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Tracking the GATS Negotiations

November 18, 2005

I.         GATS negotiations on domestic regulation

           The WTO reports that it is moving forward in disciplines on domestic regulation of services under the General Agreement on Trade and Service (GATS). The view is toward presenting recommendations by the December WTO Ministerial in Hong Kong. Concerned that the disciplines may limit policy-making by state and local governments, an advisory committee of public officials, the Intergovernmental Policy Advisory Committee (IGPAC), sent comments to the U.S. Trade Representative (USTR). IGPAC asked the USTR to resist broad restrictions on domestic regulation. Soon after IGPAC sent its report to the USTR, the Working Party on Domestic Regulation (WPDR), which reports to the WTO’s Council on Trade in Services, brought forward a detailed proposal in the form of a “Note by the Chairman.”

            The Chairman’s Note proposes a new requirement of “relevance” of domestic regulation and modifies several of the proposals that IGPAC had questioned. The Chairman’s Note does not elaborate on relevance or on how this and other elements of the Note compare to previous country proposals. This article summarizes how countries have previously interpreted the coverage and meaning of the least-burdensome discipline in order to understand what the Chairman’s Note might mean for state and local governments.

            A.    The current state of play in the WTO

            Article VI of the GATS sets out obligations related to domestic regulation. The article authorizes negotiations on specific disciplines “with a view to ensuring that measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services.” Countries will negotiate the disciplines during the upcoming WTO Ministerial in Hong Kong this December.

           The WPDR is responsible for drafting disciplines on qualification, licensing, and technical standards. Over the past few years, more than a dozen countries, including Switzerland, the EU, China, Australia, Japan, Poland, Mexico, and Taiwan have submitted proposals for the WPDR to consider. In preparation for the Hong Kong Ministerial, the chairman of the WPDR released a “Chairman’s Note” that proposes an “Illustrative List of Possible Elements for Article VI:4 disciplines.” As the first consolidated text, the Chairman’s Note suggests that the pace of negotiations is gaining momentum.

            B.    The IGPAC report

            Until recently, state and local governments have not spoken out regarding the developments in negotiations on domestic regulation, despite the serious implications of the negotiations for policy-making autonomy. That changed this October when IGPAC sent its first unsolicited report to the USTR.iii As a group of state representatives, national association members, and other public officials, IGPAC voiced concerns that language in the GATS may interfere with the rights of state and local governments to regulate services.

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II.        Interpreting GATS coverage and meaning

            In its report, IGPAC asked about the specific coverage and meaning of the least-burdensome discipline. The text of the GATS requires member states to make sure that regulations are “not more burdensome than necessary to ensure the quality of the service.” However, member countries have yet to decide exactly what this language would cover.

            A.    What types of measures might the least-burdensome discipline cover?

            Examples

            In an informal note written in 2002, the WTO compiled examples of measures that countries have previously suggested for inclusion in coverage.iv The examples raise important questions:

  • One example mentions: “Federal and sub-federal licensing and qualification requirements and procedures are different, making a license or qualification recognition obtained in one state not valid in other states.” Under this example, would licenses or qualifications from one state be required to be valid in all states? Would sub-federal licensure procedures be more burdensome than necessary if a procedure from another jurisdiction were less trade-restrictive?

  • Another example under licensing cites: “Overly burdensome licensing requirements (e.g., minimum age required for a physiotherapist 25 years old).” Would this scope of coverage invalidate minimum age limits of doctors?

  • The example of technical standards lists: “Unreasonable environmental and safety standards (maritime transport).” How much would this scope of coverage limit controls of a product’s compliance with environmental and safety standards?

Definitions

             Unless the disciplines on domestic regulation say otherwise, they would cover regulation at the state and local levels. Whether a measure will be covered by the least-burdensome discipline depends on: the definitions of qualification requirements, licensing requirements, and technical standards; the applicability of the GATS to government procurement; and whether coverage is limited by the scope of specific sector commitments under GATS.

  • Technical standards, licensing, and qualifications. The various country papers submitted to the WPDR have proposed open-ended definitions, to which the USTR has not voiced objection. For example, while qualifications could be defined narrowly to encompass solely individual professionals seeking approval for employment, some countries have proposed broad definitions that would also cover entire companies. In the context of technical standards, some countries would include standard-setting not only by governments, but also by voluntary, non-governmental bodies.

  • Government procurement at the city and county level. The GATS excludes government procurement from Articles II (Most Favored Nation), XVI (Market Access), and XVII (National Treatment), but not from Article VI (Domestic Regulation). To the extent that governments require services to meet qualification criteria in order to secure government contracts, government procurement might be covered by proposed disciplines on domestic regulation. Several proposals on qualification requirements appear to cover procurement of services, and the European Union takes that position.v GATS coverage of procurement is important for cities and counties because they are not otherwise covered by procurement agreements. For example, a city procurement code may give a preference to small businesses in order to boost its local economy. A small business preference might be subject to a GATS challenge under disciplines on qualification requirements unless government procurement is carved out.

  • Sector Commitments. There are three options for deciding coverage of disciplines on Domestic Regulation in terms of service sectors. The first is to apply disciplines generally to all of a country’s service sectors. The second is to apply disciplines “horizontally” to all sectors that a country has included in its schedule of specific commitments to follow the GATS rules on Market Access and National Treatment. The third is to apply disciplines to individual sectors one-by-one and tailor obligations as they apply to those sectors. For example, the United States has accepted additional disciplines on telecommunication services (and proposed to do so for energy services) in a reference paper that is attached to the schedule of commitments, rather than committing to broader coverage.

             The Chairman’s Note

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             The Chairman’s Note does not address the measures that the least-burdensome discipline would cover. It does not define “qualifications,” “licensing,” and “standards.” Nor does it explain whether the disciplines on domestic regulation would apply to all sectors generally or whether the coverage would include government procurement.

             B.    What does the least-burdensome discipline mean?

             What might “necessary” mean?

             The various country proposals have referred to “necessary” inconsistently, using several different phrases to describe the test that would check for a measure’s legitimacy.

  • In the Swiss proposal, a measure would pass the necessity test if it were “not more trade-restrictive than necessary to fulfill legitimate national policy objective.”

  • In the Japan paper, the measure would have to be “not more burdensome than necessary to fulfill a national policy objective.”

  • In the paper by the EU, a measure would have to be “not with the effect of creating unnecessary barriers to trade in services, and… a restriction on the supply of services.”

  • In the Mexico proposal, a legitimate measure could “not restrict trade more than is necessary for attaining a legitimate objective.”

             As used by the country proposals, the word “necessary” may connote a requirement that would restrain governments from considering a range of policy options.  For example, most legislatures work toward compromise in which neither the most-burdensome nor the least-burdensome option will satisfy a majority of legislators.  The compromise is usually in the middle in terms of the burden on business.  If the WTO defines "necessary" to mean the least-burdensome option, then that would appear to be at odds with the practice of democratic law-making.

             What does it mean to “ensure the quality of the service”?

             “Quality” may refer solely to consumer interests, which would exclude other public interests (such as environmental protection or economic development). For example, a city may wish to require construction permits or zoning limits for buildings that directly affect a coastal area. If the intended beneficiaries of “quality of the service” are only the people who own or live in the buildings, would the external environmental effects of construction be relevant to ensuring the quality of the service?

             The Chairman’s Note

             The Chairman’s Note does not interpret “quality of the service,” and it omits explicit reference to “necessity” or “burdensome” with respect to substantive requirements. Instead, it:

  • includes “review of necessity” as a transparency discipline;
  • includes “burdensome” and “reasonableness” under procedures and documentation; and
  • introduces “relevance” under licensing and qualification requirements.

             The relevance test restricts licensing requirements to those relevant to “the activities for which authorization is sought.” The relevance test possibly restricts government measures less than the least-burdensome test. That is because a measure can be relevant even though it is more restrictive than other alternatives. On the other hand, the relevance test could effectively mirror the necessity test. First, relevance could reflect the GATS focus on ensuring the “quality of the service” and entail a narrow scope of desired objectives. For example, if a relevance test is applied to regulations on construction, the test may exclude environmental protection if pollution is not sufficiently “relevant” to the quality of construction. Second, the existence of less-burdensome alternatives might be a consideration in determining whether a measure is relevant to a desired objective.

III.          Future negotiations – a role for state and local governments

             While the Chairman’s Note signals substantive progress in the WPDR, the USTR has yet to disclose a position on the least-burdensome discipline. By posing questions to the USTR that probe at the scope and definition of vague words, state and local governments can encourage the USTR to clarify positions and communicate with constituents before the WTO determines the outer bounds of a government’s right to regulate services.

For more information contact: Robert StumbergRobert StumbergRobert StumbergRobert Stumberg
at the Harrison Institute for Public Law

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