How to Read GATS Negotiating Requests and Offers

Vicente Paolo B. Yu III
WTO Program Officer
Friends of the Earth International
yuvice@philonline.com
www.foei.org

30 July 2002
Geneva, Switzerland

Trade Information Project
(CIEL-IATP-FOEI)

I. Introduction

This document is intended to assist readers gain a basic understanding of the contents of the negotiating requests and offers relating to the liberalization of trade in services that countries who are Members of the WTO are now submitting to each under the negotiations mandated under the WTO General Agreement on Trade in Services (GATS). It identifies some basic FAQs, or "frequently asked questions," and provides short answers thereto relating to GATS requests and offers.

The GATS is an international trade agreement in the WTO system that establishes the multilateral trade rules governing cross-border trade in services. All WTO Members are bound by the provisions of the GATS as part of their treaty obligations under the WTO Agreement. Any non-compliance or violation by them of their GATS obligations and commitments may render them open to binding and economically enforceable dispute settlement proceedings in the WTO.

The GATS requires WTO Members to once more negotiate with each other with the objective of achieving further "progressive liberalization" of trade in services. WTO Members are expected to make requests or offer GATS commitments to their trading partners. This will allow or make it easier for the services and service providers of the requester to enter or to provide cross-border services to the consumers of their trading partners.

II. Some FAQs About GATS Negotiating Requests and Offers

1. What are the Different Modes of Supply of a Service under the GATS?

The GATS identifies four modes of supply of a service for which specific commitments may be taken:

Mode 1 -- "cross-border supply of services" in which the service is supplied from the territory of one Member into the territory of another Member -- i.e. a Mexican electric utility company provides electricity (networked energy) services to a neighboring town in California;

Mode 2 -- "consumption abroad" or cross-border consumption of services in which the service is supplied in the territory of one Member to a service consumer coming from another Member -- i.e. an Argentinean goes to the United States and makes use of the services of a US hotel or US bank while there;

Mode 3 -- the establishment of "commercial presence" in which the services is supplied by setting up a business or professional establishment, such as a subsidiary corporation or a branch or representative office, in the territory of one Member by a service supplier of another Member -- i.e. Shell decides to invest in an oil refinery project in Nigeria and does so by creating Shell Nigeria as a separate subsidiary corporation under Nigerian law to take control of the project; or US bank Citibank decides to take advantage of new laws liberalizing the financial and banking sector in the Philippines by setting up a branch office there; and

Mode 4 -- "movement of natural persons" involves a "natural person" -- i.e. human staff -- from one Member going to the territory of another WTO Member to provide a service there for short-term, non-immigrant, business-related purposes -- i.e. a corporation based in the United States sends a manager to a branch office in Qatar to manage its operations for three years, or an information technology professional from India is hired by a German firm to work in Germany for five years.

2. How do WTO Member States commit themselves to services liberalization under the GATS?

All WTO Member States are expected to have a "Schedule of Specific Commitments" under the GATS. This is the list of commitments for every selected service sector that WTO Members came up with during the Uruguay Round, and are expected to come up with as a result of the GATS 2000 negotiations. The focus of the GATS 2000 negotiations is to "improve" -- i.e. increase the level of liberalization -- on the GATS commitments made during the Uruguay Round.

WTO Members can make commitments in each service sector or sub-sector that it wants to make commitments on in one, some, or all of the 4 modes of supply.

Theoretically, WTO Members may make commitments only in those services sectors or sub-sectors, and modes of supply, which they wish to make commitments in. This means that WTO Members, especially developing countries, do not need to make any commitments at all unless they feel that they are ready to make such commitments. However, the existing power imbalances in the WTO, and the economic pressure for liberalization exerted by industrial countries against developing countries for further services liberalization, can mean that developing countries will be effectively forced to make GATS commitments that they are neither willing nor ready to provide.

In making their commitments, WTO Members can specify the limitations or conditions under which they will allow foreign services and service providers under the 4 modes of supply above into their domestic market and compete with domestic services and service providers. These limitations or conditions can be with respect to "market access" or to "national treatment."

"Market Access (MA) Limitations" -- these are restrictions on the entry of foreign services or service suppliers into the domestic market. Those limitations that can be included by WTO Members in their commitments are listed in GATS Article XVI.

"National Treatment (NT) Limitations" -- these are laws, rules, or regulations that effectively discriminate against foreign in favor of domestic services and service suppliers, or provides for market competitive conditions that favour domestic over foreign services and service providers. The circumstances under which WTO Members can impose GATS-consistent national treatment limitations or conditions are specified in GATS Article XVII.

WTO Members, in listing the MA or NT limitations or conditions that they wish to include in their Schedules of Specific Commitments, may specific any limitation or condition even if such limitation or condition is not currently provided for by their national legislation or rule-making. By doing so, they provide themselves with more regulatory flexibility that would allow them to impose such limitations or conditions in the future if such are needed.

3. What Kind of Commitments May be Requested or Offered?

A WTO Member can, for each mode of supply and for each service sector or sub-sector, request for, or offer, any of the following commitments:

None -- A WTO Member writes "none" in its schedule of commitments if it wishes to request, offer, or commit to, full liberalization. This means that there will be not be any limitations on market access or national treatment for the service sector and mode of supply in which this commitment is written;

Unbound -- A WTO Member writes "unbound" in its schedule of commitments for a given sector or mode of supply if it wishes to remain free to introduce or maintain laws or regulations that limit market access or national treatment or favor domestic over foreign firms in that sector or mode of supply;

Limitations (to Market Access or National Treatment) -- A WTO Member can describe and write specific limitations or conditionalities to market access or national treatment in its Schedule of Specific Commitments. Such limitations can be those that are required by existing national laws or regulations.

Hence, if a WTO Member (such as the EC) wants its trading partners to fully open up their domestic services sectors to foreign competition, it will request the latter to write down "None" as their market access and national treatment commitments. On the other hand, if a WTO Member wishes to retain regulatory flexibility or to make sure that it will continue to remain free to impose restrictions or regulations on the ability of foreign services and service providers to enter the country and compete with domestic firms, it should offer only "Unbound" commitments or at least list down the specific market access and national treatment limitations it wishes to retain.

4. What are Horizontal Commitments?

"Horizontal Commitments" are those commitments that apply across-the-board to all the services sectors listed in the country’s Schedule of Specific Commitments. These commitments are usually written at the beginning of the Schedule. They can refer to economic considerations that may be applicable to all the services sectors and sub-sectors listed in the Schedule.

5. What does the request to take "full commitments" mean?

If a WTO Member in its request asks another Member to write "none" into its schedule, this is a request for "full commitments". When asking for such "full commitment", the demanding Member requests its trading partner to refrain from scheduling/listing limitations or conditions to its commitment.

If the "requestee" agrees and writes down "none" as its market access and national treatment limitations for that particular service sector, this means that it is committing itself to provide full liberalization of such service sector. It commits itself to allowing the services and service providers of other WTO Members full access to the country’s market of services consumers and that it will not impose any regulations that would restrict such access or discriminate in favor of domestic services or service suppliers. However, there are certain exceptional circumstances, such as those in GATS Article XIV and XIVbis, under which WTO Members can justify the imposition of regulations that violate their GATS obligations.

6. Where can Existing GATS Schedules of Specific Commitments of WTO Members be Found?

Existing GATS Schedules of Specific Commitments of WTO Members -- i.e. the GATS commitments that they made during the Uruguay Round in the GATS negotiations at that time -- can be downloaded from two places in the WTO website, as follows:

http://www.wto.org/english/tratop_e/serv_e/serv_commitments_e.htm; or

http://tsdb.wto.org/wto/WTOHomepublic.htm

7. How will WTO Members engage in GATS negotiations?

WTO Members started submitting their initial GATS negotiating requests to other selected WTO Members on 30 June 2002. These requests specify the services sectors of their trading partners that they wish to see liberalized and the extent of GATS commitments that they wish their trading partners to undertake with respect to those sectors. However, WTO Members are under no legal obligation to make requests under the GATS negotiations to their trading partners.

The submission of the initial offers, or responses, to those requests will commence on 31 March 2003. The WTO Members to whom requests have been made are not under any legal obligation to make any offers that directly correspond to the requests that they have received. In fact, they do not need to make any offers at all. However, as in the making of commitments, the existing power imbalances in the WTO and the economic pressures from developed countries can mean that developing countries will be effectively have to make offers that they are neither willing nor ready to provide.

WTO Members to whom requests have been made, and who have made corresponding offers, will then engage in bilateral negotiations with the requesting WTO Member. However, any results of the bilateral negotiations that will be included in the new GATS Schedule of Specific Commitments of the negotiating partners will be binding not only on both parties but also to all other WTO Members because of the "Most-Favoured Nation" (MFN) obligation in the GATS.

MFN simply means that France, for example, as a WTO Member must treat all other WTO Members in the same way and must not discriminate in favor of one or the other WTO Member. MFN as a legal GATS obligation applies to all domestic services sectors even if a WTO Member has not made any commitments with respect to those services sectors.

8. What is a Mode 1 Request, Offer, or Commitment?

A Mode 1 request, offer, or commitment refers to the liberalization of regulatory restrictions governing the supply of services from the territory of a WTO Member into the territory of another Member. A hypothetical example would be a situation in which an electric power company of a town in Mexico is prohibited by US energy regulations from providing electricity services to the electricity consumers of a neighboring town across the border in the US. In order for Mexico’s electric power company to be able to provide electricity to the town in the US, Mexico can request for a Mode 1 commitment from the US under the GATS to liberalize its electricity service provision regulations so as to allow Mexico’s electricity service providers to provide electricity services to US consumers.

A Mode 1 request can look like the following¹:

Request

What the Request Means

E.3 Trading of energy products

EC Request:

Modes 1: Take full commitments for non-network energy products and commitments for network-energy products

The phrase "trading of energy products" identifies the service sector with respect to which the EC is making the Mode 1 request.

For this particular Mode 1 request, the EC is requesting Colombia to commit to varying degrees of liberalization for its energy trading services sector.

The EC is requesting Colombia to fully liberalize the trading of "non-network" energy products -- i.e. bulk and retail sales of gasoline and other petroleum products -- by writing down "None" in its Schedule of Specific Commitments. This means that the EC wants Colombia to refrain from imposing any regulations or restrictions that would limit or restrict the ability of European energy trading companies to enter the Colombian energy market and engage in the trading of energy products there.

The EC request for Colombia to take "commitments for network-energy products" -- i.e. the provision of grid electricity -- means that it does not require "full commitments" in that sub-sector. Rather the EC wants Colombia to identify, describe and list any regulatory restrictions or limitations that it wishes to impose on the entry of foreign energy trading companies that wish to engage in the trade of "network-energy products" -- i.e. the provision of grid electricity. If Colombia does so and lists down, in its Schedule of Specific Commitments, the limitations and conditions under which foreign companies may or may not engage in the trading of "network-energy products," Colombia will have: (i) committed itself to maintaining only those limitations and restrictions, and cannot impose any other additional limitations or restrictions in the future; and (iii) clearly identified to other WTO Members the regulations and restrictions that, while currently allowed, can then be the subject of further liberalization in the future.

9. What is a Mode 2 Request, Offer, or Commitment?

A Mode 2 request, offer, or commitment refer to the liberalization of regulations or restrictions which involve the consumer (i.e. a Venezuelan) traveling to the supplying country (such as the United States) and availing of services there, such as for tourism or to attend an educational establishment. Another example of consumption abroad would be the repair of a ship or aircraft outside its home country.

An example of a Mode 2 request is²:

Request

What the Request Means

b. Accounting, auditing and bookkeeping services (CPC 862)

Mode 2: MA and NT -- This mode remains unbound. EC Request: Take full commitments, i.e. schedule "none", under MA and NT for the entire CPC 862

The header "Accounting, auditing and bookkeeping services" refer to the specific services sub-sector to which the request refers. The "CPC 862" annotation indications the classification code number of this particular services sub-sector in the Central Product Classification (CPC) list created by the United Nations Statistical Division. The provisional version of the CPC was the basis of the services classification list contained in GATT Doc. No. MTN.GNS/W/120 and used by Uruguay Round negotiators during the negotiations that resulted in the GATS. "MA" refers to Market Access and "NT" refers to National Treatment, the two areas in which commitments as to limitations and restrictions can be requested.

The EC request indicates that currently, Brazil’s Mode 2 commitments in relation to such services sub-sector are "unbound." This means that Brazil is still free to impose any regulation or restriction that it wishes relating to the ability of Brazilians to go and obtain accounting, auditing and bookkeeping services abroad. By requesting Brazil to "take full commitments, i.e. schedule ‘none,’ under MA and NT for the entire CPC 862," the EC wants Brazil to commit to allow Brazilians to go and freely obtain the accounting, auditing, and bookkeeping services of firms located in the EU. If Brazil does so and writes down "none" in its Schedule of Specific Commitments for Mode 2 for this services subsector, Brazil will have agreed and committed to refrain from imposing any future regulations or restrictions, applicable to Brazilians, on the provision of services by foreign accountants, auditors and bookkeepers to Brazilians who are in the EU.

10. What is a Mode 3 Request, Offer, or Commitment?

A Mode 3 request, offer, or commitment refer to the liberalization of regulations or restrictions on the establishment of a "commercial presence" by a foreign service provider in another country. The phrase "establishment of a commercial presence" refers to the setting up a business or professional establishment, such as a subsidiary corporation or a branch or representative office, in the territory of one Member by a service supplier of another Member. Hence, a Mode 3 request, offer, or commitment is essentially about liberalizing the conditions under which the service providers of the United States, for example, can invest and set up branch offices, joint ventures, or subsidiaries in the territory of another WTO Member.

A Mode 3 request, offer, or commitment, like those for the other modes, be for a specific sector or sub-sector, or be horizontal.

An example of a horizontal Mode 3 request is as follows³:

Request	What the Request Means
Horizontal
HORIZONTAL COMMITMENTS EC Request to Malaysia Mode 3 - Acquisitions, mergers and take-overs require approval if more than 15% (voting rights) of a single foreign interest (30% of aggregate) or more than RM 5 million. Approval also required if result is foreign ownership or control. Finally approval needed is control of Malaysian corporations though joint-venture or other arrangement. Approval depends of interest of the State-test (MA). EC request: remove restrictions. - Land property and real estate (MA). Approval required and may be denied if purpose is speculations and against state interests. EC request: remove restrictions. - Incentives/Preferences. Limited to Malaysian-owned corporations. EC request: Clarify these discriminatory measures.	As the EC request indicates, Malaysian law requires governmental approval for any substantial foreign investment in a Malaysian company, or for any foreign investment which results in substantial foreign control or ownership of a Malaysian company. Malaysian law also requires foreigners to get Malaysian governmental approval before they can purchase land or other real property in Malaysia. The EC request to Malaysia to "remove restrictions" relating to the need for governmental approvals above, if agreed to by Malaysia, effectively means that Malaysia will have to abolish its laws and regulations that require foreign investments and the purchase of real property by foreigners in Malaysia to first get Malaysian governmental approval. This removes from the Malaysian government a key regulatory tool that it can use to ensure that such foreign investments and foreign land purchases serves the national Malaysian interest. The EC request for clarification of the "discriminatory" incentives or preferences is basically a request to Malaysia to describe more clearly the basis upon which it provides incentives or preferences to Malaysian firms over foreign ones.

An example of a specific Mode 3 request is as follows⁴:

Request	What the Request Means
Specific
ENVIRONMENTAL SERVICES EC Request to Paraguay Paraguay has not undertaken commitments in environmental services. The EC requests Paraguay to commit the following subsectors, based on the EC proposal for the classification of environmental services: A. Water for human use & wastewater management Water collection, purification and distribution services through mains, except steam and hot water Waste water services (CPC 9401) B. Solid/hazardous waste management Refuse disposal services (CPC 94020) Sanitation and similar services (CPC 94030) C. Protection of ambient air and climate Services to reduce exhaust gases and other emissions and improve air quality (CPC 94040) D. Remediation and cleanup of soil & water Treatment, remediation of contaminated/polluted soil and water (part of CPC 94060) E. Noise & vibration abatement Noise abatement services (CPC 94050) F. Protection of biodiversity and landscape Nature and landscape protection services (part of CPC 94060) G. Other environmental & ancillary services Other environmental protection services not classified elsewhere (CPC 94090) EC Request for each of the above sub-sectors: - Modes ... 3 : Undertake full commitments for MA and NT.	In this case, the EC has noted that Paraguay has not made any commitments in any environmental services sector or related sub-sector. By identifying the sub-sectors and their respective CPC numbers, the EC indicates that it wishes Paraguay to make GATS commitments in these sub-sectors. With respect to Mode 3 commitments in these sub-sectors, the EC is requesting Paraguay to "undertake full commitments for MA and NT." This means that Paraguay is being requested by the EC to commit to full liberalization of its environmental services sector -- especially those sub-sectors identified in the request -- by writing down "none" in its Schedule of Specific Commitments. If Paraguay does so, it will be committing itself not to impose any regulations or restrictions that would: (i) limit the ability of European service providers from going into Paraguay and setting up branches, subsidiaries, or joint ventures there to provide environmental services [market access limitations]; or (ii) provide only Paraguayan service providers with market rights or privileges that make it more difficult for foreign firms to compete with them [national treatment conditions].

11. What is a Mode 4 Request, Offer, or Commitment?

A Mode 4 request, offer, or commitment effectively refer to the liberalization of regulatory restrictions on the entry of foreigners into a country’s job market so that foreigners can provide personal or professional services in the host country. This can include easing up working visa requirements, or eliminating legal provisions that reserve local jobs to the citizens or permanent alien residents of that country. In practice, Mode 4 commitments are often made as horizontal commitments. Below is an example of a Mode 4 request by the EC to the Philippines⁵, and notes on how to interpret the request

Request

What the Request Means

Mode 4

General

Entry permitted only if there is no available Philippine citizen to fulfill the post. EC request : Eliminate.

Additional commitments

- Difficulties are experienced as a result of the length of time taken to process work permits. The EC wishes to discuss the possibility of taking additional commitments to address this issue.

General: Currently, Philippine labor laws reserve jobs in the domestic market only to Filipino citizens, and allow foreigners to take jobs in the Philippines only if there is no Filipino citizen willing and able to take the position. The EC request to "eliminate" this restriction will require changes in Philippine labor laws.

Additional commitments: The processing of work permits for foreigners in the Philippines can take between 3-6 months, sometimes longer. The EC request "to discuss the possibility of taking additional commitments to address this issue" means that the EC wishes the Philippines to commit to reducing the period for processing alien work permits.

Both of the general and additional commitments requests have the objective of making it easier and faster for foreigners to work in the country. This might be a commitment that the Philippines, as a developing country, might not be ready to implement due to increased administrative burdens that it cannot afford to pay for. In addition, the high unemployment rate in the Philippines means that it would not be able to absorb new foreign entrants into the labor force.

12. What is a Measure that is "Of a Nature Foreseen by Articles XVI-XVII GATS"?

A WTO Member (such as the EC) may request its trading partners to ensure that the latter’s "remaining limitations on market access ... or on national treatment ... are clearly described and only be inscribed in the market access or national treatment columns if the measure is of a nature foreseen by Articles XVI-XVII GATS." This means that the recipient of the request is being asked to make sure that any services market access or national treatment limitations that it wishes to impose on the entry of foreign services or service providers in its commitments (i.e. when it makes its offer) will be: (a) clearly described; and (b) must be one of those limitations identified in GATS Articles XVI and XVII. This means that a country cannot list down in its commitment any limitations other than those listed in the GATS provisions above.

These limitations can be:

On Market Access (GATS Article XVI)

On National Treatment (GATS Article XVII)

limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test;

limitations on the total value of service transactions or assets in the form of numerical quotas or the requirement of an economic needs test;

limitations on the total number of service operations or on the total quantity of service output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test;

limitations on the total number of natural persons that may be employed in a particular service sector or that a service supplier may employ and who are necessary for, and directly related to, the supply of a specific service in the form of numerical quotas or the requirement of an economic needs test;

measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service; and

limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment.

Providing conditions and qualifications on national treatment

providing foreign services or service providers with formally identical or formally different treatment from that which the country gives to its own "like" --i.e. similar or the same -- domestic services or service providers, so long as such formally identical or formally different treatment do not favor or grant market competitive advantages to domestic services or service providers.

1 | From the leaked draft EC GATS requests to Colombia. Copies of this and the other leaked EC GATS requests can be obtained from www.gatswatch.org.

2 | From the leaked draft EC GATS request to Brazil.

3 | From the leaked draft EC GATS request to Malaysia.

4 | From the leaked draft EC GATS request to Paraguay.

5 | From the leaked EC GATS requests documents.