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Structure and Function of the GATS

TO: Representative Maralyn Chase, Chair, Joint Legislative Oversight Committee on Trade Policy,
Washington State Legislature
FROM: Robert Stumberg and Jennifer Gerbasi
DATE: June 4, 2005
RE: Revised U.S. Offer of Specific Commitments Under GATS

I.   Introduction

You asked us to comment on the “update” of the U.S. offer on specific commitments under GATS, the General Agreement on Trade in Services. Specifically, you seek information that might help your Joint Committee on Trade Policy interpret the U.S. offer and plan your future activities regarding oversight of GATS negotiations. In particular, you seek comments on the following documents:

-    May 3, 2005 – A memo from USTR on the Updated U.S. Submission to the WTO General Agreement on Trade in Services (GATS) Negotiations and the attached Summary of Sector-Specific Elements Under Consideration for Inclusion in the Updated U.S. GATS Submission (“summary”).

-    May 20, 2005 – A memo from Public Citizen’s Global Trade Watch on the summary of the U.S. GATS submission.

-    May 31, 2005 – The U.S. Revised Services Offer (“Revised U.S. offer”) that USTR posted on the USTR web-site on May 31, 2005. See USTR’s website: http://www.ustr.gov/Trade_Sectors/Services/2005_Revised_US_Services_Offer/Section_Index.html

The Public Citizen memo alerted state officials to respond before USTR’s May 27th deadline, and it raised concerns about the revised U.S. offer and the consultation process. Public Citizen provided very good analysis on very short notice, which enabled several states to respond to USTR. We appreciate Public Citizen’s timely contribution to the process.

In this memo, we provide a one-page overview of comments on the revised U.S. offer (part II), and then we aim to explain three general points that your committee and others may find useful for longer-term planning:

-Bigger picture of GATS – First, the revised U.S. offer is part of a bigger picture of GATS negotiations. Some of the other GATS negotiations could have a greater impact on state lawmaking in the future, particularly with respect to GATS disciplines on Domestic Regulation.

-   State-federal consultations – Second, USTR’s Spring 2005 consultations with state and local officials continue a pattern that avoids legislatures, and USTR does not disclose some legally significant information (both in the details of the U.S. offer and the assurances regarding state authority). In addition, USTR appears to be adding another strategy, which is to list and “bind” states at their current level of “liberalization” in a number of sectors.

   Priorities for oversight of specific commitments – Third, responding to the May 2005 GATS offer is an important oversight role for state legislatures. Keep in mind, however, that past GATS commitments and future GATS commitments that are still on the drawing board may be more important topics for oversight by your state. For example, the WTO’s interpretation of GATS commitments in the US-Gambling case puts a wide field of regulation at risk – and this is the position taken in briefs filed by the United States government. Our comments on the revised U.S. offer include connections to the broader context of past commitments and potential future commitments. By taking this broader view, your committee can start to create a menu of its own GATS priorities for future oversight activity, as opposed to simply responding to documents that USTR sends to states on short notice.

II.   Overview of the revised U.S. offer

A.   Bigger picture of GATS negotiations. On May 31st, USTR submitted a revised U.S. offer of specific commitments to the WTO. This is a middle stage in the WTO’s process of “request-offer” negotiations to commit all levels of government in the United States to follow trade rules under GATS within specific sectors and subsectors of trade in services. The trade rules that apply to these sectors are National Treatment (no discrimination) and Market Access (no quantitative limits on service suppliers, even in the absence of discrimination. The negotiations on specific commitments are one of four negotiations under GATS. The other three deal with trade rules on Domestic Regulation (the broadest and most significant for state regulation), subsidy rules for services and procurement rules for services.

B.   Federal-state consultations. The USTR sought input from state and local officials and national associations in order to increase the accuracy of commitments and limits on commitments that could affect state and local authority. However, 29 attorneys general and three state legislatures (California, Vermont and Maine) criticized the process on various grounds including these:

1.   the information sent to state officials was incomplete,
2.   the consultation process avoided contact with state legislatures,
3.   the time allowed for response was less than two weeks for most of the state officials consulted, and
4.   the state officials who had access to full information were not at liberty to share it with other state officials who had the jurisdiction and expertise necessary to make meaningful comments.

C.   Proposed GATS commitments. A number of the proposed U.S. commits could affect regulation or provision of services by state and local governments. For example:

1.   Energy services – The proposed energy commitments include pipeline transportation of fuels and storage facilities, both of which affect state and local jurisdiction over natural gas and LNG terminals that are the subject of current litigation and congressional debate. The revised offer reorganized the existing commitment on “services incidental to distribution of energy” within a new “energy services offer,” but the offer did not include other proposals that USTR has circulated regarding electricity.

2.   Environmental services – The existing commitment on “sewerage” has been renamed so as to broaden its scope to “wastewater” services contracted by private industry, the scope of which remains ambiguous in terms of services that are outsourced by public utilities.

3.   Legal services – The revised offer “binds” 23 states (and DC) at their current stage of “liberalization” of court rules that allow practice by foreign legal consultants. More broadly, the approach that USTR took on legal services could be a new strategy for consulting with states. The advantage is that it takes states where they are, rather than push or preempt then into a federal standard for deregulation. The disadvantage is that it “binds” states nonetheless with a commitment that is designed to constrain future lawmaking authority.

4.   Libraries – The revised offer deletes a limit on the commitment on library services that USTR had inserted into the 2003 offer. The deleted language referred to library services “(except nonprofit, public, and publicy-funded entities).” (emphasis added)

D.  Priorities for state-level oversight. State-level committees can provide oversight of GATS negotiations that would otherwise not take place. The least oversight is now being provided over negotiations on Domestic Regulation, which includes trade rules that could have the greatest effect on state and local government. In terms of specific commitments, states have begun to focus on energy and environmental services, but less attention is being paid to existing commitments, where states may want to propose clarifications or limits on the U.S. commitments. Among these existing commitments are the following examples, to name just a few – gambling, health facilities, health insurance (financial services), regulation of tobacco (advertising and distribution), distribution of prescription drugs, commercial zoning, and wastewater services.

 III. The bigger picture of GATS negotiations

A.   Introduction to GATS negotiations. By way of introduction, the U.S. “offer” is a stage in the GATS negotiating process. It updates a previous offer that USTR sent to the WTO in March of 2003. What is being offered is a set of draft commitments to follow trade rules under the Market Access and National Treatment provisions of GATS within specific service sectors. According to the WTO, the draft offer is a negotiating document with no legal status and no binding effect on the United States – until, that is, the United States decides to incorporate the offer into the U.S. schedule of specific commitments.[1] This means that USTR remains free to expand, retract, limit or clarify the revised U.S. offer, and comments from your oversight committee are still timely.

The negotiations on specific commitments are one offour negotiations that are mandated by GATS. These negotiations are often called the “built-in agenda” because the WTO-member nations set them in motion back in 1994, and no further congressional action is required to get them started. The other three GATS negotiations include:

-    Domestic regulation – Implementing disciplines on domestic regulation.[2 These negotiations have been going on since 1999, and the Ministerial Council agreement on WTO negotiations in August 2005 that exhorted the working parties to “intensify their efforts to conclude the negotiations.”[3] The WTO’s mandate to negotiate rules on Domestic Regulation includes an obligation to limit lawmaking at all levels of government to options that are “not more burdensome than necessary to ensure the quality of the service.”[4] These rules have broad implications for state and local regulation of services because a number of key WTO members are insisting that sub-federal regulations be covered.[5] Unlike when they commit services to market access and national treatment, governments may not be permitted under the new rules to restrict the service sectors where these new domestic regulatory restraints would apply.

-    Subsidies – Negotiating new “multilateral disciplines” to eliminate subsidies that have “trade-distortive effects.”[6] These negotiations began in 1996, but the are recently much more active; there is no deadline yet.

-    Procurement– Negotiating new “multilateral” rules on “government procurement in services under this Agreement within two years” of the WTO’s effective date in 1995. These negotiations began in 1995, but the are recently much more active; there is no deadline yet.

B.   Importance of negotiations on domestic regulation. The negotiations on specific commitments become visible in increments. However, the negotiations on “Domestic Regulation” are happening behind the scenes with little public scrutiny. Some WTO members have proposed rules that would require elimination of laws if their objectives can be address in a less trade-restrictive manner. The Domestic Regulation rules like the least-burdensome test would apply in addition to the rules under Market Access and National Treatment:

-    Even if the United States makes no specific commitment on a particular sector, the WTO might implement the trade rules on Domestic Regulation as a general obligation, which could create a conflict with state or local laws that affect that sector.

Water utility example– The largest private water companies are foreign-owned. The United States has to date said “no” to the EU’s request for a specific commitment on water services for human use. The Washington Transportation and Utility Commission (WTUC) regulates water rates and acquisitions of private water companies under a “public interest” standard, which is not presently challengeable under GATS. However, if the WTO implements the “least-burdensome” test as a general obligation for all service sectors, then the methodology for setting rates or the conditions required for approving an acquisition could be challenged as more burdensome than necessary. If raised by another country or even by the federal government, this domestic policy argument about the burden of state regulation becomes an international trade obligation under GATS domestic regulation.

-    Several countries have proposed implementing the Domestic Regulation rules only within the sectors where countries make specific commitments. In that case, even if a U.S. measure is consistent with Market Access and National Treatment, the measure could still be challenged as more burdensome than necessary.

Prescription drug example – The United States has a commitment on distribution services that covers distribution pharmaceutical goods.[7] Washington manages the cost of prescription drugs under Medicaid with a preferred drug list (PDL). The PDL is probably not challengeable under the U.S. commitment on distribution services as it does not appear to be discriminatory (National Treatment) and it does not set limits on the number of service providers or service operations. However, the drug industry lobby (PhRMA) maintains that PDL criteria based on cost and the PDL process that requires state approval for high-cost “innovative” drugs are more burdensome than necessary. If raised by another country or even by the federal government, this domestic policy argument about the burden of state regulation becomes an international trade obligation under GATS domestic regulation.

In short, the negotiations on Domestic Regulation merit close scrutiny by state and local governments, either in the context of specific sector commitments or in the broader context of regulating service sectors that are not covered by specific commitments. Because of the complexities of the U.S. federal system, the United States has reason to block introduction of new GATS rules on Domestic Regulation.

C.   Congressional action on GATS commitments. As noted above, the USTR did not need a new grant of authority from Congress to work on any of the GATS negotiations. However, when Congress authorized the President to negotiate other trade agreements (under the so-called “fast-track” process), Congress added a requirement that Congress must approve the results of any WTO “agreements,” which might include GATS negotiations, depending on the meaning of “agreement.” While this requirement for congressional approval expires along with the President’s general negotiating authority on July 1, 2007, the President’s authority to negotiate the built-in agenda of GATS lives on.[8] The GATS negotiators have already missed their first deadline, and they may not be done by July 1, 2007.[9]Thus, it might be useful to know:

           - whether it is USTR’s position that it has the authority to implement the results of GATS negotiations without congressional approval; and
          - whether Congress intends to extend or make permanent an obligation to submit the result of GATS negotiations to Congress.

 IV. Observations on federal-state consultation

A.  Significance of “binding” the states. In the summary sent to state officials, USTR explained that the revised U.S. offer “[s]imply reflects the current state-level treatment accorded to domestic and foreign service suppliers." USTR did not further explain the legal significance of the U.S. “submission.” After consulting with state officials, USTR described the U.S. offer in somewhat different terms:

Binding Liberalization at the State Level: The U.S. will bind liberalization that has already occurred at the state level over the last two years. This includes legal services (eight states), accounting, auditing and booking services, engineering and integrated engineering services, and financial services (insurance and banking).[10]

The later description makes clear that the U.S. offer is not mere transparency. Its purpose is to bind state governments at their current level of “liberalization,” and for future lawmaking, to follow GATS rules on National Treatment and Market Access in the respective subsector. While such a limit grandfathers the state law listed, the WTO’s scheduling guidelines explain that listing the state law functions as a “standstill,” which is an international obligation not to re-regulate.[11] The objective of “standstill” commitments is to constrain future lawmaking authority by creating a one-way liberalization process.

B.   USTR assurances about state regulatory authority. USTR makes a number of assurances that GATS commitments do not adversely affect state and local law-making authority. These statements take on a somewhat different meaning when the broader legal context is explained. For example –

1.   “GATS does not require deregulation or privatization of any public service.” This statement is true in the sense that countries are free to not make GATS commitments, and the WTO has yet to implement the general GATS rules on domestic regulation. However, once the United States makes a commitment in a service sector (e.g., gambling or health facilities), GATS provides that the United States “shall not maintain or adopt” limits on the number of service suppliers, service operations, employees or types of legal entity. In domestic policy debates regarding electricity, health care or financial services, removal of these limits are typically described as “deregulation.”

2.   “Like any trade agreement, GATS simply says that if a state chooses to allow private competition in services, it should give U.S. and foreign firms a chance to compete on an equal footing.”
GATS is not like any trade agreement. It is unique in its application of Market Access rules (quoted above) that prohibit quantitative limits, even when a law does not discriminate. For example, in the U.S.-Internet Gambling case, the WTO’s Appellate Body held that the Market Access rule prohibits a ban on domestically illegal trade (e.g., Internet gambling) because a ban is a “zero quota.” In its brief, USTR stated that this interpretation would constrain government power to regulate in a nondiscriminatory manner.

3.   “Nothing in any trade agreement prevents the United States or any state from enacting, modifying, or fully enforcing domestic laws.”This is true. However:

a)   It is also true that another country may challenge federal or state laws under GATS, and if successful, may impose trade sanctions in the form of punitive tariffs on U.S. goods or services that have nothing to do with the dispute. WTO sanctions have the economic effect of a secondary or tertiary boycott.

b)   It is also true that the federal government has a legal obligation under GATS to enforce U.S. trade commitments that apply to cities and states.[12]

4.   "Trade agreements such as the GATS do not automatically preempt, invalidate or overturn state laws.”This statement is true, but only in the sense that the federal government must always ask a court to preempt state law. The WTO implementing legislation specifically authorizes the Executive Branch to sue states in federal court to enforce the GATS, and sets the burden of proof to be that a state or local law “is inconsistent with the agreement in question.”[13] (emphasis added) The way in which preemption under trade agreements differs from domestic preemption is that Congress denied standing under a trade agreement to private parties.[14] In addition to the threat of preemption, federal enforcement options include withholding federal funds, approval of state plans for spending federal funds, or other kinds of federal permission that a state may need.

C.   Consultation process. There is considerable learning value in the process by which USTR consulted with state officials prior to making its May 2005 offer on specific commitments under GATS.

1.   USTR did consult with state "regulators" in some areas, but those listed did not include legislatures or the national associations that have been the most active in oversight of trade policy (such as NCSL, NAAG and NLC).

2. State-level officials were consulted on "accuracy" of the “market-opening measures” listed in the U.S. submission. This may mark a change in both negotiating strategy and consultation strategy by USTR. For example, by consulting and making commitments on market opening measures, the USTR:
a)    need not ask states to make any changes in their laws, and
b)    need not ask states whether they support or oppose having their current stage of lawmaking committed as a “standstill” obligation under GATS.

3. USTR did consult with IGPAC, which includes the national associations that have been most active in oversight of trade policy, but this consultation occurred just two weeks before the deadline for posting the revised U.S. offer.

4. As noted above, USTR used a summary of the U.S. offer to seek comments within the last two weeks, and the summary did not provide the full legal context of the subsectors being committed; nor did it provide any context on commitments outside the scope of the summary. The summary is captioned “for use by state and IGPAC officials only,” so state officials who saw the summary may have felt constrained to not share or discuss it with constituents or experts who are not “state officials.”

5. IGPAC members with security clearance did have access to the full schedule of proposed commitments, but they are not free to share or discuss this information, even with other “state officials.” Those with the best information are prohibited from sharing it with those who need it or know how to use it.

V. Observations on specific sectors and commitments

The revised U.S. offer is part of the “successive rounds” of negotiations to achieve a “progressively higher level of liberalization” under GATS.[15] The “update” receives attention because of the need to approve and lock in the expanded U.S. commitments through these incremental stages. These are important increments that deserve oversight by state and local officials. However, future sector commitments (such as energy services) may be even more important, and state and local governments are in a better position to study and influence these negotiations in advance of any request for comments from USTR to “clarify” the “current state level” of regulation. By the same token, past sector commitments (e.g., gambling and betting services, operation of health facilities, and distribution services (such as prescription drugs)) may have a greater impact on state and local governments than the current negotiations, and there is a process for re-negotiating these commitments under article XXI of GATS if there is the political will to do so.

Our comments below first cover sectors addressed by the summary that USTR sent to state officials. We then add comments to provide examples where past or future commitments might have greater impact on state and local lawmaking authority.

A.   Sectors addressed by the USTR’s summary. We have not analyzed the subsectors described in USTR’s summary of the revised U.S. offer, so we offer the following comments on several of the proposed commitments merely as issue spotting.

1.   Audiovisual services. The revised U.S. offer includes a commitment on “radio and television distribution services (excluding transmission).” This proposed offer would add to an existing commitment on “cable services provided over cable systems.”[16] Our question is simply whether USTR or state and local governments have clarified whether the existing cable commitment or the proposed television distribution commitment would affect local cable TV franchises, monopolies or service obligations (e.g., public access obligations).

2.   Higher education services. The revised U.S. offer includes a proposed commitment on higher education services, but with significant limits on the commitment. The limits on the commitment reflect a process of consultation with national associations and some state officials. The limit on the commitment reads: “The granting of U.S. federal or state government funding or subsidies may be limited to U.S.-owned institutions, including land grants, preferential tax treatment, and any other public benefits ...”[17] Our question is whether the reference to “U.S.-owned institutions” effectively safeguards subsidies for public institutions as distinguished from privately owned institutions. This question is prompted by a comparison to the horizontal (across-the-board) limits on commitments of the European Union and Canada, which exclude the supply or subsidy of a service in the public sector.[18] The US offer contains no such qualification.

This issue had been previously raised in the context of library services by the American Library Association in 2003. The ALA was concerned that a commitment under National Treatment could be used to challenge public funding that is dedicated to public but not private service providers. (See section V.B.5, “Library services,” page 12.) In the 2003 U.S. offer, USTR dealt with this issue more explicitly when it listed a commitment on library services “except nonprofit, public, and publicy-funded entities.” (emphasis added) While USTR has since deleted that language, it remains a viable model to safeguard funding that is dedicated to public institutions from a challenge under GATS on grounds that the funding is de facto discrimination under National Treatment.[19]

3.   Pipeline transportation of fuels. A part of the March 2003 offer that remains in the revised U.S. offer is the proposed offer on pipeline transportation of fuels.[20] This is significant to state and local governments for several reasons that we have not analyzed in any detail.

a)    First, as Public Citizen explains in its memo on the summary of the U.S. offer,[21] a GATS commitment may affect the ability of state or federal governments to limit the number of pipeline service suppliers, the number or location of pipeline operations, or the legal form of the pipeline operator (e.g., the legal structure of any pipeline utility). This proposal comes at a time when litigation is pending between states and the Federal Energy Regulatory Commission (FERC) on the jurisdiction of state Public Utility Commissions to regulate aspects of citing for natural gas pipelines and terminals for liquid natural gas (LNG).

b)    Second, this proposed commitment could have legal significance for whether FERC regulatory authority preempts state authority. As noted above, a state law that “affects” pipeline transportation could be challenged by the federal government as “inconsistent” with the GATS commitment. In addition, FERC’s existing statutory authority provides that FERC has jurisdiction over natural gas trade that is covered by a trade commitment of the United States.

The revised U.S. offer also includes a commitment on “storage and warehouse services,” which was not included in the summary that USTR sent to state and local officials. USTR defines this commitment by reference to the U.N. Provisional Produce Classification Code as including storage of energy products such as liquified natural gas.[22] Omission of this commitment from the summary sent to states is interesting in light of the current debate in Congress and litigation in federal courts about preemption of state authority over LNG facilities.

 B.   Sectors not addressed by the USTR’s summary

1.   Gambling. In the recent U.S.-Antigua Internet gambling case, the Appellate Body ruled that the United States had inadvertently made a GATS commitment on “gambling and betting services” when it made a commitment on the broader category of “other recreational services.”[23] Without diving into the details of that decision, the point for this memo is that all state regulation of gambling is covered by GATS, and there are many state laws that impose quantitative limits that are not consistent with the GATS rules on Market Access. For example, states license tribal monopolies, operate state lotteries as monopolies, limit the number and location of casinos, and limit the number of slot machines. In a letter dated May 31, 2005, the attorneys general from 29 states strongly urged USTR to use the current GATS negotiations to safeguard state regulatory authority:

The prospect of WTO challenges to these kinds of prohibitions should alone be sufficient to give U.S. negotiators enormous motivation to use the current GATS negotiations to secure a rule change that makes explicit the right of a WTO signatory to ban undesirable activity in a GATS covered sector.[24]

At one point during the WTO case, USTR indicated that the United States would withdraw its gambling commitment if necessary, which would require a process of negotiating compensatory adjustments in the U.S. schedule of commitments.[25] USTR now says that the United States will comply with the WTO ruling, although it has not indicated how it intends to comply. Compliance may prove to be politically difficult, since it would require Congress to either ban off-track betting on horse races or provide foreign corporations with nondiscriminatory access to the market for off-track betting.

State governments might still want to consider the benefits of withdrawing the U.S. commitment sooner rather than later. The tradeoffs involved are that:

-    The size of the gambling market is growing rapidly, so future withdrawal will become even more expensive and disruptive of the U.S. bargaining position. As the United States negotiates commitments in other sectors, it increases the likelihood that postponing withdrawal of the gambling commitment might require either (a) providing foreign access to a sector (such as energy or water) that has an adverse effect on state or local governments, or (b) allowing other countries to withdraw sectors that they have previously committed (which is less likely).

-    On the other hand, withdrawing the gambling commitment in the near future will complicate the U.S. bargaining position in the GATS negotiations.

2.   Energy.The U.S. offer of March 2003 did two significant things. First, Part I of the submission reorganized 12 existing U.S. commitments at the subsector level into a new sector called “Energy Services Offer by the United States.” Second, Part II of the March 2003 offer created space for new offers with the following introduction: “Part II of the energy services offer includes services for which commitments have not yet been made. The United States may expand Part II of this offer to include additional services. The specific content of commitments for services listed in Part II will be developed pending the results of discussions concerning a proposed guide for scheduling commitments on energy services.”[26] Part II then listed three potential new commitments without further comment:

-    Pipeline transportation of fuels (11.G).
-    Storage and warehouse services: Bulk storage services of liquids and gases. (11.H.b)
-    Technical testing and analysis services, except for technical testing and analysis services related to medical devices, food, and food products (1.F.3).

As noted above, the May 2005 offer includes a proposed commitment on both “pipeline transportation of fuels” and “storage and warehouse services,” which includes bulk storage of liquids and gases.

In 2000 and 2002, the United States submitted communications to the WTO that made several informal “proposals” for negotiating other specific commitments in the energy sector. Among these proposals were creation of a comprehensive energy index to define new subsectors for specific commitments and proposals for commitments in the electricity sector such as wholesale trade and brokering services.[27]

Anticipating continued negotiations on these U.S. proposals, state and local officials organized a Working Group on Energy and Trade policy, including you and several other officials from Washington State. In March 2005, the working group completed a preliminary analysis of potential conflicts between GATS and domestic electricity policy in its Interim Report on GATS and Electricity.[28] After sharing the report with USTR staff, the working group released the report in April. The report identified a range of potential trade conflicts including some related to state and local distribution monopolies, reservation of transmission capacity to serve local customers (native load), renewable portfolio standards, and rates charged by the Bonneville Power Administration to local public utilities in the Pacific Northwest.

The USTR staff responded to the Interim Report in April 2005 by denying that negotiations are taking place.xxix In the revised U.S. offer,[29] USTR deleted the reference to the “proposed guide for scheduling commitments on energy services.”[30] However the U.S. offer does retain the reorganization of energy-related commitments, which anticipates long-term negotiations and future commitments in the energy sector. Entitled “Energy Services Offer by the United States,” the reorganized offer includes the existing commitment on “Services incidental to distribution of energy.”[31] The working group’s Interim Report identifies how this commitment could affect states that have not restructured their markets for distribution of electricity.[32]

This may well be evidence that the issues raised by the working group have sent U.S. trade negotiators back to the drawing board. On the other hand, recent WTO minutes indicate that negotiations on the energy index and potential commitments based on the index are still quite active.[33]

3.   Environmental services. As in the March 2003 offer, the revised U.S. offer retains changes in the schedule under Environmental Services. These were not mentioned in the summary that USTR sent to state officials.

-    Wastewater services. In response to a request from the EU, USTR has changed the subsector classification called “Sewerage Services” to “Wastewater Management, excluding Water for Human Use” with a subset called “Wastewater Services (contracted by private industry).” The EU also asked the United States to eliminate the “contracted by private industry” limitation, but the United States did not accede to that change. The result in the U.S. schedule is ambiguous. “Contracted by private industry” could mean that the U.S. commitment covers contracts between private parties only or when private parties contract with government to provide a wastewater service. The latter could include so-called “public-private contracts.

-    ”Water for human use and potential overlap. After consulting with the Association of Metropolitan Water Agencies in 2002-2003, USTR decided not to accept the EU request to make a commitment on water for human use. However, many providers of water for human use (both public and private) also provide wastewater services using the same assets, employees, management and rate base for both services. The potential for cross-subsidies between related services has been used as the basis for a National Treatment claim under NAFTA.[34] A subsector of particular concern is provision of water for human use through desalination. Desal facilities process sea water into fresh water and brine, a wastewater byproduct of filtration. Government measures that affect desal facilities might be covered under a GATS commitment on wastewater, even if they are not covered under water for human use.

-    Other environmental services. The other subsectors of environmental services are of great interest to state and local governments. They include solid/hazardous waste management, protection of ambient air and climate, remediation and cleanup of soil and water, noise and vibration abatement, protection of biodiversity and landscape, and other environmental and ancillary services.

The latter category is defined only as including “other services not classified elsewhere.” This may have the effect of expanding the scope of “other” Environmental Services, which may have unintended consequences such as the United States experienced in the Internet gambling case, where the WTO found that “other recreational services” covered activities that the United States did not intend to commit.

4.   State and local tax measures. In the revised U.S. offer, the United States limits its commitment on higher education services to exclude subsidies including preferential tax treatment of U.S. schools. However, higher education is not the only sector where tax treatment might change the conditions of competition so as to create a potential trade conflict under GATS. For example, the United States lost a GATT case in 1992 (referred to as “Beer II”) because states taxed beer distributors based on the volume of annual production, which worked to the disadvantage of Canadian exporters of beer.[35] By close analogy, the United States lists several common tax situations (e.g., different tax treatment based on size or income of the service supplier) to safeguard state and local tax measures in its list of MFN exceptions under the revised U.S. offer, but these exceptions do not apply to National Treatment, the GATS rule that obligates the United States not to change the conditions of competition so as to disfavor foreign companies.[36]

This is not a new issue. In 1993, shortly after the United States lost the Beer II case, state and local officials asked USTR to limit U.S. GATS commitments so that National Treatment would not apply to state and local taxation. However, the deadline passed for including these limits within the original GATS negotiations. When the United States tried to list the tax reservations after the deadline,[37] several countries (including Canada) objected.[38]After more than a year of further negotiations, the reservations never took effect.[39] Yet Congress voted on the WTO agreements with the assurance of then-USTR Michael Kantor that “state and local tax and subsidy measures covered by our reservations will be fully protected from challenge under the WTO.”[40] The reservations remain unfulfilled and apparently off the table in the current round of GATS negotiations, with the exception of the proposed commitment on higher education.

5.   Library services. As noted above, in the 2003 U.S. offer, USTR had proposed limiting the scope of an existing commitment on “libraries, archives, museums and other cultural services” by adding “(except nonprofit, public, and publicy-funded entities).” (emphasis added) This proposed limit on the U.S. commitment is analogous to both the EU’s and Canada’s “horizonal” (across-the-board) limit on commitments, which excludes the supply or subsidy of a service in the public sector from the GATS commitment.[41]

The proposed limit on the U.S. commitment on library services in 2003 was the positive result of consultation between USTR and the American Library Association.

The ALA was concerned that public funding that is dedicated to libraries could be challenged under a U.S. commitment to provide National Treatment (NT) in this sector. In June 2003, the ALA staff reported to the ALA board that:

If library services provided by public and publicly-funded libraries were subject to NT, the federal, state and local governments could potentially have to choose between having to provide subsidies and other support to like foreign entities as well as US libraries, or not providing such support at all.

The USTR, in accordance with our discussions, agreed to use this initial offer process to clarify the scope of library services covered by existing US specific commitments.

Accordingly, in its initial [2003] offer, the US has added qualifying language to the current listing for Libraries, Archives, Museums and Other Cultural Services on the US schedule of specific commitments, to exclude "non-profit, public and publicly-funded entities." With this qualification in place, the US would not be obliged to provide National Treatment (NT) to like service providers from other WTO Member countries, thereby effectively eliminating the only potential, practical risk to these libraries under the GATS at this time. [42]

Coming after consultations with the USTR staff, the ALA’s concern about potential conflict with National Treatment is relevant not only to library services, but also to higher education, health facilities, utilities and other subsectors where government provides a service that is provided by private service providers who compete for the same customers and seek to make a profit.

The result of the ALA’s consuItations would have been quite significant as a precedent for how state and local officials could work with USTR to clarify or limit an existing commitment. Specifically, this would have been the first insertion of effective legal language into the U.S. schedule of GATS commitments to exclude (‘except”) publicly funded services from the scope of an existing commitment.

However, in the 2005 revised U.S. offer, USTR deleted the limit on this commitment.[43] We have no further information as to why USTR did so at this time.

6.   Other GATS commitments.The sectors above are notable examples of GATS commitments of great interest to state and local governments that are now being negotiated or considered. It bears emphasis that GATS provides for clarification or limitation of existing commitments, so even existing U.S. commitments are legitimate subjects of state oversight if they threaten to constrain lawmaking authority. In the three categories below, we list examples of state measures that merit analysis to assess the potential for conflict with GATS rules under Domestic Regulation, National Treatment or Market Access.

a)    Health care generally- Domestic Regulation

-    Prohibitions on genetic discrimination in health insurance.
-    Expansion of Medicaid drug discounts to cover all uninsured people.
-    Use of preferred drug lists to discourage use of high-cost drugs.

b)    Health facilities Market Access

-    Nurse-to-patient ratios to assure a minimum number of staff

c)    TobaccoMarket Access

-    Prohibitions on cigarette machines
-    Limits on cigarette advertising

d)    ZoningMarket Access

-    Limits on the size or location of “big box” stores
-    Bans on certain commercial uses within historic or scenic zones
-    Coastal zone mandates for contiguous development

VI.   Priorities for GATS oversight

In conclusion, this memo identifies more GATS sectors and negotiation topics that a state-level oversight committee has the time or resources to manage. The alternative to backing away from such a large array of topics is to focus in just one or a few. Out of over 120 sectors and subsectors in the schedule of GATS commitments, the following chart focuses on just the sectors mentioned in this memo. Consider whether your state oversight committee could make (or continue to make) a contribution in one, two or a few of these sectors by:

-    assessing the risk of conflict with state law,
-    providing a forum for public discussion,
-    connecting with other states and national associations,
-    communicating GATS concerns to Congress, and
-    providing guidance to U.S. trade negotiators.

Menu for Focusing State-Level Oversight of GATS

Service Sectors
where State and Local
Governments Regulate
or Provide Service

Selected Examples

Current or Potential Coverage under GATS
on Domestic

Specific GATS Commitments
to National Treatment & Market Access Rules
May 2005
Advertising — tobacco

Audio-visual — cable television

Distribution — zoning

Distribution — pharmaceuticals

Energy — incidental to distribution

Energy — pipelines & storage


Energy — wholesale trade

Environmental — wastewater

Environmental — water

Financial — health insurance


Higher Education


(Clicking the [R] returns you to applicable insertion point)

 [1]See WTO, GATS Training Module: Chapter 7, Preparing Requests and Offers, Technical Aspects of Offers, ¶ 7.4, available at http://www.wto.org/english/tratop_e/serv_e/cbt_course_e/c7s4p1_e.htm, viewed May 27, 2005.   [R]
[2] GATS art. VI:4.  [R]
[3] WTO, Decision Adopted by the General Council on 1 August 2004, WT/L/579, Annex C(e) (Recommendations of the Special Session of the Council for Trade in Services).  [R]
[4] GATS art. VI:4(b).  [R]
[5] GATS Working Party on Domestic Regulation, “Report on the Meeting Held on 3 July 2001”, August 16, 2001.  [R]
[6] GATS art. XV:1.  [R]
[7] United States, Schedule of Specific Commitments, Distribution Services, GATS/SC/90 (April 1994) 50; U.N. CPC Provision Code 62251 (wholesale trade in drugs) and 6321 (retail trade in drugs).  [R]
[8] The congressional delegation of fast-track negotiating authority requires the President to submit trade agreements for congressional approval including any trade agreement “entered into under the auspices of the World Trade Organization” prior to July 1, 2007. 19 U.S.C. § 3806(a)(1) and 19 U.S.C. § 3803(b)(1)(C)(ii). See letter from Robert Zoellick, U.S. Trade Representative, to Hon. Robert C. Byrd, President Pro Tempore, United States Senate, November 5, 2002 (notice of negotiations under the auspices of the WTO including GATS). Available at http://www.ustr.gov/Document_Library/Letters_to_Congress/2002/Zoellick_Notifies_Congress
, viewed May 27, 2005.  [R]
[9] The original deadline that USTR provided to Congress was January 1, 2005. Id.  [R]
[10] USTR, “Highlights of US Revised WTO Services Offer Submitted on May 31, 2005,” initially posted but then removed from http://www.ustr.gov/Document_Library/Fact_Sheets/2005/Highlights ... , viewed and printed on May 31, 2005.  [R]
[11] See WTO Secretariat, Guidelines for the Scheduling of Specific Commitments Under the General Agreement on Trade in Services (GATS), S/L/92 (28 March 2001) 44.  [R]
[12] GATS art. I:3(a).  [R]
[13] 19 U.S.C. § 3512(b)(2).  [R]
[14] Id.  [R]
[15] GATS art. XIX:1.  [R]
[16] Revised U.S. Offer, 2. Communication Services, E. Other Communications Services – Cable services provided over cable systems, at 67.  [R]
[17] Revised U.S. Offer, 5. Educational Services, C. Higher Education Services, at 75.  [R]
[18] Communication from the European Communities and Their Member States, Conditional Revised Offer (May 2005),  Horizontal Commitments, Subsidies, at 9; Canada, Schedule of Specific Commitments, General Agreement on Trade in Services, GATS/SC/16 (15 April 1994), Horizontal Commitments, Commercial Presence, at 3.  [R]
[19] Revised U.S. Offer, 10. Recreational, Cultural & Sporting Services, C. Libraries, Archives, Museums and Other Cultural Services, at 106.  [R]
[20] Revised U.S. Offer, G. Pipeline Transport, a) Transportation of fuels and H. Services Auxiliary to All Modes of Transport, b) Storage and warehouse services, at 109 and 113.  [R]
[21]See Public Citizen’s Global Trade Watch, Memorandum – Contact USTR – Urgent Action Needed to Safeguard State Regulatory Authority ... (May 20, 2005) 2.  [R]
[22] Revised U.S. Offer at 110 and 114; U.N. Prov. CPC 74220 - Bulk storage services of liquids or gases.  [R]
[23] WTO Appellate Body Report, United States-Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, ¶ _.  [R]
[24] Letter from Attorneys General Mark Shurtleff (Utah) and William Sorrell (Vermnot) et al. (May 31, 2005) at 2.  [R]
[25] Transcript of USTR press briefing, March 2005.  [R]
[26] Id.  [R]
[27] See, e.g. U.S. Proposals for Liberalizing Trade in Services, Executive Summary (July 1, 2002).  [R]
[28] Working Group on Energy & Trade Policy, Interim Report on GATS and Electricity (March 25, 2005), released April 15, 2005), available at http://www.ncsl.org/standcomm/scecon/EnergyandTradeWGLTR0405.htm, viewed June 3, 2005.  [R]
[29] Letter from Carol Balassa, Director of Services Trade Negotiations – Media, Communications and Energy Policy, to Rep. George Eskridge, Chair of the Working Group on Energy and Trade Policy (April 13, 2005) at 2.  [R]
[30] Revised U.S. Offer, Energy Services Offer by the United States, at 111.  [R]
[31] Communication from the United States, Initial Offer, TN/S/O/USA (9 April 2003) 96.  [R]
[32] See Interim Report at 13.  [R]
[33] See, e.g. WTO - Minutes of the Committee on Specific Commitments, S/CSC/M/34 (November 2004).  [R]
[34] See United Parcel Service v. Canada, Amended Statement of Claim (Nov. 30, 2001) ¶¶ 15-17.  [R]
[35] United States – Measures Affecting Alcoholic Beverages, Report of the Panel adopted on 19 June 1992 (DS23/R - 39S/206) §§ 3.34 – 3.36.  [R]
[36] Revised U.S. Offer, Final List of Article II (MFN) Exemptions, at 129-130.  [R]
[37] Communication from the United States, Subsidies and Taxes at the Sub-Federal Level, PC/SCS/W/4 (June 30, 1994).  [R]
[38] Preparatory Comm. for the WTO, Subcommittee on Services, Report of the Meeting Held on 15 July 1994, PC/SCS/M/2 (Aug. 2, 1994).  [R]
[39] See WTO Secretariat, Interim Report on the Status of Consultations on Taxes and Subsidies at the Sub-Federal Level, S/C/W/13 (30 January 1996) ¶ 10.  [R]
[40] 140 Cong. Rec. S15077-01, S15153 (November 30, 1994).  [R]
[41] Communication from the European Communities and Their Member States, Conditional Revised Offer (May 2005),  [R]Horizontal Commitments, Subsidies, at 9; Canada, Schedule of Specific Commitments, General Agreement on Trade in Services, GATS/SC/16 (15 April 1994), Horizontal Commitments, Commercial Presence, at 3.  [R]
[42] Information to the ALA Executive Board, E#12.38, 2002-2003 (June 5, 2003) at 13, available at http://www.ala.org/ala/ourassociation/governanceb/executiveboard/eboardagenda/annual2003/EBD12_38.doc., viewed June 3, 2005; see also ALA Washington Office formal comments to the USTR (May 17, 2002), available at http://www.ala.org/ala/washoff/WOissues/copyrightb/intlcopyright/comsdoha.pdf, viewed June 3, 2005.  [R]
[43] Revised U.S. Offer, 10. Recreational, Cultural & Sporting Services, C. Libraries, Archives, Museums and Other Cultural Services, at 106.  [R]

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