about which players in the com- the grounds that the FCC's requirements are more burden- munications chain bear liability in the digital online envi- some than necessary is not feasible. Similarly, in the ronment. This has a chilling effect on ISPs and telecommu- absence of a major foreign-controlled ISP, a WTO chal- nications carriers who have no control over the content lenge based on the denial of nondiscriminatory access to that they carry. It is not obvious that it would be desirable and use of cable networks is also not possible. from the point of view of the development of electronic 30. Some will feel that the Yankee Group's assessment of commerce to transpose these provisions into the TRIPS, let Canada is overly generous because new entrants in alone make them subject to WTO dispute settlement. Canada's local telecom markets are weak and the cable 36. Compare OECD (2001 a, p. 21). companies are generally dragging their feet on implement- 37. Subsidies to end users who would be free to choose their ing technologies that will permit third-party ISP access to own supplier(s) of telecom and Internet services would be their networks. But the point is that the CRTC's approach less likely to distort trade and investment flows than subsi- seems to work at least as well as that used by the FCC and dies to service suppliers. prescribed by the Reference Paper. 38. The financial services sector is, of course, covered by a 31. Compare ITU (2001) at paragraph 4.22: "Functional equiv- number of annexes, protocols, and other special docu- alence is a regulatory concept used by various countries to ments under the GATS. However, few would claim that link some or all of the above criteria in developing a policy these are models for other sectors. Indeed, some would like as to whether some forms of IP telephony should be treated to undo the principal accomplishment of past financial on the same basis as conventional switched telephony. The services negotiations-the "prudential carve-out." This premise for this approach is that similar or equivalent serv- allows governments great freedom to take measures for ices should be treated in a similar way. Other countries do prudential regulations, with little constraint by GATS dis- not share this premise, and thus have chosen not to apply ciplines; the great potential for abuse that the carve-out the same requirements to new services based on their view affords reduces predictability, security, and transparency. that this would hamper economic growth and the develop- The Financial Leaders Working Group (FLWG) has under- ment of innovative services." Compare paragraph 4.24: taken an initiative inspired by the Reference Paper and the "Technological neutrality is a principle that is invoked by process of the telecom negotiations. See, for example, some policy-makers and regulators when addressing IP Cooke (2001), in particular Annex 1, "Launch of Pro- telephony and other emerging communications technolo- Competitive Regulatory Principles for Insurance." The gies. This concept can be generally characterized as an FLWG has since completed its "model schedule" of com- effort to apply regulations in an even-handed manner to mitments in insurance services, and Cooke made a presen- like services, regardless of the technology used to provide tation to the FLWG's WTO seminar in Geneva on October these services. Unless other policy imperatives take prece- 11, 2001. dence, the purpose of this concept is to support competi- 39. Postal services are perhaps closest to telecoms in terms of tion policy by ensuring that one provider is not given more issues relating to cross-subsidization for purposes of uni- favorable regulatory treatment than another when provid- versal service and traditional international settlement ing equivalent services. There is, however, a range of inter- arrangements. It is more likely that these similarities are pretations of this concept and it has been implemented in testimony to a legacy of similar policy objectives, industrial different ways by various member States." And compare organizations, and regulations under common ministries paragraph 4.26: "A different view is that policy-makers and and administrations of posts, telecommunications and regulators should not be indifferent to technology. Emerg- telegraphs in much of the world than that similarities are ing technologies might benefit from a 'window,' that is, a inherent in the nature of the services. 106 Domestic Regulation and Service Trade Liberalization 40. Trade negotiators and services experts undertook such Competition Provisions of the Telecommunications Act of 1996. exercises at the OECD and in Geneva during the Uruguay September 15. Washington, D.C. Round in order to test whether the traditional trade princi- . 1999b. "FCC Promotes Local Telecommunications ples embodied in the GATT "worked" in the context of Competition." News Release. September 15. Washington, D.C. services, whether these could be translated into a general Feketekuty, Geza. 1998. "Setting the Agenda for the Next agreement on trade in services, and whether additional dis- Round of Negotiations on Trade in Services." . result was the GATS Annex on Telecommunications, Fink, Carsten, Aaditya Mattoo, and Randeep Rathindran. among other things. 2001. "Liberalizing Basic Telecommunications: The Asian Expe- rience." World Bank, Development Research Group Paper pre- pared for the conference, "Trade, Investment, and Competition References Policies in the Global Economy: The Case of the International Telecommunications Regime." Hamburg, Germany, January The word "processed" describes informally produced works 18-19. that may not be available commonly through libraries. Fredebeul-Krein, Markus, and Andreas Freytag. 1999. "The Bar, Fran,ois, Stephen Cohen, Peter Cowhey, Brad DeLong, Case for a More Binding WTO Agreement on Regulatory Princi- Michael Kleeman, and John Zysman. 2000. "Access and Innova- ples in Telecommunication Markets." Telecommunications Policy tion Policy for the Third-Generation Internet." Telecommunica- 23: 625-44. tions Policy 24: 489-518. Intven, Hank, ed. 2000. Telecommunications Regulatory BIAC (Business Industry Advisory Council to the OECD). Handbook. Washington, D.C.: World Bank. 2001. "Comments Received from BIAC Members on Competi- ITU (International Telecommunication Union). 2001. tion Issues in Telecommunications" BIAC in Response May 22. Report of the Secretary General on IP Telephony. World Telecom- Bigham, Fred. 1997. "Telecom Costing in Canada: The Story munications Policy Forum, Final Report. March 9. Geneva. and the Lessons." In William H. Melody, ed., Telecom Reform: Lee, Nae-Chan, and Han-Young Lie. 2000. "Korea's Telecom Principles, Policies and Regulatory Practices. Lyngby: Technical Services Reform through Trade Negotiations" Research Paper. University of Denmark. Seoul: Korea Information Society Development Institute. Bourreau, Marc, and Pinar Dogan. 2001. "Regulation and Lessig, Lawrence. 2001. "The Internet's Undoing." Financial Innovation in the Telecommunications Industry." Telecommuni- Times, November 29. cations Policy 25: 167-84. Melody, William H. 1997a. "Interconnection: Cornerstone of "BT Offers ADSL through Public-Private Partnership." 2001. Competition." In William H. Melody, ed., Telecom Reform: Prin- Total Telecom December 11. ciples, Policies and Regulatory Practices. Lyngby: Technical Uni- Call-Net Enterprises. 1997. Submission in the Matter of Pro- versity of Denmark. ceeding to Review and Consider Whether to Vary Teleglobe . 1997b. "Network Cost Analysis: Concepts and Canada Inc.-Resale and Sharing of International Private Line Methods." In William H. Melody, ed., Telecom Reform: Principles, Services. Telecom Decision CRTC 97-10, August 11. Policies and Regulatory Practices. Lyngby: Technical University of Cooke, John. 2001. "Developments in Services." Third Year- Denmark. book of the World Trade Law Association. London: World Trade North American Gateway. 1997. Reply in the matter of Tele- Law Association. globe Canada Inc.-Resale and Sharing of International Private Covad Canada Communications Inc. 2000. Part VII Applica- Lines. Telecom Public Notice CRTC 96-25, March 18. tion in the Matter of Bell Canada Tariff Notice No. 6475 as Mod- OECD (Organisation for Economic Co-operation and ified by Tariff Notice No. 6475A. May 5. Development). 2001a. "Interconnection and Local Competi- CRTC (Canadian Radio-television and Telecommunications tion." DSTI/ICCP/TISP(2000)3/final, February 7. Paris. Commission). 1997a. Local Competition. Telecom Decision 97-8, . 2001b. "Transparency in Domestic Regulation: May 1. Practices and Possibilities." TD/TC/WP(2001)31, August 13. . 1997b. Letter Decision [in the Matter of Teleglobe Paris. Canada Inc.-Resale and Sharing of International Private Line . 200 1c. "The Development of Broadband Access in Services. Telecom Decision CRTC 97-101, December 19. OECD Countries." DSTI/ICCP/TISP/2001)2/Final, October 29. . 2000. Digital Subscriber Line Service Providers' Paris. Access Approved for Unbundled Loops and Co-location. Order Pelofsky, Jeremy. 2001. "FCC, Bells Spar over Rates before 2000-983, October 27. Supreme Court." Total Telecom October 11. .2001a. Ledcor/Vancouver-Construction, Operation PwC (PricewaterhouseCoopers). 2000. Implementing the WTO and Maintenance of Transmission Lines in Vancouver. Decision Agreement on Basic Telecommunications in APEC Member 2001-23, January 5. Economies-Questionnaires Project. APEC TEL02/99T, February. European Court of Justice. 2001. Judgment in Case C- Washington, D.C. 146/00, Commission of the European Communities v. French Roseman, Daniel. 1996. "Licensing in the Context of Inter- Republic. December 6. national Telecommunications Liberalization." OECD/ICCP/ European Services Forum. 2001. "Domestic Regulation: Pre- TISP(96)4, August 12. liminary Discussion Paper." June 5. Brussels. . 2000. "CRTC Regulations Affecting the Supply of FCC (Federal Communications Commission). 1996. First Digital Subscriber Line Telecommunication Services by Resellers Report and Order on Implementation of the Local Competition and the General Agreement on Trade in Services-Analysis of Provisions in the Telecommunications Act of 1996, and Intercon- the Arguments Presented by Osler, Hoskin, & Harcourt on nection between Local Exchange Carriers and Commercial Mobile Behalf of Covad Canada Communications Inc." Memorandum. Radio Services Providers. August 8. Washington, D.C. June 5. . 1999a. Third Report and Order and Fourth Further . 2002. Economic Impact of Trade and Investment Lib- Notice of Proposed Rulemaking on Implementation of the Local eralization in the Telecommunications Sector: A Review of the Lit- Domestic Regulation and Trade in Telecommunications Services: Experience and Prospects under the GATS 107 erature for Selected Countries. Ottawa: Department of Foreign World Bank. 2002. Global Economic Prospects and the Devel- Affairs and International Trade. oping Countries. Washington, D.C. Sidak, J. Gregory. 1997. Foreign Investment in American WTO (World Trade Organization). 1999. "Principles of Telecommunications. Chicago: University of Chicago Press. Competitive Entry: Independent Telecommunications Regula- "Swiss Regulator Sees No Unbundling in Next Five Years." tion and Interconnection Principles." Communication by the 2001. Total Telecom November 27. United States of America, S/C/W/1 10/Add. 1, June 15. Geneva. Tuthill, Lee. 1996. "Users' Rights? The Multilateral Rights on Xavier, Patrick. 1998. "The Licensing of Telecommunication Access to Telecommunications." Telecommunications Policy Suppliers: Beyond the EU's Directive." Telecommunications Pol- 20(2): 89-99. icy 22(6): 483-92. United States Supreme Court. 1999. AT&T Corp. et al. v. Yankee Group. 2001 a. "What Are the Implications of Regu- Iowa Utilities Board et al., certiorari to the U.S. Court of Appeals lated Uniform Interconnection Pricing Arrangements for for the Eight Circuit (119 S.Ct. 721, decided January 25, 1999). Incumbents and New Entrants?" One to One Analysis, Global United States Trade Representative. 2002. "U.S. Requests Regulatory Strategies . WTO Panel to Rule on Mexican Telecom Restrictions." Press . 2001b. "The Race to Win the Last Mile: Local Loop Release 2002-19, February 13. Washington, D.C. Unbundling around the Globe." The Yankee Report 1(4/August). GATS REGULATORY DISCIPLINES MEET GLOBAL PUBLIC GOODS: THE CASE OF TRAN S PORTATION SERVICES Richard Janda Executive Summary tion system. And for such increasingly complex sys- The subject of multilateral disciplines on domestic tems to work, they must be buttressed by rigorous transportation regulation raises important questions safety standards and recommended practices regard- concerning the overall architecture of global gover- ing the manufacture and maintenance of means of nance. On the one hand, as this chapter documents, transport (airworthiness, seaworthiness); registra- there are examples of domestic transportation regu- tion of craft (aircraft and vessels); training and certi- lation that serve to place a disproportionate burden fication of crew; provision of emergency facilities on foreign service providers-thereby becoming (aerodrome and seaport); accident investigation and barriers to trade. On the other hand, countries do prevention; and transport of hazardous materials. pursue legitimate policy objectives designed to Indeed, one can reasonably assert that maintaining ensure the creation of and access to transportation open access to airspace and sea-lanes is a primary infrastructure and, notably, to maintain confidence global public good that rests on international coor- in and sustainability of that infrastructure through dination of domestic safety, security, and environ- safety, security, and environmental standards. Such mental regulation.2 Such international coordination domestic regulatory activity is marked by the supply for air and maritime transport has been left to the of public goods necessary to provide market ser- International Civil Aviation Organization (ICAO) vices. The lighthouse is a classic example of a public and to the International Maritime Organization good, an entity to which nonrivalrous and nonex- (IMO), respectively, with the United Nations Con- cludable access was an indispensable condition of ference on Trade and Development (UNCTAD) flourishing maritime trade.1 Yesterday's lighthouse is playing a complementary facilitation role. Regional today's satellite-based maritime or aviation naviga- intergovernmental organizations and a variety of I am grateful to Ruwantissa Abeyratne, Audrey Beguira, Adelle Blackett, Stuart Hyndman, Aisatou Jallow-Sey, Nicholas Kasirer, Pierre Larouche, Rod Macdonald, Armand de Mestral, John Weale, Joseph Wilson, and Robert Wolfe for their comments and assistance with this research and the review of this chapter. 109 110 Domestic Regulation and Service Trade Liberalization influential industry and nongovernmental organi- significant incorporation into the GATS. In coming zations round out the dramatis personae on the to a provisional affirmative condusion, I argue that world stage. Thus when the World Trade Organiza- regulatory disciplines would have merit independent tion (WTO) enters to take up a role in disciplining of substantive market access commitments and regulatory barriers, the audience is entitled to indeed that they can help create a context that is pro- expect that all of the actors, including the new- pitious to future market integration. comer, are performing in the same play. And the The second part of the chapter attempts to audience does not expect that, from the moment classify the kinds of regulatory measures that can the WTO appears, the remainder of the production give rise to market barriers in transportation. Two is to be a soliloquy. It will only be good theatre if distinctions are pertinent in considering the the actors develop the plot together. In considering implications of domestic regulation for trade: (1) how a horizontal framework of regulatory disci- private goods (market) failure vs. public goods plines might apply to air, maritime, and multi- regulation, and (2) under-enforcement barriers modal transport, this chapter seeks to develop vs. over-enforcement barriers. some hypotheses concerning possible mechanisms The third part of the chapter considers what for coordination among the WTO and other rele- sorts of cross-sectoral horizontal disciplines could vant actors, notably ICAO and IMO. apply to this set of regulatory issues, canvassing In considering how a horizontal framework of comparisons with existing regulatory disciplines. regulatory disciplines might apply to air, maritime, Whereas one could imagine a set of disciplines that and multimodal transport, this chapter outlines a would tilt analysis entirely toward market-opening number of hypotheses concerning possible mecha- outcomes, the objective must be to achieve disci- nisms for coordination among the WTO and other plines that also reinforce the provision of global relevant actors, notably ICAO and IMO. Institu- public goods. The main institutional implication of tional rivalries and turf battles must give way not this is the need to find ways to integrate ICAO and only to the search for complementarities, but also IMO into the quest for balanced regulatory disci- to the acknowledgment of limited institutional plines. This entails much more than the pro forma capacity on both sides. Whereas ICAO and IMO are agreement between the World Intellectual Property not well placed by themselves to advance the inte- Organisation (WIPO) and the WTO for technical gration of trade in services in their domains, so too cooperation respecting Trade-related Aspects of the WTO lacks the capacity and the legitimacy to Intellectual Property Rights (TRIPs),3 and more in develop regulatory standards, which are a necessary the nature of the agreements with the Codex Ali- part of the equation if meaningful annexes on mar- mentarius Commission, the International Office of itime and air transport services are ever to be devel- Epizootics, and the International Plant Protection oped. In short, the problem of regulatory disci- Commission under the auspices of the WTO plines presents in microcosm the question of how Agreement on the Application of Sanitary and Phy- today's loose network of international institutions tosanitary Measures (SPS Agreement). can be bound more tightly together so as to bolster legitimate and salutary governance regimes. The first part of the chapter sketches the limited Transportation and the GATS extent to which air and maritime transport have A striking feature of maritime and air transport been incorporated into the General Agreement on services is the limited extent to which both sectors Trade in Services (GATS). This discussion points out are subject to GATS rules and market opening com- that for transportation services there are no regula- mitments. This begs the question as to whether a tory disciplines that can reinforce substantial market rationale can nonetheless be found to apply GATS access commitments, as exist in the fields of telecom- regulatory principles in both sectors. munications and financial services. A preliminary question is therefore whether it makes sense to apply The Negotiations to Date Article VI.4 regulatory disciplines or disciplines analogous to those of the telecom Reference Paper In addressing the above question, the chapter's open- on Regulatory Principles to sectors that have eluded ing section briefly recalls the generally unhappy GATS Regulatory Disciplines Meet Global Public Goods: The Case of Transportation Services 11 negotiating history of GATS in maritime and air als that had been made prior to the 1996 suspension transport sectors. of negotiations.7 In a separate negotiating proposal, Korea highlighted the need to include maritime Maritime Transport Services Both transporta- multimodal transportation services and to address tion in general and maritime transport in particular (a) limitations on equity holdings by foreign com- have been underachievers in GATS negotiations. panies; (b) restrictions on the establishment of Whereas the Uruguay Round did attract maritime branch offices by foreign carriers; (c) the grant of transport commitments from 32 countries, the exclusive cargo carriage to vessels bearing national United States was not among them, and many of the flags; (d) restrictions on the use of shipping agents, commitments that were made-for example, by the discriminatory taxation measures, and port dues; European Union-excluded international shipping and (e) discrimination against foreign carriers in and port services and included only auxiliary ser- the use of port services.8 In its negotiating proposal, vices (e.g., storage and warehouse services other Colombia did not single out maritime multimodal than in ports; freight transport agency/freight for- services but has targeted liner conferences, suggest- warding services; preshipment inspection) and mis- ing that "the effective liberalization of [maritime] cellaneous other services (e.g., lease of vessels with service should result in the elimination of cartels crew).4 Given the limited results that were achieved that fix prices and frequencies."9 Australia issued the up to the conclusion of the GATS, an Annex on most ambitious negotiating proposal to date, sug- Negotiations on Maritime Transport Services was gesting not only that multimodal transport be included to provide a mandate for further negotia- added as a fourth pillar to maritime transport, aux- tions, like those bearing on financial services and iliary services, and port services, but also that a telecommunications, with a deadline of June 30, competition policy framework be elaborated for the 1996. Unlike the other sectoral negotiating groups maritime sector and incorporated as a special that received a post-1994 mandate, however, the annex.10 Australia included a list of trade restric- Negotiating Group on Maritime Transport Services tions subject to negotiation that is similar to Korea's came up empty-handed. The United States refused list but added (a) requirements for joint venture to make any formal offer until it saw significant arrangements and other legislative and regulatory offers from the other 33 participants in the negotia- restrictions on foreign presence in the maritime tions. Although 24 countries did submit a package transport industry; (b) preferential treatment of of draft offers, from the U.S. standpoint those offers shipping service providers from specific economies remained inadequate and generally failed to address on the basis of international agreements or for other commercial presence in the field of multimodal reasons; and (c) restrictions on carrying govern- transport.5 Ultimately the Negotiating Group ment cargo to vessels bearing national flags (other agreed to suspend the negotiations and resume than defence and other national security-related them with the next round of comprehensive ser- cargoes). Of particular relevance to this chapter, vices negotiations.6 Pending the conclusion of those Australia proposed the discussion of nontariff regu- negotiations, GATS Article II will not take effect latory measures and anticompetitive business prac- regarding international shipping, auxiliary services, tices, including "unreasonable environmental and and access to and use of port facilities. Negotiations safety standards, burdensome vessel and cargo will resume on the basis of existing or improved examination procedures, and lengthy and cumber- offers. Finally, a "peace clause" was agreed on, and some port access and clearance procedures," and pending the completion of future negotiations, it acknowledged the need to safeguard "legitimate provides that countries take no measures affecting safety, national security and environmental require- maritime trade that are designed to improve their ments pertaining to the industry." negotiating position, except in response to measures More recently, on March 3, 2003, a diverse group taken by other countries. of 38 members, including Australia, Canada, Chile, In the run-up to new negotiations, the European China, the EU, Japan, Mexico, and Nigeria, issued a Union (EU), Hong Kong (China), Japan, the Repub- Joint Statement on the Negotiations of Maritime lic of Korea, Norway, and Singapore issued a joint Transport Services, calling for "binding substantive statement stressing the need to build on the propos- liberalization of the maritime transport service 112 Domestic Regulation and Service Trade Liberalization sector" that was "consistent with sustainable devel- explicitly addressed the interplay between GATS opment, security and safety" (WTO Council for commitments on air transport services and existing Trade in Services 2003). regulatory measures (p. 3): Air Transport Services In the Uruguay Round, New Zealand recognizes that there are certain air transport services fared little better than mar- sensitivities in relation to the impact of itime services." Although an Annex on Air Trans- improved specific commitments on the regula- port Services was part of the GATS, its coverage tory frameworks contained in existing bilateral does not extend to traffic rights or to services and multilateral air services agreements, but related to the exercise of traffic rights-so-called believes that the GATS framework provides a "hard rights." The annex makes explicit reference flexible mechanism capable of accommodating only to aircraft repair and maintenance, the selling the regulatory challenges across the full range of and marketing of air transport services, and com- services sectors. After all, the GATS is not all- puter reservation services. Even given the modest encompassing. Many areas currently regulated scope of the annex, only 40 countries have made by governments or by intergovernmental agree- commitments under it.'2 ment (e.g., aviation safety and security) would At the time the Air Transport Annex was being not be affected. It should also be noted that negotiated, it was argued that most-favored-nation many other regulatory concerns traditionally (MFN) and national treatment disciplines were not addressed in existing bilateral and multilateral appropriate to the reciprocal relationships that air services agreements (e.g., remittance of earn- characterize the exchange of traffic rights, that the ings) find close parallels in existing GATS provi- system of bilateral air transport agreements dealt sions or other elements of the multilateral trad- appropriately with differential levels of develop- ing system (e.g., the GATT [General Agreement ments and varying policy objectives, and that ICAO on Tariffs and Trade]) and should not constitute was the body that ought to oversee trade liberaliza- obstacles to more meaningful specific commit- tion in this sector.'3 The broad annex carve-out nev- ments in the air transport services sector. ertheless is subject to review by the Council for Trade in Services, which to date has not arrived at ICAO members have for their part recently any concrete proposals for expanding the annex.'4 given consideration to expanding the scope of the In preparation for new services negotiations, GATS Air Transport Annex. Among the conclu- Colombia and New Zealand have formulated pro- sions to the Fifth Worldwide Air Transport Confer- posals that tend to reflect the cautious approach ence held at ICAO from March 24 to 29, 2003, was taken by countries during the Council for Trade in the following: Services review. Colombia took quite a conservative view, reiterating its faith in ICAO and the Chicago [A]pplying the basic GATS principle of most Convention framework and proposing that hard favoured nation (MFN) treatment to traffic rights rights continue to be excluded. It suggested that remains a complex and difficult issue. While there negotiations focus on expanding the set of ancillary is some support to extend the GATS Annex on Air services covered by the annex, in particular those Transport Services to include so-called "soft related to ground handling services, rental and leas- rights" as well as some aspects of "hard rights," ing services, catering services, and other supporting there is no global consensus on whether or how services, notably cleaning and disinfecting ser- this would be pursued. It is also inconclusive at vices." New Zealand took a somewhat more expan- this stage as to whether the GATS is an effective sive view and proposed including auxiliary services option for air transport liberalization.17 (including cargo handling and storage and ware- house services), as well as airport management ser- vices, air traffic control services, general aviation Relato mDisilnes services, domestic air services, and other supporting services for air transport.'6 What is important for Only the bravest of pundits would predict that com- the purposes of this article is that New Zealand mitments to market opening for transportation GATS Regulatory Disciplines Meet Global Public Goods: The Case of Transportation Services 113 services will be up for major expansion in this nego- ket access commitments. One can put this premise tiating round. Certainly the Organisation for Eco- into sharp relief by considering a traditional regu- nomic Co-operation and Development (OECD latory barrier in the transportation sector: the pro- 2001) has done its part to encourage a hard look at tection of domestic flag carriers. If, at one extreme, the creaky system of liner conferences, and the the prevailing regulatory environment purposely World Bank (2002, pp. 97-127) has weighed in on excluded foreign carriers to benefit domestic ones, the side of an ambitious market-opening negotiat- one could scarcely imagine meaningful regulatory ing agenda for air and maritime transport. One disciplines being developed under Article VI.4. It is might hold out residual hope for developments true that the Article VI obligation to minimize leading to a bandwagon effect in favour of a consid- trade-restrictive elements of domestic regulation is erably bolstered package of commitments. Although a general obligation, but if foreign carriers are sim- they have left an unfortunate degree of ambiguity ply excluded, Article VI could only require their concerning the ultimate negotiating competency of transparent exclusion! In the maritime sector, the European Commission, recently issued decisions although such flag-preferring barriers are of sharply of the European Court of Justice have made clear decreasing significance, they still play out partly that the traditional national ownership and control through unilateral cargo reservations in a number clauses included in bilateral air transport agree- of countries and partly through bilateral cargo- ments violate European law.'8 One has reason to sharing arrangements-for example, under the all- hope that this development might spark a sweeping but-obsolete UNCTAD Liner Conference Code of EU-US bilateral negotiation. An Open Skies or Conduct,'9 and often through restrictions on cabo- Trans-Atlantic Common Aviation Area agreement tage service (service between domestic ports by for- between the European Union and the United States eign carriers), as in the Jones Act of the United would have significant repercussions for aviation States.20 In air transport, the cabotage prohibition is services in the rest of the world and could become all but universal and foreign carriers can operate on the catalyst for a multilateral framework. However, if international routes only on the basis of bilateral air one takes the work of the Council for Trade in Ser- services agreements. Such agreements frequently vices and current formal negotiation proposals at restrict the number of foreign carriers that can be face value, the fairest expectation is for a much more designated, the destinations they can serve, and even modest outcome. the tariffs that can be charged or the capacity and Where might regulatory disciplines fit against frequencies of service, sometimes envisaging formal such a backdrop? Drawing inspiration from the pooling arrangements between the foreign and Telecom Reference Paper on Regulatory Principles, domestic carrier. So one must return to these ques- the World Bank (2002, p. 95) went so far as to sug- tions: because measures protecting flag carriers are gest that putting regulatory disciplines in place not subject to GATS trade disciplines, can one really within the skeletal regime of existing commitments envisage the application of liberalizing regulatory could become a driver for future liberalization of disciplines to transportation? Would that not transportation services: amount to the regulatory discipline tail wagging the dog of substantive market access commitments? Such disciplines could unleash a deeper This may be obvious: even in the absence of exchange of liberalization commitments, as WTO commitments, countries can create and have countries would be more confident that market created regulatory environments tending toward access concessions are not reversed by regulatory open trade and competition. The WTO Secre- barriers and that the gains from more liberal tariat's assessment of maritime transport services is policies are not captured by private parties. eloquent. Reviewing the results of its survey of domestic regulation, the Secretariat concluded, Before turning in the next section to the range "The overall picture resulting . . . is of a very liber- of regulatory barriers to which future regulatory alised sector as compared to many other services disciplines might appropriately apply, it is impor- sectors and in particular to other transport sec- tant to explore the premise that such disciplines tors. '2 This is particularly true of bulk traffic could apply even in the absence of significant mar- through tramp shipping, which responds to spot 114 Domestic Regulation and Service Trade Liberalization demand and accounts for some 68 percent of the tion. Through the heyday of U.S. deregulation in overall volume of traffic by tonnage. Even the 32 the late 1970s and the 1980s, it was commonly percent of traffic volume (but considerably higher believed that regulation existed to correct market proportion of traffic value) accounted for by con- failures.25 The argument for deregulation was usu- tainerized traffic through liner shipping, which ally based on a demonstration that putative market operates on scheduled services, has witnessed failures-natural monopoly, imperfect informa- declined influence of the price-fixing system of tion, externalities-either did not exist or in fact liner conferences. For example, although the 1998 could be addressed through market devices accom- U.S. Ocean Shipping Reform Act did not do away panied by antitrust law. Depending on the com- with the antitrust immunity afforded to liner con- mentator's (intellectual) proximity to (the Univer- ferences, it did abolish the "me-too" requirement sity of) Chicago, antitrust law was itself given a under which the same published contract terms deregulatory reading in all but the area of hard- had to be offered to all similarly situated shippers, core cartels because, almost tautologically, markets which tended to fix prices.22 The 1998 Act also were best placed to determine whether markets expanded the scope for nonconference shipping. were behaving as markets should (see Posner 1976). Whereas the liberalization picture for air trans- At the same time that the term "regulation" was port is somewhat less resplendent, the tendency is understood in North America to mean "illegitimate the same. In its recent analysis of the overall state of intervention in markets," in Europe the ambitious bilateral air transport agreements, the WTO Secre- regulatory enterprise of the European Commission tariat noted the spread of liberal "open skies" bilat- sought to build a single market in the place of a eral agreements as well as the conclusion of some patchwork of domestic impediments.26 From a market-opening plurilateral and regional agree- European perspective, the notion that regulation ments, with the concomitant decline in the use of could be designed to enable and to ensure the exis- International Air Transport Association (IATA) tar- tence of a market rather than to impede its natural iff conference price fixing, and concludes that the operation presented no conceptual difficulty. trend line is toward "a gradual narrowing of exist- At root, the difference between market inter- ing regulatory discrepancies."23 It can be added that vention and market-ensuring perspectives on reg- even countries such as India that heretofore have ulation derives from whether one focuses on using been adamant in their resistance to open skies poli- regulation to produce private or public goods. Pure cies are often in the midst of internal procompeti- private goods, exemplified by commodities in the tive regulatory reforms that are expected to pave market, are backed by regulatory regimes that the way for improved future market access for for- allow them to retain the following characteristics. eign carriers.24 They are: Thus even if regulatory disciplines were not part of a package of substantive commitments to reduce In private possession flag carrier preferences, they would nevertheless be Under absolute control implemented in a context that is increasingly pro- Obtained through rivalry pitious to those carriers. As a result, foreign trans- Enjoyed exclusively by the owners portation carriers are increasingly involved in Assessed by their exchange value domestic markets and thus can be significantly Alienable affected by domestic regulatory measures. The next Perishable through use. part of the chapter seeks to classify the kinds of reg- ulatory measures that can give rise to market barri- Pure public goods, exemplified by common ers in transportation. resources such as air, are backed by regulatory regimes that allow them to retain the following Classification of Regulatory characteristics. They are: Barriers to Trade in Transportation In collective possession In classifying regulatory barriers to trade, it is use- Openly accessible ful to sketch out a typology of rationales for regula- Obtained through cooperation CATS Regulatory Disciplines Meet Global Public Goods: The Case of Transportation Services 115 * Enjoyed in common established. That occurs when the following prob- * Assessed by the degree of confidence invested in lems occur in securing access to the good: them * Inalienable There are barriers to entry. * Imperishable through use.27 Control is captured. There is defection from cooperation in use of Given that common and private uses are inter- the good. dependent, no actual good is purely private or There is free riding on sustaining investments. purely public. Private goods entail ancillary public There is loss of confidence in quality of provision. goods that enable access to them and public goods There is under-capacity to provide the good. entail ancillary private goods that enable their indi- The good is depleted. vidual enjoyment. Thus a perfect market and the consumer welfare benefit it provides are a public The regulatory measures that typically are good that allows access to private goods. This designed to address these public goods failures are: reveals that the term "market failure" contains an ambiguity because it could refer to the failure of Removal of entry barriers supply of the public good, which is open access to Guarantees of agency independence the market, or to failure of supply of the private Standard setting goods to which market access is given. For that rea- Administration of taxes and user charges son it is helpful to distinguish between private and Certification and audit public goods failures. Universal service obligations Private goods failures arise when, were it not for Sustainable scarce resource allocation. regulatory intervention, the characteristics neces- sary for enjoying the goods could not be properly The foregoing classification is summarized in established. This occurs when the following prob- table 7.1. lems become generalized in a market: Each kind of regulatory measure designed to address private or public goods failures, whether * Title is contested. appropriately framed or implemented on the basis * Capacity to control is lost. of a misdiagnosis or mismatch of instruments, can * Rivalry gives way to dominant position. also give rise to discriminatory and disproportion- * Use creates spillovers. ate burdens for trading partners. Differential or * Information to assess value is asymmetrically arbitrary regulatory enforcement-often an index available. of regulatory capture-is in a sense contrary to the * Persistent excess capacity prevents alienability. idea of regulation itself, which in the words of * Sunk cost investments cannot be consumed. GATS Article VI must be "reasonable, objective and impartial." The trade issue to which this gives The regulatory measures that typically are rise is the failure of a member to maintain a com- designed to address these private goods failures are: petent and independent regulatory framework. It can be seen as a matter of institutional organiza- * Title registration tion and process rather than of substantive regula- * Licensing tory policy.28 In addition, substantive regulatory * Prevention of abuse of dominance policy can give rise to trade issues in circumstances * Internalization of spillovers of systematic over-enforcement or under-enforce- * Disclosure rules ment of measures. For our purposes here, what is * Capacity controls meant by "over-enforcement" is the systematic * Price allocation of sunk costs. governmental restriction of private choices that are consistent with the goals of the regulatory pol- Public goods failures arise when, in the absence icy. Over-enforcement can arise as a trade issue of regulatory intervention, the characteristics nec- when it is in fact pursued as a disguised trade essary for enjoying the goods cannot be properly restriction in favour of domestic service providers 116 Domestic Regulation and Service Trade Liberalization TABLE 7.1 Private vs. Public Goods Private Goods Public Goods Characteristic Failure j Regulation Characteristic Failure j Regulation Private Contested Title Collective Entry Removal possession title registration possession barnier of barriers Control Loss of Licensing Open access Capture Agency control independence Rivalry Dominant Competition Cooperation Defection Standard position safeguards setting Exdusive Spillovers Internalization Collective Free riding Taxes and enjoyment of spillovers enjoyment user charges Exchange Asymmetrical Disclosure Trust value Loss of Certification value information confidence and audit Alienability Excess Capacity Inalienability Under- Universal capacity controls capacity service Perishability Sunk costs Recovery of Imperishability Depletion Sustainable sunk costs allocation who can meet the unnecessarily high standard at The characteristic public goods failure addressed lower cost than can foreign competitors. What is by the WTO scheme is the removal of entry barriers meant by "under-enforcement" is the systematic to the market. Regulatory measures addressing absence of governmental restriction of private other private and public goods failures can consti- choices that are inconsistent with the goals of the tute barriers to entry and thus present inherent regulatory policy. Under-enforcement can arise as tradeoffs against the trade regime. When one a trade issue when a strategy of relaxed regulatory applies this rubric to maritime and air transport, oversight produces social dumping in third coun- one generates the specific regulatory burdens tries.29 Although one can imagine examples of described in tables 7.3 and 7.4. These tables are over- and under-enforcement for each kind of reg- included here to help identify the issues that may ulatory measure, table 7.2 summarizes the typical prompt the need for regulatory disciplines, and potential regulatory burden of relevance for trade they form the background to the assessment pre- disciplines.30 sented in the next section. TABLE 7.2 Typical Trade-Distorting Burdens Imposed on Domestic Regulatory Measures Private Goods Failure Public Goods Failure Regulatory measure j Potential burden Regulatory measure Potential burden Title registration Under-enforcement Removal of entry barriers Under-enforcement Licensing Over-enforcement Guarantees of agency Under-enforcement Independence Competition safeguards Under-enforcement Standard setting Over- and under- enforcement Internalization of Over- and under- Administration of taxes Over-enforcement spillovers enforcement and user charges Disclosure rules Over- and under- Certification and audit Over- and under- enforcement enforcement Capacity controls Over-enforcement Universal service Over-enforcement obligations Recovery of sunk costs Over-enforcement Sustainable allocation Over-enforcement GATS Regulatory Disciplines Meet Global Public Goods: The Case of Transportation Services 117 TABLE 7.3 Trade-Distorting Burdens in Maritime Transport Private Goods Failure Public Goods Failure Regulatory measure .0 . Regulatory measure * . - Title registration Flags of convenience Removal of entry barriers Flag-based preference; access to port facilities; access to land leg Ucensing Freight agency and Guarantees of agency Arbitrary agency terminal operator independence action licenses Prevention of abuse Uner conference Standard-setting Safety, security, of dominance antitrust immunity; hazardous material Port monopolies and environmental standards; port labor standards Intemalization of Polluter pays Administration of taxes Tonnage tax; service spillovers and user charges tariffs; customs liability claims Disclosure rules Documentation Certification and audit Seafarer certification; requirements; vessel inspection Confidentiality of contract terms Capacity controls Restrictions on branch Universal service offices; Transhipment obligations prohibitions Allocation of sunk - Sustainable scarce costs resource allocation Note: - denotes not applicable Source: Assembled from Secretariat Background Note on Maritime Services, http://www.wto.org/english/ tratop_e/serv_e/transport_e/transport_maritime_urneg-e.htm, and World Bank (2002). Balancing Private Market deteriorate into a fight over who gets to determine Access against the Provision which default regime will be used to judge the of Public Goods other. If the trade regime wins out, all regulation wilbe judged acrigt hte ttnst We turn now to a consideration of the types of will according to whether it tends to cross-sectoral horizontal disciplines that could be restrict market access. If another public goods made to apply in the transportation sector in the regime wins out-perhaps the transportation light of the regulatory challenges identified in the safety regime-then all regulation will be judged previous section of this chapter. according to whether it tends to diminish the safety of service. At one extreme any safety requirement can be understood to diminish market access because it deprives consumers of choice about the Pierre Sauve and Arvind Subramanian (2001) cor- level of safety they wish to purchase given their rectly have warned that finding the right trade-off own risk aversion. At the other extreme, any pro- between protecting legitimate public policy objec- competitive access rule can be understood to tives and restricting measures that are unduly bur- diminish safety because it tends to place service densome for trading partners is "fiendishly diffi- providers in a context where their investments in cult." This is basically because the goods that safety will be limited by market-driven returns.31 various regulatory measures seek to promote, con- It is fortunate that the goods that regulatory poli- sidered in isolation, appear to be incommensu- cies seek to enable are not elaborated in isolation rable. If the task is somehow to measure, for exam- from each other and are best understood as mutu- ple, the advantages of greater cabin safety against ally dependent and complementary rather than as the advantages of increased trade in aviation ser- obliging tragic choices. For example, aviation safety vices, we are involved in a "mug's game" that can regulation cannot be elaborated in isolation from 118 Domestic Regulation and Service Trade Liberalization TABLE 7.4 Trade-Distorting Burdens in Air Transport Private Goods Failure Public Goods Failure Potential burden Regulatory measure J Potential burden -; 4g; * tRaton ottased Removal of entry Flag-based preference akcrt barriers :tactiqnai owneiship Access to airport and u,les ground handling ' ''''i '- "f>'" . B facilities Access to land leg Freedoms of the air, induding cabotage : tnk ' . . ' Guarantees of agency Arbitrary agency .: ;w.rt&- .i o v ~ -pendece . - action Chartqdk*Wslng ot6it~aioat vs. PrevenUcl f -bus Alliane antitust Standard setting Safety, security, noise, iF*o -a-ce Immunity hazardous material, c od and environmental standards § ,,.*.iS.. g I ss, 7- ,IS{S; AJ$u t ~f,kM~4 d ;Cabin crew flight iv ' * f ~~ h a * We vf f; ?,; i v t ; > s rules ,.-ap te*. . 7Admininstration of taxes . Airport charges * Moltti cha.ges and user dcarges Air navigation charges i § . - . Ct6tifkcation and audit ICAO safety/security ! RO,.ij C0.1 )1tes ifim . ,r,?,Extrate niitorfat *t *0t= yt e , ,)ce domestic audits Caro tarf'.' ' .;,S .' 'iff disclosure Airman certification 'd4ffng &rra*g ; # ngemenwts Uriersal service Remote service *hnp' -of auge obligations obligations d'ia ,e r carriae of cargo ttctlbns A c i cd narif ;T* Sustainable scarce Slot allocation resource allocation Source: Assembled from "Air Transport Services," Background Note by the Secretariat for the Council for Trade in Services, S/C/W/59, November 5, 1998, together with subsequent Secretariat Notes titled "Developments in the Air Transport Sector Since the Conclusion of the Uruguay Round" S/C/W/1 63 and Addenda 1 to 6; and World Bank (2002). the effort to establish an aviation market. Standards ronment in which trade is conducted is more than and policies adopted are premised on an evaluation just the toleration of a necessary evil. For example, of risk reflecting the movement of passengers on the Reference Paper positively mandates the cre- commercial terms.32 Regarding market access, the ation of an independent domestic body at mini- acknowledgment in the GATS preamble that chang- mum to settle interconnection disputes. This is not ing domestic regulatory policies are part of the envi- to say that complementary and interdependent GATS Regulatory Disciplines Meet Global Public Goods: The Case of Transportation Services 119 trade and other regulatory policies obviate the need number of the regulatory measures giving rise to for difficult tradeoffs. It is simply to say that the trade-distorting burdens relate to policy frame- search for such tradeoffs is inherent in each of the works that give preferential treatment for domestic regimes before one seeks to align them through for- flag carriers. It has been concluded (incorrectly, in mal regulatory disciplines. my view) that such measures can be subject to disci- Indeed, there is an important sense in which plines only through scheduled commitments under other regulatory policies can be strengthened Articles XVI and X\VII, not under Article VI.35 This through the GATS, especially if dispute settlement conclusion was drawn by the Working Party on Pro- leads to the kind of nuanced treatment both of fessional Services (WPPS), apparently with the sup- domestic regulation and of the framework of inter- port of the Secretariat, and is the operating premise national law outside the WTO (Appellate Body for the Working Party on Domestic Regulation. The Report 1998) that was displayed by the Appellate reasoning behind this conclusion was explained by Body in United States-Shrimp33 In particular, both the Secretariat as follows (see WTO Working Party ICAO standards and IMO standards-which are on Professional Services 1996, p. 3): addressed by the terms of Articles VI.5 and VII.5 for the purposes of mutual recognition of authori- In the discussions it was noted that there was a zation, certification, and licensing-could flesh out fundamental legal distinction in the GATS GATS principles and be given greater influence in between those provisions: while Articles XVI domestic standard setting. As the WTO Secretariat and XVII belonged to Part III of the Agreement noted with respect to ICAO standards on airport on Specific Commitments, Article VI belonged charges, in a conclusion that could apply equally to to Part II on General Obligations and Disci- other ICAO and IMO standards:34 plines. As a consequence the elimination of restrictions on market access and national treat- In total, it appears clearly that the airport charg- ment is subject to the negotiation of specific ing system is based on principles in essence simi- commitments, whereas the obligation to min- lar to those of GATS, although much more imise the trade-restrictive elements of domestic sophisticated and detailed. In spite of this degree regulation is a general obligation which would of detail and of its ability to take into account, be subject to the disciplines to be developed through periodical redrafting, the new economic under Article VI:4. The legal status of these and regulatory developments, the system seems measures also naturally differs. Measures to lack the necessary enforcement and dispute restricting market access and national treatment settlement mechanisms to produce its full effects. are prohibited, unless scheduled, in sectors In that respect it is in a situation similar to the where specific commitments have been under- WIPO intellectual property conventions before taken, whereas they can be maintained in sectors the creation of the TRIPS Agreement or of inter- which are not committed. The right to maintain connection rules in telecommunication before domestic regulatory measures is however specif- the creation of the reference paper. ically recognized and will be subject to the disci- plines to be developed under Article VI:4 with If regulatory disciplines are structured not simply the aim of minimizing their negative impact on to provide a way to strike down domestic measures trade. These measures cannot be entered as lim- but also to reinforce global standards, the appropri- itations in a Member's schedule. The WPPS ate balance will have been struck and the fiendish came to the conclusion that, in order to ensure difficulty fended off. How might this be done? legal certainty and the conformity of the disci- plines with the structure of the GATS, there should not be any overlap between Articles XVI and XVII on the one hand and Article VI on the Addressing the form and content of possible trans- other hand. portation regulatory disciplines requires attention to a preliminary matter of interpretation as to the Nevertheless, the notion that the measures cov- scope of what can be devised under Article VI.4. A ered by Article VI.4 are in a watertight compartment 120 Domestic Regulation and Service Trade Liberalization separate from Articles XVI and XVII has proved including those regarding qualifications, standards, difficult to maintain. Indeed the Secretariat or licensing matters. This means that the Reference explained to the members of the Working Party on Paper can be explained by the combination of all Domestic Regulation that it had difficulty prepar- three Articles: XVI, XVII, and XVIII. However, Arti- ing a paper listing examples of regulatory mea- cle VIII also demonstrates that the legal architec- sures covered under Article VI.4, in part because ture of the GATS does not place disciplines regard- "the dividing line between measures covered under ing trade-restrictive domestic regulatory measures Article VI:4 and those covered under Articles XVI only under the roof of Part II. The real issue is and XVII was not always easy to draw."36 It is not whether members wish to elaborate a Part III easy to draw this dividing line because, although "patchwork" framework of disciplines applicable the analyses conducted under the two sets of pro- only through specific commitments or a Part II visions are different in kind, the separate analyses general framework of disciplines applicable to all actually can apply to the same regulatory mea- members. Because the text of the GATS is at best sures. One can ask, for example, whether licensing ambiguous, it seems sensible to leave to members standards are consistent with national treatment the choice of framework best suited to any particu- and market access, and ask separately whether they lar problem. In any event, whatever the members are administered reasonably, objectively, transpar- agree to under Article VI.4 will have to be inter- ently, and so as to create only those trade burdens preted as a coherent part of the GATS, and will cer- that are necessary. The latter questions can be tainly not be viewed as creating market access or asked even if no market access or national treat- national treatment commitments through the back ment commitments have been made. On the other door. hand, sometimes the failure to apply licensing In light of the foregoing discussion, I offer the standards objectively or transparently can itself conclusion that Article VI.4 could be used to craft have implications for market access or national regulatory disciplines for transportation covering treatment. Indeed, it is striking that the telecom the full range of regulatory measures that may be Reference Paper, which is incorporated into com- more burdensome on trade than necessary. mitments under Articles XVI and XVII, creates a Whether such disciplines are desirable or whether number of regulatory disciplines that clearly they are feasible are entirely separate questions. would fall under Article VI.4. These disciplines Most recently, the members of the Working Party include (a) transparent and reasonable technical on Domestic Regulation have agreed to ask them- standards governing interconnection; (b) trans- selves the following questions when considering if a parent universal services obligations (often license regulatory measure ought to come within the ambit conditions) that are not more burdensome than of Article VI.4: necessary; and (c) publicly available licensing cri- teria and terms and conditions of license. One (a) Is the measure already covered by Articles XVI could argue that all of the remaining Reference and/or XVII? Paper disciplines also fall under the terms of Arti- (b) If not, is it addressed by any other provisions of cle VI.4 both because they all "relate" to qualifica- the Agreement (e.g., Articles II, III, VIII, IX)? tion requirements and procedures, technical stan- (c) If not, does it fall clearly within the scope of dards, and licensing requirements and procedures, Article VI, in particular VI.4 (licensing require- and because the list of disciplines that could apply ments, qualification requirements, technical to such measures under Article VI.4 is not exhaus- standards, licensing procedures, and qualifica- tive.37 Thus if regulatory disciplines under Articles tion procedures)? XVI and XVII need not respect the watertight (d) If so, is the measure adequately addressed by compartment of Article VI.4, why is Article VI.4 the relevant provisions of the Accountancy disabled in the other direction? Disciplines, or are modifications required? It is also important to note that Article XVIII allows the negotiation of commitments with This methodology will indeed tend to keep Arti- respect to measures affecting trade in services not cle VI.4 as a residual provision (WTO Working subject to scheduling under Articles XVI or XVII, Party on Domestic Regulation 2003, p. 2). GATS Regulatory Disciplines Meet Global Public Goods: The Case of Transportation Services 121 The next section of this chapter addresses the services. Of the topics it addresses-competitive questions of what disciplines to include, and both safeguards, interconnection, universal service, pub- whether and to what degree those disciplines lic availability of licensing criteria, independent reg- should be part of a horizontal or sector-specific set ulators, and allocation of scarce resources-all of disciplines. Although a reality check may suggest except the second have obvious relevance. Although that none of what is discussed below is feasible in the interconnection problem does seem specific the short term, the purpose of the discussion is to to telecommunications, one can interpret the issue contribute to a principled assessment of what sorts to be one of access to essential facilities. Such an of disciplines ought to be elaborated. interpretation would allow the concepts in the Reference Paper to be applied horizontally rather than in a sector-specific way. The parallel problem for transportation is nondiscriminatory access to Four sets of existing disciplines offer enlightening port and airport facilities based on cost-oriented comparisons for the disciplines that might apply to charges. Because the Reference Paper does not transportation regulation: the Reference Paper on prescribe a regulatory code but rather ensures Regulatory Principles, the Disciplines on Domestic the transparent, nondiscriminatory, competitively Regulation in the Accountancy Sector, the Techni- neutral, and proportionate application of domestic cal Barriers to Trade (TBT) Agreement, and the regulation, it could all but apply equally to parallel Sanitary and Phytosanitary (SPS) Agreement.38 domestic transportation issues. Obvious missing elements are the health, safety, security, and envi- The Reference Paper on Regulatory Principles ronmental dimensions of regulation, which are far Could the form and content of the telecom Refer- less prominent in telecommunications than in ence Paper be a model for transportation disci- transportation and are unlikely to arise as trade plines?39 As to form, the Reference Paper may be less barriers in that field.42 Furthermore, the necessity than ideal for transportation services for reasons test in the Reference Paper falls short of what that were just discussed. If the mechanism adopted would be needed for a horizontal discipline for implementing regulatory disciplines pursues the because it is formulated to apply only to a subset of GATS Part III model of inscription through sepa- the measures covered in the Reference Paper, that rate country commitments, the disciplines would is, universal service as defined by the member. Tak- be linked to the success of negotiations on adding to ing the Reference Paper as a whole, however, one the substantive content of transportation annexes can conclude that it provides a core of concepts (which have not been promising). Furthermore, around which more ample horizontal regulatory even if such an approach could bear fruit, countries disciplines could be built. would be free to modify the terms of the disci- plines, as a number of countries, including India, Disciplines on Domestic Regulations in the did in their telecom Reference Paper commit- Accountancy Sector Although the Accountancy ments.40 This may seem to maximize flexibility in Disciplines, formulated under Article VI.4, are sec- line with the overall GATS acknowledgment of the toral rather than horizontal, they contain a number need for regulatory diversity, but it also detracts of elements that could be horizontal and of rele- from the effort to build stable and reliable disci- vance to transportation.43 The General Provisions plines within which regulatory diversity can flour- contain a necessity test that could be rendered hori- ish. In short, disciplines are ideally worked out zontal: "Members shall ensure that such measures through Article VI.4 and applied equally to all. The are not more trade-restrictive than necessary to ful- Reference Paper's departure from this logic can be fil a legitimate objective." The legitimate objectives, forgiven because it did, after all, represent the first on the other hand, would seem to be best defined effort to devise the GATS regulatory disciplines and sectorally. The legitimate objectives listed for the was drafted before any disciplines had been worked Accountancy Sector-protection of the public and on under Article VI.4.4' consumers generally, quality of service, professional As to content, on the other hand, the Reference competence, and professional integrity-could Paper is remarkably adaptable to transportation apply to other professions but are not a perfect fit 122 Domestic Regulation and Service Trade Liberalization for transportation. One could add the following 4.11 of the SPS Agreement. With regard to trans- objectives, consistent with Articles XIV and XIVbis portation, it would be useful for equivalency to and thereby produce a more complete list appropri- extend not only to qualification requirements but ate to transportation: public safety; public security; also to licensing and to technical standards so as to public health; and air, water, land, and noise pollu- formalize mutual recognition. tion abatement. One could add fair distribution and Finally, the provisions governing qualification preservation of scarce resources; competition safe- procedures and technical standards are formulated guards; and universal service to the complement of very generally and could be applied horizontally. objectives, but those objectives might better be One would expect to find greater specificity in dis- addressed through separate disciplines. ciplines governing technical standards for trans- The transparency provisions add the useful gen- portation. In particular, as is discussed below, the eral principle that competent authorities subject to roles of ICAO and IMO ideally should be specified the obligation can include nongovernmental agen- in a way that resembles the framework governing cies. In the case of transportation this could include intergovernmental organizations under the SPS the IATA, which still has a residual tariff-setting func- Agreement. The Accountancy Disciplines simply tion recognized in some bilateral air transport agree- reiterate the Article VI.5(b) requirement "that ments. In the Accountancy Disciplines, transparency account shall be taken of internationally recognized obligations are specifically enumerated to apply to standards of relevant international organizations." activities and professional titles regulated by the pro- The relevant organizations are not even listed. fession and to the list of individuals and firms enti- Taken as a whole, the Accountancy Disciplines tled to practice. The transportation parallel would be demonstrate that horizontal disciplines could to the categories and licensing arrangements govern- coexist with a sectoral elaboration of them. That ing pilots; captains; instructors; traffic controllers; would streamline the horizontal disciplines and crew; specialized ground, security, and dock person- avoid the difficulty of choosing from a broad menu nel; and working conditions (e.g., flight time rules). those disciplines relevant to individual sectors. But The licensing procedures provision of the any sector-specific approach depends on the con- Accountancy Disciplines contains only general tinued stability of the sectoral definitions. In that principles that elaborate on Article VI and could be regard it is interesting to note that the Accountancy applied horizontally. The licensing requirements Disciplines are silent about multidisciplinary prac- discipline builds on the general transparency and tice and intra-firm conflicts of interest, stating objectivity criteria but specifies their application to merely that the "disciplines are to be applicable to requirements governing firm name, residency Members who have entered specific commitments requirements, and requirements for membership in in accountancy in their schedules."45 a professional organization as well as to indemnity insurance and regulatory fees. Insurance require- The TBT and SPS Agreements In contrast to the ments and fees or charges are measures that exist in Reference Paper and to the Accountancy Disci- the transportation sector. Additional transporta- plines, the TBT Agreement and the SPS Agreement tion licensing requirements pertain to citizenship, build on what was already a relatively mature financial capacity, and air- or seaworthiness. GATT framework. They are two complementary The accountancy qualification requirements are agreements that incorporate each other by refer- tailored to specifics of the accounting profession ence and are far more elaborate than their GATS and would have to be adapted to transportation, cousins. More than the Reference Paper and the particularly with regard to permitted requirements Accounting Disciplines, they are the models for that are formulated as an exhaustive list. For exam- what the GATS horizontal regulatory disciplines ple, medical requirements, applicable to pilots, are should resemble. not included; nor are specialized training require- The TBT Agreement can be understood as the ments, such as those applicable to specific classes of horizontal disciplines for the GATT; the SPS Agree- craft.44 The Accountancy Disciplines contain the ment is the "sectoral" supplement that applies to concept of equivalence, which also finds its way regulatory measures necessary to protect human, into Article 2.7 of the TBT Agreement and Article animal, or plant life and health. For present pur- GATS Regulatory Disciplines Meet Global Public Goods: The Case of Transportation Services 123 poses only the following subset of relevant features the request of either party to the dispute or on its of these agreements require specific mention: own initiative." The relationship between the GATT and the CAC, IOE, and IPPC is the kind of relation- * The necessity tests elaborated under both agree- ship that should be created with ICAO and IMO ments explicitly address risk assessment accord- regarding regulatory measures in fields where ICAO ing to scientific and technical (engineering) and IMO have developed standards.47 criteria. * Emergency safeguard provisions save inconsis- C cIon tent measures. * Legitimate objectives are formulated through a A robust ICAO-IMO-WTO linkage mechanism, nonexhaustive list. patterned on the SPS Agreement, should be built * There is a presumption in favour of the validity into a schedule of specific transportation disci- of measures that are in accord with international plines that would complement new horizontal Arti- standards. Although it has been argued that this cle VI.4 disciplines. ICAO, with 187 members, and might not always be appropriate in the case of IMO, with 161 members, are mature and broadly services, it bears emphasizing that the presump- representative intergovernmental institutions with tion can be rebutted when justified.46 sophisticated procedures in place to review and Transparency guarantees include notice and revise their standards. If the WTO can buttress its comment requirements. standard-setting function through access to bind- * Both the SPS and the TBT Agreements give rise ing dispute settlement, ICAO and IMO can help to their own institutional monitoring frame- buttress the legitimacy of the WTO by orienting the work within the WTO. trade framework toward enabling and ensuring global public goods of safety, security, and environ- Each of the foregoing features could be incorpo- mental protection in the field of transportation. rated into a horizontal set of regulatory disciplines ICAO has developed an elaborate series of Stan- for services. dards and Recommended Practices in the fields of The most remarkable and impressive feature of personnel licensing, rules of the air, aeronautical the SPS Agreement is the way in which it manages meteorology, aeronautical charts, units of measure- relationships with the WTO's sister intergovern- ment, operation of aircraft, nationality and regis- mental organizations active in the field of sanitary tration marks, airworthiness, aeronautical telecom- and phytosanitary standards. Not only does Article munications, air traffic services, search and rescue, 12 encourage the use of international standards; it aircraft accident investigation, aerodromes, aero- also establishes a framework for seeking the advice nautical information services, aircraft noise and of the Codex Alimentarius Commission (CAC), the engine emissions, security and the safe transport of International Office of Epizootics (IOE), and the dangerous goods. Beyond the Chicago Convention, international and regional organizations operating ICAO administers a series of conventions including within the framework of the International Plant five instruments dealing with aviation security. Protection Convention (IPPC). Article 3 announces Since 1996 ICAO has implemented a system of the objective of achieving harmonization of inter- safety audits of its members. It now initiates those national standards and provides that "Members audits of its own, seeking the agreement of mem- shall play a full part, within the limits of their bers, and in February 2002 staged a conference that resources, in the [CAC, IOE, and IPPC]." The SPS led to a new mandate to develop a security audit Agreement oversight committee, the Committee on function as well. The organization's capacity to Sanitary and Phytosanitary Measures, has observer reinforce confidence in global aviation markets was members from the CAC, IOE, and IPPC and has the tested recently when Lloyd's of London re-insurers mandate to monitor harmonization and to coordi- cancelled war risk insurance after the September 11 nate with sister agencies. In cases that go to dispute terrorist attacks in the United States. ICAO has settlement, "a panel may, when it deems it appropri- been leading an initiative to establish new global ate, establish an advisory technical experts group, or self-insurance pooling arrangements for the consult the relevant international organizations, at world's carriers and has intervened with member 124 Domestic Regulation and Service Trade Liberalization states to ensure that governments temporarily pro- foreign carriers so as to improve market access of its vide backstop insurance coverage. citizens to the United States. Ultimately the U.S. IMO oversees a series of conventions, Memo- Federal Aviation Administration (FAA) conducted randa of Understanding (MOUs), and standards that its own audit of Banjul airport and concluded that address the safe operation of ships, safety of life at more stringent standards than those of ICAO would sea, safety of navigation, safety management, tanker have to be met if The Gambia wanted Open Skies. safety, carriage of hazardous materials, pollution Assisted by the FAA, The Gambia soon succeeded in from ships, marine pollution, oil pollution prepared- complying with U.S. standards. ness, maritime security, training and certification of How would one assess whether the United States seafarers, ship number identification, port control met a necessity test in imposing its regulatory stan- and facilitation, piracy and armed robbery, stow- dards on The Gambia in exchange for market aways, and illegal migrants. The 1995 amendments to access? If a DSU panel were simply to ask whether IMO-sponsored International Convention on Stan- the United States unilaterally imposed standards dards of Training, Certification and Watchkeeping more stringent than international standards, the for Seafarers entrusted IMO with powers to audit its United States would lose. But if the panel could members in their performance of those convention analyse whether the higher U.S. safety and security obligations. IMO has Facilitation, Maritime Safety, standards were (a) rationally connected to the goals and Marine Environment Committees that coordi- that underlie international standards, (b) not in nate its standard-setting and oversight activities. violation of positive international obligations, and These brief accounts serve to show that ICAO (c) implemented in a manner proportionate to a and IMO are playing critical roles as trustees for legitimate domestic objective, the United States global public goods in transportation markets. A might win. The latter analysis, however, would necessity test for transportation services could draw draw precisely on the expertise and oversight of on their standards to help assess whether domestic ICAO. That organization should serve as the measures fulfil legitimate objectives and are not WTO's advocate general in such matters. It should more trade restrictive than necessary. Such a test not be assumed that ICAO views its own standards should be accompanied by an obligation for WTO as creating ceilings on domestic regulatory mea- members to participate fully in implementing ICAO sures. In the example of The Gambia, ICAO fully and IMO standards. The two organizations could be understood that it was helping to bring that coun- asked to provide advice to Dispute Settlement try up to par in preparing for FAA review. ICAO Understanding (DSU) panels as they interpret and the FAA have a pattern of close cooperation transportation disciplines. Such an advisory activity and, in fact, ICAO has audited the FAA! would help ensure that panels consider safety, secu- rity, and environmental goals to be global public Afterword goods with their own inherent value and not simply consider their value to be ancillary to trade. In 2001 Joel Trachtman agonized about what he An example may serve to drive this final point takes to be a looming legitimacy crisis for the WTO home. The Gambia recently has concluded an Open (see Porter and others [2001], p. 357): Skies bilateral air transport agreement with the United States.48 As part of the negotiations, the [W]e have a conundrum: we cannot strengthen United States insisted that The Gambia's carrier and the WTO's legislative capacity without greater the airport at Banjul meet U.S. safety and security legitimacy, but the WTO's legitimacy is chal- standards. The Gambia sought an ICAO audit and lenged by its reliance on dispute resolution assistance in meeting ICAO standards. Partly on the to respond to most of the important issues it strength of ICAO advice, its government sought to faces.... This conundrum has no easy solution: sever the carrier assessment from the airport assess- until the social reality of benefits from WTO ment, having concluded that it could more quickly activities justifies an assignment of greater leg- meet airport standards. In short, The Gambia was islative capacity, we should not enhance its leg- prepared to negotiate access to its airport solely for islative capacity. GATS Regulatory Disciplines Meet Global Public Goods: The Case of Transportation Services 125 The problem of regulatory disciplines is situated 3. Meet the needs of the present generation without jeop- at the heart of this conundrum. In assessing ardizing those of future generations. domestic policies through dispute resolution, the Noting that few pure global public goods would meet these WTO lacks a deliberative norm-making function criteria, the authors suggested a definition of impure global public good: whereas, "[a] pure global public good is that can articulate public goods and promote the marked by universality-that is, it benefits all countries, social benefits that flow from them. A small start in people and generations-an impure global public good this conundrum can be made by linking would tend towards universality in that it would benefit more than one group of countries, and would not discrim- the WTO more closely to intergovernmental insti- inate against any population segment or set of generations" tutions that through their assemblies already have a (p. 11). deliberative norm-making capacity that achieves a 3. WTO-WIPO Cooperation Agreement, made at Geneva on December 22, 1995. Available at http://www.wto.org/ form of global consensus. english/tratop_e/trips_e/wtowip_e.htm (consulted February I agree with Robert Howse and Kalypso Nico- 7,2002). laidis that constitutionalizing the WTO in response 4. For a thorough review, see "Maritime Transport Services," its.lominglegiimacycriss.is se to fr.49 Background Note by the Secretariat for the Council for to itS looming legitimacy crisis iS a step too far. Trade in Services, S/C/W/62 November 16, 1998. See also But a contemporary return to the "embedded liber- "Uruguay Round and Post-Uruguay Round Negotiations alism bargain," as they suggested, must take in Maritime Transport Services." Available at http://www. account of the greater institutional capacity the wto.org/English/tratop_e/serv_e/transport_e/transport_ maritime_urneg_e.htm (consulted February 7, 2002). After WTO has achieved through dispute settlement. the Uruguay Round was completed, five more countries Through institutional linkages like the one pro- added maritime transport commitments. posed by this chapter for ICAO and IMO, the 5. See Negotiating Group on Maritime Transport Services, Minutes of June 4, 1996, S/NGMTS/13. WTO's capacity can be used to expand the set of 6. Decision on Maritime Transport Services, S/L/24, July 3, goods enabled and ensured through other institu- 1996. tions of global governance. In this way legitimacy 7. See Joint Statement from the European Communities and Their Member States; Hong Kong, China; Japan; Republic of Korea; Norway and Singapore, S/CSS/W/8, October 6, through a double movement that reinforces delib- 2000. erative settings outside the WTO and adds to the 8. See WTO Council for Trade in Services, Special Session: range of goods promoted within the WTO. This Communication from the Republic of Korea-Negotiating Proposal for Maritime Transport Services, SICSS/WI87, amounts to embedding the WTO more firmly May 11,2001. within the wider network of intergovernmental 9. See WTO Council for Trade in Services, Special Session: institutions, and placing the onus on those institu- Communication from Colombia-Maritime Transport Ser- vices, S/CSS/W/123, November 27, 2001. tions to root themselves more firmly in national 10. See WTO Council for Trade in Services, Special Session: democratic consensus. Communication from Australia-Negotiating Proposal for Maritime Transport Services, S/CSS/W/111, October 1, 2001. Endnotes 11. For helpful overviews, see Hubner and Sauve (2001) and 1. Ronald Coase (1974) has famously challenged the notion Abeyratne (2001). See also "Air Transport Services," Back- that the public good must be publicly supplied, ground Note by the Secretariat for the Council for Trade in 2. On global public goods generally, see Kaul, Grunberg, Services, S/C/W/59, November 5, 1998, and subsequent and Stern (1999). Noting that global public goods are Secretariat Notes titled "Developments in the Air Transport and ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ ~Sco Since the9) Concusio ofa theba Uruguay Round,"r "outcomes" for a global public rather than things sup- Sector Sice the Conclusion of the Uruguay Round:6 plied to individuals, they divided the global "public" S/C/WI163andAddendaIto6. into three groups-countries, socioeconomic groups, and 12. In a communication, Costa Rica urged members to make generations-and suggested (pp. thatmore substantial commitments and to strengthen existing lic gerons-anld suggested (pp. 10-11) that a global pub- commitments regarding aircraft repair and maintenance hic good should services (S/CSS/W/138, March 19, 2002). 1. Cover more than one group of countries-that is, as 13. For an account of these views-and a dissent from them- distinguished from a regional public good or a club see Janda (1994). It should be borne in mind that the 1944 good, the benefits of which are excludable (arguably Convention on Civil Aviation (Chicago Convention), free trade is a club good!). administered by ICAO, in essence affirms domestic sover- 2. Benefit not only a broad spectrum of countries but also eignty over airspace and does not establish a formal frame- a broad spectrum of the global population, divided in work for the exchange of traffic rights. This is left to bilat- terms of rich and poor; access to knowledge, informa- eral negotiations by individual states. tion, and technology; ethnicity, gender, religion, and 14. Hubner and Sauve (2001, p. 981) presented a helpful sum- political affiliations; and so forth. mary of the communications from Australia, the European 126 Domestic Regulation and Service Trade Liberalization Union, Japan, New Zealand, and Norway made in the con- 30. This list does go beyond the scope of GATS Article VI.4, text of the Council for Trade in Services review. but for the purposes of the chapter it is assumed that regu- 15. See WTO Council for Trade in Services, Special Session: latory disciplines could be elaborated for each of these Communication from Colombia-Air Transport Services, measures. The Working Party on Domestic Regulation is SICSSIWl124, November 27, 2001. operating on the premise that regulatory disciplines would 16. See WTO Council for Trade in Services, Special Session: be confined to the kinds of measures enumerated by Arti- Communication from New Zealand-Negotiating Pro- cle VI.4 and thus extend to qualification requirements and posal for Air Transport Services, SICSSIW/92, June 26, procedures, technical standards, and licensing require- 2001. ments and procedures. See Minutes of October 5, 2001, 17. Commission of the European Communities v. Austria, Bel- S/WPDR/M/10. gium, Denmark, Finland, Germany, Luxembourg, Sweden, 31. Thus, for example, Paul Stephen Dempsey (1990) has criti- and the United Kingdom, case numbers, respectively, C- cized airline deregulation as inherently jeopardizing the 475/98, C-471/98, C-467/98, C-469/98, C-476/98, C- protection of aviation safety. 472/98, C-468/98, C-466/98. See also "Communication 32. For example, under the U.S. Aviation Act the policy stan- from the Commission Concerning the Consequences of the dards developed by the secretary of transportation "shall Court Judgments of 5 November 2002 for European Air consider the needs for effectiveness and safety in trans- Transport Policy," COM (2002), 649 final, November 19, portation systems" (49 USC 302). 2002; and Janda and Wilson (2003, pp. 46-50). 33. For an excellent discussion of that decision, see Blackett 18. See ICAO Secretariat (2003, p. 7). What ICAO calls "inclu- (2003). sive", Australia, Chile, and New Zealand have urged should 34. "Developments in the Air Transport Sector Since the Con- be "properly and thoroughly explored." See WTO Council clusion of the Uruguay Round-Part II." Background Note for Trade in Services (2002). by the Secretariat, S/C/W/163/Add. 1 at 58, October 25, 19. UNCTAD Liner Conference Code of Conduct, 1974 (entry 2000. into force 1983). The Code reserves cargo according to the 35. WTO Council for Trade in Services, Article VI.4 of the following formula: 40 percent ships of the exporting coun- GATS: Disciplines on Domestic Regulation Applicable to try; 40 percent ships of the importing country; 20 percent All Services, Note by the Secretariat, S/C/W/96, March 1, other ships. The WTO Secretariat (note 4, p. 3) noted the 1999, p. 3. diminishing significance of this regime that had only 36. WTO Working Party on Domestic Regulation, Report on applied effectively to Western Europe-West Africa trade, the Meeting Held on 20 March 2001, Note by the Secre- which accounts for less than 3 percent of world liner trade tariat, S/WPDR/M/10, May 10, 2001. and was dealt a death blow when the EU dissolved the con- 37. See the WTO Working Party on Professional Services ferences on the grounds of competition concerns. (1996). The Secretariat has given the following broad defi- 20. United States Code Annotated, Title 46 Appendix. Shipping, nition of the five kinds of measures covered in Article VI.4: Chapter 24, Merchant Marine Act, 1920 §866. For a review "qualification requirements, that is to say substantive of recent U.S. developments, see Onley (2001). As Onley requirements which a professional service supplier is puts it, the Jones Act "reserves (with some exceptions) the required to fulfil in order to obtain certification or a coastwise, inter-coastal and non-contiguous domestic mar- licence; qualification procedures, administrative or proce- itime trades to U.S. built, U.S. owned and U.S. crewed ves- dural rules relating to the administration of qualification sels" (p. 104). requirements; licensing requirements, comprising sub- 21. See note 4. stantive requirements other than qualification require- 22. Ocean Shipping Reform Act ("OSRA"), 46 U.S.C. Pub. L. nments, which a service supplier is required to comply with No. 105-258, 112 Stat. 1902. in order to obtain a formal permission to supply a service; 23. "Developments in the Air Transport Sector Since the Con- licensing procedures, administrative procedures relating to clusion of the Uruguay Round-Part IV." Background Note the submission and processing of an application for a by the Secretariat. S/C/W/163/Add. 3 at 31,August 13, 2001. licence; and technical standards, requirements which may See also "Air Transport Services: The Positive Agenda for apply both to the characteristics or definition of the service Developing Countries." Report of the UNCTAD Secretariat and to the manner in which it is performed." TD/B/COM.1/EM.9/2, p. 5-14, April 16, 1999. 38. These are addressed in far greater detail in other chapters in 24. See Ministry of Civil Aviation, India, Draft Civil Aviation this book. The focus here is their relevance to aviation and Policy, August 2000 (http://civilaviation.nic.in/moca/civ_ maritime services. pol.html> (consulted February 7, 2002). 39. The Reference Paper was suggested as a model for regula- 25. A locus classicuts of the period is Breyer (I1982). tory disciplines in aviation in the 1999 UNCTAD Report of 26. For a fascinating critique of the notion of regulation as the Expert Meeting on Aviation Services: TD/B/COM.1/25, intervention, see Macdonald (1985). TD/B/COM.I/EM.9/3, p. 5, August 23, 1999. 27. This typology, which adds to the standard characterization 40. For an excellent overview, see Bronckers and Larouche of public goods as nonrivalrous and nonexcludable, is (forthcoming). India's schedule of telecom commitments is drawn from a larger work in progress. GATS/SC/42/Suppl.3. 28. I nevertheless characterize the provision of an independent 41. The Reference Paper was issued by the Negotiating Group regulatory framework as the regulatory measure designed on Basic Telecommunications on April 24, 1996. The first to ensure open access to the public good at issue, for exam- meeting of the Working Party on Domestic Regulation was ple, transportation safety. A strategy of not providing an held on May 17, 1999. independent regulatory framework can itself be seen as a 42. Note, however, the emerging research concerning the problem of under-enforcement, as described below. health effects of electromagnetic radiation emanating from 29. On social dumping generally, see Bean and others (2001). cell phones (WHO 2002). GATS Regulatory Disciplines Meet Global Public Goods: The Case of Transportation Services 127 43. Disciplines on Regulations in the Accountancy Sector, Macdonald, Roderick. 1985. "Regulation by Regulations." In S/Ll64, December 17, 1998. Ivan Bernier and Andree Lajoie, eds., Regulations, Crown Corpo- 44. For an example of the detail into which transportation rations and Administrative Tribunals. Toronto: University of qualification requirements can go, see 14 CFR §§1-199. Toronto Press. 45. Disciplines on Regulations in the Accountancy Sector, OECD (Organisation for Economic Co-operation and SIL/63, December 15, 1998. Development). 2001. "Liner Shipping and Competition Policy 46. Communication from European Union and Their Member Report," November 6. Paris. States-Domestic Regulation: Necessity and Transparency, Onley, Austin. 2000. "A Report from the Marine Regulatory S/WPDR/W/14, May 1, 2001. Front: Partly Cloudy with a Chance of Thunder Storms." Univer- 47. For a helpful assessment of the shortcomings of institutional sity of San Francisco Maritime Law Journal 13: 91-123. linkages in the global economy, see Stein (2001). Porter, Roger, Pierre Sauve, Arvind Subramanian, and 48. I am indebted to Aisatou Jallow-Sey for this example. Americo Beviglia-Zampetti, eds. 2001. Efficiency, Equity, Legiti- 49. See Howse and Nicolaidis (2001, p. 227), who argued for a macy: The Multilateral Trading System at the Millennium. Wash- need to return to the embedded liberalism bargain, which ington, D.C.: Brookings Institution Press. allows states to elaborate differential regulatory policies Posner, Richard A. 1976.AntitrustLaw:An Economic Perspec- within the trading system based on justified assessments of tive. Chicago: University of Chicago Press. superior public policy objectives. For another account of Sauve, Pierre, and Arvind Subramanian. 2001. "Dark Clouds embedded liberalism, see Wolfe (1997) and, more recently, over Geneva? The Troubled Prospects of the International Trad- "See You in Geneva: Democracy, the Rule of Law and the ing System." In Roger Porter, Pierre Sauve, Arvind Subramanian, WTO,` draft available at http://qsilver.queensu.ca/-wolfer/ and Americo Beviglia-Zampetti, eds., Efficiency, Equity, Legiti- Papers/ISAruleof/o201aw.pdf. macy: The Multilateral Trading System at the Millennium. Wash- ington, D.C.: Brookings Institution Press. Stein, Eric. 2001. "International Integration and Democracy: References No Love at First Sight." American Journal of International Law 95: 489-534. Abeyratne, Ruwantissa. 2001. "Trade in Air Transport Ser- WHO (World Health Organization). 2000. "Electromagnetic vices: Emerging Trends." Journal of World Trade 35: 1133-68. Fields and Public Health: Mobile Telephones." Fact Sheet 193, Bean, Charles, Samuel Bentolita, Giuseppe Bertola, and Juan June. (consulted Dolado, eds. 2001. Social Europe: OneforAll? London: Centre for February 7, 2002). Economic Policy Research. Wolfe, Robert. 1997. "Embedded Liberalism as a Transfor- Blackett, Adelle. 2003. "Defining the Contemporary Role of mation Curve: Comment." In Thomas J. Courchene, ed., The the State: WTO Treaty Interpretation, Unilateralism, and Link- Nation State in a Global/Information Era: Policy Challenges. ages." In Chi Carmody and others, eds., Trilateral Perspectives on Kingston, Ont.: John Deutsch Institute for the Study of Eco- International Legal Issues: Conflict and Coherence. Washington, nomic Policy. D.C.: American Society of International Law. World Bank. 2002. Global Economic Prospects and the Devel- Breyer, Stephen. 1982. Regulation and Its Reform. Cambridge, oping Countries, 2002. Washington, D.C. Mass.: Harvard University Press. WTO (World Trade Organization) Appellate Body Report. Bronckers, Marco, and Pierre Larouche. Forthcoming. "The 1998. United States-Import Prohibition of Certain Shrimp and WTO Regime for Telecommunications Services." In Arthur Shrimp Products. WT/DS58/AB/R, 38 I.L.M. 118, October 12. Appleton and Patrick Macrory, eds., The Kluwer Companion to WTO Council for Trade in Services. 2002. Special Session: the WTO. London: Kluwer. Communication from Australia, Chile, and New Zealand- Coase, Ronald. 1974. "The Lighthouse in Economics." Jour- Review of the GATS Annex on Air Transport Service, S/C/W/206, nal of Law and Economics 17: 457-76. March 18. Dempsey, Paul Stephen. 1990. Flying Blind: The Failure WTO Council for Trade in Services. 2003. Special Session: of Airline Deregulation. Washington, D.C.: Economic Policy Communication from Australia, Canada, Chile, the People's Institute. Republic of China, Croatia, Cyprus, Czech Republic, Dominican Hubner, Wolfgang, and Pierre Sauve. 2001. "Liberalization Republic, Estonia, the European Communities and their Mem- Scenarios for International Air Transport." Journal of World ber States, Gambia, Georgia, Guatemala, Hong Kong, China, Ice- Trade 35: 973-87. land, India, Japan, the Republic of Korea, Kyrgyz Republic, International Civil Aviation Organization (ICAO) Secre- Latvia, Lithuania, Malaysia, Malta, Mexico, New Zealand, Nige- tariat. 2003. Consolidated Conclusions, Model Clauses, Recom- ria, Norway, Pakistan, Panama, Papua New Guinea, Peru, mendations and Declaration, ATConf/5, Montreal, March 31 Poland, Romania, Singapore, Slovenia, Switzerland, and the Sep- . arate Customs Territory of Taiwan, Penghu, Kinmen and Matsu, Janda, Richard. 1994. "Passing the Torch: Why ICAO Should TN/S/W/1 1, March 3. Leave Economic Regulation to the WTO." Annals of Air and WTO Working Party on Domestic Regulation. 2003. "Report Space Law 19(1): 409-32. of the Meeting Held on 4 December 2002." Note by the Secre- Janda, Richard, and Joseph Wilson. 2003. "Has Europe Kick- tariat. S/WPDR/M/19, January 20. started the Global Liberalization of Airline Ownership and Con- WTO Working Party on Professional Services. 1996. "The trol?" In World Markets Research Centre, Aviation Strategies: Relevance of the Disciplines of the Agreement on Technical Bar- Challenges and Opportunities of Liberalization. London. riers to Trade (TBT) and on Import Licensing Procedures to Kaul, Inge, Isabelle Grunberg, and Marc Stern, eds. 1999. Article VI:4 of the General Agreement on Trade in Services." Global Public Goods. Oxford, U.K.: Oxford University Press. Note by the Secretariat. S/WPPS/W/9, September 11. t i i i I REGULATORY REFORM AND TRADE LIBERALIZATION IN FINANCIAL SERVICES Stijn Claessens Executive Summary the political economy issues that are so prevalent in Fostered by globalization and technological advances, the financial sector. Developing countries have some including the emergence of electronic finance, finan- special conditions when liberalizing and internation- cial services industries around the world are under- alizing their financial systems. There is much evi- going rapid changes: they are becoming less special dence that, as in other countries and provided a min- and making prudential regulation less necessary imum degree of oversight is in place, both regulatory while competition policy becomes both more feasible reform and trade liberalization support the develop- and necessary. Because financial services heavily ment of an efficient and stable financial system that depend on networks for their production and distri- offers wide access to high-quality financial services at bution, competition policy for financial services will low cost. The WTO, however, can be of more value to need to resemble that used in other network indus- developing countries because it provides a binding, tries. With globalization accelerating, competition procompetition framework that has proven more policy will also need to be global, supported by difficult to establish in any other way. greater cross-border institutional collaboration and Perhaps even more than before, the current the disciplines of the World Trade Organization round of WTO negotiations in the services area has (WTO) process. More than in the past, a horizontal highlighted the link between trade liberalization approach to the General Agreement on Trade in Ser- and domestic regulatory reform. The effectiveness vices (GATS) negotiations will be required as finan- of liberalization and the potential gains from it cial services today increasingly interface with many increasingly depend on the degree to which and the other industries and rely heavily on electronic net- manner in which the domestic sectors are being works. A horizontal approach also will help deal with regulated. The increased importance of the link This article was presented at the joint OECD-World Bank Conference on Regulatory Reform and Trade Liberalization in Services held March 4-5, 2002, in Paris. The author would like to thank the commentators, Jos6 F. Poblano and Sebastian Saez, and the conference participants for useful comments. 129 130 Domestic Regulation and Service Trade Liberalization between trade liberalization and domestic regula- Those changes should affect what constitutes the tion is also true for financial services. More than appropriate future regulatory framework for the any other sectors, financial services are heavily reg- financial sector. The design of the framework ulated. This implies that a variety of domestic regu- should also depend on the objective of financial lations and the way they are implemented can exert sector regulation and supervision. Many people anticompetitive effects. At the same time, financial would agree that an efficient and stable financial services are easily traded across borders, which system that offers wide access to high-quality finan- makes the degree of trade liberalization an impor- cial services at low cost is a laudable goal. The tant determinant of the overall competitive land- degree to which and the forms in which this goal scape of a country's financial sector. The experience requires public policy interventions have been with financial integration within the European hotly debated issues, especially in environments Union (EU), for example, has shown how critical to such as those of many developing countries in ensuring effective competition is harmonizing reg- which market and government failures have been ulation and supervision in conjunction with the large. In most countries the trend in public policy removal of barriers between markets. Not only do has been domestic deregulation of many aspects of the competitive effects of trade liberalization financial services, particularly the removal of prod- depend on the degree and form of domestic regula- uct, price, and market restrictions. And there has tory reform, but the gains from financial services been a trend toward tighter imposition of some liberalization also can depend significantly on the prudential standards, such as capital adequacy quality of domestic regulation and supervision. It requirements, and increased emphasis on supervi- has been argued in the case of East Asia, for exam- sion. Nevertheless, banking crises with large fiscal ple, that financial services deregulation proceeded costs, particularly in developing countries, have too fast, undermined the stability of the domestic been increasing. To some extent, these crises have financial system, and may have contributed to the resulted from a combination of inconsistent poli- 1997 financial crisis. cies, in terms of type and speed of domestic regula- Thus arises the question, what modalities are tory reforms and capital account liberalization, and best suited to ensure that financial services liberal- weak supervisory capacity. They also have reflected ization and domestic regulatory reforms are sup- the continued desire to treat financial services as portive processes? To answer that question we need somewhat special (see box 1), including the provi- to consider how the financial services industries sion of fiscal support to weak financial institutions might evolve. Around the world those industries that is often motivated more by political economy have been undergoing rapid changes fostered by factors than by clear economic needs. globalization and technological advances, includ- The rapid changes in the industry, especially the ing electronic finance. Banking systems are consoli- gains made by e-finance, require further changes in dating in many markets and banks are extending public policies toward financial services. An their presence across borders. New financial service improved enabling regulatory environment will be providers are emerging, including online-only needed in such critical areas as the telecommunica- banks and brokerages, and companies that enable tions framework, the information infrastructure, consumers to compare more easily the price and and consumer and investor protection. For the full quality of various financial services. Nonfinancial gains to consumers and firms to come about, the entities, including telecommunication and utility competitive framework must be adequate. The companies, also are entering financial markets. The same changes will allow regulators to treat financial impact of various forms of e-finance on incumbent markets more like other markets in the matter of financial institutions are particularly large. In secu- competition policy. Because of the financial sector's rities markets, trading systems for equities, fixed influence on economywide performance, competi- income, and foreign exchange are consolidating tion policy has not been applied actively to finan- globally and moving toward electronic platforms. cial services. The changes currently under way are The effects are not limited to industrial countries making financial services less special, and thus are and the advanced emerging markets, but have also making regulation imposed for prudential reasons started to affect many developing countries. less necessary. Financial services are now more Regulatory Reform and Trade Liberalization in Financial Services 131 BOX 1 Why Have Banks Been Considered to Be Special? Banks have tradtonaltDy been' consiered speclal of short-term hquld1.- Kawr, ' S for two reasons. Fst, ;tte provide credit t-o (199) hWae arguet that. tso rv other firms and mange -the fQo paymnts sto-term lk ldty mor ciw taphy:$ ethr throughout the econoyr. Disrupions in the instituftns, becaus they c o*he cmI - credit supply and a breakdbwn in the payments lnding (such as litZ of cit)* d # system could have large-spRlovere for the taking services. The *uhors t4' tW banks rest of the economy in terms of reduced real are more cost-effkicnt in. $fl tj output. Bank failures or lossshi capi can lead because deposi act rike loa c to contrtions In aggrsbate bank cred, with can be wlthdawn at py *nemt Ass restat large social costs to bank borrowers outside the need a buffer stock of idd a. o banking system. Second, banks are inherently their provision of demand depcI f0it p they fragile and susceptible to contaqiouS runs need a buffer stok tawport teK mc owing to tthe cfd1t q rrteion asyrn- n. $%*u$e bankofber 4l rnties, hit*wtttpalcn&* derr(pct t*It tIqtlt*;t4n cM4*; able Mr-value t: art high ge (C ty d htd x mond and Dybvig 1983). Even smal shocks to and thereby inta r * t solvency may lead to cost4y systemi runs when would be requhrd by two firnacial intermedi- depositors overreact to information and force ariks offerng ths servi separatel.t Thosav- the closure of even solvent Insttutions. Histori- ings allow banks to prvi IIqu1dt to ther * caly), clearinghouses and ote pivate monitors tones at a hwer coathan cotslottmiWhfldl have dea wilth some of towe conc by Uim- Instittons. Diarn modt -in (191) agpe iting the risktaldng of financal instutins fthr tW the somewh" fg ct tu: More recently, governments have responded turepof banks, which subj-et them to to the special nature of banks by providing a plnes then to monitor cmporatks p.M r. safety nt. Fnally, bs h$1rKae hav a It also has been argued that banks are seat nant roit in-providIng paytent: because only banks can provide some essential thoserservices often were lnke&WWItWektS forms of credit to coporations, especially forms sion of credit and the exchanvg of bwn caims. widely available and the role of banks is less crucial as information technology (IT) investments- in the production of those services. Technological make competition policy challenging. Network advances have shrunk the economies of scale in the externalities, particularly prevalent in payment and production of many financial services, particularly trading services, can present further barriers to among services that easily can be unbundled and entry. Competition policy in the financial sector commoditized. Such developments may well lessen will thus be more feasible and desirable, but not the overall relevance of systemic concerns. necessarily easier to implement. Although applying competition policy to finan- To investigate the various links among domestic cial services has become more feasible, it will not be regulatory reform, trade liberalization, competi- easy to implement. In the past, calculating concen- tion, and the quality of the regulation and supervi- tration indexes in a market or testing for market sion, this article addresses the following issues. power were good starting points, but today product How might the financial sector evolve in the com- definitions, which are critical to any competition ing five years? What will be the key regulatory issues tests, have become more complex. As cross-border facing the sector in the medium term? What is the delivery of financial services has become much eas- current approach for enhancing regulation and ier, defining markets has become more difficult. supervision, especially in developing countries? Network effects-in payment services, trading sys- How should one think of competition policy in tems, and exchanges-which can hamper competi- general in the financial sector? When are financial tion, have increased in importance. Furthermore, sector regulations themselves a barrier to trade and sunk costs-such as reputation-and high fixed effective competition? What are the specific issues costs in the production of financial services-such facing developing countries? Is it possible to define 132 Domestic Regulation and Service Trade Liberalization the regulatory conditions that need to be fulfilled tant market incentive for the reduction in barriers prior to liberalization, especially in developing has been the disintermediation of bank assets and countries? What is the role of the GATS in the liabilities by capital market transactions. Those process of strengthening domestic regulation? Is forces pressure banks to expand their financial ser- the prudential carve-out useful for developing vices to cater to all customer needs and preferences. countries or is it possibly too broad in scope? How can the GATS rules more generally be improved in light of ongoing changes in the global financial services industries? Although there has been a recent retrenchment, new The article argues that competition policy in the developments in IT, particularly the Internet, are an financial sector has become more important and important force in reshaping the financial services that moving to a global competition policy will be industries (see Allen, McAndrews, and Strahan necessary. The features of the desired global com- 2002; Claessens, Klingebiel, and Glaessner 2002). petition policy for financial services will need to be Given its information intensity, financial services similar to those policy features applied to other net- greatly benefit from developments in technology work industries. It will also require harmonization that enable providers to conduct business more of rules, global information sharing, and common cheaply and efficiently. There are direct as well as definition of and sanctions for violations. In that indirect cost reductions. The Internet, for example, context, the GATS process can be an important eliminates many processing steps and allows driving force for procompetitive reform, as has "straight-through processing"-the complete pro- been the case in the telecommunications sector. cessing of transactions electronically-at every seg- ment of the transaction chain, thus avoiding costly duplication of human interventions and minimiz- Changes in the Financial ing possible errors. The Internet also functions as a Services Industries new, low-cost distribution channel. Furthermore, it facilitates personalized pricing structures and more cost-effective customer stratification. Financial services are being reshaped by the global- Technological advances also are lowering the ization of financial markets and by technological costs of entry into new markets. Many new types of and structural changes, including the lowering of specialized financial service providers have entered regulatory barriers. The globalization of financial the marketplace. Aggregators enable consumers to services has involved greater financial integration, comparison shop and obtain access to all their increased mergers and acquisitions of financial financial accounts in one place. Online brokers institutions, and lower barriers between markets. make retail investing easy and e-payment providers Cross-border capital flows have been the most permit financial transactions over the Internet. important form of increased financial integration. Financial portals expose the customer to a whole But as the costs of establishing a physical presence range of financial services providers and enable have declined, cross-border entry of financial insti- them to compare prices and quality. For example, tutions has increased. This increase has also been LendingTree in the United States allows consumers spurred by governments that have removed entry easy comparison of mortgage products. Many of barriers. Bank consolidations and mergers and the entrants have been nonbanks, such as telecom- acquisitions among financial institutions, both munication companies and utilities, and ties within and across borders, have increased. The dis- between financial and nonfinancial institutions mantling of regulatory barriers separating banking, have become more extensive. Several banks, for insurance, and securities activities is also driving example, have entered alliances with retail chains to consolidation. Boundaries between different finan- sell financial services through their networks of cial intermediaries are being blurred and universal stores. Those links have been motivated by desires (or integrated) banking is becoming the norm, as to consolidate around recognized brand names and shown most clearly by the recent repeal of the by financial services providers seeking access to the Glass-Steagall Act in the United States. An impor- wide distribution networks of telecommunication Regulatory Reform and Trade Liberalization In Financial Services 133 operations, portals, and other merchants. In the banks, but also telephones, kiosks, wireless devices, securities markets, developments are rapid as well. personal computers with modems, and private net- Exchanges are demutualizing and many new trad- works. Advances in information and communica- ing systems have been started. Through enhanced tion technology further assist in the delivery of a communications capability, trading remotely has broad array of financial services through a provider become much easier and trading services are no that need not be a financial service supplier itself. longer restricted to any physical exchange, thereby From a technological point of view, there is no rea- reducing the need for local markets. son why a telecommunications company cannot be the first contact for many customers seeking finan- Changing Industry Structures cial services. Those trends have varied by the type of financial The new industrial structure emerging is becoming service and, in turn, have depended on the exis- more partitioned in the production and distribu- tence of entry barriers and the ease and degree of tion of financial services, and in the process is commoditization. Entry has been particularly redefining the nature of banks, other financial insti- strong in financial services that could be unbun- tutions, and financial markets. The functions of dled and commoditized easily and that offered production and distribution of financial services attractive initial margins. These include many non- formerly tended to be vertically integrated in banks, banking financial services, such as brokerage, trad- financial conglomerates, or exchanges.' Now some ing systems, some retail banking, and such new of those functions are being separated vertically. On offerings as bill presentment or payment gateways the production side, electronic enablers and other for business-to-business e-commerce. Because third parties provide software and hardware sup- these services also are subject to less regulation, port to financial service providers. Many financial new entrants can innovate easily with new technol- services themselves are being produced in distinct ogy. Services involving sunk costs and low com- markets where financial and other institutions par- moditization, such as corporate advisory services ticipate, and at the same time commoditize their or mergers and acquisitions within investment characteristics. Commercial loans, for example, may banking, have seen much less new entry. Instead, be generated by banks but are then quickly sold off the trend has been toward global consolidation in markets where other banks and institutional among investment banks to reap the advantages of investors participate. Besides traditional banking reputation, brand name, and economies of scale. products, such as checking accounts, mortgages, Although deposit-taking and many traditional pay- brokerage services, insurance, and credit cards, the ment services exhibit large potential for commodi- range of financial services now includes e-wallets, tization-through online banks, payment services electronic bill presentment and payment, and many using "smart" cards, and other technologies-entry electronic business services. In securities markets, has been limited, in part because of regulatory bar- listing, trading, clearing, and settlement services are riers. From a production point of view, however, becoming separately provided services. these services can easily be commoditized. There Financial institutions are becoming either enti- are few technological barriers, for example, to ties that specialize in the production of certain allowing telecommunications companies to pro- services or diversified entities that add value by tai- vide small payments services using the balances loring and combining financial products for their many mobile phone users carry on the prepaid call- clients without necessarily producing all the input ing card in their phone. financial services themselves. Aggregators help dis- Trends-in terms of the degree of consolidation tribute the final services, provide price compar- and entry, the types of services subject to com- isons, and may undertake such functions as prepro- moditization trends, and the rate of introduction of cessing of loan applications. In addition, there are e-finance-have also varied by market. In some companies functioning mainly as distribution countries, as a result of market potential or regula- channels, or portals. tory barriers, new entry has been more limited or The means of accessing financial services them- specialized in some financial services. In the selves today include not only the brick-and-mortar Republic of Korea, for example, online brokerage 134 Domestic Regulation and Service Trade Liberalization firms have captured the lion's share of brokerage have benefited as well because transaction costs business, but because the country is overbanked, on securities are lower, as are search and monitor- banking services remain with existing banks and ing costs for tracking corporate information and through traditional distribution channels. And in behavior. developing countries, which tend to have concen- trated financial systems that are also dominated by Implications for Regulation banks, the degree of commoditization of financial and Competition Policy services has been slight because incumbents have mounted barriers and have faced less incentive to The changes in the financial services industries are innovate in their own operations. There is, how- in part a response to domestic regulatory reform ever, evidence of convergence in e-finance across efforts. At the same time, the changes-especially countries. Despite institutional disadvantages (such those resulting from technological advances- as weaker telecommunications infrastructure) and call for an evaluation of the current regulatory more adverse demand and supply factors, Internet- approach. The current, internationally driven based services are sometimes as popular in emerg- approach has become increasingly standards based ing markets as in industrial countries. In Brazil, for and aimed at achieving financial sector stability. example, online banking is more prevalent than in Changes in public policy focus increasingly on con- most developed countries. sumer and investor protection and a need to approach regulation more globally. Most impor- Changing Competitive Structures tant, changes call for a more active competition policy. Current policy approaches, however, do not Removal of barriers between markets and products yet reflect such changes. and the technological gains have generally led to more competition. The financial service industry The Standards-based Approach has become much more competitive in many seg- ments, both through new entrants and from The approach to financial services regulation is already existing entities operating more efficiently. increasingly based on the compliance of domestic Barriers to entry in many areas have been lowered. financial systems with internationally formulated It has become much less expensive, for example, to norms, the most important being the Basel Core 25 launch a new bank as electronic delivery modes Principles for Effective Bank Supervision. Many reduce the need to depend on a bank branch net- other standards are being applied to financial mar- work. Or a new market can be accessed at low cost kets, including standards on systemically important using the Internet. Financial products can be pur- payments systems, securities markets, insurance, chased more easily off the shelf. Many subservices and so forth. In some sense the financial sector per- can more easily be outsourced. Information about haps more than other sectors has recently been sub- borrowers is cheaper and easier to obtain. ject to harmonization through a number of glob- Those advances are leading to benefits for con- ally formulated standards. As noted by Trachtman sumers and firms, with lower costs and better qual- (chapter 5), these standards have the status of "soft ity services. On the retail side, brokerage fees have laws" in that they are rules that are not formally fallen in many markets from more than $50 per binding, but many still have substantial binding trade to virtually zero. Internet-only banks have force.2 The standards are being used increasingly, put pressure on margins of incumbent banks with for example, by international bodies to assess higher deposit rates and more competition for financial sector stability and efficiency, as in the loans. With better two-way communication chan- IMF/World Bank Financial Sector Assessment Pro- nels, customers have more information and better gram. Such assessments and monitoring have transparency about financial services and the raised the standing and effectiveness or at least the process they are engaged in. The speed of service force of these standards, with publication of com- has also improved dramatically-for example, in pliance with many of these standards on the IMF online loan applications. Institutional customers Report on Standards and Codes Web site. Regulatory Reform and Trade Liberalization in Financial Services 135 Revisiting the Approaches Special Nature of Banks The "standards" approach is beneficial in getting Changes in the financial services industry and countries to enhance their regulation and supervi- advances in technology are eroding the special sion frameworks, especially in developing countries nature of banks. This necessitates taking another where weaknesses in those areas have contributed look at the need for a safety net to protect banks. to financial crises. There are some general ques- Traditionally, banks have had access to a publicly tions, however, about the approach as well as some provided safety net for times of liquidity problems. specific issues in the context of domestic regulatory The motivation for public provision arose from the reform efforts and trade liberalization of financial so-called special nature of banks, which held that a services. The general questions are not the focus bank's illiquidity and its consequences for system here,3 but an explicit consideration of competition stability could cause real sector consequences (box policy issues is missing in the context of domestic 1). Prudential regulation and supervision to pre- reform and trade liberalization policies. Although vent moral hazard have accompanied the safety net some standards, including the capital adequacy provision. requirements of the Basel I and II accords, were The emergence of many substitutes for bank motivated in part by the desire to level the playing deposit and loan products and the fact that the pro- field among countries, little attention has been paid prietary information that the banks had on their to the broader issues of effective competition. borrowers is now cheaper and more widely avail- Although the further adoption of global standards able, however, are altering the role of banks. Because will help equalize competitive opportunities among banks as deposit-taking and lending institutions financial institutions in many respects. However, have become less important to financial intermedia- there will likely remain a lack of harmonization in tion and stability, there may be less of a need for a many dimensions among markets and countries public safety net and associated prudential regula- and many anticompetitive regulations and non- tion and supervision.4 Although "banks" may con- entry-type barriers may still arise. At the same time, tinue to be important in financial intermediation, the standards approach can create its own barriers their importance may no longer be related to pro- against effective competition. viding liquidity or to overcoming information The most important implicit barrier is that the asymmetries. Rather, they may be important as standards approach is based on the notion of large financial conglomerates that combine deposit- a national financial system that is largely bank- taking functions with insurance, investment bank- dominated. That notion starts from the concept of a ing, asset and pension fund management, and other national supervisory authority for the banking sys- financial intermediation functions. tem, a central bank that conducts monetary policy and may provide liquidity support to banks, and a Consumer and Investor Protection national legal and regulatory system supporting it all. Together with the prudential carve-out rule in As banks and other financial products become less the GATS, such a framework encourages policy- special, consumer and investor protection and edu- makers to continue to treat financial services as spe- cation will become more important. Increasingly, cial. Going forward, however, banks will be less regulators will not be able to monitor the quality of unique in providing financial services so prudential all financial services being delivered and, as is the regulation and supervision may become less neces- case with nonfinancial products, consumers and sary. The implications of recent changes in the investors will have to be aware of the risks of finan- financial services industries call for more emphasis cial services. Extending this responsibility to con- on consumer and investor protection-which has sumers and investors requires standards in areas been relatively ignored so far-and attention to such as fraud, privacy, and transparency. Nontradi- global implications. Let us consider these public tional financial service providers further compli- policy implications before addressing the conse- cate the application of investor protection mecha- quences for competition policy. nisms that are based on current institutional 136 Domestic Regulation and Service Trade Liberalization frameworks.5 Who, for example, should regulate an is the fact that competition policy as it applies to Internet-based intermediary with no obvious phys- financial services is still in its early days of develop- ical presence that provides investment advice and ment. The limited development of such policy for directs potential customers to (affiliated) brokers? this industry arises from the so-called special char- And, because everything operates on a global scale, acter of the financial sector and the associated harmonizing standards and practices for consumer argued need for a safety net and prudential regula- and investor protection becomes more urgent. As tion. The domination of prudential regulation and cross-border products and services expand, ques- supervision over competition in the policy agenda tions about the judicial entity that enforces stan- in most countries leads authorities, for example, to dards need to be answered. What entity, for exam- restrict entry so as to preserve franchise value for ple, has regulatory authority over the sale by a incumbents. Or the payments system may not be Brazilian investor of an equity share in a Thai com- open to all types of financial and nonfinancial pany listed on a German exchange to a Belgium institutions. In many countries small banks are national? Although regulators worldwide will have often effectively excluded from efficiently provid- to consider these and other enforcement issues, ing payments services because they face high access improved disclosure and consumer education will costs to the payment system. The link between often be the only solution. competition and prudential regulation can be institutionalized-for example, when competition Global Public Policy Changes policy is explicitly delegated to the supervisory agency, as was the case in Brazil. Or it can involve With globalization and especially with the advent the ministry of finance or a supervisory agency of e-finance, capital account restrictions limiting lobbying or interfering with the competition capital flows and restrictions on the cross-border authority, as happened recently in South Africa. provision of financial services become much more More generally, entry to and exit from the financial difficult to enforce. Increased economic integration sector has often been influenced by political econ- could also carry with it new or increased global omy factors argued for, in part, by the systemic risks. More commoditization of financial products aspects of banking. could lead to less risk sharing by institutions, which A revision of the prevailing paradigm for finan- could lead to more asset price volatility. Different cial sector regulation and supervision is thus a key national markets could become more susceptible to condition necessary to allow competition policy to herding, contagion, and spurious currency attacks. be applied more effectively to financial services. With more delivery of offshore financial services, Even with such a revision, however, it will not be the costs of exit from providing financial services in easy to implement competition policy in the finan- a country could be reduced significantly. An cial sector and a mixture of institutional, func- increase in the number of creditors may complicate tional, and production approaches will likely be coordinating actions prior to or during a financial most productive. In the following section we con- crisis. Changes in the international financial archi- sider institutional and functional approaches, tecture to address these issues thus become more which have been the traditional approaches, and urgent. then turn to the complications in implementing them, arguing that the production approach may be necessary as well. Prudential Regulation and Competition Policy The changes in financial services and technology Institutional Approach to Competition Policy also make competition policy more feasible and The institutional approach to competition means more important. Competition will be important in that the entry and exit regime for different types of helping all segments of society secure greater financial institutions should be procompetitive, or access to financial services. Ensuring effective com- at least as contestable as possible given stability petition in the provision of financial services is issues. Evidence suggests that more contestable sys- complex for a variety of reasons, not least of which tems have better performance, are more efficient, Regulatory Reform and Trade Liberalization In Financial Services 137 have better quality financial services available, and Even when attempts are made to level the play- can lead to a wider extension of and greater access ing field by each financial service provider and to financial services.6 More competitive systems across each financial service, regulatory and other also can be more stable, provided entry involves a differences that create barriers to full competition diversified set of institutions. Among other activi- may continue to exist. Standards may conflict, as in ties, the institutional approach involves merger the need to require capital for local branches of review, investigation of the issues of market power foreign banks. Information requirements may dif- and dominance of institutions, and review of mar- fer by product-securities products may require ket entry barriers at the countrywide, regional, or more information disclosure than do pension global level. There are some conceptual issues products although the products are otherwise sim- regarding, for instance, the exact need to balance ilar. One possibly useful development in this competition with preserving a certain franchise respect is the trend toward single supervisory value for some types of financial institutions while agencies (e.g., the U.K. Financial Services Author- preserving their incentives for stable conduct of ity model), which may help reduce unnecessary business or to invest in information acquisition). differences in the regulatory treatment of similar In addition, there are many implementation prob- types of financial services. lems (e.g., how to balance free cross-border provi- Even when distortions in treatment across prod- sion with adequate enforcement and consumer ucts have been minimized, however, it will be diffi- protection). cult to assess whether markets for specific financial products are fully competitive. Financial institu- Functional Appr h to Ctions typically bundle services and often cross- subsidize them. They may do so because they derive The functional approach uses the same concept of their comparative advantage from the bundling of contestable markets but it applies the concept to services rather than from any specific individual the services rather than to the institutions. There is service. Or they may do so because the financial general supportive evidence that it is the functions institution has regulatory or other advantages that of finance rather than the exact institutional form allow it to provide the bundle of services in a way through which they are delivered (e.g., banks ver- that is more advantageous for them than for a sus stock markets) that matter most for access, single-service provider. Differences in access to the growth, and stability (see Demirgu ,-Kunt and safety net or different supervisory approaches, for Levine 2001). The functional approach implies a example, may lead to differences in net regulatory leveling of the playing field across providers for burdens in one service that are then spread over each financial service and across similar types of other services to reduce the burdens. Open entry in financial services. It means a proper entry and exit one market segment consequently may not guaran- regime for each financial service and minimum tee a competitive market for that specific product. differences in the regulatory treatments of similar Or perhaps predatory cross-subsidization in the services. Even when tried in earnest, however, the presence of natural entry barriers gives existing principle of a level playing field across functions is institutions an unfair advantage. More generally, it difficult to put into practice. One reason is that is difficult to ascertain that no anticompetitive bar- substitutability among specific financial services riers remain. may be high in many dimensions but may involve subtle differences in some dimensions-for exam- ple, credit risks, access to the safety net, and so Beyond the Institutional forth. Whether remaining differences are distor- andFunctionalApproaches tionary will often be difficult to ascertain. Further- Even when accepted, it will be difficult to put the more, historical differences can be difficult to cor- principle of contestable markets for financial insti- rect. For example, differences in the tax treatments tutions and financial services fully into practice of pension savings and other savings may be sig- using the institutional and functional approaches. nificant although the savings vehicles may be It may therefore be necessary to go beyond those equivalent in many ways. approaches. There are three specific reasons to seek 138 Domestic Regulation and Service Trade Liberalization another approach. First, it is quite difficult to apply Dimensions of Market Infrastructure competition policy to financial services. Sunk and Recent Changes costs, the reputation value of existing brand names, stickiness of consumers, and other factors Dimensions of market infrastructure center around can present effective barriers to entry that are diffi- ownership-public versus private ownership-and cult to regulate. Second, financial services use the forms of control, oversight, and corporate gov- many production, provision, and distribution net- ernance. The commonly shared infrastructure of works. Examples are trading systems, payment and (retail or large-value) payments systems, for exam- clearing systems, automatic teller machine sys- ple, can be run by central banks, by banks them- tems, and information systems. Any of those net- selves, or by third parties. Choices further vary works may not be openly available or may have between for-profit and not-for-profit organiza- pricing policies that easily create entry barriers or tions, and between related mutual or demutualized otherwise involve restrictive practices. Some of the structures. As another example, stock exchanges networks will be private and explicitly closed by can be set up as mutual, not-for-profit organiza- their owners; others will be public in nature but the tions or as for-profit corporations. Or the trading regulator may be selective in providing access to system may be a completely new, private sector ini- them. Third, many financial services are subject to tiative. The design and balance of various oversight network properties-that is, use by one enhances structures-self-regulatory, government, or purely the value of the service to another. Such financial private arrangements-correspondingly can and services traditionally have included stock market should vary by setup because the participants' trading services and payments services, but as more incentives for self-regulation will vary. and more financial services are being commodi- The trend recently has been toward separating tized, those properties arise now on a larger scale. and privatizing various parts of the financial mar- For all of these reasons we may need to comple- ket infrastructure, for example, the demutualiza- ment the institutional and functional approaches tion of stock exchanges, and the separation and pri- with a more production-based approach. vatization of central counterpart, clearing, and settlement functions. Parallel to this trend, over- sight functions tend to be placed more with gov- Production Approach to Competition Policy eintancs.7 Tehooy7spcal h ernment agencies. Technology, especially the With the production approach the various inputs, Internet, has also led to changes because it has rede- including network services, that are required to fined the elements of a marketplace and the infra- produce and distribute financial services must be structure supporting financial services provision. available to anyone who is interested in using The Internet is not only a marketplace itself; it also them, fairly priced, and provided efficiently. No allows for the rapid construction of electronic- part of a specific financial services production and based infrastructures, either closed or open, includ- distribution chain should have any barriers to ing front-end trading systems and back-end settle- entry or exit or any unfair pricing rules. For most ment systems. With the Internet has come its own inputs (labor, services, and so on), that simply set of governance issues, including who controls requires competitive supply markets. But because the granting of access to some private marketplace. the production and distribution of financial ser- Who, for example, should monitor the access poli- vices rely heavily on a common infrastructure with cies of the newly emerging trading systems for for- network properties, this approach requires more. eign exchange (e.g., FXall and Currenex)? For many Specifically, it requires an "efficient" market infra- of the new systems, there is no obvious regulatory structure, which itself is not an easily defined con- authority besides possibly a competition policy cept partly because many elements of financial agency) with jurisdiction over potential restrictive infrastructure have been subject to recent changes. or anticompetitive practices. In the next section we consider the analytical ele- The dimensions according to which one can ments as well as the recent changes triggered by a evaluate the various arrangements for the provision number of developments, and then analyze their of market infrastructure services, and the recent possible impact on competition. changes, are numerous, of course, with competi- Regulatory Reform and Trade Liberalization in Financial Services 139 tion being only one of them. Efficiency in provid- ments services may be not be profitable, but the ing relevant (supportive) services, risk dimensions, arrangement may support a larger than necessary integrity, incentives to innovate and upgrade, and float in the system, which then benefits the opera- so forth are relevant as well. The general assessment tors of the payments system. As another example, it is that the trend toward demutualization and priva- has been argued that members of the New York tization of stock markets, for example, has led to Stock Exchange oppose demutualization because efficiency gains in the delivery of these services, they benefit by receiving free research funded by without necessarily compromising (and often even commissions charged by brokers. The competitive enhancing) the objectives of proper risk manage- effects of any change to or regulation affecting parts ment, integrity, and stability. But whether they are of these vertically integrated production chains or also always procompetitive is not yet clear.8 cross-subsidies have to be evaluated with respect to the whole system. Competition Effects Conceptually, the nature of infrastructure services The Telecommunications Model can give rise to many competition issues. Most infra- for Competition Policy structure services are subject to large economies of Given the considerations enumerated above, it scale and many services display network properties. should be clear that encouraging effective competi- A private provider of essential services, such as dear- tion can be difficult in financial services. It will be ing and settlement, can act as a natural monopolist. hard to generalize where it is most important to Correspondingly, changes in the delivery mecha- intervene from a competition point of view (and nisms, such as moving away from a publicly pro- evaluated against the dimensions of efficiency, vided system to a private natural monopoly, as has quality of services, and risk management). The happened for many stock exchanges, can be anti- competition model appropriate for financial ser- competitive. A change in ownership of one input vices may have to go beyond the institutional and element of the production chain is, however, only a functional approach, and develop in a similar man- special and simple case. Many financial services are ner to the model for telecommunications regula- produced and distributed in a vertically integrated tion. Concepts used in applying competition policy way. Banks provide, for example, retail payment to the telecommunications industry are right of services through their own branches while they also access, fair pricing rules, limits on interconnection process the transaction and link up to the payments charges, requirements on interoperability and other system. Many stock exchanges deliver not only standards, and separation of the ownership (or front-end trading services but also dearing and set- control) of the network from the services delivered tlement services through their own systems. over it. Many of those concepts may be applicable Although the commoditization of financial services, to the network aspects of financial services. Aca- helped by policy interventions and technological demic work is being done for some financial serv- changes such as the advent of the Internet, has led to ices markets, such as payment cards, but that is still the unbundling of many elements of financial ser- a relatively new area of research. It is clear, however, vices, such a process is still far from complete. As a that in many aspects the competition policy para- result, it is difficult to evaluate the impact of changes digm needed for financial services is neither one in the competitive structure of any input on a par- based on the "specialness" of financial services nor ticular production chain.9 the paradigm traditionally used for manufacturing Another aspect is that how infrastructure ser- services. vices are provided can affect the allocation of prof- its among activities and can support cross- Developing Country subsidization. Specifically, parts of the infrastruc- Considerations ture may be mutually owned (including on a not- for-profit basis) by agents who derive profit not In many ways financial services industries in all mar- directly from the arrangement but by generating kets have been subject to similar trends. Despite dif- profits elsewhere in the system. As an example, pay- ferences among countries-including such factors 140 Domestic Regulation and Service Trade Liberalization as the state of the financial system, the readiness of erally, as countries develop they liberalize along all the telecommunications infrastructure, and the qual- three dimensions, albeit at different speeds and ity of the regulatory framework-there is common- intensities. These three forms of financial liberal- ality and convergence in the way financial services ization all support financial sector development, industries are being reshaped (Claessens, Klingebiel, economic growth, improved financial sector stabil- and Glaessner 2002). In securities markets global ity, and greater access to financing.'0 In particular, trading is becoming the norm. Increased connectiv- increased competition has produced benefits, ity has accelerated the migration of securities trading including creating pressures for financial institu- and capital raising from emerging markets to a few tions to reduce costs, to improve quality of and global financial centers (Claessens, Klingebiel, and access to services, and to move downscale. In South Schmukler 2002). In banking, consolidation is pro- Africa, for example, the large domestic banks only ceeding in many markets and with the United States felt pressure to extend their services to the lower and other countries abolishing restrictions, inte- segments of the market following the removal of grated financial service provision has become the capital account controls and liberalization of entry. norm. Following their extensive entry into the more Foreign entry has been an important part of this, advanced emerging markets, such as those in Central both directly and indirectly. Foreign banks in Europe, Argentina, Brazil, Mexico, and to a lesser Argentina, for example, have been found to provide degree East Asia, financial institutions have extended financing to small and medium-sized enterprises cross-border entry to low-income countries (Claes- on an equal or better basis than do local banks sens and Lee 2001). In terms of e-finance, the pene- (Clarke and others 2000). In general, foreign bank tration in banking has been more varied across coun- penetration seems to improve financing conditions tries. Spurred by the entry from outside the financial for enterprises of all sizes, although large firms ben- sector, however, many financial services providers are efit relatively more (Clarke and others 2000). now offering e-finance services, with major banks in There are, however, issues of consistency and emerging markets adopting state-of-the-art technol- coherence among the three forms of liberalization. ogy. And most emerging markets have seen the Financial services liberalization may require some entrance of specialized financial service providers, degree of capital account liberalization. Domestic such as portals and aggregators. regulatory reform and capital account liberaliza- Despite the similarities in the evolution of tion may involve the removal of lending restric- financial services industries around the world, tions, which must be done in a consistent fashion there remain large differences among countries in across the two forms. Inconsistencies can arise as terms of their overall development, the stages of they did in the Republic of Korea when firms were financial sector development, and the quality of allowed freely to access certain forms of interna- their regulatory and supervisory frameworks. tional capital but were restricted in their domestic These disparities raise the question whether there is borrowing. This led to the buildup of vulnerabili- a need to approach the issues of trade liberaliza- ties. The three forms can also interact in beneficial tion, domestic regulatory reform, and competition ways. For example, entry by foreign financial insti- policy differently according to a country's level of tutions may improve the stability of the domestic development. Three broad categories of differences financial system by having greater loan loss provi- among countries are relevant: the country's stage of sions and by ensuring greater access to foreign cap- financial liberalization, the quality of its domestic ital during periods of crisis."1 And capital account regulation and supervision framework, and the liberalization can complement domestic reform general development of its financial sector. efforts when it puts greater competitive pressures on domestic financial institutions to offer efficient Stages of Financial Liberalization services to consumers and firms. The stage at which the country is in terms of liber- alization can be analyzed along three dimensions: capital account liberalization, financial services lib- Reaping the full benefits of the three forms of liber- eralization, and domestic regulatory reform. Gen- alization can require a certain minimum level of Regulatory Reform and Trade Liberalization In Financial Services 141 financial sector regulation and supervision. For a restrictions on banks are more likely to support variety of reasons, countries are at different levels political constituencies than to help correct market of development of their regulatory and supervisory failures. In particular, they found that regulatory capacity, quality of legal and judicial systems, and barriers to entry, restrictions on banking activities, other institutional dimensions. Many developing greater supervisory power, and greater government countries' deficiencies can be identified in an ownership of banks were associated with more gov- assessment of their compliance with international ernment corruption. And for most countries, standards (see the previous section). Potential defi- greater supervisory powers without checks and bal- ciencies include not only the quality of regulation ances correlate with worse outcomes for financial and supervision but also accounting standards and sector development. practices, disclosure requirements, and the general Such findings do not mean one should not culture of transparency. The standards extend to all invest in supervisory capacity, but they do suggest financial markets and capital markets, including that one must be selective and careful in reinforcing pension management, insurance, and payments the independence of supervisors when there are no systems, and they concern enhancing the quality of checks and balances in the system. They also have the legal system and the usefulness of financial implications for how successful one can expect reg- information, which will typically be poorer in ulation and supervision to be without changes to developing countries. The deficiencies in each of the general political economy in a country and to these areas are expected to be addressed over time the ownership structure of the corporate and in the follow-up from such assessments and financial sectors in particular. Most of those through general pressures associated with that changes, including achieving greater political open- process (such as through disclosure of deficiencies ness, will be gradual processes, but one should con- and pressures from peers and investors). sider how reforms could help overcome some of Although it will be important to continue to those political economy constraints. In addition to upgrade standards and to invest in supervisory bringing foreign enterprise into a country, entry by capacity in developing countries, partly because foreign financial institutions can also lead to deficiencies have contributed to financial crises, reduced political pressures on the supervisory sys- one has to acknowledge that important constraints tem. Similarly, broadening the scope of institutions will remain. One such constraint will be the often- that are able to provide payments services may insufficient pay of supervisors in developing coun- reduce the political influence of incumbent banks. tries. Those low wages may result in poor-quality supervisors, and may create greater incentives for Promotion of Financial Stability Beyond the corruption. There also will often be deeper reasons need for a consistent approach to market opening why failures in regulation and supervision do not and the need to deal with political economy factors, allow developing countries to reap the full benefits arguments can be made that there are no fixed pre- of liberalization efforts. In particular, a country's conditions imposed on the quality of regulation failure to take appropriate regulatory actions when and supervision that allow effective international- liberalizing is often prompted by political economy, ization of financial services. Countries with weak which leads to moral hazard and excessive levels of and strong regulation and supervision both can do deposit insurance. In the end, those political econ- well when there is extensive foreign entry. In the omy reasons are more often the cause behind bank- first case, foreign entry brings with it improved reg- ing system crises than information asymmetries or ulation and supervision, which enhances the qual- the pure lack of regulatory capacity. ity of the overall domestic financial sector; in the In an empirical analysis of the effects of regula- second case, strong domestic regulation and super- tory and supervisory practices on banking sector vision ensures that new entry is not disruptive. It development and fragility in 107 countries, Barth, may be that the intermediate cases (i.e., countries Caprio, and Levine (2001) concluded that reform with regulatory and supervisory systems that are strategies that place excessive reliance on an exten- neither particularly weak nor particularly strong) sive checklist of regulatory and supervisory prac- present greater risks because foreign financial insti- tices involving direct government oversight of and tutions may compete away the franchise value of 142 Domestic Regulation and Service Trade Liberalization incumbents and thus create incentives for impru- country. It is important to realize that links among dent behavior, and because domestic and foreign various types of financial institutions and telecom- investors may misjudge the stability of the system. munication companies may be hindering effective In such cases, good closure rules for weak financial competition and that incumbent financial institu- institutions and quantitative restrictions on finan- tions may have a lock on networks that are essen- cial exposures may be the most appropriate tial for financial services provision. Incumbents responses while liberalizing. are more likely to block new initiatives and to do It is also the case that the nature of crises contin- so by a variety of means. The net results will be less ues to change. Contagion and volatility may have pressure to reduce costs, to improve the quality of taken on more relevance today as causes of finan- financial services, and to move down the credit cial crises than have pure fundamental weaknesses. scale into lower-income retail and small-enterprise In the fall of 1998, for example, financial markets in lending. countries with very well developed and regulated Although again it is difficult once more to gen- financial sectors, such as the United States, were eralize about how competition policy should be adversely affected by the global financial crisis differentiated by level of development, it will be when asset prices behaved irregularly. At that time even more important in developing countries to the optimal regulatory response for reducing the include competition issues when designing reform turmoil was not obvious to many people. The efforts, including payments systems, credit infor- causes (or at least the proximate causes) of financial mation arrangements, and telecommunications crises seem to keep changing so it is hard to develop regulatory and legal frameworks. Specifically, one firm preconditions for regulation and supervision must be careful in the design of networks, whether that will ensure effective domestic regulatory they involve payments systems or are related to reform, capital account liberalization, and interna- telecommunications (e.g., as in the case of cellular tionalization of financial services. Countries are providers), because these networks can become likely to continue to experience some financial important barriers to entry. In the area of retail crises despite efforts to enhance regulation and payments, for example, the use of a third-party supervision. A balanced multipillar approach provider (not a consortium of banks) for the provi- should be sought-one that is tailor-made to each sion of different forms of retail payment services country's circumstances and includes regulation could be a more appropriate plan from a competi- and supervision, bank owners'incentives, and mar- tion point of view for many developing countries. ket discipline. An effective competition authority is critical, but it will require adequate support, jurisdiction, and backing vis-a-vis other supervisory agencies. In and Competig ontPolicy many developing countries, the overall efficiency and independence of competition authorities need Country conditions do have relevance for the way to be enhanced and proper enforcement tools must in which competition policy is conducted, includ- be provided. Support often will be lacking and con- ing the disciplines associated with the GATS/WTO. flicts may exist between the competition policy Despite reforms, many developing countries' agency and the agency that deals with prudential financial sectors are still characterized by a lack of regulation. In such cases more support for the com- "effective" competition. They may have a very con- petition policy agency would be called for. Also, a centrated market structure, extensive links among case for more restrictions on cross-holdings can be financial institutions and between financial insti- made, particularly in smaller developing countries. tutions and corporations, and high ultimate own- Limits on groups and on bank commerce, includ- ership concentration of the financial sector. ing telecommunications links, may be necessary to Although entry by foreign financial institutions ensure effective competition. In some countries may be open in principle, such entry may be lim- there also may be a need to hold banks to tighter ited to some niche areas, in part because of foreign group-lending exposures because such lending will institutions' perceptions of the risks in a specific be an indirect way to support groups. Regulatory Reform and Trade Liberalization in Financial Services 143 The Role of the GATS and the WTO that strict interpretation, however, the issue remains what constitutes justifiable prudential reg- The GATS is an important force for a more pro- ulation? On one hand, a more common view on competitive policy in financial services. The past prudential regulation has developed through the financial services negotiations, however, have been promulgation of international banking and other arduous and extended. Final success arguably has standards, thus reducing the likelihood of differ- been relatively limited because many countries ences in frameworks across countries leading to have made commitments that bind less than the nontrade barriers. At the same time, as argued regulatory status quo. In others words, most devel- above, there is a need to rethink prudential regula- oping countries have not used the WTO process to tion in the first place in the financial sector, given bind themselves to an (accelerated) process of lib- changes in financial services industries globally. eralization. In part this outcome has arisen because The heavy emphasis on standards today as part of the approach for financial services thus far has been the new international financial architecture implies sector specific and carried out largely outside the that there are legitimate fears that the approach will normal GATS negotiating framework (see Sauve overshoot in matters of safety, soundness, and sta- and Steinfatt 2002). bility at the expense of concerns over free trade in Going forward, a horizontal approach similar to financial services. that for other services may be preferable for finan- The potential anticompetitive way in which the cial services (Mattoo 1999). Such an approach is to prudential carve-out can be applied does not imply be preferred because of the increased inputs from that it needs to be removed fully. For one thing, it is other sectors in the production and distribution of likely to be used sparingly in any case. Countries financial services, including those from such net- realize the reputation costs of invoking the carve- work industries as telecommunications. Liberaliz- out and applying prudential regulation in an anti- ing financial services industries alone may not lead competitive way. Particularly in the context of to the fullest possible gains. A horizontal approach developing countries, investors will look for signs of is also more feasible today because financial ser- credibility, and invoking the carve-out will send the vices have become less "special" and the horizontal opposite signal. Furthermore, invoking the pruden- approach is thus less likely to lead to conflicts with tial carve-out when in a financial crisis might be prudential concerns. A key argument for a horizon- taken as a negative sign by investors. It is also tal approach, however, is that the political economy unclear what types of regulations can reduce the factors that are so prevalent in financial services risk of financial contagion and volatility, arguably have been dominating the negotiation outcome the more likely causes of crises going forward. Use- when there was no ability to trade off interests. ful regulations will include some prudential regula- With financial services increasingly being recog- tions (e.g., requiring certain loan-loss provisioning) nized as essential inputs in overall economic pro- but they also could be more macroeconomic in duction, the support from other sectors for efficient nature (e.g., limiting exposures to certain sectors) or financial services provision, and consequently for be aimed specifically at some balance-of-payments liberalization, has increased, making a horizontal objectives (e.g., restrictions or taxes imposed on approach more attractive. short-term capital flows). Whether such regulations Applying a horizontal approach to financial fall (or ought to fall) under the prudential carve-out services liberalization may require revisiting the is unclear. Nevertheless, there might be circum- prudential carve-out of the GATS. The carve-out stances when some degree of carve-out will be use- has already been used as an argument to keep ful. As such, a form of a prudential carve-out will be financial services out of the Uruguay Round nego- necessary although it can be more circumscribed tiations. There are some issues in interpreting the than is currently the case. scope of the carve-out (see chapter 5). Under some In addition to assessing the scope of the pruden- interpretations, the carve-out cannot be used to tial carve-out, it will be useful to complement the evade other GATS commitments and must be forthcoming round of market access commitments aimed primarily at prudential regulation. Even with in the GATS with a set of procompetitive principles 144 Domestic Regulation and Service Trade Liberalization of sound regulation.'2 Proposals in that respect some aspects. It will take time, and many differ- have been made by many participants in the finan- ences in regulation and supervision potentially cial services industry, especially the insurance amounting to discriminatory barriers are likely to industry. They center around commitments on remain in the short run. Therefore it will also be improved transparency and domestic regulatory important to aim quickly for some minimal accept- reform, including transparent domestic rules and able standards and to introduce procompetitive administrative procedures (see European Services principles of sound regulation, including possibly Network 1999 and 2001 for discussions of the gen- mutual recognition, as additional competitive eral approach). The proposal from the insurance forces. industry (Financial Leaders Group 2001b), for Although developing countries can benefit the example, involves greater specificity on further most from the GATS because it helps bind their commitments on trade (modes 1 and 2) and invest- domestic regulatory regimes and can enhance the ment (modes 3 and 4) and suggestions for best credibility of their reform efforts, the gap between practices in insurance regulation and supervision, 3 commitments under the GATS and existing prac- That approach would be consistent with the single- tices is the largest for these countries. It will remain market approach pursued in the EU and with the important to acknowledge the different views from general need highlighted in this article for trade lib- developing countries on financial services negotia- eralization to be complemented with a more active tions. As importers, rather than exporters, they are competition policy. understandably less enthusiastic about opening up. They have concerns about financial instability, although the evidence suggests that greater interna- Conclusion tionalization of financial services supports more, Changes in financial services industries globally are not less, stability. And they have greater difficulty in making a more active competition policy in finan- establishing sound regulation and supervision, cial services both feasible and necessary, . although here internationalization can also help. In a need for a tighter link between domestic regula- the end, the greater reluctance to bind is best attrib- tory reform efforts and trade liberalization. Finan- uted to political economy constraints, which point cial services have become less special. This implies out the need to match the opening up of financial that they need to be less subject to prudential services to gains somewhere else in the negotia- objectives and that increases the importance of tions-and that makes another argument for hori- competition policy. Competition policy for finan- zontal negotiations. cial services will need to involve elements of the tra- ditional contestability approach and to include dimensions that are both institution and function Endnotes oriented. In an international context, the "neces- 1. Even within a single financial institution, product lines sity" approach to evaluating any remaining domes- were often vertically integrated, with few links among tic barriers in financial services can be used. Given products. For that reason, customer relationship manage- the many network aspects of financial services pro- ment has taken on more importance recently as financial institutions have realized the need to provide consumers vision, however, competition policy for financial with a complete package of financial services tailored to services should also include features of approaches their situations, without necessarily producing the individ- used for other network industries. ual services themselves. 2. Formally, the standards are recommended minimums; for A different approach to competition policy in many countries, they have become the desired levels. financial services will be neither easy nor necessar- 3. Some general questions are the following: Are the standards ily sufficient to achieve the desired outcomes of being formulated by a broad enough representation of countries to have global legitimacy? Is a standards-based efficient and stable financial systems that offer a approach sufficiently flexible to deal with the inevitable wide access to high-quality financial services at low global changes? Can similar standards be expected to apply cost. There remains a need to go deeper to reap all to all or many countries? Are the standards' evaluators suf- ficiently consistent, independent, and subject to some the potential gains of global financial integration, review themselves? and Will standards not distract from the That will require some minimum harmonization in deeper causes of financial crises? A less developed aspect of Regulatory Reform and Trade Liberalization in Financial Services 145 the standards approach has been the degree of mutual References recognition; except for the EU, few countries allow free entry on the basis of a recognized home supervisor (see The word "processed" describes informally produced works Corcoran and Hart 2001 for extensive description of the that may not be available commonly through libraries. EU approaches). More generally, there are few formal Allen, Franklin, Jaime McAndrews, and Philip Strahan. 2002. rewards for compliance with standards. "E-Finance: An Introduction." Journal of Financial Services 4. Another reason to revisit the safety net is that the entry of Research 22(1/2): 1-26. nonfinancial services providers is blurring the lines Barth, James R., Gerard Caprio, and Ross Levine. 2001. between financial and nonfinancial institutions. This may "Bank Regulation and Supervisions: What Works Best?" Work- result in a de facto extension of the public safety net to var- ing Paper 2725. World Bank, Washington, D.C. ious forms of nonfinancial institutions in times of financial Claessens, Stijn, and Marion Jansen, eds. 2000. The Internation- distress. That is especially important in emerging markets alization of Financial Services: Issues and Lessons for Developing because there has been a tendency to define the safety net Countries. The Hague: Kluwer Law International. too widely. More generally, developments make it more dif- Claessens, Stijn, and Jong-Kun Lee. 2001. "Foreign Banks in ficult for supervisors to monitor financial services Low-Income Countries: Recent Developments and Impacts." In providers and increase the potential for leakage of the James Hanson, Patrick Honohan, and Giovanni Majnoni, eds., safety net to activities not related to deposit taking. Globalization and National Financial Systems. Washington, D.C.: 5. One example is that of portals. Many portals provide World Bank. investment advice on their sites, but they may have exclu- Claessens, Stijn, Daniela Klingebiel, and Thomas Glaessner. sivity agreements with a small number of financial services 2002. "E-Finance: A New Approach to Financial Sector Develop- providers. Who has jurisdiction over portals? Do they fall ment?" Financial Markets, Institutions and Instruments. Vol. 11. under the umbrella of the securities regulator or under a Boston: Blackwell Publishing consumer protection agency? Claessens, Stijn, Daniela Klingebiel, and Sergio Schmukler. 6. Specifically, see World Bank (2001) for general evidence 2002. "The Future of Stock Exchanges in Emerging Markets." In and Claessens and Jansen (2000) for the international Robert E. Litan and Richard Herring, eds., Brookings-Wharton dimension. Papers on Financial Services 2002. Washington, D.C.: Brookings 7. Although it is hard to generalize in this area as many coun- Institution Press. tries, especially emerging markets, coming from more cen- Clarke, George, Robert Cull, and Maria Soledad Martinez tralized models are still in the opposite process of giving Peria. 2001. "Does Foreign Bank Penetration Reduce Access to greater responsibility to the private sector. Credit in Developing Countries? Evidence from Asking Borrow- 8. In the assessment of some people, public policy concerns ers." Working Paper 2716. World Bank, Development Economics related to delivery of trading, clearing, and settlement Research Group, Washington, D.C. services are no longer about quality of services or risk, Clarke, George, Robert Cull, Laura D'Amato, and Andrea but about the industrial organization of an industry Molinari. 2000. "On the Kindness of Strangers? The Impact of with mostly private agents. See, for example, Steil (2002). Foreign Entry on Domestic Banks in Argentina." In Stijn See also the public discussion around the recent pur- Claessens and Marion Jansen, eds., The Internationalization of chase by Deutsche Borse of its remaining stake in Clear- Financial Services: Issues and Lessons for Developing Countries. stream, which makes for a fully vertically integrated stock The Hague: Kluwer Law International. exchange. Corcoran, Andrea M., and Terry L. Hart. 2001. "The Regula- 9. Cruickshank, who headed a competition policy review com- tion of Cross-Border Financial Services in the EU Internal Mar- mission in the United Kingdom (Review of Banking Ser- ket: A Primer for Third Countries." Working Paper. Commodity vices in the United Kingdom, available at the Her Majesty's Futures Trading Commission, Washington, D.C. Treasury Web site, www.hm.treasury.gov.uk), stated in his Demirguc-Kunt, Asli, and Ross Levine, eds. 2001. Financial press release: "There are real problems with the way banks Structure and Economic Growth: A Cross-Country Comparison control networks which allow money to flow around the of Banks, Markets, and Development. Cambridge, Mass.: MIT economy, whether it be cheques, credit and debt cards, or Press. electronic transfers, big and small." Demirguc-Kunt, Asli, Ross Levine, and Hong-Ghi Min. 10. See World Bank (2001) for review. Reports by commissions 1998. "Opening to Foreign Banks: Issues of Stability, Efficiency, like Cruickshank in the United Kingdom also stress the and Growth." In Proceedings of the Bank of Korea Conference on beneficial effects of competition on financial services pro- the Implications of Globalization of World Financial Markets. vision to retail consumers and to small and medium-size Seoul: Bank of Korea. enterprises. Diamond, Douglas, and Philip H. Dybvig. 1983. "Bank Runs, 11. Kono and Schuknecht (2000) found evidence that entry Deposit Insurance and Liquidity." Journal of Political Economy by foreign financial institutions leads to less volatility in 91(June): 401-19. capital flows. Demirguc-Kunt, Levine, and Min (1998) Diamond, Douglas, and Raghuram Rajan. 1998. "Liquidity reported that foreign presence reduces the risks of financial Risk, Liquidity Creation and Financial Fragility: A Theory of crises. Banking." Working Paper 476. University of Chicago, Center for 12. Details on such proposals can be found on the Web sites of Research in Security Prices. the U.S. Coalition of Service Industries (www.uscsi.org) European Services Network. 1999. "ESN Position Paper on and of the European Services Forum (www.esf.be). GATS Horizontal Issues: GATS Principles for Domestic Regula- 13. The form in which these additional commitments and tion and the Development of Pro-Competitive Regulation Prin- strengthened disciplines on procompetitive regulation ciples." Brussels. Processed. could be made might be as a reference paper or appendix to . 2001. "Domestic Regulation." Preliminary Discus- the Financial Services Agreement or the Understanding. sion Paper, Brussels. Processed. 146 Domestic Regulation and Service Trade Liberalization Financial Leaders Group. 2001a. "Commentary on Proposals Matoo, Aaditya. 1999. "Developing Countries in a New for Liberalisation in Financial Services." Washington, D.C. Round of GATS Negotiations: From a Defensive to a Pro-Active Processed. Role." Paper prepared for the WTO/World Bank Conference on 2001b. "Insurance: Proposed Model Schedule and Developing Countries in a Millennium Round. Best Practices." Washington, D.C. Processed. Sauve, Pierre, and Kartsen Steinfatt. 2002. "Financial Services Kashyap, Anil K., Raghuram Rajan, and Jeremy Stein. 1999. and the WTO: What Next?" In Robert E. Litan, Paul Masson, and "Banks as Liquidity Providers: An Explanation for the Co-Exis- Michael Pomerleano, eds., Open Doors: Foreign Participation in tence of Lending and Deposit-Taking." University of Chicago. Financial Systems in Developing Countries. Washington, D.C.: Processed. Brookings Institution Press. Key, Sydney. 2001. "GATS 2000: Issues for the Financial Ser- Steil, Benn. 2002. "Changes in the Ownership and Gover- vices Negotiations.' American Enterprise Institute Series of Sec- nance of Securities Exchanges: Causes and Consequences." In toral Studies on Trade in Services. Washington, D.C.: American Robert E. Litan and Richard Herring, eds., Brookings-Wharton Enterprise Institute. Papers on Financial Services 2002. Washington, D.C.: Brookings Kono, Masamichi, and Ludger Schuknecht. 2000. "How Institution Press. Does Financial Services Trade Affect Capital Flows and Financial World Bank 2001. Finance and Growth: Policies in a Volatile Stability?" In Stijn Claessens and Marion Jansen, eds., The Inter- World. Washington, D.C. nationalization of Financial Services: Issues and Lessons for Devel- oping Countries. The Hague: Kluwer Law International. REGULATORY REFORM AND TRADE LIBERALIZATION IN ACCOUNTANCY SERVICES Claude Trolliet John Hegarty Executive Summary In 1995, the World Trade Organization (WTO) was born. Some assumed the WTO would finally Once upon a time, everything was quiet in the cac opn the r eg the sTorad marky orderly world of accountancy sector regulation. nrac he regaccounotac secrv and profs new era where accountancy services and profes- Like a Zen garden, everything was in its place- sionals could flow across borders freely. This paper however, the rationale for that placement was only explains how these expectations, for the most part, understood by the "ilnsiders."' were not fulfilled: On standards, recognition of cre- In 1957, some passionate researchers had a dentials, and principles of domestic regulation, the vision; they planned an experiment in Europe that Working Party on Professional Services-especially would catalyze the advent of a single market in the created for the purpose of furthering work in the accountancy sector (as in most other sectors). Almost fifty years later that goal has still not been atan cy ecorai ed water.sO realzed.TheTreay o Rom ke didnotopenthe standards, it encouraged the work of institutions, but did not delegate any power, and made no com- magic door of domestic regulation in the account- mitment to results. On recognition, it made an ancy sector after all. inventory of elements to be considered when nego- In the meantime, the industry organized itself to tiating a recognition agreement, but failed to pro- operate in a global economy and to respond to vide any guidance for the conduct of the process. clients' needs (despite the absence of liberalizing reform in the sector). Networks were the solution: diplines .tha wo ul not l , itpoan ch e inth independent local firms agreed by contract to dicpie tha wolvo edt n hnei h iexpendet localgle firms agreed subyit contrate to a regulation of the sector, and it hardly simplified the exploit a single brand and to submit themselves to a tako h ipt etlmn oysol n common set of rules. ~~task of the Dispute Settlement Body should any common set of rules. The views expressed are personal and should not be attributed to the World Trade Organization or the World Bank. 147 148 Domestic Regulation and Service Trade Liberalization national regulation be challenged in front of the comparable evolution of its regulation, so that it WTO. cynically could be suggested that the sector's devel- It is in this context of missed opportunities that opment was achieved in spite of, rather than thanks the Enron scandal engulfed the small world of to, countries' laws and regulations governing the accountancy regulation, and created a storm in the sector. quiet and orderly garden. Some would even argue that the approach Like all tales, this one concludes with a moral: adopted for regulating the sector is completely at Developments to date in the accountancy sector odds with the logic of trade liberalization. Regula- have been unable to overcome the antagonism tors have had as their main objectives the protec- between regulation and liberalization. Liberaliza- tion of the public and the promotion of the quality tion is not possible unless governments gain confi- of the service, which have been pursued through dence in other countries' regulatory regimes. Regu- increasingly detailed regulations or standards on lation should concentrate on what needs to be most aspects of the accountancy profession and its regulated, and do so in the most appropriate way. practice. Today, most of these regulations and stan- Even if the uniformity of regulation is not the solu- dards remain purely national and differ signifi- tion, it nevertheless raises the issue of what the cantly among countries. This variability does not appropriate regulatory framework is for the sector. create a context favorable to greater mobility of Work of IFAC and IASB on the development and services and professionals across borders. implementation of standards, of IOSCO on the As is true in many other sectors, the globalization recognition of such standards, and last but not of the world economy has brought new challenges least, of the World Bank on the observance of stan- to accountancy regulators that can no longer be dards and codes (ROSC), still leaves many ques- addressed in a purely national context. Financial tions unanswered for the moment. The role of the scandals regularly bring this issue to the fore and WTO and the impact of current services negotia- put pressure on regulators to reform the regulation tions in this context remain far from clear. of the sector, but it is not always easy to distinguish their causes between those attributable to weak- nesses in the design of the national regulatory The Accountancy Sector framework and those resulting from failures to Accountancy is a critical component of the infra- operate that framework as designed. When any reg- structure for a market economy. No economically ulatory reform is considered for the sector, it is sound activity would be possible without it. therefore necessary to seek better protection of the Beyond the information it provides on the financial public while trying to remove the barriers that position and profitability of operations, it is the unnecessarily restrict trade in accountancy services. foundation of countries' fiscal systems and it plays This is a daunting task. The authors hope this chap- a key role in corporate governance. Accountancy is ter will contribute modestly to the reflection on relied on when enforcing prudential requirements these issues and they favor the emergence of a regu- for banks, insurance companies, securities dealers, latory framework better suited to the needs of the and other market participants. As a result, the sector as well as of the economy and society at large. accountancy sector is among the most regulated in The first section of the chapter takes stock of the the world's advanced economies. work done to date in the World Trade Organization Although precise statistical data remain scarce' on trade liberalization in the accountancy sector, (an endemic problem in the field of services), all of whether during or after the Uruguay Round. The the information available on the evolution of the second section considers various other experiences sector points to significant growth of trade in of regulatory reform and trade liberalization in the accountancy services over the last decade. It reflects European Union or at international level. The third the increasing internationalization of the economy section considers the broader picture in which and the demands of corporate clients doing busi- accountancy regulation is entangled and finally dis- ness across borders. This economic dynamism of cusses the prospects for further regulatory reform the sector, however, has not been matched by a in the sector. Regulatory Reform and Trade Liberalization In Accountancy Services 149 Accountancy and the World Trade general rules having general application, rather Organization: Progress to Date than by permitting countries to retain significant Uruguay Round Outcomes impediments to international trade in accountancy services until such time as they make specific com- The Uruguay Round was the first attempt at a mul- mitments with respect to the sector and decide, tilateral level to liberalize trade in services in gen- through negotiations, to remove the barriers. The eral, and trade in accountancy services in particu- negotiating guidelines and procedures3 for the cur- lar. Few doubts were expressed by WTO members2 rent services negotiations, adopted in March 2001, about including the accountancy sector under the confirm this approach. scope of the General Agreement on Trade in Ser- At the end of the Uruguay Round, 47 members vices (GATS). There was little support for the con- (counting the 12 member states of the European tention that the special nature of statutory audit Community [EC] as 1) had undertaken specific made it eligible for exception under Article 1.3(b) commitments in the accountancy sector.4 Subse- and (c) for services supplied in the exercise of gov- quent accessions to the WTO have now brought ernmental authority. As a result, trade in accoun- that total up to 69 members.5 Most refer to the tancy services is governed by the general obliga- United Nations Central Product Classification tions and disciplines of the GATS, in particular as (CPC) nomenclature6 in their description of the far as most-favored-nation (MFN) treatment (Arti- sector. A large majority still maintains some form cle II), transparency (Article III), increased partici- of market access limitations, national treatment pation of developing countries (Article IV), domes- limitations, or both for one or more of the four tic regulation (Article VI), and recognition (Article modes of supply.7 In the accountancy sector, or for VII) are concerned. professional services in general, 7 members have In the course of the negotiations, accountancy kept MFN exemptions,8 all requiring reciprocal services received significant attention and served as treatment for the exercise of the profession. At a useful case study on how liberalizing trade in ser- best, specific commitments have bound the status vices requires attention to "behind-the-border" quo ante in the countries that have undertaken issues in that the main barriers to trade derive from them. The main positive outcome of the Uruguay provisions of domestic regulation governing the Round in the accountancy sector is therefore con- sector. To a certain extent these matters were sidered to be increased legal certainty with respect addressed in Articles VI (Domestic Regulation) and to access to the markets of those countries that VII (Recognition) of the GATS, but those provisions have covered the sector in their schedules of com- did not, in and of themselves, remove any impedi- mitments. Although the Uruguay Round had led ments to international trade. Furthermore, restric- to a deeper understanding of the impact of domes- tions on market access and national treatment fell to tic regulation on international trade in accoun- be dealt with in accordance with Articles XVI (Mar- tancy services, it was difficult to point to any ket Access) and XVII (National Treatment). meaningful liberalization that came about as a This structure of the GATS meant that measures result of the negotiations. that are subject to scheduling under Articles XVI Article VI.4, however, did foresee a future, post- and XVII would not be eliminated as a result of the Round work program to explore how the liberaliz- general obligations of members. In other words, ing potential of Articles VI and VII could be where a specific domestic regulation has the effect enhanced. Just prior to the conclusion of the of denying market access or national treatment, the Uruguay Round negotiations on December 15, regulation could only be modified when a specific 1993, members also adopted a Decision on Profes- commitment has been negotiated under the sional Services.9 The objective was to ensure con- request-offer procedure and scheduled; it could not tinuation of work on the liberalization of profes- be negated automatically as a result of the entry sional services,'0 and of accountancy services in into force of the agreement. This came as a disap- particular. The decision was also perceived as an pointment to those who had hoped to see at least attempt to minimize the frustration generated by some behind-the-border issues dealt with by way of the limited results of the Uruguay Round described 150 Domestic Regulation and Service Trade Liberalization above. The decision foresaw creation of a Working work program of the International Organization of Party on Professional Services (WPPS) and defined Securities Commissions (IOSCO) 12 and the Inter- its mandate. The primary focus of that mandate national Accounting Standards Committee (IASC) related to domestic regulation. As a matter of prior- on the possible endorsement of a core set of inter- ity the WPPS was requested to make recommenda- national accounting standards (IAS). The WPPS tions for multilateral disciplines in the accountancy also considered the possibility of transposing in the sector so as to give operational effect to specific accountancy sector some of the rules already in commitments. force for trade in goods and contained in the agree- In making its recommendations, the WPPS was ment on technical barriers to trade,13 such as the instructed to concentrate on the following: presumption of necessity in favor of measures that comply with international standards, but members' * Developing multilateral disciplines relating to national regulators, who should have led the work, market access so as to ensure that domestic reg- blocked any progress in that direction. The only ulatory requirements are based on objective and outcome was the inclusion of the following sen- transparent criteria, such as competence and the tence in the Singapore Ministerial Declaration in ability to supply the service, and are not more December 1996: "We encourage the successful burdensome than necessary to ensure the qual- completion of international standards in the ity of the service, thereby facilitating the effec- accountancy sector by IFAC [International Federa- tive liberalization of accountancy services tion of Accountants], IASC and IOSCO.'14 The * Using international standards and, in doing so, statement had no apparent effect. encouraging cooperation with the relevant In May 1997 the CTS endorsed the Guidelines international organizations as defined under for Mutual Recognition Agreements or Arrange- paragraph 5(b) of Article VI, so as to give full ments in the Accountancy Sector,'5 which had been effect to paragraph 5 of Article VII developed by the WPPS. The most common means * Facilitating the effective application of para- to achieve recognition had been through bilateral graph 6 of Article VI of the GATS by establishing agreements, and Article VII recognizes that means guidelines for recognizing qualifications. as permissible by not subjecting such agreements to MFN obligations. Bilateral negotiations enable In elaborating these disciplines, the WPPS was those involved to focus on the key issues and differ- requested to take account of the importance of the ences of their two environments. When a bilateral governmental and nongovernmental bodies regu- agreement has been achieved, however, members lating professional services. have an obligation to afford adequate opportunity for other interested members to negotiate their accession to that agreement.16 Ultimately, this obli- Developments Since the Creation of the WTO. Developments Since the Creation of theWOgation would extend mutual recognition more The Working Party on Professional Services In broadly. There is evidence to suggest that the num- March 1995, following the entry into force of the ber of mutual recognition agreements worldwide is GATS and the creation of the WTO, the Council for increasing, but they remain primarily between pairs Trade in Services (CTS) established the WPPS to of industrial countries with relatively similar develop the disciplines necessary to ensure that arrangements for the certification and accredita- measures relating to qualification requirements tion of accountants. The Guidelines acknowledge and procedures, technical standards and licensing that there are differences in education and exami- requirements, and procedures in the field of profes- nation standards, experience requirements, regula- sional service do not constitute unnecessary barri- tory influence, and various other matters, all of ers to trade. which make implementing recognition of foreign The WPPS devoted limited attention to the issue professional qualifications and licenses on a multi- of technical standards. It organized two symposia lateral basis very difficult. The second sentence of with the international standard-setting bodies for the introduction to the Guidelines reads: "These the accountancy sector1' during its first year of guidelines are non-binding and are intended to be operation, and was briefed in particular on the used by Members on a voluntary basis, and cannot Regulatory Reform and Trade Liberalization in Accountancy Services 1S5 modify the rights or obligations of the Members of view to, or with the effect of, creating unnecessary the WTO." barriers to trade in accountancy services. There is no consensus on the actual value added As indicated above, in GATS terminology by the Guidelines to the provisions of Article VII. "domestic regulation" constitutes a subset of what Some believe they provide practical guidance for is covered by the regulation of the sector in most governments, negotiating entities, or other entities countries. The WPPS confirmed that limitations to entering into mutual recognition negotiations on market access covered by Article XV123 and to the authorization, licensing, or certification of national treatment covered by Article XVII were accountancy services providers. Supporters believe excluded from the scope of the Disciplines, even if the Guidelines' nonbinding nature facilitates rather they related to qualification, standards, or licens- than mandates liberalization. The objective is to ing. According to the provisions of Articles XVI make it easier for parties to negotiate recognition and XVII, such measures had to be eliminated agreements and for third parties to negotiate their through negotiation unless inscribed in the mem- accession to such agreements or to negotiate com- ber's schedule of specific commitments. Having parable ones. The critics of the Guidelines, on the been adopted only by a decision of the CTS, the other hand, argue that they constitute a rather Disciplines do not have the same legal standing as weak document that fell hostage to the diverging the GATS, which is part of an international treaty practices already in existence in various regions of ratified by each member. Paragraph 2 of the deci- the world.'7 No member could ever have conceded sion adopting the Disciplines indicates that the that its own approach to recognition was not the intention is to integrate them into the GATS no ideal one. As a result, despite the very different later than the conclusion of the services negotia- recognition regimes currently in place around the tions now under way. According to paragraph 3 of world in the accountancy sector, all regimes com- the decision, until this integration occurs, mem- ply with the Guidelines. What made this compli- bers will not take measures that would be inconsis- ance possible in the Guidelines was the mere inven- tent with the Disciplines. It should also be noted tory of all the issues that negotiators might wish to that the first paragraph of the decision limits the address when discussing recognition of foreign application of the Disciplines to members who accountancy qualifications, rather than any partic- have entered specific commitments on account- ular guidance on how to proceed and in which ancy in their schedule. This last limitation could order. Adopting a nonbinding approach to the sub- not have been anticipated from the mandate of ject did not allow sharpening of the Guidelines Article VI.4, but might have found its origin in the content. To support the views of the critics, there is formulation adopted in paragraph 2 of the deci- no evidence that the Guidelines have been used sion on professional services, which reads: "As a since their adoption: no member has notified the matter of priority, the Working Party shall make CTS under GATS Article VII.4 of the opening or recommendations for the elaboration of multilat- conclusion of negotiations on the recognition of eral disciplines in the accountancy sector, so as to foreign accountancy qualifications.'8 give operational effect to specific commitments" The Disciplines on Domestic Regulation in the (emphasis added). The consequence of this was to Accountancy Sector were adopted in December make the undertaking of specific commitments in 199819 by a decision of the CTS.20 The work bene- the accountancy sector more onerous for members fited from a significant number of contributions on in the future. the regulation of the sector and on regulatory The Disciplines contain detailed provisions with reform in various parts of the world.21 The purpose respect to: of the Disciplines is to facilitate trade in accoun- tancy services by ensuring that domestic regula- * Transparency tions affecting such trade meet the requirements of * Licensing requirements Article VI.4, so that measures relating to licensing * Licensing procedures requirements and procedures, technical stan- * Qualification requirements dards,22 and qualification requirements and proce- * Qualification procedures dures are not prepared, adopted, or applied with a * Technical standards. 152 Domestic Regulation and Service Trade Liberalization On the Disciplines' capability to further trade ber shall ensure that its competent authorities take liberalization in the accountancy sector, opinions account of qualifications acquired in the territory of diverge along almost the same lines as in the Guide- another Member, on the basis of equivalency of lines. For the optimists, the Disciplines have poten- education, experience and/or examination require- tially far-reaching consequences for those aspects of ments" (emphasis added). The formulation domestic regulation that influence international adopted in many parts of the text is frequently non- trade. They represent an important step forward in prescriptive, and the extensive use of "shall" is defining rules on domestic regulation under the counterbalanced by qualifications such as "in prin- GATS because they contain a binding necessity test. ciple'" "wherever possible," and the like. A proposal Members are required to "ensure that measures not to create a presumption in favor of a test of compe- subject to scheduling under Articles XVI or XVII of tence as the least trade-restrictive measure received the GATS, relating to licensing requirements and little support. The Disciplines also fail to deal with procedures, technical standards and qualification the cumulative effect of requirements, each of requirements and procedures are not prepared, which would be individually considered necessary adopted or applied with a view to or with the effect but would be unnecessarily duplicative in many of creating unnecessary barriers to trade in respects. The end result is a nicely balanced politi- accountancy services. For this purpose, Members cal compromise with limited legal clout that does shall ensure that such measures are not more trade- not really challenge the regulation of the sector in restrictive than necessary to fulfill a legitimate most respects. We are not aware of any regulatory objective. Legitimate objectives are, inter alia, the change that would have occurred in the sector as a protection of consumers (which includes all users result of the adoption of the Disciplines. The CTS of accounting services and the public generally), has received no notification under Article III.3 of the quality of the service, professional competence, any regulatory change introduced as a consequence and the integrity of the profession." of the adoption of the Disciplines.24 If the skeptics accept that the necessity test con- Some final observations should be added as a tained in paragraph 2 is without doubt the most sub- conclusion on the work of the WPPS on the stantial provision in the Disciplines, they consider accountancy sector. With the exception of the sen- that the rest of the text adds little to existing GATS tence induded in the Singapore Ministerial Declara- articles. They argue that the necessity test was tion in which the organizations named and the already mentioned in the mandate of Article VI.4, process referred to are specific to that sector, the which means that nothing less was expected in the other outputs of the WPPS are nonspecific. The Disciplines. It is true, however, that they spell out Guidelines and the Disciplines could apply almost what domestic regulation ought to be necessary for: as such to any other professional service sector. This to fulfill a legitimate objective, such as the protection is not necessarily a drawback in the context of the of consumers, the quality of the service, professional GATS, but the lack of specificity is revealing about competence, and the integrity of the profession. That the limited capability of the WTO to adopt an is somewhat narrower than the formulation in para- approach to liberalization that would really be tai- graph (b) of Article VI.4. Beyond this small legal pre- lored to the particulars of one subsector. If the dis- cision, the Disciplines limit themselves to an illustra- cussions in the WPPS lead to a better understanding tion of what would normally be expected of of the interaction between Article VI.4 measures members in terms of transparency, licensing, qualifi- and market access or national treatment restrictions cation, and standards, or they specify the application covered by Articles XVI and XVII, this legal debate of the necessity test to types of measures. In some seems to be constrained by the formal framework key cases, however, the specific rules contain lan- and internal structure of the GATS rather than to guage weaker than that in the necessity test. lead to greater liberalization in the sector. For example, the provision on residency require- Following its adoption of the Disciplines, and ments states that members "shall consider" whether despite the fact that the WPPS responded only to the less trade-restrictive means could be used to first part of its mandate to deal specifically with the achieve the same policy objective, and the provision accountancy sector, in April 1999 the CTS decided to on qualification requirements states that "a Mem- replace the WPPS with a Working Party on Domes- Regulatory Reform and Trade Liberalization In Accountancy Services 153 tic Regulation (WPDR). The WPDR was charged These barriers relate to all four modes of deliv- with expanding the Article VI.4 work program to ery listed in the GATS. Many of the obstacles are services in general, including an assessment of the interrelated or derive from related aspects of extent to which the accountancy Disciplines might domestic regulation. They illustrate the inextricable be applied to other professions.25 The WPDR was links between the provisions of GATS Article VI.4 asked to report back with recommendations no later and Articles XVI and XVII, because certain aspects than the conclusion of the current negotiations. No of the same measure might be covered by the for- definitive conclusions have yet emerged from its mer and other aspects by the latter. Compounded work, which will continue in parallel with the sec- by the complexity of the regulation inherent in the toral negotiations on specific commitments and the accountancy sector, the even higher level of sophis- work on the development of further rules for emer- tication of the internal architecture of the GATS gency safeguard measures,26 government procure- constitutes one additional hurdle that will have to ment,27 and subsidies28 in the area of services. be overcome to produce meaningful liberalization. An arduous exegesis is frequently necessary to New Services Negotiations As the market access assess the liberalization potential of any additional bargaining phase of the services negotiations commitment that would be undertaken in the begins,29 it is an opportune moment to take stock WTO, whether as part of the Disciplines of Article and to look forward to what might be achieved VI.4 or of a member's schedule of specific commit- during the current round of negotiations, bearing ments. This leaves ample room for diverging legal in mind more general developments that could interpretations among specialists and is a further have an influence on talks taking place within the challenge for those trying to increase liberalization. WTO context. Everything depends, however, on the The legal certainty that was supposed to result from enthusiasm of interested parties to take advantage the GATS still has its limitations. of the opportunities being offered. To date, only two members have submitted a To begin, it is useful to recall some of the more negotiating proposal for the accountancy sector: the significant barriers that still impede international United States3' and Australia.32 In addition, the 30 3 43 trade in accountancy services. In addition to European Union,33 Canada,34 Switzerland,35 and those that apply to services generally, some having Colombia36 presented proposals relating to profes- specific relevance to accountancy include: sional services in general. The United States pro- posed that members who have not yet done so * Nationality and citizenship requirements undertake commitments in the accountancy sector. * Residence and establishment requirements In making that proposal the United States suggested * Professional certification and entry requirements that those members address a number of obstacles * Restrictions on the mobility of professional to trade liberalization that are listed in the proposal personnel and that cover, with a different formulation, most of * Scope of practice limitations the obstacles mentioned in the previous paragraph. * Restrictions on advertising, solicitation, and fee "Some items in the list may be market access restric- setting tions, or national treatment limitations, or both. In * Quantitative restrictions on the provision of addition, some obstacles, although not limitations services on market access or national treatment per se, may * Restrictions on the business structures that can result from regulatory provisions or other measures be used to provide services which make it difficult for foreign suppliers to mar- * Restrictions on international relationships ket their services."37 To that effect, the United States (including foreign ownership) and the use of is suggesting that, according to Article XVIII, mem- firm names bers make additional commitments relating to the * Restrictions on international information flows, regulation of the sector, along the lines of the Disci- including the electronic transmission of reports plines. That would replicate the approach already and accounting documents adopted during the extended telecommunication * Differences in accounting, auditing, and other negotiations with the inclusion by certain members standards. of a Reference Paper on regulatory principles in 154 Domestic Regulation and Service Trade Liberalization their schedule of specific commitments. This way of Movement of Persons. Mode 4 is an important incorporating the Disciplines into the GATS, as means of accountancy services provision, not required by the decision adopting the Disciplines, only in its own right but also in association with might be one of the most practical solutions avail- Mode 3 (Commercial Presence), where the tem- able, but it has its limitations. It further links the porary movement of skilled or managerial per- provisions of Article VI.4 to scheduled commit- sonnel or both may be necessary. This is of inter- ments and leaves it up to each member to integrate est to industrial-country providers in terms of the regulatory principles, as a whole or in part, into access to other industrial countries,38 as well as its schedule of specific commitments. From a sys- to developing countries.39 It also is of interest temic point of view, that would have the additional to certain developing countries with strong disadvantage of abandoning any chance of adopting accountancy services sectors, such as India, seek- the Disciplines as a set of regulatory principles inte- ing access to industrial and developing country grated into the GATS general obligations. markets alike. Progress depends to a large extent Australia adopted a slightly different approach. on the separate discussions on Mode 4 generally, After also listing those impediments to further lib- but for accountancy services it is also strongly eralization in the sector it considered most signifi- linked to questions of licensing and accredita- cant, it proposed to extend the reach of revised Dis- tion. Improvements in communications tech- ciplines to measures subject to scheduling under nologies, however, also may have an influence, to Articles XVI and XVII. That extension would blur the extent that the possibilities for "off-shoring" further the distinction painstakingly established certain accountancy work may enable the work between the remit of these two articles on the one to be brought to the accountants rather than the hand and Article VI.4 on the other. other way around, thereby switching from Mode Those members who made proposals for pro- 4 to Modes 1 and 2. Of interest, for example, fessional services in general have addressed some are mutual recognition negotiations currently specific market access or national treatment limi- under way between Italy and India, which would tations like residency/establishment or nationality/ enable Indian professionals to acquire the Italian citizenship requirements, calling for their removal. certification necessary to allow them to carry They all recognize the particular importance of out in India on behalf of Italian clients certain Mode 4 and suggest improvements to existing activities regulated in Italy, using communica- commitments and work on the recognition of tions technology. qualifications and licenses. Canada and Switzer- Foreign Ownership. Although few countries have land also proposed extending the scope of the Dis- adopted measures having as their stated objec- ciplines to cover other sectors (either horizontally tive the prohibition/restriction of foreign own- or sectorally), and the European Union (EU) sug- ership of domestic accountancy services firms, gested removing existing MFN exemptions cover- this is nonetheless the consequence of rules that ing professional services because they are covered require local firms to be owned (by majority or by Article VII. in full) by locally licensed professionals, and Taking into consideration the substantial work whereby access to the local license requires com- already done on the main barriers to liberalization pliance with citizenship, nationality, residence, listed above or in members' various proposals, as establishment, or burdensome recertification well as the complexity of the existing GATS legal procedures. Although many such rules were architecture, it seems that the movement of natural adopted at a time when foreign ownership was persons and foreign ownership could be among the simply not thought to be a possibility, continu- issues of most relevance to the accountancy sector ing such requirements (which are prevalent in and could most usefully be addressed during the both industrial and developing countries) is a negotiations on specific commitments currently severe impediment to the international integra- under way in the WTO. Most interested parties are tion of accountancy firms. That can have nega- still reflecting on this, however, and might come to tive consequences with respect to the transfer of different conclusions at a later stage in the process. know-how and methodologies, but it also com- Regulatory Reform and Trade Liberalization In Accountancy Services 155 plicates the governance of international firm 1970s or 1980s, but the common view is that all networks in a manner by weakening their ability firms-domestic and foreign-benefited when to enforce uniform quality standards across the such access was facilitated. network. The East Asian financial crisis high- lighted a number of cases in which the level of The debate in these two domains is therefore assurance conveyed by well-known interna- much wider than the sectoral context of accountancy tional firms differed significantly from one net- services. Progress on either front will depend on the work member firm to another, and in which the capacity of members to find solutions to the systemic absence of mechanisms normally associated questions that underlie the debate on the temporary with ownership and control prevented the uni- movement of natural persons and the articulation form enforcement of standards to which the between the provisions of Articles VI.4, XVI, and network had agreed. International ownership of XVII. If the stakes are high, the odds are low! integrated international firms by all of their partners worldwide rather than the continua- tion of separate, locally owned firms linked only Experiences of Regulatory by network agreements could enhance the qual- Re A ntade Ler . . . ~~~~in the Accountancy Sector ity and availability of accountancy services internationally and in individual countries. Any Although the GATS is the first attempt ever made changes to national regulations to permit for- at a multilateral level to liberalize trade in ser- eign professionals to participate in the owner- vices, to a large extent the design of the GATS, ship of local firms should still ensure that such specific commitments undertaken by members, firms remain subject to domestic requirements and the way the WTO was able to deal with the and domestic jurisdiction.40 One key issue to be liberalization of the accountancy sector have been resolved is how to ensure that professional firms shaped by preexisting factors. The fundamental remain under professional control if a local principles enshrined in the GATS (MFN treat- license is no longer required of its owners, or ment, market access, national treatment, and so where it is considered excessively burdensome to forth) have been inherited from the GATT legal require that foreign professionals with no desire tradition, and countries' laws and regulations in to practice in the country acquire the local qual- the accountancy sector have conditioned their ification. Within the EU a distinction has been specific commitments and the outcome of the suggested between the license necessary to pro- work of the WPPS. The first section of this chap- vide accountancy services in a country (which ter analyzed the limited expectations one may continues to be the local designation) and the have for the current WTO services negotiations. It license necessary to be considered acceptable to would be useful at this stage to identify other participate in the ownership of a domestic firm sources of inspiration to feed our reflection on (which could be a designation from any EU regulatory reform and trade liberalization. We will member state).4' This raises issues of mutual examine successively the EU experiment, the recognition for purposes of acquiring owner- efforts at standardizing accountancy deployed at ship rather than practice rights, and further the international level, and the approach adopted work is required to develop modalities that by big audit networks to develop their business at would enable this to be done in a multilateral the global level in spite of the many barriers to any context. Some people may speak against foreign form of worldwide practice. ownership because of a desire to protect local firms from competition (infant-industry pol- icy), but the efficacy of the policy more generally is open to question, given the risks of permanent Harmonization and mutual recognition are differ- infancy. Many of the countries of continental ent but complementary techniques. Mutual recog- Europe made it difficult for foreign accountancy nition is not possible in practice without a mini- firms to have access to their markets until the mum level of prior harmonization. Conversely, 156 Domestic Regulation and Service Trade Liberalization mutual recognition can act as a lever to augment restriction has to be justified by reasons linked the results already obtained through harmoniza- with the protection of the general interest; this tion. In the accountancy sector, these two interest should not already be protected by the approaches have been used at different levels (bilat- rules of the member state where the supplier is eral, regional, international) with varying out- established; and the same result should not be comes, dependent mainly on the legal framework capable of achievement through less demanding within which they applied. rules. Each of these three conditions has been pro- The most favorable framework is undoubtedly gressively defined and applied by the Court, ini- that of the EU Single Market created by the Treaty tially to trade in goods and then to trade in ser- of Rome and subsequent acts since 1957. Within a vices. The formula that defines proportionality group of countries that are relatively homogenous and each of its components is supported by a sig- in terms of economic development and sophistica- nificant body of case law. By comparison with the tion, a common set of rules governs the free move- text in paragraph 4 of GATS Article VI of the ment of services, professionals, and capital (to cite GATS and with the current absence of jurispru- only those legal elements of most relevance to the dence on it in the WTO, this seems more precise. accountancy sector) under the management and The most interesting aspects of the EU jurispru- control of a single set of institutions. Both harmo- dence on proportionality from the point of view of nization and mutual recognition have been applied regulatory reform are the way it addresses the to the EU accountancy sector. cumulative effect of regulations in the home and On the harmonization front, various directives host member state as well as in the host member have been adopted on the preparation of accounts42 state alone, and the obligation to let less demand- and on the qualification of statutory auditors.43 ing provisions capable of achieving the same result More recently, the EU institutions have interested prevail. A requirement can be justified only if no themselves in questions of the independence of already existing provision, in either the home or the statutory auditor and the assurance of the the host member state, can achieve the same quality of statutory audit services. On the mutual objective. Contrary to the text of the GATS or of recognition side, the general system of mutual the Disciplines, which remain silent in this regard, recognition of diplomas44 applies to accountants the Court imposes that the least demanding meas- and auditors in the EU and gives them the right to ure always be favored. Finally it should be noted obtain the local professional title of the host mem- that the rule of proportionality actually has been ber state after passing only an aptitude test.45 applied to the accountancy sector in one case47: Financial statements produced in one member the Court ruled that, if the requirement to have a state according to laws and regulations that com- professional establishment in the host member ply with the various accountancy directives are state where regulated audit services were provided recognized in the other EU member states without was proportionate in the sense of the Treaty of restatement. Rome, the compliance with the requirement actu- The European Court of Justice undoubtedly ally could be obtained through less demanding has contributed to the legal construction of the measures, such as the existence of temporary links Single Market. One of the most significant contri- with a locally established professional. butions is certainly its jurisprudence on necessity However, when one looks to results rather than and proportionality that also applies to the provi- to the various legal measures and decisions adopted sion of services, and hence to the provision of to implement the mandate of the Treaty of Rome so accountancy services within the EU. This jurispru- as to create a single market in the EU accountancy dence has been codified for the free movement of sector, one can only conclude that this objective services across borders in a communication of the remains as distant as ever. Very few accountancy European Commission46 adopted on December 6, professionals have taken advantage of the general 1993. The jurisprudence of the Court has estab- system of mutual recognition of diplomas; cross- lished that a restriction to the free movement of border provision of regulated accountancy services services can be maintained by member states only remains impossible for the most part; and there are if three conditions are cumulatively met: the no firms jointly owned by accountants from differ- Regulatory Reform and Trade Liberalization In Accountancy Services 157 ent member states that would be recognized as an use of financial statements. IFAC is currently accountancy firm in any of the member states con- reflecting on a reorganization of its own that, cerned (the rule is still majority ownership at least among other things, would raise the profile and by locally licensed accountants). Trade in regulated recognition of the standards it produces. accountancy services, with or without establish- Another significant obstacle to wider use of ISA ment in the member state of the client, remains and IAS has been the absence of reliable verifica- minimal within the EU. This situation pales in tion of the conformity of practice with the stan- comparison with what has been achieved for dards. Neither IFAC nor IASB has the means of lawyers, for example. checking that the professional bodies, the profes- Given the favorable institutional, political, legal, sionals (individuals or firms), or the companies and economic context of the EU, it is disappointing that claim to abide by their standards do indeed to note the extent to which the accountancy sector comply with them. Numerous surveys have been has not been subject to regulatory reforms that performed on the conformity of national rules with would have led to more significant intra-EU trade, ISA or IAS, or on the use of IAS in companies' greater mobility of professionals, or a form of EU- financial statements, but little has been done to level consolidation of some of the larger national check whether the companies claiming to comply firms in the sector. Nowhere in the world are the with IAS actually live up to that objective. In July conditions better. If progress has not proved possi- 2001 David Cairns (Secretary General of IASC ble in the EU until now, one can only wonder about from 1985 to 1994) released his second survey on the prospects elsewhere in the world, to say nothing an assessment of the use of IAS in the financial of prospects at the international level. statements of listed companies around the world.48 Quite tellingly the survey identifies a number of examples in which the conformity of the financial StandardtIation Efforts statements with IAS is not what it should have been, and that in turn raises questions about the The accountancy profession itself took the initia- absence of appropriate qualifications in the audit tive early in the 1970s and successively created two opinions expressed on these accounts. international bodies that had as one of their main Since the current services negotiations began in functions the production of international stan- the WTO, two developments of particular note dards in the domains of relevance to the practice of have taken place in relation to international stan- the accountancy profession. IFAC has produced a dards. In May 2000 IOSCO endorsed a core set of significant body of standards on various subjects, International Accounting Standards for financial including the International Standards on Auditing statements used in all cross-border offerings and (ISA) and the Code of Ethics for Professional foreign listings. Although not binding for its mem- Accountants. IASC was created to develop Interna- bers, the decision of IOSCO is a very significant tional Accounting Standards (IAS). Both bodies step toward the international acceptance of IAS. In also have worked on the interpretation of their June 2000 the European Commission announced standards. Until now the use of the standards pro- its intention to propose legislation to make the use duced by either institution has been purely volun- of IAS mandatory for all listed companies in the EU tary, even for the national professional bodies that by 2005 at latest. The draft regulation has since are their members. That voluntary nature has been been published and was endorsed by EU heads of one of the main weaknesses of the standardization state and of government at their Stockholm Sum- process in the sector, and one of the major concerns mit in March 2001 as part of their support for a of IFAC and IASB, which have worked to remedy it. package of proposals to strengthen the integration To that effect, IASC recently underwent a very sig- and regulation of the EU's capital and financial nificant reorganization that transformed it into the markets. That endorsement should dispel the hesi- International Accounting Standards Board (IASB) tations with respect to IAS that may have existed and made it much more independent from the during the Uruguay Round. However, the previous accountancy profession through the involvement of IOSCO endorsement of ISA has since been with- all other parties interested in the production and drawn, and the EU has not yet decided whether to 158 Domestic Regulation and Service Trade Liberalization mandate the use of ISA for the audit of financial work requirements across multiple jurisdictions. In statements prepared in accordance with IAS. Nei- addition, because the networks themselves are not ther IOSCO nor the EU has endorsed the recently regulated in any jurisdiction, agreement on the revised IFAC Code of Ethics. standards of performance that should be applied across the networks is itself a voluntary matter, as opposed to those standards that local regulations AudIts Neguatworks: AnvironmIndu nty o impose on locally licensed network-member firms. Particular tensions may arise when networkwide Of particular note has been the lack of greater pres- standards are more demanding than, or in conflict sure from the international accountancy firm net- with, local requirements. works for the removal of trade barriers that com- The use of a common name by network mem- plicate the specific governance and regulatory ber firms gives rise to an expectation of "One arrangements applicable (or not applicable, as the Name-One Standard," and it is a significant com- case may be) to them. Despite the impression that mercial benefit of network membership that users some may gain from the use of a common name operate under this impression, not least in those across jurisdictions, the international networks are jurisdictions where confidence in the local regula- not single entities operating under common own- tory regime for auditors is lacking. In reality, how- ership, management, and control, nor are the net- ever, the substance of the assurance given by net- works themselves licensed to perform any regulated work membership is nonobservable by users, and activities. In most countries the license to perform in the case of disputes, users have only the local reg- statutory or legally required audits may only be ulatory arrangements to rely on to seek redress. The granted to a separate, locally established entity, and separate legal personalities of the network and its only locally accredited professionals may have individual member firms make it difficult to take majority ownership (at least), management, and legal action other than against the member firm control of that entity. The activities of the entity are directly involved, in its home jurisdiction, and the subject to local regulation. The international net- standard against which performance is measured works therefore consist of multiple member firms when resolving disputes is the local rather than the linked by contract, and the ability to enforce net- network standard. workwide standards of performance is contingent This gives rise to special problems when the on the degree of willingness by the parties to these work of one member firm is being relied on in contracts to agree to such standards, which in turn another jurisdiction, where users may have expec- depends on their perceptions of the relative costs tations with respect to the level of performance- and benefits of network membership. Entry to and implicitly warranted by the use of the network exit from network membership is relatively fre- name-based on knowledge of the regulatory quent (especially at the level of smaller networks), framework and performance of the network mem- and there has been a steady trend toward greater ber firm in the jurisdiction of the user or elsewhere. concentration in the sector. Many network member The absence of an appropriate regulatory frame- firms existed prior to joining the network, rather work suggests that at least part of the solution to than being new entities created with the assistance these difficulties might lie in the application of the of the network, which can complicate the process of caveat emptor principle, but this can only work if coming into compliance with agreed network the users have adequate information on which to requirements. Different networks have different base their decisions-and that would require suffi- internal dynamics, and it is understood that the cient transparency about the internal arrangements degree of enforceability of networkwide standards of the various networks whose member firms use a varies significantly from network to network. common name across jurisdictions. However, net- Recent cases also call into question the robustness works have not made explicit the nature of the per- of firms' internal procedures for enforcing compli- formance standard assertion implicit in the use of ance with regulatory requirements even in the con- the network name. The internal procedures to text of single jurisdictions, which may give rise to ensure compliance with this performance standard concerns about the mechanisms for enforcing net- are not disclosed to users. No independent external Regulatory Reform and Trade Liberalization in Accountancy Services 159 assurance is provided that these network proce- Understanding the Regulation of the Sector dures are adequate and operate as intended. There is no transparency for the network-internal sanc- There are several reasons why countries were tions that exist for cases of noncompliance (e.g., reluctant to commit to liberalizing these areas dur- expulsion from the network or withdrawal of the ing the Uruguay Round.49 In the absence of com- right to use the network name). Users have no prehensive and reliable statistics, the potential recourse against the network as a whole in cases of benefits of liberalization were difficult to quantify. unsatisfactory performance by an individual mem- Linkages with other reform initiatives were poorly ber firm or failure of the network to properly con- understood. Domestic and international con- trol one of its member firms. Member firms of stituencies that stood to benefit from liberalization some networks may use differential standards (e.g., were not as vocal as those that feared they might one standard for "local work" and another for lose from change. To a significant extent, there was "transnational work") and it is difficult to see how also a lack of involvement and commitment on the this can be reconciled with the One Name-One part of those ministries and agencies responsible Standard expectation. One mechanism to assist for the domestic regulatory regimes governing transparency in such cases would be to use different accountancy; they were not convinced of the need brands to signal the differences in performance to make changes in response to trade policy con- standards, but networks are reluctant to surrender siderations. Most systems of national regulation the marketing advantage that comes from the One have evolved to address national concerns to pro- Name-One Standard expectation. And where net- tect the interests of national users and providers of works become aware of member firms' failure to accountancy services, and the need to take the comply with local requirements, there are no spe- international dimension into account was not suf- cific obligations for reporting the noncompliance ficiently widely recognized to enable positive to local regulatory authorities. progress during the Uruguay Round. To the extent The commitment of accountancy firms to sig- that accountancy regulators did wish to address nificant regulatory reform of the sector, which international issues, they chose other forums for would be necessary to accompany and facilitate lib- doing so, and were reluctant to have such matters eralization, is therefore uncertain. covered as part of trade talks. Specifically, there was hesitation to submit to a process that could result in binding commitments to reform, given a RegulatoAry RhefProrm:ctstrong preference for voluntary and unilateral (albeit coordinated) changes in this field. This was At the multilateral level, domestic regulation has the case with regard to accounting standards, for been defined in GATS Article VI.4 as qualification example, where negotiations between IASC and requirements and procedures, technical standards, IOSCO had not yet reached the stage where and licensing requirements and procedures to the IOSCO felt able to endorse IAS. There may also extent they do not constitute a limitation to market have been unreasonable expectations as to the access or national treatment in the sense of Articles extent to which countries could negotiate equiva- XVI and XVII. Article VI confirms the competence lent opportunities for their domestic accountancy of national regulators in this domain, but requires services providers abroad at the same time they that the resulting domestic regulation does not were opening their local markets. unnecessarily restrict trade. Previous sections of this Since the Uruguay Round a stronger understand- chapter have considered the possible effect of these ing has emerged of the contribution of accountancy rules in the accountancy sector. The current absence services to creating a sound investment climate. of consensus among the main parties is a major Business services such as accountancy and legal impediment to further progress. This state of affairs services are important in reducing transaction costs in the sector is not fatal, however, and there is merit and are essential for creating and enforcing con- in studying possible developments that could help tracts. Improving the availability and quality of achieve convergence among some of the more accountancy services is supportive of, and is sup- divergent views on the regulation of the sector. ported by, simultaneous reforms in related fields 160 Domestic Regulation and Service Trade Liberalization such as corporate governance, securities market reg- investors when allocating funds among companies ulation, and financial services (e.g., banking and and countries, are conscious of the need to ensure insurance) regulation. Enhancing confidence in the greater consistency of the services provided by regulation and operation of domestic markets helps their affiliates around the world. The expectations attract foreign direct and portfolio investment, to which they must now respond are international, often to the extent that domestic issuers no longer not national, but differences in national regulatory need to list abroadto attract foreign capital but can systems can make attaining that consistency diffi- attract foreign investors to buy their securities on cult. The Enron collapse has served to underline the domestic market. As in most sectors of the econ- the fact that concerns about the quality of account- omy, liberalizing trade in accountancy services can ing and auditing are not confined to emerging be positive in two ways: by enabling foreign markets. accountants and firms to provide services that are These developments highlight the important not other-wise available locally, and by encouraging network effects that influence accountancy regula- local providers to improve the availability and qual- tion. Countries wish to be integrated into the global ity of their services by exposing them to foreign financial system to have access to capital, and they competition. recognize that their national regulatory regimes There is also increased recognition of the inter- must facilitate that integration rather than impede national and systemic externalities of weaknesses it. At the same time, national systems of accoun- in domestic regimes for the regulation of account- tancy regulation must recognize that the users of ancy. Poor standards of governance, accountability, accountancy services are no longer defined in and transparency contributed to the East Asian national terms and that countries must have access financial crisis in 1997, the repercussions of which to services, and adopt standards, that meet interna- were felt in countries around the world. Shortcom- tional needs. These reforms need not necessarily ings in the quality of accounting and audit were apply to all domestic enterprises and accountancy among the causes. This has led to several interna- services providers because many will continue to tional initiatives to improve global financial stabil- operate in purely domestic markets or to engage in ity and the global financial architecture, and transactions for which international standards may accounting and auditing are included in the areas not be fully appropriate, but it is difficult to imag- identified for strengthening. The World Bank, for ine countries for which the international dimen- example, has supported moves to improve the sion is of no relevance. functioning of the relevant international standard setters, IASB and IFAC, and the quality of the stan- dards they produce. As part of the joint Interna- Deai with Thes ISuesa e tional Monetary Fund (IMF)/World Bank Reports WhatAre the Chances of Success? on Observance of Standards and Codes (ROSC)50 Given that much of the progress in accountancy- initiative, the Bank is working with some of its related fields is taking place outside the context of member countries to benchmark national account- the WTO, two questions present themselves: why ing and auditing requirements against the interna- should the current negotiations address trade in tional standards and to assess the quality of com- accountancy services rather than leave it to other pliance with those requirements. Enhanced organizations and forums, and what is the likeli- convergence on international standards and the hood of significant progress? putting in place of robust enforcement mecha- Responding to the first question, those who nisms to ensure compliance are among the out- would have the topic dealt with as part of the nego- comes that will flow from these assessments, build- tiations provide several justifications. First, when ing on the recognition that significant weaknesses domestic reforms are anchored in binding commit- in a country will weaken its attractiveness to ments under the GATS, there is legal certainty and increasingly prudent international investors. The enhanced external confidence in the durability and major international accounting firms, whose audit irreversibility of the changes. Second, given that the reports on financial statements are relied on by negotiations touch on many related regulatory Regulatory Reform and Trade Liberalization In Accountancy Services 161 issues, such as the rules governing financial ser- other regimes are designed in accordance with vices, coverage of accountancy services enables internationally accepted benchmark standards and negotiators to ensure consistency of approach and codes and that those standards and codes are com- to avoid unintended conflicts. Third, the WTO rec- plied with in practice. ognizes the mandates of other organizations and Some people also believe that the recognition of forums, and provides a useful platform for dis- the role of international standards in Article VI of cussing enhanced cooperation among countries on the GATS suggests that designating and adopting regulatory issues and for ensuring that the trade such standards and codes would simultaneously dimension is taken appropriately into account satisfy the twin objectives of trade liberalization when national reforms are being considered. and regulatory strengthening. For them, the Fourth, although trade negotiations are not a zero- chances of a positive outcome therefore depend on sum game, coverage of accountancy does open the the extent to which there is in place a sufficient possibility of receiving credit for liberalizing mea- body of accepted international standards that sures in this field in the context of the negotiations together form a comprehensive framework for as a whole. Fifth, the necessity test is now available regulating accountancy services. It is unfortunate as a powerful tool to assist in identifying those that the experience gained from the ROSC domestic regulations that create unnecessary barri- accounting and auditing assessments suggests that ers to trade in accountancy services. Based on these there are major gaps in that framework, and those responses, advocates would predict the high likeli- gaps suggest that even strengthened GATS rules hood of a successful outcome. will be insufficient to achieve significant incre- Those of a less optimistic disposition would mental liberalization without further progress in challenge each of those justifications. They believe developing an international regulatory framework that the legal complexity of the GATS, and in par- in the sector. ticular the somewhat nonoperational distinction between Article VI.4 measures and market access and national treatment restrictions to be sched- Determining a Needfor an International uled, is confusing and does not provide the desired Regulatory Framework legal certainty. They conclude from the WPPS As demonstrated by the results of the World experience with the production of the Disciplines Bank/IMF Financial Sector Assessment Program that the WTO is not best suited to the discussion of (FSAP)/ROSC assessments, when compared with regulatory issues. They would further argue that the regulatory principles adopted by IOSCO (for the necessity test has not yet entered into force, securities regulation), the Basel Committee (for does not provide positive guidance for the design of banking supervision), and the International Associ- an appropriate regulatory regime, and is an inade- ation of Insurance Advisors (IAIS) (for the insur- quate basis for enabling members to decide on ance sector), IAS and ISA cannot be considered which regulatory reforms are suited to fostering principles of regulation. Rather, they are method- trade liberalization while maintaining prudential ological rules for preparing and auditing financial safeguards. The lessons learned from the East Asian statements, and are silent on many key aspects of crisis of 1997 and more recently from the Enron regulation where differences of approach among collapse in the United States demonstrate the need countries give rise to the more substantial barriers for robust regulation of financial reporting and to trade in accountancy services. Both the account- auditing. Members can be expected to be very cau- ing and auditing ROSC assessments and other tious about any reforms that are perceived to empirical research have shown that adopting inter- weaken rather than strengthen domestic regimes. national standards, by itself, does little to enhance They also are unlikely to place on other members' the quality of financial reporting unless accompa- regimes the greater reliance that is necessary to nied by measures to ensure the enforcement of lower existing barriers to trade (e.g., accepting for- those standards, and it is in the area of enforcement eign licenses as a sufficient basis for ownership of that the current framework of standards and codes local firms) unless they can be assured that those is most deficient. 162 Domestic Regulation and Service Trade Liberalization The November 2001 cross-sectoral comparison International standards in the accountancy field among the regulatory principles adopted by fail to provide a comprehensive framework of regu- IOSCO, the Basel Committee, and the IAIS5' latory principles in themselves and they neglect to reveals a high degree of commonality of coverage address the interlinkages among accountancy regu- of the following issues: lation and other domains of market regulation and corporate governance. The study Enforcement Attributes of supervisory systems Mechanisms in Europe (published by the Fderation * Operational independence and adequate des Experts Comptables Europeens in 2001) draws resources attention to six different levels of enforcement of * Enforcement powers and capabilities accounting and auditing standards and emphasizes * Clarity and transparency of the supervisory how each depends on the other for full effectiveness: process * External participation in the supervisory 1. Preparation of financial statements process 2. Statutory audit of financial statements 3. Approval of financial statements The supervised entity ~~4. Institutional oversight systems * Licensing, qualifications, ownership transfer 5. Judicial m eaismsf ea i an coprt coto 5. judicial mechanisms for dealing with com- and corporate control plaints and imposing sanctions * Corporate governance 6. Monitoring by the press and the public. Ongoing supervision Only the first and the second levels are * Groupwide supervision addressed (and then only in part) by international * Monitoring and on-site inspection standards of accounting and auditing, whereas oth- * Reporting to supervisors ers fall within the scope of market regulation and . Cooperation and information sharing corporate governance. The Relationship between * Confidentiality Banking Supervisors and Banks' External Auditors Prudential standards (prepared jointly by the Basel Committee and the * Risk management International Federation of Accountants in 2001) is * Internal controls a positive first step in addressing these regulatory * Risk concentration interlinkages, but it is descriptive rather than pre- * Capital requirements scriptive, it refrains from indicating expected best * Accounting policies and practices practice, and it does not consider banking supervi- sors' enforcement role with respect to general pur- Markets and customers pose financial statements made available to the * Markets market (as opposed to financial information sub- - Market integrity mitted to supervisors for prudential purposes). - Financial crime Serious though the above gaps are, perhaps the * Customer protection major omission from the current international stan- * Information, disclosure, and transparency dards is any consideration of the appropriate rela- * Issuers tionships among the state, the institutions of the accountancy profession, and providers of accoun- Although not all of the above considerations are tancy services (whether firms or individuals). In fact, relevant to accountancy services,52 they nonetheless many of the non-standard-setting pronouncements highlight features of any regulatory system that of IFAC suggest a fundamental misunderstanding on would need to be addressed before any body of its part of what this relationship should entail. Refer- standards could have the desired effects in terms of ences made to the profession's self-regulatory role protection of the public and increased trade liberal- imply that the profession is the source of its own reg- ization. It is evident that IAS and ISA alone fall far ulatory mandate. IFAC does not appear to recognize short of that benchmark, and the gap to be filled is that self-regulatory authority is delegated by the considerable. state, and that a professional body performing self- Regulatory Reform and Trade Liberalization In Accountancy Services 163 regulatory functions does so as agent of the state enhance the protections available to the public. In rather than as representative of its members. A better the absence of this consensus, there will be an conception of the nature and role of self-regulatory unwillingness to undertake domestic reforms and organizations is set out in the IOSCO principles. significant impediments to the confidence in other IFAC's misconception of the possibility of the pro- countries' regulatory regimes that is needed to fession regulating itself without proper external underpin mutual recognition and acceptance. The accountability and supervision is mirrored in the GATS and the Disciplines on Domestic Regulation difficulties being experienced in establishing an indicate what form regulations should not take, but international public oversight board, a forum of they do not constitute a positive agenda for reform. firms, and an international peer review system. This If and when consensus is reached on an appropriate idealized (if misplaced) view of the profession as framework of regulatory principles, the GATS can master of its own affairs has disappeared in the EU53 serve as the means to anchor it in legal certainty, and will disappear definitively in the United States as but this implies that the GATS will be the benefici- a consequence of the regulatory reforms announced ary rather than the cause of progress in other following the Enron collapse. forums. Whether this progress can be achieved Because the framework of necessary regulatory within a time frame consistent with the duration of principles variously affects different actors with a the current negotiations remains to be seen. direct interest in the quality of accountancy services, it does not fall to any one body to develop those prin- ciples. A collaborative effort is required, but it is not Annex: Definition obvious that an appropriate forum exists where that of Accountancy Services cooperation could take place. Following criticisms of There is no universally accepted definition of the profession in the context of the East Asian crisis, accountancy services, nor is there a strict correspon- the International Forum on Accountancy Develop- dence between accountancy services and the activi- ment (IFAD) was established to bring together the ties of the accounting profession (European Com- major organizations in the field (induding IFAC, the mission 1997), because the skills deployed to major international accountancy firm networks, produce, process, analyze, or audit financial infor- IASB, the World Bank, the IMF, the European Com- mation can also be used for other purposes.54 Con- mission, the Organisation for Economic Co-opera- sidering accountancy services to be the services pro- tion and Development, UNCTAD, IOSCO, the Basel vided by accountants leads to a definition that varies Committee, the LAIS, and others), but efforts to agree among countries because the scope of practice of on substantive issues have not yet proved successful. accountants is far from consistent around the The World Bank is currently taking the lead in world.55 In the context of the sectoral services nego- attempts to renew the IFAD initiative, but the out- tiations held during the Uruguay Round, a large come cannot be predicted with confidence. majority of negotiating parties used the Services Sec- toral Classification List56 prepared by what was then Conclusion the GATT Secretariat on the basis of the provisional United Nations Central Product Classification. As far as trade in accountancy services is con- Accountancy services formed a subsector of profes- cerned, the WTO has served primarily as a forum sional services and were subdivided into accounting, for capturing the current situation rather than as a auditing, and bookkeeping services, corresponding force for achieving significant liberalization. There to section 862 of the provisional UN CPC: are no concrete indications that the new negotia- tions on services, which began on January 1, 2000, 862 Accounting, auditing, and bookkeeping will lead to a different outcome. If progress is to be services made, its impetus will have to come from else- where. Consensus must be built on a comprehen- sive set of principles to govern the regulation of 86211 Financial auditing services accounting and auditing-principles that facilitate Examination services of the accounting records trade liberalization while they maintain and and other supporting evidence of an organization 164 Domestic Regulation and Service Trade Liberalization for the purpose of expressing an opinion as to 4. The 47 members were Antigua and Barbuda, Argentina, whether financial statements of the organization Australia, Austria, Brazil, Brunei Darussalam, Canada, Chile, Colombia, Cuba, Cyprus, Czech Republic, Domini- present fairly its position as at a given date and the can Republic, El Salvador, European Communities, Fin- results of its operations for the period ended on land, Guyana, Hong Kong (China), Hungary, Iceland, that date in accordance with generally accepted Israel, Jamaica, Japan, the Republic of Korea, Lesotho, accounting principles. Liechtenstein, Malawi, Malaysia, Maldives, Mexico, accounting principles. Morocco, Netherlands Antilles, New Zealand, Norway, 86212 Accounting review services Peru, Poland, Sierra Leone, Singapore, Slovak Republic, South Africa, Sweden, Switzerland, Thailand, Turkey, Reviewing services of annual and interim finan- United States, Republica Bolivariana de Venezuela, and cial statements and other accounting informa- Zambia. tion. The scope of a review is less than that of an 5. Twenty-two new members have undertaken specific com- mitments in the accountancy sector: Albania, Bulgaria, audit and therefore the level of assurance pro- China, Chinese Taipei, Croatia, Ecuador, Estonia, The vided is lower. Gambia, Georgia, Jordan, Kyrgyz Republic, Latvia, Lithua- nia, Moldova, Mongolia, Oman, Panama, Papua New 86213 Compilation of financial statements Guinea, Qatar, Slovenia, Solomon Islands, and the United services Arab Emirates. 6. See the annex to this chapter. Compilation services of financial statements 7. For a detailed analysis of the specific commitments under- from information provided by the client. No taken in the accountancy sector, please refer to paragraphs assurances regarding the accuracy of the result- 37 to 42 in WTO (1998c). That analysis, however, was made at the level of the whole sector. A further distinction ing staemetsre rovde.Pepaatinsr- between statutory audit and the rest of the sector might vices of business tax returns, when provided as a have shown interesting results. bundle with the preparation of financial state- 8. The seven members are Costa Rica, Dominican Republic, ments for a single fee, are classified here. Honduras, Panama, Thailand, Turkey, and Repuiblica Boli- variana de Venezuela. Exclusion: Business tax preparation services, 9. WTO (1995e), dated April 4,1995. when provided as separate services, are classified 10. Professional services include legal services; accounting, auditing, and bookkeeping services; taxation services; in subclass 86302 (Business tax preparation and architectural services; engineering services; integrated engi- review services). neering services; urban planning and landscape architec- 86219 Other accounting services tural services; medical and dental services; veterinary serv- ices; and services provided by midwives, nurses, Other accounting services such as attestations, physiotherapists, and paramedical personnel. valuations, preparation services of pro forma 11. The International Federation of Accountants produces the International Standards on Auditing and the International statements, etc. Code of Ethics. The International Accounting Standards 86220 Bookkeeping services, except tax returns Committee (now the International Accounting Standards Board [IASBI) produces the International Accounting Bookkeeping services consisting in classifying Standards. See http://www.ifac.org/ and http://www.iasc. and recording business transactions in terms of org.uk/cmt/0001.asp for further details. 12. IOSCO is the international organization regrouping stock money or some unit of measurement in the exchange regulators. See http://www.iosco.org/iosco.html books of account. for further details. Exclusion: Bookkeeping services related to tax 13. See WTO (1996e), particularly paragraphs 20-26 on the use of international standards. returns are classified in subclass 86302 (Business 14. See WTO (1996b), paragraph 17. tax preparation and review services). 15. SIL/38, May 28, 1997. 16. Article VII.2 of the GATS. 17. See WTO (1995b) and WTO (1996c). Endnotes 18. The U.S. professional regulatory bodies (the American Institute of Certified Public Accountants [AICPA] and the 1. See paragraph 15 in WTO (1998c). National Association of State Boards of Accountancy 2. At the time of the Uruguay Round, WTO members were [NASBA]) recently negotiated mutual recognition agree- called GATT (General Agreement on Tariffs and Trade) ments with the Australian Chartered Accountants and Cer- contracting parties. For the sake of simplicity, this chapter tified Public Accountants, and with the three U.K. char- will always refer to them as "WTO members" or "mem- tered accountants bodies (although final agreement is bers," irrespective of whether the events discussed took being blocked by the British government). Both AICPA and place before or after the entry into force of the WTO agree- NASBA have been negotiating with the Mexican profes- ment on January 1, 1995. sional body (and those negotiations are now concluded). 3. S/L/93 adopted on March 28, 2001. The authors believe, however, that the Guidelines have had Regulatory Reform and Trade Liberalization in Accountancy Services 165 no noticeable influence on the negotiations, and that the 37. WTO 2000f, paragraph 6. recognition agreement previously concluded with the 38. Most intracorporate temporary movement at present takes Canadian Chartered Accountants within the North Ameri- place between Organisation for Economic Co-operation can Free Trade Agreement framework was the main guid- and Development countries, and would be at much higher ing light in this process. The methodology followed was levels if visa, work permit, and other restrictions were very similar and involved a detailed evaluation of each eased. component of the foreign qualification by the U.S. Interna- 39. Negotiations on the movement of natural persons are tional Qualifications Appraisal Board. wrongly considered by many members of WTO to be a 19. WTO 1998b. purely North-South issue. As shown in this chapter, that 20. WTO 1998a. perception is too narrow. 21. The results of several surveys on the regulation of the 40. On this issue, see the proceedings of the Organisation for accountancy sector were presented to the WPPS by IFAC Economic Co-operation and Development's third work- (July 1, 1995), the Organisation for Economic Co-operation shop on the liberalization of professional services, held and Development (OECD) (WTO 1995c), and the United February 20-21, 1997, particularly the chapter on Restric- Nations Conference on Trade and Development (WTO tions on Ownership and Investment and Alternative 1995d and 1996a). The WPPS also conducted its own survey Approaches. (WTO 1996d) to which 29 members responded. The results 41. Trolliet 1995. are presented in WTO (1997b). Finally, between September 42. Fourth and seventh company law directives, bank accounts 1994 and February 1997 the OECD organized three work- directive, insurance accounts directive, and so forth. shops-Liberalization of Trade in Professional Services, 43. Eighth company law directive. International Trade in Professional Services (assessing barri- 44. Directives 89/48 and 92/51. ers and encouraging reform), and Advancing Liberalization 45. This corresponds to the option chosen by member states through Regulatory Reform-that involved numerous when implementing the general system of mutual recogni- WTO member delegates. The proceedings of those work- tion of diplomas in the accountancy sector, not the provi- shops were presented to the WPPS (see http://www.oecd. sions of the directives. For a detailed analysis of the system org/oecd/pages/home/displaygeneral/0,3380,EN-document- and its various options, see Trolliet (1995), paragraphs 401 0-nondirectorate-no-9-16887-0,FF,html). to 643. 22. Technical standards also include codes of ethics. 46. 93/C 334/03. 23. See, in particular, the list of measures in paragraph 2 of 47. C-106/91 (Ramrath). For a detailed analysis of the case, see Article XVI. Trolliet (1995), paragraphs 754 to 827. 24. This might result, however, from the absence of legal obli- 48. Cairns 2000. gation on members for the moment. Assuming that the 49. Because the reservations with respect to the movement of approval of the Disciplines by consensus meant that mem- persons are well known, they are not dealt with in this bers agreed that this was the correct way to regulate the sec- chapter. tor, there is nevertheless no objective reason why they 50. ROSC forms part of the joint IMF/World Bank Financial would have to wait until the Disciplines enter into force to Sector Assessment Program (FSAP). adjust their domestic regulation. 51. This cross-sectoral comparison was carried out by the Joint 25. This hypothesis is being tested by the WPDR. To date, all Forum of the three organizations. the responses to that question received from members con- 52. Given objective differences with the securities, banking, firm that no significant modification to the text of the Dis- and insurance sectors. ciplines would be necessary to extend their applicability to 53. The United Kingdom was the last member state to follow other professional service sectors, and that confirms the that route. The external Accountancy Foundation is now views expressed in the previous paragraph. See WTO assuming responsibility for the regulatory tasks previously (2000a, c, d, e, 2001b, e, f, g, i). performed by the professional bodies. 26. Article X of the GATS. 54. WTO (1998c), paragraph 2. 27. Article XIII of the GATS. 55. For information about various possible ways of analyzing 28. Article XV of the GATS. the scope of practice of accountants, see WTO (1995a), 29. The last sentence of paragraph 15 of the Ministerial Decla- paragraphs 12-17. ration (WTO 2001j), adopted at the end of the third WTO 56. WTO 1991. Ministerial Conference held in Doha, Qatar, in November 2001, reads: "Participants shall submit initial requests for specific commitments by 30 June 2002 and initial offers by References 31 March 2003." 30. On the most significant barriers to international trade in Cairns, D. 2000. "International Accounting Standards Survey accountancy services, see also WTO (1 995a), paragraphs 79 2000." to 81, and the work of the OECD on liberalizing trade in European Commission. 1997. "Panorama of the EU Indus- professional services (in particular, for the workshop held try, Accountancy Services, NACE 836." Brussels. September 26-27, 1994). Trolliet C. 1994. "L'exercice de la profession comptable dans 31. WTO 2000f. la CEE." Editions Comptables Malesherbes. (Available in French 32. WTO 2001a. only.) 33. WTO 2000b. . 1995. "Etude critique du processus de liberalisation 34. WTO 2001c. de la profession comptable dans l'Union Europeenne." Universite 35. WTO 2001h. de La Rochelle (France). Unpublished doctoral thesis. (Available 36. WTO 2001d. in French only.) 166 Domestic Regulation and Service Trade Liberalization WTO (World Trade Organization). 1991. "Services Sectoral . 2000a. "Communication from the European Com- Classification List: Note by the Secretariat." MTN.GNS/W/120, munities and Their Member States: Applicability of the Disci- July 10. plines on Domestic Regulation in the Accountancy Sector to . 1995a. "The Accountancy Sector: Note by the Secre- Other Professional Services." S/WPDR/W/5, May 19. tariat." SIWPPSIW/2, June 27. . 2000b. "Communication from the European Com- . 1995b. "Communication from the European Com- munities and Their Member States: GATS 2000: Professional munities and Their Member States: Current Community System Services' S/CSS/W/33, December 22. on the Recognition of Professional Qualifications Held by Mem- . 2000c. "Communication from Hong Kong, China: bers of the Accountancy Profession, Who Are Nationals of EC Disciplines on Domestic Regulation for Professional Services; Member States' S/WPPS/W/3, October 17. Result of Consultation with Professional Sectors." S/WPDR/W/3, . 1995c. "Communication from the OECD: Work in April 28. the Area of Professional Services." SIWPPS/W/4, with Addenda . 2000d. "Communication from Poland: Disciplines 1 and 2, November 14. on Domestic Regulation for Professional Services; Result of 1995d. "Communication from UNCTAD: Work of Consultation with Professional Sectors:' S/WPDRIW/7, May 23. ISAR in the Area of Accountancy Services." S/WPPS/W/5, . 2000e. "Communication from the Republic of November 14. Korea: Disciplines on Domestic Regulation for Professional Ser- 1995e. "Decision on Professional Services, Adopted vices; Results of Consultation with Professional Sectors." by the Council for Trade in Services on 1 March 1995." S/L/3, S/WPDR/W/10, October 2. April 4. . 2000f. "Communication from the United States: 1996a. "Communication from UNCTAD: Regulation Accounting Services.' S/CSS/W/20, December 18. of the Accountancy Profession in Developing Countries and . 2001 a. "Communication from Australia: Negotiat- Countries in Transition." S/WPPS/W/8, August 12. ing Proposal for Accountancy Services." S/CSS/W/62, March 28. . 1996b. "Ministerial Declaration." WT/MIN(96)/ . 2001b. "Communication from Canada: Disciplines DEC, December 18. on Domestic Regulation for Professional Services; Results of Con- 1996c. "Mutual Recognition Agreements in the sultations with Professional Sectors.' S/WPDR/W/13, March 16. Accountancy Sector: Note by the Secretariat." S/WPPS/W/10, . 2001c. "Communication from Canada: Initial September 13. Negotiating Proposal on Professional Services." S/CSS/W/52, 1996d. "Questionnaire on the Accountancy Sector: March 14. Note by the Secretariat.' S/WPPSIW/7, with 29 Addenda, April 3. . 2001d. "Communication from Colombia: Profes- 1996e. "The Relevance of the Disciplines of the sional Services.' S/CSS/W/98, July 9. Agreements on Technical Barriers to Trade (TBT) and on Import . 2001e. "Communication from Japan: Report of the Licensing Procedures to Article VI.4 of the General Agreement Results of Research on Professional Services." S/WPDR/W/6, on Trade in Services: Note by the Secretariat.' S/WPPSIW/9, May 19. September 11. . 2001f. "Communication from Mexico: Disciplines 1997a. "Guidelines for Mutual Recognition Agree- on Domestic Regulation for Professional Services; Progress ments or Arrangements in the Accountancy Sector." S/L/38, Regarding Consultations with Professional Sectors." S/WPDR/ May 28. W/ 12, March 9. 1997b. "Synthesis of the Responses to the Question- . 2001g. "Communication from Switzerland: Applic- naire on the Accountancy Sector: Note by the Secretariat." ability of the Disciplines on Domestic Regulation in the Accoun- S/WPPS/W/1, May 5. tancy Sector to Other Professional Services." S/WPDR/W/16, . 1998a. "Decision on Disciplines Relating to the September 4. Accountancy Sector, Adopted by the Council for Trade in Ser- . 2001h. "Communication from Switzerland: GATS vices on 14 December 1998.' S/L/63, December 15. 2000: Professional Services.' SICSS/W/75, May 4. . 1998b. "Disciplines on Domestic Regulation in the . 2001i. "Communication from Thailand: Results of Accountancy Sector, Adopted by the Council for Trade in Ser- Consultation on the Applicability of Accountancy Disciplines to vices on 14 December 1998.' S/L/64, December 17. Other Professions.' S/WPDR/W/18, September 28. 1998c. "Accountancy Services: Background Note by . 2001j. "Ministerial Declaration: Adopted on 14 the Secretariat." SIC/W/73, December 4. November 2001:' WT/MIN(01)DEC/1, November 20. STRENGTHENING WTO MEMBER COMMITMENTS IN ENERGY SERVICES: PROBLEMS AND PROSPECTS Peter C. Evans Executive Summary under the GATS while responding to the specifici- Energy services have become a growing part of ties of the energy sector. international trade but are not well represented in Energy services have become a growing part of global trade agreements. A core group of World international trade but are not well represented in Trade Organization (WTO) members have recently global trade agreements. Unlike telecommunications begun the process of bringing energy services more or financial services, energy services were not taken fully under the General Agreement on Trade in Ser- up by World Trade Organization (WTO) members vices (GATS) disciplines as part of a commitment and negotiated as a separate sector during the to continue services trade liberalization negotia- Uruguay Round. At the time, a small number of tions following the Uruguay Round. In most coun- countries made commitments in energy services; tries, domestic regulations unnecessarily impede however, those commitments were limited and the gains that can arise from open and nondiscrim- largely restricted to oil field services and mining. inatory trade in energy-related services, with detri- Few, if any, commitments were made in services mental effects for economic growth, innovation, related to electricity or natural gas, even though they and the supply of cleaner and more efficient energy. constitute a substantial part of the energy sector. This This chapter examines the issues and prospects for has meant that most energy services are only subject deepening trade commitments in energy services in to the general obligations of the WTO's GATS and the WTO. It reviews the types of barriers that con- not to its market access and national treatment pro- front firms engaged in international energy trade visions. They are also not subject to additional meas- and investment and explores how those barriers ures that countries could negotiate to enhance trade can be addressed through new or strengthened reg- and competition, such as third-party access to essen- ulatory disciplines and market access commitments tial facilities and independent regulation. Portions of this chapter draw on work published (2002) in Liberalizing Global Trade in Energy Services. Washington, D.C.: The American Enterprise Institute Press. Reproduced with special thanks and acknowledgment to the series editor, Claude Barfield, and the AEI Press. 167 168 Domestic Regulation and Service Trade Liberalization A core group of WTO members began the energy security, and other public policy objectives, process of bringing energy services more fully and what, if any, special provisions may be needed under the GATS disciplines as part of a commit- regarding developing countries, emergency safe- ment to continue services trade liberalization nego- guards, and government procurement. tiations following the Uruguay Round.' These talks were folded into the Doha Development Agenda Energy Market Liberalization launched in November 2001, which set forth the objectives for new global trade negotiations. The regulatory regime governing energy markets in Although the negotiations on energy are still in the both industrial and developing countries has expe- preliminary stages, the priority now accorded to the rienced significant change since the mid- 1980s. sector suggests that countries are beginning to Regulatory frameworks that seek to encourage focus more seriously on how multilateral disci- competition and private sector ownership and plines can remove restrictions on market access and investment have increasingly replaced heavy mar- enhance the conditions for competition in the sup- ket controls and government ownership. Among ply of energy services. In most countries, domestic industrial countries, these changes were motivated regulations unnecessarily impede the gains that can by a fundamental shift in government attitudes arise from open and nondiscriminatory trade in toward regulation stemming from the poor per- energy-related services, with detrimental effects for formance of state-owned energy companies, grow- economic growth, innovation, and the supply of ing subsidy burdens, and regulatory incentive cleaner and more efficient energy. structures that stimulated costly over-investment This chapter examines the issues and prospects (Jaccard 1995). In the developing world, many of for deepening trade commitments in energy ser- these factors were also present but were com- vices in the WTO. It reviews the types of barriers pounded by the pressures created by the debt crisis that confront firms engaged in international energy and severe capital shortages. Adjusting regulatory trade and investment and explores how those barri- frameworks for energy has been widely embraced ers can be addressed through WTO disciplines. Far- as a way to attract greater private sector investment, reaching changes have taken place in the last 15 improve efficiency, and boost overall economic years as a result of the shift from government plan- performance. ning for and control of energy toward greater com- One of the most pervasive changes has taken petition and private sector ownership and invest- place in ownership patterns. Major privatizations ment. Although these developments have helped have occurred across energy sectors (oil, gas, expand international trade in energy services, power) and have involved firms in industrial as well domestic regulations continue to create unneces- as developing countries. Canada, Finland, France, sary and costly impediments to the supply of Italy, and the United Kingdom were among the first energy services on a competitive, nondiscrimina- to privatize their state oil companies. Gas distribu- tory basis. The GATS provides a framework for tion companies have also been opened to the pri- countries to dismantle these barriers, but the vate sector not only in Europe and North America framework is not ready-made or sufficiently tai- but also among developing countries. Between lored to the specific characteristics of energy mar- 1990 and 1997, 26 developing countries introduced kets for this task. As the trade community has private participation in the transmission and distri- begun to realize, measures are needed to clarify the bution of natural gas (Izaguirre 1999). In the case existing GATS classification system and develop of electric power, privatizations through public additional commitments relevant to the energy sec- share issues, management or employee buyouts, tor, including disciplines for third-party access to franchise concessions, and direct sales of an equity essential facilities, regulatory transparency, compe- stake in a state-owned enterprise to private tition safeguards, and independent regulation. Also investors have taken place throughout the world, discussed are a number of additional issues associ- including Africa, Asia, Europe, Latin America, and ated with deepening energy services trade commit- North America (Pollitt 1997). ments, including the right of governments to pur- In addition to shifting ownership patterns, the sue environmental protection, energy efficiency, regulatory regime for energy has experienced a Strengthening wrO Member Commitments In Energy Services: Problems and Prospects 169 major reduction in price controls and import The International Energy Agency (IEA) expects restrictions. The oil industry was among the first to total world oil demand to grow by more than 25 benefit. With fewer price controls and other trading percent over the current decade, rising from 76 restrictions, both buyers and sellers found that they million barrels a day in 2000 to 97 million barrels could gain by shopping around for the best deals on per day in 2010. Most of this new drilling activity upstream supply. Spot markets grew in scope until will take place in Africa, the Caspian region, Latin they eventually established crude oil as a global America, and Russia.3 Similar expansion could commodity with trading centers emerging in occur in services associated with the gas and power Antwerp-Rotterdam-Amsterdam, London, New sectors. 4 More open gas and electricity markets York, and Singapore (Horsnell and Mabro 1993). will increase the need for a variety of services, Active spot and futures trading markets spawned including intermediaries such as brokers and mar- the development of derivatives and other financial keters who can facilitate transactions between buy- vehicles that helped eliminate price differentials ers and sellers of gas and electricity. Other energy among regions, improve price transparency, and services such as those associated with transporta- reduce price volatility and risk for different types of tion and transmission and pipeline networks are crude oil and downstream products, such as naph- likely to increase. tha, heating oil, and gasoline. More recently trading has become prevalent in the natural gas and electric power industries. ~~Barriers to Energy Trade power industries. and Investment Approaches to regulating gas and power markets also have undergone reform. In many countries The degree to which trade in energy services grows opportunities have been introduced for domestic hinges significantly on progress in eliminating and foreign firms to sell power to state or private restrictions on market access and other domestic utility monopolies, which act as a "single buyer" regulatory barriers. Expanding international trade (monopsony) purchaser of electricity for resale to in energy services has the potential to yield signifi- end-use customers. Encouraging new capacity cant economic benefits in lower prices, greater additions through competitive bidding mecha- innovation, and cleaner and more efficient energy nisms represented a way to ensure that power was supply. However, barriers continue to hamper procured at the lowest cost. These reforms led to a energy service providers in most countries. Several surge in power projects developed and financed by examples will illustrate the range of barriers that independent power producers (IPPs). Under these can be found among the different ways in which arrangements IPPs generally sell their output energy services are provided. through long-term power purchase agreements One set of barriers hinders the ability of com- that include take-or-pay conditions or fixed capac- panies to provide services across borders. For ity charges to protect investors from market risk. example, French companies have relatively unim- Since the mid-1990s a growing number of coun- peded access to the German and British gas and tries have taken further steps to introduce competi- electricity markets, but access in the other direc- tion by opening up opportunities for direct retail tion is not so open. A similar situation arises in the sales of gas and electricity, particularly in the indus- electricity markets between the Canada and the trial sector, and by creating the institutional and United States. Canadian energy companies have regulatory environment for competitive pools and significant cross-border supply access to most direct bilateral contracting.2 One result of these states in the United States, but U.S. power reforms is that much new power plant capacity has providers face market access restrictions in British been built and is owned by IPPs rather than by tra- Columbia, Quebec, and other provinces. Another ditional state-run utilities. form of cross-border restriction concerns the International trade in energy services has the entry of equipment and tools needed for produc- potential to accelerate as underlying growth in tion or maintenance services. This affects a variety world energy demand increases over the next of energy service providers, but has been particu- decade. For example, demand for field services will larly harmful to oil field service providers who expand in the coming years with rising oil demand. depend on the ability to move seismic testing 170 Domestic Regulation and Service Trade Liberalization equipment, oil rigs, and other specialized equip- tition and raise the cost of international trade in ment from one country to another. energy services. In many cases establishing a local presence in a Another potentially discriminatory measure foreign country is the most efficient and effective that is gaining attention is associated with renew- way to supply energy services. However, companies able portfolio standards. An increasing number of often face a variety of establishment restrictions that countries have introduced or plan to create incen- can render these efforts noncompetitive or com- tives for inducing levels of renewable energy tech- pletely disallowed. A common form of restriction is nologies that are higher than those supplied in a associated with foreign ownership. Firms seeking to purely competitive context. Establishing certain retain full ownership of their operations may be mandatory portfolio requirements (numerical barred from establishing a local presence unless they quotas) obliges electricity suppliers to produce a join with a local joint-venture partner. Mergers and certain percentage of electricity generated from acquisitions may be restricted by rules that only renewable energy. Governments may also issue cer- allow minority foreign ownership. Certain segments tificates for the amount of renewable electricity of the market may be closed to foreign firms. These generated, which can be traded in secondary mar- trade barriers and discriminatory practices affect all kets. Producers who do not meet the minimum segments of the energy industry including oil, gas standard or hold a sufficient number of certificates and power, mining, and construction. face penalties (Espey 2001). Mandatory portfolio The ability of energy companies to dispatch standards can impede trade if they tend to favor executives, technicians, and other specialists to for- local products from specific regions and states and eign countries is essential to delivering energy ser- de facto exclude imports from eligibility. vices. However, countries often restrict the tempo- By far the largest barrier facing international rary entry of skilled people and managers. This is trade in energy services arises from the lack of typically achieved by imposing unclear or discrimi- structural reforms. This is particularly salient in the natory rules for multiple-entry visas and the period case of the network-based industries of gas and that managers and other professionals may stay in electricity. Energy service providers need both the country. In some cases temporary entry nondiscriminatory access to transmission and dis- depends on a person passing local examinations or tribution systems and the right to sell to eligible other tests before being recognized as a professional customers. In the case of natural gas, brokers nego- or specialist. In other cases services provided by tiate with transmission companies for transporta- self-employed people are not permitted. tion based on their ability to switch their gas from The regulatory process in a host country may pipeline to pipeline through market hubs to desti- also hinder foreign participation in energy markets nation. They can only provide this service if third- on equal terms. Opaque or discriminatory admin- party access is guaranteed and consumer choice has istrative decisionmaking can create barriers that been established. The right to sell to eligible cus- unfairly disadvantage foreign suppliers, particularly tomers has little meaning without access to essen- because many energy projects and associated ser- tial facilities. Likewise, the right to access essential vices require extensive licensing or permitting. A facilities will not foster competition without a clear few countries have administrative rules that require right to sell to eligible customers. regulatory agencies to consider input about regula- There continues to be broad variation across tory measures from all affected parties, including countries regarding these market access terms and foreign parties. However, many do not. Energy conditions. For example, in Europe there is signifi- companies regularly face situations in which coun- cant variation in the degree of market opening tries fail to promptly disclose new or revised regula- among countries despite ongoing efforts to estab- tions and exclude affected foreign parties from reg- lish a unified market for gas and power (see table ulatory deliberations. Although these conditions 10.1). In the case of electric power, a few countries are a fact of life that most companies operating have granted full choice to retail customers (Fin- internationally have come to accept as a part of the land, Germany, Norway, Sweden, and the United business environment, regulatory uncertainty and Kingdom) and others have followed only the mini- lack of transparency ultimately undermine compe- mum requirements of the European Union direc- Strengthening WrO Member Commitments in Energy Services: Problems and Prospects 171 TABLE 10.1 Gas and Power Liberalization among European Countries Electric Power Reform Measures Market Opening in 2000 Transmission Grid Type of Vertical Country Access Model Unbundling Gas (%) | Power (%) Austria Regulated TPA + SB Management 50 32 Belgium Regulated TPA Legal 47 35 Denmark Regulated TPA Legal 30 90 Finland Regulated TPA + Pool Ownership 90 100 France Regulated TPA Management 20 30 Germany Negotiated TPA Management 100 100 Greece Negotiated TPA - 30 Ireland Regulated TPA Management 75 30 Italy Regulated TPA + SB Legal 65 35 Luxembourg Regulated TPA Management 51 40 Netherands Regulated TPA Legal 45 33 Norway Regulated TPA + Pool Ownership - 100 Portugal Regulated TPA + SB Legal - 30 Spain Regulated TPA + Pool Ownership 72 54 Sweden Regulated TPA + Pool Ownership 47 100 United Kingdom Regulated TPA + Pool Ownership 100 100 - Not available. Note: TPA = Third Party Access, SB = Single Buyer. Sources: Commission of European Communities 2001; IEA/OECD 2000. tive. A similar pattern has emerged in the case of and its importance in power generation, the inabil- gas. The gas directive established progressive mar- ity to gain access to Japan's LNG terminals has ket opening beginning with a minimum of 20 per- severely hampered new entry in both the gas and cent in 2000 growing to 28 percent in 2003. electricity sectors and has become a point of con- Although most countries have exceeded these tention in bilateral trade talks.5 requirements, several-most notably France-have The cost of barriers to trade and discriminatory only met the bare minimum of the directive. Simi- practices in energy services is difficult to deter- lar variation exists in the approach to transmission mine. No economic studies have attempted to esti- access and type of vertical unbundling. In practice mate the economic costs of barriers to trade in this has meant that some markets in Europe are far energy services in any comprehensive manner. more open and competitive than others (Stern Available data on trade in energy services are lim- 1998, Percebois 1999). ited. Statistical reporting among domestic and The competitive bottleneck created by monop- international energy and trade bodies reflects the oly control of Japan's 23 liquefied natural gas legacy of the vertically integrated energy industry (LNG) terminals provides another example of how and an emphasis on physical flows. Because ser- the structural features of markets can restrict trade vices were generally bundled within integrated and investment. Japan's vertically integrated power firms-and continue to be so in many countries- and gas utility monopolies built, own, and operate there has been little price transparency along the the terminals, tanks, and regasification equipment energy value chain. Still, the theoretical case for associated with these facilities, which receive nearly liberalizing is strong; where it exists, the empirical all of the country's gas supplies. A handful of com- evidence suggests that much can be gained by panies control over 96 percent of the gas available opening markets to greater competition. The large in Japan (only 3 percent is produced domestically), size of the global business turnover of energy and the ability to block competitors from accessing products worth approximately US$2.4 trillion6 in these facilities. Given the advantages of gas as a fuel 2000 alone suggests that even small improvements 172 Domestic Regulation and Service Trade Liberalization may offer significant welfare gains for both indus- regulations that can affect the ability of managers, trial and developing countries. consultants, or technicians with specialized skills to move in and out of a country in the course of nor- Energy Services and the GATS mal business. The four modes were developed when the GATS The GATS provides a framework through which was developed as a way for countries to organize WTO member countries can work toward remov- and schedule their market access and national ing these and other barriers to international trade treatment commitments. Liberalization is more and investment in energy services. The framework likely achieved when countries make commitments agreement identifies different "modes" of supply across all the relevant modes; however, they are through which countries are encouraged to make under no obligation to do so. The GATS provides commitments in addition to various general obli- countries the freedom to choose the modes in gations to which all GATS members must sub- which they will make commitments. They may scribe. It also identifies areas in which countries can make commitments in energy services across all of make specific commitments, most notably on mar- the relevant modes or selectively choose among ket access and national treatment. The significance them. A country might choose to make commit- and relevance of these provisions to energy services ments on cross-border supply (mode 1) and tem- are discussed below. However, the existing GATS porary movement of natural persons (mode 4), but framework is not without limitations. Among other not commit to the right of establishment (mode 3). issues, there is a need to clarify the ambiguity sur- rounding the existing classification system and def- GATS General Obligations initional issues, particularly regarding electricity. The GATS contains more than a dozen general obligations. Two of the most important are most- favored-nation (MFN) treatment and trans- Three of the four modes of supply defined by the parency. GATS members must meet those general GATS are relevant to energy. Mode 1 covers services obligations, with certain caveats and exceptions. that are supplied cross-border but do not require The general MFN obligation (Article II) seeks to the physical movement of the supplier or con- avoid discrimination among trading partners by sumer. The category would include cross-border requiring that commitments apply equally to serv- transit or interconnection rights associated with oil ices and service providers from all other member and gas pipelines and electric power transmission. countries. Countries can make exemptions but Mode 2 has less relevance to energy services. It cov- those are subject to negotiations and should last no ers consumption abroad, as with a consumer trav- longer than 10 years.7 Thereafter, countries must eling to the supplying country for services such as seek a waiver, which must be approved by three- tourism and education and consumers traveling to quarters of WTO members. a supply, as well as work such as the repair of air- The second general obligation is transparency craft or ships outside of an owner's home country. (Article III). No exemptions are permitted; the Mode 3 is highly relevant to energy. It covers ser- obligation, however, largely concerns post hoc noti- vices that require establishment of a local presence. fication. Governments must publish all laws, regu- This covers a wide range of energy services, such as lations, and administrative guidelines relevant to seismic surveying, energy efficiency auditing, services trade, and countries must respond to energy marketing, or any number of other activities requests from other member governments to pro- that can only be reasonably supplied through phys- vide regulatory information applicable to the oper- ical, commercial presence in a foreign country. ation of the GATS. Members notify the WTO on an Mode 4 is also relevant to energy in that it covers annual basis of new laws, regulations, and adminis- the temporary entry and stay of those providing trative guidelines affecting sectors in which mem- services. This category concerns visa terms and ber countries have specific commitments. In prac- conditions, examination requirements, and other tice, however, the content of those notifications has Strengthening WTO Member Commitments in Energy Services: Problems and Prospects 173 varied greatly from country to country, with some GATS Specific Commitments: MarketAccess being quite specific and others very general and National Treatment (Thompson and lida 2001). In its current form the GATS imposes no obligation on countries to con- In addition to the general obligations that apply to sider input from affected parties, including foreign WTO members in all service sectors, the GATS parties, about regulatory measures. It also does not includes provisions for specific commitments. The constrain countries from disclosing new or revised basic GATS framework lists two: market access regulations at the last minute or excluding affected (Article XVI) and national treatment (Article XVII). foreign parties from regulatory deliberations. Cre- Those disciplines come into effect only when they ating an across-the-board, or horizontal, discipline are explicitly listed in a country's schedule of spe- and improving transparency through prior notifi- cific commitments, a document appended to the cation has been proposed; however, it remains GATS for each WTO member with the member's unclear whether WTO members will agree to specific and additional commitments made during incorporate such a measure into the GATS in the or after the Uruguay Round negotiations. The near future (lida and Nielson 2001). process reflects the so-called positive list approach Two additional general obligations concern at the core of the GATS goal of creating more open domestic regulation and monopoly service pro- service markets. Articles XVI and XVII do not apply viders. In regard to domestic regulation, Article VI unless a country has positively affirmed that the sec- states that "each Member shall ensure that all mea- tor will be bound by those disciplines. sures of general application affecting trade in serv- Energy service providers operating internation- ices are administered in a reasonable, objective and ally value commitments to market access because impartial manner." Members must have judicial or they clarify the rights of foreign firms and provide administrative bodies and procedures that provide legal standing in a trade dispute. Article XVI lists timely review and appropriate remedies for govern- measures commonly used to restrict market access ment decisions affecting trade in services. The article and asks countries to eliminate these practices. By stops short of calling for independent regulation, but making a commitment, countries indicate that they states simply that WTO members "shall ensure that will refrain from market access restrictions that the procedures in fact provide for an objective and impose limits on (a) the number of service suppli- impartial review." All provisions regarding domestic ers permitted, (b) the value of transactions or regulation apply only to those sectors for which spe- assets, (c) total service output, (d) the number of cific commitments have been made. business persons or specialists that may be Another, if limited, set of obligations concerns employed, (e) measures that restrict or require spe- monopoly and exclusive suppliers. The GATS per- cific types of legal entity or joint venture through mits countries to maintain and even create new which a service supplier may supply a service, and monopoly service providers, but seeks to ensure (f) limitations on the use of foreign capital, such as that they do not abuse their market power or com- limits on foreign share-holding or the total value of pete unfairly by operating beyond the scope of their foreign investment. exclusive rights, and thus possibly undermine spe- Another specific commitment concerns the cific commitments (Article VIII). In addition, Arti- principle of national treatment defined as treat- cle IX recognizes that certain business practices ment no less favorable than that accorded to similar may restrain competition and consequently restrict domestic services and service providers. The com- trade. To address this concern, the GATS requires mitment is valuable in trade terms because it would members to consult with one another to eliminate impose an obligation on countries to refrain from such restrictive practices. No obligations concern maintaining or imposing discriminatory practices the scope and enforcement of policy rules about that disadvantage foreign service providers. It also competition. Equally significant for the energy establishes a means of recourse to foreign energy industry, no general provisions address third-party service providers if they are denied equal treatment access to networks or other essential facilities in the licensing process, taxation, and other regula- (Melly 200 1). tory matters. 174 Domestic Regulation and Service Trade Liberalization Few countries made energy-related market sometimes referred to as negative listing. Opportu- access or national treatment commitments through nities to limit actual commitments abound within the GATS during the Uruguay Round.8 Only three the GATS framework. Nevertheless, the obligations countries-Australia, Hungary, and New Zealand- to list exceptions clearly can contribute toward made commitments in pipeline transportation of removing trade restrictions by forcing countries to fuels (a subsector of transport services). Eight coun- publish discriminatory measures for all to see. tries made specific commitments covering services incidental to energy distribution, but a number of them defined this narrowly to mean consultancy Ambiguity of Energy Classifications services. Only two (Australia and the United States) andDefinitions of the eight making commitments in that area were The WTO services sector classification list (W/120) Organisation for Economic Co-operation and was developed to help GATS signatories schedule Development (OECD) countries. More countries commitments. The classification system, however, made commitments in services incidental to min- does not clearly represent energy services. Energy ing, that is, services supplied on a fee or contract services were not identified as a separate division basis in oil and gas fields, including drilling, derrick when the classification system was devised. At the construction, repair and dismantling services, and time, state-owned monopolies operating within casing services. Thirty-three members made com- national or regional markets dominated the energy mitments in that area but 11 of those limited their sector, and oil and gas companies and electric commitments to advisory or consulting services. power utilities-whether public or private-inter- With its access to the WTO, China recently made nally supplied the breadth of energy services activi- limited commitments in this area, but foreign ties that emerged since market liberalization. The providers can engage in onshore oil field services limitations in the descriptions of energy services only in cooperation with China National Petroleum found in the United Nation's provisional central Corp. and only in designated areas approved by the product classification (UNCPC) mirror the limita- Chinese government. tions of the W/120. The limitations are problematic Other commitments associated with energy because the UNCPC is supposed to provide the were made largely in construction and retail trade. corresponding central product classification (CPC) Forty-six countries made commitments regarding number that WTO members are to use to indicate general construction for civil engineering. This area an offer or commitment in each sector or subsector covers long-distance pipelines, communications (WTO 2001 a). and power transmission lines, local pipelines, and The ambiguity of the classification system cables. Thirty countries included energy in their impedes negotiations about energy services. In the wholesale and retail trade services. In wholesale three cases in which energy services appear in the trade this included solid, liquid, and gaseous fuels W/120, they are listed as part of other generic ser- and related products; in retail trade, fuel oil, bottled vice entries. Pipeline transportation of fuels is cov- gas, coal, and wood. ered as a subsector, "transport services." Technical Expanding the limited number of specific com- testing and analysis, mining services, maintenance mitments made during the Uruguay Round would and repair of equipment, and energy distribution considerably deepen coverage in energy services. services are found under "other business services.' The GATS, however, provides members with signif- When energy services are not explicitly mentioned, icant latitude to make exceptions and limitations where they should fall in the classification system is on specific commitments. Presumably, Articles XVI either uncertain or a matter of dispute. and XVII would apply to a sector added to the Recognizing that the energy services negotia- schedule, but countries may make exceptions if tions are unlikely to produce meaningful results they are clearly spelled out in their schedule (i.e., until the classification system is clarified, Canada, not simply listing a law or measure that contains Chile, the European Union, Japan, Norway, the provisions inconsistent with its trade commitments United States, and the Republica Bolivariana de but indicating the specific provisions that are Venezuela began meeting in October 2001 to rectify inconsistent). The process of taking exceptions is the problem. Despite some progress at periodic Strengthening WTO Member Commitments In Energy Servkes: Problems and Prospects 175 meetings, the group has yet to resolve several out- services would not be covered by the GATS. Con- standing issues. The task is not simple, given the versely the approach could complicate the classifi- complexity of the energy industry and its logical cation system and create duplicate entries. Coun- overlap with many other sectors. The stakes are also tries discussing classification issues are leaning high because the way energy services are classified toward creating a checklist of core and related can influence the terms and content of the subse- energy services. quent negotiation process. As a result countries A related issue concerns what sectors are identi- have used the clarification exercise as a way to fied as important and relevant to negotiations on secure their favored negotiation outcome. energy services. A pertinent example is energy- At least four issues must be addressed. One issue related shipping services. Given the importance concerns the organization of the W/120. The and size of energy-related shipping, some countries United States originally proposed creating a sepa- (such as Norway) are likely to press for their inclu- rate division within the W/120, with new categories sion in the scope of talks on energy services. The for energy not clearly identified within the CPC. United States is likely to resist such moves and The three existing categories would be moved in argue that maritime transport is not relevant to the their entirety to the new heading. The proposal energy services negotiations and, if taken up at all, aimed to create clearer and more commercially rel- should be part of separate maritime talks. This evant listings and to place previously unlisted position reflects strong domestic political pressure energy services categories under the new heading. to maintain cabotage restrictions, which prohibit Substantially changing the existing W/120, how- the use of non-national flag vessels to transport ever, has met with resistance from other member cargo within the national jurisdiction. The Jones countries. Canada has expressed concern that Act restricts waterborne shipments of goods changes could affect existing commitments. Others between U.S. ports to ships that are built, owned, have pointed to the additional time and confusion and crewed by Americans and therefore prevents that could be involved in gaining the acceptance of foreign flag vessels from carrying oil and oil prod- the large number of WTO members who have not ucts between U.S. ports but also from serving as yet begun to focus on the energy services sector. transport for offshore oil platforms developed by Still others have argued that even if not specifically U.S. companies. identified, energy services are already included A third issue concerns how detailed to make the because the CPC covers all products and services. classifications. All countries agree that greater detail Consequently the group's attention has shifted to is necessary to make the classification system more clarifying where energy service activities may be commercially relevant. But countries differ on the found within the existing classification structure level of disaggregation. Japan has proposed general even though that placement is a less elegant and categories whereas Venezuela has been pressing for user-friendly solution. a high degree of disaggregation, particularly in the Another issue is how broadly to define the scope area of upstream oil and gas field services. In gen- of energy services. Determining the boundaries of eral an aggregated list tends to promote liberaliza- the industry is difficult because energy services are tion because it encourages broad commitments, often bundled with other activities, such as envi- whereas a disaggregated list makes it easier for ronmental, financial, transportation, legal, engi- countries to omit sectors or list detailed reserva- neering, construction, safety, and research and tions while giving the appearance of committing to development. One potential solution is to create many activities. core and noncore designations or what is some- The last and perhaps most challenging classifi- times referred to as a core-and-cluster approach.9 cation issue concerns electricity. At least two issues This approach would list energy in terms of direct are at stake. One concerns the need to clarify the energy services (e.g., exploration and extraction) confusion that arises from the term incidental in coupled with their associated services (e.g., engi- the entry "services incidental to energy distribu- neering services, environmental services, and so tion." It is not clear if commitments based on that forth). The method has the advantage of being entry include electric power generators, brokers, highly inclusive with less risk that certain types of and marketers, or only distributors. The original 176 Domestic Regulation and Service Trade Liberalization intent of this entry seems to have been those ser- share of new electric power plant capacity addi- vices, such as management, operation and repair of tions worldwide. Which WTO rules apply to most the network, and meter reading, necessary for segments of the electric power chain is reasonable. transmitting and distributing electricity on a fee or Fuels such as coal and oil are considered goods and contract basis.10 At the time the classification was are therefore subject to GATT rules. With the made, transmission and distribution of electricity caveats noted above, activities downstream of gen- were rarely undertaken on a fee or contract basis. eration, including transmission and distribution, The best option may be simply to revise the are services subject to the GATS. But because of entry so that it unequivocally includes the actual ambiguity, electricity produced by IPPs could be transmission and distribution of energy, which are subject to GATT rules if electricity is considered a now regularly carried out on a fee or contract basis. good, which implies that it is manufactured. GATT Because only eight countries made commitments rules do not apply to enterprises but only to goods. in the area during the Uruguay Round, changing IPPs could be excluded from market access and the entry may not be too disruptive. Those coun- national treatment disciplines, which are only tries should be permitted to make revisions with- granted under the GATS. It could also limit cover- out penalty if the change expands any country's age access to essential facilities if WTO members commitment. Correcting this ambiguity would agree to establish such additional commitments. make future country commitments in this area The implications are considerable given the sig- clearer and reduce the chance that the GATS would nificance of the generation sector, which is the not recognize important energy services. The time largest segment in the electricity supply chain, and effort associated with such a clarification seems making up close to a half of all revenues in the justified given the size and importance of the applicable U.S. market. Aside from fuel, generation downstream electricity services. is the segment of the industry with the greatest The other issue arises from ambiguity over the potential for competition and has been the most definition of electricity. Electricity has the charac- subject to liberalization in recent years. In competi- teristics of both a good and a service. It may be con- tive markets IPPs perform both generation and sidered a good in the sense that it is manufactured trading/marketing activities. An IPP could establish through the process of materially transforming fuels two legal entities, one covering the generation busi- into electrons. It is a service in the sense that it can- ness and the other covering its marketing-trading not be stored and must be produced as it is con- operations. In practice, however, the two activities sumed. The ambiguity may explain the different are integrally linked. Without the generation func- way in which electricity has been treated over time. tion the marketing-trading function cannot be per- During the first General Agreement on Tariffs and formed, and vice versa. Trade rules should conform Trade (GATT) discussions in the late 1940s, negotia- to commercial practices. Business should not be tors conduded that electricity should not be classi- forced to establish legal entities to conform to trade fied as a commodity. Several countries later took out rules, particularly where the rules make little com- tariff bindings on electricity, however, suggesting mercial sense. that they considered electricity to be a good. In a An odd and less than ideal outcome would result further complication, the WTO Secretariat has if the structure of a particular power market deter- noted that the World Custom Organization (WCO) mined which WTO rules applied to IPPs. Power harmonized commodity description and coding plants built to serve a single customer-be they cap- system has made electricity an optional heading so tive inside-the-fence plants or build-own-transfer that countries are not required to classify it as a projects with a single utility buyer-would fall commodity for tariff purposes (WTO 1991). under GATT rules. An IPP that sought to enter a A major issue at stake for the GATS negotiations competitive market where there are opportunities on energy services is how WTO rules will treat the to sell output to multiple parties would be consid- electric power generation sector. The liberalization ered a trader and therefore subject to the GATS. An of power markets has spawned an international IPP IPP developer would gain establishment rights industry, responsible for building an increasing (mode 3) and any additional protections such as Strengthening WTO Member Commitments in Energy Services: Problems and Prospects 177 third-party access rights that WTO members may argue that it can reduce the cost and time associated agree on as part of the GATS negotiations on energy with international negotiations, can avoid the ten- services. An IPP restricted to a single buyer, how- dency to focus on politically important sectors at ever, would not have those rights because no invest- the expenses of more encompassing agreements, ment or network access provisions are associated and can lessen the likelihood that special interests with GATT rules. Without comprehensive protec- will capture sector-specific negotiations (Mattoo tion for multilateral investment, bringing IPPs 2000b). under the scope of GATS rules to the extent possible A horizontal approach, however, may yield less, would be preferable to such treatment. Those rules not more, liberalization. Facing uncertainty, gov- are more encompassing and therefore could give ernments rationally act conservatively when mak- IPPs a greater range of legal protections. ing commitments to principles that apply across Clarifying classification issues is an important the board to all service sectors. As a result govern- precondition to a successful GATS agreement on ments may agree only to horizontal disciplines that energy services. But other issues will also shape the are too broad to have much meaning or bite for a outcome of the negotiations. As governments specific sector. General principles such as MFN, found with telecommunications, the general obli- market access, and national treatment can be pow- gations and specific commitments contained in the erful tools in the cause of liberalization, but they basic GATS framework are not sufficient to reduce should be buttressed, where necessary, by rules that trade barriers associated with domestic regulation. reflect the characteristics of a specific sector. The To ensure a procompetitive, transparent, reason- development of specific rules is also more likely to able and nondiscriminatory regulatory environ- elicit the concentrated effort among regulators, the ment requires that WTO members consider devel- industry, and other stakeholders necessary to move oping commitments specific to the energy sector, negotiations forward. Finally a horizontal approach amended to country schedules as permitted by the assumes that all service sectors are equally impor- GATS. The next section takes up the nature of these tant for economic growth and ripe for negotiation. commitments and what they should cover. Both assumptions are questionable. Given energy's fundamental role in driving modern economies, WTO members act reasonably when prioritizing Paper Justifeed? sectors, with energy services high on the list. GATS Article XVIII provides a means for coun- The most effective strategy for using the GATS to tries to negotiate additional commitments not cov- achieve liberalization in services is the subject of ered by the basic GATS framework. The provision debate. The agreements on telecommunications and grew from the recognition that MFN, market access, financial services arose from sector-specific negotia- and national treatment disciplines were not neces- tions that had generic elements but also established sarily sufficient to ensure the full benefits of trade rules applicable only to those sectors. Some trade liberalization. In the case of telecoms, the need for negotiators are concerned about relying on that additional commitments resulted in a separate approach in GATS negotiations. Fearing the poten- telecommunications reference paper that set forth tially heavy transaction costs associated with a sec- additional obligations for WTO members. Creating tor-by-sector approach and creating a confusing meaningful disciplines for energy services requires a patchwork of commitments and obligations, they similar reference paper and/or annex for energy. advocate greater reliance on disciplines that can be The provisions in the telecoms reference paper applied horizontally to all service sectors. Because provide a basis for consideration but do not directly the economic case for regulation in all service sec- apply to energy. Four core areas are important to tors springs from common underlying market fail- securing procompetitive regulatory reform, some ures (natural monopoly, asymmetric information, going beyond the principles established for tele- and various externalities), generic principles should coms. The areas are third-party access to essential be available to address those and thereby apply to all facilities, market transparency, competition safe- service sectors. Proponents of a horizontal approach guards, and independent regulation. 178 Domestic Regulation and Service Trade Liberalization Third-Party Access to Essential Facilities connecting to the network. One problem that has arisen in the United States is the gaming that takes The right to interconnect is widely viewed as one of place among developers to secure the most advan- the most important competition safeguards in a tageous place in the interconnection "queue.' The network industry. The basic telecommunications place in the queue is important because it can agreement would have been far less meaningful determine who bears the costs of systemwide without the provisions guaranteeing suppliers upgrades, which can range from as little as access to public telecommunications transport net- US$100,000 to several million dollars. Another works or services under nondiscriminatory terms. problem is associated with who conducts the inter- Establishing the right to interconnect will be no less connection study. In the best case the study should important for the energy services agreement. But be undertaken by an independent party with no parallels between telecoms and energy are imper- stake in the outcome. This often is not the case, par- fect. The term interconnection and principles devel- ticularly in markets where there is no independent oped to support it in the telecoms reference paper system operator or other disinterested party with are likely to be too restrictive for energy services. sufficient knowledge and expertise regarding net- The set of principles for energy services must work conditions. Another access issue concerns severely limit the ability of a major supplier to how interconnection prices are determined and refuse access not only to electric power transmis- then allocated. At present, there is little consensus sion and natural gas pipelines but also to other across countries on the proper costing methods essential energy infrastructure. Depending on spe- that should be used to determine these charges, cific circumstances, essential energy infrastructure even though pricing of interconnection can signifi- may include gas storage facilities, liquefied natural cantly affect the development of a competitive mar- gas terminals, oil pipelines, and oil storage facilities. ket. Although the GATS is not the place to resolve In developing the appropriate language. trade all of these issues, it can encourage governments to negotiators may look to the "essential facility doc- establish standardized interconnection policies. trine" as it has developed in the context of competi- tion policy in the United States and more recently Tranarenc in Europe. For example, the facility must be shown to have monopoly characteristics that make it truly GATS-related transparency provisions set forth in essential. It is not enough that suppliers seeking Article III are largely procedural. They require the access be inconvenienced or bear some degree of prompt publication of relevant measures; notifica- economic loss as a result of refusal of access; it must tion to the WTO of significant changes in laws, reg- be reasonably clear that an alternative to the facility ulations or administrative guidelines; and estab- is not feasible.'2 Because oil pipelines and oil stor- lishment of channels of commitment for timely age facilities are more readily constructed by a com- responses to information requests from other WTO petitor than is infrastructure like electric power members. Although these provisions are valuable, transmission systems, it is reasonable to believe that they are not sufficient. The transparency disciplines they will less likely be affected by an essential facil- found in the telecoms annex and reference paper ity provision. There may be reasonable business provide a starting point. WTO members should justifications for denying access, but the criteria consider adopting a right of prior consultation on that are established for this exception should be cir- draft laws and regulations, with reasonable notice cumscribed to avoid creating a major loophole in and time for comments.'3 Given the importance of the rules. Where access is provided it should be licensing in the energy industry, similar standards granted in a timely fashion at reasonable fees that should apply to ensure an efficient and fair system reflect the cost of these facilities. for siting, permitting, and constructing new (or Establishing the basic legal right of third-party retiring old or inefficient) power plants, pipelines, access to networks-whether on mandatory or on and other energy-related infrastructure. negotiated terms-is but the first step in ensuring But governments should not lIimit additional competitive access. A variety of subsequent issues commitments to regulatory transparency. In addi- determine the cost, timing, and fairness of actually tion to those measures, trade negotiators should Strengthening WTO Member Commitments in Energy Services: Problems and Prospects 179 consider developing language that would focus The telecoms reference paper offers an avenue attention on the need for market transparency. In a for addressing potential abuse by dominant competitive context, withholding, delaying, or providers. These provisions emerged from the rec- demanding excessive fees for basic market informa- ognized need to prevent telecom suppliers from tion can distort competition as readily as physical engaging in anticompetitive practices, either alone constraints. All market participants need access to or with others. Specific examples identified in the timely information on prices, transmission capac- agreement include (a) engaging in anticompetitive ity, congestion, scheduled volumes, and other data cross-subsidization, (b) use of information relevant to efficient and fair business transactions. obtained from competitors through interconnec- An energy services reference paper would be well tion negotiations or other means with anticompeti- served to include provisions that encourage gov- tive results, and (c) failure to make available techni- ernments to take proactive measures to ensure the cal information about essential facilities or other free flow of timely information and establish indus- commercially relevant information for new entrants trywide technical standards. to provide their services in a timely fashion. Provisions to promote market transparency The provisions directly parallel competition in alongside regulatory transparency will have sev- network-based segments of the energy industry eral benefits. The combination would contribute and would greatly strengthen the legal foundation to the goal of improving market efficiency by for trade in energy services. The telecoms reference reducing transaction costs and market distortions. paper, however, does not speak directly to cases in It could also reduce the types of questionable which a generator or marketer may use its market energy trading practices that have precipitated dominance to control prices. Market share among regulatory investigations in the United States. And generators in many power markets remains highly it could reduce the incentives that feed corruption concentrated despite liberalization (see figure in the energy sector (Salbu 1999). Creating official 10. 1). So-called horizontal market power has been and transparent channels for providing informa- an issue in a number of energy markets. Even with- tion to market actors can be a major help in out evidence of collusion, studies have shown that reducing the existing incentives to bribe officials market players may be able to manipulate prices to gain the information needed in the normal through their bidding behavior when competitive course of business. pools have been established. Studies of the British electricity spot market in the early 1990s, when just three generators controlled much of the market, found that generators were charging prices signifi- The process of liberalization has drawn attention to cantly higher than their observed marginal costs two forms of market power. One form is the poten- (Wolfram 1999). The giant price spikes experienced tial for anticompetitive behavior associated with in 2000 and 2001 in the wholesale markets, particu- vertical integration. The incumbent may take larly in California, have also raised the issue of price advantage of its control over the network (be it manipulation by generators and traders. pipelines or transmission grid) to favor more costly Perhaps language borrowed from the telecoms in-house supply with costs (plus a healthy margin) reference paper could address such anticompetitive that can be recovered through the regulated busi- outcomes by requiring countries to maintain ness. One approach attempts to control undue "appropriate measures" to prevent major suppliers market power by policing better the activities of from engaging in anticompetitive practices. The dominant providers. But imperfect information combination of the vagueness of appropriate mea- and regulators' lack of political independence often sures and specific issues raised by network access, compromise that approach. Another approach to however, weakens this provision so that it is ineffec- controlling market power is through vertical tive in addressing the undue exercise of market unbundling. The structural solution is generally power by market actors other than the network considered more effective because it removes many operator. Negotiations on energy services must incentives and abilities of incumbent utilities to consider whether additional disciplines are needed engage in anticompetitive behavior. to address these concerns about competition. 180 Domestic Regulation and Service Trade Liberalization FIGURE 10.1 Market Share Remains Concentrated in Many Markets Nordpool | Largest Australia * Second Largest Netherlands United Kingdom Germany Korea Japan (60 Hz) Spain Italy New Zealand Japan (50 Hz) France Belgium 0 10 20 30 40 50 60 70 80 90 100 Market Share of Largest Two Generators (%) Note: The United States and Canada are not included because each is made up of various markets. The share in New Zealand was reduced to 53 percent in 1999. The share in the United Kingdom (England and Wales) was reduced to approximately 28 percent in 1999. Source: IEA/OECD (2001 a, p. 49). Uncertainty over classifying complicates the issue. political interference. A great proportion of assets is If electricity generation is not a service, then the sunk, technology exhibits important economies of GATS may not be the most effective place to seek a scale, and customers generally fall into the same remedy. groups as voting populations. As a result, end-user energy pricing has long attracted the interest of politicians. The political sensitivity of prices and the inability of companies to move easily increase The institutional structures that governments the risk of administrative expropriation: regulators, establish to regulate the energy sector vary widely following public pressure or political expediency, from country to country (see table 10.2). In the may take actions that push prices below long-run 1990s privatization and the introduction of compe- average costs. The energy industry is full of exam- tition spurred a general trend toward the independ- ples of the struggle between regulatory attempts to ent regulatory agency as the preferred model. Both extract those quasi-rents and industry attempts to the European Union (EU) electricity and gas direc- fend them off (Spiller 1997). tives require member states to establish an inde- Independent regulation is widely viewed as a pendent authority responsible for resolving dis- way to reduce the problems raised by undue politi- putes (Article 20). The developments have also cal interference. The OECD and the World Bank encouraged the establishment of independent reg- advise that policy functions and regulatory func- ulatory authorities in Argentina, Australia, Bel- tions be separated and that procedures for trans- gium, Brazil, Canada, Finland, France, Hungary, parency be enhanced (see World Bank 2001). Deci- Ireland, the Netherlands, Norway, Poland, Portugal, sions removed from covert pressures are more Spain, Sweden, and the United Kingdom. likely to be made on the basis of the facts at hand Certain characteristics of the energy industry rather than the influence of government, compa- make it particularly susceptible to rent seeking and nies, or other parties. Experience suggests that reg- Strengthening WTO Member Commitments in Energy Services: Problems and Prospects 181 TABLE 10.2 Institutions for Gas and Power Regulation in Selected Countries Institutional Approach Source: IEAIOECD (2001 a, p. 32); and World Bank (2001). ulatory decisionmaking can be improved if all Considerations ofDeveloping Countries communications and evidence submitted to the ... regmul icatoroare mandevpublicean iublicthearings are Developing countries will play a critical role in the regulator are made public and if public hearings are oucm of th enrysrie eoitos h outcome of the energy services negotiations. The conducted in a fair and impartial manner, bulk of the projected increase in world energy Negotiations on energy services offer an oppor- demand will take place in developing regions, tunity to reaffirm and codify the importance of accounting for approximately two-thirds of the independent regulation and transparency in the growth in world energy demand between 1997 and energy sector. In the case of telecoms, WVTO mem- 2020 (see figure 10.2). Developing regions will bers made independent regulators a requirement become increasingly important buyers of energy but did so without prejudice as to whether the reg- bulato was separateou fromu e minstrymakingr thereg- services and are likely to increase their role as sellers ulator was separate from the ministry making tele- of services, particularly in the area of oil field ser- com policy. That arrangement should be a mini- vices. As a result, the scope and benefits of a GATS mum requirement in any agreement on energy agreement on energy services will hinge to a great degree on the number of developing countries that agree to make commitments and on the nature of Additional Issues those commitments. Developing countries present a specific set of The process of strengthening GATS disciplines for issues that WTO members will need to confront. energy services raises additional issues that negotia- What, if any, special treatment should developing tors must address. The first concerns developing countries be accorded? The GATT established a countries and their special circumstances. Among precedent for granting such countries special tran- the questions raised is whether provisions for spe- sitional arrangements in meeting trade commit- cial treatment and developmental objectives are ments and for applying differential treatment for warranted. A second issue concerns the nature and countries at different levels of development. The scope of market restrictions that countries may GATS architecture already offers countries a high impose in the pursuit of public policy objectives. A degree of flexibility.'4 Any country may impose third issue deals with the scope of reservations that restrictions on market access as long as it lists them countries may take on scheduling commitments. in its schedule of commitments and is bound to Another issue concerns the advantages and disad- provide national treatment only if it explicitly vantages of emergency safeguards as part of an makes such a commitment. The actual need for agreement on energy services (the GATS does not special treatment should be weighed carefully, par- include safeguard instruments like those in the ticularly for middle-income developing countries GATT for goods). Last is the issue of government where special treatment might be less warranted, procurement and whether GATS-specific disci- particularly if emergency safeguards are incorpo- plines should be added in this area. rated in an agreement on energy services. 182 Domestic Regulation and Service Trade Liberalization FIGURE 10.2 World Energy Demand, 1997 and 2020 China Cina 11% 14% 1997 2020 8,61 0 million tons of oil equivalent 1 3,529 million tons of oil equivalent Source: IEA/OECD (2000, p. 52). A second issue concerns what are broadly called Uruguay Round represented an effort to phase out developmental objectives. Developing countries local content, domestic sales requirements, local can benefit from establishing linkage programs, hiring targets, and other performance requirements which aim to increase domestic sourcing by foreign for goods. Developing countries have resisted efforts affiliates and to harness foreign direct investment to extend the reach of the controversial agreement: for the purpose of upgrading the technology and they often view performance requirements as an managerial capability of local firms (United important element of their development strategy Nations Conference on Trade and Investment (Bora, Lloyd, and Pangestu 2000). The contending 2001). What role should the government have in views and interests surrounding performance this process? When do developmental objectives requirements are not easily reconciled and could justify imposing FDI and trade restrictions on a pose a stumbling block to reaching a GATS agree- discriminatory basis? ment on energy services. Developing countries have sought to preserve the A third issue involves the domestic regulatory right to place conditions on the market openings capacity of developing countries to oversee and they choose to make in the name of developmental regulate competitive energy markets effectively. goals. Venezuela's delegation has asserted that "the Although the GATS may serve to promote and con- negotiations should respect the developing coun- solidate domestic energy regulatory reform efforts, tries' space to implement policies aimed at domestic multilateral trade rules cannot guarantee sound capacity-building, in particular the capacity of their regulatory institutions. Multilateral trade rules are small and medium sized energy service suppliers" designed primarily to ensure market access and are (WTO 2001ib, p. 15). Performance requirements not directly intended to promote security, environ- derive from the view that conditions on trade and ment, or social welfare goals. Building credible and investment of multinational enterprises can be used independent regulatory institutions requires a par- to increase local production, exports, or technology allel effort. The World Bank and other institutions transfer for the host country. To the extent that long have supported regulatory capacity building those requirements impose conditions that are not along those lines. Such efforts must continue but market driven, however, performance requirements must incorporate a greater trade element. Consid- can distort investment decisions and international erable work remains to be done to build compati- trade. The WTO Agreement on Trade-related bility between domestic regulation and multilateral Investment Measures (TRIMs) reached during the trade disciplines for energy. Strengthening WrO Member Commitments in Energy Services: Problems and Prospects 183 Finally, there is a need to encourage greater As noneconomic obligations, environment, developing country participation in the GATS security, and other public policy objectives always negotiations. Domination by OECD countries in present the nagging problem of how they should be negotiations on energy services would be a mistake, met and paid for. Traditionally governments have as would a view of the negotiations in North-South funded public service obligations by permitting terms. The substantial trade in energy that takes utilities to earn monopolistic rents and practice place between developing countries is a trend that cross-subsidization. That solution has not been the will grow. Developing countries stand to benefit most efficient one. Market liberalization has sought not only from establishing stronger multilateral to improve efficiency but has reopened the ques- trade disciplines with industrial countries but also tion of allocating the burden of public service obli- from establishing stronger trade rules between gations while treating market incumbents and mar- themselves. ket entrants fairly. It is often argued that although certain market interventions may be legitimate, regulators should strive for symmetry among market players in the Previous GATS agreements explicitly acknowledge application of those interventions. As Gregory the right of governments to pursue legitimate pub- Sidak and Daniel Spulber put it: "[Regulators] lic policy objectives. The agreement on financial should scrupulously design rules that create no services concluded in 1997 permits countries to advantage for the entrant over the incumbent, or impose prudential measures to protect the con- vice versa, but instead place all competitors on an sumers of financial services and to ensure the over- even regulatory footing" (Sidak and Spulber 1998, all integrity and stability of the nation's financial p. 146). In practice achieving symmetry is not an system. Maintaining universal service was an easy matter. Liberalization often generates strong important priority for countries making commit- resistance by incumbent providers because they ments regarding telecoms. The basic telecoms fear that new entrants will cherrypick the market agreement and supporting reference paper recog- and leave the incumbents saddled with the costs of nize the right of countries to impose special obliga- meeting various social objectives. In the context of tions about universal service. the GATS negotiations, those concerns help explain The nature and scope of prudential measures why some incumbent utilities have already will likely loom large in the negotiations on energy expressed reservations about establishing procom- services. Many policy objectives associated with a petitive trade rules for energy services (see, for country's energy policy have significant social and example, Takao 2001). economic consequences. In addition to considera- For those reasons, the process of introducing tions of universal service similar to those that arise competition while ensuring symmetry among mar- with telecoms, there are health, safety, rural electri- ket players often requires new institutional fication, pollution abatement, energy efficiency, arrangements and cost allocation mechanisms. and security goals. Governments have invoked all One example is renewables portfolio standards for of these policy objectives at one time or another to electric power generation to create incentives for justify quotas, subsidies, and other policy instru- inducing higher levels of renewable energy tech- ments in ways that discriminate against foreign- nologies than supplied in a purely competitive con- owned firms. Governments have justified market text. Establishing certain mandatory portfolio intervention and the contrivance of competition on requirements (numerical quotas) obliges electricity the basis of immediate as well as long-term consid- suppliers to produce a certain percentage of elec- erations regarding energy security. Immediate tricity generated from renewable energy. Govern- security considerations include market interven- ments may also issue certificates for the amount of tions taken to ensure the reliability of power sys- renewable electricity generated that can be traded tems. Long-term considerations about energy secu- in secondary markets. Producers who do not meet rity include market interventions aimed at the minimum standard or who do not hold a suffi- minimizing the country's dependence on a particu- cient number of certificates may face penalties. If lar fuel or on a particular country or region. applied fairly and reasonably, the approach can 184 Domestic Regulation and Service Trade Liberalization achieve the public goal of promoting certain energy gration. For example, article 24 of the EU gas direc- sources in an efficient and least-cost manner. As tive states that member states may "temporarily noted above, however, mandatory portfolio stan- take the necessary safeguard measures" in the event dards can impede trade and create suboptimal out- of a sudden crisis in the energy market in which the comes if they unduly favor local suppliers at the system's integrity is threatened.15 Because those expense of foreign suppliers. This may happen measures came into effect after the U.K. morato- (intentionally or unintentionally) through the defi- rium on gas-fired power plants, whether that action nition of renewable resources that is chosen. A case could have been justified as a safeguard measure is in point is the renewable energy portfolio legisla- unclear. The inclusion of the safeguard instrument tion in New Jersey, which effectively excludes Cana- within the directive, however, indicates the special dian hydropower (Horlick, Schuchhardt, and economic and security sensitivities associated with Mann 2001). It does this by excluding electricity energy. generated by hydropower (Class I renewable Incorporating safeguard-type measures within a resources), only permitting hydropower generated GATS set of disciplines on energy services may also from facilities that are of 30 megawatts or less be useful in securing deeper commitments from (Class II renewable resources). The bulk of Cana- countries. Previous service negotiations show that dian hydropower is generated in facilities much countries sometimes make binding commitments larger than 30 megawatts. below their existing levels of liberalization.16 Gov- Thus the issue for trade negotiators is not whether ernments face considerable uncertainty with governments have a right to pursue legitimate public respect to liberalization. They can never fully pre- policy objectives, but how these goals are achieved. dict the future demand for more protection at Multilateral rules should ideally make it difficult for home. Governments respond to the uncertainty by governments to rely on trade restrictions as a way of seeking flexibility (Rosendorff and Milner 2001). achieving public policy objectives. In most cases Although problematic from the perspective of lib- these objectives are better achieved through other eralization, such behavior can be perfectly rational. nondiscriminatory means (Mattoo 2000b). Governments may compensate for the lack of flexi- bility by undercommitting. Given those considerations, governments may find the inclusion of emergency safeguard instru- GATS Article X calls for negotiations on emergency ments in the negotiations on energy services safeguards, but the current agreement does not worthwhile. That inclusion, however, should be include such provisions. Some analysts have argued temporary and apply only to the extent needed to that the economic case for safeguard measures in prevent or remedy serious injury. Provided that services is weak. Bernard Hoekman and Michel they are framed to minimize abuse, emergency Kostecki (2001, p. 270) have suggested that "GATT- safeguards may elicit more meaningful commit- type emergency protection is difficult to rationalize ments from governments than otherwise can be in the services context because in many cases it will expected. require taking action against foreign firms that have established a commercial presence." They GovernmentProcurement question why a government would take such action when it would harm the investment environment Government procurement, a final area that trade and negatively affect the national employees of the negotiators must consider, can serve a catalytic role targeted foreign-owned firms. But government in stimulating competition. By opening procure- actions belie that logic, at least in the case of energy. ment to all competitors, policies on government U.K. regulators showed little concern for the effect procurement can help establish new standards for on foreign firms when they placed a moratorium entry and more competitive market conditions. on the construction of new gas-fired power plants More often, however, government policies restrict in 1997. competition to preferred-generally domestic- A precedent for safeguard measures already suppliers. The policies may be legislated, as in the exists for energy in the context of EU energy inte- case of the U.S. Buy-America policies, which dis- Strengthening WrO Member Commitments In Energy Services: Problems and Prospects 18S criminate against foreign suppliers. Or policies- ization. This finding has generated skepticism often those dealing with procurement of oil field about the ability of the GATS to drive regulatory services-may be determined on an administrative reform. But even those who are less sanguine about or political basis with little transparency and few the GATS serving as a force for domestic regulatory "challenge procedures" that give firms an opportu- reform point to the advantages that international nity to object before the final procurement decision trade disciplines provide in binding the status quo is made. (Drake and Noam 1997). Although less relevant The significance of discriminatory procurement from the standpoint of expanding market access, practices depends on several factors. One factor is standstill agreements have value in preventing slip- the size of government procurement relative to the page and in creating a firmer foundation for future market. In some cases governments may play a rounds of liberalization. minor role in service markets but a very large role Regulatory reversals and backsliding are not in other markets, particularly if a government body issues of idle concern for the energy industry. In holds a monopoly position as do many power and recent years there have been major cases of govern- gas utilities. Another factor is how tradable the ments pulling back from previously announced lib- product is. Government procurement policies are eralization measures. One recent case is the deci- unlikely to have major effects on the price of prod- sion by the California Public Utilities Commission ucts traded in world markets, such as oil. Many to suspend retail competition. Another was the services and locally produced products, such as British government's decision in 1997 to place a electricity, however, are less likely to be traded. A moratorium on the construction of gas-fired power third factor relates to the contestability of the mar- plants. Because foreign and domestic energy service ket. Discriminatory practices are less likely to affect providers were adversely affected in both cases, it is markets primarily supplied by private firms backed worth exploring what, if any, GATS disciplines by strong procompetition policies. might apply. The GATS does not now cover services supplied in the "exercise of governmental authority." The lack of coverage has not convinced everyone that standalone disciplines on government procure- On September 20, 2001, the California Public Utili- ment are needed. Simon Evenett and Bernard ties Commission suspended retail competition. Hoekman (2000) argued that there is no com- This decision revoked the right of consumers to pelling reason to treat the procurement of goods choose their preferred electricity supplier-a right and services differently and therefore that countries previously granted as part of the state's electricity should focus on developing broad horizontal disci- liberalization program. The action was motivated plines instead. They also suggested that as market by the need to complete a $13.4 billion bond offer- access and national treatment commitments ing that arose from the heavy fiscal obligations expand under the GATS, there will be less need for from California's power crisis in 2000/2001 (Cam- multilateral rules on procurement. Their suggested bridge Energy Research Associates 2001a). The cri- focus is on removing market access barriers, such as sis began in May 2000 when tight supplies and ris- the right of establishment, and on cross-cutting ing natural gas prices sparked a surge in wholesale transparency disciplines. But governments and electricity prices. The state took a number of other stakeholders do need to determine whether actions in response but did not agree to tariff government procurement of energy is sufficiently increases or to allowing the utilities to sign great and market distorting to warrant developing medium-term contracts intended to moderate ris- specific rules for energy services. ing wholesale prices. Instead, retail prices were capped. Those actions placed the utility companies in the untenable position of buying high in the wholesale markets and selling low in the retail mar- Experience in previous service negotiations sug- kets. Eventually, as the utilities sank deeper into gests that countries tend to make negotiating offers debt (or filed for bankruptcy in the case of Pacific that reflect their existing levels of domestic liberal- Gas & Electric), the state stepped into the role of 186 Domestic Regulation and Service Trade Liberalization purchasing energy on behalf of retail customers.17 enough additional discipline to prompt the state to With $11.5 billion rapidly spent to purchase power choose a more efficient response to the "protection" through the tax-supported general fund, additional necessary to float the bonds while preserving mar- revenue sources were needed. The bond offering ket openness. was sought for this purpose. Because the state of California's credibility with investors was badly The U.K. Moratorium shaken by its handling of the crisis, however, the on Gas-Fired Power Plants state had to pursue extraordinary measures to reas- sure investors that customers could not avoid pay- Liberalizing the U.K. power market unleashed a ing for the bonds. This was accomplished, in effect, surge in new gas-fired power plant capacity addi- by blocking customers' ability to purchase electric- tions during the 1990s. The so-called "dash for gas" ity from alternative energy suppliers. led to a total of 9,500 megawatts of gas-fired capac- Closing off retail access was not the only solu- ity being built from 1990 to 1996. In December tion available to California. One alternative would 1997 Britain's energy minister announced that his have been to apply a charge applicable to all cus- department was deferring decisions on outstanding tomers that could not be bypassed. This would have applications to build gas-fired power plants (Gods- allowed the state to recover the cost of bonds and mark and Bevins 1997). That action, which put contracts incurred by electricity purchases, but in a proposals for 27 plants in limbo, was justified by a way that preserved market openness. Another pos- concern over the country's long-term security of sibility would have been to retain direct access. That supply fuel diversity and to reduce excessive approach assumes the bond issue would not have dependence on one fuel. But employment consid- been undermined by customer switching and that erations also loomed large. The government's retaining the option would have the added benefit action appeared to many analysts to be a stop-gap of creating needed discipline to ensure that the measure to stem the inevitable demise of Britain's state made prudent energy purchases. Only if the coal industry.'9 In particular, the remaining high- state's electricity contracts were too expensive priced, long-term coal supply contracts with power would customers seek out lower direct-access generators were set to expire the following spring. prices.'8 Anticipating that these contracts would be aban- One way that California could have run afoul of doned or renegotiated at a much lower price and on the GATS was by violating market access commit- shorter terms, the main mining company threat- ments because the decision on retail access effec- ened to lay off 5,000 workers if favorable long-term tively limited the number of service providers to contracts were not renewed. one-the state. Given the political and fiscal pres- It is not clear if the United Kingdom's freeze on sures created by the power crisis, a pure market gas-fired plants could have been actionable under solution may not have been realistic. By some esti- the GATS. That would depend on what binding mates, prices would have spiked to 29 cents per commitments the government had made and how kilowatt hour during the worst period of shortage electricity is eventually defined. The ban, which but then would have fallen to around 11 cents per lasted until 2000, was made public before the EU kilowatt hour, assuming that additional power Gas and Power Directives were put into effect and so plant capacity was brought online. Instead, the neither directive came into play. In a narrow sense state's action effectively locked in prices at an aver- the action was nondiscriminatory in that it applied age of 16 cents per kilowatt hour, which prevented to British firms as well as to foreign firms seeking to a politically volatile price spike but effectively build gas-fired generating plants. If the United locked the state into higher prices for a much Kingdom had made relevant commitments, how- longer period of time (Leamer 2001). Had the ever, the action could have violated provisions GATS market access commitments been in place, against trade-distorting subsidies. The moratorium they may have provided disciplines necessary to on gas created an anticompetitive subsidy by favor- achieve a more efficient outcome. The GATS mar- ing some energy service suppliers over others. Pro- ket access commitment might have provided tections granted to coal had a negative effect on Strengthening WTO Member Commitments in Energy Services: Problems and Prospects 187 electricity marketers and energy service companies Endnotes that were attempting to build a portfolio of assets to 1. By the end of 2001, initial negotiating papers had been sub- compete in the increasingly competitive British mitted by Canada, Chile, the European Union, Japan, Nor- market. It also negatively affected integrated engi- way, the United States, and the Republica Bolivariana de neering and project management service providers 2. For a discussion of these reforms see Newbery (1999). who were denied business and firms involved in 3. The International Energy Agency projects that during the servicing new natural gas fields (Wighton 1998). It 1997-2020 period total oil supply will decline by an average annual rate of 1.4 percent among countries in the Organi- is therefore questionable if a blunt instrument like sation for Economic Co-operation and Development, but an outright ban was the least trade-restrictive means will increase by 1.1 percent in Russia, 3.9 percent in the available to protect the domestic coal industry. This Organization of Petroleum-Exporting Countries (OPEC) case supports the need within the context of WTO Middle East, 5.3 percent in the Caspian Sea region, and 5.7 percent in Latin America (see IEA/OECD 2000). rulemaking to ensure that protectionist policies 4. IPP developers could build as much as 430 GW (gigawatts) enacted by governments cause no greater loss of of the 771 GW of new capacity additions that are projected economic welfare than is necessary (Sykes 2001). to be made between 2000 and 2010, which represents more than half of the capacity additions worldwide (Cambridge Energy Research Associates 2001b). 5. As part of its annual trade review with Japan the U.S. gov- Conclusion ernment has raised the issue of establishing access for all market participants, but has stopped short of demanding Energy markets are undergoing major change mandatory access with regulated tariffs for competing sup- throughout the world as a result of privatization pliers (see U.S. Trade Representative 2001,Annex 11-15). and market liberalization. The era of vertically inte- 6. Calculated from data reported in the BP Statistical Review of grated monopolies with clearly defined.service ter- World Energy, June 2001 and Energy Information Adminis- tration, International Energy Outlook 2001. ritories and locked-in customer bases is giving way 7. In 1994 more than 60 WTO member countries submitted to more flexible and competitive market arrange- most-favored-nation exemptions, largely concentrated in ments. This is true even for those countries that three sectors: audiovisual, financial services, and trans- portation (road, air, and maritime). have chosen to retain public ownership of their oil, 8. For an extended discussion of these commitments see gas, or electric utility companies. These changes are WTO (1998, pp. 19-35). creating pressures not only to adjust domestic regu- 9. For a more complete description of how this approach creating pressures ~~~~~~~~might look see Thompson (2000). latory frameworks but also to establish interna- mihlokseT mpn 20) 10. Personal communication, United States Trade Representa- tional trade rules that harness the gains achieved tive staff, April 11, 2002. through competitive markets. The interest shown 11. For a discussion of why the right to block access is justified see Nagahara (2001). by governments in negotiating GATS energy service 12. Useful criteria for determining the reasonableness of a disciplines as a part of the Doha Development refusal to deal are spelled out in various U.S. court cases. Agenda reflects this new reality. See, in particular, MCI Communications Corp. v. American The GATS provides a framework for countries Tel. & Tel., 708 F.2d 1081 (7th Cir.), 1983. 13. For more on how prior consultation might work see lida to expand their commitments to market access and and Nielson (2001, pp. 115-35). national treatment significantly in the area of 14. Some argue that the GATS, as currently framed, is too flex- energy services. It also provides a way for countries ible and that is one reason it has been a relatively weak to make additional commitments in important instrument in advancing liberalization (see Low and Mat- to make additional commitments in important too 2000). areas such as third-party access to essential facili- 15. Directive 98/30/EC of the European Parliament and of the ties, competition, and independent regulation. Council of 22 June 1998, Concerning Common Rules for Achieving those goals requires clarifying the exist- the Internal Market in Natural Gas, Official Journal L 204, Achieving those goals requlres clar1fymg the exlst- July 21, 1998, pp. 1-12. ing classification system and making it more rele- 16. One example is the level of foreign equity participation vant to the way in which energy is produced and permitted in commercial banks. The Philippine govern- delivered. It will also require that countries not only ment made a binding commitment of only 51 percent even though domestic law allows 60 percent (see Mattoo 2000a, make binding commitments but also follow p. 371). through by putting in place the regulatory struc- 17. The California state legislature removed the state's investor- tures and procedures necessary to meet their obli- owned utilities from the role of purchasing energy on behalf of retail customers and gave that function to a gov- gations and specific commitments according to the ernment agency-the California Department of Water negotiated deadlines. Resources (CDWR). CDWR subsequently signed a series of 188 Domestic Regulation and Service Trade Liberalization contracts, some extending 20 years, at what turned out to lida, Keiya, and Julia Nielson. 2001. "Transparency in be the peak of market prices, in the first and second quar- Domestic Regulation: Prior Consultation." In OECD, Trade in ters of 2001. 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"Annual Reform Recom- from the Republica Bolivariana de Venezuela, S/CSSIW/69, mendations from the Government of the United States to the March 29. t I i REGULATION OF HEALTH SERVICES AND INTERNATIONAL TRADE LAW David Luff Executive Summary vices supplied by the government do not deserve The object of this chapter is to compare regulation the greatest attention, the concepts of the "quality in the health services sector with the application of of a service" or the "necessity of a measure" need current World Trade Organization (WTO) rules. further clarification. The first section offers a brief summary of the The third part of the chapter assesses the ade- most important regulatory issues arising in the quacy of GATS rules in relation to the current pri- health sector, drawing primarily from the Euro- orities of national health policies. Where relevant, pean experience. supplementary international rules are suggested. In The chapter's second section delineates the this context, to take the GATS to its limits, the chap- margin of discretion left to domestic regulators ter assumes that full commitments are made by by WTO rules. The analysis concludes that the WTO members, even if this is currently not the General Agreement on Trade in Services (GATS) case. The adequacy of an agreement such as the is the relevant WTO agreement and that it is char- GATS should not be tested against the capacity of acterized by its total flexibility. Obligations members individually to limit the applicability of imposed on governments pursuant to the GATS its provisions. On the contrary, one should assume mostly depend on individual commitments made. that all of its provisions are fully applicable and Such commitments must however be crafted should check to what extent the provisions can be appropriately. Furthermore, the absence of spe- adjusted to domestic regulatory concerns. The Pre- cific limitations in commitments generates legal amble to the GATS explicitly recognizes the right of uncertainty on several aspects of the domestic members to regulate the supply of services in order regulation of health services. The chapter identi- to meet national policy objectives, even after com- fies those key GATS issues most in need of inter- mitments are negotiated. Therefore, the last section pretation in the health sector. Although questions of the chapter will be prospective in nature and is concerning the applicability of the GATS to ser- intended to highlight possible shortcomings of The author is grateful to Aaditya Mattoo, Rudolph Adlung, Julia Nielson, Pierre Sauv6, Jolita Butkeviciene, Malcom McKinon, Johannes Bernabe, and Debra Lipson for their useful comments and advice on a first draft of this study. 191 192 Domestic Regulation and Service Trade Liberalization horizontal provisions in GATS in relation to the Occasionally, limited market mechanisms are used regulation of health services. in resource allocation, but that is not necessarily the A final objective of the chapter is to determine case. It is difficult to predict which system will pre- whether horizontal regulation under the GATS vail in the future. The current trend would consist could be sufficient or if the sector concerned would of variations of a system by which social security require specific international regulation to be funds would be responsible for the distribution of included in the scope of the WTO. The chapter social security contributions and would be makes no assumption as to the desirability of financed according to the number of affiliates. increasing trade in the health services sector.' As They would purchase health services for the benefit indicated, discussions in this chapter will concen- of their affiliates and compete with each other for trate only on the specifics of domestic regulation of those services. A perceived domestic advantage to health services and will address the latter's interface this mechanism is an increased cost efficiency with WTO rules. The chapter will not directly because funds would develop a capacity to obtain address other closely related areas, such as regula- the best offers for the supply of health services, tion of private health insurance, immigration laws, under high-quality conditions. This mechanism mutual recognition agreements, intellectual prop- also seems to have produced positive results in erty protection, and so forth. In the context of terms of trade in health services. Two possible future trade negotiations, it should be kept in shortcomings are the apparent incentive to select mind, however, that trade in health services can be patients according to their perceived health risk connected with all of these other issues (see Butke- and the possible development of anticompetitive viciene and Diaz 1998). clusters of service providers. Regulatory Issues Related to the The Application of WTO Rules Provision of Health Services In the Health Services Sector Countries have engaged in different experiences to This section examines the current effect of WTO limit the costs of public health policies while main- rules on the health services sector. The review will taining quality standards and equal access to health be limited to the first area of regulation, that is, the services. Of course, considering the lack of clear- production of health services. The second area cut results and different political, institutional, and of regulation-provision of pharmaceuticals- social realities within countries, no international mainly concerns trade in goods and the protection harmonization of policies has yet taken place. of intellectual property rights, and so falls outside Certain common regulatory issues in the health the scope of the present work. The third area of sector can be identified and used as a possible ana- regulation-financing of health services, particu- lytical framework for the purposes of this chapter. larly establishing and operating the social security Thus three key areas of regulation stand out: the system-will be covered only to the extent that production of health services, the supply of phar- WTO rules may affect the functioning of the maceuticals, and the financing of health services. In mechanisms established or if those mechanisms the first two areas, rules address three main issues: may affect trade in health services as such. ensuring quality, guaranteeing universal and non- discriminatory access to health services, and con- ' . ~Applicable Agreements trolling public expenses. The third area, financing, clearly has a close connection with the previous two Generally speaking, although all WTO agreements and when it affects them its regulation addresses are applicable, the most relevant one here is the similar concerns. It should be noted that public General Agreement on Trade in Services. Regulat- financing in the form of social security may operate ing the production of health services indeed mostly both as a fiscal and as a subsidization mechanism. affects trade in these services. The need to contain costs entails the adoption of General Agreement on Tariffs and Trade (GATT) many sorts of regulatory mechanisms, the most 1994 would also be relevant to the extent that trade radical being central planning under a fixed budget. in the goods needed to supply health services was Regulation of Health Services and International Trade Law 193 affected. For instance, if a domestic regulation vices regulations in different countries," the partic- required the use of equipment of local origin as a ular rights of developing countries to regulate must condition on the financing of hospital services or be preserved (GATS Preamble, para. 2). the granting of operating licenses, then both trade The GATS is thus characterized by its flexibility in goods (that is, trade of the equipment concerned) and the regulatory freedom that is, in principle, rec- and trade in services (that is, trade in hospital serv- ognized for members. Commitments under the ices) would be affected. As previously indicated, GATS, however, might entail the search for least however, trade in goods is not covered by the pres- trade-restrictive regulatory solutions that can be a ent study, even if the goods concerned are necessary source of legal uncertainty. to supply a health service. Restrictions on trade in In principle, the GATS constitutes the frame- equipment will be addressed only to the extent they work agreement relevant to all services and particu- might adversely affect trade in health services. larly those that have been or are being liberalized, The Government Procurement Agreement but it does not apply to services that are supplied in (GPA) might also be relevant. In several countries the exercise of governmental authority (Article social security funds act as purchasers of health 1.3[b] and Article 1.3[c]). Its structure also differs services for the benefit of their affiliates. The from that of the GATT. It contains a mix between impact of this agreement, however, is still very the- horizontal commitments applicable to all services oretical, given that few countries agreed to be and service suppliers, and sectoral commitments bound by its provisions,2 only one of those coun- applicable only to those sectors that have been tries has included the health services sector in its explicitly open to trade by WTO members. In only appendix attached to that agreement,3 and none of the latter situation does it entail noticeable regula- them has included in such appendix social security tory consequences in the health services sector. funds as procuring entities to which the provisions of the agreement would apply.4 At this stage it is Scope of the GATS with Respect to Health Ser- only useful to bear in mind that any future inclu- vices We turn now to the central question of how sion of health services and of social security funds some of the key provisions of GATS affect the regu- in the appendixes would oblige the countries con- lation of health services when these are traded. cerned to respect the procedures and the nondis- crimination rules contained in the GPA whenever Exclusion of services supplied in the exercise of govern- social security funds purchase health services for mental authority. Pursuant to GATS Article 1.3(b), their affiliates. the GATS applies only to services that are not sup- Thus the GATS will be the focal point of the plied in the exercise of governmental authority. legal analysis below. This means it applies to services that are supplied either on a commercial basis or in competition 7he GATS with other service suppliers (Article I.3[c]). The GATS does not further define these notions. The GATS, like the GATT, aims at protecting the Although developments below constitute my equality of competitive opportunities for compa- attempt to further clarify these concepts, it should nies in domestic markets regardless of their origin be stressed that, in practice, this is not a key issue in and the origin of their services. It aims at facilitat- relation to the regulation of health services. In most ing progressive liberalization of services "as a cases, health services are supplied in competition means of promoting the economic growth of all trad- with one or more service suppliers. Furthermore, in ing partners and the development of developing the absence of any explicit opening of trade in a countries" (GATS Preamble, para. 2). sector by members, the GATS is not particularly The GATS also explicitly recognizes the rights of burdensome because it does not impose obligations members to "regulate, and to introduce new regula- other than the most-favored-nation (MFN) princi- tions, on the supply of services within their territo- ple and a rule of transparency. ries in order to meet national policy objectives." It Before entering into some speculative consider- also underlines that, "given asymmetries existing ations below, there is one situation in which the with respect to the degree of development of ser- GATS would clearly not apply. This concerns health 194 Domestic Regulation and Service Trade Liberalization services that are supplied exclusively by the govern- Concerning health services, by this view ment, that is, in hospitals that are entirely depen- GATS would apply as long as dent on the government and by doctors who are 1. The service is supplied by doctors or hospi- appointed by the government on a completely or tals who are organized as separate economic nearly gratuitous basis, without allowing the entities and financially structured according patient to choose among the hospitals or doctors to economic criteria. available. 2. A price, reflecting the operating conditions of Services supplied on a commercial basis: The the supply of the service, is charged for it to a question of which services are supplied on a patient or a social security fund (or both).5 commercial basis remains unsettled. In many Those two elements generally are connected countries, the medical profession and the public and it would be rather pointless to try to figure do not consider health services to be commer- out whether the first element is really indispen- cial. Indeed, for ethical reasons health services sable. Even if hospital or medical services are cannot be dominated by the search for profit, as entirely supplied by the government and if a a typical business activity would be. Their provi- price is paid for them and reflects actual operat- sion is deemed to pursue by itself a public policy ing conditions, arguably a service is supplied on objective that is not commercial in nature. Thus, a commercial basis. in the sector of health, commercial interests On the other hand, when a service is pro- must be subject to higher values that impede the vided for free or at a price that is substantially providers of health services from functioning as below costs and is directly financed by the gov- any other economic agent. ernment,6 it would not be supplied on a com- The difficulty here lies with the different pos- mercial basis. Direct financing by the govern- sible interpretations of the word "commercial.' ment is intended financing through a fixed One could question whether the scope of this appropriation or, more generally, the absence of notion is confined to activities or undertakings any direct connection between the amount and that are profit seeking. It would be difficult to level of services supplied and the income of the argue that the application of a provision in an service provider. agreement could vary according to the opera- To establish the "commercial" basis of the tors' subjective view of the purpose of their supply of a service, a question could arise about operations. Other subjective criteria such as the whether the price paid for it should also reflect private character of an undertaking or the exis- market conditions (i.e., whether, for instance, tence of a financial risk equally may not deter- predefined price tables obligatory for all would mine the commercial character of an activity. A remove the commercial basis of the supply of more objective criterion based on the nature of the service). This does not appear to be an the undertaking could prevail. Would the activ- appropriate test. It belongs more to the issue of ity of those who have organized themselves whether there is competition among service "commercially" (i.e., those who must generate suppliers. Indeed, to the extent that a service resources while controlling and recovering their supplier organized as an autonomous undertak- costs) be "commercial" (see Van Ryn and Hee- ing receives sufficient payment for its services, nen 1976, pp. 15-23)? In other words, according whether or not such payment reflects a compet- to this interpretation (which is not official and is itive market, it can be deemed to operate under subject to questioning) and taking into account conditions that are sustainable-that is, "com- the constraints imposed on its provision and the mercial" in the sense described above. cost of the resources necessary for its supply, It should be recalled that these developments would a service supplied for a price be commer- are theoretical and still uncertain, and that in cial? Ownership of the undertaking supplying practice they are not essential in the health ser- the service (public or private) or its final objec- vices sector. Arguably, according to the view tives would not matter in this context. expressed here, only medical services and not Regulation of Health Services and Intemnational Trade Law 195 hospital services would be supplied on a com- Competition also would be lacking where mercial basis. In fact, the prices charged for hos- patients had some choice of hospitals or doc- pital services seldom cover all costs, particularly tors, but where the providers' income origi- fixed costs, and a governmental appropriation is nated in the government regardless of the needed to make up the difference.7 number of patients treated. In that case there Services supplied in competition with other service would not be a particular incentive to draw suppliers. The second criterion determining the new patients. Note also that services would not applicability of GATS is the existence of compe- be supplied on a commercial basis in such a tition among service suppliers. This requires the situation. absence of special or exclusive rights granted to One question is whether competition can be doctors or hospitals, or, where certain monopoly assumed from the mere coexistence of govern- rights still exist, the establishment of rules that mental and private services in the health sector. enable patients to choose among a certain num- In other words, would it be possible to shield ber of hospitals or doctors. from the scope of the GATS those services sup- Competition occurs when the patients have plied and financed by the government even if the choice of their service suppliers and when private suppliers are admitted? It can be argued the supplier's income depends on the number of that those are two different sectors that deserve patients treated. This is the case when the ser- completely different treatments. Indeed, to the vices are paid by the patients themselves and extent that services supplied by the government prices are freely established by the service are not competing with services supplied under providers, notwithstanding reimbursement certain competitive conditions, they could be caps. But competition may also take place even if excluded from the scope of GATS pursuant to social security funds entirely pay for the services Article 1.3(c). However, the problem is wrongly on the basis of set prices, whether those prices phrased. The question is not whether the mar- result from a mutual agreement with the med- ket is divided between public and private ser- ical profession or are fixed pursuant to unilateral vices, but whether a specific service is supplied regulation by the government. Thus to deter- in a country under certain competitive condi- mine the existence of competition among ser- tions. When independent operators are author- vice providers the market does not have to oper- ized to supply a service and some competition ate under perfect competitive conditions; it is exists among them, arguably the GATS applies sufficient that some rivalry exists among to the service concerned even if the service is providers concerned. also supplied by the government under certain In summary, it is the author's view that the privileged conditions. The applicability of GATS would apply to health services GATS to a certain service does not affect the - that can be supplied by several doctors or in possibility of governments supplying the ser- vice or granting special or exclusive rights to several whospithe pals ent can choose certain undertakings. It should be noted in this - among which the patimen can he dotors or hose i regard that the issue of ownership (i.e., the - for which the income of the doctors or hospi- ts n n du r o question of whether a service provider is public patients toereed. depends on thenumberof or private) is irrelevant in this context. For the purpose of assessing the applicability of the For example, there would not be competition GATS, it is the author's opinion that the only in central planning systems where each hospital question to be asked concerning the criterion is granted special or exclusive rights in a specific of competition is whether there is some finan- region and where patients are compelled to be cial rivalry among suppliers of the service con- treated in the hospital in their region. The same cerned in the country, no matter how intense would be true for medical services supplied by the competition or however imperfect the con- doctors who are authorized exclusively to oper- ditions of competition prevailing for that spe- ate in a specific zone in each city. cific service. 16 Domestic Regulation and Service Trade Liberalization Irrelevance of the exclusion contained in the - When any form of competition exists among Annex on Financial Services. Article l(b)(ii) of providers of health services, whether the the Annex on Financial Services specifies that: competition takes place for patients or for obtaining public financing, and whether it For the purpose of subparagraph 3(b) of Article I takes placecamongncidependentp ers of [the GATS], "services supplied in the exercise takes place among p icndepvent providers of governmental authority" means the following .ofe srvics. v Of lle services. (ii) activities forming part of a statutory sys- tem of social security or public retire- It should be noted that the exclusion of a par- ment plans. ticular service from the GATS would not mean that the manner in which it is provided cannot A wrong interpretation of such exclusion affect another service supplied on a commercial or would be that health services supplied under the competitive basis. For instance, a public hospital conditions imposed by social security laws operating under monopoly rights may refuse would be excluded from the scope of GATS. infrastructure access to certain doctors or mem- Indeed, such an exception is included in the bers of any other medical profession. In that case, Annex on Financial Services and thus only con- although the GATS would not apply to the hospi- cerns these services, not health services as such. tal service as such, it would be fully applicable to It means that the provision of financial services protect the competitive position of the other med- through a statutory system of social security ical services affected by the restrictive behavior. (such as life insurance) is excluded from the Finally, the exclusion contained in Article scope of GATS. It is thus not relevant for our 1 (b)(ii) of the Annex on Financial Services relat- purposes. ing to social security is not relevant as far as Summary. A health service would be excluded health services as such are concerned. from the scope of the GATS if it was supplied neither on a commercial basis nor in competi- The modes of supply and health services. When tion with other service providers. This typically services fal within its scope, the GATS (Article I.2) would be the case of health services that are sup- applies to measures affecting four modes of supply: plied exclusively by the government, that is, in hospitals that are entirely dependent on the gov- 1. The cross-border mode, that is, from the territory enmient and by doctors who are appointed by it of one member into the territory of any other and who serve on a completely or nearly gratu- member. This mode concerns the provision of itous basis, without allowing the patient to health services from a distance, without the choose among the hospitals or doctors available. *movement of doctors. This is now increasingly This is seldom the case (see WTO Council for possible because of the recent development of Trade in Services 1998, para. 38). Most situa- tions are hybrid in nature, entailing a mix teedine 2. The consumption abroad mode, that is, in the ter- between commercial and noncommercial con- ditions as well as some competition among ser- rty one member to the service consumer of . . . . ~~any other member. This mode concerns the vice providers, thereby justifying the applicabil- opportunity given to patients to be treated out- ity of GATS. side of their country by foreign doctors or in In an attempt to formulate positive rules, one could argue that the GATS would be relevant to foreign hospitals. 3. The commercial presence mode, that is, by a ser- all those health services vice supplier of one member through commer- - That are supplied by doctors or in hospitals cial presence in the territory of any other mem- organized as economic undertakings, and ber. This mode concerns the possibility for - For which a price reaching the level of costs is hospitals' operators to build hospitals in a for- paid by the purchaser of the service (the eign country. patient himself or the social security/insur- 4. The physical presence mode, that is, by a service ance fund), and/or supplier of one member through the presence of Regulation of Health Services and International Trade Law 197 natural persons of a member in the territory of be applied in a discriminatory manner. Members any other member. This mode is the most rele- are encouraged to recognize the education, experi- vant to doctors (or nurses or members of other ence, and authorization obtained in certain third medical professions) who wish to exercise their countries with which they conclude bilateral recog- profession in a jurisdiction other than their nition agreements. Mutual recognition is neverthe- own. less subject to a number of conditions set forth in GATS Article VII and cannot constitute a means of It is clear that to the extent that the health ser- discrimination between countries or a disguised vices concerned are not supplied in the exercise of restriction to trade. governmental authority, measures that affect one of Also, should patients be authorized to consume these four modes of supply can be assessed accord- health services abroad or to receive reimbursement ing to the GATS. An overview of current trade flows for such services, there should be no discrimination taking place under each mode can be found in the as to the country in which that is possible, without joint study of the UNCTAD and the WHO (UNC- prejudice, of course, to certain objective conditions TAD/WHO 1998). that may be imposed. Horizontal disciplines that concern all services and Transparency. GATS Article III contains an obliga- service suppliers. This would generate clusters of tion of transparency, which obliges all WTO mem- service providers. To the extent that a service is cov- bers to publish promptly all laws, regulations, or ered by the GATS, horizontal rules apply to all administrative guidelines that significantly affect measures by members affecting trade in this service the operation of the GATS. In the health services (GATS Article I.1).8 sector this provision compels WTO members to It is useful to note at the outset that when there publish licensing conditions and procedures for are no specific commitments under the GATS, few hospitals, qualification requirements for doctors, of the agreement's rules apply to measures affecting the details of the social security system, bidding trade in covered services. The contents of rules that procedures when organized, ethical rules and their are applicable irrespective of commitments taken operation, and so forth. are as follows: The rule of transparency applies to doctors' pro- fessional organizations to the extent these have Most-favored-nation treatment. Article II of the been delegated powers by the government, such as GATS contains the obligation to grant most- disciplinary powers or the capacity to determine favored-nation treatment to all services and service and/or control the conditions of access to the pro- suppliers of any WTO ember. This obligation fession (GATS Article 1.3 [a] [ii]). implies the prohibition of de facto as well as de jure discriminations between foreign services and ser- Monopoly suppliers. Pursuant to GATS Article vice suppliers (see WTO Appellate Body Report VIII, the rules above, particularly the most-favored- 1997a, para. 234). nation obligation, apply to monopoly suppliers, As an exception to this basic principle, however, that is, enterprises that have been granted special or a member may exempt itself from this obligation in exclusive a list of exemptions under GATS Article II. No spe- In the health sector this obligation is particularly cial exemption seems to have been listed in the relevant to all hospitals that have been granted spe- health services sector.9 Consequently, should health cial or exclusive rights to operate in a region or to services from certain third countries be authorized provide certain services, such as those requiring in a domestic market, such treatment should be huge investments. When providing their services, extended to services and service suppliers from all these hospitals cannot treat services or suppliers of other WTO members under similar conditions, health services (such as doctors) of different whatever the commitments taken by a member nationalities in a discriminatory manner. Should with respect to the service concerned.'0 that be the case, their behavior would constitute a Naturally, qualification requirements may be violation of the MFN rule by the state in which the imposed but they should not be discriminatory or hospitals are located. 198 Domestic Regulation and Service Trade Liberalization In practice, an illicit discriminatory treatment except that in such cases governments are supposed could result from different conditions for using the to enter into consultations and accord each other hospital's infrastructure imposed on doctors or on "sympathetic consideration" (Article XV.2). cross-border medical services, such as telemedicine, It should be noted that the conditions upon according to their nationality. It could also result which subsidies are granted and the manner in from different work conditions and remuneration which they are granted may be discriminatory and applicable to doctors according to their nationality subject to the other GATS rules. For example, pur- or from requirements to them to charge different suant to Article II, if treatment in a third country is tariffs to patients because of the patients' national- reimbursed by social security funds, reimburse- ity, and the like. ment must be granted to similar treatment pro- It is important to clarify that, in the absence of vided by all other WTO countries. any commitment on health services, there is no obligation to give to foreign doctors or foreign Disciplines that apply to sectors open to intemational telemedicine services access to the local hospitals' trade. Obligations concerning services for which infrastructure. However, if access to such infra- commitments have been made are much more structure is granted to doctors or services from one stringent than those applicable to services for country, it should be granted to those from all other which no commitments were made. Making a com- countries under similar conditions. mitment for a service results from its inclusion by This implies that the service supplied by the WTO members in their individual Schedules of doctors concerned is distinct from the hospital Commitments. Approximately 44 members have service as such. Indeed, should the doctors be done so in relation to health services, all classifica- employed by a hospital only to handle hospital tions included. The precise scope of the commit- equipment, the discrimination is more a question ments depends on the limitations that may be of local labor law than one concerning interna- included in each member's schedule. It also implies tional trade of medical services. The difficulty that the services concerned are appropriately comes from the unclear distinction between hospi- defined and dassified. tal and medical services and from the many differ- It should be stressed that the GATS does not ences existing among countries in this regard. For function like the GATT. In contrast to the latter, instance, in certain countries, such as Belgium or GATS are subject to that agreement's more strin- the Netherlands, all services supplied by doctors are gent provisions only to the extent indicated in their considered to be medical services, even if they can individual schedules. Another way to express this is only be supplied in hospitals, such as surgery or that obligations under GATS can be limited to the complex medical work. In other countries these extent described in individual Schedules of Com- services would be classified as hospital services. mitments. In any event, limitations in schedules Thus, for the purposes of determining the scope of should not be perceived as exceptions to the GATS, obligations for hospitals that have been granted but rather as rules specifying its scope and the special or exclusive rights, it is important to have scope of its provisions, and occasionally comple- some clarity and common views concerning the menting it. This means that GATS's main charac- classification of health services. teristic is its flexibility, which enables members to tailor their schedules according to their national Subsidies. In contrast to trade in goods, there are laws (subject, of course, to horizontal provisions). currently no specific disciplines on subsidies for Remember that the preamble to the GATS trade in services other than MFN treatment and expressly recognizes the right of members to "regu- transparency and a commitment under GATS Arti- late and to introduce new regulations in the supply cle XV to develop disciplines in future in response of services within their territories in order to meet to the acknowledged possible distortive effect of national policy objectives" (para. 4). In other subsidies on services trade. Therefore, subsidiza- words, none of the provisions of the GATS should tion originating from public resources, such as be intended to undermine the right of members to social security or other public financing mecha- pursue the regulatory objectives identified in the nisms, is in principle authorized by the GATS, first section of this chapter. Regulation of Health Services and International Trade Law 199 Although possible shortcoming are possible, Such a classification still raises a number of these considerations are essential in defining the questions concerning health services. One inciden- margin of discretion currently left to members to tal difficulty with the classification is that "medical regulate the provision of health services. and dental services" as well as "services provided by midwives, nurses, physiotherapists, and paramed- Definition and classification of health services in the ical personnel" are classified as "professional ser- GATS. Under the GATS, most commitments are vices" within "business services." In French, "busi- made in relation to services according to a classifica- ness services" is translated as "services provided to tion prepared by the WTO Secretariat during the businesses." Thus, apparently, services provided to Uruguay Round, on the basis of the United Nations individuals are not addressed. This is rather sur- Central Product Classification (CPC) list. Health prising and results perhaps purely from a problem services are classified in the sectors "Business Ser- of translation. vices" and "Health Related and Social Services." Defi- A major difficulty, however, concerns the deter- nitions and classifications beyond four digits (except mination of the dividing line between hospital CPC No. 93191) are found only in the CPC list (see services and medical services. It is unclear whether WTO Council for Trade in Services 1998, p. 22). services of doctors supplied in hospitals should be Health services are subdivided as follows in the classified in one or the other category. As indicated CPC Classification system used by WTO members above, this question among others is relevant when for purposes of scheduling commitments under the determining obligations of monopoly hospitals GATS: with respect to doctors needing to use their infra- Business Services structure. It is also relevant in evaluating the exact A. Professional services scope of the commitments made by members con- h. Medical and dental services (CPC No. cerning hospitals or medical services. From the CPC definitions, it would appear that 9312): Servicenosciefly aimedreatig pne-s all services of doctors aimed at curing, reactivating, venting, dansin an ingiil and/or maintaining the health status of patients in patientswith g hcounsultautionaby nrind l hospitals are hospital services. The same services to pi.Sentices wrovithout y insitutio nursing outpatients could also be classified as hospital ser- physeicthesaprovidedby paramidwive nurse vices because the CPC definition refers to services sonnel (CPC No. 93191) delivered "chiefly" to inpatients, thus arguably including all types of patients, provided that inpa- Health Related and Social Services tients remain the majority. This would mean that a. Hospital services (CPC No. 9311): Ser- the most relevant test would be whether services vices delivered under the direction of "aimed at curing, reactivating, and/or maintaining medical doctors chiefly to in-patients the health status" are supplied in hospitals. aimed at curing, reactivating, and/or The CPC definition of medical services refers to maintaining the health status "services chiefly aimed at preventing, diagnosing, b. Other human health services (CPC No. and treating illness through consultation by indi- 9319): .. . residential health facilities vidual patients without institutional nursing." "Pre- services or clinics other than hospital venting, diagnosing, and treating illness" arguably services, . . . services in the field of: means the same as "curing, reactivating, and/or morphological or chemical pathology, maintaining the health status." There is thus some bacteriology, virology, immunology,... overlap with hospital services. The CPC definition blood collection services . . . private of medical services only excludes services that do services of clinical laboratories auxil- not require institutional nursing; it does not seem iary to medical diagnosis, etc. to exclude services supplied in hospitals. Thus, c. Social services (CPC No. 9333): diagnosis, consultation, and treatment provided to Includes a variety of welfare services outpatients by doctors in hospitals without nursing with and without accommodation, could be classified both as medical services and as vocational rehabilitation services, etc. hospital services. 200 Domestic Regulation and Service Trade Liberalization Certain members' schedules also maintain the Scheduling of health services. Schedules of mem- confusion. For instance, in medical services, Belize bers determine the scope of their commitments. introduced a commitment on neurosurgery; Services included in the schedules may be limited Botswana introduced commitments in specialized by certain qualifications or exclusions. For exam- medical services including forensic medicine, ple, a member may introduce commitments for neurosurgery, cardiothoracic surgery, microvascu- medical services, with the exception of pediatric lar surgery, plastic surgery, geriatrics, traumatology, services. When a service is covered by commit- anesthesiology, dinical immunology and oncology, ments, the extent of obligations applicable to it can child psychiatry, physical medicine, and intensive also be limited by an explicit indication in the care specialist; and Malaysia introduced commit- schedule describing the level of commitments ments covering forensic medicine, nuclear medi- made with respect to the market access (second cine, geriatrics, microvascular surgery, neuro- column) and the national treatment obligations surgery, cardiothoracic surgery, plastic surgery, (third column). Scheduling is thus characterized clinical immunology and oncology, traumatology, by full flexibility for members. Scheduling, how- anesthesiology, intensive care specialist, child psy- ever, should be coherent with the rest of the GATS chiatry, and physical medicine. None of these ser- and limitations contained therein should be rele- vices can be provided outside hospitals with inten- vant. An overview of the members' Schedules of sive institutional nursing. Apparently, according to Commitments concerning health services reveals a the definitions above, they should be classified as number of difficulties in this regard. For instance, "hospital services" and not as "medical services." Poland and Slovenia introduced certain commit- A clearer distinction between these services ments concerning private hospital and sanatorium could be the one suggested in the first part of this services, excluding services provided by the public chapter. Hospital services would be services that sector. Malaysia and Mexico also introduced com- can be supplied only in hospitals-emergency ser- mitments for private hospital services only." The vices, surgery, and other heavy medical treatment exclusion of the public sector from the scope of or analysis. They also would include the provision commitments (i.e., as noted in the schedule's first of beds, space, and nursing necessary for patients to column) does not make sense. Either a service is recover. Medical services would be those that can be open to international trade or it is not. If a service supplied in places other than hospitals, such as is scheduled, foreign service suppliers can have diagnosis or light medical treatment. Alternatively, access to the domestic market of the country mak- according to another classification, such as the one ing the commitment. Of course, this does not pre- used in Belgium and the Netherlands, hospital vent the state from also supplying the service itself. services would be those supplied by hospitals them- It also may grant certain privileges to selected selves, such as the opportunity to use equipment, undertakings, whether public or private. Owner- operating rooms, and the like, whereas medical ship of the undertaking is irrelevant in this regard. services would be all the services provided by doc- Therefore, if there are to be limitations to market tors to inpatients and outpatients. The current CPC access rights with respect to a scheduled service, in corresponds more closely with the first of the two principle they cannot result from excluding an options proposed here, but the second option is allegedly subordinate service from the scope of the more likely to avoid discriminatory treatment of commitments on the basis of its private or public doctors within hospitals resulting from special or nature. Pursuant to GATS Article XX.2, limitations exclusive rights. to market access rights that result, for example, Concerning certain other services that are ancil- from the maintenance of certain special or exclu- lary to hospital or medical services, such as light sive rights must be the object of an explicit limita- diagnostic examinations and blood analysis, the tion in the second column of the schedules relating current classification does not seem to pose prob- to Article XVI. lems because CPC No. 9319 appears to be the most Another interpretation of the public sector relevant position. The other classifications do not exclusion above could be that the commitments do seem to pose problems either. not cover the scheduled services to the extent they Regulation of Health Services and International Trade Law 201 are provided by the public sector. This interpreta- rules and commitments can be included in this tion, however, would mean that the scope of com- regard in the Schedules of Commitments pursuant mitments would continuously vary according to to GATS Article XVIII. the level of services provided by the state. Such interpretation cannot be valid because it would be National treatment commitments. GATS Article an easy way to modify the scope of commitments XVII contains the national treatment obligation. It unilaterally and thus circumvent the procedure for has the same meaning as Article III of the GATT the modification of schedules set forth in GATS and implies the prohibition of de jure and de facto Article XXI. If a government wants to reserve for discrimination between domestic and foreign ser- itself the entire opportunity to provide a service, it vices and service suppliers (see WTO Appellate should not insert that service in its Schedules of Body Report 1997a, paras. 233, 240, and foll.). Commitments at all. Thus, by definition all domestic regulation that is not discriminatory by its effects is tolerated under Market access commitments. Subject to commit- Article XVII. ments made in individual schedules, GATS Article The national treatment obligation, the market XVI (Market Access) requires members not to access obligation, is subject to scheduling of the maintain national measures limiting the number service concerned and may be limited by the con- of service suppliers in a domestic market, the value tents of individual schedules (see footnote 8 to or quantity of services supplied, or the number of para. 1 of Article XVI and XI). people authorized to supply a service.12 It also In the health services sector typical limitations requires them not to maintain limitations on the inserted by members in their schedules could participation of foreign capital or restrictions on concern the possibility reserved by the states the legal entity under which a supplier is author- to maintain certain privileges to such public ser- ized to provide a service. Capital movements that vice providers as public hospitals. Indeed, with- are an essential part of the service must be author- out an explicit indication that these privileges ized (see footnote 8 to para. 1 of GATS Article XVI can be maintained, Article XVII would require and Article XI). members to abolish them. Even if limited to pub- If fully applicable, Article XVI thus indirectly lic service providers, privileges would provide obliges WTO members to dismantle special or certain advantages to domestic services that for- exclusive rights granted in their country to any eign services would not have. Limitations could provider of health services. It thus implies domestic thus concern, for example, certain tax exemp- liberalization of these services.'3 As indicated tions, social security reimbursements, regulatory above, limitations to this principle are possible to facilities, or more lenient licensing or qualifica- the extent described in the Schedules of Commit- tion requirements.16 ments (see GATS Article XVI.1, footnote 8). Theo- It should be noted that in systems of organized retically, states may maintain all special or exclusive competition, whereby the government is the buyer rights as desired. In practice, however, it is doubtful of hospital services and grants special or exclusive that a member would schedule a service if it is to rights to hospitals making the best offer for each avoid the applicability of Article XVI. pathology or for the use of specific equipment, the In any event, in the health sector typical limita- national treatment obligation implies that every tions might concern the possibility of countries to foreign service provider should have the same maintain some regional quotas of hospitals, or opportunities to bid as do domestic suppliers. If beds, or doctors, or quotas of services per doctor, as maintained, nonportability of private insurance part of a public plan for allocating health resources. should thus be subject to a specific limitation in Limitations would also be expected either to main- column three of the schedule (assuming that the tain special or exclusive rights for certain hospitals service concerned is bound). requiring huge investments'4 or supplying a uni- versal service or to impose universal service Access to telecommunications infrastructure. As a requirements on all new operators.'5 Additional corollary to the national treatment obligation con- 202 Domestic Regulation and Service Trade Liberalization cerning services for which commitments were Scope of Article VI.5 of GATS made, all existing public telecommunications (i) Technical standards and licensing and quali- infrastructure must be made available to these fication requirements services pursuant to the GATS Annex on Telecom- Although it is not entirely clear what mea- munications. This is particularly relevant to suppli- sures are covered by the phrase "licensing or ers of telemedicine services. These suppliers must qualification requirements," all rules relating be able to use all public telecommunication ser- to the opportunity for doctors or for hospi- vices and networks (i.e., those offered to the public tals to provide their services and the rules generally) on reasonable and nondiscriminatory relating to technical standards seem to be terms and conditions (see Article 5 [a] of the Annex caught by this provision.18 This article has a on Telecommunications), They also have the right very large potential scope that depends on to purchase or lease terminal equipment or to the manner in which members organize their interconnect private leased lines or owned circuits domestic regulation. If compliance with with the public network. They must be given the domestic rules is a condition for obtaining or opportunity to use their own operating protocols keeping a license or an authorization to sup- and to have access to international communica- ply a service, then it can be argued that such tions and to information contained in databases rules are a licensing or a qualification (see Articles 5[b] and 5[c] of the Annex on requirement subject to the disciplines of Telecommunications). Article VI.5. (ii) Nullification or impairment of commitments Right to regulate services under conditions of Article VI.5 only concerns standards and objectivity, impartiality, and necessity to achieve requirement that "nullify or impair . . . spe- the quality of the service. Pursuant to GATS Arti- cific commitments." Arguably, this only cov- cle VI.5, read in conjunction with Article VI.4, ers measures that are adopted after commit- measures relating to qualification requirements ments were made. The notion of nullification and procedures, technical standards, and licensing or impairment of commitments taken in the requirements can be adopted by WTO members context of Article VI.5 is still unclear. Nullifi- even with respect to services for which they made cation or impairment of benefits accruing commitments. under the GATT has been interpreted by If these measures nullify or impair commit- Panels in the context of Article XXIII of the ments of members,17 they must be based on objec- GATT as an upsetting of improved market- tive and transparent criteria, cannot be more bur- access opportunities arising out of relevant densome than necessary to ensure the quality of the tariff concessions. Thus nullification or service, and must reasonably have been expected at impairment occurs, in the context of trade in the time the commitments were made. Licensing goods, when a measure (whether or not con- procedures themselves cannot be a restriction on sistent with the WTO) that was not reason- the supply of services. Articles VI.4 and VI.5 do not ably anticipated affects the competitive posi- further specify these rules, but negotiations are tion of the goods benefiting from the open on the subject. concession (see WTO Report of the Panel This provision is obviously essential with respect 1998, paras. 10.61, 10.82). to health services. In virtually all countries, the sup- It is unclear whether the same reasoning ply of hospital services or medical services is sub- would apply to trade in services, but there are ject to rather severe requirements and authoriza- no obvious reasons why it should not. The tion procedures. They generally create obstacles to concept of nullification or impairment cov- trade by excluding or complicating entry of foreign ers measures that are consistent with GATS services or service providers who do not comply and those that are not. Under this interpreta- with them. Depending on the commitments made, tion, economic needs tests or other quantita- such obstacles to trade may nullify or impair com- tive prescriptions possibly prohibited by Arti- mitments and thus be subject to the requirements cle XVI of GATS would be covered by Article of Article VI.5. VI.5 of the GATS licensing and qualification Regulation of Health Services and International Trade Law 203 requirements. The Working Party on Profes- or hospitals. The context of a case would pro- sional Services, however, excluded this possi- vide all necessary elements in this regard. bility, considering that GATS Articles VI and (ii) The protection of reasonable expectations XVI have a different scope and cover different The reasonable expectations of WTO mem- categories of measures (see WTO Council for bers concerning the possible future domestic Trade in Services 1999a, paras. 9, 12). Thus regulation of health services in the territory of according to the Working Party a measure their trade partners are not easy to define. Any that is contrary to a commitment cannot be regulation in place at the time of the commit- justified under Article VI.5. By this interpre- ments could satisfy this condition, and later tation, the article covers only standards or rules would be satisfactory to the extent they licensing and qualification requirements that, are not more restrictive to trade than those although consistent with commitments, they replace. It should be noted in this regard would upset the competitive position of ser- that the Preamble to the GATS (para. 4) rec- vices subject to commitments in a manner ognizes the right to adopt new regulation in that was unforeseeable at the time the com- services in order to meet national policy mitments were made. objectives. Because this condition appears to If this interpretation was officially recog- reflect the limitation of the scope of Article nized (for example, in the form of a WTO VI.5 to measures that nullify or impair spe- Council Decision), the rule would simply be cific commitments, existing and new regula- another expression of the requirement that tions that are not more trade restrictive would standards and licensing or qualification not even be covered by Article VI.5. requirements be consistent with members' If new rules are more restrictive to trade, reasonable expectations. As indicated below, however, it would be more difficult to admit such interpretation would mean that all that they could reasonably have been existing legislation as well as new rules that expected at the time of commitments. One are equally or not more restrictive to trade would have to find legislative proposals exist- would be excluded from the scope of Article ing at the time of commitments or any other VI.5. declaration to be able to argue the reason- Conditions imposed by GATS Article VI.5 ableness of such expectations. This could be a Article VI.5, read in conjunction with Article source of concern for those countries that VI.4, states that qualification requirements and have not developed substantial regulation at technical standards that nullify or impair com- the time of commitments (assuming com- mitments are based on objective and transpar- mitments were made). And this condition ent criteria, that they could have been expected seems to impede reforms in the health sector at the time commitments were made, and that from systems of hybrid or organized compe- they are not more burdensome than necessary tition to one of central planning. to ensure the quality of the service. (iii) Not more burdensome than necessary to (i) Objective and transparent criteria ensure the quality of the service This condition could be read first in light of The necessity test is not defined in the GATS, the transparency requirement contained in but one could refer to the interpretation given GATS Article III. Concerning the objectivity it in the context of GATT.19 This is, uncertain, of the criteria used, Article VI.4 refers, among of course, and subject to formal clarification. other things, to the competence of the service Should this interpretation be confirmed in supplier or the ability to supply the service. the context of GATS,20 a trade-restrictive This would mean that qualification require- requirement would be necessary to the extent ments and technical standards should not be it represents the least trade-restrictive solu- based on subjective criteria unrelated to the tion reasonably available to achieve the objec- provision of the services themselves. For tive sought,21 that is, in the context of Article example, they should not result simply from VI, ensuring the quality of the service. To be protectionist pressures of domestic doctors more specific, according to this interpretation, 204 Domestic Regulation and Service Trade Liberalization to be necessary to ensure the quality of the (2) Be the least trade-restrictive measure service, a requirement must reasonably available - Relate to the quality of the service In the health sector this test, which is - Be the least trade-restrictive measure rea- still speculative, is extremely difficult sonably available. to apply. As a rule, new licensing and (1) Relate to the quality of the service qualification requirements and tech- This test is extremely vague. The nical standards are measures more question is whether it refers to the restrictive to trade than the absence of intrinsic technical quality of the ser- requirements or standards. To evalu- vice only or if it also includes the ate the extent of trade restriction overall economic quality of the serv- those requirements and standards ice and the pursuit of the patients' entail, an analysis of the conse- satisfaction. According to the second quences of noncompliance with them view, the quality test would concern could be made. For example, the lack not only doctors' professional qualifi- of compliance may entail the prohibi- cations22 and technical standards tion of supply of a service or, alterna- applicable to hospitals,23 but also tively, the imposition of an additional rules intended to make services avail- tax or adverse publicity for such non- able to all at reasonable prices. compliance. Arguably, the first kind It remains to be seen whether this of measure would be more restrictive view could also justify measures to trade than the second or third. The intended to limit public spending and question would thus be whether those that are connected with social enabling a noncompliant service to security systems in general. These penetrate the market, while imposing objectives should be covered to the an alternative least trade-restrictive extent they are part of the quality measure, would affect the quality of goals of ensuring a universal service the service. This is obviously a subjec- or the affordability of the service for tive determination that depends on all. Furthermore, as indicated in the the circumstances of the case and the Preamble to the GATS, states should concept of the quality of service used. be able to determine for themselves Should the objective promoted by the policy objectives they want to the new measure be to ensure that pursue and GATS Article VI should qualifications of doctors and techni- not constitute a limitation in that cal standards of hospitals are of a cer- regard. In any event, whatever objec- tain level, a country legitimately tive is included in the notion of qual- could worry if services not meeting ity of service, the level of quality these requirements are supplied in its sought remains a sovereign choice of territory. This is particularly true in each WTO member. the health sector. So it would be more All new requirements or standards difficult to consider that measures that nullify or impair commitments less restrictive to trade than prohibi- of members and that would not be tion are reasonably available to related to the quality of the service, achieve the level of quality sought.24 whatever interpretation is given to As indicated above, new require- this notion, would be illicit with ments that hospitals or doctors oper- regard to Article VI and would have ate on a not-for-profit basis may also to be justified according to one of the be in pursuance of quality objectives. exceptions to the GATS, particularly These are based on the perception those contained in Article XIV. that a nonprofit activity may be less Regulation of Health Services and International Trade Law 205 tempted to maximize profits to the service for patients, then new mea- detriment of the quality of the treat- sures imposing maximum prices may ment. However, one may argue that appear to be justifiable. Again, one alternative least trade-restrictive could argue that a less trade-restric- measures in this case could consist of tive measure would be the organiza- the implementation of appropriate tion of an effective social security sys- control mechanisms. Panels consid- tem whereby patients are reimbursed ered in the context of GATT that it is the cost of their care. In that context, not because alternative measures are if maximum prices are maintained, more difficult or more expensive to despite reimbursement rights, one implement that they cannot reason- could consider that they are intended ably be used (WTO Report of the not to guarantee the affordability of Panel 1996; 2000b, para. 8.207). The health services for patients but to difficulty lies in determining whether ensure the sustainability of the entire these alternative measures are actu- social security system. The question ally less restrictive to trade and would thus be whether the latter is a whether they are reasonable and as quality objective per se. As indicated effective as the one adopted. above, such is the case. Otherwise all Should the quality objective pur- new measures imposing qualification sued be the general availability of the requirements connected to social service, then new universal service security systems would not be legal requirements such as those made to under GATS Article VI. One can hospitals to accept all incoming argue that this would not be reason- patients seem to be justifiable. One able because these measures would be could argue that less trade-restrictive indefensible unless justified by one of measures in this regard could consist the exceptions of GATS. This does not of incentives given to service pro- mean that these measures should not viders to accept all patients rather be the least trade-restrictive measures than obligations imposed as a condi- available (according to the speculative tion for pursuing an activity. For interpretation of the concept of example, incentives could take the "necessity"). Determining these form of a mechanism of payment/ measures, however, is extremely deli- reimbursement per service provided cate and uncomfortable, considering instead of payment per day or hour that no optimal social security system spent with a patient. An alternative has been found to date. measure could be an obligatory con- In all cases the appreciation of the tribution to a public fund for public degree of effectiveness of least trade- hospitals. But theoretically assessing restrictive measures would have to be here the effectiveness of these alterna- made in light of other countries' tive measures, without considering experiences, international standards, the overall context of a case and the studies by the World Health Organi- organization of the health system in a zation, declarations of intent of country, would not be appropriate. states, and so forth. Should a doubt Furthermore, this determination remain as to the availability or effec- would depend, in every case, on the tiveness of a least trade-restrictive level of risk tolerated by each coun- measure, it should benefit the mem- try-arguably a sovereign choice. ber making the new measure. Indeed, Finally, if the quality objective an advantage of GATS Article VI, pursued is the affordability of the compared with Article XIV, is that 206 Domestic Regulation and Service Trade Liberalization Article VI is not an exception to that they abide by minimum transparency require- GATS. Thus the burden of proof lies ments and a sense of equity, and that they provide on the petitioner and not on the justification for all their decisions that affect trade defendant (see WTO Appellate Body in health services.25 Report 1997b, paras. 72-74). This provision is completed by GATS Article In summary, determining whether new VI.2, which requires the implementation of judicial licensing and qualification requirements and or administrative tribunals to review decisions technical standards meet the requirements of affecting trade in services, and by Article VI.3, which Articles VI.4 and VI.5 is rather complex and imposes disciplines in the provision of authoriza- uncertain. It depends mostly on existing com- tions and licenses. For instance, service suppliers mitments and the status of legislation existing at applying for authorizations must be informed with- the time those commitments were made. It also out delay about the status of their application and of heavily depends on the interpretation given to the decision on their application. the notions of "qualification requirements" and Applying these provisions should not pose par- "quality of the service" and on the application ticular difficulties in the health services sector. that is made of the necessity test. The only method to reach certainty in this Activities of public monopolies. Pursuant to Article regard would be to adopt a complete regulatory VIII, GATS rules apply to monopoly suppliers, that framework before commitments are made or to is, those who have been granted special or exclusive insert numerous limitations in the commitments. rights. As indicated above, this provision is more Or international agreement might be reached on relevant to hospitals than to doctors. Concerning a set of rules establishing the optimal regulation those medical services for which commitments of the supply and consumption of health services were made (and to the extent provided for by those in a domestic jurisdiction, as suggested by GATS commitments), it requires that monopoly hospitals Article VI.4 (see also Article VI:5 [b]). As already comply with the MFN obligation and grant access noted, such international consensus seems to their infrastructure to foreign doctors (without beyond reach at this stage, not only from an eco- prejudice to possible qualification requirements nomic point of view but also because of the vary- meeting the conditions of GATS Article VI), and ing perceptions that countries have of the level of that they treat them as they would treat domestic social security they want to provide. doctors. These obligations imply that medical activities carried out in hospitals are classified dif- Reasonableness, objectivity, and impartiality in the ferently than are hospital services. Otherwise, rela- administration of domestic regulation. GATS Arti- tions between hospitals and their personnel are cle VI. 1 imposes on governments a general obliga- only governed by domestic contractual laws. tion to be reasonable, objective, and impartial in Article VIII is also relevant for monopoly hospi- administering domestic regulations that affect tals that supply both liberalized and reserved ser- trade in services. This provision concerns all meas- vices.26 It requires governments to ensure that they ures of general application affecting trade in health do not abuse their dominant position in the services, not only those imposing qualification reserved services by acting in a manner inconsistent requirements or technical standards. The issue here with their country's commitments relating to the is not to check whether the measure itself is valid or liberalized services (Article VIII.2). The notion of necessary to achieve a specific objective, but "abuse of dominant position" is not explained in whether its application is discriminatory or unrea- the GATS, and that leaves a wide margin of discre- sonable. This rule is similar to GATT Article X.3 tion to the legal interpreter. In practice, it could concerning trade in goods. Accordingly, WTO address the issue of cross-subsidization, that is, the members must ensure that formalities imposed on practice of using the profits generated by the oper- foreign entrants are not more burdensome than ation of the reserved service to finance the provi- necessary to achieve the objective sought, that those sion of the liberalized service. This could be the who are supposed to implement them are not case of public hospitals supplying, for example, cer- themselves competitors of foreign service suppliers, tain liberalized diagnostic services. Regulation of Health Services and International Trade Law 207 Restrictive business practices of private operators. Article XIV seems to complete Article VI, which Pursuant to Article IX of GATS, WTO members relates to the conditions applicable to "new" qualifi- may find that certain business practices of doctors cation requirements and technical standards affect- or independent hospitals that do not benefit from ing trade in a scheduled service. It is different, how- special or exclusive rights nevertheless may restrain ever, in nature and scope. First, Article XIV is an competition and thereby restrain trade in services. exception to GATS and is relevant when other Even though, strictly speaking, states are not GATS obligations are not complied with. Conse- obliged to combat such practices, at the request of quently the burden of proof that the conditions of any other member they must at least agree to enter its application are met at first view shifts to the into consultations with a view to eliminating those member taking the measure.28 The doubt here ben- practices (Article IX.2). efits the petitioner, whereas in the case of Article VI This provision might be useful in those coun- it benefits the member taking the measure. tries where hospital services recently have been lib- Second, Article XIV concerns all measures that eralized but where incumbent hospitals remain de are necessary to meet one of the objectives it pro- facto dominant in their market. It also could be rel- tects. Article VI.5, instead, relates only to "new" evant to price-fixing activities undertaken within technical standards and to "new" licensing and the professional orders of doctors. qualification requirements that are necessary to ensure the quality of the service. As indicated Additional commitments. As suggested by GATS above, the notion of service quality requires clarifi- Article VI.4, the rules described above may be com- cation. It certainly includes the protection of pleted by additional commitments regarding quali- human life and health, which is one of the objec- fications, standards, licensing requirements, and so tives explicitly protected by GATS Article XIV, so forth. These commitments can be added to the several requirements or standards meeting the members' Schedules of Commitments pursuant to requirements of Article VI may not need to be scru- GATS Article XVIII. As previously indicated, no tinized under Article XIV. Article XIV is relevant such commitments have yet been made in the only to the extent that new qualification require- health sector. ments or standards either are discriminatory or do not comply with the conditions of Article VI, Exceptions. Pursuant to Article XIV, WTO mem- among others. bers may impose measures restricting trade in ser- It is difficult to identify in advance which mea- vices in a manner inconsistent with their commit- sures would have to be scrutinized under Article ments under GATS if such measures are needed XIV. Concerning "new" qualification requirements and standards, this would depend not only on the * To maintain public order specific commitments made and the status of exist- * To protect human, animal, or plant life or health ing legislation, but also on the interpretation given * To secure compliance with laws or regulations to the notion of "quality of the service" in Article that are not otherwise inconsistent with the pro- VI.4. If this notion corresponds only to the intrin- visions of the GATS, sic technical quality of the service (i.e., doctors' professional qualifications and hospitals' technical and if those measures are not applied in a manner characteristics), then "new" qualification require- that would constitute a means of arbitrary or ments or standards pursuing the general availabil- unjustifiable discrimination among countries ity of the service or the containment of public where like conditions prevail, or would constitute a spending could be contrary to Article VI. In that disguised restriction on trade in services. case, they would have to be justified pursuant to The analysis under this provision is thus Article XIV. twofold. First, it is necessary to determine whether But if the notion of "quality of the service" the objective of the measure concerned pursues one includes requirements and standards intended to of the objectives indicated in Article XIV and, sec- make services available to everyone at reasonable ond, whether its application is made in good prices (as arguably it should), then Article XIV faith.27 would be relevant only for those that, while being 208 Domestic Regulation and Service Trade Liberalization adopted after commitments were taken, are not Difficulties may arise, however, in relation to more restrictive than existing legislation or are the measures that are only intended to curtail public least trade-restrictive measures available to ensure spending and that may have the effect of limit- these objectives. Unless there is an international ing the supply of health services. In that regard it agreement on the optimal regulation of health would be difficult to pretend they are intended services, it is extremely difficult to determine in to protect human life or health as such. advance the least trade-restrictive measures that are Other difficulties concern the necessity test, reasonably available. which can be interpreted in the same manner as Concerning measures that are not licensing or GATS Article VI or GATT Article XX. Thus only qualification requirements or technical standards, the least trade-restrictive measures that reason- or that do not nullify or impair specific commit- ably could be employed to meet stated objectives ments, there are no specific conditions imposed on could be justified by this exception. If a less them by GATS Article VI.29 Such measures must restrictive alternative measure be available and abide only by the commitments of members in capable of providing the required level of pro- their schedules concerning market access and tection, the necessity test would not be met. national treatment and, in all cases, by the MFN With regard to the exception concerning principle. It is only when a violation of one of these human life or health, the Appellate Body admit- rules is discovered that a justification under Article ted (in the context of GATT) that determining XIV is required. In the health sector, this would cor- the availability of alternative measures should be respond to all domestic rules that affect the daily very strict and that a strong degree of effective- operations of doctors or hospitals but do not relate ness should be required for a measure to be to their ability to deliver their services or to the regarded as effectively meeting the objectives granting of licenses or authorizations. Although, as pursued (see WTO Appellate Body Report indicated above, the dividing line between the two 2001a, paras. 172-74). kinds of rules is difficult to determine, it would 2. The compliance with laws or regulations that appear that certain aspects of the organization of are not inconsistent with the provisions of the the social security system,30 or the degree of com- GATS (Article XIV[c]). This exception also petition authorized,3' or ethical rules or best prac- exists in GATT with respect to trade in goods. In tice recommendations32 would fall under the sec- this context it has been interpreted by a GATT ond category not covered by GATS Article VI. Thus panel as applying to measures that actually only if relevant measures are violating market implement laws or regulations that are GATT access commitments33 or are discriminatory would compatible, and not to those that pursue the they have to be justified under Article XIV. same objectives of these laws or regulations.34 For a GATS-incompatible measure to be justi- In the health services sector, this exception fied under Article XIV, it must pursue one of the would be relevant for those measures that objectives explicitly protected by it. In the health implement social security laws that are not sector, three such objectives seem to be relevant: otherwise inconsistent with the provisions of the GATS or with individual commitments. This 1. The protection of human life or health (Article concerns, for example, price-fixing arrange- XIV[b]). In the health sector most domestic reg- ments, quotas of doctors or of services per doc- ulation can pretend to be connected to the tor flowing from more general budgetary con- appropriate organization of a country's health straints relating to the financing of health system. It could be argued that the lack of such services. Determining which measure imple- regulation would constitute a risk to human life ments the other would depend on the circum- or health in that country-for example, when stances of the case. If appropriately drafted, special or exclusive rights given to hospitals much of the regulation intended to limit public require huge investments and are connected to spending could be caught by this exception. the financing of their fixed costs. Without these The next step would be to check whether the measures, there might be no investments for necessity test has been met. Each specific meas- such hospitals. ure would have to be the least trade-restrictive Regulation of Health Services and International Trade Law 209 measure reasonably available to implement the provided by national hospitals. Identification of a main legislation. One could argue here that disguised restriction to trade obviously depends on reimbursement limits would be less trade the facts of each case and requires a proper under- restrictive than, for example, quotas of doctors standing of the market concerned and of the eco- or quotas of services per doctor. But, consider- nomic interests in play. ing the importance of the objective pursued by Finally, the Appellate Body admitted that any social security laws, it also could be argued that measure that would implement an international the necessity test should be interpreted rather agreement or would be the object of serious negoti- flexibly because determining which measure ations undertaken with trade partners while meet- would be more effective for its stated purpose ing the conditions of one of the subparagraphs of would be extremely difficult.35 GATS Article XIV would meet the good-faith 3. The maintenance of public order (Article requirement contained in the chapeau of that arti- XIV[a]). According to a footnote to Article cle (see WTO Appellate Body Report 2001b, para. XIV(a), this exception may justify measures 119 and foll.). intended to overcome a "genuine and sufficiently In the health sector, as previously indicated, serious threat posed to one of the fundamental such international agreement has not yet been interests of society." It remains to be seen whether negotiated. measures intended, for example, to maintain a social security system would qualify for this Summary Applying WTO rules to the regulation exception. Indeed, the absence of social security of the health services "production" is a rather com- could constitute a genuine and serious threat to plex exercise that requires careful attention, given one of the fundamental interests of society. the importance of the subject. The necessity test is applicable here. Consid- Although several WTO agreements could be rel- ering the apparently broad and exceptional evant (particularly GATT 1994 and the GPA), the character of the public order exception, in this GATS is obviously the one that deserves the greatest context this test will be interpreted rather attention. strictly. The GATS concerns all measures that affect trade in services supplied either on a commercial Good faith application. When a GATS-inconsistent basis or in competition with other service suppliers. measure pursues one of the objectives explicitly In the health sector this means that almost all hos- protected by GATS Article XIV, it must be applied pital and medical services supplied by systems in good faith to be entirely justified by Article XIV. other than pure central planning would be covered The chapeau of Article XIV requires that these by GATS. The agreement is relevant anywhere that measures are not applied in a manner that would some form of competition for the supply of health constitute a means of arbitrary or unjustifiable dis- services exists. Uncertainties concerning the com- crimination between countries where like condi- mercial nature of the service are thus not particu- tions prevail, or constitute a disguised restriction larly important. on trade in services. One of the major characteristics of the GATS Developing here the meaning given by the that is particularly important in the health sector is jurisprudence to the same provision under the its flexibility. Depending on commitments made by GATT would take too long. To summarize, even if a member countries, virtually all domestic regulation measure apparently satisfies the conditions of health services could be GATS compatible, imposed by one of the subparagraphs of GATS except those that would discriminate against the Article XIV, its actual application may reveal a dis- services of foreign hospitals or doctors based on guised restriction to trade. For example, this would their nationality. be the case if a measure were authorized that pro- GATS's flexibility is revealed in three ways: hibited "foreign" hospitals from providing certain treatments because the results of those treatments 1. Countries first have the choice to decide are uncertain although competing treatments with whether they want to bind a specific service in equally uncertain outcomes traditionally would be their Schedules of Commitments. Should they 210 Domestic Regulation and Service Trade Liberalization refuse to do so, they are bound mainly by the changes in the health systems of many countries. MFN rule and the transparency requirements. For example, in principle, special or exclusive rights They would thus be compelled to treat services given to hospitals or doctors must be eliminated37 and service providers of different origin in a and all quantitative regulations aimed at curtailing nondiscriminatory manner and to publish all supply of these services for the purpose of cost con- laws and regulations that significantly affect tainment must be repealed, unless justified by one trade in such services. Should they accept to of the exceptions to the GATS (and that is open a service to international trade, they may unlikely).38 Furthermore, foreign service providers limit their market access and national treatment must be treated the same as domestic providers. commitments as much as needed to tailor them This means, among other things, that reimburse- to their current laws. ment for their services by social security funds 2. In sectors in which commitments were made, must be done in a manner that is equitable. technical standards and licensing and qualifica- In addition, if new qualification requirements tion requirements existing at the time of the and technical standards de facto nullify or impair commitments can be maintained. Countries the expectations of foreign doctors or hospital may also impose new standards and require- operators that accrue from commitments made, ments that are not more restrictive to trade than the requirements and standards must be limited to existing measures. They may finally impose new those necessary to ensure the quality of the service. standards and requirements that are more So this rule, which might be relevant for countries restrictive to trade than existing measures36 if whose domestic legislation is not particularly these are necessary to ensure the quality of the developed at the time when commitments are services. In this situation, according to an inter- made, functions both as an element of flexibility in pretation of the concept of "necessity" that is GATS and as a limitation on the regulatory free- consistent with the one developed under the dom of WTO members. The limitation can be tem- GATT, they would be compelled to search for pered by admitting that the concept of "quality of the least trade-restrictive measure reasonably the service" incorporates whatever policy objective available to meet stated objectives. In the health is connected to the service concerned and whatever sector this may be a difficult test to apply in objective a member decides to pursue. practice, considering the myriad possible inter- Concerning measures intended to ensure the pretations of "quality of health services" and viability of the social security system, these can be uncertainty regarding the effectiveness of alter- tolerated if they are not discriminatory or if they do native least trade-restrictive measures. In addi- not contain quantitative limitations or economic tion to standards and qualification require- needs tests.39 They also can be accepted if they are ments, countries may impose any conditions on existing measures or are not more trade restrictive the ways in which doctors or hospitals conduct than are existing measures. Should they take the business, to the extent that the conditions are form of licensing or qualification requirements and compatible with their commitments and are not should they be new measures or more trade restric- discriminatory. tive than existing ones, they could be admitted pur- 3. Should a domestic regulation eventually be suant to GATS Article VI if they are necessary to found to be incompatible with one of the provi- ensure the quality of health services. As an alterna- sions of GATS, it may be justified by one of the tive, if one of these measures violates a GATS provi- exceptions included in GATS Article XIV if it is sion it can be admitted pursuant to one of the necessary to pursue a public health objective, the exceptions contained in Article XIV if it is neces- application of a GATS-consistent law, such as sary to secure compliance with budget limitations one organizing the fiscal and budgetary aspects or to maintain public order. of the social security system, or a fundamental Finally, depending on commitments made and interest of society. on the classifications and definitions given to dif- ferent health services, monopoly hospitals them- Notwithstanding this flexibility, full commit- selves must treat the doctors working on their ments in health services may require profound premises in a nondiscriminatory manner. Regulation of Health Services and International Trade Law 211 In conclusion, in the health services sector, the again that hospital services are those that can be provisions that require the most delicate interpreta- supplied only in hospitals-that is, emergency ser- tive exercise seem to be the following: vices, surgery, and other complex medical treatment or analysis. Hospital services also would include the - GATS Article VI, particularly the notions of provision of beds and space necessary for patients to "qualification requirements," "quality of a ser- recover. Such definition maintains some flexibility vice," and "necessity" for monopoly hospitals with respect to the selection - GATS Article XIV, particularly the notions of of their personnel. On the other hand, should a less "necessity" and "public order." open definition be adopted, such as the one applica- ble in Belgium or the Netherlands, all GATS rules Considering that these provisions are mostly rel- would benefit all doctors, irrespective of where they evant if the services concerned have been subject to work. Members should thus ensure consistency in commitments in members' schedules, a proper the manner in which they define the scope of their classification and an understanding of the scope of commitments in their schedules. the services concerned are equally essential. Quality of the service New technical standards Assessment of the Adequacy and licensing and qualifications requirements that of WTO Rules in the Health relate to the hygiene of the premises, the equipment Services Sector available, the qualification of personnel, and so forth, are needed to ensure the quality of the ser- The final section of this chapter examines what vice. Although applying the necessity test depends may be the shortcomings of GATS if trade opens in on the circumstances of each case, it should not the health services sector. The section reviews the pose major problems with respect to requirements regulatory issues identified in the first section of generally applicable in most countries. the chapter and assumes that all GATS provisions The necessity test would pose difficulties with are fully applicable (i.e., that commitments were regard to any new obligation that hospitals operate made in all sectors concerned). As was noted ear- on a not-for-profit basis. Some could argue that lier, a trade agreement such as the GATS is most other requirements such as management of hospi- appropriately tested by assuming that all its provi- tals by doctors or reliance on ethical rules might be sions are applicable rather than by admitting that less restrictive to trade,40 but the effectiveness of members may unilaterally limit its application. those alternatives remains uncertain. Because this section is more prospective in Other rules, such as warranty systems under- nature and stretches the rules to their full potential, taken by hospitals to treat patients within a certain it may not correspond to the views currently pre- deadline, should not pose difficulties if those sys- vailing among most WTO members. Although it is tems are applied on a nondiscriminatory basis. unlikely that limitations will disappear from sched- ules when commitments are made by members, Universal and nondiscriminatory access to hospi- this chapter offers an opportunity to test the hori- tal services Assessing the GATS consistency of zontal provisions of the GATS to see if eventually new universal service requirements (assuming that more reliance could be placed on them rather than full commitments are made), such as the prohibi- on individual schedules. Whenever possible, sug- tion against hospitals refusing to admit a patient gestions for new rules are offered. because of the seriousness of his or her condition or because of the costs of the cure or mandated contri- Hospital Services butions to a public fund, is not an easy exercise. First one must determine such licensing or qualifi- The title of this section raises the question, What cation requirements fall within the scope of Article services are included? This question is important if VI.5 of the GATS. That would be the case if they we hope to understand the level of obligations of were applied as conditions imposed at the time of hospitals benefiting from special or exclusive rights the licensing or the authorization procedure. The to the doctors working on their premises. I suggest second difficulty would be determining whether 212 Domestic Regulation and Service Trade Liberalization universal service is part of the notion of the quality pitals' operators. Limitations to the national treat- of the service in the context of Article VI.4. If the ment obligation, however, could be inserted very response to the first two questions is positive, then appropriately in Schedules of Commitments, and universal service requirements would fall within the such limitations could be justified under GATS scope of Articles VI.4 and VI.5. Otherwise such Article XIV as necessary to protect human health. requirements may not be subject to a GATS disci- Indeed, the argument could be made that human pline unless they are discriminatory or restrictive to health would be endangered in the absence of any trade in a manner incompatible with Articles XVI such hospitals. Considering the remaining uncer- and XVII or with obligations assumed under Article tainty in this regard, formal clarifications would be XVIII. In that case, they would have to be justified welcome. under Article XIV of GATS.41 The third difficulty lies in applying the necessity test in the context of Economic regulation and control of public expen- Articles VI and XIV. For example, it could be argued diture Regulation of the economic aspects of the that incentive mechanisms are less trade restrictive supply of hospital services is delicate and no opti- and could be as effective in achieving universal ser- mal models have been found to date. It should be vice as are admissibility requirements imposed on recalled that one of the main objectives of such reg- hospitals. There remains, however, a high degree of ulation is to limit public spending while maintain- uncertainty about that. If Article VI is applicable, ing the quality of the service and its availability and the doubt benefits the member taking the measure. affordability, for all people. Different systems that This would be in line with the express admission of may be adopted in this context may contain a mix universal service requirements in the context of of licensing requirements, limits on the number of telecommunications services.42 If Article XIV is services provided, exclusive rights granted to cer- applicable, however, the doubt would benefit the tain operators, and internal regulation concerning member challenging the measure, and thereby conditions for the reimbursement of hospital ser- reduce the chances that "new" universal service vices or the manner in which the services should be requirements would be considered GATS consis- supplied. tent. Clarification would thus be welcome in this Assuming no discrimination among services regard. and service suppliers according to their nation- Rules that limit patients' choice of hospitals ality,43 different aspects of the systems imple- through reimbursement conditions often imply mented by states may fall either within the scope of that special or exclusive rights are granted to hospi- Article XVI (Market Access), Article VI (Licensing tals per region. If that is the case, such rules might Requirements), or Article XIV (Exceptions to Illicit be contrary to Article XVI (assuming that full com- Trade Restrictions). Parts of the system may be tol- mitments have been made) and would have to be erated whereas other parts will be considered illicit, reviewed according to Article XIV. It seems unlikely thus dismantling the system entirely. that they could meet the applicable necessity test, Measures aimed at directly controlling the sup- even if their objective was to organize the general ply of hospital services, such as limits on the num- availability of hospital services. ber of hospitals or hospital beds, would be contrary Rules imposing a minimum number of hospi- to GATS Article XVI in the absence of any such lim- tals per region do not appear to pose problems with its included in the schedule of the member taking respect to the GATS. It should only be noted that if the measure (assuming that full commitments are the government itself provides public hospitals and made) .4 Measures limiting the number of doctors confers on them certain privileges, such as reim- per hospital either would be contrary to Article XVI bursement facilities, tax exemptions, and the like, (concerning medical services that are not hospital the hospitals themselves should behave in a GATS- services supplied by doctors in hospitals) or would compatible manner toward doctors supplying dis- be considered licensing requirements imposed on tinct medical services on their premises. Further- hospitals (which would fall under Article VI). In more, privileges granted in this context would be any case, these measures would be needed either to contrary to the national treatment principle ensure the quality of the service (Article VI of because they would not be available to foreign hos- GATS) or to protect public order or secure compli- Regulation of Health Services and International Trade Law 213 ance with a social security system that is not other- compliance with a social security system that is not wise inconsistent with the GATS (Article XIV). otherwise inconsistent with the GATS. There is no obvious evidence that these mea- Central planning systems would be subject to sures would comply with the necessity test. One the necessity test. Central appropriations to hospi- could argue that least trade-restrictive measures tals in a region might be considered necessary to could consist of incentives given to hospitals to cover hospitals' fixed costs. In such a case, the selec- limit the number of treatments they supply to tion of the authorized hospitals and the allocation patients or of incentives given to patients to con- techniques should be entirely transparent and sume fewer hospital services. But the effectiveness based on objective criteria related to the objective of these alternative measures is uncertain. Empiri- pursued. Varieties of such systems, which could be cal evidence is needed. On the other hand, the more easily defended, would require that the allo- GATS could provide a more flexible rule indicating cation of appropriations be made on the basis of conditions on which measures directly limiting transparent and nondiscriminatory procedures, supply of hospital services would be tolerated, in such as bidding, handled by the state (or public light of the need to ensure the viability of a social social security funds) acting as purchasers of hospi- security system. A suggestion could be to admit all tal services. such measures to the extent they are related to the Systems of hybrid competition whereby hospi- maintenance of a social security system. The test of tals are paid for services provided on the basis of the existence of a "relation" rather than a "neces- prices uniformly fixed in advance do not necessar- sity" arguably would be more in line with the exist- ily entail the granting of special or exclusive rights. ing uncertainty about managing social security in They also enable some form of competition among health economy. This test is also used in GATT hospitals. Thus, to the extent no privileges are Article XX, the provision corresponding to GATS granted, such systems would have more chances to Article XIV with respect to the conservation of be GATS consistent than would centrally planned exhaustible natural resources. It has been inter- systems (assuming that full commitments have preted in this context as requiring a "close and real" been made). It is doubtful that price fixing by the connection between the measure and the objective government would pose particular problems under pursued.45 GATS, unless the low level of prices, coupled with It should be recalled that if measures limiting subsidies to local operators, resulted in market the number of doctors per hospital fall within the access restrictions. scope of GATS Article VI, only new measures that If systems of hybrid competition nevertheless are more restrictive to trade than those existing at included the granting of special or exclusive rights the time of commitments would be subject to the to operators, they would obviously have less chance necessity test. By contrast, if Article XIV were appli- of being GATS consistent. Special or exclusive cable, all measures would have to be scrutinized rights could be justified only if they were necessary, under this test. Formal clarifications of the provi- for example, to enable hospital investments in a sions applicable to these measures would be wel- region. In that case, these systems arguably should come. The issue is clearly linked to the need for be structured as systems of organized competition; coherent definitions of hospital services and med- that is, special or exclusive rights would be granted ical services. to hospitals making the best offer for each illness or Cost control mechanisms also have an unclear for the use of specific equipment. It might be status in the GATS. In principle, full commitments argued that granting privileges in the form of reim- in the health services sector would render unten- bursement limited to services supplied by the able those systems that require the granting of spe- selected hospitals instead of formal exclusivity cial or exclusive rights to hospitals. Under certain might be a less trade-restrictive option. conditions, those rights could be justified pursuant I doubt that systems of additional competition, to Article XIV if access to those rights results from in which the mechanism of organized competition nondiscriminatory procedures and the rights are is completed by the patient's choice of the procur- necessary to protect human life or health or one of ing entity of hospital services, would increase the "fundamental interests of society," or to secure chances of being GATS consistent. In fact, although 214 Domestic Regulation and Service Trade Liberalization these systems obviously increase the level of com- vice. That would not be the case with requirements petition in domestic markets, the GATS is not that have a protectionist nature intended to benefit directly concerned with this aspect because it is not established doctors-for example, a requirement its purpose to impose the most efficient domestic that foreign doctors repeat a course of medical edu- regulatory models. cation. Defining the appropriate boundary between Mixtures of the various systems, such as central normal and excessive requirements may not always budgetary planning (for fixed costs) and hybrid or be easy and would depend on the circumstances of additional competition (for variable costs), are the case. The necessity test seems appropriate here likely to become the more common regulatory and there is not much more that current rules frameworks. The difficulty with them lies in their could (and should) achieve in this regard. Remem- central planning component, which inevitably ber that the necessity test can be interpreted rather entails the granting of special or exclusive rights flexibly when human life or health considerations associated with financing the fixed costs of the hos- are at stake. pitals concerned, especially if prices for the services State formulation of good practices in medical rendered are not sufficient to cover them. Given the treatment, as well as ethical rules, arguably are usually high level of fixed costs, however, these sys- merely internal regulations subject to nondiscrimi- tems may be the only ones enabling some form of nation rules. Should they be implemented as licens- competition in the market while maintaining social ing conditions, Article VI.5 would apply if they nul- security. Furthermore, maintaining special or lified or impaired commitments made. This would exclusive rights may be necessary to provide certain be the case if the new rules were more restrictive to services that require huge investments and that are trade than were any existing measures, such as arguably natural monopolies, such as emergency membership in a professional organization becom- services or highly sophisticated equipment. Unless ing obligatory or new sanctions being imposed already excluded from commitments in schedules, against those who did not comply with the new the market access limitations resulting from those measures. In such situations, rules intended only to rights could be justified by the exception clause protect the economic interests of local doctors Article XIV that relates to human life or health. would not be justifiable; the new rules would have to be necessary to ensure the quality of the service. Medical Services Finally, rules establishing professional liability of doctors would not pose particular problems As I have noted, the definition of medical services because they are merely internal regulations subject remains unsettled, particularly regarding services to the nondiscrimination rules. that doctors supply in hospitals. If all of these ser- vices are qualified as medical services, then com- Universal and nondiscriminatory access to med- mitments made with respect to them must be ical services Requiring a minimum number of applied by hospitals that have been granted special doctors may oblige the state to provide its own doc- or exclusive rights pursuant to GATS Article VIII. tors. In that case the doctors could be employed by Furthermore, those hospitals cannot use the public hospitals and could benefit de facto from financing they receive through the operation of the exclusive rights in those hospitals. Such exclusive services for which they benefit from special or rights could be justified under GATS Article XIV by exclusive rights to cross-subsidize medical services the need to protect human health or to ensure com- for which commitments have been made. pliance with rules that require the supply of a uni- versal service. Quality of the services Requirements of diplo- However, it is unlikely that denying patients the mas, technical qualifications, experience, and the freedom to choose their doctors could be accepted like are fully justifiable under Article VI because under GATS (assuming that full commitments are they are necessary to ensure the quality of the ser- made). Restrictions along those lines normally are vices provided. It is important, however, that these accompanied by special or exclusive rights granted requirements be related to the quality of the ser- to doctors per zone of habitation and result in mar- Regulation of Health Services and International Trade Law 215 ket access restrictions. As with hospital services, the laws that are GATS consistent. This remains uncer- need for such measures to ensure universal service tain, although these measures appear to be less is highly questionable. restrictive to trade than do more direct limitations imposed on the supply of medical services. Control of public expenditure The application Including certain services that are eligible for of GATS to the different techniques aimed at limit- reimbursement in a limited list of items defined by ing public spending for medical services may be as the state does not alone constitute a limit on the delicate as it is for hospital services. The difficulty number of services authorized, so it would be diffi- also derives from the lack of any agreed optimal cult to consider it a violation of Article XVI. There- solution. fore this kind of measure could be authorized, Quantitative limits on the number of services unless it operates de facto as a means to discrimi- provided-for example, limits on the number of nate against foreign doctors, in which case it would graduated doctors admissible in a country or regional be contrary to GATS Article XVII.47 limits on the number of established doctors-may Cost limitation systems can be reviewed accord- be contrary to Article XVI. Justification for these ing to the same principles as those applicable to restrictions would depend on their being necessary hospital services. A system of pure central planning to maintain a viable social security system in the does not seem to be acceptable (assuming that full context of Article XIV. It is doubtful that such commitments have been made). In the context of measures, which would require the granting of spe- hospital services, such a system might be accepted cial or exclusive rights, would pass the necessity as necessary to finance high fixed costs, but that test. It could be argued that incentives to reduce the argument does not pertain to medical service supply of medical services by doctors, implemented whose fixed costs are rather limited. In systems of through social security regulations, might be less hybrid competition, price-fixing arrangements trade-restrictive measures.46 The effectiveness of among doctors may raise competition concerns these alternative measures is uncertain, however, that justify the states' entry into consultations with and it would be necessary to clarify which quantita- each other in the context of GATS Article IX. It may tive limitations intended to reduce social security be less trade restrictive merely to accept complete costs would be admissible under the GATS. Alter- liberalization of prices of medical services applica- natively, a new test requiring a "real and close" rela- ble to patients, even if caps are established for the tionship between the measure and the objective reimbursed portion of the honoraria. pursued could be established. Generally speaking, granting special or exclusive Other limitations, such as a fixed number of rights in the context of medical services appears to services per illness, quotas of services per doctor, or be less justifiable than in the case of hospital ser- prohibition of direct access to specialist doctors or vices because of the more limited fixed costs of hospitals, would also be contrary to either Article doctors and the absence of natural monopolies. VI.5 or Article XVI. This means that these limits also may have to be reviewed in light of the neces- Access to infrastructure by doctors As previ- sity test in the context of Article XIV. It is extremely ously indicated, doctors' access to hospital infra- difficult, of course, to make such an evaluation at structure depends on the classification given to this stage and, as is the case with the more direct their services. If their services are not classified as quantitative limitations addressed in the previous hospital services, then arguably they should benefit paragraph, a clarification would be welcome here. from the infrastructure of hospitals that have been New and complex qualifications requirements granted special or exclusive rights, in accordance for doctors unrelated to medical skills arguably with GATS Article VIII. Those hospitals cannot would nullify or impair commitments made and take advantage of their regionally dominant posi- would be contrary to GATS Article VI. They proba- tions to adversely affect the competitive positions bly would be unjustifiable under Article XIV as of doctors who are not connected with them. well, unless they are needed to maintain public Finally, access of telemedicine services to the exist- order or ensure compliance with social security ing public telecommunications infrastructure 216 Domestic Regulation and Service Trade Liberalization should not pose particular difficulties because trade in health services more than they open it. of the provisions of the Annex on Telecommu- (Such a situation calls to mind the circumstances nications (assuming full commitments have been existing in trade in goods before the Uruguay made). Round.) Furthermore, in the practice of negotia- tions, the possibility of imposing unilateral limita- tions may be restricted. It thus appears necessary to clarify a number of Although it appears that the GATS is sufficiently concepts before any general opening to trade can be flexible to support almost all regulatory systems for encouraged in the health sector. States must be the provision of health services-except those that aware of the precise consequences that such open- would discriminate among foreign services and ing would entail. Full commitments in health ser- service suppliers-its application in a number of vices may have a profound effect on the organiza- cases still raises several uncertainties. These tion of their health systems. States that have been increase with the level of commitments made. trying to achieve a delicate balance among a number The higher degree of legal certainty currently of objectives-the inherent quality of the services, derives from the absence of any commitments at universal access to them at affordable prices, and the all. If commitments are made, the lack of clarity in maintenance of a viable social security system- applicable horizontal rules (particularly those per- must understand precisely how each objective taining to domestic regulation) will encourage would be affected by regulation under GATS. members to limit the scope of those commitments Indeed, uncertainty concerning any one component in their schedules. Members may consider it impor- of the system may affect the entire system, especially tant to maintain certain special or exclusive rights if budget considerations and delicate political bal- or other trade-restrictive measures that are associ- ancing enter into play. It is understandable that ated with public spending reductions and other states would be reluctant to accept the right of pan- objectives. els to judge the GATS consistency of their legislation Without limitations described in schedules, after the fact. This is especially true if applying pro- trade-restrictive domestic regulations may have to visions that pose problems requires an important be shown necessary either to ensure the quality of level of discretionary appreciation. For example, the health service or to protect one of the nontrade necessity test could entail determining the effective- objectives covered by the exception clause of GATS ness of least trade-restrictive measures that might Article XIV. Uncertainty in this respect, especially be available. Clearly, because no optimal regulatory in relation to such important notions as "licensing system has been found to date, such a determination or qualification requirements," "quality of service," would have a regulatory effect it might be inappro- "necessity" or "public order" as well as rules gov- priate to permit a panel to define. erning the burden of proof that depend on the In summary, the following clarifications are applicability of either Article VI or Article XIV, most necessary: inevitably discourage members from relying on general rules in the absence of individual limits. First, concerning the definitions and classifica- Inserting limits in schedules is another source of tion of health services, a clear distinction should difficulties. Individual schedules are not always be made between hospital services and medical legally consistent or relevant. In addition to the services, at the least. Beyond that, the more sub- recurring problem of defining terms, limiting the classifications that can be drawn, the better. For scope of commitments to private services only at the purpose of consistency with the rest of best is useless and at worst enables the unilateral GATS, classification criteria should not be based reduction of commitments in a manner incompat- on ownership of the undertakings that provide ible with GATS Article XXI. Furthermore, the pos- the services. sible variety of commitments and limits that reflect Second, concerning Articles VI.4 and VI.5, the the diversity and spread of regulatory models may main technical standards and licensing or quali- complicate matters and, in fact, may disorganize fication requirements should be specified. They Regulation of Health Services and International Trade Law 217 should correspond to qualitative conditions that most appropriate method would be to negotiate are imposed on service providers to enable them outside the WTO an international agreement that to provide their services. These specifications addresses the profoundly technical and political obviously should rely on the work undertaken character of the issues raised. Furthermore, both within the Working Party on Domestic Regula- Article VI and Article XIV are crafted to take into tion. Then, because GATS Articles VI.4 and VI.5 account international agreements that would sat- require these measures, if new, to be necessary to isfy, for example, the necessity test. In Article VI this ensure the quality of the services, the notions of is made explicit with respect to international stan- "quality of health services" and "necessity" dards of relevant international organizations (Arti- should be defined. "Quality of health services" cle XV.5[b]). In Article XIV the jurisprudence of could incorporate not only technical considera- the Appellate Body related to GATT Article XX tions, but also the need to make health services admits that, to the extent they meet one of the available to all people at reasonable prices. The objectives covered by this provision, regulations necessity test also could explicitly incorporate a complying with international instruments may not flexible criterion of proportionality that, constitute a means of arbitrary or unjustifiable dis- arguably, would be more appropriate than the crimination among countries where like conditions search for the least trade-restrictive measure prevail. available and the determination of its effective- Alternatively, a possible solution within the ness to meet the objective pursued. WTO system would be to negotiate a kind of Refer- Third, the importance of the exceptions con- ence Paper, like those created for basic telecommu- tained in Article XIV should not be underesti- nications48 or accountancy (WTO Council for mated. In particular, they are relevant to most Trade in Services 1998), which would clarify all trade-restrictive rules aimed at curtailing public provisions whose application in the sector is still spending, such as quotas of hospitals or doctors uncertain. Such reference paper would then be or of services per hospital or doctor, and the included in Schedules of Commitments pursuant like-that is, all rules that formally limit the sup- to GATS Article XVIII and would accompany any ply of health services. Budgetary considerations new commitments made in the health services sec- relating to the financing of health services are tor, and clearly would be supported by the work essential for finding the balance between univer- carried out within the Working Party on Domestic sal access to health services and reasonable cost, Regulation. and the circumstances under which these trade- In the health services sector, given the impor- restrictive rules could be justified under Article tance of the objectives pursued by domestic regula- XIV should be specified. Because there is no tion and the interdependence of each regulatory ele- agreed optimal system concerning the economic ment, the clearer and more thorough the GATS aspects of health services regulation, perhaps the rules are, the better. Thus, to the extent possible, necessity test could be replaced by a requirement opening debate on this issue may be more appropri- of a "real and close" connection between the ate than relying exclusively on horizontal rules, even measures employed and the objective of achiev- if the latter are substantially improved and com- ing a complete and sustainable financing of pleted. Trade negotiations could provide an addi- health services. Also, Article XIV would be rele- tional step toward the definition of well-balanced vant in assessing the admissibility of special or health systems. exclusive rights that are connected to the financ- ing of fixed costs of hospitals that need signifi- Endnotes cant investments. It can be argued that these 1. Readers are referred to a comprehensive study conducted in rights are justifiable pursuant to GATS Article 1998 under the auspices of the United Nations Conference XIV(b), but this could be made explicit. on Trade and Development (UNCTAD) and the World Health Organization, which describes existing trade flows and addresses the regulatory barriers that need to be over- The question is then how to insert these clarifi- come to facilitate such trade for the benefit of developing cations in the WTO regulatory system. Perhaps the countries (UNCTAD/WHO 1998). 218 Domestic Regulation and Service Trade Liberalization 2. Twelve WTO members plus the 15 members of the Euro- these limitations also affect market access rights of mem- pean Community have agreed to be bound by the Govern- bers, then their indication in the second column suffices ment Procurement Agreement. because it remains valid for the third column as well (Arti- 3. See Annex 4 and Note I to Article 1: 1 of the GPA. The coun- cle XX.2). try concerned is the United States. This is of little practical 17. Arguably, this could include requirements and standards importance, however, because of the predominance of the that violate Article XVI of GATS. The Working Party on private sector there (WTO Council for Trade in Services Professional Services excluded this possibility, maintaining 1998, para. 41). that Articles VI and XVI have a different scope and cover 4. See Annexes I to 3 and Article 1:1 of the GPA. different categories of measures (see WTO Council for 5. Arguably, a service can be supplied below cost and on a Trade in Services 1999a, paras. 9 and 12). commercial basis. Indeed, it may be cross-subsidized by 18. These have been defined by the Working Party on Domestic revenues generated by another service of the same opera- Regulation in the following manner: ". . . qualification tor. This is why the proposed test looks at the manner in requirements, that is to say substantive requirements which a which the supplier of the service is organized and not at the professional service supplier is required to fulfil in order to manner or the conditions under which the specific service obtain certification or a licence; qualification procedures, is supplied. administrative or procedural rules relating to the adminis- 6. There is a difference between the financing of a service and tration of qualification requirements; licensing require- its acquisition by a social security fund for the benefit of its ments, comprising substantive requirements other than affiliates. In the first case, there is no commercial relation- qualification requirements, which a service supplier is ship. In the second case, arguably, the commercial relation- required to comply with in order to obtain a formal permis- ship exists between the service provider and the social secu- sion to supply a service; licensing procedures, administrative rity fund. procedures relating to the submission and processing of an 7. This should be distinguished from the situation in which application for a licence; and technical standards, require- the government itself acts as an "investor." ments which may apply both to the characteristics or defini- 8. See Article I.1 of the GATS. In accordance with Article 1.3, tion of the service and to the manner in which it is per- GATS rules apply to central, regional, or local public formed" (WTO Council for Trade in Services 1999a, para. 4). authorities and to nongovernmental bodies in the exercise 19. See WTO Council for Trade in Services (1999a, para. 19 of powers delegated by the above-cited public authorities. and foll.). It should be noted that there is no agreement on 9. Horizontal exemptions applicable to all service sectors, this interpretation of the necessity test for the future. The however, could be relevant-for example, limitations to European Communities propose in this regard a propor- land ownership, participation in the equity of domestic tionality test (see WTO Working Party on Domestic Regu- service providers, free movement of persons, and the like. lation 2001; see also WTO Working Party on Domestic 10. It should be noted that, under certain conditions set forth Regulation 2000). in GATS Article V, members may conclude preferential 20. If a panel or the Appellate Body is requested to arbitrate a regional trade agreements. dispute concerning GATS, it is likely that they would con- 11. It should be noted that the public sector exclusion is found firm this interpretation in order to maintain consistency in several other schedules and is not limited to the coun- across WTO agreements. In fact, to interpret their provi- tries above and to the health services sector. sions in accordance with Article 31.2 of the Vienna Con- 12. These measures can take the form of quotas or economic vention on the Law of Treaties, all WTO agreements are needs tests. Article XVI applies to market access through considered one unique international treaty (see WTO the modes of supply identified in Article I. The restrictions Appellate Body Report 1999, para. 81; WTO Report of the that are prohibited by Article XVI, to the extent indicated in Panel 2001, paras. 7.46, 7.47, and 7.128). schedules, are explicitly formulated in paragraphs (a) to (f) 21. See WTO Appellate Body Report 2001a, paragraph 170 and of GATS Article XVI.2. Again, it should be stressed that following; GATT 1947 Panel Report 1990b, paragraph 75; and members prefer that the actual structure of the GATS is WTO Report of the Panel 1996, paragraph 6.24. This defini- reflected in the terminology used; what is not explicitly tion of the term "necessary" was adopted for the first time in included in commitments is permitted. It should be noted, the context of GATT Article XX(d) (GATT 1947 Panel Report however, that if a service is scheduled, then the "prohibi- 1989, para. 5.26). tions" contained in Articles XVI and XVII are fully applica- 22. Note in this regard that Article VI.6 of GATS specifies "[i]n ble to that service, unless limitations are expressly men- sectors where specific commitments regarding professional tioned in the second or third column of individual services are undertaken, each Member shall provide for schedules. adequate procedures to verify the competence of profes- 13. This means opening the sector concerned to competition sionals of any other Member.' in the national territory. 23. Quality standards applicable to hospitals typically include 14. Such rights could be conferred, for instance, in the context standards related to the hygiene of the premises, the equip- of build-operate-transfer arrangements whereby private ment available, the qualification of personnel, architectural investors agree to build a hospital in exchange for a certain requirements, and so forth. period of exclusivity. 24. The Appellate Body admitted that, in the context of GATT 15. The imposition of such requirements could be subject to Article XX(b), in which the necessity test is also used, the economic needs tests that are, in principle, prohibited in severity of the review of an alternative measure's effective- paragraphs (a) to (d) of GATS Article XVI.2. ness must equal the importance of the objective pursued. 16. If the services concerned are scheduled, such limitations Protecting human health has been considered to be of vital must be explicitly included in the third column of mem- importance in this context (WTO Appellate Body Report bers' Schedules of Commitments relating to Article XVII. If 2001a, paras. 172-74). Regulation of Health Services and International Trade Law 219 25. Concerning GATT Article X.3 see WTO Appellate Body 41. An alternative, of course, is to introduce a request to mod- Report 1998, paragraph 182 and following; WTO Report of ify a schedule, pursuant to GATS Article XXI, to include the Panel 2000a, paragraph 11.80 and following; and WTO limitations concerning new universal service requirements Report of the Panel 2000c, paragraph 6.51. that would be contrary to Articles XVI or XVII. This possi- 26. Reserved services are those that are subject to special or bility is limited, however, to a period of three years after the exclusive rights and that are unbound in Schedules of entering into force of the commitments and it requires the Commitments. negotiation of compensatory adjustments. In addition, 27. This sequence of the analysis has been established by the remember that the methodological assumption underlying Appellate Body with regard to GATT Article XX, the provi- this section of the chapter is that full commitments have sion corresponding to GATS Article XIV (see WTO Appel- been made so that the adequacy of horizontal provisions in late Body Report 1996, section IV, para. 1; WTO Appellate the GATS can be assessed. Body Report 1998, paras. 115 and 157; and WTO Appellate 42. See Article 3 of the "Reference Paper" annexed to commit- Body Report 2000, para. 156). ments made by most members on basic telecommunica- 28. Concerning GATT Article XX see WTO Appellate Body tions services. Report 1996, section III.A; WTO Report of the Panel 43. Rules prohibiting portability of insurance (whether public 2000b, paragraph 8.166; and GATT 1947 Panel Report or private) would be discriminatory and contrary to GATS 1989, paragraph 5.9. Article XVII. If full commitments are made in relation to 29. All of these measures would be subject to Article VI.1, hospital services, it is unlikely that they could be justified requiring that they be administered in a reasonable, objec- according to one of the subparagraphs of Article XIV. tive, and impartial manner. 44. Measures limiting the supply of heavy equipment to spe- 30. This would concern the fiscal aspects of the social security cific hospitals could be contrary to GATT Article XI, but system, or rules aimed at limiting expenses, such as the pro- that issue falls outside the scope of this chapter. hibition of direct access to specialist doctors or hospitals or 45. WTO Appellate Body Report 1998, paragraphs 136-37 and the inclusion of services eligible for reimbursement in a 140-41. To avoid the uncomfortable character of the neces- limited list of items defined by the state. sity test, a proportionality test has been suggested by the 31. This would concern, for example, rules governing the abil- European Communities (see WTO Working Party on ity of patients to choose their doctors or hospitals or price- Domestic Regulation 2001). fixing arrangements among doctors, hospitals, and the gov- 46. This could be the case, for example, when reimbursement ernment. by social security funds is limited to a specific number of 32. This would also arguably cover warranties imposed to treat consultations per day per doctor. patients within certain deadlines, additional liabilities for 47. This would be the case of prohibition of insurance porta- doctors, and the like. bility for medical services supplied abroad (affecting the 33. This could be the case, for example, if rules maintaining supply of these services under Mode 2). special or exclusive rights were connected to the financing 48. See Fourth Protocol to the GATS, S/L/20, 30 April 1996, of hospitals. WTO. See also WTO Negotiating Group on Basic Telecom- 34. WTO Report of the Panel 1997, paragraphs 5.9-5.11; munications 1996. GATT 1947 Panel Report 1990a, paragraphs 5.16- 5.18. 35. The Appellate Body admitted, in the context of GATT Arti- References cle XX(d), that the necessity test could be applied in a more flexible manner according to such issues as the relative Adams, O., and C. Kinnon. 1998. "A Public Health Perspec- importance of the common interests or the common values tive." In International Trade in Health Services-A Development that the legislation seeks to protect (WTO Appellate Body Perspective. Geneva: UNCTAD/WHO. Report 2000, paras. 162-64). Adlung, R. 2000. "Service Trade Liberalisation from Devel- 36. Arguably, such standards and requirements would nullify oped and Developing Country Perspectives." In Pierre Sauve and and impair existing commitments. This, however, must be Robert M. Stern, eds., GATS 2000: New Directions in Services demonstrated by the claimant (GATS Article VI.5). Trade Liberalization. Washington, D.C.: Brookings Institution 37. Exceptions can be tolerated if special or exclusive rights are Press. connected to the financing of certain hospitals' fixed costs Adlung, R., and A. Carzaniga. 2001. "Health Services under and if it can be demonstrated that there would be no hospi- the General Agreement on Trade in Services.' Bulletin of the tals without such financing. In such a case, GATS Article WHO, No. 79. XIV(b) relative to the protection of human life or health Butkeviciene J., and D. Diaz. 1998. "GATS Commitments in could apply. the Health Service Sector and the Scope for Future Negotiations.' 38. Other measures aimed at containing public costs may be In International Trade in Health Services-A Development Perspec- authorized, such as reimbursement caps, obligations to tive. Geneva: UNCTAD/WHO. consult a general practitioner before having access to spe- Detels, R., W. Holland, J. McEwen, and G. S. Omenn, eds. cialist doctors, and so forth. 1996. Oxford Textbook of Public Health, 3rd ed., vol. 1. Oxford, 39. It is assumed that commitments are made with respect to U.K.: Oxford University Press. the health services that benefit from social security reim- Duriez, M., and D. Lequet-Slama. 1998. "Health Systems in bursements. Europe." Que sais-je? 3343. (In French) 40. Throughout this section it is assumed that the necessity test Feketekuty, G. 2000. "Regulatory Reform and Trade Liberal- is interpreted in a manner consistent with the GATT, that ization in Services." In Pierre Sauve and Robert M. Stern, eds., is, requiring that recourse is made to the least trade-restric- GATS 2000: New Directions in Services Trade Liberalization. tive measure that reasonably can be used. See endnote 21. Washington, D.C.: Brookings Institution Press. 220 Domestic Regulation and Service Trade Liberalization GATT (General Agreement on Tariffs and Trade). 1989.1947 . 1997a. European Communities-Regime for the Panel Report. United States-Section 337 of the TariffAct of 1930. Importation, Sale, and Distribution of Bananas. WT/DS271AB/R, Adopted November 7. L/6439, BISD 36S/386. AB 1997-3, September 9. . 1990a. 1947 Panel Report. EEC-Regulation on . 1997b. India-Patent Protection for Pharmaceuti- Imports of Parts and Components. Adopted May 16. L/6657. BISD cals and Agricultural Chemical Components. WT/DS50/AB/R, 37S/142. December 19. . 1990b. 1947 Panel Report. Thailand-Restrictions . 1998. United States-Import Prohibition of Certain on Importation of and Internal Taxes on Cigarettes. Adopted Shrimp and Shrimp Products. WT/DS58/AB/R, October 12. November 7. DS1O/R. BISD 37S/214. . 1999. Korea-Definitive Safeguard Measure on Hoekman B. M., and P. A. Messerlin. 2000. "Liberalising Imports of Certain Dairy Products. WT/DS98/AB/R, December 14. Trade in Services: Reciprocal Negotiations and Regulatory . 2000. Korea-Measures Affecting Imports of Fresh, Reform.' In Pierre Sauve and Robert M. Stern, eds., GATS 2000: Chilled, and Frozen Beef WT/DS161/AB/R, WT/DS169/AB/R, New Directions in Services Trade Liberalization. Washington, December 11. D.C.: Brookings Institution Press. . 2001a. European Communities-Measures Affecting Holland, W., and E. Mossialos. 1999. Public Health Policies in Asbestos and Asbestos-Containing Products. WT/DS135/AB/R, the European Union. London: Aldershot. March 12. Lambert, Denis-Clair. 2000. Les systemes de sante. Analyse et . 2001b. 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United States-Antidumping Measures on tional Trade in Health Services-A Development Perspective. Stainless Steel Plate in Coils and Stainless Steel Sheets and Strip Geneva: UNCTAD/WHO. from Korea. WT/DS179/R, December 22. UNCTAD/WHO (World Health Organization), eds. 1998. .2001. United States-Transitional Safeguard Measure International Trade in Health Services-A Development Perspec- on Combed Cotton Yardfrom Pakistan. WT/DS192/R, May 31. tive." Geneva. WTO Working Party on Domestic Regulation. 2000. "The Van Ryn, J., and J. Heenen. 1976. "Principes de droit commer- Necessity Test." Communication from the Republic of Korea. cial," Vol. 1, 2nd ed. Brussels: Bruylant. (In French) S/WPDR/W/9, September 28. WTO (World Trade Organization). 1998. Disciplines on Domes- . 2001. "Domestic Regulation: Necessity and Trans- tic Regulation in the Accountancy Sector. S/L/64, December 17. parency." Communication from the European Communities and WTO Appellate Body Report. 1996. United States-Standards Their Member States. S/WPDR/W/14, May 1. for Reformulated and Conventional Gasoline. WT/DS2/AB/R, April 29. DOMESTIC REGULATION AND TRADE IN SERVICES: LOOKING AHEAD Aaditya Mattoo Pierre SauvW Background Considerations domestic regulation and the disciplines' effect on This volume of essays has explored one of the most market access rank among the weakest elements in important and difficult issues in international trade the body of rules. GATS Article VI remains provi- today: the relationship between trade and invest- sional in nature. A central question confronting the ment liberalization and domestic regulatory auton- multilateral community-and one to which the omy. Although regulatory autonomy is required to contributors to this volume have tried to provide enable domestic rules to respond to local condi- some answers-is how best to strengthen GATS tions, there may be times when such autonomy disciplines without unduly curtailing national reg- leads to trade friction, either unintentionally or as ulatory freedom. Of related interest are the ques- disguised protectionism. tions of how to determine the extent to which gov- The interface between international trade and ernment regulations in the services field can be domestic regulatory conduct has been the object of based on principles of economic efficiency and a growing body of rules and jurisprudence in rela- good governance; and to what degree, amid consid- tion to trade in goods but is new in the realm of erable sectoral diversity, regulatory principles can services. Given the pervasive influence that domes- be pursued through the creation of meaningful tic regulatory conduct exerts on trade and invest- horizontal (i.e., non-sector-specific) disciplines. ment conditions, it is no surprise that the above This concluding chapter draws on the body of tensions, and the attendant policy sensitivities to analysis contained in this volume to identify a set of which they give rise, have become so prominent in issues to which services negotiators and regulators General Agreement on Trade in Services (GATS) will need to devote closer attention in the coming negotiating circles. years. From a forward-looking perspective, six key A paradox of the body of rules governing trade themes appear to warrant closer analytical scrutiny. in services at the multilateral level is that the disci- First, the rationales for regulation and the rea- plines dealing with the centrally important issue of sons for collective action at the multilateral level are 221 222 Domestic Regulation and Service Trade Liberalization similar across service sectors. Further experimenta- trade, market-opening commitments may need to tion on this policy interface along sectoral lines cer- be supported by the right to challenge trade- tainly is needed-to nurture greater GATS "buy-in" impeding or needlessly burdensome regulation. on the part of sectoral regulators, among other rea- This need emerges most clearly in the chapters on sons. The argument can be made, however, that a accountancy by Claude Trolliet and John Hegarty horizontal approach to disciplines on domestic reg- and on health services by David Luff, as well as in ulation is possible under the GATS. Horizontal the chapter on financial services standards by Joel rules may emerge (in the future) from sectoral Trachtman. Recognizing this challenge lies behind experimentation. the Article VI.4 work program on the development Second, before new disciplines on domestic reg- of possible new disciplines on regulatory conduct ulation can be contemplated a fuller understanding (beyond those already agreed for accountancy ser- of the scope of existing GATS disciplines must be vices). However, as we discuss in greater detail achieved. This concerns most centrally Articles III below, opinions diverge quite significantly on the (Transparency) and XVII (National Treatment). As form any new disciplines might take-indeed, they it happens, much can be achieved by making the diverge over the very feasibility of reaching agree- process of rulemaking more transparent and striv- ment on such disciplines. ing for nondiscrimination in rule design and Fifth, regarding the promotion of regulatory enforcement. This is a centrally important conclu- harmonization (or, at the very least, greater doses of sion presented in the chapters by Keiya Iida and regulatory convergence) and the conclusion of Julia Nielson and by David Leebron. mutual recognition agreements (MRAs), greater Although strengthened transparency disciplines participation by developing countries is clearly beyond those currently found in Article III may be desirable in the development of international stan- desirable as a means to promote good governance dards in services. Where such standards do exist, and efficient regulation, however, the design of any the likelihood of disguised or needlessly restrictive new disciplines in this area must be informed by a impediments to trade and investment may be sig- careful assessment of potential benefits and costs, nificantly lower, to the extent that such standards particularly enforcement costs. The latter may be reflect best practice policies. Multilateral disciplines nontrivial in developing-country settings. under the GATS should, accordingly, create a Meanwhile, there can be little doubt that the stronger presumption in favor of genuinely inter- nondiscrimination (both de jure and de facto) disci- national standards in services trade. Moreover, plines found in GATS Articles II (Most-Favored because of the potential of MRAs to create trade Nation [MFN]) and XVII (National Treatment) and investment distortions, bilateral or plurilateral already exert powerful discipline on domestic regu- recognition agreements should respect the nondis- latory conduct in the services area. But, as several of crimination principle, as mandated by GATS Arti- the essays in this volume suggest, there may be a vari- cle VII. As a rule, such agreements should not be ety of reasons to create deeper disciplines to protect notified under Article V of GATS (Economic Inte- the rights of foreign producers and consumers. gration) but rather be open to all eligible partici- Third, insofar as nondiscriminatory access to or pants under the potentially less trade-restrictive control of essential facilities is a problem, market- terms of Article VII. opening commitments on trade and investment Sixth, developing countries have much to gain will typically have to be complimented by procom- from strengthened multilateral disciplines on petitive regulatory disciplines. This fact emerges in domestic regulation. This is so for two important the chapters on telecommunications by Daniel reasons. First, the development of such disciplines Roseman, on transportation by Richard Janda, on can play a significant role in promoting and consol- energy by Peter Evans, and (somewhat surprisingly, idating domestic regulatory reform efforts. Second, given his characterization of the industry's increas- such disciplines can help developing country ing "commoditization"), in the chapter on financial exporters address potential regulatory barriers to services by Stijn Claessens. their exports in foreign markets. A central chal- Fourth, insofar as regulations such as licensing lenge confronting developing countries is thus how and qualification requirements are impediments to best to harness multilateral rulemaking efforts with Domestic Regulation and Trade in Services: Looking Ahead 223 a view to promoting sound regulatory institutions quite vividly, even though services sectors differ and practices at the national level. greatly, there is considerable similarity in the underlying economic and social reasons for regula- tory intervention: monopolies in network-based Understan dingsi te Trationalets services (e.g., telecommunications, transportation, ofDormand iPossibleTade Effects and energy services), externalities and asymmetric information in knowledge and intermediation- The service economy comprises an extraordinarily based services (e.g., financial and professional ser- rich variety of economic activities. Such diversity- vices), and the desire to ensure universal access in and the rulemaking challenges it poses in interna- essential services (e.g., health and education ser- tional negotiations-are defining characteristics of vices). These rationales and a range of possible the GATS. Are services sectors so different that each GATS- and domestic policy-based responses will need a distinct approach? Or are there certain thereto, are presented in Table 12.1. Focusing on basic general principles that can be applied across these rationales may provide the basis for deter- sectors-and that will remain relevant over time in mining the desirability and feasibility of answering a world of changing technology and policy?' one of the key issues confronting services negotia- The great diversity of services sectors, the diffi- tors under the Article VI.4 work program: choosing culty of making policy-relevant generalizations in between horizontal and sectoral disciplines. the midst of rapidly changing regulatory environ- In the current GATS talks, negotiators will be ments, and the regulatory precaution associated considering whether and how such disciplines could with the sheer novelty of trade negotiations in the be applied to a variety of other network services, services field have all tended so far to impart a cer- including transport (terminals and infrastructure), tain degree of sectoral specificity to discussions of environmental services (sewerage), and energy ser- the GATS-domestic regulation interface. However, vices (distribution networks), with a view to ensur- as several of the chapters in this volume bring out ing, among other things, that any major supplier of TABLE 12.1 Dealing with Domestic Regulations at the Multilateral and National Levels Possible GATS Possible national Market failures Services sectors responses policy responses Monopoly/oligopoly Network services: Generalizing key Developing procompet- telecommunications; disciplines in telecom- itive regulation to transport (terminals munications reference protect consumer and infrastructure), paper to ensure cost- interests where environmental services based access to competitive market (sewerage) and energy essential facilities, such structures do not exist services (distribution as roads, rail tracks, networks) terminals, sewers, networks, or pipelines Strengthened disciplines to deal with anticompetitive conduct Asymmetric Intermediation and Nondiscrimination and Strengthening domestic information knowledge based possible application of regulation to remedy services: financial a necessity test market failure in an services, professional economically efficient services, and so forth manner Externalities Transport, tourism, and Devising economically so forth efficient means of Social objectives: Transport, telecommu- achieving social universal service nications, financial, objectives in compet- education, health itive markets 224 Domestic Regulation and Service Trade Liberalization essential facilities provides access to all national and foreign providers-for example, calls for tender in foreign suppliers at cost-based rates and does not the local-language press or consultations with local abuse its dominant position in markets. suppliers do not engage foreign providers. More generally, national transparency may be a global Transparency public good but the full benefits of it are not fully internalized by each national government. In any The chapter by Keiya Iida and Julia Nielson pro- case, if multilateral rules do create deeper trans- vides a comprehensive review of existing trans- parency obligations, there must be some way to parency provisions in national, regional, and World ensure that these rules do not place an excessively Trade Organization (WTO) agreements, and the costly administrative burden, especially on poorer options for enhancing transparency under the countries. There is, accordingly, a great need for GATS. Transparency is, however, rather like the empirical investigation of the costs and benefits of trade policy equivalent to motherhood and apple increased transparency disciplines and of how the pie. Few would question its innate desirability. Two choice of optimal levels is today made at the issues arise, however, in the context of strengthen- national level. ing transparency disciplines. First, although trans- parency can help reduce concealed protectionism, it alone cannot eliminate the more persistent and PoY the more deeply embedded inefficiencies. Second, The problem of monopoly has two dimensions in although it is important to recognize the many services trade: the effect on conditions of access to benefits of enhanced transparency, it is also impor- markets and essential facilities for foreign produc- tant to acknowledge that its pursuit in greater ers and the effect on consumers. The chapters in quantities may also be costly. Accordingly, any new this volume have focused for the most part on the multilateral disciplines on transparency must be former issue, but we also make some comments based on a careful assessment of the benefits and about the latter problem. costs, both globally and nationally. Market failure resulting from natural monopoly For instance, ex ante transparency in the form of or oligopoly may create trade problems because obligations providing for consultations with all dominant incumbents can impede access to markets interested parties before the enactment of a new through their control of essential facilities. Because law or regulation will almost certainly have a higher of its direct effect on trade, this form of market fail- administrative cost than ex post transparency, ure typically will have to be addressed directly by whereby new regulations and regulatory decisions multilateral disciplines so that market-opening com- are made public after they have been made. Propo- mitments are not nullified or impaired. nents of strengthened transparency disciplines- The relevant GATS provision, Article VIII dealing strengthened notably through prior notification with monopolies and exclusive service providers, is requirements-point to the greater political legiti- in its current shape fairly limited in scope. As a con- macy likely to be attached to laws and regulations sequence, and as the essay by Daniel Roseman deriving from broad public consultations, and the describes, a reference paper featuring a number of attendant scope for lessening protectionist capture procompetitive regulatory principles was developed and the risk of inefficient regulatory design. in the context of the telecommunications negotia- Nonetheless, it is plausible to assume that tions to ensure that monopolistic or dominant sup- greater transparency can be associated with dimin- pliers would not undermine market access commit- ishing marginal benefits and increasing marginal ments. A number of chapters in this volume costs, and that there is an optimal level of trans- conclude that in the current set of GATS talks nego- parency that equates the two at the national level. tiators should consider whether and how such disci- The question then is why the national optimal level plines could be usefully applied to a variety of other may not necessarily be the global optimal. Simply network services, including transport (terminals put, why are multilateral rules on transparency and infrastructure), energy services (distribution needed? One possibility is that domestic trans- networks), and financial services (payment systems) parency may not translate into transparency for with a view to ensuring, among other things, that Domestic Regulation and Trade In Services: Looking Ahead 225 any major supplier of "essential facilities" provides that have greatly reduced both the optimal scale of nondiscriminatory conditions of access and use to operation and the importance of sunk costs, in all national and foreign suppliers. basic telecommunications, banking, and air and The effects of rules dealing with issues such as maritime transportation services the answer to "reasonable" and "cost-oriented" conditions of both questions is likely to be positive for some time. access to networks and pricing of services are con- Concerns about consumer interests and how they siderably more complex and will require more may be affected by monopolistic and other anticom- careful consideration. They also are likely to show petitive types of behavior are addressed in principle considerable variance and raise highly technical by GATS Artides VII and IX, but these articles pro- issues across various sectors. In such situations vide only for information exchange and consulta- generic disciplines may prove inadequate, a conclu- tion. Strengthened multilateral rules may be needed sion drawn by both Daniel Roseman (telecommu- to reassure small countries with weak enforcement nications) and Peter Evans (energy). capacity that the gains from liberalization will not be One possibly important issue that the chapters appropriated by international cartels.2 in this volume do not deal with concerns the poten- tial need for international rules to protect con- Regulatory impediments to Trade: sumers. Market power can be an issue even in the Is a Necessity Test Necessary? absence of government restrictions on entry. Despite changes in technology, it is far from clear When market failure is attributable to informa- that consumers in small markets necessarily will tional problems or externalities, multilateral trade secure access to competitively priced supplies of disciplines need not address the problem per se but telecommunications, transport, and financial ser- rather ensure that domestic measures to deal with vices even if all barriers to entry are eliminated. the market failure do not unduly restrict trade. The In some sectors, anticompetitive practices are same may be said of measures designed to achieve likely to be a problem. Two considerations would social objectives to the extent that they may be cov- seem relevant in determining whether a regulatory ered by GATS rules and subject to scheduled com- response may be necessary and, if so, what form it mitments. Such trade-restrictive effects can arise should take. One such consideration derives from from a variety of technical standards, prudential whether the national market is segmented from the regulations, and qualification requirements in pro- international market. If cross-border delivery is fessional, financial, and numerous other services, feasible then services trade resembles goods trade and from the granting of monopoly rights to com- and the size of the national market may be largely plement universal service obligations in services irrelevant in determining competitive conditions. such as health, transport, and telecommunications. In many cases, however, the cross-border delivery One means that has been suggested for disciplin- of services will be difficult, either for technological ing the trade- and investment-inhibiting effects of reasons or because of the nature of consumer this entire class of regulations is to complement the and/or regulatory preferences. For example, fixed- national treatment and market access obligations line local telecommunications services may be diffi- with the development of a "necessity" test. Such a test cult to supply without some form of commercial essentially leaves governments free to deal with presence, and consumers will often be reluctant to domestic economic and social objectives, provided buy life insurance or enter into other types of retail that any measures taken are no more burdensome financial services transactions with overseas firms. than necessary to achieve the relevant objective. Such In these cases, national market structures assume a test, for which a trade in goods equivalent is found critical importance. in the Agreement on Technical Barriers to Trade A second consideration is whether the mini- (TBT) and the Agreement on Sanitary and Phyto- mum efficient scale of operation is large relative to sanitary (SPS) measures, has long been in use as a the size of the market-or whether sunk costs are legal standard within the European Community. A important, if market contestability (i.e., the credi- necessity test also forms part of the accountancy dis- ble threat of new entry) is deemed to be the rele- ciplines agreed to by WTO members in 1998 and vant benchmark. Despite changing technologies described by Trolliet and Hegarty in this volume. 226 Domestic Regulation and Service Trade Liberalization In principle, a necessity test could be used to hardly sustainable and with some justification could encourage the adoption of economically efficient be seen as a threat to regulatory autonomy. If, on the policy choices in remedying market failures and in other hand, a Greek doctor is not deemed to be pursuing noneconomic objectives. For example, in "like" a Canadian doctor, the national treatment the case of professional licensing a requirement to discipline simply does not apply, and the Canadian requalify could be deemed unnecessarily burden- (provincial) licensing authorities are given a free some because the problem-inadequate informa- rein to do whatever they want. This is also likely to tion about whether individual practitioners possess be an unsatisfactory outcome. the required skills-could be remedied by a less The most reasonable argument would be to ask, burdensome test of competence (which is-and What is it that the Canadian licensing authorities should be-the main rationale of professional really need to do to ensure that foreign doctors do licensing regimes). not constitute a threat to the health of Canadian Important unanswered questions remain about citizens? Under such an approach, anything that the feasibility and desirability of embedding a strayed unduly from competence-based reasons for necessity test for services trade under the GATS. licensing (which quite legitimately can include a These questions include how might "necessity" be demonstrable command of local languages) should defined-or whether further definition is neces- be deemed inconsistent with national treatment. sary; whether "necessary to ensure the quality of But this is precisely a variant of the necessity test. the service" is sufficiently broad to allow for a host Some WTO members have raised the funda- of regulatory objectives; and how other elements, mental question of whether a necessity test is itself such as the reasonable availability of alternative "necessary," given the scope for addressing prob- measures (or the lack of them), should be taken lems via other means (such as transparency) and into account in resolving possible trade disputes. the concerns raised about the potential for such a It is difficult, however, to see how even the basic test to limit the full scope of possible government GATS disciplines of MFN and national treatment action to regulate service sectors. Indeed the very can be enforced without the application of some discussion of this issue has generated considerable similar test. In such situations a necessity test may controversy in regulatory and civil society circles, be more than a mere Article VI add-on. particularly in the Organisation for Economic Co- Consider first the national treatment obligation, operation and Development (OECD) area.3 As which requires that foreign services and service intractable and politically sensitive as these ques- suppliers receive no less favorable treatment than tions may be, it is doubtful that WTO members will the equivalent national services and suppliers. In be able to reach closure (in one way or another) on applying the traditional GATT/WTO two-step the Article VI.4 work program without a more approach of first establishing likeness and then thorough airing of the challenges posed by the pos- determining whether "like" foreign suppliers are sible adoption of a necessity test for services trade. receiving less favorable treatment, one can easily If policy sensitivities arise when necessity-type end up in a legal cul-de-sac. arguments are invoked in dealing with overtly dis- For example, consider the hypothetical case of a criminatory (i.e., national treatment-inconsistent) medical doctor from Greece arriving in Canada regulatory measures, the application of a necessity with a view to practicing medicine there. Imagine test to measures that satisfy nondiscrimination dis- that the Canadian licensing authorities ask him to ciplines tends to be even more controversial. This is requalify fully in his new country of adoption. so because under such circumstances a necessity Would such a requirement be inconsistent with test could be seen as suggesting that domestic regu- national treatment? The Canadian licensing author- latory conduct should somehow be subordinated to ities could legitimately allege that a doctor trained trade policy imperatives in light of its possible in Greece is not "like" a doctor trained in Canada. trade- or investment-impairing effects. What would a WTO panel say? If it said that a Greek The possible new disciplines called for under the medical doctor was like a Canadian doctor, then Article VI.4 work program are to deal with regula- Canada would not have the right to impose even a tory measures not addressed by Articles II (MFN), slightly greater burden on the Greek doctor. This is XVI (Market Access), and XVII (National Treat- Domestic Regulation and Trade in Services: Looking Ahead 227 ment) of GATS. Identifying the specific types of Agreements as well as in Article XX (Exceptions), measures to which Article VI.4 disciplines would which draw attention to the need for regulatory apply has long bedeviled WTO members. Indeed, measures to be "the least trade restrictive alternative the empirical (and commercial) significance of reasonably available to achieve the regulatory goal." strictly nondiscriminatory trade-impeding mea- A second model comes from the proportionality sures has yet to be established satisfactorily. More- tests codified under European Union law and over, even if such measures do matter, how they applied in a number of rulings by the European should be dealt with under the GATS remains quite Court of Justice on the internal trade effects of reg- unclear. ulatory measures maintained by European Com- A deliberately far-fetched example helps to high- munity member countries. Proportionality has light some of the challenges negotiators would tended to include least trade-restrictive analysis and need to contend with in developing a necessity test other tests, notably with regard to desirability applicable to nondiscriminatory regulatory mea- (means-end rationality), cost-benefit analysis, and sures. Imagine that a WTO member required that feasibility. A third model stems from proposals call- all taxi drivers be certified cardiologists because it is ing for the development of necessity-based criteria simply socially unacceptable in that country for creating a presumption in favor of economically people to die of heart attacks while trapped in traf- "efficient" regulations and regulatory outcomes fic jams. On its face, this would seem to be an exces- (Gamberale and Mattoo 2002). Whatever model (if sively burdensome regulatory requirement. It is, any) is ultimately adopted in the GATS, one rule of however, strictly nondiscriminatory and so the thumb may well be to avoid creating rules whose question is, should WTO rules prohibit it? Would enforcement would require judicial decisions to be such a prohibition not be considered unduly intru- rendered on highly delicate policy matters. Rather, sive? David Leebron's depiction of the tentativeness the rules should serve mainly to target truly egre- of U.S. judicial rulings on challenges to nondis- gious regulatory measures. Perhaps it would be suf- criminatory measures is a sobering reminder of the ficient to ensure that a nondiscriminatory measure political difficulties encountered in making rules in is "not obviously unnecessary" to secure compliance this area. Moreover, it remains unclear that nondis- with a legitimate public policy objective. Following criminatory measures other than quantitative the example of the accountancy disciplines, it may restrictions (i.e., other than those addressed by also be desirable to provide guidance to prospective GATS Article XVI in scheduled sectors) are impor- WTO panelists by drawing up an illustrative list of tant sources of trade or investment friction, or that legitimate public policy objectives to which pre- they are comparable in economic significance to de sumptions of regulatory immunity would apply at facto discriminatory measures. first view. A central challenge facing those WTO members who favor embedding a necessity test in the GATS H will be to give more precise meaning to the notion H of necessity and to the conditions under which Harmonization and mutual recognition can be such a discipline would be triggered. At a minimum seen as complements of rather than substitutes for it would seem necessary to err on the side of per- multilateral rules on domestic regulation. Three missiveness to make any such new disciplines polit- core questions arise under this cluster of issues. ically acceptable. A balance would need to be struck First, where is it feasible and desirable to develop between political concerns about the intrusiveness international standards for services trade? Second, of multilateral rules and the need to ensure that what should be the link between the GATS and protectionist or needlessly burdensome regulation international standards? And, third, how should the does not undermine market access commitments. GATS deal with plurilateral or bilateral mutual Several existing models could serve as a starting recognition? point for discussions along these lines in a GATS The pessimism that calls for regulatory harmo- setting. One such model is offered by the wording of nization typically generate is based on the absence necessity tests already found in the General Agree- of widely accepted international standards in ser- ment on Tariffs and Trade's (GATT) TBT and SPS vices. Where such standards do exist, as in financial 228 Domestic Regulation and Service Trade Liberalization services (banking, securities, and insurance) or Organization for various categories of services maritime transport, meeting them often tends to be (including the means of producing and supplying seen as a first step toward acceptability rather than them). as a sufficient condition for market access. The Another concrete example of forward move- GATS, like the GATT, does not specifically require ment in international standardization involving the use of international standards. It generally pro- developing countries is provided by the Interna- vides weaker incentives for the use of such stan- tional Monetary Fund/World Bank Financial Sec- dards than do the SPS or the TBT Agreements, and tor Assessment Programs, which are helping many it does not provide a presumption of compliance as jurisdictions assess their compliance with interna- do those other two agreements.4 tional standards in the financial sector with the aim It is unlikely that meaningful international stan- of addressing any underlying weaknesses. Carried dards for most services will be developed any time out in a voluntary and participative manner out- soon, but it bears noting that in those areas where side the trade policy framework, such regulatory global standards do exist, the likelihood of dis- cooperation may nonetheless be expected to assist guised or needlessly restrictive impediments to the progressive, orderly pursuit of liberalization of trade and investment may be significantly lower. trade and investment in financial services. This may in part occur because internationally With regard to mutual recognition agreements, agreed norms can more easily reflect best-practice three observations seem in order. First, such agree- regulatory policy. The existence of such standards ments cannot be made to happen. Second, they do also may significantly facilitate trade and invest- not seem to be happening-at least not on any ment, particularly in the case of cross-border trade major trade-influencing scale. Often touted as a where international standards may help overcome desirable alternative to regulatory harmonization the various forms of information asymmetries that for reducing transaction costs, in practice there are hold back such trade-and its commensurate liber- relatively few examples of successful, operative alization under the GATS. MRAs in services trade (see Beviglia-Zampetti 2000 Accordingly, efforts should be directed to ensure and Nicolaidis and Trachtman 2000). Third, even if that the GATS creates a stronger presumption in MRAs were to happen in greater numbers, it is favor of genuinely international standards in ser- unclear whether they would always be desirable. vices trade. As with recognition agreements (see A multilateral agreement like the GATS cannot below), efforts at developing international stan- require countries to conclude MRAs-just as any dards for services trade are likely to require greater provision such as GATS Article V (Economic Inte- doses of technical assistance and capacity building. gration) or GATT Article XXIV cannot make This may be done usefully at the national and regional integration agreements happen. As in the regional levels (particularly because geographic case of regional agreements, multilateral disciplines and historical/cultural proximity may be expected can be more or less permissive with regard to to ease regulatory convergence). mutual recognition. At the multilateral level, efforts to promote the This in turn raises a key question: where and adoption of international standards invariably will how strong are the incentives to conclude MRAs? be made outside the WTO framework. The WTO is The practice of MRAs suggests that their scope is not in the business of making regulatory standards. quite limited; they are invariably concluded Rather, its remit lies in how such standards are for- between very similar countries. Even in a region mulated and implemented if and when they affect with as strong an integrationist dynamic as the trade. The relevant institutions for promoting European Union, and despite a significant level of international standards for services are to be found prior and/or complimentary (minimal) regulatory in various specialized regulatory institutions, such harmonization, the effect of MRAs has been lim- as the Bank for International Settlements for bank- ited by the unwillingness of many host country reg- ing standards, the International Telecommunica- ulators to cede full control (see Commission of the tions Union for telecommunications, the Interna- European Communities 2002). It should come as tional Civil Aviation Organization for air transport no surprise that MRAs have yet to exert significant services, and the International Standardization effects on services trade. Domestic Regulation and Trade in Services: Looking Ahead 229 Such an outcome in turn raises the question of regulation for two main reasons. First, the develop- the benefits and costs of MRAs. The analogy with ment of such disciplines can play a significant role regional integration agreements is useful here again in promoting and consolidating domestic regula- because MRAs can be likened to sector-specific tory reform efforts. The experience in telecommu- preferential arrangements. In circumstances where nications in many developing countries is a power- regulatory barriers are prohibitively high-one can ful example of this possibility (see Roseman 2001). imagine autarchy as the ultimate example-recog- Secondly, such disciplines can help exporters in nition can only create trade. But if the barriers are developing countries address potential regulatory not that high, selective recognition can have dis- barriers to their exports in foreign markets. For criminatory effects and lead to trade diversion. The example, unless disciplines are developed to deal result may well be to create trade according to a with potentially restrictive licensing and qualifica- pattern of mutual trust rather than on the basis of tion requirements for professionals, market access the forces of comparative advantage. For instance, commitments on the movement of natural persons one can readily observe OECD countries making may have limited commercial meaning. Adopting progress (albeit limited) toward MRAs in profes- best regulatory practices or adhering to interna- sional services but avoiding those agreements with tional standards similarly may help developing countries such as the Arab Republic of Egypt, countries overcome regulatory hurdles in foreign India, or the Philippines. markets. GATS Article VII (Recognition) strikes a delicate It is important to note that there are limits to balance by allowing such agreements, provided that what can be achieved at the multilateral level third countries have the opportunity to accede or because many key regulatory challenges must still demonstrate equivalence. Thus, Article VII has a be addressed at the national level, particularly in desirable open-ended aspect that Article V (dealing the realm of building credible and independent with integration agreements) does not have. This regulatory institutions. This is so because multi- makes it particularly worrisome that many MRAs lateral trade rules are often primarily designed to require notification by WTO members under Arti- ensure market access and not directly to promote cle V rather than under Article VII. economic efficiency or social welfare. The key concern for any multilateral agreement For developing country negotiators, an impor- should not be how those who enjoy preferential tant question is how best to harness multilateral access are treated, but how those who do not enjoy rulemaking efforts with a view to promoting sound such access are treated. Somewhat ironically, the regulatory institutions and practices at the national only line of defense on the rights of third countries level. Attention must be given in this context to the could well come from a necessity test aimed at need for a proper sequencing of regulatory reform ensuring that such countries would not be subject and liberalization efforts. Technical assistance for to unnecessarily burdensome regulation even if the development of regulatory capacity in develop- they were not parties to an MRA. ing countries is bound to be a crucial accompani- Because of the potential of MRAs to create trade ment to future services trade liberalization. and investment distortions, bilateral or plurilateral Advancing our understanding of the interface recognition agreements should respect the nondis- between domestic regulation and services trade crimination principle mandated by GATS Article remains critically dependent on the quality of pol- VII. As a rule, such agreements should not be noti- icy dialogue between the trade and regulatory com- fied under GATS Article V (Economic Integration) munities. The GATS has been instrumental in but rather be open to all eligible participants under prompting a much needed rapprochement between the terms of Article VII. these two communities, promoting mutual learn- ing and helping dispel misunderstandings. Much Regulatory Reform remains to be done to enhance the quality and and Development depth of such a dialogue, which in today's more politically charged negotiating environment must Developing countries have much to gain from also involve broad participation by civil society strengthened multilateral disciplines on domestic organizations, but without such dialogue it will be 230 Domestic Regulation and Service Trade Liberalization difficult to make much headway on this difficult References policy interface. Although probably more acute in The word "processed" describes informally produced works the OECD area, such a challenge is equally impor- that may not be available commonly through libraries. tant for developing countries as they acquire a Beviglia-Zampetti, Americo. 2000. "Market Access through stake in services liberalization and the mul- Mutual recognition: The Promise and Limits of GATS Article greater stazce m servlces llDerallzatlon and the mul- Vll." In Pierre Sauve and Robert M. Stern, eds., GATS 2000: New tilateral trading system more generally. Directions in Services Trade Liberalization. Washington, D.C.: Brookings Institution Press. Commission of the European Communities. 2002. "Report Endnotes from the Commission to the Council and the European Parlia- ment on the State of the Internal Market for Services.' 1. The existence under GATS of a multilateral framework of COM(2002)441. Brussels, July 30. disciplines of generic application, coupled with a series of Gamberale, Carlo, and Aaditya Mattoo. 2002. "Domestic annexes addressing sectoral specificities, suggests that no Regulations and Liberalization of Trade in Services.' In Bernard single answer can be given to the above tensions. The policy Hoekman, Aaditya Mattoo, and Philip English, eds., Develop- tensions arising from sectoral diversity appear to require ment, Trade, and the WTO. Washington, D.C.: World Bank. flexible (and dual) rulemaking responses. Nicolaidis, Kalypso, and Joel Trachtman. 2000. "From 2. An important reason for developing a first-best interna- Policed Regulation to Managed Recognition in GATS." In Pierre tional response to these practices is to prevent recourse to an Sauve and Robert M. Stern, eds., GATS 2000: New Directions in inferior national response. It bears recalling in this regard Services Trade Liberalization. Washington, D.C.: Brookings Insti- that the costly cargo-sharing schemes imposed by many tution Press. developing countries in the maritime sector were primarily OECD (Organisation for Economic Co-operation and a reaction to the perceived power of maritime conferences. Development). 2002. GATS: The Case for Open Services Markets. 3. See OECD (2002) for a further depiction of the public pol- Paris. icy controversy surrounding the GATS and its alleged Roseman, Daniel. 2001. Economic Impact of Trade and Invest- effects on the right to regulate the supply of services. ment Liberalization in the Telecommunications Sector-A Review 4. Such a presumption can be found in Article 2.5 of the TBT of the Literature for Selected Countries. Ottawa: Department of Agreement and Artide 3.2 of the SPS Agreement. Foreign Affairs and International Trade. Processed. AUTHORS AND THEIR AFFILIATIONS Aaditya Mattoo Richard Janda The World Bank McGill University, Montreal Pierre Sauve Stijn Claessons Groupe d'Economie Mondiale, University of Amsterdam Institut d'Etudes Politiques de Paris Claude Trolliet Keiya lida and Julia Nielson World Trade Organization Trade Directorate, Organisation for Economic Co-operation and Development, Paris John Hegarty The World Bank Joel P. Trachtman The Fletcher School of Law and Diplomacy, Peter C. Evans Tufts University Centerfor International Studies, Massachusetts Institute of Technology David W. Leebron Dean and Lucy G. Moses Professor of Law, David Luff Columbia University School of Law University of Liege, Belgium Daniel Roseman Roseman Associates, Ottawa, Canada i iii i i i i i II INDEX accountancy disciplines: Article VI.4 and, 3-4, 31; audit Australian Salmon case, 62 networks and reform, 158-59; definitions of services, Basel Committee, 32-33, 35, 36-37 162-63; European Union framework, 155-56; inter- California's retail competition suspension, 185-86 national regulatory framework need, 161-62; regula- Canada and telecommunications services, 92-93, tory reform success chances, 160; sector regulation 96-97, 98 description, 159-60; standardization efforts, interna- Codex Alimentarius, 28, 37 tional level, 157-58; transparency considerations, Colombia and transportation services, 111 , 112 3-4; transportation services applicability, 121-22; Commerce Clause, U.S. Constitution: burdensome regu- WTO work on trade liberalization (see WTO and lation criterion, 46-47; discrimination prohibition, trade liberalization) 45; free trade application, 50-5 1; GATS applicability, air transport services: negotiation history, 112; trade- 51-53; nondiscriminatory legislation measures, distorting burdens, 1 18t. See also transportation 45-46; purpose and use, 44-45; trade in services services application, 48; weighted balancing test, 47-48 Annex on Financial Services, 196 competition policy in financial services: banks' special Annex on Movement of Natural Persons: accountancy status change, 131, 135; challenges of contestable disciplines and, 154-55; transparency and, 14 markets, 137-38; competition effects, 139; consumer Annex on Negotiations on Maritime Transport Services, and investor protection, 135-36; functional 109 approach, 137; global public policy changes, 136; Article VI.4: accountancy disciplines, 3-4, 31; key policy institutional approach, 136-37; market infrastructure issues, 5-6; need for compromise, 29; opening of dimensions, 138-39; production approach, 138; pru- services markets role, 3; parameters to evaluate, dential regulation and, 136; standards-based 28-29; requirements of, 3; telecommunications refer- approach, 134-35; telecommunications model appli- ence paper and, 4; transportation services and, 113, cability, 139 119-20; weakness of Article VI.5, 31-32 Council for Trade in Services (CTS), 149. See also Work- Article VI.5: conditions imposed on health services, ing Party on Professional Services 203-6; nullification or impairment, 66-69; scope for Decision on Professional Services, 150 health services, 202-3; weakness of, 31-32 developing countries: competition policy and, 142; Article XIV and health services, 207-9 energy services considerations, 181-83; financial lib- Asbestos case, 61, 63, 74 eralization stages, 140; financial services differences Asian Pacific Economic Cooperation (APEC) forum, and similarities, 139-40; financial stability promo- 90-91 tion, 141-42; national level regulatory practices, Australia: energy services commitments, 174; maritime 12-13; required supervision for financial services, transport services negotiations, 1 1; negotiating pro- 140-41; trade in services considerations, 229-30; posal for accountancy sector, 153 transparency disciplines in RTAs, 10-11 233 234 Domestic Regulation and Service Trade Liberalization Disciplines on Domestic Regulation in the Accountancy and services covered, 196-97; monopoly control and, Sector, 68, 151-52 206-7; monopoly suppliers and, 197-98; most- Doha Development Agenda, 168 favored-nation treatment and, 197; national treat- economic needs tests (ENTs), 21-22 ment commitments, 201; relevant situations, 196; electricity and the GATS, 175-77 right to regulate services, 202; scheduling of services, Emerging Markets Committee of IOSCO, 34 200-201; subsidies and, 198; supply-based competi- energy services: company establishment restrictions, tion services, 195; telecommunications infrastructure 170; costs of barriers, 171-72; cross-border restric- access and, 201-2; transparency and, 197 tions, 169-70; GATS framework and (see GATS and GATS and telecommunications services: complaints over energy services); host country regulatory processes, resolutions and implementations, 91; GATS annex, 170; market access terms and conditions, 170-71; 85-87; identification of needed tasks, 90; lack of market liberalization, 168-69; monopoly control, domestic references to international trade obliga- 171; negotiations' status, 168; reference paper pro- tions, 91-92; recommendations for economies, posal (see reference paper proposal for energy serv- 90-91; regulatory framework outcome, 90 ices); renewable portfolio standards, 170 GATS and transparency: administrative burden reduc- ENTs (economic needs tests), 21-22 tion, 16-17, 18; binding disciplines vs. best endeav- European Union: accountancy framework, 155-56; mar- ors, 15-16; flexibility enhancement, 16; horizontal vs. itime transport services negotiations, 111 sectoral disciplines application, 14-15; measures cov- extraterritorial protection issues, 75-76 ered by GATS, 13-14; proposals for enhancing, financial services: Article VI.4 work program for (see 18-19; Reference Paper proposal, 20-21; special and Article VI.4); competition policy intricacies, 131-32; differential treatment provisions, 17; summary, 16 competitive structures changes, 133-34; developing General Agreement on Tariffs and Trade (GATT): con- countries considerations, 139-42; GATS and WTO formity with international standards, 71; extraterri- roles, 143-44; globalization and regulatory reform, torial protection issues, 76; harmonization, 69; health 131; link between liberalization and regulation, 130; services relevance, 192-93; lesson learned for trade in physical structures changes, 133-34; proposals for services, 59; necessity and proportionality, 64-65; greater integration, 37-38; prudential carve-out, 30; necessity test, 68-69; nondiscrimination provisions, public policies and, 130; regulation and competition 61; nullification or impairment, 69; product-process policy (see competition policy in financial services); issues, 76 regulatory barriers, 29-30; rule of necessity or pro- General Agreement on Trade in Services (GATS): appli- portionality possibility, 32; sector changes' affect on cability of U.S. Commerce Clause, 51-53; Article VI regulatory framework, 130; special nature of banks, (see Article VI.4); challenges in negotiations, 2; con- 131, 135; SSBs soft law process and (see standard set- formity with international standards, 71; energy serv- ting bodies); technological advances, 132-33; WTO ices applicability (see GATS and energy services); delegation to SSBs, 30-31 extraterritorial protection issues, 76; financial serv- Financial Stability Forum (FSF), 37 ices reform and, 31-32, 143-44; harmonization, 70; France and telecommunications services, 93 health services applicability (see GATS and health GATS and energy services: applicability to regulatory services); horizontal issues, 4; key policy questions, reversals, California, 185-86; applicability to regula- 5-6; levels and basis of regulatory goals, 73; liberal- tory reversals, U.K., 186-87; countries making com- ization vs. deregulation, 1-2; loss of sovereignty con- mitments, 174; developing countries considerations, cerns, 2; measures referred to in, 13-14; necessity and 181-83; domestic regulation, 173; electricity and, proportionality, 65-66; nondiscrimination provi- 175-77; emergency safeguards, 184; energy classifica- sions, 62-64; possible responses to trade in services, tions and definitions, 174-77; government procure- 223; product-process issues, 76; prudential carve-out ment, 184-85; issues to be addressed, 175; market for financial services, 30; sectoral issues, 4; subna- access, 173; modes of supply relevant to energy, 172; tional measures categories, 14; telecommunications monopoly control, 173; most-favored-nation treat- services applicability (see GATS and telecommunica- ment, 172; national treatment, 173; public policy tions services); transparency and (see GATS and objectives and, 183-84; transparency, 172-73 transparency); transportation services applicability, GATS and health services: additional commitments, 207; 111-12; Understanding on Financial Services, 32; Article VI.5 conditions, 203-6; Article VI.5 scope, U.S. domestic law as a model (see United States disci- 202-3; Article XIV exceptions, 207-9; commercial plines of state regulations); WTO lessons learned (see basis services, 194-95; definitions and classifications WTO domestic regulation lessons learned). See also of services, 199-200; exclusion in Annex, 196; exist- trade in services ing flexibility, 209-10; full commitments conditions, Government Procurement Agreement (GPA), 193 210-11; general obligations imposed on govern- harmonization requirement: GATS, 70; GATT, 69; SPS, ments, 206; good faith application, 209; horizontal 69-70; TBT, 69-70; trade in services and, 227-29 disciplines and, 197; international trade and, 198-99; health services: GATS and (see GATS and health serv- market access commitments, 201; modes of supply ices); regulatory issues, 192; summary, 216-17; WTO Index 235 rules' adequacy assessment (see WTO rules' adequacy regional trade agreements (RTAs), 10-11 for health services); WTO rules applicability, 192-93 Sanitary and Phytosanitary Agreement (SPS): approach Hong Kong and maritime transport services, 111 taken by, 9, 28; conformity with international stan- Hungary and energy services commitments, 174 dards, 70-71; extraterritorial protection issues, 76; IAIS (International Association of Insurance Supervi- financial services and, 37; harmonization, 69-70; les- sors), 34-35 sons learned from trade in services, 58-60; levels and ICAO (International Civil Aviation Organization), basis of regulatory goals, 72-73; necessity and propor- 109, 123 tionality, 65; nondiscrimination provisions, 61-62; IMF support of Basel Core Principles, 36-37 product-process issues, 76; transparency require- IMO (International Maritime Organization), 109, 123 ments, 9-10; transportation services applicability, information technology and financial services industry, 122-23 132-33 securities regulation, 33-34 insurance regulation, 34-35 Shrimp case, 62 interconnection pricing in telecommunications services, Singapore and maritime transport services, 111 95-96 SPS. See Sanitary and Phytosanitary Agreement International Association of Insurance Supervisors standard setting bodies (SSBs): Basel Committee, 32-33; (IAIS), 34-35 critique of, 35; IAIS, 34-35; IMF support of Basel International Civil Aviation Organization (ICAO), Core Principles, 36-37; integration proposal, 37-38; 109, 123 international financial institutions and, 36; IOSCO, International Maritime Organization (IMO), 109, 123 33-34; trade restrictive impact of, 36; unilateral use International Organization of Securities Commissions of, 36; WTO delegation to, 30-31 (IOSCO), 33-34,35 Technical Barriers to Trade (TBT): conformity with Internet, 99, 138-39 international standards, 71; extraterritorial protec- IOSCO (International Organization of Securities Com- tion issues, 76; harmonization, 69-70; lessons learned missions), 33-34, 35 for trade in services, 58-60; levels and basis of regula- Japan and maritime transport services, 111 tory goals, 72; necessity and proportionality, 65; Korea: maritime transport services negotiations, 111; nondiscrimination provisions, 62; product-process telecommunications services and, 92, 93, 98 issues, 76; transparency requirements, 9-10; trans- Korea-Beef case, 62, 74 portation services applicability, 122-23 maritime transport services: negotiation history, 109, Technical Committee of IOSCO, 34 111-12; trade-distorting burdens, 1 17t. See also telecommunications services: background of existing transportation services obligations, 84-85; competition policy applicability, mode 4: inquiry points considerations, 22-23; options 139; country examples, 92-93, 96-97, 98; GATS disci- for enhancing transparency of, 21-22 plines impact on domestic regulation (see GATS and mutual recognition agreements (MRAs), 228-29 telecommunications services); health services and, national level regulatory practices, 11-13 201-2; independent regulator use need, 100-101; necessity and proportionality: financial services and, 32; interconnection pricing safeguards, 95-96; licensing GATS, 65-66; GATT, 64-65; necessity test, 68-69, need, 95; PTTNS and basic telecoms definitions, 151, 225-27; nullification or impairment, 66-69; 99-100; Reference Paper objective and provisions, 4, proportionality test, 69; recognition and necessity, 88-90, 95; relevance of GATS to other services, 102-3; 69; SPS, 65; TBT, 65 transparency need, 94; unbundling need, 96-97, 98; New Zealand: air transport services negotiation, 112; universal service obligations and, 101-2; worldwide energy services commitments, 174 approaches, 97 nondiscrimination: GATS, 62-64; GATT, 61; SPS, 61-62; trade in services: developing countries considerations, TBT,62 229-30; forward moving standardization, 228; har- Norway and maritime transport services, 111 monization, 227-29; key issues, 221-23; lessons nullification or impairment, 66-69 learned from WTO negotiations, 58-60; monopolies' Pike v. Bruce Church, Inc., 46,47 impact on markets and consumers, 224-25; mutual privileges and immunities clause, U.S. Constitution, recognition agreements, 228-29; necessity test mod- 48-49 els, 227; possible GATS and domestic policy-based public telecommunications transport network (PTTN), responses, 223; potential need for international rules, 86,99 225; regulatory barriers, 29-30,225-27; similarity to Reference Paper for telecommunications: objective and trade in goods, 223; transparency, rationale and provisions, 4, 88-90, 95; transportation services effects, 224. See also General Agreement on Trade in appiicability, 121 Services reference paper proposal for energy services: competi- Trade Policy Review Mechanism (TPRM), 23 tion safeguards, 179; horizontal vs. sector approach, transparency: accountancy disciplines, 3-4; benefits to 177; independent regulation, 180-81; third-party foreign firms, 8; description and importance, 7-8; access and, 178; transparency and, 178-79 energy services and, 172-73, 178-79; health services 236 Domestic Regulation and Service Trade Liberalization and, 197; multilateral level disciplines, 8-10; national World Trade Organization (WTO): delegation to SSBs, level disciplines, 11-13; options for enhancing under 30-31; financial services reform role, 31-32, 143-44; GATS (see GATS and transparency); rationale and health services applicability (see WTO rules' ade- effects, 224; summary, 23-24; in telecommunications quacy for health services); legislative capacity of, 70; services, 94; transportation services applicability, 122 legitimacy crisis, 124-25; lessons learned (see WTO transportation services: applicability of existing disci- domestic regulation lessons learned); trade liberaliza- plines, 121-23; Article VI.4 and, 13, 119-20; diffi- tion and (see WTO and trade liberalization); trans- culties in structuring regulations, I 17-18; energy- parency and, 21-22 related shipping services and, 175; GATS WTO and trade liberalization: existing barriers to applicability, 1 11-12; private or public goods regula- accountancy trade, 153; foreign ownership issues, tory failures, 1 1 5, 116t; private or public goods regu- 154; GATS and WTO roles, 153-54; movement of latory regimes, 14-15; rationales for regulation, 1 14; persons issues, 154-55; negotiating proposals offered, regulatory burdens, 116-17, 118t; regulatory disci- 153; Uruguay Round outcomes, 149-50; WPPS (see plines and liberalization, 112-14; summary, 123-24 Working Party on Professional Services) U.K's moratorium on gas-fired power plants example, WTO domestic regulation lessons learned: balancing, 186-87 73-75; comparison of existing disciplines (see WTO unbundling of telecommunications services, 96-97 lessons learned, comparison of existing disciplines); United States: as a domestic model for GATS (see United differences between standards, 77; liberalization vs. States disciplines of state regulations); maritime deregulation, 58-59; recommendations for GATS, transport services, 109; negotiating proposal for 77-78; similarity to trade in goods, 59; summary of accountancy sector, 153; telecommunications serv- recommendations, 58 ices and, 97, 98 WTO lessons learned, comparison of existing disci- United States disciplines of state regulations: applicabil- plines: conformity with international standards, ity to GATS, 51-52; burdensome regulation criterion 70-72; extraterritorial protection issues, 75-76; har- applied to GATS, 52-53; Commerce Clause (see monization requirements (see harmonization); inter- Commerce Clause, U.S. Constitution); international nal consistency, 73; legislative capacity related to trade applicability, 50-51; legal standards applied to judicial scrutiny, 71-72; levels and basis of regulatory national markets, 49-50; summary, 53-54; trade in goals, 72-73; necessity and proportionality (see services and, 48-49 necessity and proportionality); nondiscrimination United States v. Shrimp, 30, 32, 119 (see nondiscrimination); precautionary principle, 73; Uruguay Round: accountancy disciplines and, 149-50; product-process issues, 75-76; recognition/equiva- Decision on Professional Services, 31; telecom disci- lence, 75 plines and, 84-85 WTO rules' adequacy for health services: access to infra- W/120 issues, 175 structure, 215-16; access to services, 211-12, 214-15; Working Party on Professional Services (WPPS): back- applicable agreements, 192-93; economic regulation ground, 150; bilateral agreements use, 150; Disci- and control, 212-13, 215; hospital services definition plines on Domestic Regulation, 68, 151-52; effective- and quality, 211; hybrid competition systems, ness of, 152; recommendations on disciplines, 150 213-14; medical services definition and quality, 214 T R A D E A N D D E V E L O P M E N T S E R I E S "International barriers to services trade are deeply intertwined with national regulatory, investment, and immigration policies. Accordingly, the liberalization of trade in services is considerably more complex than the liberalization of trade in goods. Sector-specific issues abound. This volume sheds much light on the challenges facing the trading community in this area, with essays from a distinguished group of authors. Academics and policymakers with an interest in this vitally important and dynamic area should find the volume of great value." - ALAN 0. SYKES Frank and Bernice Greenberg Professor of Law and Director for Curriculum University of Chicago Law School "Services liberalization has been and will continue to be the engine of trade liberalization, if that outcome is to occur at all. Mattoo and Sauve provide one of the best guides to services trade and all its technicalities, ups and downs. It is must reading for all those concerned, as I am, about the future of the world trade order." -ROBERT LITAN The Brookings Institution "This book is a welcome and timely addition to the small but growing list of publications on the vital subject of international trade in services. With a new trade negotiation in process, the insights provided by this group of authors about the impact of th GAIS on domestic economic regulation will be extraordinarily useful." -JOHN H. JACKSON University Professor of Law, Georgetown University Law Center (GULC), Washington, D.C.; Editor in Chief, Journal of International Economic Law Jeannette Marie Smith 00803 ISN 3 MC C3-301 WASHINGTON DC L9IIIllg!llIIII[II 15408llllll OXFORD uJN1v5DaZT P&.5s =_. Z-e'- ~ -- __________1 _ I I .~~~~~~~~~~~~~~~~~~~~~~ 21 35