WT/TPR/S/72 Trade Policy Review
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IV. TRADE POLICIES BY SECTOR
(1) OVERVIEW
1. During the period under review, the Common Agricu ltural Policy (CAP) continued to be the
European Union's single most important expenditure item, accounting for 45% of the Community's
budget.  In addition, the CAP resulted in food prices for consumers that were higher than on world
markets, and also had certain negative effects on the environmental condition of rural areas.Externally, the CAP continued to have major implications on world markets for agricultural products,
in particular dairy products, cereals, meat, and sugar.
2. In March 1999, the Council agreed the next stage of CAP reform in the context of Agenda
2000.  Just as in the first stage of reform in 1992, prices of arable crops, beef, and dairy products are
to be cut to reduce the gap with prices on world markets, and effects on farmers' incomes are to be
partly compensated by increased direct payments under production-limiting programmes.  These
reforms continue the shift from price support – whic h distorts both producer and consumer decisions –
to direct support, to ensure that the nature of support is both less distortive and more transparent.  As
was the case of the Uruguay Round, there is a prospect of these reforms being locked in by the
negotiations under the WTO Agreement on Agriculture to continue the reform process, which beganin 2000.
3. Since the last Review, most manufacturing industries have continued to undergo structural
changes.  Despite slow growth and low investment rates, the sector appears to have taken advantage
of the increasing integration of the EU's market.  Harmonization within the EU has provided a
conducive environment for manufacturing;  it has also provided added potential benefits for foreign
trading partners.  Some obstacles to full harmonization and competition in the Internal Market appear
to remain, as illustrated by persistent price dispersion across national markets for some manufacturedproducts.  As regards trade measures, border protec tion in the manufacturing sector has continued to
decline since the last Review, with the simple average MFN tariff declining to 4.2% in 1999, down
from 4.9% two years ago.  However, tariffs on a few selected product categories are still relatively
high, while tariff escalation remains in place for some of them.  Other areas of relevance in terms of
policy measures in the manufacturing sector include state aid and standards.
4. Services remain the EU's single most dynamic economic activity.  In the context of the
Internal Market Programme, a gradual approach towards liberalization in services was adopted with
varying timetables between the different sectors.  While some sectors are still strongly characterized
along national lines (audio-visual, transportation), others have recorded unprecedented liberalization
since the last Review (telecommunications, financial services). The liberalization process at the EUlevel is aimed at establishing common rules to guarantee the right of establishment, open competition,
and the freedom to provide services. Liberalization of trade in services within the EU has also
potential beneficial effects for third countries.  The increasing exposure of the services sector to
competitive forces inside and outside the EU has rev ealed some structural rigidities still affecting the
economic performance of the sector.The European Union WT/TPR/S/72
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(2) AGRICULTURE1
(i) Features2
5. According to (the latest available) data for 1998, the cultivated surface area of the Community
covers some 129 million hectares, and is principally located in France, Spain, Germany, the United
Kingdom, and Italy (Table IV.1).  Agriculture accounts for 4.7% of the employed civilian population
of the 15 Member States, although employment in the sector is relatively higher in Greece (17.7%),Portugal (13.7%) and Ireland (10.9%).  The averag e surface covered by holdings varies significantly
among the Member States, from a high of 69.3 hectares in the U.K. to 4.3 hectares in Greece.  The
productivity of the sector, in terms of the share of value added in final production, is generally above
the average of the 15 Member States in the South and below the average in the North.
Table IV.1
Basic agricultural statistics in Member States, 1998
Utilized
agricultural
areaNumber
of
holdingsaUAA per
holdingShare of primary
sector in employed
civilian populationFinal
productionShare of value-
added in final
production
('000 hectares) ('000) (hectares) (%) (ECU million) (%)
Belgium 1,383 67 20.6 2.2 6,247 34.3
Denmark 2,689 63 42.6 3.7 6,199 43.9
Germany 17,160 534 32.1 2.8 32,043 45.9
Greece 3,499 821 4.3 17.7 8,834 70.3
Spain 25,630 1,208 21.2 7.9 26,642 56.5
France 28,331 680 41.7 4.4 46,187 50.2
Ireland 4,342 148 29.4 10.9 4,430 46.0
Italy 14,833 2,315 6.4 6.4 35,694 72.6
Luxembourg 127 3 42.5 2.9 183 53.6
Netherlands 2,011 108 18.6 3.5 16,283 51.9
Austria 3,415 210 16.3 6.5 3,553 48.6
Portugal 3,822 417 9.2 13.7 3,935 46.7
Finland 2,172 91 23.7 7.1 2,147 29.3
Sweden 3,109 90 34.7 3.1 3,252 26.0
United Kingdom 16,169 233 69.3 1.7 17,838 35.0
Total 128,691 6,989 18.4 4.7 213,467 52.3
a 1997.
Source: European Commission, DGVI (2000a).
6. Dairy products are the single most important prod uct category in the value of the EU's overall
agricultural production, accounting for 18% of fina l production, followed by beef and veal, pigmeat,
fresh vegetables, fresh fruit, and wine (Table IV.2).  These items are produced mainly in the major
farming areas of France, Spain, Germany, the United Kingdom, and Italy.  Production of wine is
however more concentrated in France than other leading crops.
                                                     
1 Annex 1 of the WTO Agreement on Agriculture defines the scope of agriculture as HS Chapters 01 to
24 less fish and fish products (Chapter 3), plus selected items from Chapters 29, 33, 35 38, 41, 43, 50, 51, 52and 53.
2 European Commission, DGVI (2000a).WT/TPR/S/72 Trade Policy Review
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Table IV.2
Distribution of final agricultural production of selected items by Member State, 1998(EU-15 = 100%)
Share in EU-15
Crop Share in total
EU final
productionBetween 5 and 10% Between 10 and 20% Greater than 20%
Wheat 5.1 Spain Germany, Italy, United
KingdomFrance
Sugarbeet 2.5 Belgium, Spain, Netherlands,
United KingdomItaly France, Germany
Fresh fruit 6.4 Greece France, Germany Italy, Spain
Fresh vegetables 9.4 Germany, Greece, Netherlands,
United KingdomFrance, Spain
Wine and must 6.6 Germany, Spain France, Italy
Milk 18.0 Spain, Netherlands France, Italy, United
KingdomGermany
Beef/veal 10.0 Ireland, Netherlands, Spain,
United KingdomGermany, Italy France
Pigmeat 10.0 Belgium, Denmark,
Netherlands, United KingdomFrance, Italy, Spain Germany
Sheepmeat and goatmeat 2.0 Ireland, Italy, Portugal France, Greece Spain, United
Kingdom
Eggs 2.3 Netherlands France, Germany, Italy,
Spain, United Kingdom
Poultry 5.4 Germany, Netherlands France, Italy, Spain, United
Kingdom
Note: Items selected on the basis of a share in total EU final production of at least 2%.
Source: European Commission, DGVI (2000a).
7. The EU's production of primary agricultural products exceeds consumption in most cases
(Table IV.3), except for oilseeds and rice, where domestic demand is covered mainly by imports.  The
highest self-sufficiency ratios occur in skimmed milk powder (production is 118% of consumption)
and common wheat (115%), and exports are therefor e an important outlet for domestic production;
for skimmed milk powder, exports account for 26% of production, and for common wheat, 15% of
EU production is exported.  Given the magnitude of its consumption and production for such
products, the EU has a significant effect on supply and demand conditions on world markets for
principal traded products (Chart IV.1).
Table IV.3
Consumption and self-sufficiency in selected primary agricultural products, 1997-98('000 tonnes)
Production Consumption Imports Exports Y/C X/Y M/C
(Y) (C) (M) (X) (%) (%) (%)
Durum wheat 7,275 8,240 1,789 1,394 88 19 22
Common wheat 87,558 75,825 1,971 13,252 115 15 3
Rice 1,667 1,695 553 291 98 17 33
Sugar 14,361 12,700 2,316 3,700 113 26 18
Oilseeds 1,843 15,765 13,948 26 12 0 88
Winea156,671 151,360 6,169 14,187 104 9 4
Beef/vealb7,624 7,398 353 694 104 9 5
Pigmeatb17,584 16,501 44 1,034 107 6 0
Skimmed milk powderc1,073 910 64 279 118 26 1
a 1,000 hectolitres.
b 1998.
c 1997.
Source: European Commission, DGVI (2000a).The European Union WT/TPR/S/72
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010203040506070
Wine Cheese Milk
powderEggs Milk Butter Meat Sugar Cereals OilseedsChart IV.1
EU share in world trade of principal traded products, 1997
Per cent
Source: Euro pean Commission, DGVI (2000a ). Exports
Imports
8. In terms of value, the EU is the world's leading trader of agricultural products, accounting for
exports of US$62.1 billion and imports of US$88.7 billion, of total world trade of US$394 billion in1998;  agricultural products accounted for 7.6% of the EU's exports and 11.1% of its imports.
3  Major
export items are wine, spirits, milk powder, cheese,  sugar, food preparations, pigmeat, beer, wheat,
bakery products, chocolate, and animal feed;  major import items are coffee, soya beans, oil-cake,
bananas, tobacco, cotton, cocoa beans, nuts, fruit juice, wine, sugar, and wool.  The United States is
the most important single export destination (just under half is wine and other beverages), as well asthe most important origin of EU imports (oilseeds and animal feed are leading product categories)
(Table AIV.1).  Important product categories in EU imports from the Central and Eastern European
countries are meat, fruit and vegetables;  fresh fruit and vegetables from the Mediterranean countries;
and coffee, cocoa, sugar, and bananas from the ACP countries.
(ii) Common Agricultural Policy (CAP)
(a) Objectives and mechanisms
9. Article 33 of the EC Treaty states the objectives of a Common Agricultural Policy (CAP),
which are to increase production in the sector concerned, provide a fair income for farmers, stabilize
markets, assure the availability of supplies, and ensure they reach consumers at reasonable prices.
These objectives are to be attained, according to Article 34 of the EC Treaty, by common organizationof agricultural markets, through instruments that include "regulation of prices, aids for the production
and marketing of the various products, storage and carryover arrangements and common machinery
for stabilizing imports or exports".  The traditional principles of the CAP are single prices,
Community preference, responsibility, and financial solidarity.
                                                     
3 WTO (1999).WT/TPR/S/72 Trade Policy Review
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10. The main mechanisms of the CAP are the guaranteed common prices, established in terms of
the euro4, and Common Market Organisations (CMOs) for 26 products or groups of products.
According to the Commission, one type of CMO – arable crops (cereals, oilseeds, protein crops), beef
and sheepmeat – provides direct aid to producers linked to factors of production such as land or
livestock, subject to reference periods and production-limiting programmes;  a second type of CMO –
olive oil, tobacco, cotton, certain processed fruit and vegetables such as citrus fruit, tomatoes, prunes,and table wine – provides assistance that is proportional to production levels, but is also subject to
ceilings based on historical levels of production;  a third type of CMO – dairy products and sugar –
provides support within production quotas, whose cost is mainly borne by the consumer;  and a fourth
type allows the market to fluctuate with a minimum of intervention, and applies to fruit and
vegetables, quality wines, pigm eat, poultry meat, eggs, and honey.
5  A full and detailed analysis of the
functioning of each CMO requires consideration of a complex set of policy instruments, which may
include border measures (tariffs and licensing), subsidies (production aids and export subsidies),
intervention measures, and a variety of other measures.6
11. The EU's expenditure on the CAP is mainly channelled through the European Agricultural
Guarantee and Guidance Fund (EAGGF), within the Community budget, as financed by ownresources and contributions by Member States.  The Guarantee section, which accounted for some
90% of CAP expenditure, mainly finances aid to producers (74%) and refunds on exports to third
countries (12%)
7, while the (much smaller) Guidance section finances structural reforms in the
agricultural sector.8  These expenditures are made directly in the Member States by the accredited
paying agencies, in advance of refund by the Commission, and subject to ex post  controls to ensure
compliance with Community regulations.9  France receives the largest share of EAGGF expenditure
(23%), in correspondence with its leading share in EU final production of agriculture (Chart IV.2).
12. In terms of the distribution of EAGGF expenditu re across CAP products (Table IV.4), the
largest share is devoted to arable crops (46.3%), followed by beef and veal (13.3%).  With respect to
arable crops, approximately 84% of expenditure consists of aid to producers, the remainder being
devoted to storage and other expenses, as well as export refunds (3.6%);  for cereals, protection
against imports from third countries is also part of the support system.  In contrast, aid to producers isnot a feature of the EU's sugar regime, which relies instead on export refunds to dispose of surplus
Community sugar production on world markets, as well as protection against imports from third
countries (except for imports from ACP countries under the Sugar Protocol to the Lomé
Convention).
10
                                                     
4 Payments to farmers are made in national currencies, requiring an agri-monetary system (WTO, 1995,
Vol. 1, Box V.1, p. 81).  The system has been adjusted for European Monetary Union as of 1 January 1999.
5 European Commission, DGVI (1999a).
6 WTO document G/SCM/N/48/EEC.
7 European Commission, DGVI (1999b).
8 As from 2000, the Guarantee section finances certain expenditure of a type previously financed by the
Guidance section, notably certain rural development measures outside Objective 1 regions and compensatory
allowances in less favoured regions (Chapter III(4)(ii)).
9 Council Regulation 1258/1999.
10 Starting with the marketing year 1981/82, the export refunds on domestic sugar have been entirely
financed by contributions of producers of sugar and isoglucose, and sugar beet and sugar cane.The European Union WT/TPR/S/72
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Chart IV.2
Share of Member States in EU final production of agriculture and in EAGGF guarantee section expenditure, 1998
Source:Belgium  3Denmark  3Germany
15Greece
4
Spain
12
France
22
Ireland 
2Italy
17Netherlands
8Austria  2Portugal  2Finland  1Sweden  1United Kingdom
8Per centFinal production of agriculture
Belgium  2Denmark  3Germany
14Greece
7
Spain
14
France
23
Ireland 
4Italy
11Netherlands
4Austria  2Portugal  2Finland  1Sweden  2United Kingdom
11EAGGF guarantee section expenditure
Per cent
Euro pean Commission, DGVI (2000a ).WT/TPR/S/72 Trade Policy Review
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Table IV.4
EAGGF Guarantee section expenditure by selected crop and economic measure, 1998
Total
expenditureShare of
expenditureGrowth of
creditsShare of 1998 expenditure allocated to
(ECU
million)(%)1998-99
(%)Aid to
producersExport
refundsOther b
Arable crops 17,945.2 46.3 -0.6 90.0 2.4 7.6
Sugar 1,776.6 4.6 9.0 0.0 71.2 28.8
Olive oil 2,266.7 5.8 -0.2 88.0 1.1 10.9
Dried fodder and dried vegetables 377.5 1.0 2.7 81.4 0.0 18.6
Textile plants and silkworms 869.8 2.2 11.3 100.0 0.0 0.0
Fruit and vegetablesa1,509.5 3.9 10.0 20.6 3.9 75.5
Wine 700.0 1.8 -5.6 0.0 5.9 94.1
Tobacco 870.3 2.2 12.6 90.5 0.0 9.5
Milk products 2,596.7 6.7 -0.6 0.0 55.0 45.0
Beef/veal 5,160.6 13.3 -4.7 82.4 15.0 2.6
Sheepmeat and goatmeat 1,534.6 4.0 14.4 100.0 0.0 0.0
Pigmeat, eggs and poultrymeat 327.9 0.6 9.6 0.0 31.3 68.7
Fishery products 21.2 0.0 0.0 0.0 0.0 100.0
Total 38,748.1 100.0 4.4 72.8 12.5 14.7
a Fresh and processed.
b Storage, guidance premiums, processing/marketing aid, consumption aid, and miscellaneous.
Source: European Commission, DGVI (2000a).
(b) Reform of the CAP
13. Reform of the CAP was first agreed in 1992.  According to the Commission, the aim was to
"strengthen the competitiveness of European agriculture, realign supply with demand and target farm
support more effectively".11  Prices were reduced to levels closer to world market prices for cereals
and beef, with effects on farmers' incomes offset by direct payments subject to production limiting
programmes.  Direct payments for cereals were made conditional upon the withdrawal of land fromproduction ("set-aside"), and for beef, headage payments were based on a maximum stocking rate per
hectare, subject to individual or regional ceilings.  The reform resulted in a certain balance for
markets and a significant decrease in stocks, prices closer to world market levels to the benefit of
consumers, and an increase of 4.5% in farmers' incomes between 1992 and 1996.
14. The 1992 reform was "locked in" to some degree by the EU's commitments on the use of
agricultural policy instruments under the WTO Agreement on Agriculture.  The Agreement's
disciplines are based on the principle that the constraints on policy choices should be greatest on the
instruments that most directly distort trade – measures applied at the border and export subsidies.  The
EU therefore converted all non-tariff barriers to tariffs
12, bound all agricultural product tariff lines in
its schedule, and pledged to reduce levels of bound tariffs by 36% on average, subject to a minimumreduction of 15% per line;  the EU has re-introduced tariffs on certain products through the special
safeguard provision (Chapter III(2)(vii)).  In addition, the Community made available current and
                                                     
11 European Commission, DGVI (1999a).
12 Including variable levies on poultry meat, beef and veal, pigmeat, dairy products, wheat and other
cereals, rice, eggs, olive oil, sugar, and processed produ cts based on these products, as well as countervailing
charges on wine, certain fruit and vegetables, and fisheries products if suppliers fail to comply with referenceprices (GATT, 1991, Vol. 1, p. 95 and GATT, 1993, Vol. 1, p.65).The European Union WT/TPR/S/72
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minimum market access opportunities through 105 tariff quotas, which are available for imports from
all WTO Members (including preferential trade partners), unless a specific country allocation is noted
in the commitment.  For the implementation period of July 1995 to July 2000, the EU has reduced the
value of export subsidies by 36% and subsidized volumes by 21% on each of 20 products, and has
also reduced the ceiling for the Aggregate Meas urement of Support (AMS) by 20% from ECU 78.672
billion to ECU 67.159 billion, and limited the base area of oilseeds production eligible for crop-specific payments.
13  The EU's commitments were assessed in the Secretariat Report for the EU's
Trade Policy Review in 1995 as follows:
In imposing disciplines on the financing of excess production, the WTO Agreement
on Agriculture, implemented hand-in-hand with the reform of the Common
Agricultural Policy, should help reduce internal supply pressures and ease the fiscalburden created by ever-expanding support systems.  Although no immediate decline is
to occur in border protection, gradual reduction of duties, resulting from the
tariffication of variable levies and charges, as well as tightened export subsidy
provisions, may eventually increase the sector's exposure to competition.
14
15. Since the entry into force of the WTO, new pressures for CAP reform have arisen from both
internal market developments in the context of WTO-mandated disciplines on the use of export
subsidies, and the prospect of the EU's enlargement to new Members from Central and Eastern
Europe.  In presenting its analysis in 1997 of the implications of enlargement for the CAP and other
Community programmes (as they were then operating), the Commission noted:
The extension of the Common Agricultural Policy (CAP) in its present form to the
acceding countries would create difficulties.  Given existing price gaps betweencandidate countries and generally substantially higher CAP prices, and despite
prospects for some narrowing of these gaps by the dates of accession, even a gradual
introduction of CAP prices would tend to stimulate surplus production, in particular in
the livestock sector, thus adding to projected surpluses.  World Trade Organization
(WTO) constraints on subsidized exports would prevent the enlarged Union to sell itssurpluses on third markets.  Extension of the CAP would also entail an important
budgetary charge, estimated at around 11 billion per year, direct payments to farmers
representing close to two thirds of this sum.
15
16. The Berlin European Council of March 1999 reached political agreement on Agenda 200016,
and the Agricultural Council in May 1999 adopted the specific regulations setting out reform of the
CAP.17  In particular, the intervention price for cereals is to be reduced by 15% in two equal steps
starting in the marketing year 2000/01 (from € 119.19/tonne to € 101.31/tonne), with a further
reduction in 2002/03 depending on market developments .  A 20% cut applies to the market price for
beef and veal (€ 2,780/tonne) in three equal steps starting in the marketing year 2000/01.  The reformof the dairy sector is to start in 2005/06, with a cut of 15% in three equal steps for the intervention
price for butter and skimmed milk, with the quota regime in place until 2007/08.
                                                     
13 The AMS excludes measures considered to have a minimal trade-distorting impact, such as direct
payments under production-limiting programmes, "decoupled income support", aid related to structuraladjustment or environment and regional assistance.
14  WTO (1995), Vol. 1, p. 79.
15 European Commission (1997b).
16 Berlin European Council, 24 and 25 March 1999, Presidency Conclusions [Online].  Available at:
http://ue.eu.int/en/Info/eurocouncil/index.htm [15 March 2000].
17 European Commission, DGVI (1999c).WT/TPR/S/72 Trade Policy Review
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17. Effects of price cuts on farmers' incomes are to be partly compensated through increased
direct payments under production limiting programmes and based on fixed references of the past.  A
reorganized rural policy is to accompany the reform process, giving Member States the option to
further reduce direct payments linked to commodity regimes and redirect resources to rural
development and environmental measures.  Expenditure on the CAP is therefore expected to rise from
€ 36.6 billion (in constant 1999 prices) in 2000 to  € 39.6 billion in 2003, thereafter gradually
declining to € 37.3 billion in 2006.
18. As was the case in the Uruguay Round, there is a prospect of this next stage of CAP reform
being locked in by the negotiations under Article 20 of the WTO Agreement on Agriculture to
continue the reform process in the sector, which began in March 2000.18
(c) Main instruments of agricultural policy
Measures affecting imports
19. Imports of certain products under common market or ganizations – cereals, rice, beef and veal,
sheepmeat and goatmeat, milk and milk products, sugar, processed fruit and vegetables, bananas, oils
and fats, seeds, wine – require a licence.  According to the Commission, this serves a statistical
purpose and is granted automatically.19  Imports within a tariff quota also require a licence.20
20. With respect to tariffs on agricultural products, 13% of lines are free of duty, 39% are
dutiable on an ad valorem  basis, and the remainder are dutiable on a non- ad valorem  basis.  In the
latter case, such rates are either just specific (assessed on a volume basis), combinations of a specific
duty and an ad valorem  component (compound rate), or "mixed" lines on which the duty is subject to
a minimum rate (MIN) and/or maximum rate (MAX), or lines on which the rate is set by a technical
formula.  Such non- ad valorem  duties are generally assessed on live animals, meat, dairy products,
fresh fruit and vegetables and processed products, cereals and products processed therefrom (flour,pasta, bakery products), rice, olive oil, sugar and processed products, processed cocoa products, wine,
spirits, and tobacco.  Their purpose is to ensure that imports do not undercut EU production, as well as
to provide an element of protection;  for example, the duty per tonne of frozen beef carcasses in 1999
was 14% of the import price plus € 1,934.
21. The simple average agricultural tariff for 1999 was estimated by the Secretariat at 17.3%.
This estimate is based on the conversion by the Co mmission, where feasible, of tariffs assessed on a
non-ad valorem  basis to ad valorem  equivalents (AVEs) using unit values, as required in its
submission to the WTO's Integrated Database (IDB).  The estimate does not include zero or reduced-
tariff treatment available within the limits of the EU's tariff quotas (Chapter III(iv));  the estimate thus
refers to the out-of-quota tariffs only.  In terms of the EU's leading agricultural product imports (in
value), protection varies significantly, from duty-free treatment for soya beans and oil-cake to an
estimated (out-of-quota) tariff of 54.6% on bananas (Table IV.5).  Comparisons with estimates
provided in the Secretariat Report for the 1997 Trade Policy Review indicate that unit value
fluctuations account for declines in AVEs of at least 50% for wheat, wine, and tobacco, and increases
of more than 50% for frozen meat and butter.
21  Grouped in terms of ISIC Rev.2 categories
(Table AIV.2), the EU's level of tariff protection is just under 20% for manufacturing activities based
on agricultural products, double the figure for basic agricultural production.
                                                     
18 Background information is available at:  http://www.wto.org/wto/seattle/english/about_e/07ag_e.htm
[15 March 2000].
19 G/LIC/N/3/EEC/2.
20 G/LIC/N3/EEC/2/Adds. 1-27.
21 WTO (1997), Vol. 1, Table IV.1, p. 85.The European Union WT/TPR/S/72
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Table IV.5
Tariff protection on the EU's leading agricultural product imports, 1999
MFN 1999
Imports Simple
averageMin. Max.Standard
deviation HS codeNo. of
8-digit
HS
linesDescription
(US$
million)(%) (%) (%) (%)
0901 6 Coffee 6,602.7 7.3 0.8 12.6 4.7
1201 2 Soya beans 4,098.9 0.0 0.0 0.0 0.0
2304 1 Oil-cakes 2,843.9 0.0 0.0 0.0 0.0
0803 3 Bananas 2,045.0 54.6a16.7 130.4 65.6
1801 1 Cocoa beans 1,851.6 0.5 0.5 0.5 0.0
2401 21 Tobacco 1,827.5 9.8 3.3 35.6 7.1
2204 94 Wine 1,486.1 8.2 0.0 42.5 8.8
2009 85 Fruit and vegetable juices 1,456.6 28.0a12.0 108.3 18.4
0802 15 Nuts 1,425.9 2.7a0.0 5.8 2.2
1511 6 Palm oil 1,128.0 7.7 0.7 14.0 5.0
2309 29 Animal feed 1,102.9 19.6a0.0 183.1 40.4
a Estimated out-of-quota rate;  in quota imports are subject to zero tariff treatment.  For WTO tariff quotas, see Annex 7 of th e
EU's 1999 Tariff.
Source : WTO Secretariat calculations, based on data provided by the European Commission.
Subsidies
22. In 1999, some € 45 billion (about US$50 billion) was spent by the EU on the CAP,
accounting for some 45% of Community-level expenditure;  an additional amount estimated at
US$13 billion was budgeted to expenditure in the sector by individual Member States, in particular byFrance (US$2.7 billion), German y (US$2.1 billion), Italy (US$1.9 bi llion), Finland (US$1.5 billion),
and the United Kingdom (US$1.3 billion).
22  These subsidies include publicly funded Community-
level programmes notified to the WTO as exempt from the AMS reduction commitment23;  the
Commission is also of the view that policies at Member State level are exempt.  In this context,
available information on AMS support in 1995-97 indicates much lower levels than those committedin the Uruguay Round by the EU: ECU 50,026 million in 1995-96 instead of ECU 78,672 million;
and ECU 51,009 million in 1996-97 instead of ECU 76,369 million.
23. Trends in Community-level payments between 1995 and 1998 indicate rising payments to
producers of arable crops (+26%), olive oil (+192%), and bovine meat (+94%), and declining
payments for fruit and vegetables (-6%), wine (-20% ), tobacco (-9%), dairy products (-33%), andsheepmeat and goatmeat (-14%).
24
24. Expenditure on export subsidies was ECU 3.5 billion in 1998, down sharply – by almost 50%
– since 1995, although the EU remains the leading user on world markets.  The reduction is due
mainly to declines in expenditures on major subsidized items such as arable crops (down 62%), dairy
products (down 38%) and bovine meat (down 56%).
25. The EU's export subsidies and/or volume of subsidized exports on individual items have been
within the EU's annual commitment levels unde r the WTO Agreement on Agriculture since 1995 on
                                                     
22 OECD (2000), Table II.5.
23 G/AG/N/EEC/17.
24 G/SCM/N/48/EEC.WT/TPR/S/72 Trade Policy Review
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products such as:  wheat and wheat flour;  rapeseed ;  butter and butteroil;  skim milk powder;  cheese;
fresh fruit and vegetables;  processed fruit and vegetables;  and raw tobacco.  For certain marketing
years after 1995-96, annual commitment levels have been exceeded although within the export
subsidy roll-over limits, for some products, such as coarse grains (1998-99);  sugar (1997-98, 1998-
99);  beef meat (1996-97);  poultry meat (1997-98) ;  other milk products (1997-98);  wine (1996-97,
1997-98);  and incorporated products (1998-99).25
(d) Impact of the CAP
26. The impact of the CAP – inside and outside the Community – is considerable.  The CAP is
the most visible item of Community expenditure, accounting for 45% of the Community budget in
1998.  Market price support raises the prices of food for consumers in the Community above world
market price levels, which may have a disproportionate impact on the poorer segments of the
population depending on the nature of social security systems.  Consumer benefits from the price
reductions resulting from the CAP reform agreed in 1999 are estimated at € 9 billion for 2005-06 and
€ 10.5 billion for 2006-07.26  The environmental condition of rural areas is also of concern, although
the effects of the CAP, compared with other factors that have a bearing on the nature of agriculturalproduction, is in dispute and varies significantly between products subject to CMOs.
27
27. The OECD's most recent data of producer and consumer support estimates for the EU indicate
that support to agricultural producers (the PSE in percentage terms) was the same in 1997-99 as in
1986-88 (Table IV.6).28  As a result of falling world market prices for key CAP products, support to
agricultural producers (the PSE in percentage term s) increased from 38% in 1997 to an estimated 49%
for 1999.  However, the OECD notes the shifting composition of producer support, from market price
support to direct payments, which now account for one quarter of total support.
Table IV.6
Transfers associated with agricultural policies, 1986-99
1986-88 1997-99 1997 1998 1999a
PSE (ECU billion) 86.3 105.5 99.1 109.9 107.4
( P e r  c e n t ) 4 4 4 43 84 54 9
CSE (ECU billion) -65.5 -57.6 -50.5 -60.5 -61.7
(Per cent) -40 -31 -25 -33 -36
Total transfers (ECU billion) 100.3 116.5 110.3 121.3 118.1
a Estimate.
Source : OECD (2000), Table III.29, p. 51.
28. The EU's export subsidy practices affect the interests of trading partners.29 The EU is, in
particular, a major factor on the world market for dairy products, such as cheese, skimmed milk
                                                     
25 G/AG/N/EEC/5/Rev.1, G/AG/N/EEC/ 11, G/AG/N/EEC/20/Rev.1, and G/AG/N/EEC/23.  "Export
subsidy roll-over" refers to the flexibility provision under Article 9.2(b) of the Agreement on Agriculture.
26 European Commission, DGVI (2000b).
27 European Commission (1997b).
28 OECD (2000), Table III.29.  The PSE has a broader scope than the AMS, which exempts certain
forms of "blue-box" support, notified by the EC in G/AG/N/EEC/17.  The PSE methodology compares domesticproduct prices with current world market prices, while the AMS compares current administered domestic prices
with a fixed external reference price calculated for the base period 1986-88 (WTO, 1995, Vol. 1, p. 79).
29 G/AG/W/32, G/AG/W/32/Rev.1, and G/AG/W/32/Rev.2.The European Union WT/TPR/S/72
Page 99
powder, and butter;  on the world market for skimmed milk powder, for example, the EU accounts for
one quarter of total export volume;  other major competitors are Australia, New Zealand, and Poland.
The EU is an important exporter of meat, accounting for just under one fifth of total export volume,
competing with Australia, New Zealand, and the United States.  For wheat and wheat flour, the EU
accounts for just under 15% of total world export volume, above the level of Argentina, on a par with
Australia and Canada, but about one half the export volume of the United States;  however, in termsof export dependence, EU producers are in general much less dependent on trade as an outlet for
domestic production than other major cereals producers.  For sugar, the EU's share is some 14%, and
major competitors are Australia, Brazil, Cuba, and Thailand.
(3) D
EVELOPMENTS IN SELECTED MANUFACTURING INDUSTRIES
(i) Overview
29. Despite slow growth and low investment rates since the last Review, the manufacturing sector
appears to have taken advantage of EU integra tion, shifting resources between industries and
countries. This restructuring seems to have taken place in line with the broad objective of closer
cohesion, with smaller countries of the EU tending to benefit most. As a consequence of the
intensification of cross-border flows resulting from globalization, practically all industrial sectors areundergoing structural changes. This is particularly evident in those sectors incorporating a rising share
of advanced technologies, such as the automobile industry, pharmaceuticals, and telecommunications.
However, globalization equally affects more traditional manufacturing sectors, such as the textile
industry (Chapter III(2)(vi)(d)).
30
30. The main challenge for policy-makers, according to the Commission, is how to release the
potential for further adjustment of industrial structures. It believes that recovery in investment activity
in both tangible and intangible assets will be needed to facilitate desired structural changes. Alongwith industry-specific factors, there is still a large "home-country effect" influencing investment.
31
The implementation of EMU, the emergence of electronic commerce and, more generally, theinformation society are examples of recent deve lopments encouraging structural adjustment.
32 The
country-specific structural reforms, emphasized in the 1999 Competitiveness Report, proved pivotal
in sectoral growth.  Sectors covered below share an exposure to an increasingly competitiveinternational environment and are all subject to pressures stemming from the introduction of new
technologies.
33 Whereas the pharmaceutical sector is still characterized by national regulations (in
particular as regards pricing and reimbursement) and the automobile sector by a block exemption on
distribution, aerospace and shipbuilding continue to benefit from state aid.
31. Traditional trade barriers in manufacturing have continued to decline in the EU since the last
Review. Simple average MFN tariffs on manufacturing products declined from 6% in 1995 to 4.2% in
1999.34  The exception continues to be high MFN tariffs on textiles and clothing.  Articles of apparel
and clothing have average tariff rates above 12% (Chart IV.3). In particular, out of 402 lines with
tariff rates in excess of 12%, 337 are in textiles and clothing, with a large concentration on clothing.
                                                     
30 COM (1998) 718 final, p.6.
31 COM(99) 725 final.
32 Between the last quarter of 1998 and that of 1999, the strengthening of the U.S. dollar against the
euro led to a gain in cost competitiveness for producers in the euro area against their U.S. competitors of around11%. Unit labour costs relative to the United States are some 18% below their 1987-98 average (about 15.5%for the manufacturing sector).
33 Other sectors, such as iron and steel, were covered in the previous TPR Review (WTO, 1997).
34 Products in HS Chapters 25 through 97 excluding those classified as "agricultural" in the WTO. The
average for manufactured products in ISIC category 3 fell from 9.1% in 1997 (7.4% in 1995) to 6.9% in 1999.WT/TPR/S/72 Trade Policy Review
Page 100
Of the remaining 65 lines, 40 are in electrical equipment (all at a 14% tariff rate), 20 are in vehicles
(of which 10 are at 22% tariff rate), and the remaining five are organic chemicals and alcoholic
solutions.
32. The tariff structure for manufactured products continues to show evidence of tariff escalation,
with textiles showing the most distinctive pattern.  Whereas raw textiles materials (51 lines) show an
average rate of 1%, semi-processed items (592 lines) have an average of 8.2%, while fully processeditems (416 lines) show an average tariff of 10%, and clothing (225 lines) 11.6%.
(ii) Automobiles
33. The EU remains the world's largest producer of motor vehicles and the largest market for
passenger cars. Because of its considerable importance in the areas of employment, trade, and
technological development, the motor vehicle industry is generally regarded as a strategic industry bymost Member States.  Direct and indirect employm ent in the sector remains around 7% of the active
population
35, whilst the production capacity utilization rate was 71% in 1997.36 The recently observed
consolidation in the sector is partly driven by overcapacity, according to a new study of the car
industry by PricewaterhouseCoopers.37  Consolidation in the sector is likely to continue as a result of
the advent of Internet sales and the need to develop global strategies.
34. Largely driven by an increase in trade with NAFTA countries (exports almost doubled
between 1995 and 1998), the EU's trade balance has remained positive despite an increasing sectoral
trade deficit with Japan and a falling trade surplus with countries in Central and Eastern Eurpope
(Chart IV.4).
35. Tariff protection in the sector remains relatively high, with the common tariff for passenger
cars (HS 8703) at 10%.  This rate, which was not reduced under the Uruguay Round, is higher than
the rate maintained by the United States (2.5%), Japan (0%) and the Republic of Korea (8%).Vehicles with large engine capacity for the transpor tation of passengers face tariffs of 16%, while the
majority of those used for the transport of goods face tariffs of 22%. The average import duty of HS
Chapter 87 as a whole (where most automotive products are classified) is, at 6.4%, one of the highest
for industrial products in the EU.
36. Until 31 December 1999, EU imports of motor vehicles from Japan were governed by the
terms of a special arrangement known as "elements of consensus" (Box IV.1).
38 According to the
Commission, all motor vehicle imports are now subject only to tariffs and technical requirements.
                                                     
35 Percentage computed by the Commission based on sources from ACEA and Eurostat labour survey.
36 FT World Automotive Manufacturing , May 1998.
37 For example, Renault has expressed interest in Samsung's and Daewoo's car divisions, aftert having
acquired an important stake in Nissan the year before.  Likewise, DaimlerChrysler continues to look forcooperation opportunities ( The Economist , 7 January 2000).
38 The EU benefited until the end of 1999 from an exception to the general prohibition of VERs,
contained in the WTO Agreement on Safeguards (Chapter III(2)(viii)).The European Union WT/TPR/S/72
Page 101
0510152025Chart IV.3
Tariffs on non-agricultural manufactured products, 1999a
Percent
Non-agricultural products in HS chapters 25 through 97 (77 is not an HS chapter) excluding petroleum.
WTO Secretariat calculation based on data provided by the European Commission.AverageMaximum
Minimum
HS Chapters
a
Source :HS
25 
26 27
28
29
30
31
3233
34   
3536
37
38
39
40
414243 
44
4546  Description
Salt; sulphur; earths and stone, etc.
Ores, slag and ashMineral fuels, mineral oils, etc.
Inorganic chemicals; organic or 
inorganic compounds of precious metals, etc.Organic chemcialsPharmaceutical products
Fertilizers    
Tanning or dyeing extracts etc. Essential oils and resinoids; perfumery, cosmetic or toilet preparations 
Soap, organic surface-active 
agents washing prep., etc.    Albuminoidal substances; modified starches; glues, etc.Explosives; pyrotechnic products; 
matches, etc
Photographic or cinematographicgoodsMiscellaneous chemical productsPlastics and articles thereof
Rubber and articles thereof
Raw hides and skins and leatherArticles of leather, etc.Furskins and artifical fur; manufactures thereof
Wood and articles of wood, etc.
Cork and articles of corkManuf. of straw, of esparto, etc.   HS
4748
49
50515253
54
5556   57
58
59    60  
61
 62 63
64
656667
68
69 Description
Pulp of wood or of other fibrous 
cellulosic materialPaper and paper board, etc.
Printed books, newspapers, etc.
SilkWool; fine or coarse animal hair, etc.CottonOther vegetable textile fibres 
Man-made filaments   
Man-made staple fibres Wadding, felt and non-wovens; special yarns; twine, cordage, etc.Carpets; other textile floor
coverings
Special woven fabrics; lace, etc.Impregnated, coated, covered or laminated textile fabrics, etc.Knitted or crocheted fabrics    
Articles of apparel and clothing 
accessories, knitted or crochetedArticles of apparel and clothing accessories, not knitted, etc.Other made-up textile articles; sets, worn 
clothing, etc.
Footwear, gaiters, etc.Headgear and parts thereofUmbrellas, walking-sticks, etc. Prepared feathers and down, etc.
Articles of stone, plaster, etc.
Ceramic productsGlass and glasswareDescription
Natural or cultured pearls, precious 
or semi-precious stones, precious metals, etc.Iron and steelArticles of iron and steel
Articles of iron and steel
Nickel and articles thereofAluminium etc. Lead and articles thereof   Zinc and articles thereof 
Tin and articles thereof
Other base metals, etc.Tools, implements, cutler spoons and forks, etc.Misc. articles of base metals
Nuclear reactors, boilers, machinery, 
etc.Electrical machinery and equipment, etc.Railway or tramway locomotives, etc.Vehicles other than railway or 
tramway rolling-stock; etc.
Aircraft, spacecraft, etc.Ships, boats, etc.Optical, photographic, etc. apparatusClocks and watches, etc.
Musical instruments, etc.
Arms and ammunition, etc.Furniture, bedding, etc.Toy, games, etc.Miscellaneous manuf. articles
Works of art, antiques, etc.HS
71
72
73
74
75767879
80
8182
83
84
85
8687
88
8990 91
92
93949596
97WT/TPR/S/72 Trade Policy Review
Page 102
-10.2 -10.5-12.8 -14.1
-6.1
-9.7
-5.412.8 14.218.421.95.87.810.211.1
5.36.45.7
-4.3 -3.4
-4.7-3.4-3.84.4
-40-30-20-10010203040
1995 1996 1997 1998Chart IV.4
Trade in the automotive sector, 1995-98
ECU billion
Share in EU total external trade in the automotive sector.
EUROSTAT [Online ]. Available at: htt p://euro pa.eu.int/comm/trade/ goods/auto/stats.htm.Japan Candidate countries NAFTA
(82.7)
(83.8)
(82 7)
(82.7)(59.7)
(56.8)
(54 1)
(50.3) a
a
Source :
37. Standards and related conformity procedures for new automobiles and other vehicles have
been harmonized across Member States since 1 January 1996 and 1998 respectively. A community-
wide type approval system is now in place repl acing national type approvals. Certifications of
conformity issued by countries party to the UN- European Commission for Eu rope (UN/ECE) Revised
1958 Agreement are accepted, provided that both parties adopted the relevant regulation.39 The
accession of the EU to the revised Agreement on the approval of motor-vehicle equipment and partsbecame effective on 24 March 1998. On 19 July 1999, the EU adopted the "parallel agreement" under
the UN/ECE (ratified on 15 February 2000), setting global technical regulations for wheeled vehicles,
equipment, and parts. In addition, the Commissi on signed a Mutual Recognition Agreement on
conformity assessment with Australia in 1998, which came into force on 1 January 1999.
40
38. Under the framework of the Europe Agreements, reciprocal and preferential treatment for the
automotive industry is agreed with partner countries (Chapter II(4)(ii)). Also the recently signed EU-
Mexico Free Trade Agreement contains specific provisions for the automobile sector.41 EU tariffs will
be completely eliminated by 2003 and Mexico's tariffs will be completely eliminated by 2007, except
for a progressive tariff quota of 14% of the Mexican market (15% of the previous year's imports after
                                                     
39 More information on the Revised 1958 Agreement, including its text and a copy of the regulations
adopted, is available at:  [http://www.itu.int/itudoc/un/editrans/wp29/wp29regs.html]
40 European Commission Press Release IP/98/134.
41 EC cars are expected to enter the Mexican market under the same, and in certain cases better,
conditions than NAFTA cars. Tariffs will be reduced from 20% to 3.3% at entry into force. EC vehicles
imported by companies that are not established in Mexico  will also benefit from these preferential conditions.
Market access will be granted within a preferential tariff quota of 15% of the Mexican market (for comparison,
current imports from the EC represent around 2% of th e Mexican market);  this quantitative limitation is to be
lifted by 1 January 2007.  See COM(2000) 9 final.The European Union WT/TPR/S/72
Page 103
2004).  Within the quota, tariffs are initially set at 3.3%, falling to 2.2% in 2001, 1.1% in 2002 and
duty free after 2003.
Box IV.1:  Elements of Consensus Arrangement between the EC and Japan
Japan and the EU negotiated an arrangement on motor vehicles in 1991:  the so-called Elements of
Consensus. The EU eased restrictions on imports of Japanese cars and Japan agreed to monitor its exports,
both to the Community as a whole and to the five Memb er States that previously restricted imports (Italy,
Spain, Portugal, the United Kingdom, and France), for a transitional period ending on 31 December 1999.
The arrangement provided forecasts of Japanese exports in 1999, linked to assumptions about that year's
demand. The forecasts for the intervening years were determined during regular consultations between the
Commission and the Japanese Government giving due regard to market developments. This process
allowed a progressive increase in exports to the fi ve Member States to prepare for the end of the
transitional period.
Actual demand in the EU for cars and light commercial vehicles below 5 tonnes was around 14.45 million
units in 1997;  15.56 million units in 1998;  and 16.4 million units in 1999.  The forecast of imports fromJapan, however, were based on estimated values of demand with associated restrictions for the five
Member States in thousands of units:
1998 forecast 1999 forecast
March October April September
Estimated demand 14,741 15,158 15,326 16,231
Forecast imports 1,167 1,190 1,184 1,245
Of which, restricted exports to
France 111 111 100 114.7
Italy 107 107 117.3 129.5Spain 65.3 70 83.7 92.7Portugal 39 43 47 50United Kingdom 186 190 190 190
The monitoring of export levels was abolished as of 1 January 2000.
Source : European Commission (2000b);  and WTO Secretariat.
39. Motor vehicle distribution remains a focus of attention of the Commission and industry alike;
it must conform to EC legislation as a condition of its block exemption from competition law until
2002.  The 1995 exemption of motor vehicle distribution and servicing agreements has wide-rangingprovisions to safeguard consumers' access to vehicle and parts supply in any Member State.
42  It also
provides dealers with enhanced freedom to add franchises, contest terminations, and resist the
imposition of sales targets (Chapter III(4)(iii)(a)).  A core element of the EC Regulation is the
requirement to open cross-border trading, granting franchised dealers the right to buy vehicles and
parts from any other franchised EU dealer of their make. It also gives dealers extended protectionfrom unilateral termination while allowing manufacturers to reorganize their franchise to meet special
market conditions.  It contains important provisi ons for opening after-sales competition, safeguarding
access to franchised dealers by independent spare-parts makers and requiring manufacturers to release
technical information to independent repairers.
                                                     
42 Commission Regulation 1475/95.WT/TPR/S/72 Trade Policy Review
Page 104
Box IV.2:  Standards and conformity assessment in the EU
Type-approval, under the jurisdiction of the Council, is the procedure whereby a Member State certifies
that a type of vehicle or separate technical units satisfy relevant technical requirements of EC Directives.The Commission undergoes a consultation period with a Working Party on Motor Vehicles comprisingrepresentatives of the EU industry.  Each Member State grants the type-approval to a vehicle that meets thetechnical requirements of the 58 separate directives  for passenger cars.  In its Framework Directive
(Council Directive No 92/53/EEC of 18 June 1992), the EU recognizes 35 UN-ECE regulations as
equivalent to relevant EC technical Directives. The EC has acceded to 78 Regulations of UN-ECE (CouncilDecision No 97/836/EEC of 27 September 1997).
A multi-stage type-approval process can be followed in which the technical requirements of the relevant
Directive must be met separately:  if type-approval has been granted for a specific part, the type approval is
valid for other models using the same part.  When a vehicle has been granted EU type-approval
certification in one Member State, the conformity is valid in all other Member States.  Type-approval wasoptional between 1993 and 1996, allowing the choice between EU type-approval and national type-approval;  it became compulsory in 1996 for new vehi cles and in 1998 for all other vehicles.  Vehicles
produced in small series (fewer than 500 units) may be exempt from certain administrative requirements,and Member States must decide within a three- month period whether to grant the type-approval.
A number of bilateral initiatives extend multilateral ha rmonization efforts. Australia and the EU mutually
recognize respective type-approval certification procedures since 1998, and the Republic of Korea and theEU mutually recognize 23 type-approval test items since 1994.
Source : OECD (1997), Chapter 17.
40. Largely as a consequence of the block exemption, the distribution system in the EU is
characterized by a very large number of independent and exclusive dealers with a low level of
ownership concentration.43  However, France and Germany have a significant number of
manufacturer-owned dealerships.  In the Mediterranean Member States, direct dealers are
supplemented by a formally organized structure of sub-dealers. The United Kingdom has a distinctive
structure with a high level of concentration and sectoral participation by public companies.  Most
dealerships are exclusive to one franchise, with sm aller countries, particularly in Northern Europe,
being a notable exception.  There are very large differences in the size of the used-car market anddealer participation;  the United Kingdom is significantly more active than other countries.
41. The difficulties derived from different interpretations of the Regulation by manufacturers
have been highlighted by the Commission's numerous investigations of dealer contracts.  For example
in January 1998, it fined Volkswagen ECU 102 million for prohibiting Italian dealers from selling
Volkswagen and Audi cars to non-Italian buyers.
44 An established distribution practice resulting from
the 15-year block exemption on the sector's distribution channels was challenged in an action by U.K.
distributors who aimed to source cars at best prices throughout the Community.45  A new Regulation
on vertical restraints setting out horizontal rules on exclusive distribution, purchasing and franchise
agreements would eventually regulate distribution in the sector.46
42. Some obstacles to full harmonization and competition in the Single Market appear to remain,
as shown by the persistence of considerable price dispersion across national markets. Industry
                                                     
43 OECD (1997) Chapter 17.
44 OJ L 124, 1998.
45 A study for the U.K. Consumers Association suggests the use of market power by manufacturers to
decrease competition and preserve obsolete methods in car retailing ( Financial Times , 20 January 2000).
46 Commission Regulation 2790/1999.  Even though the block exemption in car distribution is not
addressed before the expiration in 2002 of the 1995 sector-specific Regulation, major distribution policydecisions are likely to be affected by cont inued vertical restraint harmonization efforts.The European Union WT/TPR/S/72
Page 105
representatives suggest that differences in the pre-tax price charged by Member States are largely the
consequence of disparate taxation regimes.47  The average pre-tax price dispersion across Member
States was recorded at 19.5% in November 1999.48 Much progress is reported to be needed in pre-tax
price transparency.49 Some frictions remain in the Internal Market:  for example, France was brought
before the ECJ for impeding the transport through its territory of legally manufactured spare parts for
motor vehicles aimed at the Italian market.50
43. The motor vehicle sector has traditionally benefited from state aid granted by Member States
to national firms. The Commission introduced in 19 89 the Community Framework for state aid to the
motor vehicle industry on the basis of Article 88(1) of the EC Treaty;  it was aimed at increasing
transparency and imposing discipline in the granting of such aid.  In its most recent form, for the
period 1998-2000, refinements have been introduced in the rules of notification and the guidelines forthe assessment of aid.
51  For instance, the new framework stipulates that specific cases must be
notified where project costs exceed € 50 million (previously ECU 17 million) or where the amount of
aid envisaged exceeds € 5 million (unchanged).
44. Some Member States have provided support to state-owned companies or those investing in
areas under the EC structural funds programme . The Commission ruled against support given to
Daewoo to invest in Álava, Spain, finding the support  contrary to EC laws; while it authorized aid to
Mercedes in the order of € 32 million (5,5% of the total cost) in the Basque country.52
(iii) Pharmaceutical
45. The pharmaceutical industry in Europe remains strong, accounting for around 40% of world
production.53  Within the EU, Germany, the United Kingdom, and France are the main producing
countries.  As a result of the Uruguay Round, pharmaceutical products have a bound rate of 0%. The
EU has regularly registered a trade surplus in the sector; in 1998 the trade surplus wasECU 14.4 billion, up from ECU 12 billion in 1997. Imports mainly originate in the United States and
Switzerland (Chart IV.5). According to the Commission, the pharmaceutical industry in the EU
                                                     
47 Differing taxation systems in the Member States have led manufacturers to produce different
specifications for the same model or have been a factor in the application of different sales prices ( European
Voice , 6 December 1999). Purchase taxes range from relatively low levels in Germany and Sweden to almost
200% in Denmark. Goldberg and Verboven (1998) establish the existence of significant differences in qualityadjusted prices, with Italy and the United Kingdom systematically representing the most expensive markets.
48 European Commission Press Release IP/00/121.
49 European Commission, DGXXI (1997).
50 Under French legislation on industrial property and consumer protection spare parts produced abroad
are considered counterfeit goods. See European Commission, Internal Market (ongoing).
51 In particular, emphasis is now placed on proving a clear need for aid, and the comparator plants for
assessing the extra cost of locating in an assisted ar ea can, from now on, be in the European Economic Area,
Central and Eastern European countries (CEECs), Sloven ia or the Baltic countries and – in some cases – on
another continent (European Commission, 1997c).
52 El Pais , 30 September 1999 and 20 January 2000.  Investigations were also initiated on help
provided by the Saxony government (Germany) to VW for € 100 million and by Italy to Fiat for € 40 million
(European Commission Press Releases IP/99/885 and IP/99/888).
53 The market value (at ex-factory prices) of the EU pharmaceutical market is just over € 62 billion and
its retail value exceeds € 90 billion;  € 56 billion of the retail value comes from payments by health-caresystems.WT/TPR/S/72 Trade Policy Review
Page 106
registers significantly lower productivity per worker than its U.S. counterpart;  the overall profitability
and the return on capital employed appear to be significantly higher in the United States.54
-3.1 -3.3 -3.4 -3.8
-2.6 -3.3-4.22.74.16.510.210.613.514.6
-1.9
-1.4-1.3-0.8-1.01.8 1.9 2.42.6 2.2
-10-50510152025
1995 1996 1997 1998Chart IV.5
Trade in the pharmaceutical sector, 1995-98
ECU billion
Euro pean Commission, Intra- and Extra-EU trade [CD-Rom], HS 30.
 Source :Others United States Switzerland
46. The sector's performance is highly dependent on research and development.  In 1997, the EU
spent more than ECU 10 billion on R&D, a three-fold increase over the previous ten years. The same
year, the industry employed some 487,000 people, of which 71,000 in R&D activities.55
47. From a leadership position in the sector 20 years ago, patent filings indicated that the EU has
been overtaken by the United States.56 Around 40% of the 47 new active substances launched on the
world market in 1997 were discovered and devel oped in Europe (down from 65% 30 years ago).
Recent data based on a total of 770 biotechnology-derived medicines (including 206 genetically
engineered) under development at the end of 1995 indicate that 25% of the biopharmaceutical
development work is currently located in Europe (63% in the United States, 7% in Japan). In genetherapy, 22% of the development work is located in Europe (70% in the United States, 1% in Japan).
48. The Council laid down general guidelines for Community policy on pharmaceutical products
on 18 May 1998. It emphasizes the need to:  improve the operation of the Internal Market in this
sector, in line with the principles of free movement and competition; facilitate the provision of health
care at levels that are affordable and in ways that give patients maximum access to medicines;
                                                     
54 A proper assessment of the extent and nature of these differences faces measurement problems
because of transfer pricing, breakdown between pharmaceutical and other activities, etc. The continued
differences between the European markets lead to excess costs (such as higher marketing costs, higher
distribution and administrative costs) and to excess production capacity (COM(1998)588 final).
55 In addition to a substantial R&D-based sector, the pharmaceutical industry has sizeable activity in
the generic (i.e. patent-expired) and non-prescription (over-the-counter) fields.
56 COM(93)718 final.The European Union WT/TPR/S/72
Page 107
recognize the need for Member States to adopt economic measures to control overall expenditure on
pharmaceutical products; continue to regulate the pharmaceutical sector in order to ensure the safety,
quality, and effectiveness of medicines; and strengthen the competitiveness of the industry,
particularly by encouraging research and development.57
49. The EU market for medicines has hitherto been  fragmented by national controls and is now
regulated at a number of levels, in particular through the regulatory mechanisms for the SingleMarket, and through action by Member States at national level to manage their health-care systems.
58
There is wide diversity in health-care-systems regu lations in different Member States, including price,
volume, and access controls.  In a recent communication, the Commission considered a range of
specific measures to regulate the market for pharmaceuticals, most, however, relate to the exercise of
exclusive competence of the Member States. In accordance with the principle of subsidiarity, it is forthe Member States to decide on a national basis whether these measures could, or should, be
adopted.
59  Nevertheless, in the past, four areas have been the target of EU sector-specific regulation:
marketing authorization; price controls; rationaliz ation of the use of medicine; and protection of
intellectual property.60
50. The common legislative framework covering the development, testing, approval, production
and marketing of pharmaceutical products, and the centralization of the evaluation of new products
are implemented by the European Medicines Eval uation Agency (EMEA), but only some products are
bound to this centralized procedure.  Even though EMEA has been in place since 1995, reservations
remain about the other decentralized procedures still in effect. Since 1998, applications to more than
one Member State are automatically transformed into mutual-recognition applications given that
Member States are bound by decisions of other Members.  Mutual-recognition applications are dealt
with under a more cumbersome procedure, which strengthened and replaced the Committee forProprietary Medicinal Products (CMPC).
51. The sector is among the few with remaining price controls implemented by Member States.
This, in spite of the Transparency Directive of 1989 intended to make such regulation more open, to
encourage local activities or as a reward for local investment.
61  Price controls have resulted in delays
until admission to reimbursement or permitted prices are agreed; prices being fixed at relatively lowlevels; and parallel trade.  Partly as a result of national controls, prices still differ widely between
Member States. Attempts to extend the Directive's scope have been delayed and Member States
remain in control of their health-care related expenditure policies.
52. The mere existence of parallel trade reflects important deviations from competitive pricing,
which given its reduced volume does not appear to be an important disincentive to innovation.
62 A
decision by the ECJ has encouraged the parallel trade in pharmaceutical products. Some market
imperfections persist, as evidenced by remaining price differences between Member States of up to
40% for prescription medicines63, and infringement proceedings initiated by the Commission against
                                                     
57 Bulletin of the European Union, Supplement 5/98, 1.2.38.
58 COM(1999) 10 final, p. 13.
59 COM(1998) 588 final.
60 Commission efforts aim at assembling, in a single instrument, all the provisions in force governing
the production, placing on the market, distribution and utilization of medicinal products for human use
(COM(1999) 315 final).
61 Council Directive 89/105/EEC.
62 Of particular relevance is that – even in the so-called low-price-countries – the industry regularly
registers sizeable profits.
63 Nachrichten für Aussenhandel , 26 November 1999.WT/TPR/S/72 Trade Policy Review
Page 108
several Member States.64 It is estimated that parallel trade within the EU increased from
approximately 1% to 1.4% of total market value between 1990 and 1997.65  According to a
Commission report, the low level of parallel imports is explained by a series of obstacles, such as
dilatory and expensive import licensing and the imposition of transaction costs.66  Other obstacles
include brand-name loyalty, wholesalers' opposition for fear of being by-passed, and retailers' fear of
retaliation. It is significant that national health-care systems found it necessary to provide incentivesor pressure to encourage their use (Box IV.3).
Box IV.3:  Legal precedent in th e parallel trade of medicines
The pharmaceutical industry brought pressure on wholes alers not to deal with pa rallel traders and to have
such traders from countries suspect of being popular sources restricted.  In the Bayer  case (Case T-41/96)
the Commission took action against the company for forbidding wholesalers in France and Spain to exportAdalat to other EU Members, and imposed a fine of ECU 3 million.
Another strategy is to set common prices throughout the EU.  However, rapid devaluation and divergent
inflation rates are quickly exploited by traders.  Co mpanies have lowered prices to a level sufficient to
deter parallel traders only for bulk purchasers, such as hospitals.
In its most recent statement on these issues, in the judgement in Merck v Primecrown  (cases C-267/95 and
C-268/95), the Court noted that "distortions caused by different price legislation in a Member State must be
remedied by measures taken by the Community authorities and not by the adoption by another Member
State of measures incompatible with the rules on free movement of goods". In this judgement, the ECJ alsoconfirmed that a patent holder may not impede the parallel importation of his own products from a MemberState where the product could not be protected by a pa tent, unless he can prove that he is under a genuine,
existing legal obligation to market the product in that Member State.
In a recent judgement Decker v Caisse de maladies des employés privés  (case C-120/95) concerning
consumers moving across borders to access health care products, the Court has noted that "aims of a purely
economic nature cannot justify a barrier to the fundamental principle of the free movement of goods",going on to note, however, that "it cannot be excluded that the risk of seriously undermining the financialbalance of the social security system may constitute an  over-riding reason in the general interest capable of
justifying a barrier of that kind". Taken together, these judgements indicate firstly that the use ofpharmaceuticals within the health-care systems does not exempt them from the rules of the Single Market,
and secondly, that companies normally exhaust their intellectual property rights at the time when they
willingly place products onto any part of the pharmaceutical market within the European Union.
Source : European Communities (1997c) and COM(1998) 588 final.
53. In the Silhouette case67, the ECJ confirmed that Article 7 of Directive 40/89 establishes the
absolute principle of Community exhaustion, i.e. Member States are not allowed to extend the
principle of Community exhaustion to international exhaustion. Thus, trade mark holders within the
Community may rely on their national trade mark rights to prevent parallel imports of their products
when these originate in non-EEA countries.
                                                     
64 Reasoned opinions were sent to Italy and Belgium in July and December 1998, respectively;  Austria
in October 1999;  and France in January 2000.  The Commission also intervened in August 1999 against a quotascheme in Denmark controlling public expenditure on pharmaceuticals, and began infringement proceedings inJuly 1999 against Glaxo Wellcome's double-price system in Spain.
65 The figures for the Netherlands are 5% in 1990 and 14% in 1997. Although for some products in
some countries the market penetration rate of parallel trade is as high as 50% (European Communities, 1997b,p. 37).
66 European Communities (1997c).
67 European Court of Justice, case C-355/96 of 16 July 1998.The European Union WT/TPR/S/72
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54. Directives aimed at the "rational use of medicines" have harmonized the classification of
medicines, advertising, information to be prov ided to patients, and pharmaceutical wholesaling.68
Appreciable differences in the national regulations that preceded the 1992 Directives were superseded
in an attempt to eliminate barriers to intra-EU trade, while offering some insurance for patients
against fraudulent practices.
55. Protection of intellectual property has been provided in the form of patent life extension (for
up to five years) and marketing exclusivity (see Chapter III for other measures).69  More recently,
biotechnological innovations came under the umbrella of intellectual property legislation.70 A
Community Directive replaces ad hoc  decisions by national authorities and the European Patent
Office;  Member States must bring their national laws into compliance with the Directive by
30 July 2000. Although beneficial for the research-based sector, these measures, and in particularmarketing exclusivity, may have handicapped generic producers.
71
56. The EU signed Mutual Recognition Agreements with the United States, Canada and Australia
covering inspections carried out when assessing a request for authorization to market a product, such
as a new drug, and inspections during the routine production of items already authorized. Most, but
not all, medicinal products are covered.72
(iv) Aerospace
57. The European aerospace industry employs over 420,000 people directly and has created
critical and pervasive technologies that fuel the development of other industries.  The aerospace
industry, estimated to be worth around ECU 1,000 billion over the next 20 years, involves some
750 companies with an estimated 80,000 suppliers operating in all Member States. These companies,
of varying size, span the aircraft, engine, and equipment sectors  – from major international groups to
SMEs.73  In 1998, the European aerospace industry represented 34% (ECU 62.2 billion) of the world’s
sales volume, with exports (including services) of ECU 33.5 billion and imports in excess of
ECU 9 billion.74  The average MFN tariff rate in the sector was 2% in 1999 with a high of 7.7%.
                                                     
68 Council Directives 92/25/EEC, 92/26/EEC, 92/27/EEC, 92/28/EEC.
69 Council Regulation 1768/92 and Council Directive 87/21/EEC.  The Commission revised
Community marketing authorization procedures in July 1998. Interpretative Communication (OJ C 229,22 July 1998).
70 Directive 98/44/EC of the European Parliament and of the Council.
71 The European Generic Medicines Association, for instance, has recommended amendments that
provide a harmonized five-year data-protection period for NCEs only, limit data exclusivity to no longer thanthe basic patent, and allow the registration and marketing of generic versions of original products not presentlymarketed by the originator, and withdrawn for reasons other than the protection of public health.
72 The MRA with Canada is similar to that with the United States regarding verification of the
capabilities of all inspection services involved, but after two years (three years for the United States),
recognition will be based on "Good Manufacturing Practice" certificates instead of comprehensive inspectionreports. In both cases, analytical co ntrols of batches imported into the EU will be waived. See European
Commission Press Releases IP/97/514, IP/98/438, and IP/98/134.
73 COM(1997) 466 final and the European Association of Aerospace Industries (AECMA)
74 The value of merchandise exports in "aircraft, spacecraft and parts thereof" (HS Chapter 88, which
does not correspond to the definition "aerospace") was over ECU 29 billion in 1998, representing more than 4%
of EU total merchandise exports.  Merchandise imports  were valued at over ECU 27 billion. The EU has
consistently been a major net importer from the United States (69% of total merchandise imports in 1998), withyearly deficits increasing from ECU 1.6 billion in 1995 to  ECU 9 billion in 1998. The Un ited States is also the
largest export market, with 32% of the total.WT/TPR/S/72 Trade Policy Review
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58. Aerospace is the largest single element of the European defence industry, with approximately
60% of its total sales;  with more than 16% of its turnover spent on research and technological
development, is the most research-intensive sector.  The defence business represents around 40% of
total European aerospace activities, and is constrained by differing national defence and procurement
regulations.75 The space industry directly employs about 35,000 people in Europe, with a turnover of
ECU 4 billion in 1998. The European industry has a share of 20-25% of the world space market in thesatellite manufacturing sector, and more than 50% in space launch services as a result of the Ariane
programme.
59. Mergers in aerospace industries on prime-contractor level have had, and will have, a profound
impact on the industry world-wide.
76  To a large extent the consolidation of the sector has been driven
by the recognition that the structure of the industr y will only allow for a small number of world-class
prime contractors to sustain competitiveness and commercial success through the integration of
capabilities in a broad range of interrelated aerospace disciplines.
60. Airbus' share of the large civil aircraft world market increased from around 30% in the early
1990s to 55% in 1999, largely as a result of greater productivity.77 Its production line  appears to be
efficient:  Boeing has 216 workers for every aircraft (550 jets made by 119,000 people), comparedwith 143 (230 by 33,000) for Airbus – a 51% productivity difference.
78 Discussions on restructuring
Airbus into a single company have been on the agenda for several years.
61. At the multilateral level, trade in civil aircraft is disciplined by the 1979 GATT Agreement on
Trade in Civil Aircraft (ATCA).  All major aircraft-manufacturing countries are among the signatories
to this Agreement.  In 1992, the EU and the United States concluded a bilateral agreement on trade in
large civil aircraft (LCA);  the main objective was to regulate and limit (a) the level of direct
government development support to the respective aircraft industries to one third of the total cost ofdevelopment, and (b) the level of indirect government support to 3% of the industry turnover.
79 In
addition, it includes a prohibition on government production support for the manufacturing, marketing
and sale of aircraft, and a clarification of disciplines on government intervention in aircraft marketing
or procurement decisions.80 Public support remains a contentious issue in the aircraft industry, as
exemplified by a foreign-exchange guarantee gr anted by the Belgian Government to aircraft
                                                     
75 In terms of fighter-aircraft contracts awarded world-wide between 1992 and 1996, it is believed that
15-20% went to European producers. In the world civil-helicopter market the European share decreasedthroughout the 1980s but stabilized in the 1990s, standi ng at 28% in 1996. In regional aircraft, where the
number of manufacturers is far greater but has been diminishing over the years, European companies hold a
majority share of the market (over 70% in 1994). More recently, rapidly increasing competition from Canadian,Brazilian, and Asian producers, combined with the collapse of Fokker and the sale of Dornier to Fairchild, hasresulted in a dramatic reduction in European market share (COM(1997) 466 final, and AECMA).
76 Boeing and McDonnell Douglas merged in 1997. More recently DASA, Aerospatiale Matra, and
CASA joined to form the European Aeronautic, Defe nse and Space company (which has an 80% stake in the
Airbus consortium, the remainder being held by BAe Systems).  EADS is now jointly held by DaimlerChrysler
(30%), the French State (15%), Laga rdère (11.1%) and other financial institutions (3.9%);  its remaining 40% is
traded on the stock market.
77 The Economist , 21 January 2000.
78 The Economist , 28 November 1998.
79 GATT (1993).
80 The United Kingdom agreed to a long-term loan to the industry of up to £123 million in 1998, with
France allotting half as much in its 1999 budget. Concerns have been raised about development support for theA3XX aircraft, a 550-650-seat jumbo,  especially regarding the commercial viability of the new programme atthe time of the financial commitment.  Up to one th ird of the development cost s of US$10-12 b illion could be
met by the governments of the consortium members.The European Union WT/TPR/S/72
Page 111
component manufacturers.  The EU was questioned on this matter under provisions of the ATCA and
the Agreement on Subsidies and Countervailing Measures.
(v) Shipbuilding
62. The European shipbuilding industry, accounting for around 19% of total world deliveries in
1999, employs about 80,000 people directly in shipyards. In addition, the marine equipment industry
in the EU employs around 240,000 people.  EU eq uipment manufacturers currently represent a
combined turnover of over €19 billion, showing the high economic significance of the marine supply
industry in the EU.  The restructuring of the worl d industry since 1976, and a decrease in prices of
35% since 1990, has led to a reduction of 70% in the workforce and of at least 60% of production
capacity within the EU. Nevertheless, the EU has been able to maintain a market share of about 14%
in volume over recent years, reflecting a significant productivity increase. The sharp increase incapacity in the Republic of Korea, and the resulting increased competition, may further reduce the
EU's share in the world market (Chart IV.6).
01,0002,0003,0004,0005,0006,0007,000
1988 89 90 91 92 93 94 95 96 1997Chart IV.6
Capacity and market shares in shipbuilding
4324
69 8 432210
18
6
41141029
2661717
331956 1990
1998 1999
EU(15)
Rep. of KoreaOther European 
countries
OthersJapan
Source : El Pais , 10 November 1999 ; COM (1997 ) 470 final ; and Verband für Schiffbau und Meerestechnik E.V.Thousand tonnes
Japan
EU(15)Rep. of KoreaNaval construction capacity Market shares
Per cent of total completed vessels
63. The EU's commercial shipbuilding activities are still quite fragmented;  about 100 ship-
building companies were operating in 1999, of which about a dozen retained a 65% share of
production. The five largest shipbuilders represented about 36% in compensated gross tonnes (cgt) inWT/TPR/S/72 Trade Policy Review
Page 112
1996.81  This fragmentation, together with the lack of large series orders and economies of scale, has
affected the EU's productivity . In terms of cgt. for the 1999 order book, the EU’s share is 25%. The
EU secured, in new orders (cgt), a 14.7% market share in 1999.82 The fastest growing and most
profitable sector is the production of cruise ships.
64. Naval shipbuilding activities, on the other hand, are concentrated in ten Member States, with
a workforce estimated at over 60,000  in 1997. The most important facilities are located in France,
Germany, Italy, Sweden, and the United Kingdom. The fall in demand for naval shipbuilding has ledwarship builders to switch to commercial shipbuildin g in order to fill capacity.  Although access may
be easier for mixed yards, some naval producers have managed to enter the merchant shipbuilding
sector with certain ship types (fast ferries). The current crisis in shipbuilding has also led some
commercial shipbuilders to seek navy contracts.
65. The overall trade balance of the sector has remained relatively stable over the last four years,
reaching a high of almost ECU 5 billion in 1998 from a low of slightly over ECU 4 billion in 1996.
Following a deterioration in the trade surplus with NAFTA and ACP countries in 1997, the sector
recovered in 1998, primarily due to exports to the latter almost tripling in one year (Chart IV.7).
66. According to the Commission, there is overcapacity in the shipbuilding market, and it is very
likely to grow.  Capacity expansion in other countries, especially in the period 1994 to 1996, has beenthe main reason for the continuing and growing imbalance. Prices have plummeted, in particular for
ship types for which competition is fierce, bringing demand forward and shifting market shares to
other yards.  Most significant is the shift in market shares with regard to container vessels.
83  Based on
an analysis of the costs of shipbuilding in foreign yards, the Commission is ready to consider anti-
subsidy complaints from European industry, or to deploy commercial policy instruments to counter
unfair trade practices if sufficient evidence is provided.84
67. The sector has benefited from substantial support programmes maintained by Member States.
However, the possibilities to grant state aid to the shipbuilding industry within the EU have been
gradually reduced in the past years.85 Forms of aid have included support for the restructuring of
domestic shipbuilding industries, direct assistance for operations and investment, indirect aid, home
credit schemes, export credits, and practices associated with public ownership of yards.  Assistance
has been granted mainly at the national level, subject to EC disciplines and approval.
68. A new regulation imposing stricter conditions on state aid to this sector entered into force for
a period of five years, on 1 January 1999.86  At its core, the regulation deals with operating (contract-
related), closure, and restructuring aid. The new policy departs from the approach taken in the
Seventh Directive regulating the provision of aid until December 1998 in several respects: operating
aid will be eliminated as of 31 December 2000; in vestment and innovation aid for the modernization
of existing yards may be granted on the basis of approved regional-aid schemes.  The granting of
restructuring aid is only possible under restrictive conditions, which apply in addition to the general
Community regime on state aid for rescuing and restructuring firms in difficulties.
                                                     
81 COM(1997) 470 final.
82 Verband Für Schiffbau Und Meerestechnik E.V., VSM Jahresbericht  (1999) [Online].  Available at:
http://www.vsm.de/.
83 COM(1999) 474 final.
84 OJ C 348, 1999, p. 73.
85 OJ C 370, 1999, p. 108.
86 In the absence of the OECD Agreement, due to its non-ratification by one member, the EC adopted
Council Regulation 1540/98.  The regulation is designed to make shipbuilding subject to arrangements close tothose for other industries.The European Union WT/TPR/S/72
Page 113
-0.5 -0.6 -0.40.51.31.01.21.91.7
1.02.8
-0.2
-0.3-0.3 -0.3-0.2
-0.4-0.4-0.3-0.3
-2-1012345
1995 1996 1997 1998Chart IV.7
Trade in the shipbuilding sector with selected countries, 1995-98
ECU billion
Share in EU total external trade in the shipbuilding sector.
EUROSTAT [Online]. Available at: htt p://euro pa.eu.int/comm/trade/ goods/shi p/stats.htm.Rep. of Korea ACP NAFTA
(33.5)
(36.2)(42.1)(35.6)(50.1)
(25.9)(42.3)
(37.8) a
a
Source :
69. Member States could consider linking preferential taxation or state guarantees for the
purchase of new ships to a "European-built" requirement, thus stimulating local demand.87 This also
applies to the Community safe-seas policy,88 as promoting the use of safe and clean ships if aid is
given only to ships built in the European Union with very high safety standards.
70. The Commission closely monitors aid granted by Member States.89  For example, in
November 1999 it submitted its final monitoring report to the Council on the restructuring of the
publicly owned shipyards in Spain, and of two yard s – MTW Schiffswerft and Volkswerft Stralsund –
of the former German Democratic Republic.  The restructuring of these two yards was particularly
problematic as a first privatization had failed due to the collapse of the Bremer Vulkan group in
1996.90  The report covers progress made in the implementation of the restructuring plans, and
                                                     
87 This "home-built" requirement is, according to the Commission, de facto or de jure  common in the
national shipbuilding credit schemes of Member States, the United States, Japan, and the Republic of Korea and
it is, under certain conditions, compatible with the OECD Shipbuilding Agreement (COM(1997) 470 final).
88 COM(93) 66 final.
89 The Commission fined the German yard Kvaerner Warnow Werft DM 83 million for exceeding its
capacity limitation in 1998, and DM 12.6 million in 1997 ( EU Business  [Online].  Available at:
http://www.eubusiness.com/). It decided negatively concerning the misuse of ECU 400 million in previous aidto the Bremer Vulkan Group, and in a case in which Germany had granted development aid to VolkswerftStralsund, considering the aid misused and incompatible with the shipbuilding-aid Directive (EuropeanCommission Press Release IP/99/149).  It approved in 1999 an aid scheme in Spain to spend € 171 million over
the period 1999-2003 and providing aid to shipowners outside the EEA (European Commission Press Release
IP/00/43).
90 After a temporary re-nationalization, the two German yards were re-privatized to major foreign
shipbuilding groups in early 1998.  The report conclu des that the aid received was used as specified, the
conditions attached to the approval of aid were respected, and the targets of the restructuring plan wereWT/TPR/S/72 Trade Policy Review
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compliance with the conditions attached to aid, such as capacity reductions and limitations on
production.
71. After five years of negotiations at the OECD, the main shipbuilding nations reached an
agreement in July 1994, while also revising the Unde rstanding on export credits for ships (Box IV.5).
The "Agreement respecting normal competitive condi tions" was signed in December 1994 by the EC,
the United States, Japan, the Republic of Korea, and Norway. It was ratified by the EC inDecember 1995 and was due to enter into force on 1 January 1996, however, this agreement is not yet
in force.
Box IV.5:  OECD Agreement on shipbuilding
The OECD Agreement represents an effort to establish specific disciplines by providing for the elimination
of all measures specific to shipbuilding, except those related to R&D, and the social cost of closures.
In particular, it would provide for a level playing field in home and export credits for new buildings. The
OECD agreement revised the 1981 Understanding on expor t credit for ships, which is still in force. The
current rules allow official facilities for up to 80% of the contract value providing guarantee and financingat 8% interest rate, with a 8.5 years repayment period. The revised 1994 Understanding, which is not yet in
force, allows also for up to 80% of the contract va lue providing guarantee and financing at the CIRR rates
(commercial interest rates of reference) with a repayment period extended to up 12 years. Development aidprovisions were tightened in the new Understanding. Building limitations on cabotage are also limited toabout 200,000 cgt per year.  If production exceeds the set limits, responsive measures are foreseen in theAgreement, providing for an effective binding disp ute settlement where disciplines are not respected.
Another important component of the Agreement is the Injurious Pricing Instrument (IPI) to prevent
predatory pricing practices that could constitute an impediment to international trade. It is based on the
shipbuilder principle (the shipbuilder, and not the importer, has to pay the so-called injurious pricingcharge – i.e. the anti-dumping charge). If it does not pay, countermeasures are provided for (ban on
onloading and offloading), for future ships built in the yard.
Source : http://europa.eu.int/comm/dg01/ships.htm;  and COM(1997) 470 final.
(4) SERVICES
(i) Overview
72. Services is the single most dynamic economic activity in the European Union, accounting for
over two thirds of GDP and employment.91 Between 1970 and 1997, the share of market services in
total value added rose from 39.1% to 53.4%, while non-market services rose from 11.8% to 15.0%.92
Within market services, business, health and education services (other market services) ranked first,
with 46.5% of total value added, followed by di stributive trades (24.7%) and financial services
(10.6%). Across the EU, about 67 million people were employed in market services and around 31
                                                                                                                                                                    
achieved. As regards the Spanish yards, the report conc ludes that all the conditions have been respected,
although the Commission is still examining the compatibility of special tax credits paid in 1998. Despite themeasures taken, the yards failed to achieve the target of breaking even by the end of 1998. In both cases theCommission will continue to monitor certain matters, notably compliance with ongoing limitations onproduction. European Commission Press Release IP/99/753.
91 Eurostat  News Release No. 39/2000.
92 Market services cover communication services;  di stributive trades;  financial services;  hotels,
restaurants and cafes;  other market services;  and transport services. Non-market services cover health,
education, and other non-market services.  Market services are more than twice as important as non-marketservices in employment and more than three times in terms of value added.The European Union WT/TPR/S/72
Page 115
million in non-market, representing respective shares of 46.1% and 21.3% of total employment in
1997. Although distributive trades and other market  services were the main employers in every
Member State, there were marked differences.93
73. The share of services in external trade has decreased slightly since the early 1990s, primarily
due to a fall in the share of transport, government, and non-allocated services (Table IV.7). The
falling share of intra-EU imports in the total, dur ing the same period, reflects the growing trade links
with non-EU countries in transport, travel, construction, financial, merchanting, professional,
government, and non-allocated services.
Table IV.7
EU trade in individual services sectors, 1992 and 1997
(Per cent)
Imports Exports Total intra-EU imports
1992 1997 1992 1997 1992 1997
Transport 28.8 28.2 28.6 26.0 53.7 52.1
Travel 25.3 26.5 23.5 25.2 64.5 60.1
Communications 1.9 2.2 1.7 1.6 46.3 48.9
Construction 2.8 3.5 4.9 5.2 56.7 49.5
Insurance 2.5 1.5 2.6 3.2 62.0 65.5
Financial 3.3 2.6 4.7 5.4 63.4 57.2
Computer and information 1.5 1.6 0.9 2.0 54.0 58.8
Royalties and licence fees 6.3 7.0 3.3 4.2 35.7 39.6
Merchanting and other trade-related 5.4 5.6 2.7 5.5 51.7 50.6
Operational leasing 1.3 0.8 0.8 0.7 45.9 58.1
Misc. business, prof. and technical 13.7 15.3 15.3 16.7 60.2 57.9
Personal, cultural and recreational 2.6 2.4 1.8 1.0 52.1 52.1
Government 3.1 2.4 6.4 3.0 58.4 54.9
Not allocated 1.6 0.4 2.8 0.4 61.4 59.6
All services sectors 100.0 100.0 100.0 100.0 57.8 55.2
Share in total trade 24.7 24.4 19.5 18.7 n.a. n.a.
n.a. Not applicable.
Source: Eurostat, International trade in services – EU, 1988-1997 .
74. The overall trade policy objective of the EU in the area of services remains the removal of
restrictions to competition and trade.  A gradual approach towards liberalization in most services was
adopted with varying timetables between the different sectors.  A number of services sectors, such as
telecommunication services, have recorded unprecedented liberalization since the last Review in
1997, while in others, such as audio-visual services, no major liberalization measures were taken. An
important recent development, with profound horizontal implications for the services sector as a
whole, is the advent of electronic commerce (Annex IV.1). The liberalization process at the EU level
is aimed at establishing common rules to guarantee the right of establishment, open competition, andaccess to networks.  The increasing exposure of the services sector to competitive forces inside and
outside the EU has revealed strong structural rigidities, whose correction would enhance the economic
performance of the sector.
                                                     
93 Finland was the only country to report negative growth in market services over the last decade, while
there was a decrease in non-market services in Sweden (-0.6%), Belgium (-0.5%), and the United Kingdom(-3%). Also, only 20% of all service workers in the United Kingdom and Luxembourg were employed in non-market activities;  in Nordic countries and Ireland, where the public sector plays an important role as supplier of
services, the corresponding rate stood at the average EU rate of 32%.WT/TPR/S/72 Trade Policy Review
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75. Major legislative developments have taken place in telecommunications and financial
services since the last Review.  The liberalization of telecoms since January 1998 has allowed the
rapid development of a competitive market, followed by changes in legislation aimed at harmonizing
disparate conditions and standards.  Since then, the market has been characterized by the
concentration of service providers aimed at exploiting the economies of scale in the provision of long-
distance and mobile telephony as well as other vertically and horizontally related services. Theintensity and rapidity of change in the industry necessitated a more active application of competition
law and further legislative harmonization.  Regarding financial services, the introduction of the euro
and the adoption of sectoral commitments under the WTO agreement on financial services, marked a
period of transition to a common market.
76. In sectors where the EU has granted national treatment – such as telecommunications and a
large segment of financial services – the relevance of domestic policies for third-country operators is
direct.  Under the premise of the Internal Ma rket, Commission efforts are aimed at eliminating
discriminatory policies between Member States.  The combination of national treatment concessions
in the WTO and the Internal Market efforts has invigorated the further integration of the sector into
the world economy.  Indeed, in areas where the EU has committed to open regimes with extra-EUtrading partners, the Commission's harmonization efforts have had a positive impact on operators
from third countries, as is the case in telecommuni cations and to some extent financial services. This
is not the case in other sectors, such as transp ortation and audio-visual, where, notwithstanding the
reduction of intra-community barriers, EU legislation provides for various forms of European or
bilateral preference.
77. The competence of the Community over commercial policy covers trade in goods and cross-
border supply of services
94;  joint competence between the Community and the Member States exists
in certain areas.
(ii) Financial services
(a) Overview
78. The most important developments since the last Review are the efforts towards the
establishment of a single market within the framework of the Action Plan for a Single Financial
Market .  One of the main objectives of this plan is to foster the stability of the common financial
market and consumer protection though the harmoni zation, at the Community level, of national
financial services regulation, particularly in the banking and securities areas.  Another element with
profound implications for the sector has been the structural change triggered by the introduction of the
euro (Annex I.1).
79. As a consequence of the transition towards a common regulatory regime, the market for
financial services in the EU has continued to expand and integrate. Further internal and external
liberalization as well as deregulation have provided impetus to the sector's performance.95 Within the
sector, the most dynamic areas in terms of growth have been banking and securities.  Whereas the
number of banks decreased by 10% between 1994 and 1997, thus marking the concentration of the
                                                     
94 European Court of Justice ruling 1/94 (WTO (1995), Vol 1, p. 13).  Pescatore (1999) elaborates on
ruling 1/94 and future modification of the scope of Article 133 of the EC Treaty.
95 A reported lack of common standards and legislative principles was identified as an important
restriction on the operation of foreign undertakings. Fo r instance, the European Insurance Committee (CEA) has
emphasized the negative impact of the lack of a transparent operational framework in the insurance market.The European Union WT/TPR/S/72
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sector, the number of local units increased by 8% and employment was relatively stable.96 Cross-
border bank lending in the EU increased by almost one third between 1990 and 1999.97  Financial
services continue to account for over 6% of the EU's GDP.
80. The EC actively participated in the negotiations on the Fifth Protocol to the GATS, which
entered into force on 1 March 1999.98  The resulting commitments, summarized in Annex IV.2,
enshrine the principle of  the single passport (subsection (b) below).  Member States may only applythe restrictions specified in the schedule of specific commitments with regard to the direct
establishment from a third country of a commercial presence or to the provision of cross-border
services from a third country.
99  Reciprocity conditions on foreign-based suppliers' access to the EU
market were eliminated with the implementation of the Fifth Protocol to the GATS.
(b) Regulatory framework
81. Financial services are regulated under three sub-categories: banking, encompassing all types
of credit institution; insurance, covering life and non-life insurance markets; and securities, covering
listing, public offer of securities, and provision of certain investment services. Due to the close
relationship between banking and investment activities the securities and banking sectors are
becoming increasingly covered under common legislation.  Intertwined with the three sectors'regulation are initiatives aimed at consumer protection, the establishment of a comprehensive
payments system, and the application of competition law.
82. The regulatory framework of the internal market for financial services rests on the principles
of harmonization of prudential rules, home-country control, and mutual recognition (concerning rules
and regulations by the national supervisory authorities).  At its core is the principle of the single
passport (i.e. mutual recognition of licences)
100, although some subsectors, such as securities and
common accounting standards for companies do not yet benefit from this.101  National supervisors are
held to apply mutual recognition, based on home-country control, and residual host-country control is
only allowed for supervision of liquidity or under the "general good" clause (Box IV.6).
83. In the banking subsector, core regulation is set in two Banking Directives.102 Additional
measures encouraging harmonization of prudential regulation include: rules on the preparation of
consolidated accounts; rules designed to harmonize the concept of "own funds"; a minimum solvencyratio; regulation monitoring market risks incurred by credit institutions; rules preventing illegal use of
the banking system; supervision of credit institutions on a consolidated basis; limitation of large
                                                     
96 Local units are defined as part of credit instituti ons located separately and employing at least one
person ( Eurostat News Release No. 4/2000).
97 BIS (1999).
98 The EU's recent commitments in financial services are listed in WTO document
GATS/SC/31/Suppl.4/Rev.1.
99 Consequently, the only restrictions to third-country subsidiaries established elsewhere in the EU that
can be applied by the receiving Member State, are those that can also be applied in conformity with CommunityLaw to companies or nationals of other Member States.
100 Under this principle, a third country's incorporated  institution established directly in a Member State
is subject to conditions equivalent to those applied to domestic financial institutions of that Member State (home
country). Additional branches of the incorporated institution established in other Member States (host countries)
are bound only by the legislation of the home country.
101  Bulletin Quotidien Europe,  No. 7654.
102 The First Banking Directive 77/780/EEC and the Second Banking Directive 89/646/EEC.  See
WTO (1995), Vol. 1, p. 114.WT/TPR/S/72 Trade Policy Review
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exposures incurred by credit institutions; and rules on deposit-guarantee schemes.103 Efforts are being
undertaken to simplify the existing regulatory framework and should result in the consolidation of
19 banking Directives into one text. Following the second phase of the Simpler Legislation for the
Internal Market (SLIM) initiative104, the Commission emphasized, inter alia , the need for a revision of
prior notification requirements and the extension of the information procedure on the application of
the general good principle .
84. Equivalent core legislation in insurance is contained in three Life and three Non-life
Insurance Directives105, aimed at safeguarding both the right of establishment and freedom to provide
services. The prudential supervision of insurance undertakings that are part of an insurance group has
also been the subject of EU regulation; work is under way to revise and update the minimum solvency
margin requirements for insurance undertakings. Other important legislation in this area covers motor-vehicle insurance and various aspects of insurance companies' activities. Under the third phase of the
SLIM initiative, launched in March 1998, current efforts are aimed at consolidating and codifying the
major directives and a thorough review of various sectoral requirements contained therein.
106
85. Core regulation in securities is contained in the Collective Investment Undertakings
Directive.107 Transactions in securities were liberalized under the Capital Adequacy and Investment
Services Directives, which implement (since mid-1996) the right of establishment and the  freedom to
provide services in this area.108 In October 1998, the EU implemented minimum compensation
safeguards and refinements, for the subsector, on home-country control.109  On 31 March 1998, the
Commission proposed the removal of barriers to the creation of risk-capital markets110, and in
June 1998, presented two proposals for the regulation of undertakings of collective investment in
transferable securities (UCITS).111
                                                     
103 Other measures to facilitate the further integration of the banking sector have experienced delays.
For example, the cross-border credit transfers Directive 97/ 5/EC of the European Parliament and Council, to be
implemented in national legislation by August 1999, was not put in place by some Member States. The
European Consumers' Organization (BEUC) demands a more thorough enforcement of EU legislation(European Report,  No. 2429, 30 July 1999). The Commission, in light of the high cost to consumers, started
monitoring cross-frontier transfer costs (European Commission Press Release IP/00/108).
104 The measures identified in the SLIM exercise  relate to the need to avoid double reporting
requirements, fast-track adoption procedures for purely technical modifications to existing legislation,
codification and changes to specific articles of the First and Second Banking Directives.
105 The Life Insurance Directives are 79/267/EEC, 90/619/EEC, and 92/96/EEC. The Non-Life
Insurance Directives are 73/239/EEC, 88/357/EEC, and 92/49/EEC.
106 European Commission, DGXV (ongoing), No. 12;  and COM(99) 147 final.
107 Council Directive 85/611/EEC.
108 Council Directive 93/6/EEC, and Council Directive 93/22/EEC.
109 Directive 97/9/EC of the European Parliament and Council on investor-compensation schemes.
110 The proposal identifies, in particular, unsatisfactory regulation at the European and national levels
hindering venture capital funds, institutional investors, cross-border issues/listing, and the development ofcommon accounting rules (Commission Communication SEC(1998) 552 final andhttp://europe.eu.int/scadplus/leg/en/lvb/l24195.htm [14 April 2000]).
111 One proposal would allow new forms of collective investment undertakings such as funds investing
in bank deposits and other liquid financial assets to sell their units across the EU.  The other proposal wouldgive management companies a single licence to operate throughout the Single Market and allow such companiesto manage the assets of single private or institutional investors, including pension funds. (COM(1998) 449 finaland COM(1998) 451 final).The European Union WT/TPR/S/72
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Box IV.6: The legal concept of the "genera l good" in the financial services directives
The concept of the "general good" has served as the foundation for a number of national provisions aimed
at establishing some level of safeguard to local operators.  In theory it is intended as a summary of theconditions that have been recognized by the Court of Justice as justification for non-discriminatoryrestrictions of the freedom to provide services and freedom of establishment. Thus, following theapplication of Articles 43 and 49 of the EC Treaty, freedom to provide services and freedom of
establishment are characterized primarily by the re quirement of equal treatment or non-discrimination.
In fact, and following Court of Justice case law, Articles 43 and 49 of the EC Treaty are deemed to require
the removal of all restrictions imposed on the grounds that the provider is established in a different MemberState.  Furthermore, it is also established that the freed om to provide services may be restricted only by the
host Member State provisions that are justified by the general good and that are applied to all persons or
undertakings within the territory insofar as the interest that is preserved by the national provision is not the
one safeguarded by the provisions to which the provider of a service is subject in its home State.  Thus,while going beyond the wording of the Treaty to the benefit of the freedom to provide services, Court ofJustice case law partly retracts from this extension by introducing the concept of the "prescription of thegeneral good".
In particular, five conditions must be attached to the use of the general good clause in financial services:
justification by a general good motive, must not be subject to prior Community harmonization; must not be
discriminatory, must not duplicate rules applicable in the home Member State;  and must be necessary and
proportionate to the objective pursued. Furthermore, general good motives have been distinctively acceptedby the Court of Justice such as, for instance, consumer protection; the fairness of commercial transactions;the integrity of the financial system; the coherence of the fiscal system; and the effectiveness of fiscalsupervision.
Source : European Parliament document A4-0307/98 [4 September 1998];  European Court of Justice
case C-222/95 Parodi  [1997];  Björkland (1998);  Tyson (1997);  and COM(1999) 5046 final.
86. For the financial sector as a whole, the introduction of the euro left an important imprint on
the various regulations and proposals introduced since the last Review. New legislation grantsfinancial services a more horizontal treatment. In particular, it brings the sector under existing
consumer protection directives, competition law, and Internal Market initiatives.  The resulting market
consolidation appears to have revealed areas where further progress is necessary, such as trade in the
€ 245 billion sale and repurchase (repo) markets.
112 In this context, supervisory authority powers in
banking, insurance, and investment have been strengthened, allowing for a more comprehensiveregulatory network across the EU.
113  Work is under way to regulate "financial conglomerate" type
groups. This also applies to distance contracts (distance marketing of consumer financial services),
where existing consumer protection legislation for banking and investment services would be
supplemented and extended to all retail financial services.114  It would also allow suppliers of financial
services to offer their services under a common set of rules throughout the Single Market. Payment
                                                     
112 Experts point to different tax treatment, laws, and regulations in Member States as remaining
obstacles to growth in the market ( Financial Times , 27 October 1999, and European Commission Press Release
IP/99/794).
113 "Post-BCI" Directive 95/26/EC of the European Parliament and Council.
114 Directive 97/7/EC of the European Parliament and Council.  The proposed Directive is set to ensure
a higher level of protection for consumers of retail fina ncial services.  It covers distance contracts concerning
financial services concluded under an organized distance sales or services-provision scheme. Other provisionsinclude, inter alia , the consumer's rights to a period of reflection, to withdrawal, and to be refunded; as well as
"inertia selling" (providing services not requested), accepted means of distance communications, and complaintsand redress procedures for the settlement of disputes (COM(99) 385 final).WT/TPR/S/72 Trade Policy Review
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systems and common capital adequacy requirements for investment firms and credit institutions have
also shown horizontal consolidation.115
87. Delays in the adoption of proposed regulation on the reorganization and winding-up of credit
institutions and the compulsory winding-up of insurance companies were identified by the Financial
Services Policy Group as one of the remaining barriers to the Single Market.116  Action in this area
would cover the mutual recognition by Member States of the provisions taken by each of them toresolve the financial difficulties of its own establishments.
88. According to the Commission, there is no Co mmunity framework for pension funds at this
stage, and the complexity and specificities of national pension fund regulations and tax treatment are
major obstacles to labour mobility and freedom to provide services in the EU. In addition, in some
Member States, pension funds have to cope with stringent investment restrictions. In May 1999, theCommission issued a Communication on how these obsta cles to the proper functioning of the Single
Market could be dealt with.
117
(c) Application of the regulatory package in the Member States
89. The implementation of the common regulatory package has varied among Members States,
ranging from 100% for three Member States to 95% for Luxembourg.  In order to address this, theCommission has strengthened its infringement procedures for non-implementation and incorrect
transposition of EC legislation.  A large number of infringement proceedings have been initiated over
the past years.
118 Having failed to respond to a reasoned opinion, the Commission referred to the ECJ:
Germany in 1997 (restrictions on investment trusts established in other Member States); Belgium and
Spain in 1998 (failure to transpose various insurance Directives); France in 1998 (failure to abolish
conflictive national insurance legislation) and again in 1999 (failure to transpose a Directive on
prudential supervision in the financial services);  Italy in 1999 (failure to implement, as regardsinsurance companies, the "post-BCCI" Directive); Spain (prior authorization requirements on
insurance agents and brokers established in other Member States who wish to offer their services in
Spain); and Portugal (contravention of EU merger regulations).
119 In January 2000, the Commission
referred Luxembourg to the ECJ for failure to transpose the Directive on investor-compensation
schemes.
                                                     
115 Directives of the European Parliament and Council 98/26/EC on settlement finality and securities
settlement systems, 98/31/EC and 98/33/EC of 22 June 1998.
116 The Financial Services Policy Group (FSPG) has b een established to identify priorities among the
measures outlined in European Commission (1998).
117 COM(99) 134 final of 11 May 1999. Three main themes will underlie the Commission's action:  the
drawing-up of a proposal for a Directive on the prudential regulation of pension funds in order to protect
beneficiaries and enable pension funds to optimize their investment policies;  the coordination of national tax
regulations in order to prevent double taxation of migrant workers and ensure that tax reliefs can be granted oncross-border contributions;  and the launching of technical work and discussions on how to permit thetransferability of supplementary pension rights from one Member State to another.
118 For example, reasoned opinions (Chapter II(4)(i)) were sent in 1997 to France and Spain for
violations of the EU rules on the Single Market in insurance; in 1998 to the United Kingdom for failure to notify
implementation of Directives relating to financial services; and in 1999 to Italy concerning discriminatory
treatment of national credit institutions. Reasoned opinions were also sent to Austria, France, and Portugal forfailure to implement the Directive on investor compensa tion schemes; and to France and Italy on national tax
measures favouring their domestic stock markets to the detriment of the other stock exchanges in the EU.
119 Financial Times , 4 November 1999.The European Union WT/TPR/S/72
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(d) Action Plan for a single financial market
90. An Action Plan to improve the Single Market for financial services over the next five years,
including a series of policy objectives and specific measures, was recently adopted by the
Commission. The Action Plan suggests indicative priorities and time-scales for legislative and other
measures to tackle three strategic objectives:  ensuring a Single Market for wholesale financial
services;  open and secure retail markets;  and state-of-the-art prudential rules and supervision.120
91. As regards wholesale markets, six elements were emphasized: the development of a common
legal framework for integrated securities and derivatives markets; the removal of outstanding barriers
to raising capital on an EU-wide basis; moving towa rds a single set of financial statements for listed
companies; providing legal security to underpin cross-border securities trade; the creation of a secure
and transparent environment for cross-border restructuring; and creating a sound framework in whichasset managers could optimise their portfolios' performance.  Three steps should foster the
development of retail markets: the promotion of e nhanced information, transparency, and security for
cross-border provision of retail financial services; expediting speedy resolution of consumer disputes
through effective extra-judicial procedures; and the balanced application of local consumer protection
laws.  Furthermore, three measures have been identified by the Commission for ensuring thecontinued stability of EU financial markets: improving banking, insurance, and securities prudential
legislation standards in agreement with existing bodies, such as the Basle Committee on Banking
Supervision and the Forum of European Securities Commissions; improvement of the prudential
supervision of financial conglomerates; and arrangements to increase cross-sectoral discussion and
cooperation between authorities.
121
(e) Other developments
92. Notwithstanding progress already achieved, there still appears to be room for establishment of
a common regulatory body.122 Most banks concentrate their activities in their home market. Even the
largest banks do not account for more than 1% or 2% of the total volume of banking services at the
Community level. Furthermore, cross-border provision of insurance services is still the exception.123
93. The Commission delineated, in the Amsterdam Declaration, the interpretative framework for
services of general economic interest as applied by Member States. In particular, it singled outGermany and Austria, which provide comprehensive financial infrastructure through their national
savings banks organizations.  While the two countries hold that this constitutes the provision of a
universal service, according to the Commission other credit institutions having no obligation to do so,
also provide comparably dense networks of branches or agencies.
124 Sweden, for instance, obliges one
credit institution to provide a nation-wide payment service network, while offering compensation only
                                                     
120 European Commission (1998).
121 Many European banks have voiced concern about the emphasis on the use of external credit rating
in the Basle first draft ( European Voice , 29 November 1999 and Financial Times , 23 November 1999).  More
information on the new capital adequacy framework is available at:  http://www.bis.org/publ/bcbs50.htm.
122 The Committee of Legal Affairs and Citizen's Rights at the European Parliament stated that current
legislation of banking institutions "has not achieved the results expected, and that cross-border banking servicesin the EU account for only a minimal proportion of financial transactions…[this]…can be explained by the factthat banking services are closely bound up with the fis cal and statutory climate in each of the Member States."
"Report on the Commission's interpretative communication on freedom to provide services and the interest of
the general good in the second banking directive", European Parliament document A4-0152/98, 24 April 1998.
123 European Parliament document A4-0307/98, 4 September 1998.
124 Report of the European Commission to the Council of Ministers: Services of general economic
interest in the banking sector of 17 June 1998 [Online].  Available at: http://europa.eu.int/comm/dg04/aid/en/rep_bank.htm.WT/TPR/S/72 Trade Policy Review
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where no other credit institution offers such services.  This narrower use of a universal service
requirement has a lower impact than the more stringent use of the service of general economic
interest.
94. National governments are still involved in the financial services market in a number of
instances, such as the provision of services of general economic interest, using credit institutions,
raising public funds, and conditioning state assistance to the legal status of undertakings. However,the Commission considers that liberalization should allow Member States to rely more on competitive
tendering for the provision of services of general economic interest.
125 A legal separation of public
and private activities within an undertaking would address the case of credit institutions raising funds
for a Member State. The European Banking Federation filed a complaint to the Commission in
December 1999 about the State guarantees for Germany's Landesbanks, and the Commission began aformal investigation.
126 It is reported that France's banking sector is also giving mutuals, like Credit
Agricole, an unfair competitive advantage while limiting profits for commercial banks.127
(iii) Telecommunications
(a) Overview
95. The telecommunications services market in the EU was valued at € 183 billion in 1999.
Along with the U.S. market, valued at € 189 billion, it is among the world's largest. The sector's rapid
expansion, at an estimated annual rate of 10.3% in 1999, has been largely driven by the development
of new services, such as mobile (31.5%), Internet and online services (38.1%), as well as the
liberalization of the market. Within the EU, the major markets for telecommunication services are
Germany (22.6%), the United Kingdom (16.5%), France (15.3%), and Italy (14.3%).128
96. The main development since the last Review has been the opening to full competition of
telecommunications infrastructure and services on 1 January 1998, largely as a result of EU'scommitments under the Fourth Protocol to the GATS.
129 Fourteen Member States encompassing over
97% of the EU population had fully liberalized their telecommunications markets by the beginning of
2000;  this will serve as an engine to economic growth and benefit EU consumers through lower
prices.130 The liberalization of the telecommunications market was extended to all foreign operators,
with minor limitations on market access and national treatment;  as a consequence the frameworkregulating EU nationals is almost entirely applicable to foreign suppliers.
                                                     
125 This applies, for instance, to the provision by credit institutions of special services to Member
States, such as establishing branches in remote areas . According to the Commission, large number of services
can be provided without any public intervention. Compe titive bids, for instance, could effectively eliminate the
need for state aid.
126 Bulletin Quotidien Europe , Nos 7652, 7644, 7633, 7621 and 7600.
127 According to the report, the removal of barriers to the provision of certain services that existed for
cooperative and savings banks while at the same time maintaining their privileges, has set the stage for anunlevel playing field in banking. Distortions to market mechanisms are still present in the banking system,mainly through the extensive system of administered savings and through the State's active presence in themarket with the triad Caisse des dépôts et consignations, trésor, et la poste (IMF, 1999).
128 European IT Observatory  (2000).
129 The content of the EU's commitments is covered in WTO (1997), p. 112.
130 Having been liberalized on 1 January 2000, Portugal's telecommunications market is the sector with
highest forecast growth, 18% in 2000.  Within the first week of liberalization, telecommunication prices fell by
5% to 40% and new licences in fixed telephony have been granted ( Nachrichten für Aussenhandel ,
7 January 2000). Greece is to liberalize its market on 31 December 2000.The European Union WT/TPR/S/72
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97. The liberalization of the telecommunications market revealed areas where additional
regulation was necessary.  The sector-specific regulation that followed, while successfully opening
the market, could not address the rapid technologic al changes and subsequent market developments.
As a consequence, the EU has moved towards a more aggressive implementation of competition
policy. The comparatively low level of harmonization, in particular of the Community licensing and
interconnection regimes, represents a barrier to the Single Market. The Commission has also beenclosely monitoring the implementation of regulation at the Member State level to ensure that the
benefits of liberalization spread to consumers.
(b) Regulatory framework
98. The current legal framework guarantees competition, harmonizes network access and
interconnection conditions, and ensures consumer protection.
131 It has evolved on a dual regime
consisting of ex-ante  sector-specific regulation and ex-post  application of competition rules.132  The
future evolution of the regulatory framework should be characterized by the application of
competition rules in a wider context  and gradual phasing out of sector-specific regulation.
99. In response to the fast evolving nature of the sector in the last few years, the three
components of the first regulatory pillar (sector-specific) have experienced numerous changes.  Thethree components are the Frequency Directives, the ensemble of core directives under the Open
Network Provision (ONP), and ot her Directives.  Most changes have been implemented under the
ONP.
133 Among the remaining barriers for third-country operators with activities in more than one
Member State is the persistent lack of a "one-stop shop" procedure. The EU is considering the
development of such procedure in the context of future licensing harmonization efforts.134
100. With regard  to the second regulatory pillar, the Commission has consolidated the application
of competition law to bottleneck access through the adoption of the "Access Notice".135  This defines
the practical application of the concept of essential facilities in the context of EU competition law
(Box IV.7) and elaborates on the interplay between competition law and the telecommunications
regulatory framework. In particular, sector-specific regulation will generally have precedence with
regard to action under competition law only if such sector-specific intervention is pro-competitive and
efficient.136
101. Three elements are central to the development of the more recent legislation in the sector and
its future evolution.  First, the development of competitive markets and regulatory harmonization are
                                                     
131 The regulatory package is implemented thro ugh Commission Directive 96/19/EC, the "Full
Competition Directive".
132 Whereas sector-specific rules were developed in accordance with the directives of Article 95 of the
EC Treaty helping the transition from a public monopoly to a competitive market structure, competition rulesare derived from the application of Articles 81 and 82, together with Merger Regulation. See Ungerer (1996) forcoverage of the history and development of the EU's telecom markets and regulation.
133 For instance, the revision of the Voice Telephony Directive has defined a minimum set and quality
of services available to all consumers and it is foreseen that mobile telephone operators will be treated under thesame Directive in future legislation, thus bringing together fixed-line and mobile telephony under commonregulation (Directive 98/10/EC of the European Parliament and Council).
134 WTO document S/C/W/110/Add.5, paragraphs 21 to 24.
135 Notice on the application of the competition rules to access agreements in the telecommunications
sector (OJ L 265, 1998).
136 Ungerer (1998) notes four elements on the conditionality of the precedence of sector-specific
regulation: the precedence under European Law of Community Competition Law; the requirement of anefficient procedure to settle disputes; the availability of, and criteria for, interim injunctive relief; and a clauseunder Regulation 17 allowing the Commission to intervene if sufficient pan-European interest justifies it.WT/TPR/S/72 Trade Policy Review
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at the heart of the Commission's initiatives. 137  Second, the pursuit of an appropriate investment
climate in the sector has prevented sector-specific regulation from fully addressing major market
imperfections, as the development of infrastructure requires significant incentives in the form of
market power rents.  Third, is the convergence of the technologies underlying the supply of services
and of the sector itself with other services sectors (media). The three elements have jointly put weight
behind an increased use of competition law to regulate the market.
Box IV.7: Essential Facilities definition and the Bronner/MediaPrint case
In the context of EU legislation and within the framework of the Negotiating Group on Basic
Telecommunications, "essential facilities" mean facilities of a public telecommunications transport network
and service that:
(a) are exclusively or predominantly provided by a single or limited number of suppliers; and
(b) cannot feasibly be economically or technical ly substituted in order to provide a service.
The concept of "essential facilities" in the context of competition law was previously applied in a situation
where:
(a) there exists a threat to competitive behaviour in the market;
(b) the denial of access by the market leader is not objectively justified;  and(c) the provision of alternative services is impossible or economically unfeasible.
The Bronner/MediaPrint case marked a turning-point for the definition of "essential facilities", for it
introduced the notion of objectivity in the context of point (c). It is not sufficient that it is economicallyunfeasible for any one of the competitors, but that it be objectively impossible for all. Therefore, the
European Court of Justice has established a demanding test concerning the opening of networks under a
pure competition law based "essential facilities" approach.  According to the Commission this is not inorder to discourage application of Article 82 of the Treaty, but to protect the ability to use one's owninvestment for one's own benefit.
102. Concerns on tax competition as regards the application of VAT on telecommunication
services have been addressed through a Directive.138 Accordingly, foreign service providers supplying
telecommunication services to taxable persons (essentially EU businesses) are not obliged to registerwithin the Community.  Those selling to final consumers (such as individual persons or authorities)
will have to register in each Member State in which they supply (generally the place of residence of
the recipient). If they decide to set up a subsidia ry or a branch in the EU supplying final customers,
registration at the location of the branch or subsidiary will be sufficient.
(c) Implementation of the regulatory package
103. The Commission has been monitoring and regularly reporting on the implementation of the
regulatory package. The bulk of measures in the telecommunications package has been transposed
into national legislation by the Member States, although some gaps remain.  Table IV.8 provides an
overview of the status of transposition into national law of the various Harmonization Directives.
Member States for which there is a reported lack of implementation are primarily Greece, Italy, andPortugal.
                                                     
137 For instance, existing legislation addressing competitive concerns in the local loop is treated in
COM(98) 71 final. Concerns on cross-ownership of two technologies are partially addressed by a Directiveestablishing the legal separation of cable and telephony operators (Commission Directive 1999/64/EC).Ungerer (1999a) analyses the role of mobile telephony regulation on future legislation in the sector.
138 Council Directive 1999/59/EC.The European Union WT/TPR/S/72
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Table IV.8
Overview of transposition of recent harmonization directives, 1 October 1999
Directive BEL DNK DEU GRC ESP FRA IRL ITA LUX NLD AUT PRT FIN SWE GBR
ONP framework
90/387/EEC
as amended by 97/51/EC***
******
******
******
a***
******
******
******
******
*****
******
*****
a***
******
******
***
Leased lines
97/51/EC
as amended by 97/51/EC**
*****
******
******
a***
******
******
******
***
******
******
***a
a***
******
******
***
New voice telephony98/10/EC ** *** *** a *** *** *** *c** *** *** ** *** *** ***
Licensing
97/13/EC ** *** *** a *** *** *** ** *** *** *** *** *** *** ***
Interconnection
97/33/EC a *** *** a *** *** *** *** ** *** *** *** *** *** ***
Numbering
98/61/EC
amending 97/33/EC*** *** *** a *** ** *** ** *** *** *** *** ** *** b
Data protection
97/66/EC ** ** *** * *** ** * *** * ** *** *** *** *** **
Legend
*** Substantially transposed:  It is considered that the major provisions and principles of the directive concerned are transpo sed, and
therefore the legislation allows the implementation of the main objectives pursued by the directives within the territory of th e
Member States.
** Partially transposed:  It is considered that important principles have not been transposed, or that transposition of importan t
principles is not in conformity with the package.
* Not transposed:  No transposition measures have been notified to the Commission.  In all those cases the Commission has
already begun proceedings for failure to communicate measures.
a Recent legislation under examination.
b Deferment requested.c Old Voice Telephony 95/62/EC is substantially transposed.
Source : COM(99) 537 final.
104. Despite pointing out that the bulk of measures have been transposed into national legislation
by the Member States, some important aspects, differing by country, are identified by the Commission
as in need of improvement in light of the dynamic nature of telecom markets.139  These include
national regulatory authorities, licensing, interconnection/special access, universal service and
user/consumer protection, tariffs/accounting systems, numbering, frequency, rights of way, and localaccess competition.
105. Whereas all EU Members have established national regulatory authorities (NRAs), concerns
remain as to their degree of separation from th e body controlling the incumbent operator in some
Member States, the sufficiency of the powers available to them, the clarity of access procedures, and
the assignment of resources for their effective functioning. With respect to licensing, the concerns
relate in particular to onerous licence conditions, lack of transparency in regard to conditions and
procedures, the level of fees, and the length of time required in certain cases to issue licences.
106. The lack of proper national implementation of the regulatory framework for cost accounting
in many Member States seems to be contributing to extensive price squeezes, in particular between
retail and interconnection tariffs, and to excessive tariffs for leased lines. Concerns about
                                                     
139 COM(99) 537 final.WT/TPR/S/72 Trade Policy Review
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interconnection relate to the reluctance of NRAs to intervene in a timely and effective manner. The
timely availability of infrastructure capacity and national regulatory regimes are also pointed out as
bottlenecks. NRAs are rapidly moving towards the introduction of efficient long-run average
incremental costs (LRAIC) with regard to interconne ction.  The average cost of interconnection in the
EU, e.g. call termination/origination used at "lo cal" interconnection, is between 0.54 and 1.93  euro-
cents per minute at peak time (the "best practice" range for 2000 is 0.5-0.9, Chart IV.8).140
107. There is currently a lack of competition in the local access market in all Member States,
although steps are being taken to issue wireless local loop licences and to use national regulation to
provide alternative ways of accessing the end users. The greatest problems affecting consumers
appear to be the lack of transparency in tariffs and in service information, and the need to establish
efficient and rapid complaint handling and redress mechanisms. Significant concerns also include theeffects of the cost of cross-border leased lines.
108. Despite tariff reductions in long-distance and international calls (Chart IV.9), it is suggested
that an insufficient level of cost-orientation produces anti-competitive effects in certain market
segments and increases the cost burden on other sectors of the economy.  Lack of clarity in the control
and transparency of tariffs in some Members appears to be a concern, while others do not have anappropriate cost accounting system for public telecom networks/systems or the system lacks sufficient
transparency to guarantee the absence of cross-subsidization.  There are also problems with regard to
the pricing methodology by the incumbent and the conditions granted to large customers.
0.00.51.01.52.02.53.0
BEL DNK DEU GRC FRA IRL ITA LUX NLD AUT PRT FIN SWE GBR ESPChart IV.8
Local interconnection rate, September 1999 and March 2000
COM(99) 537 final; and INFSO/A/1 [Online]. Available at: 
http://www.is po.cec.be/infosoc/telecom policy/en/ictarifc0en. pdf.€ cents per minute
Upper limit of "best 
practice"Fixed to fixed
Mobile to fixed
Source :
                                                     
140 "Best current practices" denote price ranges specifying acceptable charges for the various forms of
interconnection;  they are revised periodically by the Commission.The European Union WT/TPR/S/72
Page 127
01234GBRSWEGRCFINESPBELPRTAUTITADEUIRLFRANLDDNKLUX
Source : COM (99) 537 final.Chart IV.9
Cost of international calls and its average annual variation, as o f 
1 August 1999
-60 -50 -40 -30 -20 -10 0 10Char ge (in euro/PPP ) Annual variation (in percenta ge)
EU 
average
109. Concerns relate to the transparency in the management of frequencies.  For example, only
Finland has so far granted licences for third-generation mobile networks (March 1999). Other
problems identified by the Commission include the rights of way, and competition in local access.141
(d) Market developments
110. The voice telephony market in the EU has grown in value by an estimated average of 4.6% in
1999. During the period August 1998 to August 1999, more than 260 licences were granted to offer
fixed telephone services to the public.142 The number of authorized operators per million inhabitants
grew from 1.7 to 2.5 (Table IV.9).  The total number of operators offering services in the long-
distance call market increased to 244 from 195 in 1998, and in the international-call market to 280from 166 in 1998.
111. The value of the mobile market is estimated to have increased by an average 15.7% in 1999,
with the average penetration rate reaching 36% in August 1999, up from 18% in August 1998. In
some countries the number of mobile subscribers is comparable to that for the fixed service. The total
number of mobile licences has increased to 94 (a nalogue, GSM, DCS) from 77 in 1998. Fifty-two
operators now offer digital mobile services at national level.  New entrants have become the leading
                                                     
141 While allowing new entrants to use existing subscriber lines is not explicitly mandated by the
harmonization directives, there is a growing realization in a number of Member States (Denmark, Germany,
Italy, the Netherlands, Austria, and Finland) that local loop unbundling (LLU) is necessary in order to introducecompetition at local level (COM(99) 537 final).
142 The number of fixed lines is still growing, probably driven by the demand for second residential
lines and Internet connectivity through ISDN.WT/TPR/S/72 Trade Policy Review
Page 128
operators in two countries (Germany and the United Kingdom).143  Notwithstanding growing signs of
competition, an International Telecommunications Users Association (INTUG) study indicates that
the difference in price between roamed and non- roamed international mobile calls to the same
destination within the EU can be up to 500%, th us prompting an investigation under competition
rules.144  Furthermore, mobile operators may be over-charging for calls to their customers by as much
as € 4.5 billion a year, according to a study commissioned by the European CompetitiveTelecommunications Association (ECTA).
145
Table IV.9
Number of operators in telecommunication services, August 1999
Public fixed voice telephony Mobile servicesa
Local callsLong-
distance callsInternational calls GSM 900 DCS 1800
Offering Authorized Local National
A u s t r i a 4 64 52 04 5 2 2 2
Belgium 23 23 9 23 2 2
United Kingdom 293 158 66 158 2 2
Denmark 147 11 11 11 2 4
F i n l a n d 7 52 61 42 6 3 3 2 3
France 59 40 31 40 3 3
Germany 147 47 47 47 2 2
Greeceb11112 1
Ireland 32 32 8 32 2 2
I t a l y 3 93 61 23 6 3 4
Luxembourg 11 11 7 11 2 2
Netherlands 38 38 24 38 2 5
Portugalc11113 3
S p a i n 6 32 71 02 7 2 3
Sweden 63 63 22 63 3 4
a Data refer to the number of operators authorized to offer mobi le services and not to the number of licences for GSM900 and
DCS1800, since operators often have multiple licences.
b Monopoly to be liberalized on 31 December 2000.
c Four licences for public voice telephony had been issued as at August 1999, but operators could not start commercial activity
until January 2000, owing to Portugal's derogation for the introduction of competition.
Source : COM(99) 537 final.
112. Network services (switched data and leased lines) grew by an estimated average of 8.6% in
1999, while Internet services showed an average increase of about 125% from January 1998 until
July 1999.  The number of operators authorized to offer network services increased by more than 400
between August 1998 and August 1999, with the number of authorized operators per million
inhabitants rising from 1.4 to 2.5.146 The average tariff for national leased lines decreased steadily
from August 1996 until August 1999, while still showing persistent differences between Member
                                                     
143 New entrants have 50% of the overall mobile market in only France and Portugal. In the digital
market, new entrants' shares are higher, showing a digital mobile market share of more than 45% in Denmark,Greece, France, the Netherlands, Austria, Portugal, and Sweden.
144 Information available at:  http://www.intug.net/surveys/gsm/explanation.html [14 April 2000],
European Commission Press Release IP/00/111.
145 Information available at:  http://www.ectaweb.org/home/mobile_study_pr.htm [12 April 2000].
146 There are now 375 authorized operators in the local network services market, 194 in the long-
distance market (173 in 1998), and 187 in the international market (162 in 1998).The European Union WT/TPR/S/72
Page 129
States. The Commission adopted in November 1999 a recommendation to cut local leased-line
charges by imposing price ceilings.147 The average tariff for international leased lines also decreased
over the same period. However, the level of prices as at 1 August 1999 remained relatively high
compared with the price of similar national services.148 According to INTUG, cross-border tariffs are
more than 120% of national tariffs in all Member States, and in some cases as much as 500%.149
113. The unprecedented number of mergers involving European fixed and mobile operators
observed since 1990 continued in the last couple of years. The Commission reported 25 mergers in
telecommunications for 1999. In 1998, there were a total of 23 cases compared with 12 in 1997.150 Of
central significance for the sector are the recent Vodafone AirTouch/Mannesman merger, involving
more than € 180 billion, and those of Worldcom w ith MCI, and BT with AT&T, which continued the
trend of transatlantic mega-mergers.  The divestiture commitment of MCI of its Internet holdingspoints to the growing importance of Internet conn ectivity competition.  Mergers also raised important
issues regarding competition law in an environment of global market consolidation, and the growing
need for international consorted action, especially as regards access and interconnection.
(iv) Transport services
(a) Overview
114. Commercial transport services account for approximately 4% of the EU's GDP. If own-
account operations and private transport are included, this figure rises to 7%, which is more than the
agriculture or steel sectors.
151 Maritime shipping remains the main mode of external trade in transport
services in the EU, followed closely by air transpor t. The extra-EU trade deficit in cross-border supply
for both modes of transport widened between 1997 and 1998.   The trend within the two modes shows
them tending in different directions over the longer term (Chart IV.10).152
115. The EU has continued the trend towards a more liberal regime in transport services. The
transport provisions of Title V of the EC Treaty do not apply to air and maritime transport.
Article 80(2) specifies a qualified majority in the Council for establishing the applicability of this
Title's procedures.  It was not until the Single Act,  with the "area without frontiers" formula, and
successive court cases, that an internal market for transport services began to develop. The action
programme launched in 1995 on the Common Transport Policy is to finish its first five-year cycle in2000. The programme's main objectives are to improve quality; the functioning of the Single Market
so as to promote efficiency; and to broaden external relations with third countries.
                                                     
147 According to the Commission, these recommend ed price ceilings provide guidance to NRAs to
assess whether the prices are reasonable  (European Commission Press Release IP/99/837).
148 For instance, the average standard retail tariff for 2 Mbit/s international half-circuits is from 7 to
14 times higher than for national 200 km circuits.
149 INTUG Surveys [Online].  Available at:  http://www.intug.net/surveys/ill/explanation.html
[12 April 2000].
150 "Merger Decisions by products" [Online].  Available at: http://europe.eu.int/comm/dg04/merger/
closed/en/nace6.htm  [12 April 2000].
151 European Commission (1999e).
152 In terms of employment, turnover and number of enterprises, both air and water (including sea and
inland) transport are but a small fraction of the transport sector with a joint share of 10%, 20% and 2,5%respectively (European Commission, Energy and Transport (ongoing)).WT/TPR/S/72 Trade Policy Review
Page 130
-8,000-6,000-4,000-2,00002,0004,0006,0008,000ECU million
Supporting, auxiliary and other services: this category covers a range of services provided in ports, airports and other termin al 
facilities (air terminals, terminuses, etc.). It includes cargo handling (loading and unloading of containers, etc.), storage a nd 
warehousing, packaging and repackaging, various services such as towage, pilotage and navigational guidance for carriers, 
maintenance and cleaning of transport equipment, and salvage operations.
Eurostat, Statistics in Focus, Economy and Finance, No. 32/1999.Chart IV.10
Trade balance of selected transport services, 1992-97
Sea Sea    Air
Sea Sea Sea Sea  Air Air Air Air
  Air19921997
1996
19951994 1993
Passengers
Freight
Other services a
a
Source:
(b) Air transport
Common regulatory framework
116. The European air transport market includes the EU, Norway, and Iceland (by virtue of the
EEA), and is set to be extended to include the ten applicant countries within the next few years.153
Two subsectors can be distinguished as far as the regulatory framework is concerned. First, scheduled
and non-scheduled services, which are mostly unregulated, the latter being characterized by fierce
competition. Second, cargo services, which are only lightly regulated while experiencing a fairly
competitive environment.  The fast development of charter services, under the provisions of Article 5
of the Chicago Convention, brought into evidence the need for regulatory reform of scheduled air
transport, leading to the effective libera lization of intra-EU air services in 1993.154  Despite the liberal
regulatory regime, market imperfections and a partial exemption from competition policy makecontinued evolution in regulation necessary.
117. The regulatory framework of the Internal Market is contained in three Community legislative
packages gradually harmonizing a body of existing treaties.  While the first two packages delineated
the present framework, the third package embodied the most significant legislative development
                                                     
153 Progress was made in negotiations with countries of Central and Eastern Europe (Bulgaria, Czech
Republic, Hungary, Poland, Romania, Slovakia) for a multilateral agreement with transition periods for the
transfer of acquis communautaire  (Bulletin Quotidien Europe , No. 7612 of December 1999). An agreement was
signed on 7 December 1998 with Switzerland, which, if approved, will provide unlimited traffic rights betweenairports in the EU and Switzerland. Switzerland will also apply a large number of Community technicalregulations, plus competition and state-aid rules (European Commission Press Release IP/98/1100).
154 Pelkmans (1997).The European Union WT/TPR/S/72
Page 131
(Table AIV.3).  In order to improve the allocation of slots and access to the ground-handling market,
the EU lifted, in April 1997, remaining cabotage restrictions inside the EU.155
118. More recently, the Commission adopted two proposals on airport charges – sanctioning cost-
relatedness, transparency and non-discrimination  – and safety assessment of third countries'
aircraft.156 A recent Regulation on the use of "hush-kits", prohibits Member States from adding
acoustically modified older aircraft to their national registry and, with effect from 1 April 2002,prohibits the operation of aircraft in Community territory that were not registered by the date of entry
into force of the Regulation in May 2000.
157 In addition, the Commission has proposed measures to
eliminate technical obstacles, through the harmonization of safety rules, and the creation of a
European aviation safety authority.  It also proposes the development of a comprehensive database to
monitor developments in the airline industry, and air fares in particular, more effectively.
119. The procedure for the application of competition rules to undertakings in the air transport
sector within the EU dates back to 1987.158 A Commission regulation impl emented a horizontal block
exemption regarding four aspects:  schedule joint planning and coordination; joint-operation of a
scheduled air service on a new or on a low-density route; tariff consultations for the scheduled
carriage of passengers, and of freight;  and slot-allocation and airport scheduling.159 Only the last two
aspects remain under the block exemption, at least until 30 June 2001.  Competition rules that are
applied to third countries follows three principles (Box IV.8).
120. The air-transport market between the EU and third countries is governed by bilateral
agreements.160  The Commission is pursuing a mandate to negotiate a comprehensive arrangement
with third countries on behalf of the EU. In Novemb er 1998 it referred cases to the European Court of
Justice against the "open-skies" agreements of Austria, Belgium, Denmark, Finland, Germany,
Luxembourg, Sweden, and the United Kingdom.  The Commission believes that the cumulative effectof a series of bilateral agreements interferes with the operation of the air-transport market due to
fragmentation along national lines and non-reciprocity.  Instead, it proposes a Common Transatlantic
Aviation Area arrangement between the United Stat es and the EU, which would extend the standard
exchange of rights from open skies agreements, setting the stage for negotiations on essential issues
beyond traffic rights, in particular regarding the prevailing rules on ownership and control.
161
Other developments
121. Liberalizing air transport within the EU has proved beneficial as there are now more, and
larger competitors in the market. The number of carriers has increased from 132 in 1993 to 164 in
1998;  the market share of incumbent national carriers has been declining steadily and the number of
routes with more than two operators has trebled since 1992 (Chart IV.11).162 However, further efforts
are reported to be needed in some areas to remove entry barriers. Operators point out the lack of slots,
                                                     
155 Council Regulations 2407/92, 2408/92, 2409/92 and 95/93;  and Directive 96/67/EC.  See WTO
(1995) and WTO (1997) for further details.
156 COM (1998) 509 final and COM(1998) 597 final.
157 Council Regulation 925/1999.  The United States filed a complaint with the International Civil
Aviation Organization against the EU for what it considers would represent a ban from EU airports for certainU.S.-built airplanes ( International Herald Tribune , 14 March 2000).
158 Council Regulations 3975/87 and 3976/87.
159 Commission Regulation 1617/93, as amended.
160 According to the Commission, these agreements re present de facto constraints on the evolution of
the sector by restricting routes and fares, designating airlines and capacity, and specifying ownership provisions.
161 There is a 49% limit on foreign ownership of EU airlines by parties outside the Community.
162 COM(2000) 26 final.WT/TPR/S/72 Trade Policy Review
Page 132
state aids, and frequent-flyer programmes as the most important.163 Also, some abuses are still
reported: the Commission recently fined British Airways for abusing its dominant position as a buyer
of air-travel-agency services, and Lufthansa for an infringement of the Code of Conduct for Computer
Reservation Systems.164 The Commission established the principles guiding the use of travel agents'
commissions.
Box IV.8: Implementation of Competition Rules on air transport with third countries
Council regulation (EEC) No. 3975/87 (OJ L 374 , 31.12.87, p. 1) establishes that Articles 81 and 82 of the
Treaty may be fully applied to all air transport.  However, given the absence of an implementing regulationfor air transport between Member States and third countries, the latter is governed by the interim regimeprovided by Articles 84 and 85 of the Treaty.  The consequences were laid out by the European Court ofJustice in cases Nouvelles Frontières (Joined Cases 209-213/84 Ministère Public v. Lucas Asjes and Others
[1986] ECR 1425) and Ahmed Saeed (Case 66/86 Ahmed Saeed Flugreisen and Silverline Reisebüro v.
ZbuW , [1989] ECR 803) so that:
(i) both the national competition authorities and the Commission (with weaker powers of investigation
and enforcement and no power to impose fines) may apply the rules;
(ii) an agreement is not automatically void under Article 81 and a national court may not apply Article
81, unless and until the Commission or the national competition authorities of a Member State have
so held; but
(iii) Article 82 is directly applicable without any such prior decision, so that it may be applied by
national courts.
A 1997 Commission proposal would extend the scope of Regulation 3975/87 to third-country routes,
entitling the Commission to apply Articles 81 and 82 of the EC Treaty directly to arrangements and
practices affecting international air transport between  the EU and third countries. Restrictive agreements
relating to air transport services on third-country ro utes would become void and unenforceable and might
lead to fines unless they benefit from a block exemp tion or are granted an individual exemption by the
Commission under the conditions of Article 81(3). A corollary proposal of the Commission would extendthe scope of Regulation 3976/87 entitling the Commission to adopt a block exemption applying to certainarrangements affecting third-country routes. The two Commission proposals are still before the Council.
Source :    Balfour (1994), COM(97) 218 final;  and the European Commission.
122. Although liberalization has, overall, brought benefits to consumers in terms of better services
at lower prices, fares do not appear to have followed the same trend; promotional fares have become
more widespread, but the more competitive market structure has not always reduced the prices of
fully flexible fares. A Communication on the European airline industry points out large differences infares per kilometre across Europe and expresses concern about tariffs on certain routes.
 165  The level
of fares decreases on average by 10% to 24% when the monopolistic market structure is eliminated
(Chart IV.12). The shortage and high cost of airport infrastructure and air-space congestion remain the
main bottlenecks to increased competition, and negatively affect the competitiveness of the airline
industry as a whole. Small and medium-sized airlines  cannot improve their market positions faster due
to these barriers. Despite Regulation 95/93 and Council Directive 96/67/EEC, different regulatory
                                                     
163 European Communities (1997d).
164 Council Regulation 2299/89; European Commission Press Releases IP/99/504 and IP/99/542.  The
Spanish competition bureau also opened a process against Iberia for abuse of its dominant position in the travelagency market ( El Pais , 22 October 1999).
165 COM(1999) 182 final.The European Union WT/TPR/S/72
Page 133
practices across Member States in slot allocation and other areas, such as ground handling, also hinder
the development of fully competitive markets.166
0100200300400500600700800900
Jan 92 Jan 93 Jan 94 Jan 95 Jan 96 Jan 97Chart IV.11
Cross-border routes and number of competitors, 1992-97
Number of routes
Source : European Commission Press Release IP/99/339.+2% +1%+5%+20%+3%Monopoly
More than two carriersDuopoly
Total number of cross-border routes
123. According to the Commission, European compan ies suffer from relative financial fragility
compared with their main competitors; in recent  years the Commission has operated a "one-time-last-
time" approach to state aid, which has paved the way for the restructuring and privatization of many
of the state flag-carrier airlines. The conditions attached to aid have been strictly monitored and
enforced and the Commission does not intend to permit further aid for restructuring purposes.167 It is
estimated that from 1990 through 1996, flag carriers received support worth over US$ 9 billion.168
124. In the new competitive environment, airlines in the EU are beginning to consolidate through
alliances and other joint activities;  full mergers between airlines are not yet possible due to
nationality restrictions in the bilateral agreements on which most international (but not intra-EU or
intra-EEA) air traffic is based.  The decision to conditionally approve the alliances
                                                     
166 A recent court ruling in London allows for trade in  airline slots at Heathrow airport.  This could
allow new entrants into the most congested and expensive airport in the EU ( The Economist ,
11 September 1999). An amendment to Council Regulation 95/93 is being prepared in order to optimize the useof slots. Reinforcing the position of new entrants, in cluding regional carriers, is also being considered
(OJ C 370, 1999, p. 73).
167 For instance, the assistance of the French Government to Air France, authorized in 1994 and
challenged by the Court of First Instance in response to complaints by European competitors, was confirmed by
the Commission in July 1998 (European Press Release IP/ 98/682).  Proceedings were also reopened in the cases
of Olympic Airways, given that conditions of the 1994 State Aid Agreement were not being complied with.Furthermore, aid to TAP and Alitalia was allowed, despite, in the case of the latter, irregularities in compliancewith the terms of the aid package (European Press Releases IP/98/135 and IP/98/495).
168 The Economist , 27 September 1997.WT/TPR/S/72 Trade Policy Review
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Lufthansa/SAS/United Airlines and British Airway s/American Airlines embodies a recognition of the
growing intercontinental nature of the market.169 The increasing weight of the large alliances and their
ability to corner the lucrative market of corporate deals may require further deregulation and prompter
application of competition law if outsider airlines are to survive.170
0.000.050.100.150.200.250.300.350.400.450.50
Business Economy PromotionMonopoly routes
Duopoly routes
Three-carrier routesEuro per kmChart IV.12
Airfares by number of carriers on the route (as percentage of monopoly)
Source : Press release IP/99/339 of 21 Ma y 1999.100%
95%
90%100%
93%
83%
100%
83%
76%
125. The Commission opened investigations into airport charges in all Member States, having
found in February 1999 that discounts of 50% and 60% for domestic flights at Portuguese and Finnishairports discriminated against foreign carriers.
171 The company operating Frankfurt airport, which had
a monopoly in ramp-handling services at the airport, was found to have abused its dominant position
by prohibiting both self-handling (by airline companies) and third-party handling (by denying other
companies access to the ramp). The Commission also found that Aéroports de Paris had abused its
dominant position by imposing discriminatory commercial fees on service providers or airlinesproviding ground-handling or self-handling services.
172
                                                     
169 Five other intercontinental alliances under examination since 3 July 1996 are:
Swissair/Sabena/Austrian/Delta Airlines, British Airways/US Air, KLM and North West, and more recently AirFrance/Delta and Air France/Continental (European Commission Press Release IP/98/7).
170 The Economist , 27 September 1997 and 26 September 1998.
171 Two studies by the EU's air traffic control agency , Eurocontrol, and by the Association of European
Airlines reported airport charges rising by up to 35% in just four years, with handling charges 70% higher thanin the United States, European Voice , Vol. 5(34), 23 September 1999.
172 OJ L 72, 1998 and OJ L 252, 1998.The European Union WT/TPR/S/72
Page 135
(c) Maritime transport
Background
126. EU-owned vessels represented about one third of world dead-weight tonnage as of July 1999.
The transfer of ships registered in the EU to op en registries (principally Malta) has continued to
spread over the period under review.  The large a nd growing majority of the EU's merchant fleet
capacity is registered under non-EU flags.173  Greece is by far the largest user of open registries in
Europe and the world:  it accounts for 73% of the fleet registered in Cyprus, 56% of that in Malta;  it
also has a sizeable presence in Panama, Liberia, and the Bahamas (Chart IV.13).
127. The increasing importance of imports of sea transport services is evident in Chart IV.10.
Increasing trade deficits in the sector are a consequence of faster growth in imports (debits) than
exports (credits).  This is particularly evident in the case of Italy, where debit transactions more thandoubled between 1992 and 1997, while credit increased by only 50%.  This pattern, although less
marked, is also present in the other Member States with important trade transactions, led by the
United Kingdom.
174
020,00040,00060,00080,000100,000120,000140,000
Liberia Panama Cyprus Bahamas MaltaChart IV.13
Nationality of major open-registry fleets, as at 31 December 1997
Thousand  dwt
Source : UNCTAD (1998).Other
Other EU15
Greece
12.5%20.4%67.2%
11.1%2.9%86.0%
72.6%12.0%15.5%
19.0%25.2%55.8%
56.3%7.2%36.4%
                                                     
173 As of 1 January 1999 this figure stood at 66% of total EU capacity (from 64% in 1998 and 61% in
1997).  European Commission, Energy and Transport (ongoing) and UNCTAD (1998).
174 European Commission (1999f).WT/TPR/S/72 Trade Policy Review
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Common regulatory framework
128. A package of four regulations adopted in 1986 constituted the initial legal framework for the
EU maritime policy.175  They apply the principle of freedom to provide services, lay down the
competition rules applicable to maritime transpor t, enable counteractive measures against unfair
pricing practices by third-country shipowners, and provide for coordinated action to safeguard free
access to ocean trade.  Restrictions on the provision of services within Member States (maritimecabotage) were eliminated on 1 January 1993.
176 The third Community report on the implementation
of Regulation 3577/92, concerning the period 1997-99, was adopted on 24 February 2000.  Under the
provisions of this Regulation, the Commission recently referred France to the Court of Justice for
allowing only domestic vessels to transport goods between domestic ports.177 Rules for safety,
registration, and training regimes were modified over the past two years.178 According to the
Commission, the revised rules harmonize EU regulation with existing international standards.
129. Rules for the application of competition law to maritime transport date back to 1986179,
granting a block exemption for certain practices of liner conferences.  An alternative and parallel
block exemption was implemented in April 1995 for a period of five years, for the application of
Article 81(3) of the EC Treaty to certain categories of agreements, decisions and concerted practicesbetween liner shipping companies (consortia).
180 The Regulation is likely to be renewed, possibly
subject to minor modifications.181
130. The considerable decline in the number of ships under national flags led the various Member
States to initiate state-aid programmes in maritime transport services.  In 1997, the Commission re-
examined these programmes taking into account their fiscal implications.  State aid may normally be
granted only for ships registered under the national flag and can only be implemented to safeguard
Community jobs, maintain seafaring know-how, and improve skills.  Tax abatements for shippingcompanies are considered to be state aid and should be restricted to maritime transport activities.
State aid to cut labour costs may, exceptionally, be considered to be compatible with the common
market if it reduces costs and tax burdens borne by Community shipowners and seafarers to levels
comparable with those in the rest of the world.
182 Another alternative regulatory approach resorts to
the creation of "second registries", which retain the national flag while allowing more flexibleconditions of manning.
183  In addition to the Danish, French, and German examples, which already
                                                     
175 Council Regulations 4055/86 4056/86, 4057/86 and 4058/86.
176 Council Regulation 3577/92 provided for a gradual liberalization of cabotage in France, Italy,
Greece, Portugal, and Spain up until 1 January 1999. Currently, Greece has the only remaining exemption, until2004, when scheduled passenger services and  services by vessels less than 650gt should also be opened to otherEuropean operators.
177 COM(1999) 301 final, p. 50. A proposal to amend this regulation for matters relating to crew was
put forward by the Commission (COM(1998) 251 final).
178 Council Directives 98/18/EC, 98/25/EC, 98/35/EC, 98/41/EC, 1999/35/EC, and Commission
Directive 1999/19/EC.
179 Council Regulation 4056/86.
180 Commission Regulation 870/95.
181 "Report on Commission Regulation 870/95" (liner shipping consortia) of 28 January 1999 [Online].
Available at:  http://europa.eu.int/comm/ dg04/entente/en/report_comm_reg_870_95.pdf.
182 Crewing relief support, investment aid, training facilitation, and public service obligations and
contracts must also follow well defined criteria (Commiss ion Notice on monitoring of State aid and reduction of
labour costs (OJ C 1, 1997); and Community approach to State aid for transport by sea (OJ C 205, 1997)).
183 The crew, except for some officers, does not have to be composed of nationals paid at national rates
(WTO document S/C/W/62).The European Union WT/TPR/S/72
Page 137
existed before the end of the last maritime negotiations at the WTO, second registries have been
instituted in Italy and Spain.184
131. As regards relations with third countries, a proposal for a Council Decision has not yet
received an opinion from the European Parliame nt.  The proposal, replacing existing procedures
dating back to 1977185, would set up a consultation procedure with third countries on relations in
shipping matters and on action relating to such matters in international organizations, and anauthorization procedure for agreements concerning maritime transport.
Other developments
132. The EU has adopted Directives for the negotiation of agreements with China and India, while
agreements with the Russian Federation (1997), Estonia, Latvia, Lithuania, and Ukraine (1998) have
already come into force. In 1999 the Port State Co ntrol regime (recognized the right of the State in
which a ship calls to arrest and detain a substandard ship for safety reasons) was strengthened and the
Council adopted a Directive on a system of mandatory surveys for the safe operation of regular ro-ro
ferry and high-speed passenger craft services.  Moreover a Directive concerning the working hours of
seafarers was adopted.
133. In 1998, the Commission condemned a number of agreements entered into under the Trans-
Atlantic Conference Agreement (TACA) concerning price-fixing that constituted restrictions on
competition incompatible with Article 81(1) of the Treaty, and did not qualify either for the group
exemption for shipping conferences or for an individual exemption pursuant to Article 81(3). The
Commission also decided to impose a fine of € 273 million on TACA members for abusing a
dominant position.
186
(v) Audio-visual
(a) Background
134. Between 1997 and 1998 the EU audio-visual sector  continued to grow;  it expanded by over
10%, boosted by a one-third increase in video-games sales and by a nearly 11% growth of the films'
box office. TV and radio broadcasting remain the most important activities, covering nearly three
quarters of the total audio-visual market. Other main activities are video sales and rental (about 11%
of market in 1998), video games (8%) and theatre-film exhibitions (6%). The number of feature filmsproduced decreased slightly from 563 in 1996 to 550 in 1998, following a period of significant
increase (456 feature films produced in 1994). However, investment in production rose by 4% in the
same period. Gross box office grew from US$4.3 billion in 1996 to US$4.8 billion in 1998.
187 In
                                                     
184 In the Netherlands a new fixed tonnage tax was created, replacing the corporate income tax.
Reimbursements of income tax for seafarers have also b een instituted or are envisaged in Ireland, Sweden, and
the United Kingdom.  The United Kingdom has also introduced roll-over relief on capital allowances balancing
charges and assistance in relieving U.K. crews in foreign ports.  France and Germany have recently eliminated
certain fiscal advantages and depreciation allowances, but these measures were in both instances linked tonon-shipping considerations. The United Kingdom and Germany have, furthermore, brought some safetystandards, manning requirements, support measures, and national legislation in line with those contained ininternational regulations and agreements (OECD  Maritime Transport Committee Annual Report (1999)[Online].  Available at: http://www.oecd.org//dsti/sti/transpor/sea/prod/.
185 Council Decision 77/587/EEC.
186 European Communities (1999b), p. 77.
187 This increase is largely attributed to the development of the exhibition sector, in particular
multiplexes, though the increase in box-office appears to be  lower than the increase in the number of screens in
the market.WT/TPR/S/72 Trade Policy Review
Page 138
1998, there were about 370 TV channels, up from about 120 in 1992, an increase linked largely to the
development of pay-TV. The introduction of digital broadcasting techniques is likely to provide
conditions for further expansion of TV services. A study on the economic effect of new
communication technologies on audio-visual markets underlines the growing importance of online
and offline multimedia for content providers over the next five years (Chart IV.14).188
135. With approximately one third of the world's audio-visual turnover, leading European
companies are concentrated in Germany (25%), the United Kingdom (25%), France (19%), and Italy
(10%). Between 1997 and 1998, there was an increase in intra-community trade coupled with a
deterioration in the balance of trade with North America of 12% (Chart IV.15).
0100020003000400050006000
1995 2005Chart IV.14
Growth of non-free-to-air share of content provider revenues, 1995 and 2005
Source: Norcontel (1997).ECU million
Online multimedia
Offline multimedia
Transactional
Pay TV
Video sale
Video rental
Cinema
(15% of total)(35% of total)
136. The European programming industry is characterized by fragmentation into national markets,
and a low rate of cross-border programming, distribution and circulation.189  Such characteristics
make the collection of financial resources more difficult.190 Partly as a consequence of these factors,
trade in audio-visual services has proved a sensitive issue.  The EC and its Member States did notmake commitments in audio-visual services and sc heduled exemptions with regard to audio-visual
services under Article II of the GATS.
191 As pointed out by the Commission in late 1999, "in the
                                                     
188 Norcontel (1997).
189 There is a large dispersion in the production co sts in the industry across Member States.  Germany,
the United Kingdom, and France exhibit significantly higher prices for TV programmes than other European
countries (European Audiovisual Observatory, 1999).
190 "Audiovisual policy" [Online].  Available at:  http://europa.eu.int/pol/av/index_en.htm
[30 March 2000], and "Brief background" [Online].  Available at: http://europe.eu.int/pol/av/info_en.htm[15 November 1999].
191 See WTO (1997), p. 125.The European Union WT/TPR/S/72
Page 139
framework of the WTO, it is vital for the Community and its Member States to maintain their freedom
of action in the audiovisual sector if Europe is to retain its cultural and linguistic diversity".
Furthermore, "this freedom of action appears all the more necessary since it is not possible today to
foresee the questions and challenges which will doubtless arise out of the rapid development of the
Internet".192 The issue is also likely to arise in the context of the enlargement process; the Commission
finds "important that the accession countries implement rapidly and in full the Community acquis inthe audiovisual sector".
193
-8,000-7,000-6,000-5,000-4,000-3,000-2,000-1,00001,0002,000
1993 1994 1995 1996 1997 1998Chart IV.15
Trade in audio-visual services between the European Union 
and North America, 1993-98
Source : Euro pean Audiovisual Observator y (2000 ).US$ million
Non-british
British
VideoTelevisionTheatrical
Credits Debits
(b) Regulatory framework
137. The EC Treaty has a comprehensive coverage of audio-visual policy, including free
movement of goods (Articles 23, 25 and 28), and freedom of movement of workers, right of
establishment and freedom to provide services (Articles 39 to 55). In addition, it provides for
professional training projects, promotion of culture, and industrial policy initiatives (Articles 150,151, and 157). Competition rules and common commercial policy also play a significant role in this
sector. Technological developments have compelled the EU to take a more dynamic role in the
implementation of its audio-visual policy, in particular, adopting the principle of technological
neutrality emphasizing that "services providing audiovisual content should be regulated according to
their nature and not according to their means of delivery" (Annex IV.1).
194
                                                     
192 COM(1999) 657 final, pp. 2 and 22.
193 COM(1999) 657 final, p. 2.
194 COM(1999) 657 final.   See also speeches by Commissioner Reding 11 October 1999 [Online].
Available at: http://europe.eu.int/comm/dg10/avpolicy/key_doc/red-paris_fr.html, and SPEECH/99/191 of30 November 1999.WT/TPR/S/72 Trade Policy Review
Page 140
138. The legal framework for television broadcasting services in the Internal Market, is laid down
in the Television without Frontiers (TWF) Directive.195 Adopted in 1989, it was revised in 1997 to
take account of technological and market developmen ts, while also introducing a clarification of the
rules on jurisdiction and the protection of minors, and the new rules concerning the broadcasting of
major events and teleshopping.196 The TWF Directive establishes the legal framework for the free
movement of television broadcasting services within the EU, in particular concerning the freedom ofreception and retransmission; the promotion of distribution and production of television programmes;
television advertising and sponsorship; and the protection of minors. Article 4 of the Directive
specifies that broadcasters should, whenever practicable, reserve a majority proportion of their
transmission time for European works, whereas Article 5 specifies that 10% of their transmission time
or their programming budget be reserved to works created by independent European producers. Theseproportions should be achieved gradually and Member States are required to report to the
Commission every two years on the application of these provisions.
139. The Commission found that, in most Member States, the majority of channels either met or
exceeded these obligations in 1995 and 1996.
197 The second report on the application of the TWF
Directive describes and analyses the salient facts in the application of the Directive between1 January 1995 and 30 July 1997, and attempts to offer an overall view of the progress achieved in
interpreting its standards, with special attention given to the decisions of the European Court of
Justice.
198  A general review on the application of the Directive shall be submitted by the Commission
no later than 31 December 2000 and every two years thereafter.199
140. Other regulatory initiatives identified by the Commission200 pertain to : access to audio-visual
content, where close monitoring was recommended by the Commission; copyright protection, where
the rapid adoption of a proposed Directive on Copyright and Related Rights in the InformationSociety is of importance;
201  protection of minors;202 advertising and sponsorship, where the
Commission will study new advertising techniques in view of a possible future evaluation of the
provisions contained in the TWF Directive, in particular with regard to interactivity and product
placement; and state aid to cinema and television, where the Commission will assess, in 2000, the
need for the establishment of guidelines for the tr eatment of state aid to cinema and TV programme
production.
141. The regulatory framework is complemented by a support mechanism, the EC MEDIA
Programme. The MEDIA II Programme is a central component of the European audio-visual support
programme, allocating ECU 45 million over five years in support of training of audio-visual
professionals, and ECU 265 million on development of  production projects and distribution of audio-
visual products.  MEDIA II will expire in December 2000. The proposed allocation for the future
                                                     
195 Council Directive 89/552/EEC of 3 October 1989, amended by European Parliament and the
Council Directive 97/36/EC of 30 June 1997. See Drijber (1999) for an overview of the Directive.
196 Member States had until 30 December 1998 to implement the TWF Directive.  Questions regarding
its interpretation prompted legal action by the Commission.
197 COM(1998) 199 final.  For the period 1991-1992 see COM(94) 57 final; and COM(96) 302 final for
1993-1994.  The effect of the quota system in France, and a perspective on the system is given by Peltier (1999).
198 COM (97) 523 final.
199 This will take into account technological developments  in the sector as well as the results of studies
carried out for the Commission into the protection of minors and on advertising aimed at minors. Article 25(a)of the Directive also requires an independent study into the impact of the Directive's provisions concerning the
promotion of European works, to be carried out by June 2002.
200 COM(1999) 657 final.
201 COM(97) 628 final.
202 A Council Recommendation on the protection of minors and human dignity in audiovisual and
information services was adopted in 1998 (OJ L 270, 1998).The European Union WT/TPR/S/72
Page 141
MEDIA Plus programme over five years is € 50 million for training and € 350 million for the
development and distribution of projects.203 The Commission claims to be making the international
dimension an increasingly important aspect of the Programme by opening participation to third
countries.204
(c) Related developments
142. Notwithstanding the continuing integration of Eu ropean audio-visual services, a study for the
Commission identified five areas of concern to the Internal Market205:  the non-homogeneity of audio-
visual products, services and markets; differences in national regulations in particular relating to
cross-media ownership206;  market structure207;  preferential treatment for domestic operators208;  and
intellectual property barriers.209
143. In January 1999, the EU adopted a resolution seeking to clarify the protocol on public service
broadcasting annexed to the Treaty of Amsterdam. The Amsterdam Protocol confirms the essential
role of the Member States in the organization and financing of their public radio and television
broadcasting systems.
144. Public channels are allowed to offer a wider range of programmes and ensure equality of
access for the public to new technologies.  It has been noted that "the presence of State-fundedoperators and the strong regulating interventions from the Member States create significant distortions
in the allocation of market resources".
210 Competition policy has also been actively implemented with
regard to mergers.  Of the ten merger decisions with unfavourable outcome, five were in the audio-
visual sector.  They cover different aspects including pay-TV administration (MSG Média Service
and Deutsche Telekom/Beta Research), satellite broadcasting (Nordic Satellite Distribution),
advertising and production (RTL/Véronica/Endemol), and horizontal mergers among competitors
(Kirch/Bertelsman).
                                                     
203 COM(1999) 658 final.
204 Industry representatives made a pledge to help promote, via the MEDIA Plus programme, European
films outside the EU and to channel more resources into the framework ( European Report , No. 2446,
27 October 1999). Securitization fund initiatives, such as the European Guarantee Fund (WTO, 1997) are alsoseen as an integral part of the industry's success (Report from the High Level Group on Audiovisual Policy[Online].  Available at:  http://europe.eu.int/comm/dg10/avpolicy/key_doc/hlg2_en.html [10 April 2000]).
205 European Communities (1998), section 1.4.3.
206 Rules governing cross-ownership, which are not harmonized by the TWF Directive, are said to
affect the ability of broadcasters to operate easily in more than one Member State.
207 In a number of Member States broadcasting is st ill a concentrated industry, whereas distribution is
still characterized by pockets of natural monopoly at a national or local level.
208 National and local authorities were found to have "must-carry" rules in the allocation of cable
capacity; increased public funding of public broadcasters without incentive to invest in cross-border trade; un-
coordinated national production subsidy systems; and quota arrangements going beyond what is specified in theTWF Directive.
209 Barriers that are not addressed by the copyri ght Directives include: traditional contractual
agreements granting exclusive national broadcasting rights; nationally negotiated agreements with labour unionsimposing additional licensing requirements when broadcasting abroad; and the effect of differences in the
organization of national collecting societies on the acquisition and administration of rights.
210 In particular, public operators collect revenues fr om the market and the State, obtain funds as a flat
licence fee (instead of as a reimbursement for specific costs), and obtain additional revenue by selling in-housedeveloped programmes with state support. The first distortion is pointed out as more significant and is the objectof most complaints lodged by private broadcasters. (OECD, 1999b, p. 293).WT/TPR/S/72 Trade Policy Review
Page 142
Annex IV.1:  Electronic commerce
(a) Background
1. Electronic commerce (e-commerce) is expected to radically alter many economic activities
and the associated social environment, while in itself being affected by technology, market dynamics,
and policy decisions.  E-commerce has had a visible impact on sectors that primarily transmit
information (communications and media), while gr adually expanding into those that produce it
(financial and audio-visual services). New frameworks for conducting business, and the need for an
adequate response from public policy-makers, are currently being discussed in many international
fora.  Consistent statistical indicators do not yet exist to measure the level, growth and composition of
e-commerce.  Current estimates for world-wide business-to-business e-commerce vary from US$70-
170 billion for 1999 and from US$1.2-3.2 trillion in 2003.1  A contributing factor to the growth of e-
commerce is, naturally, the Internet.  It is expected that between 2001 and 2003, Europe will have
Internet user numbers level with the United States.1
2. The EU Council of Ministers has responded enth usiastically to the e-Europe initiative of
December 1999 from the Commission.  This initiative aims at putting Europe level with or in front of
other industrialized countries during the coming years, for instance regarding computer literacy, theuse of and affordable access to the Internet, and accelerated take-up of e-commerce by business and
individuals.
(b) Negotiating framework at the WTO
3. At the Second Session of the WTO Ministerial Conference in Geneva in 1998, Members
agreed to establish a comprehensive work programm e to examine all trade-related issues related to
global e-commerce.
1  The programme assigned responsibilities to the Councils for Trade in Services,
Trade in Goods, and TRIPS, as well as the Committee on Trade and Development. Twelve issueswere identified for clarification by the Council fo r Trade in Services:  scope;  MFN; transparency;
increasing participation of developing countries; domestic regulation; recognition; competition-related
provisions; protection of privacy and public morals, and the prevention of fraud; specific
commitments in market access and national treatment, and market-access commitments on electronic
supply of services;  national treatment; customs duties; and classification issues.
4. Four issues were emphasized by the EU as lying at the core of future negotiations.
2  The first
concerns the affirmation of the technological neutrality of existing commitments.  In particular, this
recognition would confirm that relevant existing commitments in GATS apply to e-commerce.  The
second key issue is Community control over the implementation of domestic regulation on e-
commerce, therefore establishing the principles that would limit the scope of national legislation towell-defined objectives.
3  The third issue concerns the classification of electronic services, that is,
determining which rules apply to certain electronic transactions.   It is the view of the Commission
that goods ordered electronically, and delivered physically, fall within the scope of the GATT while
electronic deliveries consist of services and therefore fall within the scope of the GATS.  Finally, the
EU underlined the advantages of building on and expanding existing commitments, such as market-
                                                     
1 Electronic commerce is understood to mean, for the purposes of the work programme, "the
production, distribution, marketing, sale or delivery of goods and services by electronic means" (WTO
document WT/L/274).
2 USCSI (1999a).
3 Thus appropriate measures would be maintained by Members to fight anti-competitive practices and
regulatory measures on the electronic means of delivery could be justified on the basis of specific public policyobjectives to be defined.The European Union WT/TPR/S/72
Page 143
access commitments in financial and professional services, with a particular emphasis on their cross-
border provision.  The Commission also emphasized the need to enhance the participation of
developing countries in e-commerce (in particular by improving and facilitating access to
telecommunications services), and that the current practice of not imposing customs duties on
electronic transmissions shall be maintained.
(c) Regulatory framework
5. Through adoption of the "European Initiative on Electronic Commerce" in April 19974, the
Commission proposes a comprehensive set of actions in the field of e-commerce, to be implemented
by the year 2000.  The initiative identified four key objectives:  (i) to provide widespread, affordable
access to the infrastructure, products, and services needed for e-commerce; (ii) to create a regulatory
framework so as to provide legal certainty and tax neutrality for electronic payments; (iii) thefostering of the e-commerce business environment; and (iv) ensuring that the regulatory framework at
the global level is coherent and compatible with that of the EU. Two venues for the implementation of
e-commerce regulations are being pursued.  On the one hand, the Commission started two main
initiatives, and a series of directives, adapting the existing legal framework in financial services and
requiring relevant draft national rules to be notified.  On the other, it is pursuing draft regulationsamending the Rome and Brussels Conventions, inco rporating electronic transactions under existing
consumer protection legislation.
6. The first initiative comprises two directives clarifying the regulatory framework applicable to
electronic transactions, in particular regarding electronic money.  The first draft Directive defines the
technological neutrality of money and the types of business activities to be undertaken by e-money
institutions (enterprises issuing e-money without undertaking the full range of banking operations).
5
The second amends the definition of a credit institution within the banking directives so as to include
e-money institutions under the existing legislative umbrella, including granting them the European
passport.6  In particular, the new Directive is aimed, inter alia,  at specifying the provisions from
which e-money institutions are exempt, as well as those regulating their capital requirements,
limitations on investment, and those establishing the supervisory national authorities.
7. The second initiative covers all information society services, both business-to-business and
business-to-consumer services, including services provided free of charge to the recipient –
e.g. funded by advertising or sponsorship revenue – and services allowing for online electronic
transactions, such as interactive teleshopping of goods and services, and online shopping malls.  The
proposed Directive establishes specific harmonized rules defining where operators are established,
commercial communications, electronic contracts, liability of intermediaries, and enforcement ofrights.
7  The Directive would define the legal framework applicable to third-country providers
established within the EU;  supervision would be enforced at the source of their activity.  In other
                                                     
4 COM(97) 157.  The Committee on Economic and Monetary Affairs and Industrial Policy of the
European Parliament reported on the initiative in PE 223.962/fin [Online].  Available at:http://www.ispo.cec.be/ecommerce/epreports/EP223_962_en.pdf.
5 COM(98) 461(1).  Common Position EC No 8/2000 was adopted on 29 November 1999
(OJ C 26, 2000, p.1).
6 COM(98) 461(2).  Common Position EC No 9/2000 was adopted on 29 November 1999
(OJ C 26, 2000, p.12).
7 COM(1999) 427 final.  A common position was agreed to by the Council of Ministers on
7 December 1999.WT/TPR/S/72 Trade Policy Review
Page 144
areas, the Directive builds on existing EU instruments that already provide for harmonization at
Community level, or on the mutual recognition of national laws.8
8. Two other Directives cover electronic signatures and a transparency mechanism for national
legislation. The first establishes a legal framework for the use of electronic signatures and should,
according to the Commission, ensure the legal recognition of these throughout the EU.9  M a i n
elements include a definition of the essential requirements, minimum liability rules for serviceproviders, legal recognition of the electronic signature, the certification of services, and the
establishment of a mechanism of cooperation with third countries on mutual recognition.  The second
extends, as from August 1999, the scope of existing legislation affecting the free movement of goods
to include rules on information society services.  In particular, it requires draft national rules
concerning information society services to be notified to the Commission, thus opening a venue forcomments and amendments.
9. A second policy instrument, used by the Commission, is the implementation or extension of
regulations on jurisdiction and applicable law for both contractual and non-contractual civil and
commercial obligations;  certain provisions are re lated to consumer protection.  A proposal amending
the Brussels Convention on jurisdiction and recognition has been the focal point for consumerprotection entities pushing for the right for consumers to bring proceedings in their home country, and
industry associations demanding the right for companies to be sued only in their home country.  The
proposed regulation, modifying the Brussels Convention and reformatting it as a regulation (presented
by the Commission in July 1999
10) would give consumers in the EU the right to sue foreign Internet
providers of goods and services in the consumer's local court.11  In public hearings held in
November 1999, some industry representatives argued that there is no sure way to know the location
of their customers on the Internet, thus the uncertainty on the applicable rules would impose a majorcost for the industry and could hamper its development.
12 Others, however, supported the Commission
proposal, saying that it was in everybody's interest to ensure consumer confidence.
10. A second paper on the law applicable to extra-contractual obligations (so-called Rome II
instrument), still under consideration by the Commi ssion, is reported to bring into question the rule of
origin for contractual obligations in the Internal Market.13  Any proposed regulation requires final
approval by the Council of Ministers, whose deci sion was postponed following reservations of the
European Central Bank regarding the regulation of institutions issuing electronic money.14  I t  w a s
recently reported that the Commission is consider ing an online procedure for settling contractual
disputes, thus opening the possibility of de ference of e-commerce provisions from the two
Conventions.15
                                                     
8 Despite the positive aspects of the proposed legislation and its warm welcome in professional
associations, one source of concern is the broad derogations set out in Article 22 (USCIS, 1999b).  Examplesinclude the provision to permit Member States to restri ct online services for consumer protection purposes, the
possibility of a Member State by-passing community procedures to implement such measures when it finds a
"case of urgency", and the inclusion among the derogation of all "consumer contracts".
9 Directive 1999/93/EC of the European Parliament and of the Council.
10 Wall Street Journal , 15 July 1999.
11 In effect, the regulation would classify a site on the World Wide Web as cross-border advertising,
thus dropping the requirement of active solicitation of the plaintiff's business in the plaintiff's home country for
the right to local jurisdiction to apply ( Financial Times , 29 October 1999).
12 Financial Times , 5 November 1999.
13 Wall Street Journal  and Financial Times , 6 July 1999.
14 Financial Times , 9 November 1999.
15 Financial Times , 27 January 2000.The European Union WT/TPR/S/72
Page 145
Annex IV.2:  EC Financial Services Schedule in GATS
1. EC commitments to provide national treatment and market access in financial services are
subject to limitations in the "all sectors" (horizontal) section of its Schedule.  Market access
commitments in respect to cross-border supply a nd consumption abroad apply only to transactions
indicated respectively in paragraphs B.3 and B.4 of  the "Understanding on Commitments in Financial
Services" (the Understanding); thus they are applicable to transportation insurance, reinsurance,financial information transfers and financial intermediation.
1  Commitments on the presence of natural
persons are similarly bound by the horizontal section, with the exception of Sweden where they are
made in accordance to the Understanding.  Commercial presence commitments are in accordance with
the provisions of the Understanding.
2. Limitations on market access for cross-border supply and consumption abroad in banking and
other financial services excluding insurance were notified by Belgium, Italy, and Ireland for cross-
border supply, and Germany, Finland, Greece, an d the United Kingdom for consumption abroad.
National treatment limitations on commercial presence of banking institutions are scheduled for: Italy
disallowing foreign intermediaries to provide investment services; France requiring sufficient
presence for the management of franc-denominated issues; and Sweden reserving residencyrequirements for founders of financial institutions.
3. Market-access limitations in the securities services across the EU are implemented in the
Collective Investment Undertakings (UCITS) Directive.   Only four Member States do not
individually limit market access for financial services.  Austria notified restrictions on foreign and
securities exchanges, bond issues and pension fund management; Belgium, the requirement of an
authorization for foreign acquisition of Belgian securities in public bids; while Denmark, Belgium,
and Spain notified restrictions on securities trading to companies incorporated in their territory.Belgium, in addition, reserved the right to impose minimum capital requirements; Finland the
requirement of residency in the EEA of critical groups and people in the institution and payments
from governmental entities to be carried out through the Finnish Postal Giro System. Italy notified a
series of limitations regarding, inter alia,  clearing and settlement systems; public offer of securities;
deposit, custody and administration services; and the incorporation of fund management companiesand other non-UCITS collective investment schemes.  A similar limitation on certain types of
collective investment schemes was also notified by Ireland, where, on the other hand, the additional
channel of a local authorization is open to companies not incorporated in the EU.  Portugal declared
issuing authorizations for establishment on a case-by-case basis, and not allowing the provision of
venture capital, broker-dealer or pension-fund mana gement services.  The United Kingdom notified
restrictions on inter-dealer brokers to be establis hed in the EEA; and Sweden notified the limitation of
commercial presence to branches of undertakings and banks and also to representative offices for
banks.  Only three Member States notified limits on the presence of natural persons.  Market access
limitations were notified by France on minimum nationality requirements  for supervisory bodies, and
Greece on residency requirements for nominated managers. Only Italy notified national treatmentlimitations by requiring residency of financial salesmen.
4. Restrictions on market access and national treatment were notified on cross-border supply and
consumption abroad of insurance and insurance-related services covered by the Schedule.  Austria is
the only country with a scheduled limitation on national treatment of cross-border supply and
consumption abroad by requiring a higher premium tax on contracts written by a subsidiary not
established in the EU or by a branch not established in Austria.  Market access restrictions are also
                                                     
1 Insurance is confined to risks relating to mar itime shipping, commercial aviation, space launching,
and freight; goods in international transit; and other insu rance services referred to in subparagraph 5(a)(iv), as
well as financial services referred to in subparagraphs 5(a)(xv) and 5(a)(xvi) of the Annex on Financial Services.WT/TPR/S/72 Trade Policy Review
Page 146
notified by six countries for both modes: Austria scheduled the prohibition of promotional activity
and the intermediation on behalf of a subsidiary not established in the EU or by a branch not
established in Austria; Austria, Denmark, and Germany may require compulsory air insurance to be
underwritten by firms established in the Community (or by a home branch in the case of Austria and
Germany), while Denmark also requires a licence to service Danish residents, ships or property;
Germany notified a limit to service provision in international transport; only insurance firmsestablished in the Community may carry out insurance of risks relating to ground transport in France,
or insurance related to exports by residents, transport of goods, and other territorial risks in Italy; and
Portugal maintains the right to limit air and mariti me transport insurance to be underwritten by firms
established in the EU, while allowing only entities established therein to act as intermediaries for such
insurance business in Portugal.  Restrictions on cross-border supply were scheduled by four countries:both Italy and Spain have unbound limitations for the actuarial profession; Finland allows only
insurers having their head office in the EEA or a br anch in the country to offer insurance services and
requiring the supplier of insurance broker services to have a permanent place of business in the EEA;
direct insurance in Sweden may be required to go through suppliers authorized locally.
5. Additional commitments include best practice in supervisory, information, and licence
provision, as well as a lighter burden in the licensing requirement for insurance.
Annex Table
Schedule of sector-specific commitments (not including horizontal restrictions)
Insurance Banking
Mode of supply Mode of supply
(1) (2) (3) (4) (1) (2) (3) (4)
Belgium
Denmark
Germany
Greece
Spain
France
Ireland
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
United Kingdom
Mode of supply: (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons
Note:
Limitations on market access.
Limitations on national treatment.
White denotes subsectors with no commitments, grey those with partial commitments, and black those with full commitments.
Source: WTO document GATS/SC/31/Suppl.4/Rev. 1.The European Union WT/TPR/S/72
Page 147
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