Part three: Introduction to GATT and GATS

Ursula Johnston: Hello and welcome to the next module of the Gowling WLG Training on various aspects of world trade law. I am Ursula Johnston and I am joined today by my colleague, Savannah Would.

Ursula: So today we are going to briefly touch back on the General Agreement on Tariffs and Trade (GATT) and then we are going to spend much more time looking at the General Agreement on Trade in Services (GATS), which is not so commonly discussed or understood.

Ursula: So just to recap on our earlier module. You may remember that we have said GATT was only ever intended to be a provisional agreement that was looking to preserve the tariff reduction commitments that key economies had agreed on the back of the end of the Second World War and it was only ever intended to last until such time as the International Trade Organisation – what we now would call the World Trade Organisation – would be established.

Ursula: However, GATT has actually now become a permanent framework for the multi-lateral trading system and it is considered to be the default basis for international trade. Obviously at the moment where we are talking about the UK's relationship with the EU and what we sometimes call WTO trading terms, what we are really referring to is trading under the principles of GATT.

Ursula: Each member to the WTO must set out their tariffs, which they will apply in their tariff schedule, so their harmonised system and that is annexed to GATT. Then for several sectors or several types of goods, members have agreed to bind themselves to commitments, which essentially put a ceiling on the level of tariffs that can be levied, but with obviously some exceptions built in around that.

Ursula: Non-tariff measures as you are probably aware, are dealt with under different WTO agreements. The idea of GATT is to uphold these two key principles of most favoured nation and secondly, national treatment, so that is essentially around ensuring consistent treatment of all WTO members. You cannot, without a specific agreement in place – you cannot treat one member more favourably than the other in terms of market access for goods.

Ursula: Just turning to GATS – General Agreement on Trade in Services. The main purpose of GATS is similar to that of GATT – it was the creation of a credible and reliable system of international trade rules and was looking to liberalise trade in services.

Ursula: The genesis for this is really the development of services as being a key part of the economies of developed countries during the 1980s and the 1990s. At that time, whilst trade in services accounted for a high proportion of GMP in those countries, actually international trading services accounted for only about 20%25 of total world trade.

Ursula: As production of manufactured goods shifted out of developed economies into low wage and developing on newly industrialising countries, those developed countries became – they wanted to look at how could they maintain their comparative advantage in many service sectors, in particular financial services, telecommunications, transport and professional services, by creating a multi-lateral trade regime that would also support liberalisation of the international trading services.

Ursula: In the Uruguay Round, which began in – the Uruguay Round of WTO negotiations – which began in 1996, they began to negotiate this multi-lateral agreement on international trade in services and this eventually resulted in the General Agreement on Trade in Services (GATS) that came into force in 1995.

Ursula: It applies to all service sectors other than services supplied in the exercise of governmental authority, for example that is services not supplied on a commercial basis and services that are not in competition with other – or where the supplier is not in competition with other suppliers and it does not apply to measures affecting air traffic rights and services and that is contained within the Annex on Air Transport Services.

Ursula: GATS also does not affect measures regarding citizenship, residents or employment on a permanent basis. The agreement looks – it distinguishes between four modes of supplying services. You have cross-border supplies – that is services flowing from the territory of one member into the territory of another member. That could be banking, for example.

Ursula: It covers a supply which is a consumption abroad. For example, where a tourist or a patient moves into another member's territory to obtain service, it applies where – let us say what we call a commercial presence - where a service supplier of one member establishes a territorial presence in another member's territory to provide a service. For example, a domestic subsidiary of a foreign insurance company, or hotel chain.

Ursula: And then lastly, the presence of a natural person – so this is where, one person would move from one member to enter the other territory of another member to provide a service. Typically, could be an accountant or doctor or even, perhaps, a lawyer.

Ursula: Savannah.

Savannah: Thanks Ursula. As Ursula mentioned, there is a distinction in GATS between a member's basic obligations and its specific commitments. Some of the basic obligations include the most favoured nation treatment – whereby each member must accord unconditionally to services or service suppliers of all other members, treatment no less favourable than that accorded to like services and service suppliers of any other country.

Savannah: This is essentially a prohibition on preferential arrangements in principle. Members could seek exemptions before GATS came into force. New exemptions can be granted – either to new members at the time of accession or to current members in the form of a waiver, under Article 93 of the WTO Agreement.

Savannah: There is an additional possibility for groups of members to enter into economic integration agreements, or mutual recognition between the groups of regulatory standards, certificates and other matters, provided that certain conditions are fulfilled. Where there are exemptions, these are subject to review and the principle is that the exemption should not be for a period of longer than ten years.

Savannah: Additionally, there is a requirement for GATS' members to publish all measures of general application, and international agreements affecting trade in services to which a member is a party shall also be published, and each member also is required to respond promptly to all requests by any other member for specific information on any of its measures of general application or the international agreements to which it is signatory.

Savannah: In terms of specific commitments these apply only to the services listed on each member's schedule and the significance of this is that it is possible to exclude certain services and sectors from these obligations. So the services schedule can deal with market access which can include limitations on the various points we've listed on the slide, so for example this could limit the number of service suppliers, the total value of service transactions or the total quantity of service outputs. National treatment can also be dealt with in the schedule and these commitments can be full or qualified and in the sectors mentioned in the schedule subject to any conditions and qualifications set out within the schedule each member has to accord to the services and service suppliers of any other member, treatment no less favourable than that it accords to its own like services and service suppliers and if we can move to the next slide please.

Savannah: So there's a requirement for each member to have a schedule specific commitments as we mentioned and we set out on the slide some of the requirements that the schedule must meet. It must ascertain the services for which the member guarantees market access and national treatment and identify any limitations on such principles so, for example, in relation to market access this will set out the terms, the limitations and conditions in relation to this.

Savannah: Members are also free to tailor the sector coverage and substantive content of national treatment commitments as they see fit. It must also identify any specific standards or regulatory principles and it will consist of both horizontal and sectoral sections. By horizontal sections we mean entries that apply across all sectors listed within the schedule whereas the sectoral sections are entries that apply to a particular service sector.

Savannah: So members are free to expand existing commitments at any time but there are specific processes that must be followed if they wish to modify or withdraw any of the commitments in its schedule. So these can be modified or withdrawn at any time after three years from the date in which they entered into force. If members wish to do this they must notify their intention to modify or withdraw a commitment to the Council for Trade in Services and this must be done at least three months before the intended date of implementation. The members who are affected by this change they can request that the modifying member enters into negotiations with a view to reaching an agreement on any necessary compensatory adjustments and it is worth noting as well that compensatory adjustments are made on a most-favoured-nation basis.

Savannah: So there are various exceptions to the obligations under GATS and we have set out some of the general ones on the slide. For example, economic integration, which does not prevent members from being party to agreements liberalising trade and services between parties to the agreement and this is similar to Article 24 of GATT. This essentially permits free trade areas and customs unions but the agreement must have substantial sector coverage and provide for the absence or elimination of substantially all discrimination.

Savannah: There is also some general exceptions, for example relating to the protection of public morals, maintaining public order and protecting humans, animals, plants and health. The public order exception may be invoked only where there's a genuine and sufficiently serious threat posed to one of the fundamental interests society. There is also an exception for national security and restrictions to safeguard the balance of payments. This means that in the event of serious balance of payments and external financial difficulties or a threat thereof a member may adopt or maintain restrictions on trade in services on which it has undertaken specific commitments including on payments or transfers for transactions related to such commitments.

Savannah: We have also noted on the slide a case study in relation to the United States, the Online Gambling case. This case provides a good example of how the Appellate Body has previously considered the application of the general exceptions. So a bit of background to the case, Antigua challenged a variety of Federal and State laws and regulatory actions within the US arguing that these amounted to a complete prohibition on the cross-border provision of gambling by Antiguan suppliers. The USA had an unqualified market access commitment in relation to other recreational services which includes gambling and betting services under the UN Central Product Classification Guidelines.

Savannah: Antigua argued that these prohibitions violated the US market access commitments under GATS and although the restriction was not a numerical quota as such, Antigua argued that this was a qualitative prohibition on online gambling. The Appellate Body found that the US had violated this commitment and considered whether the prohibition was justified under the public morals and order exception mentioned on the slide.

Savannah: The WTO panel had taken a reasonably liberal view finding that the US' concerns about money laundering, organised crime, the protection of miners and compulsive gamblers did fall within this exception. However, the panel had concluded that the US prohibition did not meet the necessity test under Article 14. This was on the basis that the US had not made efforts to resolve its concerns through cooperation with the Antiguan authorities or exploring alternative, less restrictive policies that would effectively address these concerns.

Savannah: The Appellate Body later overruled the panel on this point and considered the burden would be on Antigua to identify a less restrictive trade measure after which the US would need to demonstrate that the particular measure would not satisfy its public policy goals. One of the particular statutes considered by the Appellate Body permitted off-track betting on the horse races in respect of domestic suppliers of gambling services but it did not permit offshore suppliers and it was held that this statute violated Article 14 as it constituted arbitrary and unjustified discrimination. The decision authorised Antigua to impose retaliatory trade measures not exceeding US$21 million per year.

Ursula: Thanks for that, that's a good example of GATS in force. We also wanted to talk a little bit at the end of this session about some of the current challenges for digital trade in particular and it's clear to all of us, particularly those of us in advanced economies, that digital communications, digital commerce, digitally capable products including the internet of things, digitally delivered and enabled services have grown and will continue to grow in their importance in all of our lives and economic growth in general.

Ursula: So one of the WTOs said what are they doing about ensuring that they are keeping up-to-date in this area. The WTO established a specific program on electronic commerce and, as it stands, WTO ministers continue to agree on perhaps not imposing customs duties on electronic transmissions although, I think in the last six to 12 months, there has been some potential objections to this raised by economies such as India for example and South Africa I think which feel that that does not necessarily serve their interest particularly well.

Ursula: So, electronics transmissions, that basically covers any non-physical product sold through an e-commerce platform. But also the increasingly internet of things that includes products that are digitally enabled. A digital component in turn may be dependent on cross-border services so that products and services become, are becoming, increasingly combined and the liberalisation of trade and products will obviously then require the equivalent liberalisation of the trade in the relevant service.

Ursula: Trade officials have already begun discussing a new mode, so we looked at those four modes of delivery of services back in the, I think, the third slide so they are now looking at a new mode which is referred to mode 5 which would cover a trade in services where they are exported as parts of a good and coming back this is what we are talking about some of the objections to that current moratorium so they're saying if the value of the services is included in the price of the goods then tariffs maybe should be applied to those services because the service is a large proportion of that overall value.

Ursula: Now additionally we should sort of mention, because we are looking at trade agreements particularly now in the context of Brexit but newer preferential trade agreements such as USMCA, so the US, Mexico and Canada Agreement, they contain specific chapters that address electronic commerce and many of them are trying to lock in this moratorium on Customs duties on electronic transmissions.

Ursula: Some of those new e-commerce chapters also prohibit any restriction being imposed on cross-border data flows or data localisation requirements subject to exceptions for public policy reasons such as privacy and cyber security. They also contain internal national treatment and most favoured nation treatment obligations but they are not dependent on the schedules because they are now in the GATS context. So for example, some imposed requirements to regulate, to protect privacy and cyber security.

Ursula: Just a quick word on privacy or privacy in cyber security. In order to protect individual's privacy, countries increasingly are regulating the gathering and attention and dissemination of data about citizens, so the 2016 GDPR is an example of the General Data Protection Regulation that was established by the EU. So these rules can typically restrict the ability to transfer data abroad or condition the transfer on the quality of data protection in the proposed foreign repository countries, that's a country where the data is going to be held.

Ursula: So these rules obviously impose limits on cross-border trade in relevant services which may be subject to GATS depending on the individual country's GATS commitments. So, therefore, they could be subject to challenge where there are restrictions but there is probably a likely defence based on the exceptional provisions that Savannah discussed earlier.

Ursula: So I think we've sort of touched briefly on GATS today and I hope that you have found this session helpful and we look forward to bringing you the next module. Thanks very much Savannah for all your hard work and input.

Savannah: Thanks Ursula.

Ursula: Thanks, bye.