1. © Dr. Arthur E. APPLETON 17 October 2008 appleton@appletonluff.com
ICTSD Roundtable Cross-Retaliation and GATS: Options for Developing Countries
© Dr. Arthur E. APPLETON
17 October 2008

2. Overview/Conclusion
ICTSD asked me to examine the legal, technical and economic problems that might arise from cross-retaliation (CR) in GATS
Paper looks more generally at retaliation and cross retaliation under the GATS
Conclusions: Avenues exist, particularly in Modes 3 & 4 of GATS, and MFN suspensions, but most of the legal, technical and economic obstacles found with retaliation and CR in the goods sector also exist in the services sector
Retaliation/Cross-retaliation in TRIPS remains more promising for developing countries.

3. Organisation
The paper provides an overview of Article 22 DSU, discusses “retaliation” and “cross-retaliation”, and notes the objective of suspension - “inducing compliance”
Paper focuses primarily on the Article 22.6 arbitral decisions in EC-Bananas III (Ecuador) where suspension of GATS concessions was authorised, and US-Gambling (a GATS case) where GATS suspension arose but the complainant devoted its energy to CR in TRIPs
22.6 in EC-Hormones (US), EC-Bananas III (US) and US-1916 Act receive attention (equivalence)

4. Organisation: General Rules (Art. 22)
1) Seek to suspend concessions or other obligations in same “sector” as nullification or impairment,
2) If suspension is not “practicable or effective”, seek suspension in other sectors under the same agreement”,
If suspension in other sectors under the same agreement is not “practicable or effective”, and the circumstances are “serious enough”, seek suspension of concessions or other obligations under another covered agreement
(no practicable or effective requirement for the actual CR)

5. Organisation: General Rules (Art. 22)
In applying the above principles, a complainant must consider:
(i) the trade in the sector or under the agreement under which the panel or Appellate Body has found a violation or other nullification or impairment, and the importance of such trade to that party;
(ii) the broader economic elements related to the nullification or impairment and the broader economic consequences of the suspension of concessions or other obligations.

6. General Rules (Art. 22)
The level of suspension of concessions or other obligations must be “equivalent to the level of nullification or impairment.”
Note “Sector” has a special meaning – principal sector as identified in the Services Sectoral Classification List”

7. General Rules (Art. 22 and GATS Art. XXIII)
Paper distinguishes between:
suspension of concessions (“specific commitments”) in Art. XVI-XVIII of GATS – columns 2-4, MA, NT and Additional commitments), and
Suspension of other obligations Art. II-XV of GATS, in particular MFN
Follows approach on MFN in US-Gambling and not EC-Bananas III (Ecuador)

8. Broad Concerns - Suspensions of Specific Commitments and General Obligations
Will suspension of concessions or other obligations be equivalent (as required by Article 22.4 of the DSU) to the level of nullification or impairment – can equivalence even be quantified for certain forms of suspension? (big issue)
2) Will the suspension of concessions be impracticable or ineffective? Is the complainant a developing country that lack substantial trade volumes or economic power vis-à-vis the violating Member? Will the suspensions be devoid of a significant economic impact on the offending country?

9. Broad Concerns - Suspensions of Specific Commitments and General Obligations
3) Will suspension bring economic harm to complaining party? Is complaining party highly dependent on service imports from the offending country? Will suspension result in unemployment?
4) Will proposed suspension have effects that endure beyond the date that the WTO-inconsistent measure is withdrawn? By excluding a Member from a market on a short-term basis, would the excluded Member be permanently disadvantaged? To what extent might this violate Article 22.7 of the DSU (equivalence)?

10. Broad Concerns - Suspensions of Specific Commitments and General Obligations
5) What effect will suspension have on the investment climate or on the complaining member’s development?
6) Will suspension of concessions or other obligations violate rights under national laws (including a Member’s constitution), or under bilateral, regional or other international agreements?
7) Will complaining party need to enact or change its domestic law to allow retaliation or cross-retaliation in specific sectors and to suspend concessions or other obligations?

11. Broad Concerns - Suspensions of Specific Commitments and General Obligations
8) How should a proposed suspension be distributed or apportioned among service providers or recipients from an offending country?
9) Can the suspension be avoided or circumvented? Do alternative channels exist for supplying the service in question?
10) Will consumers and businesses in the complainant’s territory be forced to hire new and more expensive service suppliers or providers? The economic interests of consumers and businesses in the complaining Member may be harmed.

12. Broad Concerns - Suspensions of Specific Commitments and General Obligations
11) Will the suspension disrupt the supply chain of various businesses? Businesses in a complaining country may be less inclined to purchase services offered in a Member targeted for retaliation. For example, retaliation imposed on transport services may affect trade in goods.
12) Will the suspension disrupt regional efforts towards economic integration?

13. Mode 1: Cross-Border Supply (only mode directly comparable to importation)
Article XVI – Market Access provides ideas:
Limitations on the number of service suppliers from the offending Member, and limitations on the total value of services supplied by the offending Member. (Either limit or prohibit the cross-border supply of services in Mode 1)
For example, a complaining party could prohibit the cross-border purchase of services from an offending Member, such as legal or accountancy services, or fire, automobile, life or property insurance from insurers located in the offending country.

14. Problems in Mode 1
Retaliatory measure can’t exceed the level of nullification or impairment
Cross-border supply of services is difficult to limit (phone, , fax, etc.). Success may depend on honesty (the tax man)
Suspensions in Mode 1 may hurt economic interests dependent on these services
Suspension may protect domestic service providers (but prices may increase)
Services offered in Mode 1 are easily replaced in another Mode of Supply

15. Mode 2: Consumption Abroad
Freedom of Member to purchase services in territory of another Member/servicing property in another Member. (Restrictions imposed by Member whose nationals seek the service)
If consumer movement: Market Access restrictions such as quantitative limitations on the value or number of service transactions by service recipients abroad. Also:
(i) limiting, restricting or taxing consumption abroad by consumers;
(ii) restricting or prohibiting a Member’s nationals from purchasing medical, dental, legal, consulting or other professional services in the territory of another Member;
(iii) limitations on the number of residents allowed to travel to a specific country for tourism, and
(iv) prohibitions on coverage under a Member’s public health insurance scheme for medical treatment received abroad.

16. Mode 2: Consumption Abroad
If movement of objects: (service or repair abroad) the transaction itself may be targeted:
a prohibition or restrictions on the use of specific foreign repair facilities,
taxes imposed on companies that use foreign repair services, and
prohibitions on insurance coverage for goods repaired abroad.

17. Mode 2: Problems Establishing equivalence
Difficulty to police nationals/goods abroad
Damages domestic industries that benefit from nationals receiving services abroad (outsourced medical procedures); aviation and ship safety…
Although tourism depends on travelling abroad, many professional services (procured abroad) can be offered in a different mode of supply

18. Mode 3: Commercial Presence
Article XVI: Pre-establishment stage:
limitations on the number of service suppliers permitted to supply services from a Member targeted for cross-retaliation,
limitations on the total number of natural persons that a service supplier may employ,
measures that restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service (e.g., limitations on foreign ownership or a requirement that a service supplier enter into a joint venture with a local partner), and
limitations on the participation of foreign capital (minimum equity requirements).

19. Mode 3: Commercial Presence
Article XVI: Post-establishment phase:
limitations on the value of service transactions within a member’s territory,
limitations on the number of service operations or on the total quantity of service output.

20. Mode 3: Problems Pre-establishment: will discourage FDI
Post-establishment: Who is a foreign service provider? (legal personality and protection)
May cause injury to the domestic economy of DCs
Undermines predictability of legal system and will undermine FDI
Loss of employment, tax revenue (bad for economy)
Constitutional and other legal difficulties (conflicts with national law and international agreements)
Often no significant effect on offending Member
Difficulty establishing equivalence

21. Mode 4: Presence of Natural persons
From Article XVI: At the pre-establishment stage, suspension of specific commitments may include:
numerical limitations on the number of foreign service suppliers permitted to provide temporary services within a Member’s territory,
limitations on the number of temporary foreign staff a company may employ,
measures that restrict or require the creation of specific legal entities or joint ventures to supply a service within a Member’s territory, and
limitations on the number of people that may be employed in a particular service sector or that a service supplier may employ.

22. Mode 4: Presence of Natural persons
Article XVI: At the post-establishment stage, suspension of specific commitments might include:
limitations on the value of services provided by foreign service suppliers within a Member’s territory or within a particular region in a Member’s territory,
limitations on the number of service operations or on the total quantity of service output.
Article XVIII: limitations on recognition of particular foreign degrees and qualifications

23. Mode 4: Problems
Similar to Mode 3: equivalence, violations of private contractual rights of service providers lawfully working in a particular Member’s territory,
May result in Members facing difficulty attracting foreign service suppliers,
May have adverse effects for enterprises offering services in Mode 3 (if foreign experts are sometimes required),
Problems if Members from developing countries are dependent on foreign service suppliers.
linguistic, economic, cultural and geographic factors may limit the availability of alternate service suppliers

24. General Obligations: MFN
Paper favours approach in US-Gambling: no need for specific commitments
Most of the general obligations in Articles II-XV are not readily quantifiable for purposes of determining equivalence
(US-1916 Act: quantifiable v. qualitative question)
Suspension of MFN can be quantifiable: higher duties, tariff, fees or other restrictions (regulations)
Paper generally treats tax issues here and takes a favourable view of MFN suspension
Note terminology: retaliation and CR are not applied on an MFN basis

25. Conclusions for Developing Countries
Select high profile and politically influential sectors for retaliation and cross-retaliation
The financial service sector, in particular the banking and insurance industry, may be the most vulnerable and most easily targeted.
Capable of mustering the political pressure needed to encourage political reform, and companies in this sector are probably the easiest targets for cross-retaliation.
Taxation measures (through a suspension of MFN) are likely to provide a practical means of reaching already established financial service providers.

26. Conclusions for Developing Countries
Suspensions involving the financial service industry require a substantial commercial presence (whether or not the developing country has made a commitment in Mode 3). Financial service providers must have something to lose economically.
Success depends on the ability of the targeted sector to lobby governments, and the permissibility of measures pursuant to local, regional and international law.
Suspensions may be more effective in Modes 3 and 4 where establishment of service suppliers is at issue

27. © Dr. Arthur E. APPLETON 17 October 2008 appleton@appletonluff.com
ICTSD Roundtable Cross-Retaliation and GATS: Options for Developing Countries
© Dr. Arthur E. APPLETON
17 October 2008