GATS and Exemptions

Project Proposed By- Ravi Prakash

- B.A. LL.B.(Hons.)

- 1756

Proposed to – Dr. P.P. Rao

Assistant Professor of Law

A final draft submitted for the partial fulfillment of the course

International Trade Law, for attaining the degree B.A. LL.B.(Hons.)

Chanakya National Law University, Nyaya Nagar, Mithapur,

Patna, Bihar 800001
 DECLARATION

I hereby declare that the work reported in the B.A LL.B.(Hons.) Project Report entitled
“GATS & Exemptions” submitted at Chanakya National Law University, Patna is an
authentic record of my work carried out under the supervision of Prof. Dr. P.P.Rao, Asst.
Professor of Law. I have not submitted this work elsewhere for any other degree or diploma.
I am fully responsible for the contents of my Project Report.

Ravi Prakash
Roll no: 1756
B.A LL.B. (Hons.)
6th Semester
 ACKNOWLEDGEMENT

Primarily, I would like to express my special thanks of gratitude to my Constitutional Law

faculty Prof. Dr. P.P.Rao, Asst. Professor of Law who gave me the opportunity to do this
project of International Law on the topic “GATS & Exemptions”, who also helped me in
completing my project. I came to know about so many new things after completing this
project.

Then, I would like to thank my friends who have helped me with their valuable suggestions e
that has been helpful in various phases of the completion of the project.

I would also like to extend my gratitude to the library staff members for providing me with
all the facility that was required.

Date: - 19/02/2020 Ravi Prakash

Roll no: 1756

B.A. LL.B. (Hons.)
Contents
1. Introduction....................................................................................3
2. Purpose & Historical Background of GATS......................................5
3. MFN & GATS....................................................................................7
4. Exemptions under GATS................................................................13
5. Case Study.....................................................................................15
6. Conclusion.....................................................................................23
BIBLIOGRAPHY....................................................................................26
 1. Introduction

The creation of the GATS was one of the landmark achievements of the Uruguay Round,
whose results entered into force in January 1995. The GATS was inspired by essentially the
same objectives as its counterpart in merchandise trade, the General Agreement on Tariffs
and Trade (GATT): creating a credible and reliable system of international trade rules;
ensuring fair and equitable treatment of all participants (principle of non-discrimination);
stimulating economic activity through guaranteed policy bindings; and promoting trade and
development through progressive liberalization.

While services currently account for over 60 percent of global production and employment,
they represent no more than 20 per cent of total trade (BOP basis). This — seemingly modest
— share should not be underestimated, however. Many services, which have long been
considered genuine domestic activities, have increasingly become internationally mobile.
This trend is likely to continue, owing to the introduction of new transmission technologies
(e.g. electronic banking, tele-health or tele-education services), the opening up in many
countries of long-entrenched monopolies (e.g. voice telephony and postal services), and
regulatory reforms in hitherto tightly regulated sectors such as transport. Combined with
changing consumer preferences, such technical and regulatory innovations have enhanced the
“tradability” of services and, thus, created a need for multilateral disciplines.1

It is a basic principle of the Agreement that the most favoured nation (MFN) treatment
applies to all measures affecting trade in services. However, GATS allows certain exceptions
to be exercised once in this regard (Article II.2) which should not exceed ten years in
principle. Exemptions are subject to negotiation with a view to being progressively
eliminated, in trade liberalising rounds. Such measures must have been specified in a list of
MFN exemptions submitted by the end of the Uruguay Round or by the conclusion of
extended negotiations on certain sectors for which the delayed submission of related
exemptions was expressly authorised or exemptions notified at the time of WTO accession.2

1
https://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm
2
http://www.intracen.org/MFN-exemptions/
AIMS & OBJECTIVES:- The aim of the researcher is to present a detailed study of the
topic. The main objective is to know about in what is the purpose of GATS and the
exemptions provide under GATS.

HYPOTHESIS:- Exemptions under GATS are subject to negotiation with a view to being
progressively eliminated, in trade liberalising rounds

 
 2. Purpose & Historical Background of GATS
The creation of the GATS was one of the landmark achievements of the Uruguay Round,
whose results entered into force in January 1995. The GATS was inspired by essentially the
same objectives as its counterpart in merchandise trade, the General Agreement on Tariffs
and Trade (GATT): creating a credible and reliable system of international trade rules;
ensuring fair and equitable treatment of all participants (principle of non-discrimination);
stimulating economic activity through guaranteed policy bindings; and promoting trade and
development through progressive liberalization.

While services currently account for over two-thirds of global production and employment,
they represent no more than 25 per cent of total trade, when measured on a balance-of-
payments basis.  This — seemingly modest — share should not be underestimated, however.
Indeed, balance-of-payments statistics do not capture one of the modes of service supply
defined in the GATS, which is the supply through commercial presence in another country
(mode 3).  Furthermore, even though services are increasingly traded in their own right, they
also serve as crucial inputs into the production of goods and, consequently, when assessed in
value-added terms, services account for about 50 per cent of world trade.3

Before GATS came into being, there was the General Agreement on Trade and Tariffs
(GATT). GATT was both an international trade treaty and an organization of 23 countries
founded in 1948. The GATT worked to remove or reduce barriers from international trade
in goods, which included customs duties, subsidies and import bans. It also acted as a forum
for trade issues and while the organization had the ability to render judgments in trade
disputes, it did not have the power to enforce those decisions. A clause in the agreement
stated that the country that lost the judgment also had to agree to the sanction prescribed by
the judgment. This clause effectively prevented any international sanctions to a country that
bargained in bad faith or that later pulled out of a negotiated agreement. The result was that
deals in trade between countries were not meaningful or reliable.

In 1986, the GATT began the Uruguay Round Negotiations that lasted until 1994. The result
of these negotiations was the formation of the World Trade Organization (WTO) in 1995.
The most significant change to international trade was that the WTO was granted the power
to enforce trade treaties. Members agreed that trade disputes would be heard before a WTO
3
https://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm
panel and its decisions would be binding. The WTO appoints independent experts who base
their judgments on "interpretations of the agreements and individual countries’
commitments".

The other major result of the Uruguay Round Negotiations was the implementation of a new
agreement called the General Agreement on Trade in Services (GATS) in 1995. This
agreement, like GATT before it, is focused on reducing barriers to international trade, but in
this treaty the focus is on the trade of services.4

4
http://capping.slis.ualberta.ca/global/sandra/history.html
 3. MFN & GATS
This Section discusses other GATS provisions which either extend/reiterate the scope of the
basic MFN obligation or provide for departures from it.

Articles XVI and XVII

While Article II applies across the board, Article XVI on market access and Article XVII on
national treatment only apply to sectors included by a Member in its schedule of specific
commitments. The liberalizing content of the GATS depends to a large extent on the nature
of these specific commitments. Article XVI prohibits a range of measures (mostly
quantitative restrictions) unless explicitly listed in a Member's schedule, and Article XVII
prohibits measures which discriminate against foreign services or service suppliers, again
unless listed in a Member's schedule.

The texts of Articles II, XVI and XVII do not create an explicit hierarchy of obligations.
Thus, it is not completely clear from the text itself whether a Member taking an MFN
exemption would also be free to discriminate with respect to the commitments made under
Articles XVI and XVII. However, the "Scheduling of Initial Commitments in Trade in
Services: Explanatory Note" states that "where an MFN exemption has been granted for a
measure, a Member is free to deviate from its Article II obligations, but not from its Article
XVI and XVII commitments. Therefore, in such cases, a Member may accord treatment
more favourable than the minimum standard to some Members, as long as all Members
receive at least the that minimum standard of market access and national treatment appearing
in its schedule."5

It follows that an MFN exemption would give a Member who had made no commitments in
a sector considerable freedom to discriminate. However, an MFN exemption which coexists
with fully liberal market access and national treatment commitments would have little
meaning - unless a Member wished to provide more favourable treatment to certain foreign
suppliers than it does to its own.

Regional integration

5
MTN.GNS/W/164, 3 September 1993. The document warns that "the answers should not be considered as
an authoritative legal interpretation of the GATS."
Apart from services specified in individual MFN exemption lists, the only permitted
departure from most-favoured-nation treatment under the GATS covers preferential
treatment among countries that are members of regional trading arrangements. The GATS
rules on "Economic Integration", in Article V, are modelled on those in Article XXIV of the
GATT. Article V:1 permits any WTO member to enter into an agreement to further liberalize
trade in services with the other countries that are parties to the agreement, provided the
agreement has "substantial sectoral coverage", eliminates measures that discriminate against
service suppliers of other countries in the group, and prohibits new or more discriminatory
measures. Recognizing that action to open up services markets may well form part of a wider
process of economic integration, Article V:2 allows the liberalization achieved to be judged
in this light.

The drafting of these rules improves on their GATT equivalents in some respects: for
instance, "substantial sectoral coverage" is more carefully defined, since it disqualifies
agreements that exclude any of the four modes of supply. Some other provisions are carried
over from Article XXIV with little change. An approved agreement must be designed to help
trade among its members, and must not result in an increase in the overall barriers faced by
non-members in trading with the group within the respective sectors or sub-sectors (Article
V:4). If the establishment of the agreement, or its subsequent enlargement, leads to the
withdrawal of commitments made to non-members, there must be negotiations to provide
appropriate compensation (Article V:5). No compensation, on the other hand, is due from
non-members for any trade benefits they may gain from the agreement (Article V:8).

Article V:7 creates a transparency obligation, requiring Members who are party to regional
agreements to notify promptly any such agreement and any enlargement or significant
modification to it. The agreements which have been notified so far include the agreements
establishing NAFTA, the European Communities and their Member States, as well as their
agreements with the Slovak Republic, Hungary, Poland, the Czech Republic, Romania,
Norway, Iceland, Liechtenstein and Bulgaria, and agreements between Canada and Chile and
between Australia and New Zealand.

A related exception from the MFN rule, for the movement of natural persons, is permitted by
Article V bis of the GATS. This allows countries to take part in agreements which establish
full integration of labour markets. The only such agreement notified so far is the one
involving Denmark, Finland, Iceland, Norway and Sweden.

Recognition6

Article VII of the GATS, dealing with recognition, attempts to strike a difficult balance. On
the one hand, it is permissive. Thus, Article VII:1 states:

For the purposes of the fulfilment, in whole or in part, of its standards or criteria for the
authorization, licensing or certification of services suppliers, and subject to the requirements
of paragraph 3, a member may recognize the education or experience obtained, requirements
met, or licenses or certifications granted in a particular country. Such recognition, which may
be achieved through harmonization or otherwise, may be based upon an agreement or
arrangement with the country concerned or may be accorded autonomously.

This provision would seem to allow a Member at any point of time to recognize standards of
one or more Members and not of others, without violating its GATS obligations - even
though services and service suppliers of the former group have easier access than those of the
latter group. The remaining paragraphs of Article VII seek to ensure that this freedom is not
abused. Article VII:2 requires a Member who enters into a mutual recognition agreement
(MRA) to afford adequate opportunity to other interested Members to negotiate their
accession to such an agreement or to negotiate comparable ones. If a Member grants
recognition autonomously, then it is obliged to give any other Member adequate opportunity
to demonstrate that education, experience, licenses, or certifications obtained in that other
Member's territory should be recognized. In this respect, Article VII mandates an openness
vis-à-vis third countries in a way that Article V, dealing with economic integration
agreements, does not.

Article VII:3 stipulates that a Member must not grant recognition in a manner which would
constitute a means of discrimination between countries in the application of its standards or
criteria for the authorization, licensing or certification of services suppliers, or a disguised
restriction on trade in services. This raises the question of how it could be established
whether selective recognition is discriminatory. This question we discuss more fully below.

6
 Petersmann; van Loon; Patel (1 December 2017).  Collected Courses of the Xiamen Academy of International
Law, Volume 11 (2017): Xiamen Academy of International Law Summer Courses, July 27–31, 2015. BRILL.
p. 16. ISBN 978-90-04-35530-9.
It is worth noting that Article VII:5 states that "wherever appropriate, recognition should be
based on multilaterally agreed criteria" and requires Members to work towards the
establishment and adoption of such criteria. The issue, of course, is how much discretion the
phrase "wherever appropriate" gives Members in deciding whether to follow their own rather
than internationally agreed criteria.

What is the empirical significance of MRAs? It is possible to provide a preliminary answer

thanks to the transparency requirement created by Article VII:4: Members must inform the
Council for Trade in Services about existing MRAs and of the opening of negotiations on
any future ones. So far, 21 notifications have been received under Article VII:4, of which 10
are from Latin American countries, 4 from the United States, 3 from Switzerland, and 1 each
from the European Commission, Australia, Norway and Macau. Not surprisingly, all but one
of these pertain to the recognition of educational degrees and professional qualifications
obtained abroad.11 The only other MRA is in the domain of financial services: owing to
reciprocal recognition of the proof of solvency between the EU and Switzerland, foreign
direct (other than life) insurance companies having their principal place of business in the
territory of one of the contracting parties are not obliged to localise funds to a significant
extent and are not obliged to furnish security.

Interestingly, mutual recognition of qualifications is also mentioned as an element of 11

regional integration agreements, notified under GATS Article V:7(a). These agreements
include the one establishing the European Union, agreements between the European Union
and neighbouring countries, and the Closer Economic Relations Treaty between Australia
and New Zealand. This raises the question of whether MRAs concluded in the context of a
regional integration agreements are still subject to the disciplines in Article VII:2 and 3. One
view may be that Article V provides an exception to the fundamental non-discrimination
obligation in Article II and therefore an exemption also to similar obligations contained in
other GATS provisions, including Article VII. Alternatively, it could be argued that all
MRAs, regardless of whether they are concluded by parties to a regional integration
agreement or other Members, are covered by Article VII and its disciplines cannot be
circumvented by appealing to Article V.

Monopolies and exclusive service suppliers

Article VIII requires each Member to ensure that any monopoly supplier of a service does
not "in the supply of the monopoly service in the relevant market" act in a manner
inconsistent with the MFN obligation and the Member's specific commitments. A monopoly
supplier of a service is defined in the GATS as any person, public or private, which in the
relevant market of the territory of a Member is authorized or established formally or in effect
by that Member as the sole supplier of that service (Article XXVIII(h)).

Government procurement

Article XIII of the GATS exempts government purchase of services for its own use from the
MFN obligation (as well as from the market access and national treatment rules). However,
the same provision mandates negotiations on government procurement in services which may
lead to commitments to open up some government purchases to foreign service suppliers.

General exceptions

The GATS provisions on general and security exceptions resemble their GATT equivalents.
The general exceptions are, as in the GATT, preceded by a headnote that makes the right of a
member to adopt or enforce measures necessary for the purposes listed subject to the
condition that they not be applied as a means of "arbitrary or unjustifiable discrimination
between countries where like conditions prevail, or as a disguised restriction on trade in
services". The list of purposes that follows includes the protection of public morals and
maintenance of public order;7 protection of human, animal or plant life or health; securing
compliance with laws or regulations which are not inconsistent with the provisions of GATS
including those relating to the prevention of deceptive and fraudulent practices, the
protection of individual privacy in the handling of personal data, and safety; ensuring
equitable and effective taxation and the avoidance of double taxation. A footnote spells out a
number of ways in which a country's taxation practices may treat foreigners differently from
its own nationals. The security exceptions are virtually identical with those in GATT 1994.8

Sectoral annexes and decisions

7
The maintenance of public order is not an objective listed in the general exceptions provision of GATT 1994,
and may be invoked "only where a genuine an sufficiently serious threat is posed to one of the fundamental
interests of society" (footnote 5 to Article XIV).
8
Nothing in the GATS requires a member to give information, or take action, against its essential security
interests concerning services for a military establishment, related to fissionable or fissionable materials, or in
time of war or international emergency or in pursuit of obligations under the United Nations Charter for peace
and security.
The Annex on Air Transport specifically excludes the complex network of bilateral
agreements on air traffic rights from GATS rules.9 In consequence, the GATS applies at
present only to aircraft repair and maintenance services, the selling and marketing of air
transport services (a function defined as not including the pricing or conditions of transport
services), and computer reservation systems.10

In the maritime transport sector, the failure to conclude negotiations successfully led to the
June 1996 Decision to suspend the application of the MFN obligation to the sector until the
end of the next round of comprehensive services negotiations. The suspension was prompted
by the difficulty in eliminating MFN-inconsistent measures in the maritime sector. Even
though Members could have listed exemptions from the MFN obligations, the dominant view
was that the continued suspension of the MFN obligation would avert the need for many
countries to take MFN exemptions which may be more difficult to negotiate away once
explicitly listed.

9
International air transport services are for the most part governed by arrangements negotiated under the
Chicago Convention (i.e. the International Air Services Transit Agreement, done at Chicago, 7 December 1944.)
10
The WTO dispute settlement procedures can be invoked only in respect of obligations specifically assumed
by members, and even then only after any bilateral or other procedures have been exhausted. A provision for
periodic reviews of developments in the air transport sector, to be undertaken at least once in every five
years, leaves the door open for a possible future extension of GATS commitments in the sectors
 4. Exemptions under GATS

The relevance of the MFN treatment obligation has been emasculated, largely as a result of
the need to protect other vital issues conflicting with trade liberalization such as societal
values and interests and other new emergence. In this regard, exception provisions were
inserted in the GATS that allow states, under certain conditions, to adopt measures that are
otherwise WTO – inconsistent. Some of these exceptions are temporal while others are
permanent.

The exceptions to MFN treatment are many but discussion herein will focus on the most
important namely: the provisions of GATS Article XIV on the protection of vital issues such
as societal values and interests; GATS Article V on regional integration; and the economic
development exception allowing for Special and Deferential (S&D) treatment provisions.

GATS Article XIV captioned “General Exceptions” are strikingly similar, save for some
differences on the grounds contained in the paragraphs under the respective Articles. As it
was found in the case of US – Gambling, 11 as well as subsequent decided cases, GATT
Article XX constitutes the basis to interpret GATS Article XIV. The wordings of both
Articles impose a two-tier test to determine whether a measure otherwise inconsistent with
the GATT or the GATS can be justified. 12 The first test requires a provisional justification
under any of the grounds contained in the paragraphs under the respective Articles, while the
second test requires an examination of whether the provisionally justified measure meets the
requirement of the chapeau of the aforementioned Articles. 13 The said grounds on which the
exception herein applies abound and for GATT Article XX, contains both economic and non
– economic values under paragraphs (a) to (j). Some of the grounds include but not limited to
11
Appellate Body Report, US – Gambling, para.291
12
Appellate Body Report, US – Gasoline, para 20 in respect of Article XX of the GATT 1994. See also Appellate
Body Report, US – Gambling, para, 292 in respect of Article XIV of the GATS.
13
Note that the most controversial cases in respect of Article XX of the GATT 1994 and Article XIV of the GATS
have been on the chapeau and that the final decision by the Appellate Body in this regard is the task of finding
the line of equilibrium. 15 Note that there
the necessity to protect public morals, human, animal or plant life or health, the necessity to
maintain order, and the necessity to comply with laws and regulations which are not
inconsistent with the provisions of the GATT as well as the GATS. Economic emergency
justifies derogation from MFN treatment obligation. This is provided for under GATT
Article XIX, which allows states to adopt measures otherwise WTO – inconsistent, where a
surge in import causes or threaten to cause injury to domestic industry. In this regard, it is
imperative, for the purpose of protecting domestic industry, that the Member state may adopt
measures restricting import competition for a period, however temporary in order to allow
the domestic industry time to adjust to the new economic realities. Such measures are called
safeguard measures14. No safeguard measures exist for trade in services! Worthy of note is
the fact that the application of these safeguard measures depend on ‘fair trade’ and not
‘unfair’ trade action as is the case with anti - dumping and countervailing measure15.

Similarly, regional integration through Regional Trade Agreements (RTAs) also justifies
derogation from MFN treatment obligation. This is provided for under GATT Article XXIV
and GATS Article V, which allow states to create free trade areas, customs unions, economic
or monetary unions, or political unions which may cover different economic activities, such
as trade, services, and foreign investment. Although the preferential treatment which is
limited to RTA Members, conflicts with the MFN principle of non - discrimination, it is
allowed for reason that the measure is for the pursuit of regional integration in order to
promote trade. It follows therefore that member states to RTA are not suppose to erect tariff
barriers against other WTO Members more than what normally existed prior to the creation
of the RTA. This practice constitutes the recent trend to the MFN treatment being steadily
marginalized as will be seen below.

Lastly, economic development reason is also used to justify derogation from MFN treatment
obligation. This exception to the MFN principle of non – discrimination allows various
measures to be adopted in the interest of developing countries in order to facilitate their
integration into the world trading system and to promote their economic development. This
positive effort in favour of developing countries currently undertaken by the WTO takes
many forms and is documented in almost all WTO agreements. The WTO law provisions to

14
Note that there exist also an Agreement on Safeguard and also the transitional safeguard measure under
China Accession Protocol.
15
Appellate Body Report, Argentina – Footwear (EC),para.94
this effect are called special and differential (S&D) treatment provisions 16. It should be noted
that the S&D treatment provisions are not mandatory as such compliance in practice and
success of the same is a subject of intense debate.

5. Case Study

1. European Communities - Regimes for Importation, Sale and Distribution of

Bananas, Wf /DS2717

EC is one of the largest importers of bananas in the world. For example, in 1994 EC was
the world's second largest importer of bananas after US. Latin American countries and
African-Caribbeanand Asian (ACP) countries are the major banana exporters to EC.
Costa Rica, Ecuador, Colombia, Panama and Honduras are the leading Latin American
banana exporters and Cameron, Cote d'lvoire; St. Lucia, The Dominican Republic,
Jamaica, Belize and Dominica are the leading ACP exporters to the EC. A large part of
bananas consumed in EC is produced domestically in Canary islands, Martinique,
Guadeloupe, Madeira, the Azores and, the Algarve and Crete and Laconia.

Ecuador, Guatemala, Honduras, Mexico and the United States brought complaint against
European Communities concerning its regime of importation, sale and distribution of
bananas established by Council Regulation (EEC) No. 404/93 of 13th February 1993, on
the common organisation of the market for bananas (Regulation 404/93) and subsequent
EC legislation, regulations and administrative measures including the provisions of the
Framework Agreement on Bananas, which implement, supplement and amend that
regime. The complainants claimed that the EC's regime of importation, sale and
distribution of bananas is inconsistent with several agreements of GATT 1994 as well as
Article II (Most Favoured Nation Treatment) and Article XVII (National Treatment) of
GATS.

We present a brief summary of the Council Regulation and subsequent Framework

Agreement of Bananas of the EC below. The other regulations and administrative
measures related to the EC's importation of bananas are given in the Panel Report of
WI' /DS27, Paragraph 3.29 to 3.36.
16
The preamble to the WTO Agreement is categorical on this issue of special preferences to developing
countries
17
[Information Extracted from Panel Report of WT/DS27, paragraph 3.1 to 3.36]
Council Regulation 404/93

The EC established a Common Market Organisation for bananas by Council Regulation

(EEC) 404/93 in February 1993. Prior to this each country in the EC implemented
national import regimes for bananas. Some countries had de facto prohibition against
banana imports; some gave preferential access to bananas from one or the other ACP
states. Bananas from ACP countries were permitted duty freC: into all EC member
countries.

EC's Council Regulation 404/93 established rules of imports that apply uniformly to all
EC members. This regulation consists of five separate tides. Tide III of this regulation
establishes EC assistance for the domestic banana sector. Under this tide, members of
recognized EC producer organizations (and individual producers under certain
circumstances) are eligible for compensation of any income loss resulting from the
implementation of the EC banana regime. Tide IV of the Council Regulation lays down
the tariff treatment for banana imports. It establishes 3 categories of imports for this
purpose.

(i) Traditional imports from twelve ACP countries;

(ii) (ii) Non-traditional imports from ACP countries which are quantities in excess of
traditional quantities supplied by traditional ACP countries and quantities
supplied by ACP countries which are not traditional suppliers of the EC;
(iii) Imports from third (non-ACP) countries.

The EC tariff treatment of banana imports under this regulation was as follows.

• Traditional ACP bananas - Duty free up to a total of 857,700 tonnes with country
specific quotas for each of the 12 ACP countries.

• Non-traditional ACP bananas- Duty free up to a total of 90,000 tonnes, divided into
countryspecific allocations. A specific tariff ofECU 693 per tonne for out-of-quota
shipments in 1996/97.

• Third-country bananas- A specific tariff of ECU 75 per tonne up to 2.11 million tonnes.
An additional 353,000 tonnes were made available in 1995 and 1996. Country-specific
allocations were made for countries party to the Framework Agreement on Bananas
 (BFA), plus an "others" category. A specific tariff ofECU 793 per tonne for out-of-quota
shipments in 1996/97.

For each of the 3 categorise the quantitative restrictions / allocations are presented in the
panel report (Paragraph 3.8 to paragraph 3.20]

There are some regulations imposed by EC subsequent to the Council Regulations that
implement, supplement and amend the regime. These regulations are briefly presented
below.

• Operator Category Rules - EC under its Operator Category rules defines 3 'Operator
Categories' base on quantity of bananas marketed in the previous years, for the
distribution of import licences. The definitions of these categories and their respective
entidements are as follows. Category A: operators that have marketed third-country and/
or non-traditional ACP bananas. [Allocation - 66.5%]

Category B: operators that have marketed EC and/ or traditional ACP bananas. [Allocation -
30%] Category C: operators who started marketing bananas other than EC and/ or traditional
ACP bananas, as from 1992 or thereafter ('newcomer category"). [Allocation - 3.5%] Import
quantities of category A and B are determined on the basis of previous 3 years supply and
that of category C is determined on the basis of volume of application, due to unavailability
of previous years' data for this newcomer category. The operator categories A and B are
further subdivided into 3 types of qualifying entities or "activity functions" as set forth
below. Economic agents, in order to qualify as category A or B, must have performed at least
one of these activities of marketing bananas during the previous three years (reference years).
Activity (a): "primary import' - "the purchase of green third-country bananas and/ or ACP
bananas from the producers, or where applicable, the production, and their subsequent
consignment to and sale of such products in the Community". [Weight allocation- 57 % (of
average quantity of import within respective categories)]
Activity (b): "secondary importer or customs clearer'- "as owners, the supply and release
for free circulation of green bananas and sale with a view to their subsequent marketing in
the Community; the risks of spoilage or loss of the product shall be equated with the risk
taken on by the owner". [Weight allocation -15%) Activity (&): ''ripening' - "as owners, the
ripening of green bananas and their marketing within the Community". [Weight allocation-
28%] .

• Hurricane Licenses - In addition to the above mentioned 2.553 million tonnes tariff quota
the EC also issued 281,605 tons of supplemental "Hurricane Licenses" from November 1994
to May 1996. Hurricane licenses may be used to import bananas from any source. These
licenses are granted, on an ad hoc basic, to operators who "include or directly represent" a
producer adversely affected by a tropical storm and is thus unable to supply the EC market.
Bananas imported with hurricane licences may be counted as reference quantities for future
eligibility for Category B licences. Hurricane import volumes are subject to the third-country
(non-ACP) in-quota tariff (ECU 75 per ton).

Framework Agreement of Bananas(BFA)

In 1994, the EC negotiated the BFA with Colombia, Costa Rica, Venezuela and Nicaragua.
The BFA contains provisions concerning the size of the basic tariff quota, the in-quota tariff
(ECU 75 per tonne), country-specific allocations and transferability of those allocations, the
90,000 tonne allocation for non-traditional ACP bananas, and export certificates. The BFA
was incorporated into the EC's Uruguay Round Schedule in March 1994. It came into force
on 1 January 1995 and its functioning is scheduled to be reviewed "before the end of the third
year" with full consultations with Member Latin American suppliers. The BFA is applicable
until31 December 2002.

Lome waiver

The Fourth Lome Convention, signed on 15 December 1989 between the EC and 70 African,
Caribbean and Pacific developing countries, many of which are Members of the WTO,
contains a protocol concerning bananas, along with provisions applying to products more
generally. On 10 October 1994, the EC requested, together with the ACP contracting parties,
a waiver from the EC's obligations under Article 1:1 of GATT 1947. The waiver was granted
by the CONTRACTING PARTIES on 9 December 1994 and provides, in paragraph 1 of the
waiver decision, as follows: "[I]he provisions of paragraph 1 of Article I of the General
Agreement shall be waived, until 29 February 2000, to the extent necessary to permit the
European Communities to provide preferential treatment for products originating in ACP
States as required by the relevant provisions of the Fourth Lome Convention, without being
required to extend the same preferential treatment to like products of any other contracting
party."

2. Canada - Certain Measures Mfecting Automotive Industty, Wf /DS139, and

Wf /DS14218

European Communities (EC) and Japan, the two complaining parties to this case
(WT/DS139, and WT/DS142) filed a complaint with respect to a Canadian measure which
provides a duty exemption for the importation of certain automobiles, buses and other
specified commercial vehicles \'motor vehicles''). EC and Japan claimed that the measure is
inconsistent with Art II (MFN) and Art XVII (National Treatment) of the GATS and some
other articles of various other agreements under the WTO. During the proceedings of the
case, Article I (scope) of GATS was referred and eventually clarified. The other articles of
agreements under the WTO that the Canadian measure was claimed to inconsistent with are
Art I:1 (MFN) and Art 111:4 (National Treatment) of GATT 1994, Art 2 of Trade Related
Investment Measures (TRIMS), Article 3.1(a) of Agreement on Subsidy and Countervailing
Measures (SCM).

The Canadian measure at issue in this appeal is duty-free treatment provided to imports of
automobiles, buses and specified commercial vehicles (“motor vehicles”) by certain
manufacturers under the Customs Tariff, the Motor Vehicles Tariff Order, 1998 (the "MVTO
1998'') and the Special Remission Orders (the "SROs"). The conditions under which
eligibility for the import duty exemption is determined are set out in the MVTO 1998, the
SROs and certain Letters of Undertaking (the "Letters'').

The Canadian Customs Tariff provides that a motor vehicle can be imported into Canada at a
tariff of 6.1% applied uniformly on a Most Favoured Nation basis.

Under the MVTO 1998, the import duty exemption is available to manufacturers of motor
vehicles on imports "from any country entided to the Most-Favoured-Nation Tariff'', if the
manufacturer meets the following three conditions:

1. The manufacturer must have produced in Canada, during the designated "base year",
motor vehicles of the class imported; 2. The ratio of the net sales value of the vehicles

18
"GATSwatch, 2003". Archived from the original on 10 April 2016. Retrieved 17 August 2007.
 produced in Canada to the net sales value of all vehicles of that class sold for
consumption in Canada in the period of importation must be "equal to or higher than"
the ratio in the "base year", and the ratio shall not in any case be lower than 75:100
(the "ratio requirements''); and 3. The amount of Canadian value added in the
manufacturer's local production of motor vehicles must be "equal to or greater than"
the amount of Canadian value added in the local production of motor vehicles of that
class during the "base year" (the "CVA requirements").

Through the SROs, Canada has also designated certain other companies, in addition
to those qualifying under the MVTO 1998, as eligible to import motor vehicles duty-
free. The SROs entide motor vehicles imported by these companies to receive the
import duty exemption as long as they meet certain designated conditions.
Specifically, the SROs provide for the remission [reduction] of duties on imports of
motor vehicles where conditions relating to certain specified production-to-sales ratio
requirements and CV A requirements are fulfilled. The Letters were prepared and
submitted by the Canadian subsidiaries of four automobile manufacturers to the
Canadian Minister of Industry in January 1965 and commit these manufacturers to
increase the amount of Canadian value added used by a specified percentage of each
manufacturer's market share growth. These four companies were: General Motors of
Canada Ltd., Ford Motors Co. of Canada Ltd., Chrysler Canada Ltd., and American
Motors (Canada) Ltd. Ibid. paragraphs 10.92-10.95 and 10.128.

3. United States - Measures Affecting the Cross-Border Supply of Gambling and

Betting Services Wf/DS28519

Antigua made a complaint against the United States concerning certain measures of the US
state and federal authorities that allegedly made it unlawful for suppliers located outside the
US to supply of gambling and betting services to consumers within the US. Antigua claimed
that these restrictions imposed by the US through its federal and State laws resulted in a
"total prohibition" on the cross border supply of gambling and betting services against
Antigua. Antigua contended that such "total prohibition" was inconsistent with the
obligations of the US under its GATS schedule of commitments as well as Articles VI, XI,
19
From the document MTN.GNS/W/124, available on the World Trade Organization Website, posted courtesy
of ISTIA.
XVI and XVII of the GATS. In this connection Antigua points out that US had made
Specific Commitments for foil market access and national treatment with respect to Cross
Border Supply of betting and gambling services.

In response US asserted to the Panel that a "total prohibition" could not constitute a measure
and by challenging such an alleged "total prohibition", rather than the laws and regulations
underlying such prohibition, Antigua had failed to satisfy its burden as the complaining party
to identify specific measures that are subject to the prima facie case.

The Panel then addressed this argument by "identifying the measures that the Panel would
consider in determining whether the specific provisions of the GATS that Antigua had
invoked have been violated." The panel determined first, that Antigua was not entitled to rely
on the alleged "total prohibition" as a "measure" in and of itself. The Panel also determined
that the following laws of the US warrant a substantive examination by the Panel. These
Laws are –

Federal Laws:

1. Section 1084 ofTitle 18 of the US Code (The Wire Act);

2. Section 1952 ofTitle 18 of the US Code (The Travel Act);

3. Section 1955 ofTitle 18 of the US Code (The 11/ega/G(Jfllb/ing Business Act or

IGBA).

State Laws13:

4. Colorado: Section 18 - 10 - 103 of the Colorado revised S Ia/utes

5. Louisiana: Section 14:90.3 of the Louisiana Revised Statutes (Annotated)

6. Massachusetts: Section 17A of the Chapter 271 of the Annotated Laws of

Massachusetts

7. Minnesota: Section 609.755(1) and subdivisions 2-3 of Section 609.75 of the

Minnesota Statutes (Annotated)

8. New Jersry: Paragraph 2 of Section VII of Article 4 of the New Jersry Constitution and
Section 2A: 40-1 of the New Jersry Code;
 9. New York: Section 9 of Article 1 of the New York Constitution and Section 5401 of
the New York General obligations law;

10. South Dakota: Sections 22-25 A- 1 through 22- 25A- 15 of the South Dakota
Codified Laws; and

11. Utah: Section 76- 10- 1102 of the Utah Code (Annotated)

The Panel by examining the above measures found that the 3 federal laws and State laws of
Louisiana, .Massachusetts, South Dakota and Utah are inconsistent with Article XVI: 1 and
XVI: 2 (.Market Access) of GATS and the state laws of Colorado, .Minnesota, New Jersey
and New York are not inconsistent with Article XVI of GATS.

Below we provide a brief introduction of the above-mentioned US measures at issue. The

three federal laws:

 The 'Wire Act' (18 U.S.C § 1084), prohibits gambling businesses from knowingly
receiving or sending certain types of bets or information that assist in placing bets
over interstate and international wires.
 The 'Travel Act' {18 U:S:C § 1952), imposes criminal penalties for those who
utilize interstate or foreign commerce with the intent to distribute the proceeds of
any unlawful activity, including gambling considered unlawful in the United
States.
 The 'Illegal' Gambling Business Act' (18 U.S.C § 1955), makes it a federal crime
to operate a gambling business that violates the law of the state where the
gambling takes place (provided that certain other criteria are fulfilled such as the
involvement of at least five people and an operation during more than 30 days).
 6. Conclusion

MFN exemptions have certainly not proven a critical issue in the negotiations conducted
under the DDA. Apparently, a grand coalition among WTO Members simply does not want
to deal with these exemptions. Tellingly, there have been no attempts, whatsoever, to
categorize the maze of existing exemptions in order at least to explore the potential for
targeted solutions. The existence of a variety ‘high-profile measures’, which may be deemed
immortal for deeply rooted political reasons (category A in Box 1), could have contributed to
a sense of resignation and, thus, facilitated the survival of others, including antiquated
reciprocity clauses in narrowly defined sectors (category B), which should have been
revoked before long.

A further range of exemptions might not serve any actual purpose, either because they have
been listed simply for precautionary reasons or the underlying policies have been changed
since. The current discrepancy between scheduled commitments on market access and
national treatment and the actually applied trade regimes, attributable to significant service
reforms over the past 10 or 15 years, might thus exist among MFN exemptions as well.
(Cases in point are differential accounting rates in international telephone traffic, government
mandated, which may have been rendered redundant by recent liberalization moves; category
F.) Hesitations to revoke relevant entries could be due to government-internal
communication and coordination problems and the absence of negotiating momentum in the
Doha round.

In contrast, there are also indications that governments, in particular among the WTO’s
founding Members, have misjudged the need for MFN exemptions. This could explain, inter
alia, the significantly higher number of measures listed by acceded countries (4.7 per
country)—comprising transition economies, developing countries and LDCs—as compared
to their peers among Uruguay Round participants (1.9 exemptions), which had less time and,
possibly, expertise at their disposal. Moreover, new departures from the MFN requirement,
including in the context of BITs or labour migration agreements, might have been either
ignored or wrapped in other legal clothes, such as Article V (Economic Integration) and
already existing MFN exemptions. In the absence of compelling strategic considerations—
for example, within the context of the ongoing services round—the governments concerned
may prefer to remain silent for reasons of political expediency.
Yet, inactivity is not the solution. Ultimately at stake is the credibility and integrity of a legal
system whose core obligations cannot be ignored indefinitely without consequences. It is
thus deeply disturbing that the mandated negotiation of MFN exemptions has produced no
more than 30 significant offers, out of a total of some 500 measures, to date. In variation of a
popular proverb, one might wonder whether the way to irrelevance is paved with bad
exemptions.

Given the current jumble of problems, including ‘over-listing’, ‘non-listing’ and longevity of
exemptions, there is certainly no silver bullet. For example, re-opening the door for new
MFN exemptions might not only help to bring missed, hidden or misallocated measures into
conformity. It could also trigger an avalanche of additional listings and, hence, simply
compound the problem. Similarly, too strong a focus on ‘high-profile exemptions’ might
simply squander negotiating energy and, thus, help others to survive that would have been
more promising targets. The challenge is thus to separate those measures that, from today’s
perspective, might be destined for immortality, from others that could be tolerated under
certain conditions, which remain to be agreed, while helping to remove those that could (or
should) have been buried long ago. But who would take the initiative?
BIBLIOGRAPHY

20
Source: WTO document GATS/EL/78 of 15 April 1994.
1. Altinger, L. and Enders, A. (1996), The Scope and Depth of GATS
Commitments, World Economy, 19, 65-94.
2. Bagwell, K. and Staiger, R. (1997), GATT-Think, mimeo.
3. Farber, D.A. and Hudec, R.E. (1996), GATT Legal Restraints on Domestic
Environmental Regulations, in Bhagwati, J. and Hudec, R.E. (eds.), Fair Trade
and Harmonization: Prerequisites for Free Trade? Volume 2, Legal Analysis, MIT
Press, Cambridge, Massachusetts, and London, England.
4. Hoekman, B. (1996), Tentative First Steps: An Assessment of the Uruguay Round
Agreement on Services, in Martin, W. and Winters, L.A. (eds.), The Uruguay
Round and the Developing Countries, Cambridge University Press, Cambridge.
5. Mattoo, A. (1997), National Treatment in the GATS - Corner Stone or Pandora's
Box?, Journal of World Trade, 31, 107-135.
6. Mattoo, A. and Subramanian, A. (1998), Regulatory Autonomy and Multilateral
Disciplines, Journal of International Economic Law, 1, 303-322.
7. Pelkmans, J. and Winters, A. (1988), Europe's Domestic Market, Chatham House
Papers 43, Royal Institute of International Affairs, Routledge, London.
8. Roessler, F. (1996), Diverging Domestic Policies and Multilateral Trade
Integration, in Bhagwati, J. and Hudec, R.E. (eds.), op. cit.
9. Sapir, A. (1998), GATS 1994-2000, mimeo.
10. Schartz, W.F. and Sykes, A.O. (1996), Toward a Positive Theory of the Most
Favoured Nation Obligation and Its Exceptions in the WTO/GATT System,
International Review of Law and Economics, 16, 27-51.