1. China — Certain Measures Affecting Electronic Payment Services DISPUTE DS413

2. DS413 Overview Complainant: United States Respondent: China Third Parties: Australia, Ecuador, European Union, Guatemala, Japan, Korea, Republic of, India Agreements Cited: Services (GATS) Articles: XVI: Market Access (XVI:1, XVI:2(a)) XVI: Market Access XVII: National Treatment Request for Consultations: 15 September 2010 Request for Consultations Panel Report Circulated: 16 July 2012 Panel Report Circulated 2

3. Dispute Summary & Context, U.S. Claims China only allowed Chinese entities (UnionPay) to supply electronic payment services in Chinese currency (renminbi) within China Foreign services can only provide payment card services for payments in foreign currencies, not in Chinese currency China requires payment services to be compatible with the China UnionPay system and that it bear UnionPay’s logo 3

4. Dispute Summary & Context, Continued China guaranteed UnionPay access to all merchants that take electronic payment, while others must negotiate their own access to merchants These restrictions provide favorable treatment to China UnionPay and disadvantage other providers such as U.S. based Visa Inc. “… discriminatory measures deny a level playing field to American service providers…” - U.S. Trade Representative (USTR) Ron Kirk 4

5. Proceedings September 15, 2010: U.S. requested consultations with China February 11, 2011: U.S. requested establishment of a panel February 24, 2011: Dispute Settlement Body (DSB) deferred the establishment of a panel March 25, 2011: DSB established a panel June 23, 2011: U.S. requested the Director-General to determine the composition of the panel July 4, 2011: Director-General composed panel January 9, 2012: Chairman of the panel notified the DSB that it would not be able to issue its report within six months July 16 2012: Panel Report circulated to membersPanel Report 5

6. Business Context Only allowing China UnionPay to supply electronic payments in Chinese currency greatly advantaged the domestic company Guaranteeing China UnionPay access to all merchants that accept electronic transactions also advantaged the domestic company Other restrictions such as requiring China UnionPay logos disadvantaged foreign competitors 6

7. GATS Articles XVI & XVII XVI Market Access XVI:1 - “…Each Member shall accord services and service suppliers of any other Member treatment no less favorable than that provided for under the terms, limitations and conditions agreed and specified in its Schedule.” XVII:2(a) – Members shall not maintain: “Limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test…” XVII National Treatment “…in respect of all measures affecting the supply of services, treatment no less favorable than that it accords to its own like services and service suppliers.” 7

8. The WTO Issue The US claims that China has violated the market access commitments it made upon joining the WTO Market access commitments = opening up markets to foreign players, including financial markets The US claims that through UnionPay, China has a monopoly over the market of EPS “China’s measures establishing and supporting China UnionPa’ys monopoly on the supply of EPS are inconsistent with Article XVII of the GATS because they accord less favorable treatment to foreign EPS suppliers” (p. A-8) 8

9. Position of China Requests that the panel reject the US claim entirely Discrepancies in regard o the definition of “EPS” Claim that the market for so called “network services” is different from the market in which financial institutions issue payment cards and acquire payment card transactions China’s position is that they made no market access or national treatment commitments in respect of clearing and settlement services, asks the panel to reject US claims Accuses US of failing to comply with DSU Article 6.2 (explanation of legal implications) 9

10. DSU Article 6.2 In Korea — Dairy, the Appellate Body analyzed the requirements imposed by Article 6.2:Article 6.2 “The request must: (i) be in writing; (ii) indicate whether consultations were held; (iii) identify the specific measures at issue; and (iv) provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly. In its fourth requirement, Article 6.2 demands only a summary — and it may be a brief one — of the legal basis of the complaint; but the summary must, in any event, be one that is ’sufficient to present the problem clearly’. It is not enough, in other words, that ‘the legal basis of the complaint’ is summarily identified; the identification must ‘present the problem clearly’.Article 6.2 In EC — Bananas III, the Appellate Body held that there were two reasons why a panel request must be “sufficiently precise”: “As a panel request is normally not subjected to detailed scrutiny by the DSB, it is incumbent upon a panel to examine the request for the establishment of the panel very carefully to ensure its compliance with both the letter and the spirit of Article 6.2 of the DSU. It is important that a panel request be sufficiently precise for two reasons: first, it often forms the basis for the terms of reference of the panel pursuant to Article 7 of the DSU; and, second, it informs the defending party and the third parties of the legal basis of the complaint.”Article 6.2 of the DSUArticle 7 of the DSU 10

11. Position of United States Ultimately accuses China of failing to open its markets Claims that their request is fully compliant with DSU Article 6.2 Disputes China’s claim that “EPS” does not qualify under the services at question 11

12. US Panel Request Includes that China maintains the following measures: requirements that mandate CUP as sole supplier for EPS for all domestic transactions denominated and pain in RMB requirements that RMB denominated payment cards issued in China bear the CUP logo requirements that all ATM machines, merchant card processing equipment and POS terminals accept CUP cards requirements on acquiring institutions to post the CUP logo and be capable of accepting all bank cards bearing the CUP logo broad prohibitions on the use of non-CUP cards requires that CUP be used to handle all RMB transactions in Macao or Hong Kong using bank cards issued in China 12

13. Panel Decision The Panel rejected China’s claim that the United States’ request for the establishment of a panel failed to meet the requirement in DSU Art. 6.2 to provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly Found that China was disadvantaging foreign suppliers of EPS 13

14. Dispute Ruling After the ruling, China in September 2012 stated that it intended to implement the DSB's recommendations and ruling, buy requested a reasonable period of time to implement them In November 2012, China and the United States agreed that the reasonable period of time shall be 11 months from the date of adoption of the panel report (August 2012) After the time expired in July 2013, China reported that it had fully implemented the DSB's recommendations and rulings However, the US said that it did not agree with China's assertion and that it would monitor and review China's actions 14

15. What Did the U.S. Gain? Most of the world’s top providers of electronic payment services for credit and debit card transactions are headquartered in the United States (Visa, MasterCard, AmEx) This decision enables American service providers to provide electronic payment services in China in local currency using credit, debit, prepaid, and other payment cards By industry estimates, the U.S. stood to gain 6,000 jobs related to EPS 15

16. What Has Happened Since? WTO issued a directive ordering China to open its borders by 2015 as it has not yet done so According to a WSJ article in October 2014, China was finally “easing its grip on credit cards” and allowing foreign companies (Visa, MasterCard) to have a greater presence The government announced that qualified domestic and global bank card operators can seek licenses beginning in June 2015 However, it also announced that the new financial integrated cards issued by all banks must conform new (PBOC 3.0 standards), which were incompatible with EMV issued card 16

17. What Has Happened Since? (continued) This new standard effectively rendered the penetration to the Chinese market impossible The only way to enter was to cooperate with UnionPay (the state-controlled firm that has exclusive permission from PBOC to clear all payments) In February 2016, Visa signed a memorandum of understanding with UnionPay to expand access to the Chinese market Wait and see! But, it would not be surprising if we see another WTO directive urging China to respect the ruling and give level playing field to all companies 17

18. Broader Implication Disputes are about broken promises. In this case, Us vs. China. Broken promises undermine the WTO credibility Can countries change rules as they wish for economic/political reasons (especially during a crisis)? Small vs. Big countries: stronger countries have more bargaining power, may change behavior to benefit themselves 18

19. Broader Implication (continued) Open up the market of EPS in China which will allow for an increase in competition More opportunities for foreign suppliers Sets precedent for the meaning of EPS and market access commitments Provides context for additional disputes regarding DSU Article 6.2 and GATS Articles XVI & XVII 19