InternationalCh 2017 Chapter10TradeInServi BusinessGuideToTradeA

CHAPTER 10 | TRADE IN SERVICES
Chapter 10
Trade in Services
Peter Allgeier and Olivia Burzynska-Hernandez 1*
Executive Summary
under U.S. or applicable copyright law.
The services revolution is transforming the world economy. Every business depends on
services, which account for the largest worldwide share of jobs, output and job
growth. Coupled with the services revolution, the digital revolution has radically
expanded the international movement of services.
Services can be traded internationally in four modes: (1) Cross-Border Supply, where
the service product (such as a medical diagnosis or architectural drawings) travel
internationally, by email, fax, or the like; (2) Consumption Abroad, where the service
consumer travels to another country to receive the service (e.g., tourism); (3)
Commercial Presence, where a company sets up an operation in another country (e.g.,
Contents
a bank branch); and (4) Presence of Natural Persons, where a person travels abroad
permitted
to provide a service on a temporary basis (e.g., repairing sophisticated machinery).

uses of
The General Agreement on Trade in Services (GATS), one of the Uruguay Round
Table
Agreements, was the first international agreement to provide comprehensive rules on

All rights reserved. May not be reproduced in any form without permission from the publisher, except fair
service trade. It sets forth general obligations, and provides a mechanism for specific
negotiated market-opening commitments.
The General Obligations include:

Most-favoured-nation treatment;
Transparency requirements;
Rules relating to regulations; and
A requirement that monopoly suppliers in sectors where market-opening
commitments have been made do not abuse their position.
Specific Commitments are negotiated on a sector-by-sector and mode-by-mode basis

(the WTO has created a list of twelve sectors, such as Business Services and
Transportation). Market access can be limited by the number of suppliers, the total
value of service transactions, and the number of employees in a particular sector.
Restrictions can be imposed on the type of legal entity that can be established (e.g.,
subsidiary or branch), and the participation of foreign capital. In addition, national
treatment can be limited or not granted at all. However, any restrictions on market
access or national treatment must be recorded in the Member’s services schedule.
The GATS follows the so-called “positive list” approach, under which all market-
Copyright 2017. ICC Services.
opening commitments and limitations are recorded in the Member’s schedule. Any
* Peter Allgeier served as Deputy US Trade Representative and US Ambassador to the World Trade Organization. Most recently he
was President of the Coalition of Service Industries (CSI). Olivia Burzynska-Hernandez was a Policy Associate at the CSI.
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sectors that are not scheduled are assumed to be closed. Some Regional Trade
Agreements use the opposite, “negative list”, approach, under which all sectors and
modes are assumed to be open unless a specific exception is taken.
1.0 Introduction
1.1 The Services Revolution
The global economy is in the midst of the Services Revolution, which is having as
dramatic an effect on our work life and daily life as the Industrial Revolution in the 19th
Century. Services make the world go around, for consumers, businesses and
governments.
Just think of your daily routine. First thing in the morning, you wake up knowing that
your family is safe because of the electronic security service that monitored
everything while you slept, from the locks on your doors to the carbon monoxide in
the garage. Then you probably check your e-mail, the football or cricket results, and
the headlines from the Financial Times on your smartphone service. If you drive to
work, you require car insurance; if you take the subway or bus, you are using a
transport service. On the way to the office, you stop at your favourite coffee bar for
breakfast. At the office, you put the package containing the birthday tie you want to
return in the express delivery pick-up box. A quick check online of your bank balance,
then you place calls to everyone who left you voicemails overnight, using one of the
international telecommunications services.
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Services make the business world go around. In fact, they make the entire world go
around – if they are allowed to.
The Services Revolution is evident from the fact that services are by far the largest
source of jobs (3.2 billion worldwide),1 output (70% of world GDP),2 and job growth.
The numbers are impressive, but the revolution is more than just numbers of workers
or share of GDP. The most important thing to recognise is that all businesses – small
and large – and all segments of the economy, including agriculture, manufacturing and
energy, depend on services to be successful. Services are the enablers of all other
economic activities.
GLOBAL VALUE CHAINS

The integration of services with manufacturing and agriculture is what
produces global value chains, in which enterprises and countries specialise
in tasks rather than goods. Every economic activity depends on supportive
services, i.e., services that enable other producers (in manufacturing,
agriculture, mining, and other services) to achieve their output and sales
goals in the most efficient ways possible, especially if they are to plug into
the supply chains that are the predominant phenomenon in international
trade. Manufacturing jobs depend on services. For example, GE, Siemens,
and Boeing depend on services workers in their own companies or from out-
side service suppliers – in accounting, finance, product design, distribution
and logistics, advertising, computer-related services, telecommunications,
express delivery, just to name a few. Likewise, ask any farmer about his or
her reliance on services: crop insurance, extension services, financing,
storage services, distribution and marketing, equipment maintenance, etc.
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Developing countries and small businesses are in particular need of access to efficient,
economical services in order to compete in international markets and to maximise
efficiency and competitiveness at home. International services (Internet, electronic
payments, express delivery) enable millions of small, even micro, enterprises
throughout the world to engage in “random” exports of goods and services without
any need for a physical presence overseas.
Businesses will profit enormously if they pay attention to how services affect their
daily activities, and if they become aware of the economic advantages they can reap
by taking better advantage of the international, regional and national rules governing
trade in services.
1.2 The Digital Revolution

At the centre of the Services Revolution is a second revolution: “The Digital
Revolution”, of which the Internet is emblematic. The Internet has enabled services to
be delivered digitally across borders to a degree that was unimaginable 20 years ago.
Many items that were formerly delivered as goods (e.g., software, movies and music)
are now being delivered digitally. Keep in mind that Amazon.com was only founded in
1994, and Facebook was founded 10 years later.
The Internet is the Great Silk Road of the 21st century. Just as the Great Silk Road
provided the transmission route for trade among Asia, Europe and North Africa during
the 6th through 14th centuries, so the Internet now plays that role for the entire world.
In this digital age, companies in international markets constantly need to move data
digitally across the globe for their own internal operations and to serve their
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customers. While this may be obvious in the case of insurance firms processing claims
or accounting firms verifying and reviewing audits, it is actually essential for any
international business. For example, think of express delivery companies tracking
packages across the globe, or an airline company remotely monitoring its engines
while its planes are in flight. Retailers have to manage their worldwide procurement
and inventory, and car manufacturers have to manage their supply chains. Health
professionals seek second opinions from specialists across the globe via the Internet.
None of this was contemplated 20 years ago when countries negotiated the General
Agreement on Trade in Services (GATS), the multilateral rules for trade in services that
were part of the Uruguay Round of trade talks. The world has changed radically in the
intervening years as a result of technological advances, global data flows, global value
chains, innovative business practices, and the widespread use of the Internet by nearly
everyone (approximately three billion Internet users at last count).3
The international rules and provisions governing trade in services and digital trade
have not kept up with these developments. They urgently need to be updated and
brought into line with the realities of today’s digitally connected world.
THE IMPLICATIONS OF THE DIGITAL REVOLUTION

Traditional goods providers that market books, journals, magazines,
newspapers, films, music, games, software, etc. know that the digital revolu-
tion has changed their businesses forever. Digital trade distributes what we
think of as a good in a manner more typical of a service. While cross-border
marketing costs may be lower, issues related to taxation, as well as piracy
and other malicious activity, abound. Traditional goods providers must not
only adapt their business model to deal with the digital revolution, to the
extent that they deal with the delivery of traditional goods, they must now
seek to improve marketing and delivery by taking advantage of progress
(and even evolution) in the services sector. They must also realise that the
digital age may still pose unforeseen challenges to their business model, and
that the line between delivery of a good and a service may become
increasingly blurry in some sectors. The delivery of a good has always
involved a service sector component (advertising, distribution, professional
services, etc.). Now, with increased service sector competition and efficiency,
management of service providers has become even more important.
1.3 How Services are Traded Internationally

The Services Revolution is a genuine international revolution. Not only is it occurring in
all countries, it is occurring increasingly in trade among countries. Businesses need to
understand how services are traded internationally. There are four ways in which
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services can be traded, known in international agreements as the four “modes of

supply”. These are:
1. Providing services across a border, such as an architectural drawing or
medical diagnosis transmitted via the Internet or by mail (Mode 1 – Cross-
Border Supply);
2. Having the customer come to the host country to receive the service, e.g.,
tourism or going abroad for an operation (Mode 2 – Consumption Abroad);
3. Establishing an affiliate or branch or partnership in a foreign country, e.g.,
opening a fast food restaurant or operating a bank branch (Mode 3 –
Commercial Presence); and
4. Sending an employee temporarily to the customer in a foreign country, e.g.,
repairing sophisticated machinery or operating an off-shore oil drilling
platform (Mode 4 – Presence of Natural Persons).4
According to the World Trade Organization (WTO), cross-border exports of services
supplied in Modes 1, 2 and 4 reached US$4.9 trillion in 2014.5 The WTO estimates that
the distribution of modes of supply is: 30% for Mode 1; 10% for Mode 2; 55% for Mode
3; and less than 5% for Mode 4. But because services are imbedded in all
manufactured goods and agricultural products, the current international trade
accounting vastly understates the value of cross-border services. For example, the
entire value of an automobile is recorded as a manufactured good import, even
though it is a combined manufacture and services import. The WTO has estimated
that international trade in services amounts to 45% of international trade, rather than
the 23% of trade indicated by the traditional trade statistics.6
MUCH SERVICE TRADE GOES BY UNNOTICED

AND AS A RESULT UNREGULATED
Although the international and regional rules governing service trade
are important, much service trade operates below the radar screen. For
example, if an attorney provides a foreign client with legal advice by phone
or email (Mode 1), there is little that the authorities on either side of the
border can do to regulate or prevent it. If a Swiss resident crosses the border
into France, Italy or Germany for a haircut (Mode 2), there is also little that
the authorities can do to limit such transactions (assuming they wanted to).
Much service trade goes unnoticed and unregulated (particularly in Modes 1
and 2), regardless of international and regional commitments.
1.4 The Multilateral Services Regime: the General Agreement

on Trade in Services (GATS)
Services trade was not important in 1947, when the General Agreement on Trade in
Goods was negotiated, and there was no attempt to develop rules covering services.
However by the 1980s, as a result of improved and cheaper telecommunications and
travel opportunities, services trade was growing quickly around the world, providing
new opportunities for developed and developing countries. A number of countries, led
by the United States and the EU, pushed for inclusion of services in the Uruguay
Round, one of whose most significant achievements was the negotiation of the GATS,
the first international trade agreement to focus exclusively on services trade. Although
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developed countries have tended to benefit more from international services trade,
many developing country businesses are beginning to reap enormous benefits as
increased competition between international and domestic service providers reduces
costs and improves quality, thereby benefitting consumers and businesses worldwide.
As discussed in more detail later in this chapter, the GATS gives WTO Members great
flexibility in terms of the extent to which they open their service sectors. They can
decide which sectors and modes of supply they wish to open, they can impose
restrictions on the degree and timing of the opening, and, in contrast to the GATT, the
GATS does not require national treatment to be given to foreign service suppliers. Under
the GATS, Members make “commitments” as to which service sectors and
subsectors they want to open, and have the ability to specify limitations they wish
to place on such liberalisation. They also make commitments as to the extent to
which they are prepared to give national treatment to foreign suppliers in the
service sectors they have opened. The commitments and limitations are recorded in
the Members’ schedules.
In order for a business to assess opportunities to provide services to

foreign markets, a business must look at both “the border” (i.e., permission
to provide a service) and “behind the border” (the myriad regulations that
set the rules for providing the service). Businesses must also look at the
market access schedules for specific services in a given country, as well as
the general (“Horizontal”) rules governing the conduct of services in the
importing market (see Section 4 below). The service schedules of all WTO
Members are available on the services section of the WTO website: See
http://i-tip.wto.org/services/default.aspx. “Behind the border” legal and
regulatory information is often available on domestic websites. However,
businesses usually find it necessary to visit target markets, and even to hire
local legal and economic consultants to assess practices that may affect
their market access and eventual performance.
1.5 Coverage
GATS is comprehensive in its coverage of service sectors. The only sector-specific
exclusion is air traffic rights, which are governed by bilateral or other non-WTO
agreements.7 The GATS covers all measures, “whether in the form of a law, regulation,
rule, procedure, decision, administrative action, or any other form”.8 This includes
measures at all levels of government (i.e., central, regional or local, as well as any
non-governmental bodies that are exercising powers delegated by a government,
such as a bar association or medical council).
As discussed below, the key provisions of the General Agreement on Trade in Services are:
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1.General Obligations
a. Regulations to which all WTO Members must adhere
2. Specific (negotiated) Commitments (Market Access Schedules)
a. Market Access
b. National Treatment
c. Additional Commitments
d. Other types of commitments
3. Exceptions
a. Services or measures that Members can exempt from
GATS rules and regulations
4. Annexes
a. Details and clarifications on GATS articles, including
more information on exemptions.
2.0 General Obligations

GATS stipulates both unconditional and conditional general obligations that each
Member takes on when accepting the agreement. Unconditional general obligations
refer to the rules which WTO Members must apply to all sectors, whether or not they
have agreed to open them. These obligations include most-favoured-nation (MFN)
treatment, obligations affecting domestic regulations and transparency. Conditional
general obligations refer to obligations that apply only to sectors that a Member has
agreed to open and are therefore listed in the Member’s schedule of commitments. In
GATS, conditional general obligations relate to certain domestic regulations,
monopolies and payments and transfers.
2.1 Unconditional General Obligations

2.1.1 Most-Favoured-Nation (MFN) Treatment (Article II)
Most-favoured-nation (MFN) treatment ensures that WTO Members do not
discriminate among other WTO Members. In other words, one Member cannot
provide another Member with an offer or special preference without providing the
same offer or preference to all Members. However, at the conclusion of the Uruguay
Round, or upon a new Member’s accession to the WTO, a Member could list in its
schedule exceptions to the MFN obligation. In principle, these exemptions are meant
to expire in no more than 10 years, but in fact there is no effective means of enforcing
their termination. Therefore, one must consult a Member’s schedule to determine the
extent to which an MFN exemption exists.
The business community should be aware that as described in Section 10

below, Article V of GATS provides an important exception to MFN between
Members who are also parties to bilateral or plurilateral free trade agreements
(or customs unions) covering services. This exception applies if the regional
trade agreement has substantial sectoral coverage and eliminates substan-
tially all discrimination among the parties to that agreement.
Businesses contemplating service transactions should first ascertain

whether there is a bilateral or plurilateral trade agreement in place that
may give their service exports preferential market access.
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2.1.2 Transparency (Article III)

All WTO Members are required to “promptly publish all relevant measures of general
application” that affect the operation of the GATS. Members are required to notify the
WTO Council for Trade in Services of new or changed laws, regulations, or
administrative guidelines that will affect trade in any services subject to specific
commitments. This allows businesses to have time to prepare for any changes that
need to be made. Members are also required to establish “Enquiry points” to respond
to requests from other Members.
Businesses can consult service sector notifications of WTO Members on the

I-Tip Services website,9 although the website warns that the list may not be
complete. Businesses can find the contact information of each Member’s
GATS Enquiry Points on the WTO Website.10
2.1.3 Domestic Regulation (Article VI)

The domestic regulation obligation applicable to all service sectors, whether or not
market opening commitments have been made, allows individual service suppliers to
access domestic mechanisms to seek legal redress, including objective and impartial
review by “judicial, arbitral or administrative tribunals or procedures” in the Member
where they are supplying a service. If a service supplier seeks legal action in a
particular domestic market, the affected Member is obligated to provide a legal
mechanism to review promptly, and where justified, provide appropriate remedies for
administrative decisions affecting trade in services. Domestic regulation is also treated
below under “Conditional General Obligations” (Section 2.2).
2.1.4 Subsidies (Article XV)

While the GATS, unlike the GATT, does not discipline subsidies, a Member granting a
subsidy is supposed to give “sympathetic consideration” to a request for consultations
by another Member that considers itself adversely affected by the subsidy.
Since WTO subsidy disciplines only apply to goods, a business contempla-

ting entry into a particular service sector may find it useful to petition its
government for financial assistance. Several governments have given consi-
deration to the provision of financial support to potential service
suppliers to facilitate entry of their goods sectors into global value chains.
2.2 Conditional General Obligations

2.2.1 Domestic Regulations (Article VI)
In sectors where a Member has made market access commitments, regulatory
requirements must be based on objective and transparent criteria and must not be
more burdensome than necessary to ensure the quality of the service. Also, applications
for the supply of a service must be acted on within a reasonable time. Regulatory
requirements include licensing and qualification requirements, along with technical
standards. This obligation ensures that any specific commitments that Members take
are not undermined by requirements or technical standards that could not reasonably
have been expected at the time that the specific commitments were made.
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Service sectors that appear to open as a result of specific market-opening

commitments may not be as open as first appears. WTO Members
sometimes use licensing and qualification requirements as a means to limit
access to service sectors. Service sector professionals contemplating work
abroad under Mode 4 are advised to check whether there are foreign
national licensing or qualification requirements that may limit the exercise
of their profession (for example lawyers might be subject to local bar
admittance requirements). Conversely, service sector professionals seeking
to prevent foreign encroachment may try to maintain or erect licensing and
qualification barriers. Although such barriers are supposed to be subject to
WTO disciplines, negotiations to develop such disciplines have been slow.
Professional service providers should be aware that domestic regulations

often pose a very important barrier to market access. The GATS Agreement
limits the types of domestic regulations that a Member can impose in
sectors in which they have made commitments, and provides an avenue
of legal recourse in the event that a Member exceeds permissible limits.
Nevertheless the present disciplines are weak.
2.2.2 Recognition of Professional Qualifications (Article VII)

Article VII provides the framework for a Member to recognise the educational
qualifications or professional certifications granted by another Member. Such
recognition may be the result of an agreement between the Members or granted
autonomously by one Member to another. The criteria or standard for the recognition
should be based on multilateral standards, and the arrangement or autonomous
recognition should be available to other Members on a non-discriminatory basis.
2.2.3 Payments and Transfers (Article XI)

Article XI of the GATS requires Members to allow “international transfers and
payments for current transactions relating to specific commitments.” This means that
a Member cannot restrict payments and transfers (inward or outward) on transactions
related to its specific services commitments except in the event of a balance of
payments emergency. Moreover, any restrictions to safeguard the balance of
payments must be consistent with the criteria in Article XII, which include non-
discrimination among Members, consistency with the IMF Articles of Agreement,
temporary and progressive phase out, and avoidance of unnecessary damage to the
commercial, economic and financial interests of any other Member.
2.2.4 Monopolies and Exclusive Service Suppliers (Article VIII)

GATS Members are permitted to maintain monopoly suppliers of services, provided
they adhere to the MFN obligation and any relevant specific market access
commitments in their schedule. Monopolies may not abuse their monopoly position in
the provision of services outside the scope of their monopoly rights.
3.0 Specific Commitments

As explained above, the GATS gives WTO Members great flexibility in terms of
opening their services markets to foreign competition. Where a Member decides to
open a particular sector (in technical terms, makes a “commitment”), this is recorded
in a schedule, which also lists any limitations on the degree of opening as well as any
National Treatment limitations. Members’ schedules are provided to the WTO, and are
available on the WTO website.11
During the Uruguay Round negotiations, countries agreed to make commitments in 12

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broad service sectors, such as Business Services and Transportation Services, plus a
catchall “Other” category.12 These broad sectors are broken down into 160 subsectors.
Developed countries, and countries that recently acceded to the WTO (such as China)
were often required by Members to make extensive commitments. Developing countries
that are among the founding WTO Members tended to make fewer commitments.
Members made three types of commitment, which are reflected in different columns
in their schedules: Market Access Commitments, National Treatment Commitments
and Additional Commitments. These are explained below.
3.1 Market Access Commitments (Article XVI)

Market access for services is very different than market access for goods, for which
the only permissible restrictions are tariffs (and regulations that have a legitimate
purpose, such as safety). A Member may impose the following limitations on market
access for foreign service suppliers, so long as those limitations are recorded in the
Member’s Schedule:
Limitations on the number of service suppliers;
Limitations on the total value of service transactions or assets;
Limitations on the total number of service operations or the total quantity of
services output;
Limitations on the total number of natural persons employed in a particular
service sector;
Restrictions or requirements on the type of legal entity (e.g., subsidiary or

branch) through which a service is supplied; and
Limitations on the participation of foreign capital in terms of a maximum

percentage limit on foreign shareholding or the total value of aggregate
foreign investment.
To give an example, a Member might decide to open its banking sector, but to limit
the number of foreign banks to five, to limit the combined value of their business to
US$10 billion, to require them to operate as branches rather than subsidiaries, and to
limit the foreign employees to a specific number of senior managers and technical
specialists for a specified length of time.
3.2 National Treatment (Article XVII)

In contrast to the GATT, the GATS does not require Members to provide unrestricted
national treatment to foreign service suppliers, even in sectors where a Member has
granted market access. However, any limitations on national treatment must be
recorded in the Member’s Schedule. A Member may choose to give no national
treatment at all, or it may limit national treatment. For example, some Members
impose restrictions on foreign ownership of land (e.g., leasing only and not outright
ownership), which can obviously have an impact on Mode 3 investment.
3.3 Additional Commitments (Article XVIII)

Many Members also scheduled additional commitments in the last column of their
GATS schedules. Often these commitments deal with standards, qualifications and
licenses. They are particularly common in the telecommunications sector.
3.4 Other Types of Commitments

3.4.1 The Understanding on Commitments in Financial Services
The Understanding on Commitments in Financial Services is a set of voluntary
commitments that individual Members may schedule as additional liberalisation. It
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reflects the fact that some WTO Members were prepared to go further in liberalising
their services regime than was acceptable to the overall WTO membership. The
Understanding lists a “menu” of commitments for Members to choose, so the precise
commitments scheduled vary from Member to Member. Among the commitments
are: an agreement not to add non-conforming measures (i.e., measures that are
excluded from coverage); most-favoured-nation treatment and national treatment on
the purchase of financial services by public entities; permission to supply new
services; and certain conditions of temporary entry for senior financial services
managerial personnel or specialists (e.g., actuarial, legal, computer and
telecommunications).
3.4.2 The Telecommunications Reference Paper

The Telecommunications Reference Paper, like the Financial Services Understanding, is
a voluntary, legally binding list of definitions and principles applying to basic
telecommunications services regulatory practices that a Member may include in its
schedule, in whole or in part. Six areas of regulatory practice are covered: (1)
prevention of anti-competitive practices by the telecommunications network provider;
(2) interconnection arrangements and safeguards; (3) universal service provisions; (4)
transparency in licensing; (5) independence of telecommunications regulatory bodies;
and (6) procedures for the allocation and use of scarce resources such as frequencies.
4.0 How to Read a GATS Schedule

4.1 Scheduled Commitments
At first glance, services schedules are rather intimidating documents, but learning to
read a GATS schedule is not only important for service providers, it is important for
investors that may need services supplied by foreign service providers. Most
Members’ schedules begin with the so-called Horizontal Commitments. These record
commitments (and limitations) that are applicable to all service sectors and
subsectors for which market access commitments have been made, and are simply
designed to avoid having to repeat the same information on each of the sector-
specific schedules. Typically they define the types of individual who may enter under
Mode 4 in connection with a Mode 3 investment, e.g., senior management or technical
specialists. They also sometimes involve restrictions on land ownership by foreigners
(relevant to Mode 3 investments).
The Horizontal Commitments are followed by Sectoral Commitments listing the

commitments (and restrictions) mode-by-mode for each service sector and subsector
in which a Member has granted market access. There are 12 sectors and 160 sub-
sectors that a Member could schedule. No listing is provided for sectors where a
Member has not made a commitment.
4.2 Terminology
It is also necessary to understand the terminology used in service schedules. None
means that a Member is opening a particular service sector in the designated Mode of
Supply with no restriction whatever. Unbound means that a Member has made no
market access or national treatment commitment. From the business perspective this
means that the Member is not taking a legal obligation to allow market access or to
grant national treatment. Market access may be permitted, but the Member has the
legal right to withdraw such permission. Unbound* means that supply of the service
through the mode in question is not technically feasible. For example, it is not possible
to provide a haircut via the Internet or any other Mode 1 method.13
READING A SERVICES SCHEDULE

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Looking at a particular service schedule may help to clarify the subject.

Appendix A consists of extracts from Japan’s service schedule. Suppose that
a US advertising company wishes to establish a subsidiary in Japan. It will
learn from the relevant Sectoral schedule that there are no Mode 3 restrictions
with respect to advertising services. However, the Horizontal Schedule indi-
cates that Mode 4 restrictions exist. There we find that a foreign person may
be transferred to Japan for a period of no longer than five years in order to
perform a number of specified activities, such as branch director, auditor, or
engineer, provided he or she has been employed by the sponsoring
enterprise for at least one year immediately preceding the assignment to
Japan. The Horizontal Schedule also tells us that Japan is making no
national treatment commitment with respect to the provision of research
and development subsidies for foreign service suppliers via commercial
presence (Mode 3) or temporary entry of natural persons (Mode 4). In other
words, in the event that the Japanese Government decided to provide
subsidies to its domestic advertising agencies, it would be under no
obligation to do so for foreign-owned agencies.
4.3 How Schedules Are Negotiated (Request-Offer)

Market access schedules are negotiated bilaterally through an iterative request-offer
process, with the results applying to all Members. At the beginning of the market
access negotiations, each party presents an “offer” listing the sectors that it is willing
to open, including specification of which modes of supply the offer covers and any
restrictions it is placing on the degree of opening. Each party also submits a “request”
to each of the other parties, identifying the sectors and modes of supply that it would
like each party to open. There follows rounds of separate bilateral negotiations as each
party modifies its offers and requests (improving or reducing them) until a bilateral
agreement is reached with each party (actually with each of the Member’s major
trading partners). The sum of a party’s final offers is made available to all Members of
the negotiation, i.e., the bilateral offers are “multilateralised” in their application.
4.4 “Water”
A Member’s GATS schedule only indicates the degree to which the Member is legally
obliged to open a particular sector. Many Members have opened up their service
markets to a considerable degree since the Uruguay Round, without altering their
schedules, so that the markets are in fact more open than schedules suggest. The
difference between the committed and actual degrees of openness is known as “water”.
A service business wishing to invest in another country that finds that

either the country has made no market access commitments in the sector
in question or that it has placed limitations on its commitments that would
make it difficult for the business to operate effectively should investigate
whether the market is in fact more open than indicated in the schedule. But
it must keep in mind that the country is under no obligation to maintain
that additional degree of openness, and could revert to its more restricted
scheduled commitment (on an MFN basis) in the future.
5.0 Protocols
At the initiation of the World Trade Organization, it was recognised that in certain
services areas the specific market access commitments were inadequate. It was
agreed that subsequent negotiations should occur to provide additional time for
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Members to improve their commitments. The additional commitments, negotiated

between 1995 and 1997, were recorded in protocols that became integral parts of the
GATS. There were four protocols: the second and fifth protocols on financial services,
the third protocol on movement of natural persons, and the fourth protocol on access
to basic telecommunications services. There is no first protocol.14
6.0 Positive List vs. Negative List

The GATS and some free trade agreements (particularly those involving developing
countries) use the so-called “positive list” method for scheduling a Member’s market
access and national treatment commitments, with the rule being that no
commitments have been made in sectors that are not listed in the schedule. Other
bilateral and plurilateral free trade agreements (FTAs), including all of those
negotiated by the United States, use a “negative list” approach, in which full market
access and national treatment is given except where exclusions are listed.
ADVANTAGES OF THE NEGATIVE LIST APPROACH

The negative list approach, which assumes that everything is covered unless
explicitly excluded, is preferable from a market-opening standpoint because
it provides more comprehensive coverage and better clarity on market
access restrictions. It also means that new services, or services delivered in
a new manner, automatically receive market access and national treatment
because they were not specified in the original negative list.
US FTAs are structured quite differently from the GATS and positive list FTAs.
Typically, they have separate chapters covering cross-border trade in services,
financial services, and telecommunications. Some, but not all, contain a chapter on
temporary entry for business persons. All have a separate chapter on investment,
which covers all types of investment, not just investment in services. Such investment
provisions will be discussed in Volume Two of this series.
7.0 Exceptions
7.1 General Exceptions (Article XIV)
The GATS sets forth several important general exceptions applicable to service sector
rules that largely parallel the exceptions present in the GATT 1994 (which is applicable
to goods). These exceptions are limited by the strict requirement that they not be
applied “in a manner which would constitute a means of arbitrary or unjustifiable
discrimination between countries where like conditions prevail, or a disguised
restriction on trade in services”. The exceptions allow Members to adopt or enforce
measures:
Necessary to protect public morals or to maintain public order;
Necessary to protect human, animal or plant life or health;
Necessary to secure compliance with laws or regulations which are
consistent with this agreement, including:
– prevention of deception of fraudulent practices;
– the protection of privacy of individuals in relation to the processing

and dissemination of personal data and protection of confidentiality
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of individual records and accounts; and
– safety;
Inconsistent with Article XVII (national treatment) as long as the difference
in treatment is aimed at ensuring the equitable or effective imposition or
collection of direct taxes in respect of services or services suppliers of
other Members; and
Inconsistent with Article II (most-favoured-nation treatment), as long as the
difference in treatment is the result of an agreement on the avoidance of
double taxation.
Businesses should be aware that no WTO dispute settlement proceeding

has ever upheld a government trade measure applicable to service
providers based on any of the above exceptions. Just as in cases applying
similar language applicable to trade in goods, it is evident that the
Appellate Body will interpret these exceptions narrowly.
7.2 Security Exceptions (Article XIVbis)

The GATS also contains limited exceptions whereby a Member can avoid GATS
obligations in order to protect its national security. These exceptions are virtually
identical to the exceptions set forth in GATT Article XXI, discussed in Chapter Two. No
GATS dispute has ever interpreted these exceptions.
8.0 Annexes (Article XXIX)

The GATS includes a number of Annexes that provide more detailed provisions
relating to certain service sectors, as well as provisions relating to Mode 4.
8.1 Annex on Financial Services

The GATS Annex on Financial Services covers all financial services, which include
insurance and insurance-related services (e.g., actuarial, risk assessment, claim
settlement), and banking and other financial services. The Annex specifies that
financial services supplied in the exercise of governmental authority (e.g., central bank,
social security, public retirement plans) are not covered by GATS. The Annex also
explicitly permits a country to take measures that would otherwise conflict with the
GATS, for prudential reasons, including for the protection of investors, depositors,
policyholders or persons to whom a fiduciary duty is owed by a financial services
supplier, or to ensure the integrity and stability of the financial system. The prudential
exception is drafted to provide wide latitude for regulators to protect the integrity and
the stability of the financial system, provided that such measures are not designed
simply to avoid a Member’s obligation under the GATS. Examples of such measures are
higher reserve requirements for foreign banks and reinsurance collateral requirements.
8.2 Annex on Movement of Natural Persons Supplying Services

The Annex on Movement of Natural Persons Supplying Services confirms that the
agreement does not apply to measures regarding citizenship, residence, employment
on a permanent basis, or natural persons seeking access to the employment market of
another country, i.e., who do not already have jobs. It also makes clear that
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maintaining a visa system is not in itself inconsistent with market access commitments
or national treatment or MFN obligations.
8.3 Annex on Telecommunications

The Annex on Telecommunications recognises that service suppliers in all areas
depend on access to telecommunications networks on reasonable and non-
discriminatory terms, which the Annex requires and spells out in some detail. This
Annex also acknowledges a Member’s rights to impose regulations to protect the
technical integrity of networks and to safeguard their public service responsibilities,
such as making networks available to the public generally. The treatment prescribed in
the Annex, however, applies only to those (telecom-using) services that are contained
in the Member’s schedule of market access commitments.
8.4 Annex on Air Transport Services

The Annex on Air Transport Services excludes from coverage measures affecting air
traffic rights or services directly related to the exercise of those rights. It does specify,
however, that the agreement applies to measures affecting aircraft repair and maintenance
services, sales and marketing of air transport services, and computer reservations
systems services, to the extent that they are scheduled on a country’s positive list.
9.0 Dispute Settlement (Article XXIII)

GATS provides access to the WTO dispute settlement process, which is discussed in
Chapter Twelve. Relatively few WTO dispute settlement cases involving services have
been concluded. The most significant cases include: (1) A US case against Mexico on
telecommunications services;15 (2) A case against the United States on gambling
services;16 (3) A US case against China on publications and audio-visual services;17 and
(4) A US case against China on electronic payment services.18 While different GATS
articles were in play in these disputes, in both cases involving China the panels and
the Appellate Body found some form of discrimination between domestic and foreign
suppliers of the relevant services or that foreign service suppliers had to conduct a
crucial part of their business through a government-designated monopoly. The
Mexican case found discriminatory regulatory practices, including with respect to
excessive interconnection charges, and with respect to service suppliers’ access to
telecommunications networks.
As only WTO Members are parties to WTO dispute settlement, companies

with grievances must work through a friendly government that is willing to
take their cause to WTO dispute settlement.
9.1 Case Study: China Electronic Payment Services19

In September 2010 the United States initiated a case claiming that China had imposed
WTO-illegal restrictions and requirements pertaining to electronic payment services
(EPS) for payment card transactions, and against the suppliers of those services.
Among other things, the United States alleged that China had given a Chinese entity a
monopoly in the processing of all domestic Renminbi transactions.
The WTO panel issued its decision in July 2012. While it did not accept all of the US
claims, it did find that the establishment of the Chinese company as the sole supplier
for the clearing of certain types of card transactions violated China’s Market Access
commitments, and that certain requirements with respect to all payment cards issued
in China, including that they bear the logo of the Chinese clearing company, were
inconsistent with China’s national treatment obligations.
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China did not appeal the Panel’s decision. While China and the United States agreed in
August 2013 on procedures for compliance with the panel ruling, the United States
maintained through early 2017 that China had not brought its measure into
compliance with the Panel’s recommendations. In May 2017, however, China agreed to
provide full market access to US electronic payment service companies by July 2017.
10.0 Bilateral and Plurilateral Agreements

10.1 GATS Article V
GATS Article V recognises the right of WTO Members to negotiate service sector
bilateral or plurilateral free trade agreements (called “Economic Integration
Agreements”) provided: (1) the agreement has “substantial sectoral coverage”, as
measured by number of sectors, volume of trade, and modes of supply; (2) the
members of the bilateral/plurilateral eliminate “substantially all discrimination between
or among the parties” in those sectors; and (3) the members do not raise the level of
barriers in the covered sectors to those outside the agreement higher than the level
existing prior to the free trade agreement. While most early free trade agreements
covered goods only, virtually all modern agreements include services, and services
provisions are being added to some of the early free trade agreements.
10.2 Trade in Services Agreement (TiSA)

Since the inception of the WTO in 1995, technological advancement and the wide use
of the Internet by businesses and consumers have dramatically changed the global
services market. But the trading system has not kept up. Trade negotiators need to
address issues created by the digital revolution and cross-border data transfer, supply
chains, state entities competing in commercial services, clustering and integrating
services across sectors, and the integration of services with all other segments of the
economy, including agriculture, manufacturing and energy.

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CHAPTER 10 | TRADE IN SERVICES

to provide a service on a temporary basis (e.g., repairing sophisticated machinery).

Agreements, was the first international agreement to provide comprehensive rules on

The General Obligations include:

Specific Commitments are negotiated on a sector-by-sector and mode-by-mode basis

INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 231

GLOBAL VALUE CHAINS

232 | INTERNATIONAL CHAMBER OF COMMERCE (ICC)

1.2 The Digital Revolution

INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 233

THE IMPLICATIONS OF THE DIGITAL REVOLUTION

1.3 How Services are Traded Internationally

services can be traded, known in international agreements as the four “modes of

234 | INTERNATIONAL CHAMBER OF COMMERCE (ICC)

MUCH SERVICE TRADE GOES BY UNNOTICED

1.4 The Multilateral Services Regime: the General Agreement

INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 235

In order for a business to assess opportunities to provide services to

2.0 General Obligations

236 | INTERNATIONAL CHAMBER OF COMMERCE (ICC)

2.1 Unconditional General Obligations

The business community should be aware that as described in Section 10

Businesses contemplating service transactions should first ascertain

2.1.2 Transparency (Article III)

Businesses can consult service sector notifications of WTO Members on the

2.1.3 Domestic Regulation (Article VI)

INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 237

2.1.4 Subsidies (Article XV)

Since WTO subsidy disciplines only apply to goods, a business contempla-

2.2 Conditional General Obligations

Service sectors that appear to open as a result of specific market-opening

Professional service providers should be aware that domestic regulations

2.2.2 Recognition of Professional Qualifications (Article VII)

2.2.3 Payments and Transfers (Article XI)

238 | INTERNATIONAL CHAMBER OF COMMERCE (ICC)

2.2.4 Monopolies and Exclusive Service Suppliers (Article VIII)

3.0 Specific Commitments

During the Uruguay Round negotiations, countries agreed to make commitments in 12

3.1 Market Access Commitments (Article XVI)

 Restrictions or requirements on the type of legal entity (e.g., subsidiary or

 Limitations on the participation of foreign capital in terms of a maximum

INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 239

3.2 National Treatment (Article XVII)

3.3 Additional Commitments (Article XVIII)

3.4 Other Types of Commitments

3.4.2 The Telecommunications Reference Paper

4.0 How to Read a GATS Schedule

240 | INTERNATIONAL CHAMBER OF COMMERCE (ICC)

The Horizontal Commitments are followed by Sectoral Commitments listing the

READING A SERVICES SCHEDULE

Looking at a particular service schedule may help to clarify the subject.

4.3 How Schedules Are Negotiated (Request-Offer)

INTERNATIONAL CHAMBER OF COMMERCE (ICC) | 241

A service business wishing to invest in another country that finds that

Members to improve their commitments. The additional commitments, negotiated

6.0 Positive List vs. Negative List

ADVANTAGES OF THE NEGATIVE LIST APPROACH

242 | INTERNATIONAL CHAMBER OF COMMERCE (ICC)

– prevention of deception of fraudulent practices;

– the protection of privacy of individuals in relation to the processing

of individual records and accounts; and

Businesses should be aware that no WTO dispute settlement proceeding

7.2 Security Exceptions (Article XIVbis)

Restrictions or requirements on the type of legal entity (e.g., subsidiary or

Limitations on the participation of foreign capital in terms of a maximum