WORLD TRADE  
ORGANIZATION  WT/DS204/R 
2 April 2004 
 (04-1211) 
 Original:   English 
   
 
     
 
  
MEXICO – MEASURES AFFECTING 
TELECOMMUNICATIONS SERVICES  
 
 
 
Report of the Panel  
 
 
 This report of the Panel on Mexico – Measures a ffecting Telecommunications Services is being 
circulated to all Members, pursuant to the DSU.  The report is being circulated as an unrestricted 
document from 2 April 2004 pursuant to the Procedur es for the Circulation and Derestriction of WTO 
Documents (WT/L/452). 
 
    
 
     
 
Note by the Secretariat :  This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 60 
days after the date of its circulation unless a party to  the dispute decides to app eal or the DSB decides by 
consensus not to adopt the report.  If the Panel Report is appealed to the Appellate Body, it shall not be 
considered for adoption by the DSB until after the completion of the appeal.  Information on the current status of the Panel Report is available from the WTO Secretariat.
 
 
  
 
  WT/DS204/R 
 Page i 
 
 
TABLE OF CONTENTS  
Page  
 
I. INTRODUCTION................................................................................................................... ................... 1  
II. FACTUAL ASPECTS................................................................................................................ ................ 2  
A. MEXICO 'S TELECOMMUNICATION MARKET ........................................................................................ 2  
B. MEXICO 'S TELECOMMUNICATIONS LAWS AND REGULATIONS ........................................................... 2  
1. Federal Telecommun ications Law......................................................................................... 2  
2. International Long- distance Rules......................................................................................... 4  
C. THE COMPETITION LAWS OF MEXICO ................................................................................................ 5  
1. Federal Law of Econ omic Comp etition ................................................................................. 5  
2. Code of Regulations (to Federal Law on Economic  Competition) ........................................ 5  
D. MEXICO 'S COMMITMENTS UNDER THE GENERAL AGREEMENT ON TRADE IN SERVICES 
(GATS) ......................................................................................................................... .................... 6  
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS .......................................... 6  
IV. MAIN ARGUMENTS OF  THE PARTIES.............................................................................................. 7  
A. SECTION 2 OF THE REFERENCE PAPER ................................................................................................ 7  
1. Scope of application of the Reference Paper ......................................................................... 8  
2. The scope of "interconnection" w ithin Mexico's Refe rence Paper ...................................... 10  
(a) The concept of in terconnect ion............................................................................................... 10  
(b) The meaning of interconnection w ithin the Refere nce Paper.................................................. 12  
(i) Interpretation of the term "inter connection" in its context.......................................... 13  
(ii) Subsequent practice .................................................................................................... 16  
(iii) Supplementary means of  interpre tation ...................................................................... 18  
aa) Negotiating hi story...................................................................................... 18  
bb) The international scope and bilateral nature of the accounting rate regime. 18  
cc) Circumstances of the conclusion of the treaty: Mexican legislation at the 
time of negot iations..................................................................................... 20  
(c) Whether the Reference Paper obligations extend to accounting rate regimes ......................... 20  
(i) Concept of "acc ounting ra te"...................................................................................... 21  
(ii) Domestic interconnection v. accounti ng rates ............................................................ 22  
aa) Differences from a commerc ial point of  view............................................. 23  
bb) Differences from a contra ctual point of view.............................................. 24  
cc) Differences from a techni cal point of  view ................................................. 25  
dd) Differences from a regula tory point of view ............................................... 27  
3. Specific Commitments  of Mexico ......................................................................................... 29  
(a) Definition of the service and mode of  suppl y ......................................................................... 30  
(i) Definition of services.................................................................................................. 30  
aa) Half-circuit v. full- circuit regimes............................................................... 34  
(b) Mexico's commitment on cross-border supply ........................................................................ 36  
(c) Meaning of the limita tions insc ribed....................................................................................... 39  
(i) Concession requ irement ............................................................................................. 42  
(ii) Routing requi rement................................................................................................... 44  
(iii) Commercial agency perm it requir ement..................................................................... 47  
4. Whether Telmex is a major supplier within  the meaning of the Reference Paper ............... 50  
(a) The relevant  market ............................................................................................................ .... 51 
(b) Whether Telmex ha s market power......................................................................................... 52  
5. Whether Telmex' interconnection ra tes are "basadas en costos" ........................................ 55  
(a) Whether Telmex interconnection ra tes are "based in cost" ..................................................... 55  
(i) The meaning of "bas ed in cost" .................................................................................. 55  
(ii) Whether Telmex interconnection ra tes are "based in cost"......................................... 63  
aa) Costs based on maximum rates ch arged for networ k components .............. 65  
bb) "Grey market" rates for calls between the United States and Mexico ......... 68  
cc) International proxies ................................................................................... 70  
dd) Financial compensation among Mexican ope rators relating to international 
calls............................................................................................................. 70  WT/DS204/R 
Page ii  
 
(b) Whether Telmex interconnecti on rates are "r easonable "......................................................... 71  
(i) The meaning of "reasonabl e"...................................................................................... 71  
(ii) Whether Telmex interconnecti on rates are "r easonable " ............................................ 75  
B. SECTION 1.1 OF THE REFERENCE PAPER : PREVENTION OF ANTI -COMPETITIVE PRACTICES IN 
TELECOMMUNICATIONS ................................................................................................................... 76  
1. Panel's standard of review................................................................................................... 76  
2. Section 1.1 of Mexico's  Reference Paper............................................................................. 77  
(a) Purpose of Se ction 1.1 ......................................................................................................... ... 77 
(b) Extent of the requiremen t under Sec tion 1.1........................................................................... 77  
(i) "Appropriate m easures".............................................................................................. 78  
aa) Whether the ILD Rules are "appropriate measures" under Section 1.1....... 78  
bb) Whether a proportionate return syst em could be an anti-competitive 
measure ....................................................................................................... 82  
(ii) "Major s upplier" ......................................................................................................... 84  
(iii) "Anti-competitiv e practices"....................................................................................... 86  
aa) Definition of anti-com petitive pr actices...................................................... 86  
bb) Government in terventio n ............................................................................ 87  
cc) Price fixing as an anti -competitive practice ................................................ 89  
(c) Relationship between Section 1.1 and Sect ion 2.2(b) of the Reference Paper ........................ 90  
(d) Relationship between Sections 1.1 and 3 of Mexico's Re ference Paper.................................. 91  
C. SECTION 5 OF THE GATS  ANNEX ON TELECOMMUNICATIONS ........................................................ 92  
1. Application of the Annex...................................................................................................... 9 2 
2. Application of Sections 5(a)  and 5(b) of the Annex ............................................................. 97  
(a) Claims under Section 5( a) of the Annex ................................................................................. 97  
(b) Claims under Section 5( b) of the Annex ............................................................................... 100  
3. Application of Sections 5(e), 5( f) and 5(g) of the Annex.................................................... 107  
V. ARGUMENTS OF THE THIRD PARTIES........................................................................................ 111  
A. AUSTRALIA...................................................................................................................... .......... 111  
1. Informal Understanding on  Accounting Rates................................................................... 111  
2. Scope of "interconnection" in Sec tion 2 of the Refe rence Paper ....................................... 111  
3. Interconnection and ac counting ra tes................................................................................ 112  
4. Meaning of "cost-oriented" rates in sec tion 2.2(b) of the Reference Paper ...................... 112  
B. BRAZIL ......................................................................................................................... ............... 113  
1. Introduc tion ................................................................................................................... .... 113  
2. Scope and reach of sp ecific commitm ents.......................................................................... 113  
3. Non-discrimination and the concep t of "like circ umstances" ............................................ 114  
C. EUROPEAN  COMMUNITI ES..................................................................................................... 116  
1. Interpretation of Mexico's specific  commitment under  mode 1 ......................................... 116  
2. Mexico's commitments under mode 3 ................................................................................ 118  
3. Application of the interconnection rules contained in the Re ference Paper...................... 119  
4. Rates relating to termination of internati onal calls ........................................................... 119  
5. The meaning of "reasonable"............................................................................................. 120  
6. Requirements of Section 1.................................................................................................. 121  
7. Applicability of the Annex on Telecommuni cations ........................................................... 121  
8. The notion of likeness ........................................................................................................ 1 22 
D. JAPAN .......................................................................................................................... ................ 122  
1. Validity for an action by  the United States ........................................................................ 122  
2. The term "cost oriented" .................................................................................................... 123  
3. The term "cost-based"........................................................................................................ 12 3 
4. Election of a uniform accounting rate and proportionate re turn system........................... 124  
VI. INTERIM REVIEW ................................................................................................................. ............. 125  
VII. FINDINGS ....................................................................................................................... ....................... 138  
A. INTRODUCTION .............................................................................................................................. 1 38 
1. Telecommunications in the WTO ....................................................................................... 139  
2. Measures at issue in this dispute ....................................................................................... 139  
3. Mexico's legal framework for the regulatio n of telecommunicatio ns services .................. 140  
4. Rules of inte rpretation ....................................................................................................... 1 41 
5. Order of analysis of  the claims .......................................................................................... 142   WT/DS204/R 
 Page iii 
 
 
B. WHETHER MEXICO HAS FULFILLED ITS COMMITMENTS UNDER SECTIONS 2.1 AND 2.2 OF THE 
REFERENCE PAPER ......................................................................................................................... 142  
1. Whether Mexico has undertaken an interconn ection commitment, in  Section 2 of its 
Reference Paper, with respect to the tele communications services at issue...................... 143  
(a) What are the services at issue?.............................................................................................. 14 3 
(b) Are the services at issu e supplied cro ss-borde r? ................................................................... 144  
(c) Has Mexico undertaken commitments on the cross- border supply of the services at issue?. 149  
(i) Cross-border services in  Mexico's Schedule............................................................. 150  
aa) Service sectors inscribed in Mexico's Schedule ........................................ 150  
bb) Introductory heading................................................................................. 151  
cc) Supplementary documents used  to schedule commitments....................... 152  
i) Description of the suppl ementary doc uments .................................. 152  
– Draft Model Schedule ............................................................ 153  
– The Note by th e Chairm an ..................................................... 154  
– Scheduling Gu idelines............................................................ 154  
ii) Interpretative value of th e supplementary  documents...................... 154  
dd) Mexico's cross-border tel ecommunications commitments........................ 155  
(ii) Market access and national treatment co mmitments for cro ss-border s upply........... 156  
(iii) Mexico's "routing restric tion"................................................................................... 157  
aa) "International traffic" ................................................................................ 158  
bb) "Routed through th e facilities".................................................................. 158  
cc) "Enterprise that ha s a conce ssion"............................................................. 159  
(d) Do Mexico's specific commitments provide "the basis" for its additional commitment on 
interconne ction?............................................................................................................... ..... 160  
(e) Do Mexico's additional commitments on intercon nection apply to suppliers of cross-border 
services?...................................................................................................................... .......... 161  
(i) Ordinary m eaning..................................................................................................... 163  
(ii) Context provided by the te rm "interc onnecti on"....................................................... 164  
(iii) Other contextual  elements ........................................................................................ 167  
(iv) Object and purpose ................................................................................................... 167  
(v) Supplementary means – the "Underst anding"........................................................... 168  
(vi) Supplementary m eans – ot her................................................................................... 172  
2. Whether Mexico has fulfilled its interconnec tion commitment, in Section 2.2(b) of 
its Reference Paper, with respect to the services at issue.................................................. 173  
(a) Is Telmex a "maj or supplie r"?............................................................................................... 173  
(i) What is the "relevant market for ba sic telecommunications services"? .................... 174  
(ii) Does Telmex have "the ability to materially affect the terms of participation (having 
regard to price and suppl y)" in that market?............................................................. 175  
(iii) If Telmex has the ability to materially affect the terms of participation in that market, 
does it result from "control over essential facilities", or "use of its position in the 
market"? ................................................................................................................... 175  
(b) Are the Telmex interconnecti on rates "cost- oriented"?......................................................... 176  
(i) Meaning of "cost-or iented" ra tes .............................................................................. 178  
(ii) Does Telmex interconnect United States suppliers at cost-o riented rates? ............... 182  
aa) Comparison with domestic prices in Mexico for the same network 
component s ............................................................................................... 182  
i) Relevant networ k compone nts......................................................... 183  
ii) Prices for the relevant  network co mponents .................................... 184  
– Termination in Zone 1 (large cities) ....................................... 184  
– Termination in Zone 2 (medium cities).................................. 184  
– Termination in Zone 3 (other cities)....................................... 184  
iii) Difference between component pr ices and Telm ex rates................. 184  
bb) Comparison with "grey market" prices on the Mexico-United States route185  
cc) Comparison with termination rates on other international routes.............. 186  
dd) "Proportionate return" procedur es among Mexican  operators................... 186  
(iii) Are the Telmex interconnection term s and conditions "reasonabl e"?....................... 188  
C. WHETHER MEXICO HAS MET ITS COMMITMENT UNDER SECTION 1 OF ITS REFERENCE PAPER ...... 190  
1. Is Telmex a "major  supplier"? ........................................................................................... 191  
2. What are "anti-compe titive practi ces"?............................................................................. 191  
(a) Meaning of "anti-comp etitive practices"............................................................................... 191  
(b) Whether practices required under a Member's law can be "anti-competitive practices" ....... 193  WT/DS204/R 
Page iv  
 
3. Do the ILD Rules require a major supplier to engage in "anti-competitive 
practi ces"?.................................................................................................................... ..... 195  
(a) What acts do the ILD Rules require of Telmex and other Me xican opera tors?..................... 195  
(i) Uniform settleme nt rate ............................................................................................ 195  
(ii) Proportionate return.................................................................................................. 196  
(b) Are the acts required of Telmex and other Me xican operators "anti-co mpetitive practices"?197  
(i) Uniform settleme nt rate ............................................................................................ 198  
(ii) Proportionate return.................................................................................................. 198  
4. Has Mexico maintained "appropriate me asures" to prevent anti-competitive 
practices by a major supplier? .......................................................................................... 199  
D. WHETHER MEXICO HAS MET ITS OBLIGATION UNDER SECTION 5 OF THE GATS  ANNEX ON 
TELECOMMUNICATIONS ................................................................................................................. 199  
1. Whether the Annex imposes obligations on Mexico to ensure access to and use of 
public telecommunications transport networks and services for the supply of the 
basic telecommunications serv ices scheduled by Mexico .................................................. 201  
(a) Does the Annex apply to access to and use of  public telecomm unications transport networks 
and services for the supply of basi c telecommunications  services? ...................................... 201  
(b) Does Section 5 of the Annex apply to the ba sic telecommunications commitments scheduled 
by Mexico? ..................................................................................................................... ...... 204  
2. Whether Mexico has fulfilled its obligations  under Section 5 of  the Annex....................... 205  
(a) Structure of Section 5......................................................................................................... ... 206 
(b) Claim under Sec tion 5( a) ...................................................................................................... 2 08 
(i) "Any service supplier of  any other Member" ........................................................... 209  
(ii) With respect to "public telecommunications transport networks and services"........ 209  
(iii) "For the supply of a service included in its schedule" .............................................. 209  
(iv) "On reasonable … term s and cond itions"................................................................. 210  
aa) Rates charged for access and use .............................................................. 211  
bb) Underlying IL D Rules............................................................................... 215  
(c) Claim under Section 5(b)  of the Annex ................................................................................. 216  
(i) Whether Mexico has a commitment in effect to allow commercial agencies to supply 
the services at issue through co mmercial presence  (mode 3) ................................... 217  
(ii) Whether Mexico's commitments on the supply of the services at issue by commercial 
agencies through commercial presence include the supply of international 
telecommunications services (from Mexico to the United States) through mode 3.. 221  
(iii) Access to and use of priv ate leased circuits.............................................................. 222  
(iv) Interconnection of privat e leased circuits ................................................................. 223  
(v) Subject to paragra phs (e) an d (f)............................................................................... 223  
(d) Invocation of Section 5(g)..................................................................................................... 224 
VIII. CONCLUSIONS AND RE COMMENDATIO N.................................................................................. 224  
IX. ANNEXES........................................................................................................................ ....................... 227  
A. ABBREVIATIONS USED FOR DI SPUTE SETTLEMENT CASE S REFERRED TO IN THE REPORT ................ 227  
B. MEXICO :  SCHEDULE OF SPECIFIC COMMITMENTS , SUPPLEMENT 2................................................. 228  
C. ILD  RULES ............................................................................................................................... ..... 238  
  WT/DS204/R 
 Page 1 
 
 
I. INTRODUCTION 
1.1 On 17 August 2000, the United States requested  consultations with Mexico pursuant to 
Article 4 of the Understanding on Rules and Proce dures Governing the Settlement of Disputes (the 
"DSU") and Article XXIII of the General Ag reement on Trade in Services (the "GATS").1  T h i s  
request concerned Mexico's GATS commitments and obligations on basic and value-added 
telecommunications services. 
1.2 The consultations took place on 10 October 2000, but the parties failed to reach a mutually 
satisfactory resolution.  On 10 November 2000, th e United States requested the Dispute Settlement 
Body (the "DSB") to establish a panel, in accordance  with Articles 4 and 6 of the DSU, in order to 
examine Mexico's measures with respect to trad e in basic and value-added telecommunications 
services.2  On the same date, the United States requ ested additional consultations with Mexico, 
pursuant to Article 4 of the DSU and Article XX III of the GATS, regarding Mexico's measures 
affecting trade in telecommunications services.3  The additional consultations took place on 
16 January 2001, but the parties failed again to reach a mutually satisfactory resolution.  On 
13 February 2002, the United States again requested the DSB to establish a panel, in accordance with 
Articles 4 and 6 of the DSU in order to examin e Mexico's measures affecting telecommunications 
services.4 
1.3 At its meeting on 17 April 2002, the DSB establis hed a Panel in accordance with Article 6 of 
the DSU.5  At that meeting, the parties agreed that th e Panel should have standa rd terms of reference 
as follows: 
"To examine, in the light of the relevant provisions of the covered agreements cited 
by the United States in document WT/DS204/3,  the matter referred to the DSB by the 
United States in that document, and to ma ke such findings as will assist the DSB in 
making the recommendations or in giving the rulings provided for in those agreements."
6  
1.4 On 16 August 2002, the United States requested the Director-General to determine the 
composition of the Panel pursuant to Article 8.7 of the DSU, which provides: 
"If there is no agreement on the panelists within 20 days after the date of the 
establishment of a panel, at the request of  either party, the Director-General, in 
consultation with the Chairman of the DSB and the Chairman of the relevant Council 
or Committee, shall determine the com position of the panel by appointing the 
panelists whom the Director-General consid ers most appropriate in accordance with 
any relevant special or additional rules or  procedures of the covered agreement or 
covered agreements which are at issue in th e dispute, after consulting with the parties 
to the dispute.  The Chairman of th e DSB shall inform the Members of the 
composition of the panel thus formed no later than 10 days after the date the 
Chairman receives such a request." 
                                                      
1 See WT/DS204/1. 
2 See WT/DS204/2. 
3 See WT/DS204/1/Add.1. 
4 See WT/DS204/3. 
5 See WT/DSB/M/123. 
6 See WT/DS204/4. WT/DS204/R 
Page 2  
 
 
1.5 On 26 August 2002, the Director-Gen eral composed the Panel as follows:
7 
 Chairman: Mr Ernst-Ulrich Petersmann 
  Members: Mr Raymond Tam 
   Mr Björn Wellenius 
 1.6 Australia, Brazil, Canada, Cuba, the European  Communities, Guatemala, Honduras, India, 
Japan and Nicaragua reserved their rights to par ticipate in the Panel proceedings as third parties. 
1.7 The Panel met with the parties on 17 and 18 December 2002 and on 12 and 13 March 2003.  
The Panel met with the third parties on 18 December 2002. 
1.8 The Panel submitted its Interim Report to th e parties on 21 November 2003.  The Panel 
submitted its final report to the parties on 12 March 2004. 
II. FACTUAL ASPECTS 
2.1 This dispute concerns provisions in Mexi co's domestic laws and regulations on 
telecommunications which  govern the supply of telecommunication services. 
A. M
EXICO 'S TELECOMMUNICATION MARKET  
2.2 Prior to 1997, long-distance and internationa l telecommunications services in Mexico were 
supplied on a monopoly basis by Teléfonos de México, S.A. de C.V. ("Telmex").  Since that date, 
Mexico has authorized multiple Mexican carrier s to provide international services over their 
networks.  Under Mexican laws, th e largest carrier of outgoing calls to a particular international 
market, has the exclusive right to negotiate th e terms and conditions for the termination of 
international calls in Mexico that apply to any ca rrier between Mexico and that international market.8  
Telmex is presently the largest carrier of outgoing  calls for all markets.  Currently, there are 
27 carriers ("concesionarios" or "concessionaires")  allowed to provide long distance services, 
including two United States-affiliated carriers – Avantel (WorldCom) and Alestra (AT/T).9  Of these 
27 long-distance concessionaries 11 are authorized to  operate international gateways, allowing them 
to carry incoming and outgoing international calls.10  Telmex remains the largest supplier of basic 
telecommunications services in Mexico, including international outbound traffic.  
B. MEXICO 'S TELECOMMUNICATIONS LAWS AND REGULATIONS  
1. Federal Telecommunications Law  
2.3 The Federal Telecommunications Law (the "FTL" ) of Mexico provides the legal framework 
for the regulation of telecommunications activities in Mexico.11  Its purpose is "to govern the use, 
utilization and exploitation of the radio-electrical spectrum, of the telecommunications networks, and 
of satellite communication".12  More broadly, it is intended to "promote efficient development of 
                                                      
7 See WT/DS204/4. 
8 See ILD Rules 2 and 13. 
9 See Mexico's first written submission, paragraph 87.  See also  Mexico's first oral statement, 
paragraph 11.  
10 See Mexico's first written submission, paragraph 88.  
11 See Federal Telecommunications Law (FTL), (" Ley Federal de Telecomunicaciones "), published in 
the Federal Gazette (" Diario oficial de la Federación ") on 7 June 1995, entered into force on 8 June 1995. 
12 See FTL, Article 1.  WT/DS204/R 
 Page 3 
 
 
telecommunications;  exercise the authority of the State on these matters to ensure national sovereignty;  to promote a healthy competiti on among the different telecommunications service 
providers in order to offer better services, diversity  and quality for the benefit of the users and to 
promote an adequate social coverage".
13 
2.4 The FTL establishes a Secretariat of Communications and Transportation (" Secretaría de 
Comunicaciones y Transportes " or "Secretariat"), which is authorized, inter alia , to grant concessions 
required for "installing, operating or explo iting public telecommunications networks".14  A concession 
may only be granted to a Mexican individual or comp any, and any foreign investment therein may not 
exceed 49 per cent15, except for cellular telephone services.16 
2.5 Special rules apply to " comercializadoras " ("commercial agencies").17  A commercial agency 
is any entity which, "without being the owner or possessor of any transmission media, provides 
telecommunication services to third parties usi ng the capacity of a public telecommunications 
network concessionaire."18  A concessionaire of a public te lecommunications network may not, 
without permission of the Secretariat, have "any di rect or indirect interest in the capital" of a 
commercial agency.19  The establishment and operation of commercial agencies is "subject, without 
exception, to the respec tive regulatory provisions".20  The Secretariat has issued regulations for 
commercial agencies to provide pay public te lephone public telephony services (pay phones).21 
2.6 The "interconnection" of public telecommunica tions networks with foreign networks is 
carried out through agreements entere d into by the interested parties.22  Should these require 
agreement with a foreign government, the concessionair e must request the Secretariat to enter into the 
appropriate agreement.23 
2.7 Several fundamental technical terms are defined in the FTL.  These are: 
2.8 Telecommunications :  "every broadcast, transmission or  reception of signs, signals, written 
data, images, voice, sound or data of whatever nature  carried out through wires, radio-electricity, optic 
or physical means or any other electromagnetic systems" ; 
2.9 Telecommunications network :  "systems integrated by means of transmission such as channels 
or circuits using frequency bands of the radio-el ectrical spectrum, satellite links, wiring, electric 
transmission networks or any other transmission m eans, as well as when applicable, exchanges, 
switching devices or any other equipment required";  
                                                      
13 See FTL, Article 7. 
14 See FTL, Article 11. 
15 See FTL, Article 12.  Foreign investment in cellula r telephone services may however be greater than 
49 per cent, with the permission of the Commission on Foreign Investment. 
16 See FTL, Article 12. 
17 Also referred to in English language translations of the FTL as "telecommunications service 
marketing companies". 
18 See FTL, Article 52. 
19 See FTL, Article 53. 
20 See FTL, Article 54. 
21 See Mexico's answer to question No. 6(d)  of the Panel of 19 December 2002 (" Mexico has inscribed 
in its schedule that it 'will not issue permits for the establis hment of a commercial agency until the 
corresponding regulations are issued '.  Why has Mexico not issued the regul ations on the es tablishment and 
operation of commercial agencies?").   See also  the Public Telephony Regulations, published in the Federal 
Gazette on 16 December 1996 (Exhibit MEX-29). 
22 See FTL, Article 47, paragraph 2. 
23 See FTL, Article 47, paragraph 4. WT/DS204/R 
Page 4  
 
2.10 Private telecommunications network :  "the telecommunications network used to meet specific 
requirements for telecommunications services of cer tain people not implying commercial exploitation 
of services or capacity of said network";  
2.11 Public telecommunications network :  "the telecommunications network through which 
telecommunications services are commercially exploited.  The network does not include users' 
terminal telecommunications equipment nor te lecommunications networks located beyond the 
terminal connection point".
24 
2. International Long-distance Rules 
2.12 The International Long Distance Rules (" ILD Rules") are issued by the Federal 
Telecommunications Commission (" Comisión Federal de Telecomunicaciones " or "Commission"), an 
agency of the Secretariat of Communications and Transportation.25  They serve "to regulate the 
provision of international long-distance service and est ablish the terms to be included in agreements 
for the interconnection of public telecommun ications networks w ith foreign networks."26  
International long-distance service is defined as the service whereby all international switched traffic 
is carried through long-distance exchanges authorized as international gateways.27 
2.13 Direct interconnection with foreign public te lecommunications networks in order to carry 
international traffic may only be done  by "international gateway operators".28  These are long-distance 
service licensees authorized by the Commission "to operate a switching exchange as an international 
gateway"29, that is, the exchange is "interconnected to  international incoming and outgoing circuits 
authorised by the Commission to carry international traffic".30  Traffic is "switched" when it is 
"carried by means of a temporary connection betw een two or more circuits between two or more 
users, allowing the users the full and exclusiv e use of the connection until it is released."31 
2.14 Each international gateway operator must appl y the same "uniform settlement rate" to every 
long-distance call to or from a given country, regardless of which operator originates or terminates the call.
32  The uniform settlement rate for each country is established, throu gh negotiations with the 
operators of that country, by the long-distance ser vice licensee having the greatest percentage of 
outgoing long-distance market share for that country in the previous six months.33 
2.15 Each international gateway operator must also a pply the principle of "proportionate return".  
Under this principle, incoming  calls (or associated revenues) from a foreign country must be 
distributed among international gateway operator s in proportion to each international gateway 
operator's market share in outgoing  calls to that country.34 
                                                      
24 See FTL, Article 3. 
25 See Rules for the Provision of International Long-Distance Service To Be Applied by the Licensees 
of Public Telecommunications Networks Author ized to Provide this Service (ILD Rules) (Reglas para Prestar el 
Servicio de Larga Distancia Internacional que deberán aplicar los Concesionarios de Redes Públicas de Telecomunicaciones Autorizados para Prestar este Servicio) .  Issued by the Commission;  published in the 
Federal Gazette on 11 December 1996;  en tered into force on  12 December 1996. 
26 See ILD Rule 1. 
27 See ILD Rule 2:XI. 
28 See ILD Rules 3 and 6. 
29 See ILD Rule 2:VII. 
30 See ILD Rule 2:VIII. 
31 See ILD Rule 2:XV 
32 See ILD Rules 2:XII(a) and (b);  and 10. 
33 See ILD Rule 13. 
34 See ILD Rules 2:XII, 10, 13, 16, 17 and 19.  WT/DS204/R 
 Page 5 
 
 
2.16 Private cross-border networks must lease capacity from a long-distance licensee 
(concessionaire).35  Any cross-border traffic carried through de dicated infrastructure that forms part of 
a private network must be originated and terminated within the same private network.36 
C. THE COMPETITION LAWS OF MEXICO  
1. Federal Law of Economic Competition37 
2.17 The Federal Law of Economic Competition (" Ley Federal de Competencia Económica " or 
"FLEC") is intended "to protect the process of comp etition and free market participation, through the 
prevention and elimination of monopolies, monopolistic practices and other restrictions that deter the 
efficient operation of the market for goods and services."38 
2.18 Under the law, the "relevant market " is determined by considering, inter alia , "the 
possibilities of substituting the goods or services in question, with others of domestic or foreign 
origin, bearing technological possibilities, and the extent to which substitutes are available to 
consumers and the time required for such substitution".39  Whether an economic agent has "substantial 
power" in the relevant market is determined, inter alia , on "the share of such agent in the relevant 
market and the possibility to fix prices unilaterally or  to restrict supply in the relevant market, without 
competitive agents being able, presently or potentially, to offset such power".40 
2. Code of Regulations (to Federal Law on Economic Competition)41 
2.19 The Code of Regulations to the FLEC sets out in detail the rules, inter alia,  for the analysis of 
the relevant market and substantial power.  
2.20 For the relevant market analysis, the Code states that the Commission shall "identify the 
goods or services which make up the relevant market, whether produced, marketed or supplied by the 
economic agents, and those that are or may be subs tituted for them, whether domestic or foreign, as 
well as the time required for such substitution to take  place."  The Commission is also to take into 
account "economic and normative restrictions of a local , federal or internationa l nature which prevent 
access to the said substitute goods or services, or wh ich prevent the access of users or consumers to 
alternative sources of supply, or the access of  the suppliers to alternative customers".42  
2.21 With respect to substantial power, the Code re quires the authorities to take into account the 
"degree of positioning of the goods or services in the relevant market";  the "lack of access to imports or the existence of high importation costs";  and the "existence of high cost differentials which could face consumers on turning to other suppliers."
43 
                                                      
35 See ILD Rule 4. 
36 See ILD Rule 4. 
37 See FLEC.  Approved by the Congress on 18 Decem ber 1992, promulgated by the President on 
22 December 1992, published on 24 December 1992, entered into for ce 180 days after publication. 
38 See FLEC , Article 2. 
39 See FLEC, Article 12. 
40 See FLEC, Article 13. 
41 See Code of Regulations to the Federal Law on Economic Competition ("Reglamento de la Ley 
Federal de Competencia Económica "), published in the Official Gazette on 4 March 1998, entered into force on 
5 March 1998 (with the exception of Article 6 which entered into force 6 months from 5 March 1998). 
42 See Code of Regulations to the Federal Law on Economic Competition , Article 9. 
43 See Code of Regulations to the Federal Law on Economic Competition , Article 12. WT/DS204/R 
Page 6  
 
D. M
EXICO 'S COMMITMENTS UNDER THE GENERAL AGREEMENT ON TRADE IN SERVICES 
(GATS) 
2.22 Mexico has undertaken specific commitmen ts for telecommunications services under 
Articles XVI (Market Access), XVII (National Treatment), and Article XVIII (Additional Commitments).  Its additional comm itments consist of undertakings known as the "reference paper".  
These commitments are reproduced in Annex B.  
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS  
3.1 The United States requests the Panel to find that:
44 
(a) Mexico's failure to ensure that Telmex  provides interconnection to United States 
basic telecom suppliers on a cross-border b asis on cost-oriented, reasonable rates, 
terms and conditions is inconsistent with its  obligations under Sections 2.1 and 2.2 of 
the Reference Paper, as inscribed in Mexico's GATS Schedule of Commitments, 
GATS/SC/56/Suppl.2; in particular, that: 
(i) Mexico's Reference Paper obligations apply to the terms and conditions of 
interconnection between Telmex and United States suppliers of basic 
telecommunications services on a cross-border basis; 
(ii) Telmex is a "major supplier" of basic telecommunications services in 
Mexico, as that term is used in Me xico's Reference Paper obligations; 
(iii) Mexico has failed to ensure that Telmex provides interconnection to 
United States suppliers at rates that are " basadas en costos " and terms and 
conditions that are razonables because: 
- Mexico has allowed Telmex to char ge an interconnection rate that 
substantially exceeds cost,  
- Mexico allows Telmex to restrict the supply of scheduled basic 
telecommunications services;  and  
- Mexico prohibits the use of any a lternative to the Telmex negotiated 
interconnection rate through Mexico's ILD rules, specifically Rule 13 along 
with Rules 3, 6, 10, 22 and 23. 
(iv) Mexico's ILD Rules (specifically Rule 13 along with Rules 3, 6, 10, 22 
and 23) fail to ensure that Telmex pr ovides cross-border interconnection in 
accordance with Section 2.2 of the Reference Paper. 
(b) Mexico's failure to maintain measures to  prevent Telmex from engaging in anti-
competitive practices is inconsistent with its obligations under Section 1.1 of the 
Reference Paper;  as inscribed in Mexico's GATS Schedule of Commitments, GATS/SC/56/Suppl.2; and in particular, that Mexico's ILD Rules (specifically Rule 13 along with Rules 3, 6, 10, 22 and 23)  empower Telmex to operate a cartel 
dominated by itself to fix rates for intern ational interconnection and restrict the 
supply of scheduled basic telecommunications services; 
                                                     
 
44 See the United States' first written submission, para graph 297, and the United States' second written 
submission, paragraph 129.  See also  the United States' second oral statement, paragraph 88.  WT/DS204/R 
 Page 7 
 
 
(c) Mexico's failure to ensure United Stat es basic telecom suppliers reasonable and 
non-discriminatory access to, and use of, public telecom networks and services is inconsistent with its obligations under S ections 5(a) and (b) of the GATS Annex on 
Telecommunications;  and in particular, Mexi co failed to ensure that United States 
service suppliers may access and use pub lic telecommunications networks and 
services through: 
(i) interconnection at reasonable terms and conditions for the supply of 
scheduled services by facilities-based operators and commercial agencies; 
and 
(ii) private leased circuits for the supply of  scheduled services by facilities-based 
operators and commercial agencies. 
3.2 The United States also requests that the Panel recommend that Mexico bring its measures into 
conformity with its obligations under the GATS. 
3.3 Mexico requests that the Panel reject all of the claims of the United States, and find that: 
(a) The measures being challenged by the United States are not inconsistent with 
Sections 2.1 and 2.2 of the Reference Paper,  inscribed in Mexico's GATS Schedule of 
Specific Commitments; 
(b) Mexico has not acted inconsistently with its obligations under Section 1.1 of the 
Reference Paper, inscribed in Mexico's GATS Schedule of Specific Commitments;  
and 
(c) The measures being challenged by the United States are not inconsistent with Section 
5 of the GATS Annex on Telecommunications.
45 
IV. MAIN ARGUMENTS OF THE PARTIES 
A. SECTION 2 OF THE REFERENCE PAPER  
4.1 The United States  claims that Mexico's ILD Rules fa il to ensure that Telmex provides 
interconnection to United States basic telecom supplie rs on a cross-border basis with cost-oriented, 
reasonable rates, terms and conditions and that this is  inconsistent with its obl igations under Sections 
2.1 and 2.2 of the Reference Paper, as inscrib ed in Mexico's GATS Schedule of Commitments.46  The 
United States argues that the interconnection obligati ons in Section 2 of the Reference Paper apply:  
(i) as legally binding GATS commitments;  (ii) because of the specific commitments Mexico has undertaken in its GATS Schedule;  and (iii) to the circumstances at issue in this case, namely the 
interconnection between United States service supp liers and Telmex for the purpose of delivering 
their basic telecom services from the United States into Mexico.
47 
4.2 Mexico argues that the claims of the United States must fail because Mexico's Reference 
Paper obligations do not apply to the measures at issu e in this dispute, namely the accounting rates set 
by bilateral agreements between the United Stat es and Mexican basic telecommunications carriers.48  
                                                      
45 See Mexico's first written submission, paragraph 267.  See also  Mexico's first oral statement, 
paragraph 58, Mexico's second written submission, paragraph 107 and Mexico's second oral statement, 
paragraph 124. 
46 See the United States' first written submission, para graph 297, and the United States' second written 
submission, paragraph 129.  See also  the United States' second oral statement, paragraph 88. 
47 See the United States' first written submission, paragraph 44. 
48 See Mexico's first written submission, paragraph 112. WT/DS204/R 
Page 8  
 
In the alternative, Mexico argues, if Section 2 of the Reference Paper is found to apply to the 
accounting rate regime as implemen ted between the United States and Mexico, the United States has 
nevertheless failed to establish a prima facie cas e that the accounting rates negotiated between 
United States and Mexican carriers are not " basadas en costos " ("cost-oriented") and " razonables " 
("reasonable") pursuant to Section 2. 2(b) of Mexico's Reference Paper.
49  Moreover, Mexico argues, 
the United States has failed to establish that the ILD Rules are inconsistent with Section 2.2 of the 
Reference Paper.50 
1. Scope of application of the Reference Paper 
4.3 The United States  argues that Mexico undertook the interconnection obligations of Section 2 
of the Reference Paper as additional binding commitments under Article XVIII of the GATS.  
According to the United States, Mexico inscribed the entire text of the Reference Paper into its 
Schedule as an additional commitment.51  Therefore, the United States argues, pursuant to 
Article XVIII of the GATS, Mexico committed to  the United States (and all other WTO Members) 
that it would abide by the strict terms and conditions  contained in Section 2 of the Reference Paper.  
In particular, the United States argues, Mexico comm itted that it would ensure that its major supplier 
of basic telecom services Telmex provides interconn ection at rates that are based in cost and are 
reasonable.52 
4.4 Mexico  submits that its Reference Paper does not ap ply to the accounting rates set by bilateral 
agreements between United States and Mexican basic telecommunications carriers53 since it governs 
matters relating to domestic regulation.54  Mexico argues that the United States fails to recognize that 
the Reference Paper is a statement of "definitions and principles" that have the objective of guiding 
domestic regulators in dealing with major telecommunications suppliers.55  According to Mexico, the 
Reference Paper was intended to accommodate different political and legal regimes in WTO 
Members, and is sufficiently flexible to accommoda te differences in market structures and regulatory 
philosophies.56  In Mexico's view, this means that the principles and definitions in the Reference 
Paper must be interpreted in the light of the domestic regulatory system of the WTO Member in 
question.57  Mexico considers that in this case, because its domestic regulatory regime distinguishes 
between:  (i) the accounting rate regime applicable to traffic exchange between foreign carriers and 
Mexican concessionaires;  and (ii) the regime that is  applicable to carriers within Mexico's borders, 
the United States' challenge under Secti on 2 of the Reference Paper must fail.58 
4.5 Mexico  notes that Section 2 of the Reference Paper contains a number of requirements as to 
how a major supplier must provide interconnection,  with the goal of promoting competition within 
domestic markets; that is, preventing a major supp lier from using its position to prevent new entrant 
competitors from participating in the domestic mark et.  In contrast, Mexico argues, because carriers 
from different countries that enter into accounting rate arrangements are not competing with each 
other, the requirements of the Reference Paper have no meaning for those arrangements.59 
                                                      
49 See Mexico's first written submission, paragraph 117. 
50 Ibid. 
51 See the United States' first written submission, paragraph 45. 
52 See the United States' first written submission, paragraph 47. 
53 See Mexico's first written submission, paragraph 112. 
54 See Mexico's first written submission, paragraph 152.  See also  Mexico's first oral statement, 
paragraph 25. 
55 See Mexico's first oral st atement, paragraph 48. 
56 See Mexico's first oral st atement, paragraph 49. 
57 Ibid. 
58 See Mexico's first oral st atement, paragraph 50. 
59 See Mexico's first written submission, paragraph 154.  WT/DS204/R 
 Page 9 
 
 
4.6 The United States  contends that there is nothing in th e Reference Paper to suggest that its 
only goal was to promote domestic competition.  In its view, there is no textual basis for concluding 
that the Reference Paper is limited to one mode of  supply of the service, i.e. that which is solely 
within its territory.  Instead, the United States not es, Article I of the GATS states that the Agreement 
covers all measures affecting trade in services, in cluding the cross-border supply of services.  While 
the United States asserts that it is undoubtedly true that the Re ference Paper "governs matters relating 
to domestic regulation", it further submits that this does not mean that foreign service suppliers are 
"outside the scope of application of" the Referenc e Paper, or that the Reference Paper governs only 
matters relating to domestic regulation.60 
4.7 Mexico  argues that the mere fact that Article I of the GATS ascribes a broad application of 
the general obligations of the GATS to all measure s by Members affecting trade in services does not 
mean that Mexico's Reference Paper has a similarly broad application.  Mexico submits that it is an 
"additional commitment" that it inscribed in its Sc hedule pursuant to Article XVIII of the GATS and, 
as such, its terms must be interpreted in accordan ce with the rules of treaty interpretation in 
Articles 31 and 32 of the Vienna Convention on the Law of the Treaties of 1969  ("Vienna 
Convention ").61  According to Mexico, the Model Refere nce Paper, upon which Mexico's Reference 
Paper is based, develops further the principles a nd obligations found in Article VI of the GATS on 
domestic regulation and Article VIII of the GATS on monopolies and exclusive service suppliers, 
both of which focus on activities within the territory  of the Member in question.  Thus, Mexico 
concludes, these Articles deal with matters relating to domestic regulation, an d not "the supply of a 
service from the territory of one Member into the territory of any other Member", which is the focus 
of the United States' claims in this dispute.62 
4.8 The United States  contends that Section 2 applies to this case because United States suppliers 
of basic switched telecom services seek to link with Telmex to connect calls by their users originating 
in the United States to Telmex's users in Mexico .  According to the Unit ed States, Telmex and 
United States basic telecom suppliers are proveedores de redes públicas de telecomunicaciones de 
transporte o de servicios  ("suppliers providing public teleco mmunications transport networks or 
services") ("PTTNS") because they provide basic te lecommunications services, which, pursuant to the 
Decision on Negotiations on Basic Telecommunications  by the WTO Trade Negotiations Committee, 
is synonymous with "telecommunications trans port networks and services"; also, it adds, such 
services are "public" because the Central Product Cl assification (CPC) codes that Mexico used to 
describe its commitments refer to "public" services.  The United States further argues that supply on a 
cross-border basis of basic telecom services betwee n the United States and Mexico requires "linking" 
(conexión ) between United States suppliers (e.g., AT&T ) and Mexican suppliers (e.g., Telmex) in 
order to allow users of the United States supplier to communicate with users of the Mexican supplier 
and to access services provided by the Mexican supplier.63  According to the United States, this is 
because under Mexican law, United States basic tel ecom suppliers may not own telecommunications 
facilities in Mexico and thereby extend their public telecommunicati ons networks from the 
United States into Mexico.  Therefore, the Unite d States argues, when a United States basic telecom 
supplier provides telecommunications services from the territory of the United States into the territory 
of Mexico, it must link its network or a leased line to the network of a Mexican service supplier (such 
as Telmex) and pay that Mexican service supplier to "terminate" (i.e., deliver) the phone call to the 
                                                      
60 See the United States' first oral  statement, paragraph 22.  See also  the United States' answer to 
question No. 7 of the Panel of 19 December 2002 (" Article I of the GATS states that the agreement covers all 
measures affecting trade in services , including the cross border supply of  services.  Mexico claims that the 
Reference Paper applies only to matters relating to domestic regulation within the borders of each WTO Member.  Please explain ."). 
61 See Mexico's answer to question No. 7 of the Pa nel of 19 December 2002.  For question No. 7, see 
footnote 60 of this Report. 
62 See Mexico's second written submission, paragraph 25.  See also  Mexico's answer to question No. 7 
of the Panel of 19 Decembe r 2002. For qu estion No. 7, see footnote 60 of this Report. 
63 See the United States' first written submission, paragraphs 60-64. WT/DS204/R 
Page 10  
 
end-user in Mexico.
64  This conexión , in turn, allows the consumers of the United States basic telecom 
supplier ("users of one supplier") to communicate w ith Telmex's consumers in Mexico ("users of 
another supplier"), as well as the United States service  supplier ("user") to access services provided by 
Telmex ("another supplier"), namely the services invol ved in delivering a call that originated in the 
United States to its final destination in Mexico.65 
4.9 Mexico  argues that the apparently broad technical definition of "interconnection" in 
Section 2.1 of Mexico's Reference Paper66 is not determinative of the scope of application of 
Section 2 as a whole.  In Mexico's view, this defi nition must be interpreted in its context, which 
substantially narrows the scope of application of S ection 2.  Mexico explains that interconnection 
occurs between two entities.  With respect to one en tity, the wording of Section 2.2 restricts the scope 
of Section 2 to interconnection with a "major supplie r".  With respect to both entities, the definition in 
Section 2.1 refers to "suppliers providing public te lecommunications transport networks or services".  
Mexico contends that, although s uppliers in Mexico provide PTTNS in Mexico, i.e. Alestra and 
Avantel, thus enabling both suppliers in an inte rconnection arrangement to  meet this definition, 
United States-based suppliers such as AT&T and Wo rldCom do not provide such services in Mexico.  
Thus, Mexico argues, meaning must be given to the fact that Section 2.1 does not refer to "service 
suppliers of any other Member", a phrase which is  used elsewhere in the GATS and which would 
have made it clear that Section 2 applies to cross- border (i.e., international) interconnection.  Mexico 
also submits that the phrase " respecto de los cuales se cont raigan compromisos específicos " in 
Section 2.1 of Mexico's Reference Paper further narro ws the scope of application of Section 2 to the 
bounds of the market access inscribed in Mexico's Schedule.  Thus, it argues, Section 2 applies only 
to services supplied in Mexico through mode 3 (commercial presence) by concessionaires with 
foreign direct ownership up to 49 per cent.  In ot her words, Mexico concludes, it applies only to 
interconnection within Mexico.67 
4.10 The United States  submits that, if Mexico had meant to limit the applicability of Section 2 to 
interconnection of "some" suppliers with a major s upplier, it would have adopted language to that 
effect.  In the absence of any such limitation,  the United States contends, Section 2 applies to 
interconnection of "all" suppliers with a major supplie r.  For context, the United States refers to the 
definition in Article XXVIII(g) of the GATS, which states that "'service supplier' means any person 
that supplies a service."  According to the United St ates, there is no limitation on whether the service 
supplier is domestic or foreign.68 
2. The scope of "interconnection" within Mexico's Reference Paper 
(a) The concept of interconnection 
4.11 The United States  submits that interconnection consists of the linking of the networks of two 
different suppliers of telecommunications services for the purpose of exchanging traffic.  According 
to the United States, interconnection is the necessary  intermediary step that enables a phone call to 
travel from the network used by the person placing th e call (the "calling party") to the network used 
by the person receiving the call (the "receiving party").69  The United States explains that, because no 
telecom supplier has a worldwide ubiquitous network,  all telecommunications service suppliers rely 
on another service supplier to deliver (or "terminate ") the phone call to the receiving party when the 
receiving party is not on the network of the calling party's supplier.  To do so, it argues, the calling 
                                                      
64 See the United States' first written submission, paragraph 65. 
65 See the United States' first written submission, paragraph 67. 
66 As regards the definition of the term "interconnection", see Section IV.A.2(a) of this Report. 
67 See Mexico's second written submission, paragraphs 27-28.  See also  Mexico's answer to question 
No. 7 of the Panel of 19 December 2002.  For question No. 7, see footnote 60 of this Report. 
68 See the United States' second oral statement, paragraphs 27-28. 
69 See the United States' first written submission, paragraph 39.  WT/DS204/R 
 Page 11 
 
 
party's service supplier must link to the network of the receiving party's service supplier and hand-off 
the call for delivery to the receiving party.  In other words, the United States submits, the calling 
party's service supplier interconnects its network with  that of the receiving party's service supplier to 
enable users of both networks to communicate with each other.70 
4.12 The United States  submits that, whether for the purpose of origination or termination, 
interconnection is generally unders tood as the linking between the networks of different basic telecom 
suppliers for the purpose of allowing users of one supplier to communicate with users of another.  
In support of its view, the United States refers to Section 2.1 of the Reference Paper, which defines 
interconnection as "linking with suppliers providing  public telecommunications transport networks or 
services in order to allow the users of one supplie r to communicate with users of another supplier and 
to access services provided by another supplier".  The United States also notes that in its domestic 
regulation, Mexico defines inte rconnection similarly as "[p]hysica l and logical connection between 
two public telecommunications networ ks, that allows the exchange of  switched public traffic between 
the switching central offices of both networks.  Th e interconnection allows the users of one of the 
networks to interconnect and excha nge public switched traffic with th e users of the other network and 
vice versa, or to use the services provided by the other network."71  
4.13 The United States  also refers to the definition of "interconnection" in the European 
Communities' Interconnection Directive as "the physical and logical linking of telecommunications networks used by the same or a different organiza tion in order to allow the users of one organization 
to communicate with users of the same or anot her organization, or to access services provided by 
another organization."
72  The United States submits that the European Commission has explained that 
"[t]he most basic interconnection service provided is that of call termination  (i.e. delivering a call 
which originates on one network to its  destination on another network)."73 
4.14 In Mexico 's view, the term "interconnection" is a broad concept that can have different 
meanings in different contexts.  Generally, it explains, interconnection rates are charges for physically 
and technically linking two domestic networks for purposes of exchanging traffic.  In some contexts, 
it indicates, interconnection is treated as distinct from commercial arrangements – such as settlement, 
peering, and reciprocal compensation arrangements – that involve charges for use of a network for transport and termination of traffic that originat es on another network.  Mexico contends that, for 
example, United States law makes a clear distinction between interconnection and transport and termination services: interconnection is the physi cal linking of two networks, while transport and 
termination is when one carrier routes traffic ove r the network of another carrier.  According to 
Mexico, the regulation of interconnection rates is a significant issue in domestic markets for telephone 
service where carriers need access to other carriers' networks to provide service in competition with each other.  As a result, countries seeking to encourage domestic competition must have strict requirements for incumbent providers with market po wer.  Mexico claims that these rules generally 
require incumbent carriers to provide all of their competitors interconnection with rates, terms and 
conditions that are reasonable and non-discriminator y.  Mexico argues that interconnection must be 
permitted at any technically feasible point within the carrier's network and at least equal in quality to 
that provided by the incumbent provider to itself or  to its subsidiaries, affiliates, or any other 
                                                     
 
70 See the United States' first written submission, paragraph 40. 
71 See the United States' first written submission, paragraph 41. 
72 The United States refers to Directive 97/33/EC, Interconnection in Telecommunications, Art. 2(1)(a), 
available at http://europa.eu.int/ispo/infosoc/telecompolicy/en/dir97-33en.htm. 
73 The United States refers to  Commission Recommendation on Interconnection in a Liberalised 
Market, Part 1 – Interconnection Pricing , Explanatory Memorandum (January 8, 1998), Sect. 3.1 (emphasis in 
original), available at http:// www.europa.eu.int/ISPO/infosoc/te lecompolicy/en/r3148-en.htm. WT/DS204/R 
Page 12  
 
competitor.  Mexico adds that competitors must  also have a process to resolve disputes with 
incumbent carriers that arise during and after the negotiation process.
74 
4.15 The United States  considers that Mexico's argument that United States law makes a "clear 
distinction" between interconnecti on and call termination is irreleva nt.  It submits that in the 
United States, as in the European Communities, a ke y purpose of the regulation of interconnection is 
to ensure that carriers may terminate calls on other carriers' networks at cost-oriented rates.  The 
United States submits that the FCC (Federal Comm unications Commission) has made clear that "[t]he 
interconnection obligation of Section 251(c)(2) ... allows competing carriers to choose the most 
efficient points at which to exchange traffic with incumbent LECs, thereby lowering the competing 
carriers costs of, among other things, transport and termination of traffic .75  The United States 
explains that United States law defines "transport and termination" separately from interconnection 
because United States local exchange carriers have additional  obligations with respect to the transport 
and termination of calls, including the require ment to establish "reciprocal compensation 
arrangements" for the termination of calls  originated on other local networks.76 77 
(b) The meaning of interconnection within the Reference Paper 
4.16 According to Mexico , the term "interconnection" in S ection 2 of the Reference Paper is 
capable of many meanings including: domestic local interconnection, domestic long-distance 
interconnection and intern ational interconnection.78  However, Mexico contends, when properly 
interpreted, "interconnection" in Section 2 of the Reference Paper does not include arrangements 
under the accounting rate regime.79  In Mexico's view, the term "interconnection" does not encompass 
the accounting rate regime.80  Mexico understands that, in the context of the Reference Paper, 
"interconnection" must be interpreted to refer to  interconnection within a WTO Member's borders, for 
example, interconnection to a local exchange carri er by a domestic long-distance carrier, or by a 
competitive local carrier and the incumbent local carrier.81  Mexico thus submits that the United States 
incorrectly defines the rates for the transporta tion and termination of international calls as 
"interconnection rates".82  
4.17 Mexico  further contends that this interpre tation does not render the Reference Paper 
meaningless in the context of international trade in  services as implied by the EC in its third party 
submission.  Mexico explains that, for example,  where permitted under a WTO Member's Schedule, if 
a foreign company establishes a commercial presence in  that Member's territory, it would have to 
interconnect with other carriers within the domestic network.  Mexico submits that this 
                                                      
74 See Mexico's first written submission, paragraphs 36-38. 
75 The United States refers to the Implementation of the Local Competition Provisions in the 
Telecommunications Act of 1996, 11 FCC Rcd. 15499, paragraph 172 (1996) (emphasis added) (Exhibit US-
55). 
76 The United States refers to the 47 USC. § 251(b)(5) (Exhibit US-56).  Traffic terminated under 
reciprocal compensation arrangements  is subject to the same "forward -looking economic cost-based pricing 
standard" that governs other interconnection services provided by incumbent local carriers.  Implementation of 
the Local Competition Provisions in the Telecommunications Act of 1996, 11 FCC Rcd. 15499, paragraph 1054 
(1996) (Exhibit US-55). 
77 See the United States' answer to question No. 8 of the Panel of 19 December 2002 ("What are the 
main differences and similarities between an accounting rate regime and an interconnection regime from 
commercial, contractual, technical, and regulatory viewpoints? "). 
78 See Mexico's first written submission, paragraph 150. 
79 See Mexico's first written submission, paragraph 151.  See also  Mexico's first oral statement, 
paragraph 26. 
80 See Mexico's first written submission, paragraph 164.   See also  Mexico's first oral statement, 
paragraph 25. 
81 See Mexico's first written submission, paragraph 152. 
82 See Mexico's first written submission, paragraph 21.  WT/DS204/R 
 Page 13 
 
 
interconnection would be governed by the provisions of  the Reference Paper.  Mexico further submits 
that its ILD Rules fully implement those provisions of the Reference Paper vis-à-vis foreign carriers 
with a commercial presence in Mexico, among others, AT&T, WorldCom and Verizon.83 
4.18 The United States  contends that the plain language of  the Reference Paper simply does not 
support Mexico's argument.  According to the Unite d States, the definition of "interconnection" in 
Section 2.1 is not limited to domes tic interconnection, or in other wo rds, interconnection provided to 
commercially present suppliers.  Rather, it argues, it is written broadly to include all means of 
"linking" for the purpose of en abling users to communicate – whether domestic (mode 3) or 
international (mode 1).84  Citing to provisions of Mexico's ILD Rules and Federal 
Telecommunications Law, the United States also argues that even Mexico, in almost all references in 
its internal laws and regulations, refers to the li nking of foreign service suppliers to its international 
port operators as "interconnection".85  
4.19 Mexico submits that the United States ignores ILD Rules 2, 10, 13, 16 and 19 which define 
"settlement rate" and explicitly di stinguish between "settlement rates", which are applicable to 
international traffic, and "interconnection rates, whic h are paid to the local operator that terminates the 
call.86 
4.20 The United States  submits that the distinction Mexico draws between "interconnection rates" 
and "charges for use of a network for transport and termination of traffic that originates on another 
network" is irrelevant.87  In its view, even though interconnection arrangements cover a wide variety 
of different commercial, contr actual and technical situations, all of these arrangements are 
"interconnection" under Section 2.1 of the Reference Paper.88  According to the United States, the 
requirements of Mexico's Reference Paper apply to all interconnection services, particularly call 
termination.  The United States explains that, becau se call termination means allowing calls originated 
on the network of one supplier to be terminated on the network of another supplier, it falls squarely 
within Mexico's definition of "interconnection" in  Section 2.1, which is "linking with suppliers 
providing public telecommunications tran sport networks or services in order to allow the users of one 
supplier to communicate with users of another s upplier and to access services provided by another 
supplier ."89 
(i) Interpretation of the term "interconnection " in its context 
4.21 Mexico  argues that the United States' interpretati on arises from an improper application of the 
general rule of interpretation in Article 31 of the Vienna Convention90 since, in its view, the 
United States simply presents the "ordinar y meaning" of the term "interconnection".91  M e x i c o  
submits that, under Article 31 of the Vienna Convention  it is insufficient to rely solely on the ordinary 
                                                      
83 See Mexico's first oral st atement, paragraph 29. 
84 See the United States' first oral statement, paragraph 20.  See also the United States' second written 
submission, paragraph 41. 
85 See the United States' first oral statement, paragraph 20.  See also the United States' second written 
submission, paragraphs 41-42. 
86 See Mexico's second oral statement paragraph 11. 
87 The United States refers to Mexico's distinction in paragraph 36 of its first written submission ( see 
paragraph 4.14 of this Report).  See the United States' second written submission, paragraph 54. 
88 See the United States' answer to question No. 8 of  the Panel of 19 December 2002.  For question 
No. 8, see footnote 77 of this Report. 
89 See the United States' second written submission, paragraph 54. 
90 See Mexico's second written submission, paragraph 33.   See also  Mexico's answer to question No. 7 
of the Panel of 19 December 2002.  For question No. 7, see footnote 60 of this Report.  
91 See Mexico's first written submission, paragraph 150. See also  Mexico's first oral statement, 
paragraph 27. WT/DS204/R 
Page 14  
 
meaning of a term and that the United States has th erefore failed to take into account the context of 
the term and object and purpose of Mexico's Reference Paper.
92 
4.22 As regards the context, Mexico  submits that, the history of the negotiations on basic 
telecommunications confirms that "interconnection", "accounting rates" and "termination services" were discussed but that agreement was reached only on interconnection.  Accordingly, Mexico 
contends, accounting rates were clearly outside the scope  of what was agreed.  Mexico contends that a 
specific draft text on accounting rates was removed from the negotiating drafts for the Model Reference Paper.
93  For example, Mexico states that the fo llowing bracketed text was included in a 
6 March 1996 provisional negotiating text: 
"[Accounting rate is the rate per traffic unit agreed upon between administrations for 
a given relation, which is used for the establishment of international accounts, as per 
International Telecommunication Union Recommendation D. 150 New System for Accounting in International Telephony.]… 
[7.  Public availability of accounting rates  International accounting rates mainta ined by any supplier of public 
telecommunications transport services with foreign correspondents will be open to 
public review.  Upon request of another Member, and [sic] essential facilities supplier 
will be required to justify why an intern ational accounting rate differs significantly 
from domestic interconnection rates.]" 
But the final version of the Reference Paper did not include any of this text.  Furthermore, Mexico 
submits that accounting rates were consciously excluded  from this text is confirmed by the fact that 
they are "on the table" in the Doha Round of negotiations.
94  
4.23 The United States  responds that Mexico's citation of an  earlier draft of the Reference Paper 
does not support its argument that accounting rat es (or international interconnection rates) were 
intended to be excluded from the definition of "int erconnection."  According to the United States, 
Mexico's argument ignores the rules of treaty interpretation included in the Vienna Convention .  The 
United States submits that whatever provisions we re considered during the drafting process, the Panel 
is charged with interpreting the final version of the Reference Paper.  Mexico's final version includes, 
in Section 2.1, a definition of "interconnection" that broadly covers "linking ... to allow the users of one supplier to communicate with users of anothe r supplier and to access services provided by another 
supplier."
95  
4.24 The United States  also argues that the requirement in that earlier draft of the Reference Paper 
that "a dominant supplier explain the reasons why an  international accounting rate differs significantly 
from domestic interconnection rates" at the request of a Member indicates that the negotiators considered accounting rates and dom estic interconnection rates to be charges for two types of 
interconnection.  According to the United States,  the former is a charge for international 
interconnection and the latter is a charge for domes tic interconnection and that  the deletion of this 
provision merely demonstrates that Members did not undertake those specific  obligations.  The 
United States further argues that it does not aff ect the remaining Reference Paper obligations, 
                                                     
 
92 See Mexico's first written submission, paragraph 151.  See also  Mexico's first oral statement, 
paragraph 27 
93 See Mexico's first written submission, paragraphs 167-169.   See also  Mexico's first oral statement, 
paragraphs 21-22, Mexico's second written submission, pa ragraph 37 and Mexico's answer to question No. 7 of 
the Panel of 19 December 2 002.  For question No. 7, see footnote 60 of this Report. 
94 See Mexico's first written submission, paragraphs 167-170. 
95 See the United States' second written submission, paragraph 47.  WT/DS204/R 
 Page 15 
 
 
including the obligation of Mexico to ensure that  its major supplier Telmex charges interconnection 
rates, including rates for international inte rconnection, that are basadas en costos.96 
4.25 Mexico  submits that the following factors contradict  the position of the United States.  First, 
the fact that the negotiating drafts explicitl y distinguished between "accounting rates" and 
"interconnection/interconnection rates" confirms that the negotiators treated the accounting rate 
regime separately from inte rconnection.  Second, the fact that th ere were transparency requirements in 
draft Sections 2.2(b) and 2.3 negated the need fo r a transparency requirement in square-bracketed 
Section 7 if, as the United States' argues, "interc onnection" subsumed the accounting rate regime.  
[This fact, t]hat an explicit transparency requireme nt was included in Section 7 confirms that the 
negotiators treated the accounting ra te regime separately and distinc tly from "interconnection". Third, 
the United States is one of the few WTO Members that  make their accounting rates transparent.  If the 
interconnection transparency provisions in the Reference Papers of WTO Members applied to 
accounting rates, all WTO Members with such commi tments would make their rates transparent.  
Fourth, the fact that no other provisions in the negotiating drafts, the Model Reference Paper and Mexico's Reference Paper could be interpreted to include an obligation analogous to that contained in 
draft Section 7, so it could not have been rem oved from the final version of the Reference Paper 
because its substance was subsumed by other Sections of it.  Rather, its subject matter and substance 
was unique and the negotiators were unable to agree upon its inclusion.
97  
4.26 Mexico further argues that the Understanding on Accounting Rates ("the Understanding"), 
which was outlined in the February 15, 1997 Re port of the Chairman of the Group on Basic 
Telecommunications98, confirms that WTO Members did not intend that accounting rates would be 
subject to the obligations of the GATS, including the Reference Paper.99  According to Mexico, the 
Understanding resulted from a discussion of whethe r Members should take Article II of the GATS 
(most-favoured nation) exemptions in respect of the application of differentia l accounting rates, after 
several countries did take such exemptions.  Article II of the GATS, Mexico explains, applies to "any 
measure covered by [the GATS]".  The main deba te was whether accounting rates negotiated between 
private entities should be considered "measures" within the meaning of Article XXVII of the 
GATS.100  Mexico argues that, given this uncertainty , as well as the fact that the accounting rate 
regime was the subject of ongoing and active study in  the ITU, the Members agreed that accounting 
rates would be treated as a subject for further negot iation, as part of the "b uilt-in" negotiations under 
the GATS.  In the meantime, it explains, the Understanding imposes a moratorium on dispute settlement action relating to accounting rates in the WTO.
101  In addition, Mexico argues, although the 
Understanding originally arose in the context of Article II exemptions, WTO Members did not 
contemplate that any other obligation of the Refe rence Paper or of the A nnex on Telecommunications 
would apply to accounting rates.  According to Mexi co, it only agreed to inscribe the Reference Paper 
as an additional commitment in its Schedule because  of the Understanding that accounting rates were 
not covered by it.102 
4.27 As regards the Understanding, the United States  submits that it is concerned with Article II 
of the GATS, concerning most-favoured-nation treat ment, rather than the Reference Paper.  The 
United States points out that it did not address the issue of cost-orientation or reasonable terms.103  
                                                      
96 See the United States' second written submission, paragraph 48. 
97 See Mexico's comments on the United States' answer to question No. 18 of the Panel of 14 March 
2003,  paragraphs 29-33. 
98 The Panel understands that  the document referred to by Mexico is the Report of the Group on Basic 
Telecommunications (S/GBT/4, February 15, 1997). 
99 See Mexico's first written submission, paragraph 171. 
100 See Mexico's first written submission, paragraph 172. 
101 See Mexico's first written submission, paragraph 173. 
102 See Mexico's first written submission, paragraph 176. 
103 See the United States' answer to question No. 16 (a) of the Panel of 19 December 2002 (" At the close 
of the negotiations on basic telecommunications, an understanding on accounting rates was reached (S/GBT/4, WT/DS204/R 
Page 16  
 
The United States further argues that Mexico's  claim based on the Chairman's Note (the 
Understanding)
104 is unsound for at least two reasons.105  First, the Chairman's Note is at best a non-
binding statement that did not find its way into th e GATS, the Reference Paper or Mexico's Schedule 
itself.106  In support of this, the United States cites to a report by the Group on Basic 
Telecommunications107, which states that "[t]he Chairman stressed that this was merely an 
understanding, which could not and was not intended to have binding legal force.  It therefore did not 
take away from Members the rights they have under the Dispute Settlement Understanding . . ."108 
Second, the United States argues that the report it self made clear that the Chairman's Note "was 
merely intended to give members who had not taken MFN exemptions on accounting rates some degree of reassurance." Even in that limited cont ext, the Note has no application outside of GATS 
Article II - the MFN article.
109  The United States argues that this is clear from the Note's text: the 
reference in the Chairman's Note to "such" accounti ng rates is a reference back to the introductory 
paragraph of the Note, which speaks to "differe ntial" accounting rates and the MFN exemptions 
actually taken by the five countries mentioned in  the Note.  However, it argues, because the 
United States has not brought a claim under Article II of the GATS, the Note is irrelevant to this 
dispute.110  The United States further indicates that th e fact that accounting rates are subject to 
discussions in the ITU has no relevance to whether they are covered by Mexico's WTO commitments;  
nor is it relevant that WTO Members are consider ing further commitments on accounting rates in the 
current services negotiations.111 
(ii) Subsequent practice 
4.28 Mexico submits that the rule of interpretation in paragraph 3(b) of Article 31 of the Vienna 
Convention , which provides that "[t]here  should be taken into account toge ther with the context… any 
subsequent practice  in the application of the treaty which establishes the agreement of the parties 
regarding its  interpretation", is also relevant to this disput e.  According to Mexico, all fifty-five of the 
WTO Members (including the Unite d States) that inscribed the interconnection commitments in 
Section 2.2(b) of the Model Reference Paper ma intain the traditional joint service accounting rate 
regime.  Thus, Mexico argues, WTO Members, incl uding the United States, did not intend Section 2 
                                                                                                                                                                     
paragraph 7). If Section 2 of the Reference Paper requiring 'cost-oriented' rates and 'reasonable' terms applies 
to accounting rates, why would there have been a need for the Group on Ba sic Telecommunications to arrive at 
a separate understanding on accounting rates? "). 
104 The Panel takes note here that, from the context of the United States' submission, the document 
referred to by the United States should be the Report of the Group on Basic Telecommunications (S/GBT/4, 
15 February 1997). 
105 See the United States' first oral  statement, paragraph 25.  See also the United States' second written 
submission, paragraph 49. 
106 See the United States' first oral  statement, paragraph 26.   See also the United States' second written 
submission, paragraph 50. 
107 The Panel takes note here that, from the context of the United States' submission, the document 
referred to by the United States should be the Report of Meeting of 15 February 1997 (S/GBT/M/9, 10 March 
1997). 
108 See the United States' first oral  statement, paragraph 26.   See also the United States' second written 
submission, paragraph 50. 
109 See the United States' first oral  statement, paragraph 27.  See also the United States' second written 
submission, paragraph 51. 
110 See the United States' first oral  statement, paragraph 27.  See also the United States' second written 
submission, paragraph 51.   See also the United States' answer to question No. 16(b) of the Panel of 
19 December 2002 (" What is the significance of the statement in the understanding that 'the accounting rate 
system ... by its nature involves differential rates'? "). 
111 See the United States' first oral statement, paragraph 24.   See also the United States' answer to 
question No. 12 of the Panel of 19 December 2002 (" Which ITU instruments, if any, are relevant for the 
interpretation of Section 2 of the Reference Paper?  Why? ").  WT/DS204/R 
 Page 17 
 
 
of their Reference Papers to apply to intern ational interconnection under the traditional accounting 
rate regime.112   
4.29 Mexico  further submits that, its interpretation is s upported by the practice of the United States 
and other WTO members.  According to Me xico, fifty-five WTO Members included the 
interconnection commitments of Section 2.2(b) of the Model Reference Paper in their individually 
inscribed Reference Papers and all of them, including  the United States, maintain the traditional joint 
service accounting rate regime.113  
4.30 Mexico  submits that the Benchmarks Order is relevant to this dispute in several respects.  
United States law, including the Benchmarks Order, is consistent with Me xico's position that WTO 
Members did not believe that the Fourth Protocol  or the Annex on Telecommunications applied to 
accounting rate arrangements.  In this regard, the FCC established and applied the benchmarks for the 
countries that inscribed the Reference Paper as well as those that did not, and did not purport to set 
benchmarks for the former at the same level as th e domestic interconnection rates in those countries.  
Also, although there are United States carriers that  qualify as "major suppliers" under the definition 
advocated by the United States, the Benchmarks Or der does not require any United States carriers to 
base settlement rates on their own costs – to the co ntrary, the United States Benchmarks Order and 
International Settlements Policy effectively prohib it United States carriers from adopting settlement 
rates based on their own costs.  In the event that th e Panel were to conclude that the Section 2.2 of the 
Reference Paper applies to accounting rate arrangeme nts and that Telmex is a major supplier within 
the meaning of the Reference Paper in the cont ext of the negotiation of rates for bilateral 
United States-Mexican traffic exchanges, it woul d need to establish a methodology to determine 
whether the rates were "cost-based, reasonable and ec onomically feasible."  Initially, the United States 
seemed to suggest that the requirement for "cost- based" rates required an evaluation of the specific 
costs of Telmex.  However, Mexico introduced ev idence that it is accepted practice – both in the 
international and domestic contexts – to use "benchma rks" to determine whether rates are acceptable.  
The United States had also now agreed with Me xico that Members "can reasonably rely on 
competitive market dynamics to yield cost-based settle ment rates."  This meant that Mexico was not 
obliged by the Reference Paper to make calculations  of the specific costs of Mexican carriers in 
providing transport and transmission services for incomi ng international calls.  It also meant that the 
Panel reasonably could refer to the available benc hmarks for accounting rates – those of the ITU 
Working Group 3 and the FCC – to determine whethe r the rates are "cost-based" and "reasonable."  
Mexico submits that, under the standards of both the ITU and the FCC, Mexico's settlement rates 
clearly are cost-based and reasonable.114 
4.31 The United States  argues that Mexico errs in suggesti ng that the FCC's "Benchmarks Order", 
which requires United States carriers to negotiate lo wer accounting rates, is inconsistent with the 
United States claim in this proceeding that Mexi co's WTO Reference Paper obligations apply to 
settlement rates.  The United States submits that the FCC recognized in the Benchmarks Order that 
"[t]he WTO Basic Telecom Agreement reached on 15 February 1997 will ha ve profound effects on 
the accounting rate system," since 69 countries had ag reed to open their markets, and 59 countries had 
agreed to implement the Reference Paper.  The Unit ed States points out that the FCC went on to state 
that "the WTO Basic Telecom Agreement will fundam entally change the nature of relations between 
international telecommunications carriers," and exp ected that its benchmarks would be "moot for 
competitive countries and carriers."  However, the FCC emphasized that "[n]onetheles, the 
benchmarks are necessary because many countri es still will not be open to competition."  Thus, 
according to the United States, the FCC was partic ularly concerned by the failure to achieve 
                                                      
112 See Mexico's second written submission, paragraph 32.   See also  Mexico's answer to question No. 7 
of the Panel of 19 December 2002.  For question No. 7, see footnote 60 of this Report. 
113 See Mexico's second written submission, paragraphs 14 and 32. 
114 See Mexico's comments on the United States' answer to  question No. 19(b) of the Panel of 14 March 
2003, paragraph 41. WT/DS204/R 
Page 18  
 
meaningful accounting rate reform through the IT U, the 189-country membership of which includes 
the large majority of countries for which benchmark rates were established by the Benchmarks Order.  
The countries opening their markets and accepting the Reference Paper comprised less than 25 per 
cent of the nearly 250 routes for which the FCC est ablished benchmark accounting rates.  According 
to the United States, the Benchmarks Or der was necessary to fill this gap.
115 
4.32 The United States  also argues that Mexico is incorr ect in its argument that its accounting 
rates are consistent with ITU recommendations on be nchmark rates.  The United States submits that 
neither ITU recommendations nor ITU benchmarks ar e relevant to Mexico's WTO obligations.  In 
addition, according to the United States Recommenda tion ITU D.140, included by Mexico as Exhibit 
MEX-11, expressly states, at paragraph E.3.2, that the benchmark levels discussed therein should not 
be "taken as cost-orientated levels."116 
4.33 Finally, according to Mexico , the United States has argued that its own ILD rules are 
consistent with Section 1 of the Reference Paper because it only applies the ru les to foreign carriers 
that have market power.  As shown above, however, the FCC continues to apply the rules to Mexico 
notwithstanding that, according to the FCC's ow n standards, there is "meaningful economic 
competition" within Mexico.  Mexico has also su bmitted documents from the FCC establishing that it 
has waived its International Settlements Policy only fo r 15 countries, and that it deems virtually every 
major foreign carrier to have market power.  Acco rding to Mexico, the conduct of the United States in 
maintaining uniform settlement rate, symmetrical rate and proportionate return requirements is 
evidence that the United States either does not belie ve that the Reference Paper applies to accounting 
rate arrangements or that such market cont rol practices are consistent with Section 1.117 
(iii) Supplementary means of interpretation 
4.34 According to Mexico,  even if the United States' interpre tation could be considered a proper 
application of Article 31 of the Vienna Convention , it "leads to a result which is manifestly absurd 
[and] unreasonable", thus requiring recourse to the negotiating history and to the circumstances surrounding the conclusion of the treaty.
118  Mexico explains that, under Article 32 of the Vienna 
Convention , recourse may be had to supplementary means of interpretation, including the preparatory 
work of the treaty and the circumstances of its c onclusion, in order to confirm the meaning resulting 
from the application of Article 31 or to determin e the meaning when the in terpretation according to 
Article 31 leaves the meaning ambiguous.119   
aa) Negotiating history  
4.35 According to Mexico , a review of the negotiating history of the Reference Paper upon which 
Mexico's version is based confirms that the term  "interconnection" in the Reference Paper was not 
intended by the WTO Members to enco mpass the accounting rate regime.120  See the parties 
arguments on this matter in Section IV.A.2(b)(i) above. 
bb) The international scope and bilatera l nature of the accounting rate regime  
4.36 Mexico  further argues that the United States' e xpansive interpretation of Section 2 of 
Mexico's Reference Paper fails to take into account the international scope and bilateral nature of the 
                                                      
115 See The United States' second written submission, footnote 42 to paragraph 59. 
116 See the United States' second written submission, paragraph 66. 
117 See Mexico's comments on the United States' answer to  question No. 19(b) of the Panel of 14 March 
2003, paragraph 41. 
118 See Mexico's second written submission, paragraph 33.  See also  Mexico's answer to question No. 7 
of the Panel of 19 December 2002.  For question No. 7, see footnote 60 of this Report. 
119 See Mexico's first written submission, paragraph 165. 
120 See Mexico's first written submission, paragraph 166.  WT/DS204/R 
 Page 19 
 
 
accounting rate regime.  In terms of the internatio nal scope, it argues, only fifty-five of the one 
hundred and forty-four WTO Members inscribed a vers ion of the Reference Paper in their schedules 
that included the "cost-oriented" requirement in pa ragraph 2.2(b) of the Model Reference Paper while 
the remaining eighty-nine WTO Members are under no such obligation.  Mexico contends that, under 
the United States' interpretation of Section 2.2 of Mexico's Reference Paper, those fifty-five WTO 
Members would be required to implement terminat ion rates on their own national carriers using the 
strict "cost-oriented" standard posed by the Un ited States, while nothing would oblige carriers from 
the remaining eighty-nine WTO Members and from non-Members to do the same.  In its view, the 
result would be that the net outflows of payments from countries subject to Section 2.2(b) disciplines 
to countries not subject to Section 2.2(b) disciplin es would rise astronomically, forcing carriers of the 
former countries to choose between bankruptcy and re fusing to pay.  It further indicates that the 
accounting rate regime would collapse completely without a viable replacement, possibly even 
leading to interruptions in international traffic.121  
4.37 Also, Mexico  claims, the bilateral nature of accountin g rate regimes could lead to a further 
absurdity.  Mexico explains that  the financial pressures caused by one of the parties in a bilateral 
accounting rate arrangement dropping its settlement rate to a very low level could pressure the other 
party to reduce its rates in order to sustain the economic viability of the arrangement.  In such a 
situation, the other party would effectively be comp elled to bring itself closer into compliance with a 
WTO standard or requirement that it did not inscrib e in its Schedule.  Thus, it argues, even if that 
WTO Member had been careful in its Schedule to ensure that its accounting rate regime was not 
disciplined, it would be indirectly subject to disciplines inscribed in the schedules of other WTO 
Members with whom it had accounting rate arrangements in place.  In Mexico's view, this 
circumstance would undermine the overall balance of concessions that formed the basis for the 
agreement.122 
4.38 The United States  submits that neither Mexico nor any other Member violates the Reference 
Paper by continuing to use "accounting rates", or violates the ITU's International Telecommunications 
Regulation by subjecting "accounting rates" to the ob ligations in the Reference Paper.  According to 
the United States, Members that have scheduled th e Reference Paper may continue to allow their 
carriers to charge "accounting rates" to terminate tr affic.  Those Members must simply ensure that 
those "accounting rates", when used by major supp liers, are consistent with the requirements of 
Section 2.2(b).123 
4.39 The United States  further submits that Mexico need not worry that Telmex will be faced with 
"net outflows of payments."  In fact, it argues,  ISR or other types of interconnection arrangements 
have, in large part, already superseded the acc ounting rage regime among most of the 55 countries 
Mexico lists.124  Also, the United States argues that price reductions made by private parties in 
response to competitive pressure are not "compelled".125  In the view of the United States, Mexico's 
"doomsday" scenario is an invention.  The United St ates contends that Mexico's assertion that Telmex 
would be forced into bankruptcy if it is forced to observe the "strict 'cost-oriented' standard posed by 
the United States" is not accurate.  Rather, the Un ited States submits that Telmex's current rates 
substantially exceed the prices charged for the ve ry same elements of interconnection furnished 
domestically.  Thus, it argues, cutting Telmex's rates for the interconnection of international traffic to 
the level of prices charged for interconnection furnished domestically would not lead to the 
"doomsday" scenario posed in Mexico's submissi ons, since under Mexican law these rates already 
                                                      
121 See Mexico's second written submission, paragraph 34.  See also  Mexico's answer to question No. 7 
of the Panel of 19 December 2002.  For question No. 7, see footnote 60 of this Report. 
122 See Mexico's second written submission, paragraph 35.  See also  Mexico's answer to question No. 7 
of the Panel of 19 December 2002.  For question No. 7, see footnote 60 of this Report.  
123 See the United States' second oral statement, paragraph 33. 
124 See the United States' second oral statement, paragraph 37. 
125 See the United States' second oral statement, paragraph 38. WT/DS204/R 
Page 20  
 
cover costs, including a reasonable rate of return.
126  Moreover, the United States notes, 
approximately 80 per cent of Mexico 's international traffic is exchanged with the United States.  Thus, 
it submits, if Telmex were to charge cost-based inte rconnection rates to terminate this traffic, given 
the large imbalance in traffic fl ows between the United States and Mexico, the result will not even 
approach a situation in which Telmex makes "net outflows of payments".127 
cc) Circumstances of the conclusion of the treaty: Mexican legislation at the time of 
negotiations  
4.40 As to the circumstances of the conclusion of the treaty, Mexico  turns to Mexican legislation 
and regulation in effect at the time of the basic telecommunications negotiatio ns.  This includes the 
ILD Rules.  Those rules recognize that the term "interconnection" can be used to describe the 
technical aspects of interconnection in all contexts.  However, they also explicitly distinguish between 
"settlement rates" for international incoming calls  and "interconnection charges" for interconnection 
within Mexico's borders.  Accordingly, Mexico submits that, under these laws, at the time of the 
conclusion of the negotiations, interconnection disci plines such as those in Section 2.2 of Mexico's 
Reference Paper applied only to domestic interconn ection and points out that this is still the case 
today.128  As support, Mexico cites to the Appellate Body Report in EC – Computer Equipment129, 
where the Appellate Body found that, inter alia , a Member's legislation on customs classification at 
the time of conclusion of the negotiations was part  of the circumstances of the conclusion of the 
treaty. 130 
4.41 The United States  argues that, while it is true that in EC – Computer Equipment , the 
Appellate Body found that a Member's legislati on at the time of negotiations can be used as a 
supplementary  means of interpretation, Mexico considers that its ILD rules should override  the 
definition of "interconnection" used in Section 2.1.131  The United States submits that Mexico ignores 
the Appellate Body's cautionary note that "[t]he purpose of treaty interpretation is to establish the 
common  intention of the parties to the treaty.  To est ablish this intention, the prior practice of only one 
of the parties may be relevant, but it is clearly of more limited value than the practice of all parties."  
The Unites States submits that, according to the Appella te Body, if the prior practice of a party is not 
consistent, it is not relevant at all as a supplemen tary means of interpretation.  The Unites States 
further submits that, while Mexico focuses on one particular provision of Mexican law which it 
contends distinguishes between "interconnection" a nd "settlement rates", it has demonstrated that 
elsewhere in Mexican law, the linking of forei gn service suppliers to Mexican international port 
operators is referred to as "interc onnection", and that throughout its laws and regulations, Mexico uses 
the term "interconnection agreement" to d escribe agreements with foreign operators.132 
(c) Whether the Reference Paper obligati ons extend to accounting rate regimes 
4.42 The United States  claims that the interconnection obligations in Section 2 of the Reference 
Paper apply to the interconnection between Unite d States service suppliers and Telmex for the 
purpose of delivering their basic telecom ser vices from the United States into Mexico.133  Because 
                                                      
126 See the United States' second oral statement, paragraph 35. 
127 See the United States' second oral statement, paragraph 36. 
128 See Mexico's second written submission, paragraph 38.   See also  Mexico's answer to question No. 7 
of the Panel of 19 December 2002.  For question No. 7, see footnote 60 of this Report. 
129 Mexico refers to paragraphs 92-94 of the Appellate Body Report, EC – Computer Equipment . 
130 See Mexico's second written submission, paragraph 38.   See also  Mexico's answer to question No. 7 
of the Panel of 19 December 2002.  For question No. 7, see footnote 60 of this Report. 
131 See the United States' second oral statement, paragraph 44. 
132 See the United States' second oral statement, paragraph 45. 
133 See the United States' first written submission, paragraph 44.  WT/DS204/R 
 Page 21 
 
 
accounting rates are interconnection rates between ca rriers located in two different countries, the 
Reference Paper obligations apply to accounting rate regimes as well.134  
4.43 Mexico , on the contrary, argues that the substantiv e provisions in Section 2.2 of Mexico's 
Reference Paper can be given full meaning only in the domestic context and therefore cannot be given 
full meaning in the context of arrangements under the accounting rate regime.135 
(i) Concept of "accounting rate " 
4.44 Mexico  argues that the "accounting rate regime" re fers to bilateral relationships between 
carriers in two countries whereby they agree to  compensate one another for transporting and 
terminating traffic that originates in the other country.136  Based on the definition by the ITU, Mexico 
submits that the "accounting rate" is the price two carriers of different countries negotiate for carrying 
one minute of international telephone service between their countries.  Mexico explains that each 
carrier's portion of the accounting rate is called the "settlement rate."  Settlement payments between 
carriers result when traffic flowing in one directi on exceeds traffic flowing in the opposite direction.  
To calculate its settlement payment, a carrier multip lies the number of minutes its outbound traffic to 
a particular foreign carrier exceeds its inbound traffi c from that foreign carrier  and then multiplies this 
amount by the settlement rate charged by the other carrier (also known as the "accounting rate 
division share").  Thus, it concludes, a carrier that originates more traffic than it terminates will make 
periodic settlement payments to its  foreign correspondent carrier.137 
4.45 The United States  notes that Mexico provides no citation for the definition of accounting rate 
regime, and no definition – nor any reference to acc ounting rates – is included in Mexico's Schedule 
Thus, the United States submits, Mexico's de finition confirms that accounting rates are 
interconnection rates between carriers located in two different countries, and fails to show that these 
terms are mutually exclusive.  The United States al so points out that Mexico's ILD rules make no 
reference to accounting rates, and refer throu ghout to "interconnection" and "international 
interconnection" agreements.138 
4.46 The United States submits that Mexico's Schedule – including its Reference Paper 
commitments – must be interpreted on its own terms,  according to the rules of interpretation included 
in the Vienna Convention .  According to the United States, ITU instruments, developed for a different 
organization, of different members, for different pur poses, are not relevant for the interpretation of the 
requirements of Section 2 of the Reference Paper.   The United States notes that Mexico cites no 
binding ITU resolutions that would be violated by Mexico's compliance with its WTO obligations as claimed by the United States and indeed there ar e none.  According to the United States, Mexico 
principally uses ITU documents to support its argu ment that the accounting rate regime is not 
included within the scope of the Reference Paper.  The United States claims that Mexico neglects to 
discuss the definition of "interconnection" included in Section 2.1 of its Reference Paper, or to present 
any justification for its view that the arrange ments in question do not meet that unambiguous 
definition.
139  Furthermore, the United States argues th at the definition of "accounting rates" 
maintained by the ITU is in fact consistent w ith the definition of interconnection included in 
Section 2.1 of the Reference Paper.  According to the United States, the ITU has recognized that 
competition has changed the ways that intern ational carriers compensate one another for 
                                                      
134 See the United States' second written submission, paragraph 45. 
135 See Mexico's second written submission, paragraphs 29-30.   See also  Mexico's answer to question 
No. 7 of the Panel of 19 December 2002.  For question No. 7, see footnote 60 of this Report.  
136 See Mexico's first written submission, paragraph 24. 
137 See Mexico's first written submission, paragraphs 28-29. 
138 See the United States' second written submission, paragraph 45.   See also  the United States answer 
to question No. 8 of the Panel of 19  December 2002.  For question No. 8, see footnote 77 of this Report. 
139 See the United States' answer to ques tion No. 12 of the Panel of 19 December 2002.  For question 
No. 12, see footnote 111 of this Report. WT/DS204/R 
Page 22  
 
interconnection, and that accounting rates are one , and only one, of the alternative charging 
mechanisms that are available fo r use between carriers in different countries to interconnect their 
networks.
140 
4.47 Mexico  acknowledges that the ITU instruments do not assist in the determination of when 
"tarifas basadas en costos " or "cost oriented rates" are reas onable and economically feasible within 
the meaning of Section 2.2(b) of Mexico's Refere nce Paper.  However, Mexico argues, they could 
have some relevance in the interpre tation of Section 2.2(b) of Mexico 's Reference Paper in the context 
of interconnection rates within Mexico's borders .  In addition, Mexico notes, International 
Telecommunications Regulation ("ITR") 6.2.1, whic h requires that accounting rates be established by 
mutual agreement among administrations or recogni zed private operating agencies is an important 
element of the context in which the negotiations on basic telecommunications took place.  Mexico 
submits that ITR 6.2.1 requires that accounting rat es be determined in negotiations between carriers.  
As a result, accounting rates that a carrier negotiat es for carrying traffic to different countries typically 
vary widely.  Mexico further submits that other recommendations of ITU working committees, such 
as E.110, also help to illustrate the context in which certain terms are used within the 
telecommunications sector, which in turn may assist the Panel in determining the "ordinary meaning" 
of terms in the Reference Paper.141 
4.48 Mexico  also notes that the ITRs are supplemented by a series of D-series Recommendations 
produced by ITU-T Study Group 3.  Recommendation D.140 states that "accounting rates for international telephone services should be cost-orienta ted and should take into account relevant cost 
trends." At the same time, this same Recommenda tion recognizes that that "the costs incurred in 
providing telecommunication services, although based on the same components, may have a different 
impact depending on the country's development status."
142  Thus, Mexico contends, as a whole, the 
Recommendation encouraged a transition to lower acc ounting rates, but did not mandate a particular 
methodology for calculating costs nor contemplate that countries would be able to immediately establish cost-oriented rates.
143 
(ii) Domestic interconnection v. accounting rates 
4.49 Comparing the two, Mexico  argues that domestic interconnection is more complicated than 
accounting rate regimes.144  Mexico explains that, for exampl e: international interconnection cannot 
occur at "any  technically feasible point"; by their nature accounting rates are per se discriminatory and 
cannot comply with the non-discrimination require ment; and domestic regulatory bodies do not have 
legal authority to resolve disputes and impose solutions  over carriers that are outside of their territorial 
jurisdiction.  Mexico also points to a Note by the Secretariat on Additional Commitments under 
Article XVIII of the GATS, which states that the pr imary purpose of the interconnection provisions of 
the Model Reference Paper (Section 2) is to saf eguard competitive situations where a dominant 
supplier can exert control over its competitors .  Thus, Mexico argues, even assuming arguendo  that 
Telmex is a dominant supplier, it does not "exert control over its competitors" with respect to the 
supply of a service from the territory of one Member (i.e., the United States) into the territory of any 
other Member (i.e., Mexico) because Telmex simply  does not compete with United States suppliers 
for the supply of such services.145 
                                                      
140 See the United States' second written submission, paragraph 58. 
141 See Mexico's first written submission, paragraphs 30-31.  See also Mexico's answer to question 
No. 12 of the Panel of 19 December 2002.  For question No. 12, see footnote 111 of this Report. 
142 See Mexico's first written submission, paragraph 32. 
143 Ibid. 
144 See Mexico's first written submission, paragraph 39. 
145 See Mexico's second written submission, paragraphs 29-30.   See also  Mexico's answer to question 
No. 7 of the Panel of 19 December 2002.  For question No. 7, see footnote 60 of this Report.  WT/DS204/R 
 Page 23 
 
 
4.50 The United States  argues that, under the definition included in Section 2.1 of Mexico's 
Reference Paper, the "linking" accomplished via th e accounting rate regime is just one form of 
"interconnection."  As a result, there is no element of an "accounting rate regime" that cannot also be 
an element of an "interconnection regime."  Any commercial, contractual, technical or regulatory 
differences between various types of interconn ection arrangements, including accounting rate 
arrangements, fall under the broad de finition included in Section 2.1.146 
4.51 In response to a question by the Panel, the parties commented on the possible differences 
between domestic interconnection and accounting ra te regimes from a commercial, contractual, 
technical and regulatory point of view.147 
aa) Differences from a commercial point of view  
4.52 Mexico  argues that domestic interconnection and accounting rate regimes are different from a 
commercial viewpoint.  According to Mexico, a na tional carrier entering into an accounting rate 
arrangement with a national carrier of another natio n is not in competition with that carrier, because 
the two carriers cannot compete for each other's cu stomers.  Moreover, it argues, under the accounting 
rate regime, carriers from different countries must co me to a mutual agreement on their relationship; 
there is no supra-national authority that can dictate terms or rates to both parties simultaneously.  On 
the other hand, Mexico indicates, the commercial cont ext of domestic interconnection regimes is quite 
different.  In the sphere of domestic interconnection, the main focus is on how new entrant 
("competitive") carriers gain access to the establishe d networks of incumbent carriers, so as to 
compete with the incumbents for their customers.  Mexico explains that, for example, a new entrant 
providing a local telephone service generally will not start out with a network that reaches all of the 
potential customers in the region; it therefore must interconnect with the incu mbent carrier to ensure 
its customers can be connected with all of the incumbent's customers.  There is little economic 
incentive for the incumbent carrier to allow its competitors to inte rconnect, since the competitor will 
be trying to sell the same services to those customer s as the incumbent.  But if the new entrant cannot 
interconnect, Mexico submits, it will be unabl e to provide a fully competitive service.148  
4.53 Mexico submits that domestic interconnection arrangements vary depending upon the 
location as well as type of interconnection, and also involve technical and operational issues.149  In 
addition, unlike with the accounting regime whereb y a relationship with only one carrier in the 
destination country enables termination througho ut that country, domestic  interconnection requires 
relationships with potentially numerous different carriers.150  Mexico explains that this is because to 
ensure a local carrier's customers can reach all cu stomers in the market, a carrier must interconnect 
with all other local carriers in the market.  Simila rly, it argues, a domestic long-distance carrier (or 
inter-city or interexchange carrier) must interconnect  with local carriers throughout a country in order 
to be able to reach all end-user customers.  Because a long-distance carrier depends exclusively upon 
local carriers for access to customers, whereas the lo cal carrier has no similar need for access to the 
long-distance carrier, the local carrier  has the incentive and ability to set interconnection rates as high 
                                                      
146 See the United States' answer to question No. 17 of the Panel of 14 March 2003 (" In considering the 
commercial, contractual, technical, and regulatory d ifferences between an accounting rate regime and an 
interconnection regime, which you described in your responses to our questions following the First Panel 
Meeting, could you please identify those elements in ea ch regime that can never be elements of the other 
regime? "). 
147 See Mexico's answer to question No. 8 of the Pane l of 19 December 2002.  For question No. 8, see 
footnote 77 of this Report. 
148 Ibid. 
149 See Mexico's first written submission, paragraph 39. 
150 See Mexico's first written submission, paragraph 40.   See also  Mexico's answer to question No. 8 of 
the Panel of 19 December 2 002.  For question No. 8, see footnote 77 of this Report. WT/DS204/R 
Page 24  
 
as possible.
151  Thus, Mexico concludes, regulators again pl ay an important role in setting the terms, 
conditions, and rates for inte rconnection between domestic long-distance and local carriers.152  In 
conclusion, Mexico submits, the accounting rate regi me by its nature must be cooperative, whereas 
domestic interconnection involves fierce competition that must be regulated.153  
4.54 The United States considers that, from a commercial viewpoint, interconnection is a key 
wholesale input in supplying a basic telecommunica tions service because it allows suppliers to 
complete phone calls where the person placing th e call uses a different network from the person 
receiving the call.  Because no telecommunications s upplier has a worldwide, ubiquitous network, all 
telecommunications suppliers must interconnect with  other telecommunications suppliers to complete 
phone calls to receiving parties that use different networks.  Similarly, it argues, telecommunications 
suppliers without their own local networks also must interconnect with other telecommunications 
suppliers to originate calls.  The United States su bmits that all interconnection, including accounting 
rate arrangements between carriers in different co untries, performs this key commercial function of 
allowing the completion of calls between the networ ks of different suppliers.  The definition of 
interconnection set forth in Section 2.1 of the Refe rence Paper includes all such "linking" between the 
networks of different suppliers.154 
4.55 The United States  further submits that Mexico wrongly seeks to imply that the regulation of 
interconnection rates is necessary only where interc onnecting suppliers compete with each other.  
Mexico goes on to acknowledge that interconnection is  also an important concern in domestic markets 
where the interconnecting carriers do not compete with each other, su ch as where "a domestic long-
distance carrier (or inter-city or interexchange carrier) must interconnect with local carriers 
throughout a country in order to be able to reach a ll end-user customers. "  In these circumstances, it 
argues, the domestic long-distance carrier must interconnect with local carriers for both call termination and call origination.  The United States subm its that Mexico furt her acknowledges that 
the regulation of interconnection rates is necess ary in such circumstances, not because the 
interconnecting carriers are targeting the same cust omers, but because "the local carrier has the 
incentive and ability to set interconnection rates as high as possible."  For the same reasons, it 
submits, the regulation of inte rconnection rates is necessary for the cross-border supply of 
international basic telecommunications services,  which are also dependent on interconnection 
arrangements for call termination with suppliers  that have "the incentive and ability to set 
interconnection rates as high as possible."
 155 
bb) Differences from a contractual point of view  
4.56 In response to a question by the Panel,  Mexico  lists the major provisions of the standard 
domestic interconnection agreement in comparison w ith accounting rate agreements.  According to 
Mexico, most of the provisions of one agreement are either not applicable or can never be a provision 
in the other agreement.156  For example, Mexico pointed to an accounting rate agreement that 
provided for dispute settlement thr ough international commercial arb itration, while a US domestic 
interconnection agreement provided for dispute settlem ent in the courts, before a state public utility 
commission, or before the Federal Communications Commission.  Mexico also highlighted that the 
                                                      
151 See Mexico's first written submission, paragraph 41.   See also  Mexico's answer to question No. 8 of 
the Panel of 19 December 2 002.  For question No. 8, see footnote 77 of this Report. 
152 See Mexico's first written submission, paragraph 41. 
153 See Mexico's answer to question No. 8 of the Pane l of 19 December 2002.  For question No. 8, see 
footnote 77 of this Report.  
154 See the United States' answer to question No. 8 of the Panel of 19 December 2002.  For question 
No. 8, see footnote 77 of this Report. 
155 Ibid. 
156 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002.   For question No. 8, see 
footnote 77 of this Report;  see also Mexico's answer to question No. 17 of the Panel of 14 March 2003.  For 
question No. 17, see footnote 146 of this Report.   WT/DS204/R 
 Page 25 
 
 
domestic interconnection agreement contained many  provisions not included in accounting rate 
agreements, such as with respect to audits, indemn ification, insurance, discontinuation of service, 
intellectual property, directory and operator assi stance, access to unbundled network elements, access 
to poles, ducts, conduits, and rights-of-way, access to  databases needed to provide 911 emergency call 
service, and a provision that each party reserves the right to institute an appropriate proceeding with 
the appropriate federal or state governmental body of appropriate jurisdiction regarding the prices 
charges for services by the incumbent carrier.157 
4.57 The United States  points out that, from a contractual viewpoint, interconnection 
arrangements between suppliers in the same or  different countries, including accounting rate 
arrangements between suppliers in different countries,  may include a wide variety of rates, terms and 
conditions concerning such matters as specific servic es covered by the agreement, the rates applicable 
to specific services, payment schedules, procedur es for dispute resolution, time duration of the 
agreement, restrictions on assignments of rights, an d various network technical considerations.  The 
United States explains that interconnection arrange ments may provide for one-way or two-way traffic 
flows, with the same or different rates applying in each direction, and two-way traffic flow.  
Interconnection arrangements may also provide fo r "net" payment arrangements under which the two 
carriers set off their interconnect payments with one carrier remitting the balance to the other carrier.   
4.58 The United States indicates that, under a traditional accounting rate regime, an agreed 
accounting rate is divided in half a nd applied to traffic flows in both directions.  However, it argues, 
Mexico's ILD rules governing "interconnection agre ements with foreign operators" (Rule 23) do not 
restrict the compensation methods that may be negotiated by the "concession holder who holds the 
largest outgoing long-distance market share" (Rule 13).  Notably, the rates that Telmex currently 
charges United States suppliers differ significan tly from the "accounting rate revenue division 
procedure" described by the informal note submitted  by the ITU to the Council on Trade in Services 
("a net settlement payment is made on the basis of excess traffic minutes, multiplied by half the accounting rate").  The United States explains th at United States suppliers are currently charged 
different rates for each of three rate zones in Mexico.  Additiona lly, under that arrangement, another 
rate applies to Mexico-United States traffic.  Furthermore, the United States submits, negotiated 
interconnection rates, including accounting rates be tween suppliers in different countries, are 
normally established by the interconnecting suppliers .  Mexico's ILD Rule 13 requirement that only 
the concession holder with the largest market share ma y negotiate with foreign operators rates that are 
then binding on its competitors does not reflect a ny traditional accounting rate  regime and, to the 
knowledge of the United States, is not requi red by any Member other than Mexico.
158 
cc) Differences from a t echnical point of view  
4.59 Mexico  argues that domestic interconnection and accounting rate regimes are different from a 
technical viewpoint.  Mexico submits that Sect ion 2.2 of the Reference Paper requires that 
interconnection be ensured at "any technically feasi ble point" in the major supplier's network.  In 
contrast, under the accounting rate regime intern ational carriers connect at a border or some 
international mid-way point that is decided privatel y between the carriers, who have a mutual interest 
in cooperating with each other to complete interna tional calls.  In Mexico's opinion, unless a country 
permits foreign carriers to establish their own fac ilities within its territory – which Mexico has not, 
                                                      
157 See Mexico's answer to question No. 8 of the Panel of 19 December 2202.  For question No. 8 see 
footnote 77; s ee also  Mexico's answer to question No. 17 of the Panel of 14 March 2003.  For question No. 17 
see footnote 146 of this Report. 
158 See the United States' answer to question No. 8 of the Panel of 19 December 2002.  For question 
No. 8, see footnote 77 of this Report. WT/DS204/R 
Page 26  
 
and for which it has a limitation in its Schedule – fo reign carriers must always connect at the border, 
not at any technically feasible point.
159  
4.60 According to Mexico , each specific international relationship has its individual technical 
complexities.  Nations that use ANSI standards a nd interconnect with those that use CEPT standards 
must carry out conversions of speeds and protocols for coding of voice channels or of signalling of 
channels, among other things.  Th ese conversions require an agreement between the parties on the 
installation of standard translator equipment, whic h can be in the country of origin, the country of 
destination, or even in an intermediate country.  No authority regulates the required translations, and 
neither company has any obligatio n to comply with the other's requirements in any manner.  
Furthermore, conditions can vary from interconnecti on to interconnection.  National interconnection 
arrangements, in contrast, are ge nerally homogeneous, and the techni cal aspects of all agreements 
entered into with one local company are virtua lly identical.  Mexico also notes that domestic 
interconnections are carried out between two carriers, and if they in a particular case require a third 
party for interconnection, in general terms it is tr ansparent; the company that  interconnects is always 
responsible for the whole network, whether it is ow ned or leased, up to the point of interconnection 
with the local operator.  In contrast, in internationa l relationships, the infrastructure is shared up to an 
intermediate point, and the concept known as HMIU, or "half-miu," applies, a term not commonly 
used in the domestic interconnection lexicon.  In  the case of border interconnections, the HMIU is 
limited to a virtual point or to a very short fi ber optic segment; nevertheless, a point of mutual 
responsibility between the parties continues to exis t.  Mexico further submits that the special 
complexities of international interconnection are re flected in ITU-T Recommendation E.110, and the 
recommendation to concentrate international traffic in  "a few international exchanges" highlights that 
the concept of interconnection "at any technically f easible point" is not applicable to international 
interconnection.160 
4.61 The United States  considers that, from a technical  viewpoint, interconnection, by definition, 
involves the "linking" of networks of different suppliers, and the technical characteristics of the 
networks of different suppliers vary.  Consequently, it argues, there may be technical differences 
between interconnection arrangeme nts depending on the technologies used by the interconnecting 
supplier networks, or on whether th e interconnection arrangement is between two fixed line carriers; 
between a fixed line and a wireless  carrier; between local and long-d istance carriers; or between two 
local carriers.  The United States submits that, for all interconnection arrangements, including interconnection arrangements involving cross-border s uppliers, technical issues are generally resolved 
through the use of protocols and standards and thro ugh joint coordination and planning.  Also, to the 
extent that interconnection at a particular point in the network of the major supplier is not "technically 
feasible", Section 2.2 of the Reference Paper does not apply.
 161 
4.62 The United States  considers that since United States carriers interconnect their networks with 
the network of Telmex at the border, the border is clearly a "technically feasible point" of 
interconnection under Section 2.2.  In its view, that Mexico prohibits interconnection at other 
technically feasible points does not change th e nature of the activity encompassed by 
interconnection.162  The United States also observes th at the international interconnection 
arrangements are plainly interconn ection under Section 2.1 of the Re ference Paper, and also are 
similar to the "meet-point interconnection arrangement s" that incumbent local exchange carriers in the 
                                                      
159 See Mexico's first written submission, paragraph 155. 
160 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002.   For question No. 8, see 
footnote 77 of this Report. 
161 See the United States' answer to question No. 8 of the Panel of 19 December 2002.  For question 
No. 8, see footnote 77 of this Report. 
162 See the United States' first oral statement, paragraph 29.  WT/DS204/R 
 Page 27 
 
 
United States are required to provide to new entr ants.  Thus, Mexico can not exclude the accounting 
rate regime from interc onnection on this ground.163 
4.63 The United States  contends that Mexico's attempt to ex clude the accounting rate regime from 
interconnection on the grounds that "international ca rriers connect at a border or some international 
mid-way point" is unfounded.  In its view, such "li nking" of networks is pl ainly interconnection under 
Section 2.1 of the Reference Pa per, and also is similar to the "meet-point interconnection 
arrangements" that incumbent local exchange carrier s in the United States are required to provide to 
new entrants.  The United States considers that m eet-point arrangements are arrangements by which 
each telecommunications carrier builds and maintains its network to a meet point.  The FCC found in 
1996 that meet-point arrangements for interconnec tion between carrier facilities, also known as "mid-
span meets", were commonly used between nei ghbouring LECs (local exchange carriers) for the 
mutual exchange of traffic.164 
dd) Differences from a regulatory point of view  
4.64 Mexico  argues that domestic interconnection and accounting rate regimes are different from a 
regulatory viewpoint.  According to Mexico, in the domestic interconnection context, countries 
seeking to encourage domestic competition must ha ve strict requirements for incumbent providers 
with market power.  These rules generally require incumbent carriers to provide all of their competitors interconnection with rates, term s and conditions that are reasonable and non-
discriminatory.
 165  In this regard, Section 2.2(a) provides that interconnection must be provided under 
"non-discriminatory terms, conditions, and rates."  In  contrast, there is no expectation that a carrier 
offer the same accounting rate agreement to fore ign carriers from different countries; indeed, there 
was specifically no agreement in the GATS negotia tions to require that accounting rates be non-
discriminatory.166  Interconnection must be permitted at an y technically feasible point within the 
carrier's network and at least equal in quality to th at provided by the incumbent provider to itself or to 
its subsidiaries, affiliates, or any other competitor.167  Mexico notes that Section 2.2(a) also provides 
that a major supplier must provide interconnection "of a quality no less favourable than that provided 
for its own like services or for like services of non-aff iliated service suppliers or  for its subsidiaries or 
other affiliates."  In its view, issues of comparable  quality arise only when there is concern that an 
incumbent carrier could provide inferior quality facilities to carriers competing with it.  This issue does not arise in the context of the accounting rate  regime, where the traffic is handed off at the 
border to a national long-distance carrier that h as no interest in impeding calls or providing low 
quality service, but rather is responsible for all of th e facilities within its country used to complete the 
call.
168   
4.65 Mexico  submits that Section 2.2(b) of the Refere nce Paper provides that interconnection must 
be provided in a "timely fashion".  In its view, this issue does not arise in the context of the 
accounting rate regime, where national carriers have no incentive to block access; to the contrary, international calls can be comple ted only if the carriers from the two countries act in cooperation, and 
the carriers are compensated for completing the call.
169  Mexico further submits that Section 2.2(b) 
also provides that interconnection tariffs must be "sufficiently unbundled so that the supplier need not 
pay for network components or facilities that it does not require for the service to be provided." In 
                                                      
163 See the United States' second written submission, paragraph 44. 
164 See the United States' answer to question No. 8 of the Panel of 19 December 2002.  For question 
No. 8, see footnote 77 of this Report. 
165 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002.   For question No. 8, see 
footnote 77 of this Report.  
166 See Mexico's first written submission, paragraph 156. 
167 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002.   For question No. 8, see 
footnote 77 of this Report. 
168 See Mexico's first written submission, paragraph 157. 
169 See Mexico's first written submission, paragraph 158. WT/DS204/R 
Page 28  
 
contrast, it argues, unbundling does not arise in the context of the accounting rate regime because 
once a carrier hands traffic off at a border, the te rminating carrier is completely responsible for 
ensuring that the call reaches its final destination.
170   
4.66 Mexico notes that Section 2.2(c) of the Reference Paper provides that a major supplier shall 
provide interconnection upon request "at points in a ddition to the network te rmination points offered 
to the majority of users, subject to charges that reflect the cost of construction of necessary additional 
facilities."171  Mexico points out that, under the accounting rate regime in effect between Mexico and 
the United States, however, the decision of whethe r to construct new gatewa ys for connecting with 
international carriers is left solely to the discreti on of the carriers, and each carrier bears it own costs 
because neither has facilities within the other country.172  Mexico argues that Section 2.3 provides that 
procedures applicable for interconn ection negotiations must be made  publicly available.  Because 
negotiation of accounting rate agreemen ts is done privately, this requirement has no application to the 
accounting rate regime.173  Mexico also contends that Section 2.4 provides that a major supplier must 
make publicly available its interconn ection agreements or a reference interconnection offer.  There is, 
however, no expectation that accounting rates be made public.174 
4.67 Mexico recalls that Section 2.5 requires that countries have an independent domestic 
regulatory body to resolve disputes regarding appropriate terms, c onditions and rates for 
interconnection.175  Mexico points out that competitors must  have a process to resolve disputes with 
incumbent carriers that arise during and after th e negotiation process.  Because both parties to the 
interconnection agreement are established under the laws of one country, dispute settlement 
mechanisms can be established giving a governme ntal regulator the authority to impose terms, 
conditions and rates on both parties.   In the context of accounting rate agreements, in contrast, 
governments have different regulator y goals and more limited power. 176  For example, a domestic 
regulatory body can have the authority to resolv e disputes and impose solutions only over two carriers 
that are within its rate-setting jurisdiction.  Mexi co submits that a domestic regulatory agency cannot 
require a foreign carrier to accept its determination of  an appropriate accounting rate; and, in any case, 
the foreign carrier would always be free to ignore the determination. 177  As reflected in requirements 
such as those for uniform settlement rates (a dopted by both the United States and Mexico), 
proportionate return (adopted by both the United St ates and Mexico), and symmetrical rates (adopted 
by the United States but not Mexico), government s generally seek to:  (i) avoid allowing accounting 
rate arrangements to undermine dome stic competition;  and (ii) bol ster the negotiating position of 
their national carriers vis-à-vis foreign carriers.  At the same time, Mexico argues, because a 
government of one country lacks jurisdiction over fo reign carriers, neither rates nor other terms and 
conditions can be enforced by that government.  A government can require th at its national carriers 
seek approval of accounting rate arrangements and in  that manner try to impose various conditions, 
but its authority is circumscribed.178  
4.68 The United States submits that, from a regulatory viewpoint, interconnection arrangements, 
including accounting rate arrangements, may be subject to different regulatory requirements to 
address different commercial, contractual and technical  situations.  The United States submits that any 
such regulatory differences, however, do not alte r the status of all of these arrangements as 
                                                      
170 See Mexico's first written submission, paragraph 159. 
171 See Mexico's first written submission, paragraph 160. 
172 Ibid. 
173 See Mexico's first written submission, paragraph 161. 
174 See Mexico's first written submission, paragraph 162. 
175 See Mexico's first written submission, paragraph 163. 
176 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002.   For question No. 8, see 
footnote 77 of this Report.  
177 See Mexico's first written submission, paragraph 163. 
178 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002.   For question No. 8, see 
footnote 77 of this Report.   WT/DS204/R 
 Page 29 
 
 
"interconnection" under Secti on 2.1 of the Reference Paper.179  The fact that some of the requirements 
of Section 2 may not apply to interconnection provi ded to cross-border suppliers does not mean that 
other requirements of Section 2 are equally inapplicable.180  As stated by the European Communities, 
"from a regulatory point of view, accounting ra tes are just one form of interconnection." 181  T h e  
United States further submits that Mexico is wrong in  implying that the regulation of interconnection 
rates is necessary only where interconnecting supplie rs compete with each other.  The United States 
points out that Mexico also acknowledges that inte rconnection is an importa nt concern in domestic 
markets where the interconnecting carriers do not comp ete with each other, such as where "a domestic 
long-distance carrier (or inter-city or interexchange  carrier) must interconnect with local carriers 
throughout a country in order to be able to reach all end-user customers".  The United States further 
notes that Mexico also acknowledges that the regulati on of interconnection rates is necessary in such 
circumstances, not because the interconnecting carrier s are targeting the same customers, but because 
"the local carrier has the incentive and ability to set interconnection rates as high as possible."  The 
United States argues that, for the same reasons, the regulation of interconnection rates is necessary for 
the cross-border supply of international basic tel ecommunications services, which are also dependent 
on interconnection arrangements for call termination with suppliers that have "the incentive and 
ability to set interconnection rates as high as possible."182 
4.69 The United States  further submits that Mexico is also  wrong to contend that a major supplier 
"has no interest in impeding calls or providing in ferior quality service" to cross-border suppliers 
because these suppliers are not competitors.  In fact, major suppliers are direct competitors with cross-
border suppliers that originate services in-country  through home-country di rect and similar call 
reversal services.  Moreover, a major supplier h as an incentive to impose a competitive disadvantage 
on a foreign cross-border supplier if an affiliate of  the major supplier competes with the cross-border 
supplier – as many such affiliates were expected to do following a successful outcome of the basic 
telecommunications negotiations. 183  The United States also notes that the requirements of non-
discrimination and unbundling are equally relevant to  the interconnection of international traffic as 
they are to the interconnection of domestic traffic.184 
3. Specific Commitments of Mexico 
4.70 The United States  claims that Section 2.1 of Mexico's  Reference Paper defines the scope of 
Mexico's interconnection obligations.  Section 2.1 stat es that "[t]his section applies, on the basis of the 
specific commitments undertaken, to linking with  suppliers providing public telecommunications 
transport networks or services in order to allow the users of one supplier to communicate with users of 
another supplier and to access services provided by  another supplier".  In this regard, the 
United States claims that, Mexico's obligations un der Section 2 of the Reference Paper apply to the 
interconnection between Telmex and United States suppliers of basic telecom services on a cross-
border basis because such interconnection:  (i) i nvolves the specific market access;  and national 
treatment commitments that Mexico undertook in its  Schedule for basic telecommunications services;  
and (ii) links suppliers of public  telecom networks and services (a  United States supplier of basic 
                                                      
179 See the United States' answer to question No. 8 of the Panel of 19 December 2002.  For question 
No. 8, see footnote 77 of this Report. 
180 See the United States' first oral statement, paragraph 29.  See also the United States' second written 
submission, paragraph 57.   See also  the United States' answer to question No. 7 of the Panel of 19 December 
2002.  For question No. 7, see footnote 60 of this Report.  
181 See the United States' answer to question No. 8 of the Panel of 19 December 2002.  For question 
No. 8, see footnote 77 of this Report.  
182 See the United States' second written submission, paragraph 52. 
183 See the United States' answer to question No. 8 of the Panel of 19 December 2002.  For question 
No. 8, see footnote 77 of this Report.  See also  the United States' first oral statement, paragraph 30.  See also the 
United States' second written submission, paragraph 53. 
184 See the United States' first oral  statement, paragraph 29.   See also the United States' second written 
submission, paragraph 57. WT/DS204/R 
Page 30  
 
telecom services and Telmex) to enable users of th e United States supplier to communicate with users 
of Telmex and to access Telmex's services.
185 
4.71 Mexico  submits that a proper interpretation of th e provisions of Mexico's Reference Paper 
and Schedule demonstrates that Secti on 2 of Mexico's Reference Paper does not apply to the terms 
and conditions of interconnecti on between United States suppliers  of basic telecommunications 
services and Telmex, that is, to "international" interconnection.186 
(a) Definition of the service and mode of supply  
(i) Definition of services 
4.72 Mexico  submits that the services at issue are basic telecommunication services and not 
"telephone calls" or any other cu stomer-supplied information or da ta (e.g., voice or facsimile).  
Mexico argues that, the services at issue are the servi ces related to the transportation or transmission 
of such data.  In Mexico 's view, it is the "public  telecommunications infrastructure" that permits the 
supply of such services.  In support of its argument, Mexico cites to the CPC  definitions of "voice 
telephony" (found in CPC codes 75211 and 75212), a nd "circuit-switched data transmission services" 
(CPC 7523). 187   
4.73 Mexico  deems it significant that "communications " are listed in Section 7 along with 
"transport" and "storage" services.  Mexico contends th at its view is substantiated by the fact that no 
Member imposes restrictions on the number of incoming or outgoing calls, whereas many of them impose restrictions on services relating to the calls.  Mexico also notes the sp ecific wording used to 
describe the modes for trade in services highlights this difference.  Mode 1 covers cross-border "supply" of a service.  Thus, Mexico argues, it ca nnot reasonably be established that United States 
carriers "supply" telephone calls;  what they supply is  the service that transports their customers' 
telephone calls.
188 
4.74 The United States  argues that Mexico's argument should be rejected because Mexico ignores 
the text of the CPC codes it inscribed.  According to  the United States, the CPC codes states that the 
services subject to Mexico's market access commitmen ts are not simply the "transmission or transport 
of customer-supplied information".  Contrary to Mexico's argument, the United States submits, the 
nature of the service and its cross-border character is not affected by the fact that the Mexican 
concessionaire assumes responsibility for the traffic at the border.  This "hand off" is expressly 
contemplated in CPC 75212, which provides that th e customer has access to both "the suppliers' and 
                                                      
185 See the United States' first written submission, paragraph 48. 
186 See Mexico's second written submission, paragraph 22. 
187 See Mexico's second written submission, paragraphs 64-65.   See also  Mexico's answer to question 
No. 3(a) of the Panel of 19 December 2002 (" The cross-border supply of telecommunications services is defined 
as the supply of a service 'from the territory of one Member into the territory of any other Member.'  Mexico 
states that a foreign supplier of facilities-based teleco mmunications services can only supply these services 
cross-border, if that supplier is also permitted to supply facilities-based serv ices in Mexico (par a 234). (a) Does 
Mexico consider that cross-border suppl y of basic telecommunications by a foreign supplier can take place only 
if that supplier terminates its cross-border services on  the facilities of the concessionaire owned or controlled 
by that same supplier?  Does Mexico therefore cons ider that an international telecommunications service 
terminated on facilities of any other concessionaire ca nnot be considered a service supplied through mode 1? "). 
188 See Mexico's answer to question No. 1 of the Panel of 14 March 2003 (" Why do you consider that 
the service being scheduled is the transport of the calls instead of the calls themselves?  Please relate to the 
standard definitions in the Central Product Classification (CPC) ").  WT/DS204/R 
 Page 31 
 
 
connecting carriers' entire telephone  network".  Thus, it concludes, the CPC code specifically 
contemplates the "joint provision" of voice services.189 
4.75 According to the United States , the CPC codes make clear that the services covered by 
Mexico's market access commitments include, under CPC 75212, "switching and transmission 
services necessary to establish and maintain communications between local calling areas." 
Establishing and maintaining comm unications requires active coordi nation between a supplier on each 
side of  the border, and is not two discrete services provided by different companies.  For example, the United States explains, in order to complete a call,  AT&T's switch must communicate with Telmex's 
switch, which is located within Mexico, not on th e border.  Similarly, CPC 75212 states that the 
scheduled service "provides the cust omers with access to the suppliers' and connecting carrier's entire 
telephone network." According to the United Stat es, what a "customer" purchases from a United 
States supplier is a "communication" – a telephone call – from its point of origin in the United States 
to its point of termination in Mexico.  In othe r words, the United States submits, the service includes 
the entirety of a telephone call.  Moreover, CP C 75212 covers "services necessary to establish and 
maintain communications between local calling area s." This includes communications between a local 
calling area in the United States and a local calling area in Mexico.
190 
4.76 Mexico  concludes that, the relevant trade in service s, or the "supply of a service", at issue in 
this dispute, is the production, marketing, or sale of transmission or transport  services of customer-
supplied information or data.  Mexico notes that cr oss-border supply occurs when a service supplier is 
not present within the territory of the Member wh ere the service is delivered or consumed, but it 
supplies the relevant services across the border.  Th erefore, Mexico argues, cross-border supply under 
mode 1 in the GATS requires that the service  at issue cross a border.191  
4.77 Accordingly, Mexico  argues, in order to determine whet her the market access commitments 
inscribed in Mexico's Schedule allow the cross-bor der supply of public tel ecommunications transport 
services, the Panel must determine whether Mexico's commitments permit public transmission or transport services provided by United States supp liers to cross the border into Mexico.
192 
4.78 Mexico  submits that what the United States fails to mention is that the joint provision of 
telephone services typically involves more than one "s witching and transmission" service supplier.  In 
Mexico's view, this is confirmed by the "hand-off"  occurring at the border, as clearly evidenced by the 
accounting rate transaction, which has major implicati ons in terms of the modes of supply under the 
GATS.  Indeed, where a Member's Schedule requir es services to be provided jointly by a foreign 
supplier and a locally established supplier, there can  be no cross-border trade within the meaning of 
GATS Article I:2(a).193 
4.79 According to Mexico , this legal reasoning likewise applies to cross-border transport of other 
items.  Mexico submits that, where a "hand-off" occu rs at the border to a se rvice supplier established 
in the destination country, there can be no cross- border trade in the transport of the services involved 
into the destination country.  In the case of water, Mexico explains, if – at the border – a different 
supplier provides the pipeline transport service into the destination country, then the transport service 
supplier in the originating country cannot be said to provide cross-border service "from the territory" 
                                                      
189 See the United States' second oral statement, paragraph 17.  See also  the United States' comments on 
Mexico's answer to question No. 21 of  the Panel of 14 March 2003, paragraphs 1 and 5. 
190 See the United States' second oral statement, paragraphs 18-20. 
191 See Mexico's second written submission, paragraphs 65-67.   See also  the Mexico's answer to 
question No. 3(a) of the Panel of 19 December 2002.  For question No. 3(a), see footnote 187 of this Report.   
See also Mexico's second oral statement, paragraph 27. 
192 See Mexico's second written submission, paragraph 68.   See  also Mexico's second oral statement, 
paragraph 27. 
193 See Mexico's answer to question No. 1 of the Panel of 14 March 2003.  For question No. 1, see 
footnote 188 of this Report. WT/DS204/R 
Page 32  
 
of the originating country "into the territory" of th e destination country.  Mexico further submits that 
the above interpretation is not only legally but also  "logically" sound.  According to Mexico, one of 
the important elements in the ability to supply cro ss-border services is that the foreign service supplier 
does not have to involve suppliers in the destin ation country in order to provide the services in 
question.  This is impossible in the case of hand- off at the border and the joint provision of services.
194 
4.80 The United States  argues that, second, the cross-border supply of a service does not require 
that the service supplier operate on both sides of the border. The United States submits that 
Article I:2(a) of GATS defines the cross-border s upply of a service as the supply of a service from the 
territory of one Member into the territory of any other Member.  The United States argues that it is the 
service that crosses the border, not the supplier.  According to the United States, accepting Mexico's 
argument would mean that the provision of basic telecommunications services on a cross-border basis 
would only be possible if a service supplier al so operated on a commercial presence basis.  The 
United States submits that the result would be to render meaningless Mexico's mode 1 commitments in the basic telecommunications sector.  Since Un ited States and Mexican basic telecommunications 
suppliers currently interconnect at the border, accep ting Mexico's argument would also mean that the 
supply of basic telecommunications services does not fit into any of the modes of supply under 
GATS.  The United States submits that such an interp retation would be contrary to the nature of basic 
telecommunications services.  That basic telecommunications services can be, and indeed are, supplied on a cross-border basis is confirmed by the undi sputed fact that billions of calls (i.e., signals) 
are actually transmitted between the United States and Mexico annually.
195 
4.81 Mexico  submits that at the core of the United St ates' argument that United States suppliers 
actually provide basic telecommunications services on a cross-border basis is the erroneous 
proposition that the "telephone calls" are the services of United States suppliers that move across the 
border.  According to Mexico, the flaw in the Un ited States' reasoning becomes obvious when it is 
applied to other transport services.  For example,  Mexico explains, in the case of mail, the service 
consists of the pick-up, transport and delivery of lette rs.  Mexico submits that the fact that millions of 
letters cross the border between two countries does not necessarily mean that postal services providers 
in country A supply their services from its territory into  the territory of country B.  In order for cross-
border trade in services to occur, it is the trans port and delivery services of a supplier established in 
country A, not merely the letters, that must cros s the border.  There will not be any cross-border 
supply to the extent that the supplier established in country A provides its transport services only in its 
home country's territory, and delivers the letter at  a border point, where it is picked-up by another 
supplier, which operates in country B,  and arrange for the transport of th e letter to its final destination.  
This is an example of the joint provision of a ser vice by two suppliers.  In no sense can this joint 
provision of a service by two suppliers on either side of the border be described as the cross-border supply of transport services by the supplier established in country A into the territory of country B.  
Similarly, the fact that billions of minutes of calls (i.e., signals) are transmitted between the 
United States and Mexico annually does not demons trate that United States basic telecommunications 
service suppliers provide their transport and transmission services on a cross-border basis into Mexico.  The relevant question is whether United St ates suppliers can transport and transmit signals 
from the United States into Mexico.  The cross- border supply of basic telecommunications services 
will be possible only to the extent that calls orig inating in a foreign country are transported and 
transmitted by the foreign supplier across Mexico's border to the recipient.  In the case of basic 
telecommunications, this requires a transport and transmission network that transcends national 
borders.
196 
                                                      
194 See Mexico's answer to question No. 1 of the Panel of 14 March 2003.  For question No. 1, see 
footnote 188 of this Report. 
195 See the United States' second written submission, paragraph 29. 
196 See Mexico's second oral stat ement, paragraphs 27-30.  WT/DS204/R 
 Page 33 
 
 
4.82 According to Mexico , the United States has not established that such cross-border supply of 
basic telecommunications services is at issue in this dispute.  As a matter of law, it cannot make this 
demonstration because the transport and transmissi on services supplied by United States suppliers are 
not provided across the border, but merely to the bor der.  At that point, traffic is handed off to a 
Mexican concessionaire, which receives and carries th e calls to the recipient, that is, supplies 
telecommunications transport services into and w ithin Mexico.  Therefore, Mexico argues, the 
United States is mistaken when it states that "the  way in which United States suppliers complete calls 
into Mexico is by routing through the facilities of an  enterprise that has a con cession".  The fact is that 
United States suppliers do not "complete calls" and,  hence, do not supply transport and transmission 
services across the border into and within Mexico.197 
4.83 Mexico  also notes that, under the United States' interpretation, its suppliers are providing 
telecommunications services on a cross-border basis wh en the calls are routed through the facilities of 
another supplier.  This is not tenable. "Routing" (i.e., transmitti ng) traffic is the service being 
provided by basic telecommunications suppliers.  Wh en the calls are "routed" through the facilities of 
a Mexican supplier, it is that supplier, not the Un ited States supplier, that provides the transport and 
transmission services at issue in this dispute.198  Mexico further claims that, accepting the United 
States' argument that the fact th at signals are transmitted across th e border demonstrates that basic 
telecommunications services are provided on a cross-border basis would mean that market access under mode 1 would be granted as soon as a WTO Memb er allows calls originating in other countries 
to be transmitted across its borders, regardless of w ho is supplying that service.  This is also 
untenable.
199  There is not a single WTO Member that prohibits incoming calls to its citizens from the 
territories of other WTO Members.  This does not mean  that all WTO Members have granted market 
access under mode 1.200  Mexico submits that, cross-border supply does not occur under the half-
circuit regime established between Mexico and the Un ited States, as laid down in Mexico's Schedule.  
According to Mexico, cross-border supply unqu estionably cannot occur where a commercial presence 
limitation is scheduled under mode 1, because the in cumbent provider in the United States must either 
become established in Mexico or rely on another pr ovider established in Mexico in order to transport 
and terminate calls into and within Mexico.  In practice, the half-circuit regime requires 
telecommunications traffic to be handed over at the border to another provider operating inside 
Mexican territory, and it is the latter that carries the traffic over the Mexican half of the circuit.  Under 
Mexico's Schedule, therefore, the incumben t provider in the United States cannot supply 
telecommunications transport services over the Mexican  half circuit and so will never be able to 
provide services "from the territory" of the Un ited States "into the territory" of Mexico.201 
                                                      
197 See Mexico's second oral stat ement, paragraphs 31-32. 
198 See Mexico's second oral statement, paragraph 33.  See also Mexico's answer to question No. 4(b) 
of the Panel of 14 March 2003 (" In paragraph 52 of its replies to the qu estions by the Panel, Mexico asserts that 
a supplier must be present in the terr itory of Mexico to supply  telecommunications serv ices cross-border.  In 
paragraph 38 of Mexico's second oral statement, Mexico states that the supplier must  use or operate transport 
and transmission facilities.  However , Mexico maintains in the same paragr aph that a foreign supplier who has 
established a commercial presence in Mexico automatically supplies services through mode 3.  (b) Why does Mexico consider that a supplier routing through facilities  of a concessionaire does  not 'use transport or 
transmission facilities'? "). 
199 See Mexico's second oral statement, paragraph 34. 
200 See Mexico's second oral statement, paragraph 35. 
201 See Mexico's answer to question No. 3(c) of the Panel of 14 March 2003 (" If so, does the supplier 
have to supply through its network(s) the entire service, or is it sufficient that it supplies through its network for 
a portion of the transmission service?  Please elaborate by using evidence from relevant regulations, and 
consider the following scenarios:  the cross-border serv ice is supplied over a facilities-based network (i) on all 
segments of the transmission service, and on both sides of the border;  or (ii) on any segment of the 
transmission service, and on either side of the border;  or (iii) on the originating side of the border only;  or  
(iv) on the terminating side of the border only? "). WT/DS204/R 
Page 34  
 
 
aa) Half-circuit v. full-circuit regimes
 
4.84 In response to a question by the Panel, Mexico  describes the difference between the half-
circuit and full-circuit regimes.  Mexico first su bmits that, the "half-circuit" regime does not allow 
foreign suppliers to supply their services on the opposite  side of the circuit.  Because of the inherent 
"hand off", all services in the destination country ar e supplied by incumbent suppliers in that country 
and, therefore, the supply is provided under mode 3.202  In contrast, Mexico claims, under the full-
circuit regime: 
"Foreign operators can, if they wish, carry thei r international calls into the interior of 
the destination country and terminate th em there via interconnect arrangements 
similar to, or even identical  to, those used for domestic traffic.  They are no longer 
compelled to hand off their traffic to a correspondent operator before it reaches the 
destination country".203 
4.85 According to Mexico , the clearest example of a full-circuit regime is when a foreign supplier 
expands its network to the territory of the des tination country by its ow n transmission links and 
network nodes (i.e. "points of presence").  As to mode  1, in order for a United States-based supplier to 
supply services from United States territory to Mexican territory (in other words, cross-border supply) it must supply telecom transport services over the whole of the full circuit without having a commercial presence in Mexico within the mean ing of GATS Article XXVIII(d).  According to 
Mexico, this definition of "commercial presence" relat es to the establishment of a particular type of 
legal entity, as clarified in the GATS Guidelines fo r Scheduling.  A full-circuit regime does not 
require the establishment of such legal entities.  This is confirmed in the ITU Document included as 
Exhibit MEX-59, which establishes that "internationa l operators can avoid the half-circuit regime by 
establishing a switch in a foreign territory, then pr oviding end-to-end service to that switch." Indeed, 
it is not even necessary to establish a commercial presence in the foreign country.  Where it is 
possible to establish a full-circuit regime without the need for such presence, the foreign country 
supplier can provide services to the destination co untry under mode 1.  For the purposes of this 
dispute, it is not necessary for the Panel to define  all the circumstances in which a single circuit 
regime may be set up so as to allow telecom tran sport services to be supplied under mode 1.  The 
crucial point is that Mexico's Schedule main tains the half-circuit regime and requires all 
telecommunications to be handed over at the border so that the transport and transmission services 
supplied on the Mexican side of the border are suppl ied by Mexican-based concessionaires.  In other 
words, Mexico does not permit the supply of telecom transport services under mode 1.
204 
4.86 Moreover, the United States  argues that the one example Mexico gives of cross-border 
supply from the United States into Mexico is wher e a United States supplier "has a full circuit" and 
                                                      
202 See Mexico's answer to question No. 4(d) of the Panel of 14 March 2003 (" In paragraph 52 of its 
replies to the questions by the Panel, Mexico asserts that a supplier must be present in the territory of Mexico to 
supply telecommunications services cr oss-border.  In paragraph 38 of Mexi co's second oral statement, Mexico 
states that the supplier must use or  operate transport and tr ansmission facilities.  How ever, Mexico maintains in 
the same paragraph that a foreign supplier who has established a commercial presence in Mexico automatically 
supplies services through mode 3.  (d) How do you relate the notions of 'full circuit' and 'half circuit' to supply under mode 1 and mode 3? "). 
203 See Mexico's answer to question No. 4(d) of the Panel of 14 March 2003 (quoting M. Tyler and C. 
Joy, 1.1.98.  Telecommunications in the New Era:  Competing in the Single Market , p.51).  For question 
No. 4(d), see footnote 202 of this Report. 
204 See Mexico's answer to question No. 4(d) of the Panel of 14 March 2003.  For question No. 4(d), 
see footnote 202 of this Report.  WT/DS204/R 
 Page 35 
 
 
"establish[es] a switch" or a "point of presence" in Mexico.205  Mexico states that the United States 
supplier does not have a commercial presence on the Mexican side of the border in this example.  According to the United States, however, whether or not "establishing a switch" or a "point of presence" on the Mexican side of the border is a "commercial presence," "establishing a switch" or a "point of presence" certainly involves operating in so me fashion on the Mexican side of the border.  
This interpretation therefore adds an element that  is not present in Article I:2(a) of GATS, which 
defines the cross-border supply of a service as the supply of a service from the territory of one Member into the territory of any other Member because Mexico's interpretation requires that to 
provide basic telecommunications services in the cross-border mode, a service supplier must operate on both sides of the border.
206 
4.87 Mexico  submits that, under the full-circuit regime, a foreign supplier carries traffic to the 
"interior" of the destination country.  It then in terconnects with the local network in the same way as 
does a national operator.  This means that, under th e full-circuit regime what is relevant for the 
foreign operator is the interconnecti on "within" the destination country.207  The United States is not 
contesting the interconnection regime with Mexico as it applies to operators established within the 
territory of Mexico.  Mexico further claims this is based on Mexico's position that Section 2 of its 
Reference Paper applies solely to "interconnection" within its borders.208 
4.88 Mexico  also submits that, the u se of a satellite or any othe r kind of wireless technology 
instead of a landline does not in or of itself de termine whether cross-border supply exists, since 
countries regulate the use of the radio frequency spect rum in their territory.  Even in the case of a 
satellite system with a global footprint, like the one that the Iridium system uses (the only one of its 
type), the use of the Mexican spectrum to carry calls  is subject to restrictions similar to those for 
landlines and other wireless services that the operato r provides.  Accordingly, Iridium has a Mexican 
affiliate with a concession to supply public teleco m transport services inside Mexico and through 
which switched calls to Mexico must be routed in order to complete transm ission to the end-user's 
handset when the user is in Mexico.209 
4.89 Therefore, Mexico  argues, carrying calls by satellite di rect to the user's telephone could 
potentially involve a cross-border service, for example,  if there is only one supplier involved and there 
are no joint services with a supplier who is comme rcially established in the destination country.  
Whether a Member has made a commitment or not , and the way in which the commitment has been 
made to authorize such cross-border supply, can be  determined only by examining the specific scope 
of the Member's inscription.210 
4.90 The United States  argues that Mexico's explanation regarding satellite services is, again, 
based upon acceptance of the notion that a telephone ca ll or signal is a separate service from the 
transportation of that signal.  The United States re iterates that this notion ignores the CPC codes, 
which specifically contemplate "hand off" of the si gnal and the joint provision of voice services, and 
                                                      
205 The United States refers to Mexico's answers to questions of the Panel of 14 March 2003, 
paragraphs 51, 58 and 76. 
206 See the United States' comments on Mexico's answer to question No. 4(a) of the Panel of 
14 March 2003, paragraphs 15 and 16. 
207 See Mexico's answer to question No. 4(d) of the Panel of 14 March 2003.  For question No. 4(d), 
see footnote 202 of this Report. 
208 Ibid. 
209 See Mexico's answer to question No. 5 of the Panel of 14 March 2003 (" Does the provision of a 
telephone service from one Member, transmitted by satellite direct to an end-user's handset in another Member, 
constitute cross-border supply in terms of Article 1:2(a) of the GATS?  Why or why not? "). 
210 See Mexico's answer to question No. 5 of the Panel of 14 March 2003.  For question No. 5, see 
footnote  209 of this Report. WT/DS204/R 
Page 36  
 
the purchase by a "customer" of a "communication"  over the entirety of a telephone call, from its 
point of origin to its point of termination.
211 
(b) Mexico's commitment on cross-border supply 
4.91 According to the United States , Mexico undertook market access and national treatment 
commitments in its schedule for basic telecom services supplied by "facilities-based" operators on a 
cross-border (mode 1) basis.  The United States also notes that Mexico limited this commitment to 
ensure that service suppliers route international traffic through the facilities of an entity licensed in 
Mexico (known as a "concessionaire"), thus confirmi ng its specific intention to include international 
services within the scope of these commitments.212 
4.92 The United States  further submits that Mexico scheduled cross-border commitments for non-
facilities-based telecom services ("commercial agenci es") as well.  Based on Mexico's Schedule, the 
United States argues that Mexico committed to acco rd market access and national treatment to United 
States suppliers, which do not themselves own fac ilities, but instead provide telecommunications 
services over capacity (such as a line) that they lease from a concessionaire.213 
4.93 Mexico  argues that it did not schedule cross-border commitments for basic 
telecommunications services supplied by fac ilities-based and non-facilities-based operators.214  
Mexico submits that the phrase " respecto de los cuales se contraigan compromisos específicos " in 
Section 2.1 of its Reference Paper limits the app lication of Section 2 to the precise market access 
allowed in Mexico's specific commitm ents inscribed in its Schedule.  The phrase translates as "on the 
basis of specific commitments undertaken" or "in respect of which specific commitments are 
undertaken".  It qualifies the entire provision and, th ereby, links Section 2 of the Reference Paper to 
the specific commitments in Mexico's Schedule.  It means that Section 2 applies only within the 
bounds of Mexico's inscribed market access for the supply of services.215 
4.94 Mexico  submits that, in order to understand  its scheduled commitments in basic 
telecommunications services, the first thing to consider is the circumstances in which those commitments were negotiated.  Mexico started to liberalize its basic telecommunications market with 
the privatization of Telmex in 1990 and with th e implementation of the FTL in 1995.  One of the 
principal objectives of the FTL was to liberalize the Mexican market for basic telecommunications by granting concessions to new entrants, which could incl ude up to 49 per cent foreign ownership.  As a 
result of these reforms, Mexico introduced comp etition into the international long-distance service 
market.  However, under Mexican law, only those ca rriers able to meet th e conditions necessary to 
obtain a concession are allowed to enter the market.  As to foreign enterprises, they were neither 
allowed to provide international services, nor to  install, operate or use facilities in Mexico.
216 
4.95 Mexico  argues that it was within this context th at Mexico agreed to the market access 
commitments with accompanying limitations relating to basic telecommunication services in its Schedule, which means that Mexico bound itself to the regulatory status quo  as it existed in 1997 at 
the end of the WTO negotiations on basic telecommunications.  That status quo did not permit 
                                                     
 
211 See  the United States' comments on Mexico's answer to question No. 5 of the Panel of 14 March 
2003, paragraph 22. 
212 See the United States' first written submission, paragraph 54.  See also  the United States' answer to 
question No. 2(a) of the Panel of 14 March 2003 (" What is a 'facilities based public telecommunications 
network'?  Please elaborate by referring to relevant re gulations.  Are there public telecommunications networks 
that are not 'facilities based'? "). 
213 See the United States' first written submission, paragraphs 55-57. 
214 See Mexico's first written submission, paragraph 134.  See also  Mexico's second written submission, 
paragraph 76. 
215 See Mexico's second written submission, paragraph 41. 
216 See Mexico's first written submission, paragraphs 120-122.  WT/DS204/R 
 Page 37 
 
 
United States suppliers to supply public teleco mmunications transport networks and services 
(PTTNS) from the territory of the United States into the territory of Mexico.  Thus, Mexico did not, by inscribing this commitment, permit market ac cess for the supply of basic telecommunications 
services through mode 1.  However, it did permit ma rket access for facilities-based suppliers through 
commercial presence in Mexico in the form of up to 49 per cent direct foreign ownership of a 
concessionaire.
217 
4.96 Mexico  also points out that, according to paragraph 1 of Article XVI of the GATS, the 
obligation is to accord treatment no less favourable th an that provided under the terms, limitations and 
conditions on market access speci fied in a Member's Schedule.218  Thus, Mexico argues, the mere 
inscription of a service sector in the "sector or  subsector" column of a Schedule of Specific 
Commitments does not imply that a Member has bound itself to grant unconditional market access for 
any of the modes of supply; rather, any commitment  made must be read in light of the "terms, 
limitations and conditions" specifically inscribed  under the relevant column of the Schedule.219 
According to Mexico, the relevant terms, limitatio ns and conditions on market access inscribed in 
Mexico's Schedule clarify that Mexico did not  undertake any commitments to permit basic 
telecommunications service suppliers of other Members to provide "facilities-based" or "non-
facilities" based basic telecommunications services on a "cross-border" basis.220  
4.97 In response to a question by the Panel, the United States  contends that, once any level of 
commitment is undertaken, Section 2 applies fully within the modes of supply in which commitments 
have been taken, unless the limitation scheduled sp ecifically limits the applic ability of the Reference 
Paper.221 
4.98 Mexico  submits that Section 2 of Mexico 's Reference Paper does not apply fully to a service 
sector or subsector once any level of commitment is made in  any mode of supply because of the 
following reasons: 
(i) First, the specific language of Mexico's Reference Paper — i.e., the phrase " respecto 
de los cuales se contraigan compromisos específicos " – plainly restricts the 
application of the Reference Paper to the precise scope of Mexico's commitments for 
market access for the supply of basic tel ecommunication services.  In order to give 
meaning to this restriction, it is necessary to interpret Mexico's specific commitments 
in totality, including the inscribed limitations. 
(ii) Second, those commitments must be interprete d in the light of the relevant mode of 
supply and any associated limitations, because it is the positive inscriptions and the 
limitations read together that define Mexi co's specific commitments with respect to 
the supply of particular services. 
                                                      
217 See Mexico's first written submission, paragraph 123.  See also  Mexico's answer to question 
No. 1(a) of the Panel of 19 December 2002 (" Section 2.1 of the Reference Pape r as scheduled by Mexico states 
that interconnection applies 'respecto de los cuales se contraigan compromisos específicos' [on the basis of specific commitments undertaken].  (a) Are there specific  commitments undertaken by Mexico in modes 1 and 3 
of its schedule with respect to the supply of basic telecommunications? "). 
218 See Mexico's first written submission, paragraphs 124-125. 
219 See Mexico's first written submission, paragraph 125.   See also  Mexico's first oral statement, 
paragraph 37. 
220 See Mexico's first written submission, paragraph 127. 
221 See the United States' answer to question No. 1( c) of the Panel of 19 December 2002 (" Section 2.1 
of the Reference Paper as scheduled by Mexico states that interconnection applies 'respecto de los cuales se contraigan compromisos específicos' [on the basis of spec ific commitments undertaken].  (c) Does Section 2 of 
the Reference Paper apply fully to a service sector or subsector once any level of commitment in market access 
or national treatment is made in any of the modes of supply? "). WT/DS204/R 
Page 38  
 
(iii) Third, the United States is wrong to interpre t the phrase "where specific commitments 
are undertaken" to simply mean that wh ere any commitments are undertaken by a 
WTO Member the Reference Paper applies fu lly.  The inscription of the Reference 
Paper in the fourth column of a Member's Schedule is, itself, a commitment that would invoke the application of Section 2 of the Reference Paper under the United 
States' interpretation.  Such an interpreta tion means that the phrase "respecto de los 
cuales se contraigan compromisos específicos " in Section 2.1 of the Reference Paper 
is unnecessary.  This renders the phrase meaningless and, therefore, is an impermissible interpretation under Ar ticle 31 of the Vienna Convention.
222 
4.99 Mexico  further argues that its interpretation that its Reference Paper applies only within the 
bounds of its specific commitments and limitations on  market access is consistent with the object and 
purpose of Section 2.  According to Mexico, the primary objective of the interconnection provisions of the Reference Paper is to safeguard competitive conditions in situations where a dominant carrier 
can exert control over its competitors within its mark et.  Thus, in order to benefit from the terms and 
conditions of interconnection provided for in Section 2, foreign suppliers  must first be granted market 
access under the commitments inscribed in a Member's Schedule.  Accordingly, suppliers that are not 
allowed to compete in a given market because they  have not been granted access cannot benefit from 
the terms and conditions provided for in Section 2.
223 
4.100  Mexico  also argues that, independently of the meaning of the phrase " respecto de los cuales 
se contraigan compromisos específicos ", Article 31 of the Vienna Convention  requires that Mexico's 
Reference Paper be interpreted in a manner that gives meaning to its content and to the specific 
commitments and limitations inscribed in Mexico's Schedule.224  Mexico also urges the Panel to bear 
in mind the principle of effectiveness in the interpretation of treaties ( ut res magis valeat quam 
pereat ) which, according to the Appellate Body , requires that a treaty interpreter: 
"… must give meaning and effect to all the terms of the treaty.  An interpreter is not 
free to adopt a reading that would result in reducing whole clauses or paragraphs of a 
treaty to redundancy or inutility."225 
4.101  According to Mexico , the United States' interpretation entails reading the sector/subsector 
column of Mexico's Schedule in isolation from th e rest of its Schedule.  Among other things, the 
United States' interpretation ignores the fact th at a Member may inscribe "unbound" in either 
columns 2 (market access) or 3 (national treatment).   In such circumstances, there is no specific 
market access commitment fo r the service sector or subsector and mode involved.  Similarly, where 
the term "unbound" is not used, but limitations are inscribed under specific modes, it is only through a 
detailed examination of the text of those limitations that it can be determined whether or not suppliers 
of other WTO Members have, in fact, been gr anted market access under each of the modes.226 
4.102  Mexico  argues that the United States interpreta tion of Mexico's Reference Paper would 
effectively grant market access to United States supplie rs of basic telecommunications services that is 
not inscribed in Mexico's Schedule.  Furthermor e, it would render meaningless the limitations on 
                                                      
222 See Mexico's second written submission, paragraph 43.   See also Mexico's answer to question 
No. 1(c) of the Panel of 19 December 2002.  For question No. 1(c), see footnote 221 of this Report. 
223 See Mexico's second written submission, paragraph 44. 
224 See Mexico's second written submission, paragraph 46. 
225 See Mexico's second written submission, paragraph 46.  See also Mexico's answer to question 
No. 2(a) of the Panel of 19 December 2002 (" The explanatory note containing Guidelines for the Scheduling of 
Commitments (MTN.GNS/W/164) requires in paragraph 25 that in scheduling limitations 'the entry should 
describe each measure concisely, indicating the elements  which make it inconsistent with Articles XVI or XVII'. 
(a) What are the elements of inconsis tency with Article XVI contained in the Mexican law referred to in relation 
to the establishment of enterprises eligible for a concession? "). 
226 See Mexico's second written submission, paragraphs 47-48.  WT/DS204/R 
 Page 39 
 
 
market access that are specified in Mexico's Schedule.   Such an interpretation is inconsistent with the 
principle of effective interpretation in Article 31 of the Vienna Convention  and, therefore, is 
impermissible.227 
(c) Meaning of the limitations inscribed 
4.103  Mexico  also submits that the inscription in its Schedule cannot be equated with providing 
market access for cross-border trade.  Mexico expl ains that, under Article XVI of the GATS, the mere 
fact that a Member has inscribed a commitment for a particular mode of supply in a particular sector or subsector cannot be ipso facto  equated with an undertaking to grant market access to suppliers of 
other Members for the supply of services through that mode of supply.  Rather, whether and to what extent market access has been gran ted to foreign suppliers depends on careful interpretation of the 
precise meaning of the limitations inscribed in the Member's Schedule for the relevant mode.  This 
requires detailed analyses of all entries in a Member's Schedule  in accordance with the general 
principles of treaty interpretation set forth in the Vienna Convention .
228 
4.104  According to Mexico , the phrase "none, except the following" is an accepted drafting 
convention to introduce a limitation.  Using its right to inscribe limitations, a WTO Member can 
effectively disallow market access to foreign suppliers  for trade in one mode of supply, even though 
there is a "standstill" binding for that mode of supply.  When specific commitments are undertaken 
under GATS Article XVI, a Member binds certain me asures and commits not to accord to foreign 
suppliers treatment less favourable than that stip ulated in these measures.  It is those "terms, 
limitations and conditions" specified in a Schedule that  determine the level of market access, if any, 
for each mode of supply that is bound by a Member.  Thus, Mexico argues, the fact that a Member has 
inscribed a commitment for a particular mode of supply in a particular service sector does not 
necessarily mean that market acce ss has been granted to foreign suppliers for the supply of the 
relevant services in that particular mode. 229 
4.105  Mexico  notes that, in inscribing their limitations, WTO Members can bind themselves to the 
status quo  for the supply of a service through one of the modes of supply.  It may very well be that, 
under the status quo  as inscribed in the limitations in their Schedule, no market access is actually 
provided to foreign suppliers for the supply of the relevant service through that mode of supply.  In such cases, the limitation has the effect of prohib iting market access for th ese suppliers even though 
the Member did not inscribe "unbound" in the releva nt column.  For example, certain limitations on 
the number of service suppliers can effectively cr eate a "zero quota", which prohibits market access 
for foreign suppliers.
230  In support of its argument, Mexico cites two WTO Secretariat Notes.231232  
According to Mexico, the inscription of a commercia l presence requirement in such a manner has the 
effect of prohibiting market access for the cro ss-border supply of such services even though the 
                                                      
227 See Mexico's second written submission, paragraph 49. 
228 See Mexico's second written submission, paragraph 55. 
229 See Mexico's second written submission, paragraphs 56-57.  See also Mexico's answer to question 
No. 2(a) of the Panel of 19 December 2002.  For question No. 2(a), see footnote 225 of this Report.   See also  
Mexico's second oral statement, paragraph 44. 
230 See Mexico's second written submission, paragraph 59. 
231 Explanatory Note in Scheduling of Initial Commitments in Trade in Services: Explanatory Note , 
MTN.GNS/W/164/Add.1, 30 Nov. 1993 and Draft Revision of the Guidelines for the Scheduling of Specific 
Commitment s, Committee on Specific Commitments, Note by th e Secretariat, S/CSC/W/30, 23 March 2001. 
232 See Mexico's first written submission, footnote 89 to paragraph 129.  See also  Mexico's first oral 
statement, paragraph 42. See also  Mexico's second written submission, paragraph 59.  See also Mexico's answer 
to question No. 1(b) of the Panel of 19 December 2002 (" Section 2.1 of the Reference Paper as scheduled by 
Mexico states that interconnection applies 'respecto de los cuales se contraigan compromisos especificos' [on 
the basis of specific commitm ents undertaken].  (b) If Mexico is argui ng that it does not have such commitments 
(paragraphs 134 and 146 of its submission), why did it not schedule these sectors and modes as 'unbound'? "). WT/DS204/R 
Page 40  
 
Member did not inscribe "unbound" in the relevant  column and this is exactly what Mexico has 
done.
233 
4.106  The United States  argues that Mexico's reliance on the Scheduling Note is misplaced.  The 
United States points out that the part of the Note that Mexico relies on only applies to "a residence requirement, nationality condition or commercial presence  requirement."  Thus, it is not applicable to 
the limitation in Mexico's Schedule,  which is a routing requirement.
234 
4.107  The United States  argues that Mexico's commitment is clear and straightforward:  there are 
no limitations on the mode 1 commitment, with the exception of a routing requirement.  The 
United States submits that Mexi co's argument that "None" shoul d be interpreted as "Unbound" is 
thoroughly untenable.  The requirement to route international traffic through the facilities of a 
Mexican concessionaire does not completely evi scerate Mexico's market access commitment for 
mode 1 – indeed, there would be no need for this or any other limitation if Mexico had left mode 1 
unbound.  The way in which United States suppliers complete calls into Mexico is by "rout[ing] 
through the facilities of an enterprise that has a concession" – an option specifically provided in 
Mexico's Schedule.235 
4.108  The United States  argues that Mexico ignores this aspect of its commitment in asserting that 
it has made no commitment for the supply of teleco mmunications services on a cross-border basis.  
The United States submits that, even if this limita tion had any effects, it would still be a limitation on 
a commitment that Mexico undertook and would theref ore still trigger the obligations in Section 2 of 
the Reference Paper and Section 5 of the Annex.236 
4.109  The United States  also considers that, as a legal matter,  Mexico's routing requirement is not a 
market access limitation at all.  The United Stat es agrees with the European Communities that the 
limitation scheduled by Mexico is superfluous and without legal eff ect because a routing requirement 
is not one of the limitations listed in Article XVI:2  of GATS.  According to the United States, a note 
by the Secretariat supports this position, confirming that "a Member grants full market access in a 
given sector and mode of supply when it does not main tain in that sector and mode any of the types of 
measures listed in Article XVI."237  In the United States' view, Mexico did not need to schedule the 
requirement that cross-border suppliers route tr affic through the facilities of a concessionaire to 
maintain that limitation for Article XVI purposes.238 
4.110  Mexico  submits that the United States' characterization of Mexico's mode 1 limitation is 
erroneous.  As a legal matter, the concession require ment stipulated in Mexico's mode 1 limitation 
must be given meaning.  Mexico argues that the correct interpretation is that the limitation that 
"international traffic must be routed to the fac ilities of an enterprise that has a concession" imposes 
commercial presence and nationality requirements for the supply of scheduled services.  Thus, this 
limitation ensures that suppliers established in th e United States cannot transport and transmit signals 
across Mexico's borders.  Instead, they have to rely on Mexican concessionaires, which have the 
exclusive right to supply telecommunications transport and transmission services in Mexico.239 
4.111  For international "facilities-based" services, Mexico  argues that its schedule sets forth a 
limitation by requiring that international traffic must  be routed through the facilities of an enterprise 
                                                      
233 See Mexico's second written submission, paragraph 61. 
234 See the United States' second written submission, paragraph 22.   See also  the United States' answer 
to question No. 1(b) of the Panel of 19 December 2002.  For question No. 1(b), see footnote 232 of this Report. 
235 See the United States' second written submission, paragraph 15. 
236 Ibid. 
237 See document MTN.GNS/W/163, of 3 September 1993, paragraph 4. 
238 See the United States' second written submission, paragraph 16. 
239 See Mexico's second oral statement, paragraph 48.  WT/DS204/R 
 Page 41 
 
 
that has a concession granted by the Ministry of Communication and Transport (SCT).240 Under 
Mexican law, only Mexican individuals or  companies may obtain such a concession.241  Thus, the 
limitation in the market access column of Mexico's Schedule creates a nationality and commercial presence requirement for suppliers of scheduled services.
242 Therefore, Mexico effectively froze the 
level of market access to that prevailing at the tim e of the negotiations and reserved its right to limit 
those enterprises authorized to supply basic tele communications services within Mexico to service 
suppliers that have commercial pres ence in Mexico (i.e., concessionaires).243  Since United States 
suppliers (e.g. AT&T and WorldCom) of basic telecommunications services cannot obtain concessions, they are not allowed to supply basic telecommunications services from the territory of 
the United States into the territory of Me xico, that is, on a cross-border basis.
244  Mexico also claims 
that it reserved its right to prevent foreign service suppliers from owning facilities in Mexico through 
the inscription of broad limitations on market acc ess through commercial presence (mode 3) in its 
Schedule.245  In order to install, operate or use a f acilities-based public telecommunications network in 
Mexico, Mexico's Schedule stipulates that a concession from the SCT is required and that direct foreign investment is limited to 49 per cent in an enterprise set up in acco rdance with Mexican law.
246 
4.112  The United States  replies that whether or not Mexico was "freezing" the level of market 
access prevailing at the time of the negotiations is  irrelevant; the ordinary meaning of Mexico's 
Schedule speaks for itself and should control.  In support of its argument, the United States points to 
the same Secretariat's Explanatory Note on Sc heduling relied upon by Mexico, which emphasizes 
that, if a Member wished to bind the status quo,  as Mexico now asserts was its intention, these so-
called "standstill" commitments were to be schedul ed no differently than any other market access 
commitments.  Thus, the Panel still has to interp ret the meaning of the routing requirement in 
Mexico's Schedule as it is written, regardless of Mexico's intention.247 
4.113  The United States  counters that the requirement to route international traffic through the 
facilities of a Mexican concessionaire does not co mpletely eviscerate Mexico's market access 
commitment for mode 1.  According to the United States, Mexico's argument is untenable for two 
reasons.  First, even if this limitation had any effect, it would still be a limitation on a commitment 
that Mexico undertook and would therefore still trigge r the obligations in Section 2 of the Reference 
Paper.248  Second, the United States argues that Mexico's routing requirement is not a market access 
limitation at all since a routing restriction is not the type of limitation found in Article XVI:2 of the 
GATS.249  The United States points to a note by the S ecretariat, which states that "a Member grants 
full market access in a given sector and mode of s upply when it does not maintain in that sector and 
                                                      
240 See Mexico's first written submission, paragraph 128.   See also  Mexico's first oral statement, 
paragraph 40. See also Mexico's answer to question No. 1(b) of the Panel of 19  December 2002.  For question 
No. 1(b), see footnote 232 of this Report.  
241 See Mexico's first written submission, paragraph 129.  See also Mexico's second written submission, 
paragraph 70. 
242 See Mexico's first written submission, paragraph 129.  See also  Mexico's first oral statement, 
paragraph 41.   See  also Mexico's second written submission, paragraph 71.  See also Mexico's answer to 
question No. 1(b) of the Panel of 19 December 2002.   For question No. 1(b), see footnote 232 of this Report.  
243 See Mexico's first written submission, paragraphs 129-130. 
244 See Mexico's first written submission, paragraph 130.   See  also Mexico's second written submission, 
paragraph 72. 
245 See Mexico's first written submission, paragraph 131. 
246 See Mexico's first written submission, paragraph 131.  See also Mexico's second written submission, 
paragraph 72. 
247 See the United States' second written submission, paragraph 20. 
248 See the United States' first oral  statement, paragraph 13.  See also the United States' second written 
submission, paragraph 15-16. 
249 See the United States' first oral  statement, paragraph 13.  See also the United States' second written 
submission, paragraph 16.  See also  the United States' answer to question No. 1(b) of the Panel of 19 December 
2002.  For question No. 1(b), see footnote 232 of this Report.  WT/DS204/R 
Page 42  
 
mode any of the types of measures listed in Article XVI."
250  Thus, the United States argues that the 
routing requirement is superfluous and without legal effect because it is not one of the limitations 
listed in Article XVI:2 of GATS.251 
4.114  Mexico  submits that the United States' interpreta tion is wrong.  Instead, Mexico argues, the 
correct interpretation is that, in fact, the transport and transmission services provided by United States 
suppliers do not enter the territory of Mexico when United States suppliers hand over traffic to 
Mexican suppliers at a border point.252 
4.115  Mexico  argues that the United States' interpretation is based on its mistaken belief that United 
States suppliers are providing basic telecommunicati ons transport services into Mexico when they 
rely on other service suppliers (i.e., Mexican conc essionaires) to transport and transmit signals in 
Mexico.  To the contrary, the transport and tr ansmission services supplied by United States carriers 
end at the border.  There is no cross-border supply simply because United States suppliers do not supply end-to-end services.  Accepting the Unite d States argument would mean that suppliers 
established in United States territory have to be deemed to supply services into another Member's 
territory when they hand off traffic to other supp liers which then transport and transmit the signals.
253 
4.116  Mexico  submits that the United States' interpreta tion fails to give meaning to the word 
"concession", which is at the heart of Mexico's limi tation.  The terms of Mexico's Schedule make it 
clear that a "concession" is a title to "insta ll, operate or use a facilities-based public 
telecommunications network".  A concession is availa ble only to enterprises established in accordance 
with Mexican law, which includes a limitation on direct  foreign investment of up to 49 per cent.  The 
concession requirement, therefore, imposes a commercial presence limitation on Mexico's mode 1 
commitment to supply public telecommunications tr ansport and transmission services in Mexico.  In 
other words, only enterprises esta blished in Mexico are entitled by law to transport and transmit 
international traffic, which is the service at issue in  this dispute.  This requirement prohibits the cross-
border supply of telecommunications transport servi ces by United States suppliers into Mexico and 
denies cross-border market access for United States suppliers, such as AT&T.254 
4.117  In response to a question from the Panel, Mexico  also asserts that the "concession 
requirement", the "routing requirement," and the co mmercial agency "permit requirement" fall within 
the limitations listed in GATS Article XVI:2(a) and (e).255 
(i) Concession requirement 
4.118  Mexico  argues that the concession requirement creates commercial presence and nationality 
requirements to supply basic telecommunications ser vices in Mexico.  According to Mexico, these 
requirements fall within GATS Article XVI:2(a) whic h refers to "limitations on the number of service 
suppliers whether in the form of numerical quot as, monopolies, exclusive service suppliers or the 
requirements of an economic needs test".  More sp ecifically, with respect to mode 1 (cross-border) 
supply, by requiring a commercial presence, the "number of service suppliers" that can supply 
                                                      
250 MTN.GNS/W/164 (September 3, 1993), paragraph 4, cited in the United States' first oral statement, 
paragraph 13. See also the United States' second written submission, paragraph 16.   See also  the United States' 
answer to question No. 1(b) of the Panel of 19 December 2 002.  For question No. 1(b), see footnote 232 of this 
Report. 
251 See the United States' first oral  statement, paragraph 13.  See also the United States' second written 
submission, paragraph 16.   See also  the United States' answer to question No. 1(b) of the Panel of 19 December 
2002.  For question No. 1(b), see footnote 232 of this Report.  
252 See Mexico's second oral statement, paragraph 50. 
253 See Mexico's second oral statement, paragraph 51. 
254 See Mexico's second oral statement, paragraph 52. 
255 See Mexico's answer to question No. 2(a) of the Pa nel of 19 December 2002.  For question No. 2(a), 
see footnote 225 of this Report.  WT/DS204/R 
 Page 43 
 
 
services through mode 1 is zero.  The concessi on requirement creates co mmercial presence and 
nationality requirements because concessions can be granted only to Mexican individuals or 
companies.  With respect to mode 3 (commercial presence), the 49 per cent maximum foreign ownership and nationality requirements similarly crea te a zero quota.  This is confirmed by a WTO 
Secretariat Note, which states that "nationality requi rements for suppliers of services" are "limitations 
on the number of service suppliers" because they are "equivalent to zero quota".
256  Accordingly, the 
concession requirement prevents nationals and juri dical persons of other Members from installing, 
operating or using a facilities-based public telecomm unications network in Mexico.  Mexico also 
submits that the "concession" requirement means that suppliers must assume a specific legal form.  
Thus, it also falls within Article XVI:2(e) which refe rs to "measures which restrict or require specific 
types of legal entity or joint venture through which a service supplier may supply a service".  
A "concessionaire" is a specific type of legal entity under Mexican law.257 
4.119  The United States  argues that, because Mexico's mode 1 limitation does not use the term 
"commercial presence", the limitation does not impose a commercial presence requirement.258   
4.120  In addition, the United States  responds that, first, Mexico's argument that a limitation 
scheduled under one mode of supply can be "read  together" or "in combination with" another 
limitation listed under a different mode is without an y legal support.  According to the United States, 
to interpret Mexico's Schedule in this manner would amount to the Panel inserting a limitation on 
Mexico's mode 1 commitment that Mexico itself di d not schedule.  The United States argues that this 
would impermissibly diminish the rights of the United States in violation of Article 19.2 of the DSU.
259 
4.121  The United States argues that Mexico's argument is also contrary to a Secretariat Scheduling 
Note, MTN.GNS/W/164 (3 September 1993), paragraph 19( a).  That Note explains that "international 
transport, the supply of a service through teleco mmunications or mail, and services embodied in 
exported goods (e.g. a computer diskette, or drawin gs) are all examples of cross-border supply, since 
the service supplier is not present within the te rritory of the Member where the service is 
delivered."260 
4.122  Finally, the United States  argues that Mexico's own Schedule does not support its argument.  
Mexico's Schedule specifically permits market acce ss in mode 1 as long as traffic is routed through 
the facilities of "an enterprise that has a concessi on ... ".  Mexico's Schedule does not limit market 
access in mode 1 to only those foreign service supplie r itself owns or controls.  Thus, Mexico's own 
Schedule anticipates that a "service," within the m eaning of the GATS, can be supplied on a cross- 
border basis as long as traffic is routed through the facilities of any Mexican concessionaire.261 
4.123  Mexico  replies that this interpretation is incorrect.262  According to Mexico, a commercial 
presence requirement can be inscribed without th e need expressly to use the words "commercial 
presence requirement".263  What matters is the effect of th e measure inscribed in the Schedule.  
Mexico did not refer to "commercial presence" in th e generic sense but instead used the more specific 
phrase "enterprise that has a concession".  This entails a specific legal form of commercial presence – 
                                                      
256 See the Scheduling of Initial Commitments in Trade in Services:  Explanatory Note , 
MTN.GNS/W/164, 3 September 1993. 
257 See Mexico's answer to question No. 2(a) of the Pa nel of 19 December 2002.  For question No. 2(a), 
see footnote 225 of this Report. 
258 See the United States second oral statement, paragraph 11. 
259 See the United States' second written submission, paragraph 28. 
260 See the United States' second written submission, paragraph 30. 
261 See the United States' second written submission, paragraph 31. 
262 See Mexico's answer to question No. 3(c) of the Panel of 14 March 2003.  For question No. 3(c), see 
footnote 201 of this Report. 
263 Ibid. WT/DS204/R 
Page 44  
 
i.e. a "concessionaire" – as well as nationality and other requirements.  The use of a more specific phrase is consistent with the GATS Guidelines for the Scheduling of Commitments, which establish 
that "[i]f in the context of such a commitment, a measure is maintained which is contrary to 
Article XVI or XVII, it must be entered as a limi tation in the appropriate column (either market 
access or national treatment) for the relevant sector and modes of supply;  the entry should describe 
the measure concisely, indicating the elements wh ich make it inconsistent with Article XVI or 
XVII".
264 
4.124  According to Mexico , the requirement that "international traffic must be routed through the 
facilities of an enterprise that has a concession" cr eates an inconsistency w ith Article XVI of the 
GATS, because it reserves the supply of services to entities commercially present in Mexico – thereby 
establishing a zero quota on cross-border trade which im plies that no such trade can occur.  More 
specifically, because the limitations require a commerc ial presence for the supply of routing services, 
the number of suppliers that may supply such ser vices through mode 1 is zero.  Consequently, the 
measure inscribed in Mexico's Schedule is a limitatio n on the number of service suppliers within the 
meaning of GATS Article XVI:2.  It also compels suppliers of routing services to acquire a specific 
legal status under the terms of this provision.265 
4.125  Mexico  submits that, under the scenarios outlined ab ove, a United States supplier would have 
to "supply" telecommunications transport and transm ission services "on both sides of the border" (that 
is, both sides of the half circuit), without any "co mmercial presence" in Mexico within the meaning of  
GATS Article XXVIII(d), in order for cross-border supply to be able to occur.  This is not the case 
where traffic is handed over at the border to another carrier.  As explained below, this can occur only 
under a "full-circuit" regime.266 
4.126  The United States  responds that Mexico's assertion that a "half circuit regime" is 
"incorporated in Mexico's Schedule," requires co mmercial presence and therefore prevents cross-
border supply is based on a misstatement of what  Mexico's Schedule actually says.  Mexico 
apparently derives this argument, and the distinctio n between "half circuit" an d "full circuit" service, 
from the requirement in its Schedule that internati onal traffic "be routed through the facilities of an 
enterprise that has a concession."  The United Stat es argues that this phrase, however, does not require 
that a foreign supplier own a concession to send in ternational traffic into Mexico.  Rather, it only 
requires that foreign suppliers operating in the cross-border mode route that traffic through the 
facilities of an entity that has a concession.  Accord ing to the United States, Mexico clearly knew how 
to schedule a concession requirement when it meant to do so – to enjoy market access in mode 3, 
Mexico's Schedule states that "[a] concession from the SCT is required."  The United States submits 
that the contrast between Mexico's mode 1 and mo de 3 "limitations" demonstrates that there is no 
concession requirement with respect to the cr oss-border supply of basic telecommunications 
services.267 
(ii) Routing requirement 
4.127  Mexico  further argues that the routing requirement establishes a "zero quota" on mode 1 
access for international simple resale (ISR).268  According to Mexico, the requirement that 
international traffic be routed "through the fac ilities" of a concessionaire excludes ISR traffic.  
Specifically, the "facilities of a concessionaire" mean s more than its ordinary meaning – i.e. the 
                                                      
264 See Mexico's answer to question No. 3(c) of the Panel of 14 March 2003.  For question No. 3(c), see 
footnote 201 of this Report. 
265 Ibid. 
266 Ibid. 
267 See the United States' comments on Mexico's answer to question No. 3(c) of the Panel of 14 March 
2003, paragraph 13. 
268 See Mexico's answer to question No. 2(a) of the Pa nel of 19 December 2002.  For question No. 2(a), 
see footnote 225 of this Report.  WT/DS204/R 
 Page 45 
 
 
equipment of a concessionaire.  Either by vi rtue of Article 31(4) or Article 32 of the Vienna 
Convention , this term must be interpreted in the light  of its special meaning under Mexican law.  
Mexico notes that FTL Article 47 limits installati on of telecommunications equipment for cross-
border traffic to concessionaires and those otherwise specifically authorized by the SCT.  ILD Rule 3 
specifies that international long-distance traffic can be carried only by international gateway 
operators.  ILD Rule 6 specifies that long-dist ance concessionaries may carry international long-
distance traffic only through intern ational gateways.  This means th at the term "through the facilities 
of" means through an international gateway.  This excludes ISR traffic because such traffic, by its 
character, passes through private lines and not thr ough an international gateway.  It effectively 
imposes a "zero quota" on ISR traffic and, as su ch, is a limitation that falls within GATS 
Article XVI:2(a).269 
4.128  The United States  further submits that Mexico's position fails to recognize that "facilities" is 
in fact a much broader term than "ports," and embraces a variety of means that might be used to terminate cross-border traffic, including private leased circuits.  The United States argues that 
Mexico's own laws and regulations recognize that  the term "facilities" is broader than just 
"international ports."  Article 47 of Mexico's  Federal Law on Telecommunications requires a 
concession to install "telecommunications equipment and transmission means," a category of facilities 
obviously broader than merely international ports.
270  Likewise, Mexico's ILD Rule 4 clarifies that the 
facilities of an international concessionaire include  the international port and "telecommunications 
equipment and means of transmission that cross the country's borders."271272 
4.129  The United States  submits that these definitions are also consistent with the WTO's 
Telecommunications Services Glossary of Terms, wh ich defines "networks or facilities" to include 
"the ensemble of equipment, sites, switches, lines,  circuits, software, and ot her transmission apparatus 
used to provide telecommunications services."  Inte rnational switched ports ar e only one of the many 
types of telecommunications facilities embraces by this  definition.  Accordin g to the United States, 
Mexico's scheduled facilities routing requirement mu st therefore be interpreted to permit routing 
through any facilities.  Nothing in Mexico's Schedule, with respect to services provided under mode 1, 
allows Mexico to preclude the termination of cr oss-border traffic using private leased circuits 
obtained from a Mexican concessionaire.  This is the essence of International Simple Resale ("ISR").
273 
4.130  The United States  notes that, even if the term "facilities" is construed to mean just 
"international ports," this conclusion would only affe ct Mexico's right to prohibit the interconnection 
of private leased circuits at network points other th an the international port, which is relevant to the 
United States' claim under the Annex on Telecommuni cations.  Mexico would still be required to 
allow private lines to be interconnected at the intern ational port.  According to the United States, even 
if Mexico's Schedule were interpreted to allow Mexico  to require international traffic to route through 
a switched port operated by a Mexican concessionaire,  United States carriers would still be providing 
telecommunications services on a cross-border (mode 1) basis.  Thus, the obligations of Section 2 of 
the Reference Paper would still apply.274 
                                                      
269 See Mexico's answer to question No. 6(b)  of the Panel of 19 December 2002 (" Mexico has inscribed 
in its schedule that it 'will not issue permits for the establishment of a commercial agency until the 
corresponding regulations are issued'.  (b) Mexico asserts that international si mple resale is prohibited.  Please 
explain how this follows from its scheduled commitments. "). 
270 See Mexico's Federal Telecommunications Law att ached as Exhibit US-16 to the first written 
submission of the United States. 
271 See Mexico's ILD rules attached as Exhibit US-1 to  the first written submission of the United States. 
272 See the United States' second written submission, paragraph 24. 
273 See the United States' second written submission, paragraph 25. 
274 See the United States' second written submission, paragraph 26. WT/DS204/R 
Page 46  
 
4.131  Mexico  argues that the term "bypass" in the Unite d States' submission refers to means that 
carriers can use to avoid paying settlement rates fo r having their traffic terminated in a foreign 
country.  According to Mexico, the most commonly u sed method is international simple resale (ISR).  
Mexico argues that the Reference Paper does not ove rride Mexico's limitation on international simple 
resale (ISR).  Unlike a traditional accounting rate arrangement whereby carriers hand off traffic at the 
border or another mid-point between countries, ISR entails the use of private leased lines that cross 
the border.  The private lines are connected directly to the domestic public switched telephone network in the destination country, thus enabling dir ect access to end-users in that country.  Private 
lines are normally used for closed, intracorporate networking capabilities and are usually charged on a 
flat-rate basis.  By leasing capacity on a private line, a carrier seeking to terminate traffic in a foreign 
country can bypass the accounting rate regime and a void paying per-minute settlement rates.  Many 
nations, including the United States on certain routes, prohibit the use of ISR for carrying international traffic for the specific reason that they wish to preserve use of the accounting rate 
regime.  According to Mexico, ISR is also prohibited in Mexico.
275 
4.132  According to Mexico , the "private" character of a circuit does not stem from its technical 
features but from the manner in which the circuit is u sed.  To the extent that the circuit is used for an 
end-to-end private service, it constitutes a private-line circ uit;  if it is used to carry public traffic, the 
circuit is public.  The issue whether a supplier can  do so in conformity with Mexico's Schedule, 
however, depends on the market access inscriptions  and limitations regarding the services in question 
and the supply of those services.  In Mexico, once a private line (end-to-end) is used to carry public 
traffic, it is considered to be part of the public network and consequently loses its "private" character.  
It is then regulated as part of the public network and may not be used, or l eased, for an end-to-end 
service.  In other words, a "private circuit" may not carry public traffic.  Mexico has undertaken 
commitments with respect to the transport of public  traffic using the public network and the transport 
of end-to-end private traffic using public network facilities ( infraestructura de la red pública ).  
However, nowhere in Mexico's Schedule has a market access commitment b een undertaken for the 
transport of public traffic through private lines.276 
4.133  Mexico  points out that, it is important to have a clear understanding of the nature of private-
line service.  The main characteristic of private-lin e service is that it constitutes "end-to-end" service – 
i.e. the consumer determines beforehand the spec ific location where the service will be used.  
Conversely, public traffic is not limited to specific points;  it has access to the entire public network.  
ISR involves sending the traffic by means of a privat e-line service and then connecting such traffic to 
the switched public network in the foreign country.  The originating carrier thus gains access to an 
end-to-end private-line service in the foreign country and has to rely on an entity (which has leased a 
domestic private line, presumably for its own use) w ithin that foreign country in order to arrange for 
the traffic to be connected to the public network.  In other words, the originating carrier itself is not 
involved in the connection to the public network in the foreign country.  However, in Section 2.C(g) 
of its Schedule, Mexico has made clear that on ce the operator of a private network "resells" that 
network in order to connect public traffic to th e public network, the private network no longer 
constitutes a "private" end-to-end connection.  Th e operator becomes subject to all the rules and 
limitations governing public networ ks and no longer qualifies as a private-line carrier – which by 
definition precludes it from being used for ISR.277 
4.134  Therefore, Mexico  argues, the United States in fact claims that Me xico should allow Mexican 
users of end-to-end private-line services to intercon nect with the switched public network, so that 
                                                      
275 See Mexico's first written submission, paragraphs 33-34. 
276 See Mexico's answer to question No. 3(d) of the Panel of 14 March 2003 (" Does a supplier who 
owns facilities but leases private circuits for part of the transmission still supply services through a 'facilities based public telecommunications network'?  Please elaborate by using evidence from relevant regulations. "). 
277 See Mexico's answer to question No. 3(d) of the Panel of 14 March 2003.  For question No. 3(d), 
see footnote 276 of this Report.  WT/DS204/R 
 Page 47 
 
 
United States carriers can arrange for their traffi c to evade (i.e. bypass) authorized Mexican 
carriers.278 
4.135  Mexico  submits that it has therefore made clear that once the operator of a private network 
"resells" that network in order to connect public tra ffic to the public network, the private network no 
longer constitutes a "private" end-to-end connection.   The operator becomes subject to all the rules 
and limitations governing public netw orks and no longer qualifies as a private-line carrier – which by 
definition precludes it from being used for ISR.279 
4.136  The United States  notes that, while Mexico continues to argue that a private circuit cannot 
carry public traffic, it has failed to respond to the Un ited States observation that Telmex in fact offers 
such private lines to other public network operators , not just private businesses.  The United States 
argues that this demonstrates that the inscription on "private leased circuit services" in Mexico's 
Schedule does not mean what Mexico now contends.  The inclusion in Mexico's Schedule of "private 
leased circuit services" relates only to the obligatio n of private "network operators" in Mexico who 
want to exploit their networks commercially to obtain a concession, not to the ability of firms operating on a resale rather than a facilities basis in  Mexico to send traffic through leased private lines 
obtained from a network operator that has a concession.  The separate provision for "commercial 
agencies" under mode 3 operating on a permit, not a concession, reinforces this interpretation.  
Though an owner of network facilities in Mexico wo uld need a concession in order to lease its lines to 
others to carry public traffic on a resale basis (i.e., become the "lessor"), th e firms leasing such lines 
(the "lessee") would not themselves need the conce ssion.  The United States contends that ISR does 
not "evade" the authorized Mexican carriers' ne tworks.  Rather, commercial agencies under mode 1 
would use the networks of the Mexican carriers as re quired by the routing restriction, but are simply 
not bound to send their traffic through the internat ional switched ports subject to the cartel pricing 
provision of  ILD Rule 13.
280 
(iii) Commercial agency permit requirement 
4.137  Mexico  submits that the permit requirement establishes a "zero quota" on mode 3 access for 
commercial agencies which is a limitation under GATS Article XVI:2(a).281  According to Mexico, 
the permit requirement is qualified by the paragraph "[t]he establis hment and operation of commercial 
agencies is invariably subject to the relevant re gulations.  The SCT will not issue permits for the 
establishment of a commercial agency until the corres ponding regulations are issu ed".  This paragraph 
means that, at the time the limitation was inscribed, permits were not being issued by the SCT.  Like 
the limitations on market access for facilities-based s uppliers, this is equivalent to a zero quota.  
Accordingly, the requirement falls within the category of "limitations on the number of service 
suppliers" in paragraph (a ) of GATS Article XVI:2.282 
4.138   The United States  disagrees with this classification.283  However, the United States argues 
that the Panel does not need to deal  with this issue, for one very simple reason – the mode 1 market 
access column of Mexico's Schedule does not incl ude such a "concession requirement."  Mexico's 
                                                      
278 See Mexico's answer to question No. 3(d) of the Panel of 14 March 2003.  For question No. 3(d), 
see footnote 276 of this Report.  
279 Ibid. 
280 See the United States' comments on Mexico's answer to question No. 3(d) of the Panel of 14 March 
2003, paragraph 14. 
281 See Mexico's answer to question No. 2(a) of the Pa nel of 19 December 2002.  For question No. 2(a), 
see footnote 225 of this Report.  
282 See Mexico's answer to question No. 6(a) of the Panel of 19 December 2002 (" Mexico has inscribed 
in its schedule that it "will not issue permits for the establishment of a commercial agency until the 
corresponding regulations are issued ". What is the scope of Mexico's commitment under Mode 1 and Mode 3 
for commercial agencies?"). 
283 See the United States' second written submission, paragraph 17. WT/DS204/R 
Page 48  
 
Schedule simply does not require foreign suppliers  sending international traffic into Mexico to 
themselves have a concession.  Rather, it only requires that they route that traffic through the facilities 
of an entity that has a concession.  The United St ates further submits that this interpretation of 
Mexico's routing requirement is reinforced by th e contrast between Mexico's mode 1 and mode 3 
market access limitations.  To en joy market access as a facilities-based  operator in mode 3, Mexico's 
Schedule states that "[a] concession from the SCT is  required."  This wording shows that Mexico 
knew how to describe a concession requirement, where it so intended.
284 
4.139  Mexico  replies that it is not arguing that its limitation requires the United States-established 
supplier "itself" to maintain a co mmercial presence but that, given the nature of the half-circuit 
regime, routing services over the Mexican half ci rcuit must be supplied by a concessionaire 
established in Mexico.285 
4.140  The United States  does not agree that the routing requi rement falls within the limitations 
listed in GATS Article XVI:2(a) and (e).  Accord ing to the United Stat es, however, even accepting 
Mexico's point solely for the sake of argum ent, classifying the routing requirement under 
subparagraphs (a) or (e) would not reduce Mexico's  cross-border commitment to "unbound", and thus 
Section 2 of the Reference Paper and S ection 5 of the Annex would still apply.286 
4.141  In response to a question by the Panel, the United States  further claims that Mexico's 
argument that the cross-border supply of basic tele communications services by a foreign supplier can 
take place only if that supplier terminates its cross border services on the facilities of a concessionaire owned or controlled by that same supplie r is untenable for the following reasons:
287 
(i) Mexico's own Schedule does not limit ma rket access in mode 1 to only those 
foreign service suppliers that route traffic through the facilities of a Mexican 
concessionaire that the foreign service supplier itself owns or controls.288  
(ii) Second, accepting Mexico's argument would mean that the provision of basic 
telecommunications services on a cross-border basis would only be possible if a service supplier also operated on a commercial presence basis.  The result 
would be to make mode 1 redundant, and to render meaningless Members' 
mode 1 commitments in the basic telecommunications sector – a result that is contrary to the rules of interpre tation to be applied by the Panel.
289  Such an 
interpretation would be contrary to the meaning of mode 1, which is defined 
in GATS as the supply of a service "from the territory of one Member into the territory of any other Member." The ordinary meaning of these terms is 
that the service moves from the territory of one Member into the territory of 
the other Member, not the service supplier.  This reading is also supported by an explanatory scheduling note, which st ates that "international transport, the 
                                                     
 
284 See the United States' second oral statement, paragraphs 8-9. 
285 See Mexico's answer to question No. 3(c) of the Panel of 14 March 2003 (" If so, does the supplier 
have to supply through its network(s) the entire service, or is it sufficient that it supplies through its network for a portion of the transmission service?  Please elaborate by using evidence from relevant regulations, and 
consider the following scenarios:  the cross-border servi ce is supplied over a facilities-based network:  (i) on all 
segments of the transmission service, and on both sides of the border;  or (ii) on any segment of the 
transmission service, and on either side of the border;  or (iii) on the originating side of the border only;  or (iv) 
on the terminating side of the border only? ").  See also  the United States' comments on Mexico's answer to 
question No. 3(c) of the Panel of 14 March 2003, paragraph 13. 
286 See the United States' second written submission, paragraph 17. 
287 See the United States' answer to question No. 3(a) of  the Panel of 19 December 2002.  For question 
No. 3(a), see footnote 187 of this Report. 
288 Ibid. 
289 Ibid.  WT/DS204/R 
 Page 49 
 
 
supply of a service through telecommunications or mail, and services embodied in exported goods (e.g. a computer diskette, or drawings) are all examples of cross-border supply, since the service supplier is not present within the territory of the Memb er where the service is delivered".
290 
4.142  Mexico  acknowledges that a concessionaire which is  controlled by a foreign minority partner 
is a service supplier of another Member under th e definitions in Article XXVIII of the GATS.  
Mexico notes, however, that the United States has not established that any of the concessionaires 
authorized to supply public telecommunications servic es in the territory of Mexico are "controlled" by 
persons of another Member.  Thus, the evidence on the record does not demonstrate that these concessionaires are service suppliers of another Member.
291 
4.143  Mexico  further argues that, even if the Unite d States were to demonstrate that a 
concessionaire is a service supplier of the United St ates under the definitions in Article XXVIII of the 
GATS, this would merely establish that United States suppliers are supplying public telecommunications transport services through commercia l presence in the territory of Mexico.  Thus, 
those market entrants would not be supplyi ng services through mode 1 (cross-border supply).
292 
4.144  Moreover, Mexico  submits, other United States suppliers that "interconnect" with those 
concessionaires would not be supplying public telecommunications transport services on a cross-border basis from the United States into  Mexico because, in that event, the transport and delivery of a 
telephone call to the receiving party in Mexico woul d still require the joint provision of services by 
two service suppliers and the United States supplier th at originates the call would still have to hand 
off its traffic at the border to a supplier commercia lly established in Mexico.  The latter supplier is a 
different and separate "juridical person" that supplies services under the GATS.  Cross-border supply 
only occurs when a telecommunications service supplie r established and operating in the territory of a 
given WTO Member transports and delivers the data supplied by its customers across a border into the territory of another WTO Member.
 293 
4.145  Mexico  also submits that, even if the United States suppliers that "interconnect" with these 
concessionaires were supplying PTTNS on a "cross-border" basis from the United States into Mexico, 
the disciplines in Section 2 of Mexico's Reference Pape r would not apply.  By virtue of the chapeau to 
Section 2.2, the disciplines in that section apply only to interconnection with a "major supplier".  These concessionaires are not "major suppliers".
294 
4.146  As to non-facilities-based international services, Mexico  argues that, because an identical 
limitation relating to mode 1 cross-border supply is  inscribed under subparagraph (o) (i.e., Other – 
Commercial agencies) in Mexico's Schedule, Un ited States non-facilities-based suppliers of basic 
telecommunications services are prevented from suppl ying their services on a cross-border basis as 
well.  Also, Mexico claims that, by requiring intern ational calls to be routed through a facilities-based 
licensed carrier, Mexico has not undertaken any commit ment to authorize International Simple Resale 
(ISR).295  The effect of this limitation requires all supp liers established in the United States, including 
                                                      
290 See the United States' answer to question No. 3(a) of  the Panel of 19 December 2002.  For question 
No. 3(a), see footnote 187 of this Report. 
291 See Mexico's answer to question No. 5(c) of the Panel of 19 December 2002 (" Mexico argues that 
the limitation set out under Mode 1 read together with th e limitation set out under Mode 3 of Mexico's Schedule 
must be interpreted to mean that Mexico has not committed to the cross-border supply of basic 
telecommunications. (c) If so, can a concessionaire wh ich is controlled by a foreign minority partner be a 
service supplier of another Member under th e definitions in Article XXVIII of the GATS? "). 
292 See Mexico's answer to question No. 5(c) of the Pa nel of 19 December 2002.  For question No. 5(c), 
see footnote 291 of this Report. 
293 Ibid. 
294 Ibid. 
295 See Mexico's first written submission, paragraphs 132-133. WT/DS204/R 
Page 50  
 
United States "resellers" or "commercial agencies", to hand of their traffic at the border for transport services on the Mexican side of the half circuit to be supplied by Mexican c oncessionaires established 
in Mexico.
296 
4.147  The United States  argues that this asserted prohib ition does not follow from Mexico's 
scheduled commitments.  According to the Unite d States, Mexico's commitments for commercial 
agencies specifically include both the supply by a foreign supplier of scheduled basic 
telecommunications services from the United States in to Mexico over capacity leased from a Mexican 
concessionaire (mode 1), and the acquisition by a foreign service supplier of a locally-established commercial agency for the purpose of supplying sch eduled international basic telecommunications 
services from Mexico to the United States over capacity leased from a Mexican concessionaire 
(mode 3).  Both of these situations are examples of what is typically known as international simple 
resale.  The United States also notes that Mexico's routing requirement does not equate to a prohibition on the use of private leased circuits be cause a foreign service supplier that leases capacity 
from a concessionaire is still in co mpliance with the Mexican requireme nt to route traffic through the 
facilities of a concessionaire.
297 
4.148  Mexico  argues that Article XVIII of the GATS establishes a distinction between measures 
that affect market access and national treatment, which are subject to scheduling under GATS Article XVI and XVII, and other measures that aff ect the supply of a service within a Member's 
territory.  Only the latter category of measures can be covered by add itional commitments under 
Article XVIII of the GATS.  This means that th e terms and conditions governing market access for 
foreign service suppliers are determined by the commitments made under Article XVI of the GATS, 
and not by the commitments made pursuant to Artic le XVIII.  Since the Reference Paper was included 
in Mexico's Schedule pursuant to Article XVIII, it does not relate to Mexico's Scheduled market 
access commitments.
298 
4. Whether Telmex is a major supplier within the meaning of the Reference Paper 
4.149  The United States  submits that the Reference Paper defines "major supplier" as a "supplier 
which has the ability to materially affect the terms of  participation (having regard to price and supply) 
in the relevant market for basic telecommunicati ons services as a result of (a) control over essential 
facilities or (b) use of its position in the market".  According to the United States, this definition 
requires the determination of the "relevant ma rket for basic telecommunications services" and 
whether, in that market, the supplier in question can  use either control over essential facilities or its 
position in the market to materially affect terms of  participation.  The United States further notes that, 
because "control over essential facilities" and "use of its  position in the market" are in the disjunctive, 
either is sufficient to meet the definition.299 
4.150  Mexico  notes first that the burden is on the Un ited States to demonstrate that the 
interconnection at issue concerns a "major supplier".  According to Mexico, the analysis of the United 
                                                      
296 See Mexico's answer to question No. 6 of the Panel of 14 March 2003 ( What in your view, would be 
the legal significance of the routing re striction, in the absence of any mode  3 limitations in Mexico's Schedule?  
Under this hypothesis, which subparagraph of ArticleXVI:2 of the GATS would the routing restriction fit 
under? ).  See also  Mexico's answer to question No. 8 of the Panel of 14 March 2003 ( Mexico's commitments 
relating to commercial agencies – under "(o) other " – appear to be subordinate to the chapeau of its entry on 
telecommunications services.  Pl ease explain this relationship. ). 
297 See the United States' answer to question No. 6(b) of the Panel of 19 December 2002.  For question 
No. 6(b), see footnote 269 of this Report. 
298 See Mexico's first written submission, paragraphs 137-138. 
299 See the United States' first written submission, paragraphs 68-69.  WT/DS204/R 
 Page 51 
 
 
States is flawed.  Mexico also claims that the United States has not presented a prima facie case that 
Telmex is a "major supplier" within the meaning of the Reference Paper.300 
(a) The relevant market 
4.151  The United States  submits that, according to well-accepted principles of market analysis 
deriving from competition law, which are simila r in both United States antitrust and Mexican 
competition law, markets are defined in terms of s ubstitution, looking at the alternatives available and 
acceptable to consumers.  According to the United States, international telecommunications services, 
whether involving termination of cross-border suppl y or origination through a commercial presence in 
the country, are distinct from domestic telecommunica tions services and not substitutes.  In support of 
its argument, the United States cited to decisi ons by the Mexican competition authority, the Comisión 
Federal de Competencia  ("CFC"), which stated that international long-distance service is a relevant 
market for which there are "no close substitutes," and that such service is distinct from domestic local, 
access, long-distance or carrier toll services.301 
4.152  The United States  further submits that, within the broa d category of international services, it 
is necessary to distinguish the market s for originating traffic and for terminating traffic.  According to 
the United States' substitution analysis, because a Un ited States carrier cannot own its own facilities in 
Mexico and is required to hand o ff its cross-border telecommunications traffic into Mexico to a 
Mexican concessionaire at the international bord er, termination by Telmex (and other Mexican 
carriers authorized to operate inte rnational ports) is needed by United States and other foreign carriers 
to complete their international telecommunications traffic into Mexico.  Therefore, argues the United 
States, the origination of international voice telephon y, facsimile or circuit-switched data transmission 
in Mexico cannot be considered a substitute for th e termination of such services supplied on a cross-
border basis from the United States into Mexico.302 
4.153  The United States  also argues that, because Mexican la w does not permit the use of private 
leased circuits by either a foreign facilities-based operator or a commercial agency (either foreign or 
Mexican) for the purpose of carrying cross-border sw itched traffic, United States suppliers have no 
choice but to rely on Telmex (and other Mexican c oncessionaires authorized to operate international 
ports) to terminate their cross-border switched tele communications traffic in Mexico.  According to 
the United States, this limitation is clearly relevant  for market definition analysis under the established 
Mexican competition law, which takes into account  restrictions on using alternate sources of 
supply.303 
4.154  Thus, the United States  argues, the "relevant market for basic telecommunications services" 
in this dispute is the termination of voice telephon y, circuit-switched data transmission and facsimile 
services supplied on a cross-border basis from the United States into Mexico.304 
4.155  Mexico  replies that, the United States fails to clearl y define the services at issue and how they 
are supplied in its analysis.305 
4.156  Mexico  further argues, assuming that the servi ces at issue are the transportation and 
transmission of telecommunications signals and that  the mode of supply at issue is mode 1 (cross-
border), the United States fails to explain how the "r elevant market" it defines is relevant to the cross-
border supply of such services.  The United States de fines the "relevant market" as "the termination of 
                                                      
300 See Mexico's second oral statement, paragraphs 68, 69, and 74. 
301 See the United States' first written submission, paragraphs 73 and 75. 
302 See the United States' first written submission, paragraph 76. 
303 See the United States' first written submission, paragraph 77. 
304 See the United States' first written submission, paragraph 78. 
305 See Mexico's second oral statement, paragraph 70. WT/DS204/R 
Page 52  
 
voice telephony, facsimile and circuit-switched data  transmission services".  According to Mexico, 
"termination services", to the extent that they are provided by a carrier in a WTO Member, are 
provided on a mode 3 (commercial presence) basis and not on a cross-border basis.  Mexico claims 
that the United States' analysis confuses two distin ct modes of supply – cross-border and commercial 
presence.  Moreover, Mexico submits, the United St ates relies on a relevant market resolution by the 
Mexican competition authority that is under review by Mexican courts
306 precisely because it was 
based on data from 1996, that is, when the tel ecommunications market was not yet fully open.307 
4.157  In addition, Mexico  submits, even assuming that defining the relevant market as "termination 
services" is relevant, it is unclear whether a carrier in Mexico, such as Telmex, is providing "termination services".  According to Mexico, a t echnical distinction can be made between the 
traditional accounting rate procedure, which invol ves jointly provided services and a division of 
revenues for the provision of these jointly provided services, and a termination  regime under which 
telecommunications services are treated as a tradab le commodity rather than as jointly provided 
services.  Mexico submits that this distinction has been recognized by the ITU.  Mexico maintains a 
traditional accounting rate regime under which services are provided jointly and re venue is divided.  It 
does not maintain a termination regime.  In this sense, it cannot be said that any carrier operating in 
Mexico provides "termination services".  In fact, th e rates are determined by bilateral negotiations 
between private parties – carriers of Mexico and the United States – for traffic going in both directions.  Accordingly, the "relevant market" for those negotiations must encompass that two-way 
traffic.  Mexico also notes that, at the time of the negotiation of the current accounting rates, 
WorldCom had the same market share of southbound  traffic that Telmex did of northbound traffic.
308 
4.158  Mexico  also submits that, even if a carrier in Mexico does provide "termination services" for 
foreign carriers wishing to terminate calls with in Mexico, these services and how to schedule them 
were a specific topic of discussion during the nego tiations on basic telecommunications.  There was 
no agreement on these services and, even if there w as, Mexico has not inscribed in its Schedule any 
specific commitments with respect to these services.309 
(b) Whether Telmex has market power 
4.159  The United States  argues that, Telmex has "market pow er" or "substantial power" in the 
relevant market for termination of voice telephony, facsimile and circuit-switched data transmission 
services supplied on a cross-border basis from the Un ited States into Mexico, based on the special 
rights given to it by Mexico's ILD Rules as well as  the findings of Mexico's own Federal Competition 
Commission, and the evidence of Telmex's continuing  dominance in this area and persistent ability to 
maintain international settlement rates well above cost.310 
4.160  The United States  submits that, Telmex's market power stems most directly from the special 
and exclusive legal right conferred on it under Mexico 's ILD Rules.  In particular, Rule 13 provides 
that "[t]he long-distance concessionaire with the grea test percentage of the outgoing long-distance 
market in the last six months prior to negotiati on with a determined country, shall be the one to 
negotiate the liquidation tariffs with the operators of  such country." Rule 10 also provides that this 
rate shall be the uniform rate ch arged by all Mexican carriers.  Thus , the United States contends,  as 
the largest carrier, Telmex is granted the exclusiv e right to determine the settlement rates for cross-
border termination for all Me xican carriers.  Even thoug h there are other Mexican 
                                                      
306 See Mexico's second oral statement, paragraph 71. 
307 See Mexico's first written submission, paragraphs 102-108. 
308 See Mexico's second oral statement, paragraph 72. 
309 See Mexico's second oral statement, paragraph 73. 
310 See the United States' first written submission, paragraph 81.  WT/DS204/R 
 Page 53 
 
 
telecommunications carriers that have their own ne tworks, they are prohibited from competing on the 
price of terminating cross-border traffic in to Mexico by operation of Mexican law.311 
4.161  Mexico  argues that the requirements in Rules 10 a nd 13 help protect and promote investment 
in domestic infrastructure in several ways: (i) they en sure that an incumbent carrier will not be able to 
use its market position to negotiate better deals than the new entrants; (ii) they prevent large carriers 
in the two countries from conspiring to exclude smalle r carriers; and (iii) they prevent new entrants 
that focus on high volume, low cost end-users from tr iggering a "price war" that could drive the rates 
of all carriers too low to support infrastructure build-out.  Mexico points out that, since the 
United States already has very substantial inv estments in telecommunications infrastructure, 
promotion of investments in facilities has not been a high priority.  However, for countries such as 
Mexico, with low teledensity and unserved rural ar eas, it is vital.  Mexico further notes that it 
implemented the ILD Rules for accounting rate agre ements to mirror the pre-existing rules of the 
United States, which for United States-Mexico traffic re quire that United States carriers reflect in their 
accounting rate agreements the requirements of propor tional return and uniform settlement rates.  The 
United States further requires that international settlement rates be symmetrical – that is, that 
United States carriers charge foreign carriers the exac t same rate that they pay the foreign carriers.  
The stated purpose of the United States policy is  to prevent its carriers from being "whipsawed" by 
foreign carriers; that is, to prevent foreign carrier s from being able to obtain unduly favourable terms 
and conditions from United States carriers by setting th em against one another.  Thus, Mexico argues, 
in the absence of the ILD Rules,  Mexican carriers would be vulnerable to "whipsawing" by 
United States carriers.312 
4.162  The United States  also claims that the extent of Te lmex's market power has also been 
substantiated by Mexico's own competition authority, the Comisión Federal de Competencia  
("CFC").313  According to the United States, in 2001, th e CFC reaffirmed its earlier conclusion that 
Telmex had " poder sustancial " (substantial power) in international ser vices in light of its "large share 
of the international long-distance market," "its  ability to set payment charges applicable to 
international traffic," and its "advantages arising from its  vertical integration that enable it to set prices 
for cross-border dedicated circuits and enjoy signi ficant advantages from the resale of international 
port services."314  The United States further submits that, the CFC's conclusion regarding international 
services is also applicable to the market for termin ation of switched cross-border traffic as a subset of 
the broader international services market analyzed in  the CFC decision.  The United States explains 
that, Mexico's ILD Rules require the proportional allocation of terminating traffic among Mexican 
network operators according to each operator's share of  originating traffic, rather than allowing each 
operator to compete freely to terminate any amount of incoming international traffic.  Therefore, if an 
operator has "substantial power" in providing international services or iginating within Mexico, it will 
have at least a comparable position in the market for termination of cross-border switched traffic into 
Mexico.315 
4.163  The United States also submits that, like the CFC, the United States Federal Communications 
Commission has also found that both Telmex and its United States affiliate are dominant in the 
provision of international services between the United States and Mexico.  The FCC determined that Telmex continues to control "bottleneck" facilities,  including the only ubiquitous local network an 
ubiquitous inter-city facilities that are needed for ca rriers to terminate international switched services 
into Mexico.
316 
                                                      
311 See the United States' first written submission, paragraph 82. 
312 See Mexico's first written submission, paragraphs 79-81. 
313 See the United States' first written submission, paragraph 84. 
314 See the United States' first written submission, paragraphs 84-90. 
315 See the United States' first written submission, paragraph 91. 
316 See the United States' first written submission, paragraph 92. WT/DS204/R 
Page 54  
 
4.164  Mexico  argues that it has taken a number of step s to establish a comprehensive regulatory 
framework for the incumbent (former monopoly) ca rrier, Telmex, which are designed to introduce 
competition while protecting and promoting the nation's telecommunications infrastructure.
317 
According to Mexico, Telmex's concession title was substantially modified when it was privatized.318 
As a result, Telmex's concession title itself contai ns provisions intended to  prevent anti-competitive 
activities.319  Mexico also points out that, under Artic le 63 of the Federal Economic Competition Law 
(FTL), a finding by the Federal Competition Commission ("COFECO") that a concessionaire possesses substantial market power does not imply that the concessionaire has abused its market 
power (that is, behaved in  an anticompetitive manner).
320 Rather, it merely allows COFETEL to 
impose prophylactic measures to prevent abuses of market power.321 
4.165  The United States  submits that, current market eviden ce indicates that Telmex has exercised 
and continues to exercise, market power with resp ect to the markets for termination of cross-border 
voice telephony and circuit-switched data transmissi on services from the United States into Mexico.  
The United States begins by noting that Telmex's sh are in the international long-distance market has 
long been well over 50%.  The United States notes that , a large market share on the order of 50% or 
more, particularly when sustained over time , is well recognized by competition authorities and 
telecommunications regulators as relevant evidence of a firm's market power, though not the sole 
determining factor, and the higher the market share,  the more readily it will support a presumption of 
market power.322  Furthermore, the United States submits that Telmex's significant market power is 
indicated by the absence of signifi cant new suppliers of international telecommunications services in 
Mexico during the past few years.323  Also, the United States argues, Telmex's market power is 
demonstrated by its ability to maintain prices for a sustained period of time well above the levels that 
could be expected to prevail in a competitive environment.324 
4.166  Mexico  submits that currently there are 27 concessionaires allowed to provide long-distance 
services, including three United States-affiliated carr iers, Avantel (WorldCom), Alestra (AT/T) and 
Iusatel (Verizon).325  Also, as of September 2002, 11 out of the 27 long-distance concessionaires in 
Mexico were authorized to operate international ports and, thus, to carry outgoing and incoming 
international calls.326  According to Mexico, new entrants in  the Mexican domestic and international 
long-distance market have gained significant market  share when compared with other countries that 
opened the sector to compe tition under similar conditions.327  Mexico points out that, with respect to 
the domestic long-distance market, using data from the year 2000, it took the new entrants only four years to capture a 29% share of the Mexican mark et (measured in terms of access lines served per 
carrier).
328  In the European Union, new entrants in the domestic long-distance market had on average 
20 per cent market share in 2000 after three years of competition.329  By comparison, it took new 
entrants in the United States more than 11 years af ter competition was allowed to reach a comparable 
                                                      
317 See Mexico's first written submission, paragraph 96. 
318 See Mexico's first written submission, paragraph 97. 
319 See Mexico's first written submission, paragraph 98. 
320 See Mexico's first written submission, paragraph 103. 
321 Ibid. 
322 See the United States' first written submission, paragraph 93. 
323 See the United States' first written submission, paragraph 95. 
324 See the United States' first written submission, paragraph 97. 
325 See Mexico's first written submission, paragraph 87.  See also  Mexico's first oral statement, 
paragraph 11. 
326 See Mexico's first written submission, paragraph 88. 
327 See Mexico's first written submission, paragraph 89. 
328 See Mexico's first written submission, paragraph 90.  See also  Mexico's first oral statement, 
paragraph 13. 
329 Ibid.  WT/DS204/R 
 Page 55 
 
 
market share.330  Mexico also notes that, in the case of the market for international long-distance 
traffic, new entrants in Mexico have perfo rmed even better in capturing market share.331  This is 
reflected in the market share of Telmex, which at the end of 2000 was at a 61%, whereas in European 
Union member countries the incumbents had an aver age market share of 80% in terms of minutes.332  
Again, in the United States, after eleven years of  competition, the incumbent (AT&T) had a market 
share of 59% – similar to that of Telmex today.333  Mexico further submits that that new entrant 
carriers have been gaining significant market share on many important routes.334  For example, from 
January to June of 2002, Alestra (the affiliate of AT&T) had 39% of the outgoing traffic to the 
United Kingdom while Telmex had 49%.335 
5. Whether Telmex' interconnection rates are "basadas en costos" 
4.167  The United States  argues that Section 2.2 of Mexico's  Reference Paper requires Mexico to 
ensure that Telmex provides interconnecti on at rates that are "based in cost" (" basadas en costos ") 
and "reasonable".  However, according to the United St ates, Mexico has failed to meet this obligation 
because the rates that Telmex charg es United States suppliers to interc onnect are not based in cost or 
reasonable.336 
4.168  Mexico  argues that, because Mexico did not make any specific commitments relating to the 
accounting rate regime, Section 2 of the Reference Paper does not apply to the facts of this dispute.  
Mexico further submits that, even if Mexico's Refe rence Paper could be considered to apply to the 
accounting rate regime, the United States has failed to present a prima facie case that the accounting 
rates negotiated by Mexican and United States carri ers do not comply with the obligations of the 
Reference Paper.337 
(a) Whether Telmex interconnection rates are "based in cost" 
(i) The meaning of "based in cost " 
4.169  The United States  submits that the term "based in cost" is  not defined in the reference paper.  
The United States notes first that the ordinary meani ng of "based in cost" suggests that the "cost" at 
issue must be related to the cost in curred in providing the good or service.338  Next the United States 
argues that, because the terms "cost-oriented" and " basadas en costos " are used in the 
telecommunications laws and regulations of WTO Me mbers, this usage could be termed a "special 
meaning," which Article 31(4) of the Vienna Convention  provides "shall be given to a term if it is 
established that the parties so intended."339  After surveying the laws of many WTO Members, 
including Mexico, the United States argues that, there appears to be consensus among many WTO 
Members – including Mexico – to give  the term "cost-oriented" and " basadas en costos " the "special 
meaning" that interconnection rates should be based on the cost of providing interconnection.340  The 
United States also submits that this "special m eaning" is in line with the meaning derived from 
                                                      
330 See Mexico's first written submission, paragraph 90.   See also  Mexico's first oral statement, 
paragraph 13. 
331 See Mexico's first written submission, paragraph 91.   See also  Mexico's first oral statement, 
paragraph 14. 
332 Ibid. 
333 Ibid. 
334 See Mexico's first written submission, paragraph 73.   See also  Mexico's first oral statement, 
paragraph 14. 
335 Ibid. 
336 See the United States' first written submission, paragraphs 100-101. 
337 See Mexico's first written submission, paragraphs 147, 148, and 177. 
338 See the United States' first written submission, paragraph 107. 
339 See the United States' first written submission, paragraph 108. 
340 See the United States' first written submission, paragraphs 109-113. WT/DS204/R 
Page 56  
 
Article 31(1) of the Vienna Convention , which states that a "treaty shall be interpreted in good faith in 
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the 
light of its object and purpose."
341 According to the United States, the interconnection obligations in 
Section 2 are one part of the set of pro-comp etitive regulatory commitments embodied in the 
Reference Paper, which mandates major suppliers to  charge interconnection rates based on the cost 
that the major supplier incurs  in providing interconnection.342 
4.170  Mexico  claims that the United States interprets the term " basadas en costos " narrowly to 
mean that the rate in question must equal the ba re cost of providing the service and this narrow 
interpretation must be rejected.343  According to Mexico, basadas en costos  allows for more distance 
between the rate and the cost than is argued by the United States.344  In support of its argument, 
Mexico first notes that if the negotiators of the Model Reference Paper and Mexico's Reference Paper 
had intended this narrow interpretati on, they would have referred to "rates that equal cost" or "rates 
that at most recover cost".345  Instead, they used a much more flexible term.346  Further, interpreting 
"cost oriented" to mean "equal to cost" would lead to an absurdity, in that the carrier supplying the 
service would be prohibited from making any profit  at all in transactions with other carriers.347  
4.171  According to Mexico , cost-oriented rates should allow an  adequate rate of return, even 
without the modifiers "reasonable" and "economically  feasible" being taken into consideration.  
Determining an adequate rate of  return is an extremely complex matter and one which is not 
necessarily restricted to the charg es for carrying international calls; rather, it could quite legitimately 
involve overall carrier costs.  Specifically, a mu lti-product firm (one offering a range of services) 
incurs different kinds of costs in  providing its services, some of whic h can be directly allocated to 
specific services, given that it is provision of these  particular services which gives rise to the cost 
incurred.  However, in addition to  direct costs, a multi-product firm  incurs costs that are shared 
between groups of services and costs which are co mmon to all services.  Both common and shared 
costs can only be avoided if the group of services is terminated (in the case of shared costs) or if the 
whole firm closes down (in the case of common costs).  In spite of the fact that common and shared 
costs cannot be directly allocated to the various services offered by a multi-product firm, they are 
nevertheless real economic costs which must be recovered if the firm hopes to earn a competitive 
return on the capital used and to co ntinue to attract investment funds for the business.  Most firms in 
competitive industries are multi-product and the ma rgins referred to are necessary, as are cost 
increases.  Such increases provide the expected  revenue and recoup bot h common costs and any 
historic costs permitted by the market.  The extent of the margins depends on market conditions.  In 
short, Mexico argues, fixing a carrier's interconnecti on rate at direct cost level would be incorrect 
from an economic point of view.  At the same time, an "economically correct" increase in common 
and shared costs is mainly a question of market conditions.348 
4.172  Mexico  also submits that it does not, in any case, consider that the Reference Paper provides 
a basis for determining the level of rate of return appropriate for any particul ar circumstance.  Rather, 
it would be more advisable to focus on whether the ra te is in itself reasonable in the light of all the 
                                                      
341 See the United States' first written submission, paragraph 114. 
342 See the United States' first written submission, paragraphs 115-117. 
343 See Mexico's second written submission, paragraph 81.   See also  Mexico's answer to question 
No. 10(a) of the Panel of 19 December 2002 (" Does Mexico consider that the rates that Mexican companies 
currently charge for terminating incoming traffic from the United States are cost-oriented? "). 
344 See Mexico's second written submission, paragraph 82.   See also  Mexico's answer to question 
No. 10(a) of the Panel of 19 Decem ber 2002.  For question No. 10(a), see footnote 343 of this Report.  
345 See Mexico's answer to question No. 10(a) of the Panel of 19 December 2002.  For question 
No. 10(a), see footnote 343 of this Report. 
346 Ibid. 
347 Ibid. 
348 See Mexico's answer to question No. 12 of the Panel of 14 March 2003.  For question No. 12, see 
footnote 111 of this Report.  WT/DS204/R 
 Page 57 
 
 
circumstances, for example, by way of a compar ison with target rates and the rates of other 
countries.349 
4.173  The United States  submits that Mexico's assertion is  not correct.  According to the 
United States, under Mexican law, interconnecti on rates for commercially-present suppliers must 
recover at least the total cost of all network elemen ts.  The term used for "total cost" in Mexican law 
is "long run average incremental cost."  The United States argues that the term "long run" refers to a 
period long enough so that all costs become variab le.  As a result, when Mexican law requires that 
carriers recover "at least the long run average incremen tal cost," it already builds in the cost of capital, 
which includes a reasonable rate of return, or in other words a profit.350 
4.174  Mexico  also submits that Mexico's Schedule is part of the GATS which, itself, is part of  the 
WTO Agreement.  As a consequence, other agreemen ts within the WTO Agreement form part of the 
context of the GATS and, thereby, part of the cont ext of Mexico's Schedule.  Mexico points out that, 
according to Article 2.2 of the Agreement on Implem entation of Article VI of the General Agreement 
on Tariffs and Trade (Anti-Dumping Agreement), where a precise relationship between a price and a cost was intended, this relationship was specified explicitly.  However, no such relationship is 
specified in the Model Reference Paper or in Mexico 's Reference Paper.  Mexico also submits that, 
even assuming that the reference papers inscribed  in the Members' schedules could apply to the 
accounting rate regime, the practice of the WTO Members subsequent to the conclusion of the negotiations on basic telecommunicati ons confirms that the Members do not share the United States' 
narrow interpretation of "cost-oriented".  Of th e 55 WTO Members that inscribed a version of the 
reference paper in their schedules that included the "cost-oriented" requirement in paragraph 2.2(b), 
Mexico is not aware of any that have adopted an explicit requirement that settlement rates negotiated 
under accounting rates arrangements be based on the costs of their own carriers, let alone equal to cost 
or no greater than their carriers' rates for domestic interconnection.  There is good reason for this state 
of affairs.  If the narrow interpretation posed by the United States is applied to accounting rates, it 
would create the absurdity identified in Mexi co's response to question 7 of the Panel.
351 
4.175  The United States  replies that it is aware of no Member, other than Mexico, that has accepted 
commitments under Section 2.2(b) of the Reference Paper and that has simultaneously imposed an 
explicit prohibition on competition between supplie rs providing interconnection to cross-border 
suppliers, the effect of which is to prevent comp etition from reducing rates.  Even if other WTO 
Members do not have explicit requireme nts for settlement rates to be cost-based, they also do not have 
restrictions, such as those maintained by Mexi co, on competition between suppliers.  Those other 
Members therefore can reasonably rely on competitive market dynamics to yield cost-based 
settlement rates.  The United States notes that, for numerous countries where competitive conditions 
are allowed to govern international interconnecti on rate negotiations, United States carriers have 
negotiated rates for traffic termination in  the range of 1.5 to 4 cents per minute.352 
                                                      
349 See Mexico's answer to question No. 12 of the Panel of 14 March 2003 (" Is there a margin for an 
adequate rate of return that can be interpreted into the terms 'cost-oriented rates that are … reasonable. '  If so, 
what would be an adequate margin of return.  Please provide examples. "). 
350 See the United States' second oral statement, paragraph 50.  See also  the United States' comments on 
Mexico's answer to question No. 12 of the Panel of 14 March 2003, paragraph 36. 
351 See Mexico's answer to question No. 10(a) of the Panel of 19 December 2002.  For question 
No. 10(a), see footnote 343 of this Report. 
352 See the United States' answer to question No. 19(a) of the Panel of 14 March 2003 (" Mexico states 
in paragraph 146 of its Responses to questions that it 'is not aware that the United States or any other country 
among the 55 has explicitly attempted to subject accounting rate arrangements to the obligations of Section 2.2(b).' (a) Does the United States share Mexico's belief that most or a ll of the Members that have accepted 
Section 2.2(b) Reference Paper commitments also tolerate, or require, non-cost-based 'accounting rate 
arrangements' with carriers in other countries? "). WT/DS204/R 
Page 58  
 
4.176  The United States  also points to evidence showing one major operator's wholesale rates to 
terminate calls to various countries, including six EC member States and eighteen other WTO Members that included the interconnection commitments  under Section 2.2(b) of the Reference Paper.  
All of those rates are lower than the current average rate Telmex charges United States suppliers, and 
many are below 2 cents per minute.  Mexico h as challenged none of this evidence.  Thus, the 
United States argues, to the extent that any WTO Me mber does not fulfil its obligations under Section 
2.2(b) of the Reference Paper, other WTO Members ha ve the right to challenge that failure in dispute 
settlement.
353 
4.177  Mexico  argues that, under a "cost-based" or "cost-or iented" standard, a rate is not limited to 
simply recovering cost but can also recover amounts that reflect social policy and other concerns.  
Therefore, the narrow benchmark established in the United States' first written and oral submissions is 
without legal basis.  By implication, the evidence us ed to argue that Mexico does not comply with the 
narrow benchmark is irrelevant a nd does not establish a prima facie  case of a violation of 
Section 2.2(b) of Mexico's Reference Paper.354  
4.178  Mexico  notes that the United States' accounting rate arrangements with a number of other 
countries provide for much higher settlement rate s than the current United States –– Mexico 
arrangement.  Noting that accounting rate arrangements exist side-by-side with ISR even in countries 
where ISR is legal, Mexico argues that the Unite d States continues to ignore those accounting rate 
arrangements and insists on comparing the United States-Mexico accounting rate arrangement to ISR 
charges purportedly available to United States' carrie rs to send traffic to other countries.  Mexico 
submits that the United States refuses to acknowledge a comparison of the United States — Mexico 
accounting rate arrangement to United States accoun ting rate arrangements w ith other countries.  
Mexico further argues that the United States implic itly admits that other WTO Members "do not have 
explicit requirements for settleme nt rates to be cost-based."355 
4.179  Mexico  argues that, because accounting rate arra ngements provide for access to an entire 
country's public network, the phrase in Section 2.2(b)  does not mean that the charges associated with 
the interconnection cannot include an amount to off set the cost of rolling out telecommunications 
infrastructure.356  Clearly, such charges can be allocated to any and all network components.  Under 
the United States' argument, a WTO Member inscrib ing commitments analogous to Section 2.2(b) of 
Mexico's Reference Paper could not include any am ount to offset infrastructure roll-out.  Such an 
interpretation is absurd and is contrary to Article  IV and paragraph five of the Preamble to the 
GATS.357 
4.180  Mexico  argues further that the United States neglec ts to acknowledge that paragraph 2.2(b) 
states that interconnection is provided "on terms, conditions … and cost-oriented rates …that are … 
reasonable, having regard to economic feasibility ."358  According to Mexico, the ordinary meaning of 
"economically" is "as regards the efficient use of income and wealth: economically feasible 
proposals"; the ordinary meaning of "feasible" includes "capable of being done, effected or 
                                                      
353 See the United States' answer to question No. 19(a) of the Panel of 14 March 2003.  For question 
No. 19(a), see footnote 352 of this Report. 
354 See Mexico's second written submission, paragraphs 83-84. 
355 See Mexico's comments on the United States answer to question No. 19(a) of the Panel of 14 March 
2003, paragraphs 36-37. 
356 See the United States' comments on Mexico's answer to question No. 4(a) of the Panel of 14 March 
2003, paragraph 16. 
357 See Mexico's second oral statement, paragraph 83. 
358 See Mexico's first written submission, paragraph 181.   See also  Mexico's second written submission, 
paragraph 87.  WT/DS204/R 
 Page 59 
 
 
accomplished" and "suitable".359  In the context of interconnection rates, the term means that the 
obligation to ensure that rates are cost-oriented is not absolute, but rather tempered by factors arising 
from economic feasibility, which can include consider ations of a nation's overall policy goals for 
expanding its telecommunications infrastructure.360  Thus countries – especially developing countries 
such as Mexico – have wide latitude to allow rat es that would permit the continued development of 
needed infrastructure and the ach ievement of universal service.361 
4.181  Mexico  submits that the United States' claim must fail because the United States did not 
interpret "based in cost" in light of the entire qualifying phrase.362  Mexico argues that, in applying the 
"economically feasible standard," account must be taken of Mexico's clear policy goal of promoting 
universal access to basic telecommunications service  for its population.  Ac counting rate revenues 
remain an important potential source of funds for in frastructure development.  However, Mexico's net 
revenue from settlement rates (from all countries) has al ready been declining.  Thus, in light of the 
important need of Mexico for investment in the telecommunications sector, further and immediate drastic cuts in settlement revenue are not economically feasible.
363 
4.182  Mexico  cites to a statement of a United States repres entative in the context of discussions that 
led to the Annex on Telecommunications.364  According to Mexico, this statement highlights that the 
term "cost-based" was not intended to require that the "price of a specific service on a specific route to be identified and charged on a cost-based basis";  ra ther, the term as used in the telecommunications 
sector implies considerable flexibility for regulators to  take into account social policy goals, the need 
to balance out varying cost structures across differe nt regions and as between local and long-distance 
service.  Mexico also cites to two reports by th e Mexican Government, which shows that Mexico has 
had an established policy to promote the construc tion of telecommunications infrastructure with a 
view toward broadening the availability of telepho ne and related services.  Neither the Reference 
Paper, nor the GATS more generally , should be interpreted in such a way as to prevent Mexico from 
carrying out this policy.
365 
4.183  The United States  argues that the terms " basadas en costos " and "cost-oriented" require a 
relationship between interconnection rates and the co st incurred in providing interconnection, rather 
than costs incurred in connection with infrastructur e development or other social policy goals.  The 
WTO website defines "cost-based pricing" as "the general principle of charging for services in relation to the cost of providing these services." Furt hermore, Section 2.2(b) of Mexico's Reference 
Paper requires that a supplier purchasing interconn ection "need not pay for network components or 
facilities that it does not require for the [interconn ection] service to be provided."  This language 
provides relevant context for the interpretation of " basadas en costos ", and makes clear that the scope 
of all interconnection charges is limited to the specific network components and facilities required for 
the interconnection service provided, and not other unre lated costs.  By claiming that "accounting rate 
revenues remain an important source of potenti al revenue for infrastructure development," the 
                                                     
 
359 See Mexico's second written submission, paragraph 93.   See also Mexico's answer to question 
No. 14(a) of the Panel of 19 December 2002 (" What is the meaning of '… having regard to economic feasibility 
…' in paragraph 2.2 of the Reference Paper? ") 
360 See Mexico's first written submission, paragraph 181.  See also  Mexico's second written submission, 
paragraph 93.  See also Mexico's answer to question No. 14(a) of the Panel of 19 December 2002.  For question 
No. 14(a), see footnote 359 of this Report. 
361 See Mexico's answer to question No. 14(a) of the Panel of 19 December 2002.  For question No. 
14(a), see footnote 359 of this Report. 
362 See Mexico's first written submission, paragraph 181.   See also  Mexico's second written submission, 
paragraph 88. 
363 See Mexico's second written submission, paragraph 95.   See also Mexico's answer to question 
No. 14(a) of the Panel of 19 Decem ber 2002.  For question No. 14(a), see footnote 359 of this Report. 
364 See Mexico's second written submission, paragraph 82. 
365 See Mexico's answer to question No. 10(a) of the Panel of 19 December 2002.  For question 
No. 10(a), see footnote 343 of this Report. WT/DS204/R 
Page 60  
 
United States argues, Mexico effectively concedes th at its international inte rconnection rates recover 
more than the cost of the "network components or facilities . . . require[d] for service to be provided" 
to United States suppliers.
366 
4.184  The United States  submits that nothing in this definiti on supports consideration of the public 
policy factors cited by Mexico.  According to the United States, Mexico's definition of "economically 
feasible" as requiring consideration of the "efficient"  use of income and wealth in fact prohibits 
consideration of the non-cost-oriented factors Mexi co seeks to include through this language.  The 
efficient use of resources requires cost -oriented pricing and not subsidization .  Citing an ITU 
statement, the United States argues that the effici ent use of income and wealth must preclude the 
open-ended subsidization of "policy goals" such as infrastructure development and universal service.  
The terms " basadas en costos " and "cost-oriented" require a re lationship between interconnection 
rates and the costs incurred in providing interconnection.367 
4.185  The United States  also submits that cost-oriented pricing,  as that term is used in Section 2 of 
the Reference Paper, does not permit Mexico so-ca lled "flexibility" to implement the national goals 
that Mexico identified in its submission.  A ccording to the United States, the provisions on 
interconnection serve to achieve the requirement to which all Members that subscribed to the 
Reference Paper committed, namely to ensure that the scope of all interconnection charges is limited 
to the specific network components and facilities required for the interconnection service provided, 
and not other unrelated costs.368  Furthermore, the United States disagrees with Mexico's 
interpretation of its statement during the 1990 negotiati ons.  According to the United States, it is clear 
from this statement, that the United States was draw ing a distinction between a cost-based rate and a 
price that includes a universal service component.  As Mexico notes, this statement was made in the 
context of the Annex negotiations, which did not le ad to the adoption of any "cost-based" or "cost-
orientation" rate requirement.  In contrast, the Reference Paper separates the disciplines on interconnection rates in Section 2 from the disciplines on universal service in Section 3.
369 
4.186  The United States  argues that the phrase "having regard to economic feasibility" does not 
"temper" a Member's obligation to provide interconn ection at cost-oriented rates, in light of its 
"overall policy goals for expanding its telecomm unications infrastructure." According to the 
United States, Section 2.2(b) of the Reference Pa per requires a relationship between interconnection 
rates and the cost incurred in providing interconnecti on, rather than costs incurred in connection with 
telecommunications infrastructure roll-out.  Addition ally, Section 3 of the Reference Paper imposes 
separate and particular requirements for Members wishing to impose universal service obligations to 
fund the requirements of Members seeking to rollou t their national telecommunications infrastructure.  
Thus, the United States argues that Mexico seeks to avoid the requiremen ts of Section 3 (and to read 
Section 3 out of the Reference Paper) by justifying  its rollout costs pursuant to the phrase "having 
regard to economic feasibility." 370 
4.187  The United States  argues that taking the phrase "economically feasible" into account does 
not change the fact that Telmex's rates are substan tially above cost and that, as a result, Mexico is not 
in compliance with Section 2 of the Reference Paper.   The United States explains that, first this phrase 
must be read in the context of subparagraph 2.2(b) of the Reference Paper in its entirety.  According 
                                                      
366 See the United States' answer to question No. 13 of the Panel of 14 March 2003 (" Does cost-
oriented pricing allow for flexibility in implementing national goals, as Mexico  appears to argue  in paragraphs 
188-192 of Mexico's Responses to questions? ").  See also the United States' second oral statement, paragraph 60. 
367 See the United States' second oral st atement, paragraphs 59 and 60. 
368 See the United States' answer to question No. 13 of the Panel of 14 March 2003.  For question 
No. 13, see footnote 366 of this Report. 
369 See the United States' second oral statement, paragraph 62. 
370 See the United States' second written submission, paragraph 71.  See also the United States' answer 
to question No. 14(a) of the Panel of 19 December 2002.  For question No. 14(a), see footnote 359 of this 
Report.  WT/DS204/R 
 Page 61 
 
 
to such reading, this phrase immediately foll ows the requirement for "reasonable" terms and 
conditions for interconnection, which prohibits the u se of such terms and conditions to restrict the 
supply of a scheduled basic telecommunications service.  Second, under the ordinary meaning of the phrase "having regard to economic feasibility," a te rm or condition for interconnection will not be 
"razonables " if it restricts the supply of a scheduled  telecommunications service where such 
interconnection is economically practical or possi ble – that is, where the resulting revenues are 
sufficient to cover the expenses of its operation or use.
371  
4.188  The United States  further explains that this means that the obligation to provide 
interconnection is limited only where there is in sufficient demand from interconnecting suppliers to 
generate sufficient revenue to cover the expenses of operation or use, or where a major supplier 
requires an additional period of  time to install necessary switching capabilities or other required 
network components or facilities where more rapid inst allation would entail very high costs that could 
not be recovered from interconnec ting suppliers.  However, because the United States-Mexico route 
carries the world's largest one-way volume of intern ational calls, there is no question of insufficient 
demand for interconnection; also, because United St ates suppliers are already interconnected with 
Telmex, such interconnection does not require additional switching capabilities or other network 
components or facilities.  Thus, neither is the case in  Mexico.  Third, to the extent that the phrase 
"having regard to economic feasibility" limits the ob ligation to provide interconnection at rates that 
are " basadas en costos ", interconnection rates should be sufficient to cover the expenses of the 
operation and use of interconnection, which requires no more than that interconnection rates should 
cover both direct costs and common costs, and shou ld permit a reasonable return on an operator's 
investment.  According to the United States, all of these costs are already includ ed in the rates set out 
by the United States as benchmarks for the determin ation whether Mexico's interconnection rates are 
"basadas en costos ".372 
4.189  The United States  also notes that, Mexico may meet its other national goals, unrelated to 
interconnection, in a variety of ways.  For example, Mexico could put in place a universal service 
obligation, under Section 3 of the Reference Pape r.  However, the recovery of universal service 
subsidies through inflated interconnection charges paid  to the major supplier would be contrary to the 
Section 3 requirement that universal service obliga tions be "administered in a transparent, non-
discriminatory and competitively-neutral manner . . ." .  Such recovery would not be transparent, 
because universal service obligations would be hi dden in interconnection rates paid to the major 
supplier.  Nor would it adhere to the requireme nts for non-discrimination and competitive neutrality, 
because it would burden only those suppliers purchasing interconnection with the funding of universal 
service obligations.373  Moreover, the United States claims that  Mexico's argument is also refuted by 
Section 3 of the Reference Paper, which provides fo r separate universal service obligations to finance 
universal service and infrastructure development.  The recovery of universal service subsidies hidden 
in interconnection charges would be contrary to the Section 3 requirement for transparent 
administration of universal service obligations.374 
4.190  Mexico  argues that Section 3 of Mexico's Reference Paper merely imposes obligations for 
universal service, that is, requirements imposed on dom estic carriers to supply universal service.  It 
                                                      
371 See the United States' second written submission, paragraphs 67-70.   See also the United States' 
answers to question No. 14(a) (for question No. 14(a), see footnote 359 of this Report) and question No. 14(b) 
("How might this phrase modify in practice the determination of cost-oriented interconnection prices? ") of the 
Panel of 19 December 2002. 
372 See the United States' second written submission, paragraphs 67-70.  See also the United States' 
answers to question 14(a) (for question 14(a), see footnote 359 of this Report) and question 14(b) (for question 
No. 14(b), see footnote 371) of the Pa nel of 19 December 2002. 
373 See the United States' answer to question No. 13 of the Panel of 14 March 2003.  For question 
No. 13, see footnote 366 of this Report.  
374 See the United States' second oral statement, paragraph 60.  See also   the United States' comments 
on Mexico's answer to question No. 14 of the Panel of 14 March 2003, paragraphs 37-38. WT/DS204/R 
Page 62  
 
does not in any way discipline the rates charged for interconnection.
375  Furthermore, Mexico has not 
imposed, nor can it impose, any universal service oblig ations on United States carriers.  According to 
Mexico, universal service obligations involve costs fo r domestic carriers, which must then be able to 
recover them, together with a reas onable return.  This is only possible by means of the rates, including 
the interconnection rates, which they charge.  S ection 2.2(b) of Mexico's  Reference Paper must 
therefore permit rates which, inter alia , allow for the cost of rolling out infrastructure, plus a 
reasonable return.  Mexico submits that this is  particularly significant for developing country 
Members, such as Mexico, which require substan tial investment in their telecommunications 
infrastructure.  The objective of achieving unive rsal access is expressly provided for in Mexican 
legislation.  The legitimacy of such investment  by developing country Members is explicitly 
recognized in GATS Article IV.  Hence, Mexico conc ludes, there is no connection between Sections 2 
and 3 in the context of accounting rate arrangements.376 
4.191  Citing to provisions concerning rural telephone companies in the Communications Act of the 
United States, Mexico  also argues that an analogous concep t can be found in the United States' 
domestic telecommunications law.  Based on these provisions, Mexico claims that under 
United States law the concept of "economic feasibility " is a complete exception to the requirement to 
offer cost-based interconnection rates.377 
4.192  The United States  argues that, this requirement of Unite d States law is fully consistent with 
the United States' Reference Paper obligations.  Th e United States expressly limited Section 2.2 of its 
Reference Paper to permit this exemption for rura l carriers.  Mexico made no such limitation on its 
Reference Paper, with respect to rural or any other carriers.378 
4.193  Mexico  also argues that the term "cost-based" does not imply that governmental authorities 
need to set all rates.  To the contrary, durin g the telecommunications negotiations the view was 
expressed that, where domestic competition in tel ecommunications services has been established, the 
market itself will ensure that rat es are sufficiently "cost-based".  A ccording to Mexico, this view is 
also endorsed by the United States.  Nonetheless, Me xico also notes that, empirical evidence indicates 
that there is also a high correlation between the introduction of domestic competition and decreases in 
international accounting rates.  Mexico claims that , in a market where there is competition, market 
dynamics will ensure that the rates are cost-o riented.  Recalling its rapid success in introducing 
competition in its domestic market, Mexico argues th at, if the requirements of Section 2.2(b) were 
applied to accounting rates, Mexico's success in  introducing and maintaining competition in the 
domestic market for long-distance services has satisfied  its obligations to ensure that settlement rates 
are cost-based within the meaning of the Reference Paper.  According to Mexico , this is supported by 
the fact that Mexico's settlement rates for calls from the United States have dropped since 1997 – by 85%, 78% and 69%, depending on the destination of the call.
379 
4.194  The United States  replies that Mexico's argument that competition in a different  market, for 
the supply of long-distance service in Mexico, ensur es cost-oriented rates in the separate market for 
the provision of interconnection to United States su ppliers operating in the cross-border mode, is not 
logical.  According to the United States, while competitive market dynamics could reasonably be 
expected to ensure cost-oriented rates in most countries, the market dynamics that would normally 
                                                      
375 See Mexico's answer to question No. 14 of the Panel of 14 March 2003 (" How do Mexico's 
considerations on elements to be included in the establishment of cost-oriented rates relate to its obligations 
under Section 3 of its Reference Paper? "). 
376 See Mexico's answer to question No. 14 of the Panel of 14 March 2003.  For question No. 14, see 
footnote 375 of this Report. 
377 See Mexico's answer to question No. 14(a) of the Panel of 19 December 2002.  For question 
No. 14(a), see footnote 359 of this Report. 
378 See the United States' second oral statement, paragraph 62. 
379 See Mexico's answer to question No. 10(a) of the Panel of 19 December 2002.  For question 
No. 10(a), see footnote 343 of this Report.  WT/DS204/R 
 Page 63 
 
 
lead to cost-oriented rates are not allowed in Mexico.  The United States points out that, Mexico 
imposes a naked prohibition on competition on all in ternational routes between firms that would 
otherwise be competitors, Mexico's ILD rules re quire a horizontal price-fixing cartel among Mexican 
suppliers.  Those rules prevent all price co mpetition between Mexica n suppliers providing 
interconnection to United States cross-border supplie rs.  Even if other WTO Members do not have 
explicit requirements for settlement rates to be co st-based, they also do not have restrictions on 
competition like Mexico, and therefore can reasonably rely on competitive market dynamics to yield cost-based rates.
380 
4.195  Mexico  further argues that, with respect to the unilateral reduction of settlement rates for 
incoming calls to domestic interconnection rate leve ls, Mexico would have to require that Mexican 
carriers unilaterally reduce their charges to fore ign carriers from all GATS Members for transporting 
and terminating incoming international telephone tr affic, but Mexico would have no assurance that 
the other Members would implement the same radical  change in their regulatory systems, because 
only Mexico is the subject of the current complain t.  This would expose Mexican carriers to huge 
financial liabilities to foreign carriers, including tho se of the United States.  Thus, Mexico argues, the 
accounting rate regime cannot be changed or abandoned without a mu ltilateral agreement on a system 
to replace it.381 
(ii) Whether Telmex interconnection rates are "based in cost " 
4.196  The United States  submits that, in August 2002, Cofetel approved a Telmex proposal to 
charge United States suppliers' settlement rates base d on three zones within Mexico.  The "settlement 
rate" is the interconnection rate that Telmex (and other Mexican suppliers) ch arge United States cross 
border suppliers to connect their calls to their fina l destination in Mexico.  Telmex charges 5.5 cents 
per minute for traffic terminating in the three largest  cities in Mexico (Mexico City, Guadalajara, and 
Monterrey) (Zone 1);  8.5 cents per minute for th e other roughly 200 medium-sized cities in Mexico 
(Zone 2);  and 11.75 cents for traffic terminating in all other locations in the rest of Mexico 
(Zone 3).382  The United States argues that th ese rates are not based in cost.  
4.197  The United States  submits that, because Mexico declined  to make Telmex's interconnection 
cost data available to the United States, it uses othe r relevant public data as proxies for measuring the 
cost of interconnection provided to United Stat es cross-border suppliers.  According to the 
United States, these include:  (1) published Mexi can price data on maximum rates that Telmex 
charges for the network components used to provide interconnection;  (2) grey market rates for calls 
between the United States and Mexico;  (3) international proxies;  and (4) rates Mexican carriers 
charge each other for settling accounts relating to international calls.383   
4.198  Mexico  notes that the European Commission allows  the regulatory authorities of member 
states to use target rates for domestic interconnection rates to determine whether rates charged by their 
carriers could be deemed cost-oriented.  Mexico argues that, if the use of target rates is satisfactory to 
comply with the obligations of Section 2.2 for domestic  interconnection rates, the use of target rates is 
also acceptable for settlement rates.   In this regard, Mexico's inte rnational settlement rates with the 
United States are consistent with the target ra te recommended by ITU Study Group 3 for Mexico.  
Mexico also submits that the current accounting ra te arrangement between Mexican and United States 
carriers even complies with the benchmark rate for Mexico unilaterally set by the FCC of the 
                                                      
380 See the United States' second oral statement, paragraphs 55-58. 
381 See Mexico's second written submission, paragraph 96.  See also Mexico's answer to question 
No. 14(a) of the Panel of 19 Decem ber 2002.  For question No. 14(a), see footnote 359 of this Report. 
382 See the United States' first written submission, paragraph 118. 
383 See the United States' first written submission, paragraph 120. WT/DS204/R 
Page 64  
 
United States.  Thus, Mexico argues, its rates are cons istent with the cost-based obligation even if the 
term "cost-based" is viewed in isolation.
384 
4.199  The United States  questions Mexico's attempts to justify the use of this ITU target rate by 
citing the European Commission's use of "current b est practices" domestic interconnection rates.  For 
2000, the EC established best practice rates of 1.5 to 1.8 Euro-cents (about 1.4 to 1.65 United States 
cents) for double transit (or nationwide termination) at  peak (time of day) rates.  Adding the Cofetel 
approved rate of 1.5 cents (used in the pricing methodology by the United States as an estimated 
charge for the additional network components (i nternational transmission and gateway switching) 
required to terminate an international call) to the EC best practices rates for nationwide termination 
yields an international "best practices" target of only about 3 cents per minute.  The current 5.5, 8.5 
and 11.75 cents per minute international rates char ged by Telmex exceed this target by 83%, 183% 
and 292%.385 
4.200  The United States  replies that neither the ITU or F CC benchmark is a ppropriate, because 
both the ITU and the FCC state that their benchmarks are not cost-oriented.386 
4.201  The United States  points out first that Mexico's obliga tion under Section 2 of its Reference 
Paper is to ensure that Telmex's interconnection rat es are cost-oriented, not to observe that Telmex's 
interconnection rates are consistent with a transitiona l target rate that makes no claim to be "basadas 
en costos".  The United States notes that ITU Re commendation D.140 states that its target rates are 
"to be used . . . during the transition to cost-ori entation," and should not be "taken as cost-oriented 
levels." After ITU members have attained these targ et rates they "should continue to take positive 
steps to reduce their accounting ra tes to cost-oriented levels." 387 
4.202  The United States  also submits that Mexico incorrectly claims that it is subject to these ITU 
target rates.  ITU Recommendation D.140 states that the target rates "are not applicable between 
competitive markets." Therefore, the ITU targets do  not apply to the termination of United States 
traffic in Mexico, which has made binding comm itments to open its basic telecommunications 
markets to competition.388 
4.203  The United States  also notes that the benchmark rat es established by the FCC in 1997 were 
not cost-oriented when issued, and are even less so in 2003.  In adopting those rates, the FCC stated 
that its benchmarks ". . . still exceed foreign carrier s' costs to terminate inte rnational traffic because 
they are based primarily on foreign carriers tariffed  rates" in effect in 1996, and "include costs 
associated with providing retail communications services to consumers which would not be included 
in cost-based settlement rates." The FCC therefor e emphasized that its benchmarks "continue to 
exceed, usually substantially, any reasonable estimate of the level of foreign carriers' relevant costs of 
providing international termination services."389 
                                                      
384 See Mexico's answer to question No. 10(a) of the Panel of 19 December 2002.  For question 
No. 10(a), see footnote 343 of this Report. 
385 See the United States' answer to question No. 21 of the Panel of 14 March 2003 (" Mexico states that 
its international settlement rates are consistent with the target rate recommended by ITU Study Group 3 for 
Mexico, in its Responses to questions , paragraph 195.  Please comment. "). 
386 See the United States' second oral statement, paragraph 51. 
387 See the United States' second oral  statement, paragraph 52.  See also the United States' answer to 
question No. 21 of the Panel of 14 March 2003.  For question No. 21, see footnote 385 of this Report. 
388 See the United States' answer to question No. 21 of the Panel of 14 March 2003.  For question 
No. 21, see footnote 385 of this Report. 
389 See the United States' second or al statement, paragraph 53.   See also the United States' answer to 
question No. 19(b) of the Panel of 14 March 2003 (" Mexico states in paragraph 146 of its Responses to 
questions that it 'is not aware that the United States or any other country among the 55 has explicitly attempted 
to subject accounting rate arrangements to the obligations of Section 2.2(b).' (b) What, for example, is the  WT/DS204/R 
 Page 65 
 
 
4.204  Mexico  submits that the United States' assertion th at the FCC's "benchmarks" are not cost-
oriented, ignores Mexico's point that the current United States-Mexican accounting rate is not at the 
level of the United States benchmark for Mexico , but well below it.  The FCC's benchmark for 
Mexico's settlement rate is $.19, while the current rates are $.055, $.085 and $.115.  Thus, the rate for 
calls to the three largest Mexican cities is about 71  per cent lower than the United States benchmark, 
and the rate for calls to rural areas is about 40 per cent lower than the benchmark.  Mexico also 
identifies portions of the FCC's 1999 ISP Reform Order  in which it established its policy that the 
United States international settlements policy (that is, the requirements for uniform and symmetrical settlement rates and proportionate re turn) could be waived for a country where the settlement rate was 
at least 25 per cent below the benchmark for that count ry, on the basis that rates at this level "are 
sufficiently below the benchmark level to indicat e that a dominant carrier is facing competitive 
pressures to lower rates" and "an indication that competitive market forces exist to constrain the 
ability of a foreign carrier to exercise market power."   Mexico argues that according to this standard 
of United States law, the current settlement rates for United States-Mexico traffic indicate that there is 
"meaningful economic competition" within Mexico.
390 
aa) Costs based on maximum rates charged for network components  
4.205  The United States  submits that, in the absence of i ndependent competitive negotiations on 
interconnection rates and in the absence of Telmex cost data, the maximum cost that Telmex could 
incur to provide interconnection to United Stat es suppliers can be estimated by identifying the 
network components Telmex uses to terminate a ca ll from the United States and then adding together 
the corresponding prices that either Cofetel or Te lmex established for these components.  According 
to the United States, because it is reasonable to assume that the component prices established by 
Cofetel or Telmex are sufficient to cover the co mponent costs, the sum total of those component 
prices can be regarded as a "cost ceiling" for the aggregate network components.  Under the 
United States' analysis, the maximum average cost th at Telmex incurs to provide interconnection to 
United States suppliers is 5.2 (United States) ce nts per minute.  The blended average rate of 
approximately 9.2 cents per minute that Telmex charges exceed this maximum average cost by more 
than 75 per cent.391  The United States further argues that, b ecause it bases these estimates of cost on  
prices charged by Telmex, costs incurred by Telmex , especially for the very large volumes of traffic 
generated by United States carriers,  would be substantially lower.392 
4.206  The United States  identifies four network compone nts Telmex uses to provide 
interconnection and terminate in Mexico ca lls that originate in the United States: 
"(i) International transmission and switc hing: this network component includes 
transport from the United States-Mexico border to and through the Telmex/Telnor international gateway switch. 
(ii) Local links: this network component consists of those facilities utilized to 
transport a call from the international ga teway switch to an entry point in the 
Telmex/Telnor domestic network. 
(iii) Subscriber line: this network component includes switching in the 
terminating city and transmission over facilities (such as a local loop) to the 
receiving telephone. 
                                                                                                                                                                    
 
situation in the United States in this respect?  In particular, what is the relevance of the Benchmarks Order 
referred to in paragraph 196 of Mexico's Responses to questions? "). 
390 See Mexico's comments on the United States' answer to  question No. 19(b) of the Panel of 14 March 
2003, paragraphs 38-40. 
391 See the United States' first written submission, paragraph 121. 
392 Ibid. WT/DS204/R 
Page 66  
 
(iv) Long-distance links: this network component consists of those facilities 
 utilized to transport traffic from th e entry point in the Telmex/Telnor 
 domestic network to the last switch in the network chain."
393 
4.207  According to the United States , these network components reflect the guidelines 
promulgated by the ITU for identifying the cost s incurred in terminating international calls.  
According to the ITU, the network components us ed to provide international telephone services are 
international transmission and switching facilities (c omponent 1 above) and nati onal extension (which 
incorporates components 2 through 4 above).394 As a basis for its calculation, the United States uses 
the published Telmex prices, which are approved by  Cofetel, for these network components.  The 
United States further argues that, because Mexica n law requires these Cofetel-approved rates to 
recover at least the total cost of these network co mponents, they therefore include at least the true 
costs of these network components, including direct and indirect costs.395  For certain network 
components, the United States relies on either Telmex 's retail prices or on certain non-cost-oriented 
wholesale rates that Telmex charges.  The United St ates argues that Telmex prices, as such, set an 
upward limit (cost ceiling) of cost; rat es above this cost ceiling cannot be " basadas en costos ".396 
4.208  The United States  then discusses the specific prices of these network components, depending 
on the destination of a call into Mexico.  Accordin g to the United States, cross-border suppliers of 
basic telecom services interconnect with Telmex in  order to terminate calls to three "zones" in 
Mexico.  These three zones are:  (1) calls termina ting in Mexico City, Guadalajara, and Monterrey;  
(2) calls terminating in approximately 200 medium c ities in Mexico;  and (3) calls terminating in all 
other locations in Mexico.  The United Stat es notes that each successive calling zone reflects 
progressively more extensive use of Telmex's ne twork (and hence progressively higher prices, based 
on Telmex's current pricing practices).397 
4.209  For calls to Zone 1 cities, the United States  submits that Telmex's costs can be no more than 
2.5 cents per minute (1.5 cents for international transmission and switching plus 0.022 cents for local 
link plus 1.003 cents for subscriber line) for the network components to interconnect a call from the 
United States border.398  However, Telmex currently charges a Cofetel-approved rate of 5.5 cents to 
connect these calls.  Thus, the United States asserts  that Telmex charges United States suppliers an 
interconnection rate that is approximately 220 per ce nt of the maximum cost it incurs to terminate a 
call in Zone 1.399  
4.210  According to the United States , calls to Zone 2 cities re quire one additional network 
component, i.e., a "long-distance link" used for tr ansport within Mexico between the international 
gateway switch and the switch in the destination c ity.  For these calls, Telmex allows its competitors 
to purchase "on-net" interconnection.  The United St ates submits that Telmex's costs can be no more 
than 3 cents per minute (1.5 cents for internati onal transmission and switching plus 0.022 cents for 
local link plus 0.536 cents for long-distance link plus 1.003 cents for subscriber line) for the network components used to interconnect a call from the Un ited States border to a Zone 2 city.  However, 
Telmex currently charges a Cofetel-approved rate of 8.5 cents to connect these calls.  Thus, the 
                                                     
 
393 See the United States' first written submission, paragraph 122. 
394 See the United States' first written submission, paragraph 123;  see also  International 
Telecommunication Union, Recommendation D.140 (Accounting Rate Principles for the International Telephone Service) ("D.140"), October 2000. 
395 See the United States' first written submission, paragraph 124. 
396 See the United States' first written submission, paragraph 126. 
397 See the United States' first written submission, paragraph 127. 
398 See the United States' first written submission, paragraph 130. 
399 Ibid.  WT/DS204/R 
 Page 67 
 
 
United States argues that Telmex charges Un ited States suppliers an interconnection rate 
approximately 275 per cent of the maximum cost  it incurs to terminate a call in Zone 2.400 
4.211  The United States  further notes that, calls to Zone 3 cities are classified as "off-net", which 
means that Telmex has not opened to originati ng competition and does not allow competitors to 
purchase "on-net" termination.  According to th e United States, Telmex uses the same network 
components as it does for Zone 2 to terminate calls in Zone 3 cities.  However, unlike the preceding 
two calling patterns, Telmex's rate for terminating interconnection is substantially higher than that 
charged by Telmex for "on-net" interconnection.  In  Zones 1 and 2, Telmex terminates calls in cities 
where competitors are allowed to purchase "on-net" termination at rates established by Cofetel and 
incorporated into commercial agreements between  Mexican operators.  However, Telmex charges 
highly inflated rates (known as " reventa " or "off-net" rates) to terminate calls in cities where 
competitors are not allowed to buy "on-net" te rminating interconnection.  Because unbundled pricing 
information for the network components used to provide reventa  service is not readily available, the 
United States utilizes the 7.76 cent reventa  rate that Telmex charges its competitors to terminate calls 
to off-net cities.  Based on this, the United States submits that Telmex's costs can be no more than 
9.28 cents per minute (1.5 cents for international tr ansmission and switching plus 0.022 cents for local 
link plus 7.76 cents for termina ting interconnection) for the networ k components used to interconnect 
a call from the United States border to a Zone 3 city .  However, Telmex currently charges a Cofetel-
approved rate of 11.75 cents to connect these calls.  Thus, the United States argues that Telmex charges United States suppliers an interconnection rate approximately 127 per cent of the maximum 
cost it incurs to terminate a call in Zone 3.
401 
4.212  In conclusion, the United States  argues that the 9.2 cents per minute blended average of the 
three zone rates that Telmex charges United St ates suppliers for interconnection exceeds Telmex's 
published price for the network components used to  provide such interconnection, and hence, 
Telmex's maximum blended average costs, by 77 pe r cent.  As to each of the three zones, the 
United States argues that the rates that Telmex charges United States suppliers for interconnection 
exceeds Telmex's published price for the network co mponents used to provide such interconnection, 
and hence, Telmex's maximum costs by 27 to 183 pe r cent.  The United States also emphasizes that 
the data it is using – including Telmex's retail ra tes for private lines and Telmex's rates for off-net 
interconnection – yields the maximum cost th at Telmex could possibly incur to provide 
interconnection to United States suppliers.  According to  the United States, the real cost that Telmex 
incurs is likely far lower than the maximum cost ceili ngs identified in this section, and is likely in line 
with the 1 to 2 cent per minute rate in effect  with carriers in countries with WTO-compliant 
competitive conditions.  Even so, the United St ates argues, the rates that Telmex charges 
United States suppliers for interconnection fa r exceed even this inflated cost ceiling.402 
4.213  Mexico  submits that the proposed United States methodology for determining whether rates 
are cost-oriented is not found in the agreement.  According to Mexico, even though the United States 
agrees that the Reference Paper does not define th e terms "cost based" or "cost oriented", it still 
attempts to imply that there is universal agreement on the meaning of those terms, as well as universal agreement that the costs of providing national acce ss through accounting rate agreements must be 
determined in the same manner as the costs of domestic interconnection.
403  Mexico argues that under 
the United States' methodology, accounting rates negotiated between Mexican and United States 
carriers must be set no greater than domestic interconnection rates.404  Citing to publications by the 
ITU, Mexico claims that there is no common unders tanding of what the terms "cost-based" and "cost-
oriented" mean, either in the domestic or internat ional contexts, and there is no consensus that it 
                                                      
400 See the United States' first written submission, paragraphs 131-132. 
401 See the United States' first written submission, paragraphs 133-136. 
402 See the United States' first written submission, paragraphs 137-139. 
403 See Mexico's first written submission, paragraph 186. 
404 See Mexico's first written submission, paragraph 179. WT/DS204/R 
Page 68  
 
means that the costs of transporting and terminating international calls should be deemed the same as 
the costs of domestic interconnection.
405 
4.214  The United States  replies that it is not arguing that the costs of mode 1 interconnection must 
be equal to the costs for domestic interconnecti on for commercially-present suppliers.  Instead the 
United States submits that the point of its estimate d cost model is to show that the rates currently 
charged by Telmex substantially exceed the prices charged for the same elements domestically.  Since 
Mexican law requires that interconnection rates fo r commercially-present suppliers must recover at 
least the total cost of all network elements,  in terconnection rates for cross-border suppliers that 
exceed rates for commercially-present suppliers are by definition not b ased in cost.  The United States 
further clarifies that it is not asking that the Panel determine a rate that would be considered basadas 
en costos ;  instead it is only asking that the Panel de termine that the rates currently charged by 
Telmex for interconnection provided to cross-border s uppliers are not based in cost.  According to the 
United States, Mexico has not contested that rate s for international interconnection exceed rates for 
domestic interconnection by 127 to 283 per cent (usi ng the exact same network elements)  and that 
rates for domestic interconnection are required by Me xican law to be based in cost.  Thus, whatever 
the definition of " basadas en costos ," under these circumstances Mexico's international 
interconnection rates cannot be considered cost-based. 406 
4.215  Mexico  further argues that the United States is wrong in arguing that the type of cost analysis 
used for domestic interconnection can be applied to settlement rates fo r international calls.  Mexico's 
GATS commitments preserved the current system under which termination of international long-
distance traffic in Mexico is conducted under a join t provision regime (half circuit regime), not under 
a whole provision regime (full circuit regime).  The accounting rate system is widely, if not 
universally, used for settlements under the half circ uit regime.  The cost analysis demanded by the 
United States is used only for interconnection under a whole circuit regime, in particular domestic 
interconnection.  According to Mexico, proposals ha ve been made (such as by Australia) to replace 
the accounting rate systems with a cost-oriente d "termination rate" regime, which could be 
implemented using half circuit or full circuit cr iteria.  However, there is not yet an agreed 
methodology on how to determine costs under a termina tion rate regime, either at the bilateral or 
multilateral levels.  Thus, the issue remains unresolved.407 
4.216  The United States  replies that the various methodologies proposed by the United States 
should not be regarded as estimates of the cost of te rminating incoming international calls in Mexico.  
Rather, the United States argues that, the methodolog ies presented show a maximum cost or a ceiling 
on the costs incurred and, as su ch, exceed the actual cost.408 
bb) "Grey market" rates for calls between the United States and Mexico  
4.217  Another proxy the United States  uses for identifying costs of interconnection are grey market 
rates for transport and termination of internationa l minutes into Mexico, sold in London, Los Angeles 
and New York.  The United States recognizes that such arrangements bypass the uniform settlement 
rates required by regulations in Mexico and therefor e are technically illegal in Mexico.  However,  the 
United States argues that these rates provide anothe r estimate of what some operators are currently 
                                                      
405 See Mexico's first written submission, paragraphs 187-190. 
406 See the United States' first oral  statement, paragraph 33.  See also the United States' second written 
submission, paragraphs 61-62. 
407 See Mexico's answer to ques tion No. 11(b) of the Panel of 19 December 2002 (" If [Mexico does not 
consider that the estimates of the cost of terminating in coming international calls in Mexico given in the United 
States submission are roughly correct], please give reasons and outline how more satisfactory figures might be 
obtained. "). 
408 See the United States' answer to question No. 11(a) of the Pa nel of 19 December 2002 (" Does 
Mexico consider that the estimates of the cost of termin ating incoming inte rnational calls in Mexico given in the 
United States submission are roughly correct? ").  WT/DS204/R 
 Page 69 
 
 
paying for the network components used to termin ate such calls, even given the constraints of 
Mexico's regulations.  According to the United St ates, these rates also provide insight as to the 
relevant costs incurred to complete  calls into Mexico, given that a grey market for such calls would 
not exist unless operators were making a profit over the cost of the network components required to 
complete the calls.  Based on its comparison of the rates, the United States submits that the grey 
market rates are far lower than the rates charged by Telmex and even the maximum costs shown in 
the above United States pricing surrogate, and thus confirm the conservative nature of the 
assumptions underlying that methodology.409  
4.218  The United States  also notes several factors which suggest  that the grey market rates include 
costs in addition to the costs of the network com ponents used by Telmex to terminate United States 
calls into Mexico.  First, the United States argues th at the grey market rates include – in addition to 
termination – the cost of transporting calls from di fferent points abroad (Los Angeles, New York, or 
London) to the Mexican border.  Second, the Unite d States asserts, because such  calls are technically 
illegal in Mexico, they necessarily involve a regulat ory risk premium to cover the possibility that 
these grey market operations can be shut down at an y time.  Furthermore, to avoid detection, such 
operators typically do not use efficient, high-capacity  links for their networks (but instead rely on 
commercially available low capacity links), thereby incurring network inefficiencies and higher costs.  
Third, according to the United States, given the pr ice ceiling set by Telmex (i.e., the cross-border 
interconnection rate) which still gove rns the overwhelming majority of calls, and the limited capacity 
of the grey market to meet demand for alternative termination, market pressure to drive grey market 
rates to cost is limited – such operators can meet demand by offering a limited discount to the 
Telmex-set price umbrella, which likely results in  such grey market rates being well above cost.410 
4.219  In conclusion, the United States  argues that, even though these grey market rates themselves 
are above Telmex's maximum costs, the Telmex interconnection rates still exceed these grey market 
rates.411  Thus, Telmex's interconnection rates ar e substantially above Telmex's costs.  
4.220  Mexico  argues that, by asserting that rates for illeg al bypass traffic into Mexico should be 
used as the benchmark for determining whether th e accounting rates negotiated between United States 
and Mexican carriers comply with the Reference Pape r, the United States is tantamount to stating that 
international access must be priced as though Mexico  had authorized the United States' carriers to 
provide service into Mexico throug h ISR, so that the United States ' carriers could interconnect with 
the domestic network within Mexico without routi ng their traffic through an authorized facilities 
based carrier.  But Mexico does not allow ISR, and scheduled a reservation to the GATS allowing it 
to maintain that prohibition.  Accordingly, Mexi co argues, the United States reliance on the rates 
charged for illegal ISR traffic into Mexico as a be nchmark is completely inappropriate, just as 
illegally downloaded music can not be used as a meas ure of the true cost of producing the music.412  
4.221  The United States  counters that Mexico's analogy is flawed.  According to the United States, 
in the case of illegally downloaded music, no one pa ys for the use of the downloaded music; on the 
other hand, in the case of illegal bypass, the users of bypass are paying for the use of those network 
elements.  Mexico does not assert that bypass rates do not cover the costs of the various components involved in providing bypass service.  Nor does it id entify any cost that is not recovered by bypass 
rates.
413 
                                                      
409 See the United States' first written submission, paragraph 141. 
410 See the United States' first written submission, paragraphs 143-144. 
411 See the United States' first written submission, paragraph 145.   See also the United States' second 
written submission, paragraph 63. 
412 See Mexico's first written submission, paragraph 180. 
413 See the United States' second written submission, paragraph 65. WT/DS204/R 
Page 70  
 
4.222  Mexico  also submits that the United States makes "apples to oranges" comparisons.  
According to Mexico, the United States compares ISR rates from the United States to various 
countries with the United States-Mexico accounting ra tes, rather than comparing the United States 
accounting rates with those countries to the United States-Mexico accounting rates.  Mexico also 
points out that, in the same submis sions in which it complains about  the unavailability of ISR into 
Mexico, the United States presents detailed inform ation about the rates United States carriers are 
currently paying for ISR into Mexico.  This contradiction serves to highlight that the United States has not presented the complete factual picture.
414 
cc) International proxies  
4.223  The United States  also shows that Telmex termination rates exceed wholesale rates 
established by a major operator to terminate calls to various countries that, like Mexico, have more 
than one long-distance provider.  The United St ates notes that these rates include transport from 
points of interconnection in Los Angeles, New York  or London and thus include network components 
and costs in addition to those used and incurred by Telmex in terminating a call from the Mexican 
border to the final destination in Mexico.  The United States also points out that none of these 
countries match the volume of international traffi c and corresponding economies of scale for traffic 
between the United States and Mexico.  Neverthe less, the United States argues, these international 
rates provide a useful, but highly conservative, benchmark further supporting the United States claim 
that Mexico has failed to ensure that Telmex pr ovides interconnection to cross border suppliers at 
rates that are basadas en costos . 415 
dd) Financial compensation among Mexican ope rators relating to international calls  
4.224  The United States  also argues that financial compensation procedures among Mexican 
operators demonstrate that the interconnection rat es charged to United States suppliers are not cost-
oriented.416  According to the United States, the ILD Rul es require Mexican international operators to 
allocate incoming international calls among themse lves under a "proportionate return" system that 
reflects each operators' share of outgoing calls.  Because the Mexican intern ational operators do not 
necessarily receive traffic (and the associated paym ents by United States carriers) in accordance with 
this proportionate return requirement, the ILD Ru les also establish redistribution and compensation 
procedures to ensure that each operator either re ceives the correct amount of traffic or receives 
appropriate financial compensation.417 
4.225  The United States  explains that the "proportionate return" system works in two ways:  first, 
under the traffic redistribution procedures establis hed by ILD Rule 16, the operator receiving the 
excess traffic at its international port is required to  transfer the excess traffic to another operator 
entitled to receive the traffic under the allocation fo rmula.  The initial operator is allowed to deduct 
from the settlement rate for its own international por t services (authorized by Cofetel at 1.5 cents per 
minute), with the remainder of the settlement rate  going to the operator to which the traffic is 
transferred.418  Alternatively, the United States argues, IL D Rule 17 allows the Mexican international 
operators to "mutually negotiate financial compen sation agreements in consideration of the rights 
generated for each of them in accordance with th e proportionate return system."  This allows 
operators that are unable to identify and transf er excess traffic in accordance with Rule 16 to 
                                                      
414 See Mexico's second oral statement, paragraph 78. 
415 See the United States' first written submission, paragraphs 146-147.  See also the United States' 
second written submission, paragraph 63. 
416 See the United States' second written submission, paragraph 64. 
417 See the United States' first written submission, paragraph 148. 
418 See the United States' first written submission, paragraph 149.  WT/DS204/R 
 Page 71 
 
 
terminate that traffic and then negotiate financia l compensation agreements (or "true-up" payments) 
with the operator entitled to receive the traffic under the allocation formula.419 
4.226  The United States  argues that, the mere existence of Rule 17 should be regarded as an 
admission by Mexico that the interconnection rate  charged to cross-border suppliers is not  basadas en 
costos .420  The United States claims th at, if the settlement rate was basadas en costos , no Rule 17 
"financial compensation" would be available for any "entitled" operator to  receive, because the 
settlement rate received by the operator actually r eceiving and terminating the "excess" traffic would 
merely be sufficient to cover those termination costs.421  The United States further explains that, under 
Rule 17 financial compensation procedures, operators  terminate excess traffic with their own network 
arrangements, deduct the "cost" incurred in such termination from the settlement payments received 
for that traffic, and distribute the residual amount to the operator entitled to additional traffic under the 
ILD Rules.  According to the United States, impl ementing this financial transfer, however, requires 
operators to agree on the cost of terminating a call,  since what they transfer between themselves is 
only the "premium" on such calls, or the amount in excess of the costs incurre d for terminating such 
calls.422  Thus, the United States argues that Rule 17 payments are required solely because cross-
border interconnection rates are not basadas en costos .423  
4.227  Mexico  argues that the requirement for proportion ate return allows new entrants in the 
domestic market to preserve and gain market share by allowing them to terminate incoming traffic in the same proportion as their share of outgoing traffic.  According to Mexico, a carrier that has gained 
more customers in the domestic market, and ther eby carries these customers' outgoing traffic to a 
particular country, is ensured that it will be able to terminate a proportionate share of the country's 
incoming traffic, which otherwise might be carried by larger carriers.
424 
(b) Whether Telmex interconnection rates are "reasonable" 
(i) The meaning of "reasonable " 
4.228  The United States  submits that the Referenc e Paper does not define " razonable " or 
"reasonable."  Thus, the United States argues, th e term should be interpreted according to the 
customary rules of treaty interpretation reflected in Article 31(1) of the Vienna Convention .  
According to the United States, such an analysis considers the ordinary meaning of "reasonable" (a 
word that has a very broad meaning) in its context and in light of the object and purpose of the agreement.
425  
4.229  The United States  argues that, the commitments that resulted from the negotiations on basic 
telecommunications should be interpreted in light of both that particular object and purpose of the 
agreement as a whole and of those negotiations in particular:  the liberalization of trade in basic 
telecom services.  The United States asserts that the Reference Paper is an integral part of these basic 
telecom commitments.  These additional commitmen ts recognize that major suppliers of basic 
telecommunications services have the potential to use their dominant position to undermine market 
access and national treatment commitments.  Thus, the United States claims, Section 2 of the 
                                                      
419 See the United States' first written submission, paragraph 150. 
420 See the United States' first written submission, paragraph 151.  See also the United States' second 
written submission, paragraph 64. 
421 See the United States' first written submission, paragraph 151. 
422 See the United States' first written submission, paragraph 153. 
423 See the United States' first written submission, paragraph 155. 
424 See Mexico's first written submission, paragraph 78. 
425 See the United States' first written submission, paragraphs 158-159. WT/DS204/R 
Page 72  
 
Reference Paper establishes discip lines to prevent major suppliers from using interconnection to 
restrict other suppliers from offering a scheduled service.
426   
4.230  In terms of the context, the United States  argues that the interconnection obligations of 
Section 2 are especially important for the cross-borde r supply of basic telecom services – particularly 
in markets like Mexico, which legally bar fo reign service suppliers from owning facilities and 
therefore force foreign suppliers to rely on the majo r supplier to deliver their services to the end-user.  
In such cases, foreign suppliers have no choice bu t to pay a domestic service supplier (such as 
Telmex) an interconnection rate to terminate their cal ls.  As a result, the ma jor supplier has the power 
and incentive to price this input at levels which extract as much revenue as possible from cross-border 
suppliers.  Thus, by raising the wholesale price of cross-border interconnection, the major supplier has 
the power to raise the retail price, reduce demand fo r the retail service, and thereby restrict the cross-
border supply of services into Mexico .  The United States further claims that, under Section 2, it is not 
enough for a WTO Member like Mexico to ensu re that its major supplier's cross border 
interconnection rate is cost-based.  Mexico must also ensure that the terms and conditions are 
reasonable – providing additional security that a majo r supplier may not use its bottleneck control of 
interconnection to restrict a foreign supplier ava iling itself of scheduled cross-border market access 
and national treatment commitments.427  
4.231  The United States  concludes that, Section 2.2 of the Re ference Paper is designed to ensure 
that a major supplier cannot restrict the supply of  a scheduled basic telecom service through the terms 
and condition for interconnection.  Therefore,  interconnection terms and conditions are not 
"reasonable" if they would permit a major supplier to  restrict the supply of a scheduled basic telecom 
service.428 
4.232  Mexico  submits that the United States' interpretation of "reasonable" is based on its 
assumption that Mexico has allowed United States suppliers to provide their services on a cross-
border basis.  However, Mexico argues, its co mmitments do not permit United States suppliers of 
basic telecommunications services to provide their transmission or transport services across the border 
into Mexico.  It is not the rates negotiated by Telm ex that restrict the supply of telecommunications 
transmission and transport services, but rather, th e limitations inscribed in Mexico's Schedule.  
Pursuant to Article XVI of the GATS, Mexico is en titled to restrict the rights of service suppliers of 
other Members to supply basic telecommunicati ons services into and within its territory.429 
4.233  According to Mexico , the United States' argument on this issue also results from its apparent 
misunderstanding of the meaning of cross-border supply in the context of telecommunications 
transport services.  Specifically, the United States co nsistently confuses the "telephone call" or other 
data that is transported by the service suppliers with the actual transport and transmission services that 
are at issue in this dispute. 430  
4.234  Mexico  argues that the United States' interpretati on of the word "reasonable" is overly and 
blatantly simplistic.431  According to Mexico, the ordinary meaning of "reasonable" is "in accordance 
with reason; not absurd; within the limits of reason; not greatly more or less than might be expected".  
Mexico argues that the reasonableness of " tarifas basadas en costos " or cost-oriented rates can be 
judged only within the context of all relevant f acts and circumstances because it is those facts and 
circumstances that provide a basis for reason and expectation.432  In this light, Mexico argues, it 
                                                      
426 See the United States' first written submission, paragraphs 160-162. 
427 See the United States' first written submission, paragraphs 163-164. 
428 See the United States' first written submission, paragraph 165. 
429 See Mexico's second written submission, paragraph 108. 
430 See Mexico's second written submission, paragraph 110. 
431 See Mexico's first written submission, paragraph 182. 
432 See Mexico's second written submission, paragraphs 89 and 115.   See also  Mexico's answer to 
question No. 15 of the Pane l of 19 December 2002 (" The United States suggests that interconnection terms and  WT/DS204/R 
 Page 73 
 
 
cannot be said, categorically, that an action or a measure that restricts the supply of a scheduled 
service is "unreasonable".  In the broad sense, all fo rms of government regula tion related to the terms 
and conditions of supply of a servi ce have some impact on the level of supply of that service.  
However, merely because they have that effect, it cannot be said that they are "unreasonable" under 
any interpretation of the term "reasonable".433 
4.235  Mexico  further argues that the fact that other major telecommunications markets, especially 
the United States, maintain virtually identical rules to preserve the negotiating position of their 
carriers vis-à-vis  Mexican carriers must be taken into acc ount in determining whether Mexico's ILD 
rules are "reasonable," and whether it would be "eco nomically feasible" for Mexico to eliminate them 
unilaterally.434 
4.236  Mexico  argues that the United States' interpretati on of "reasonable" does not allow for rates 
that simply recover bare costs, let alone rates that are "economically feasible" to Mexico.  The fact that the same settlement rate appli es to other Mexican carriers is irrelevant to the application of the 
"reasonableness" requirement in Section 2.2(b)  because that requirement applies only to 
interconnection with major suppliers .  Accordingly, the interpretation presented by the United States 
is manifestly absurd and should be rejected by this Panel.
435 
4.237  According to Mexico , a multitude of facts and circumstances are relevant to the determination 
of whether " tarifas basadas en costos " are reasonable.  These include the state of a WTO Member's 
telecommunications industry, the c overage and quality of its telecomm unications network, the return 
on investment, and the nature of the rates at issue.436 
4.238  Mexico  argues that, in determining the reasonabl eness of Mexico's accounting rates, the 
bilateral nature of accounting rates must be ta ken into account.  Bilateral accounting rate 
arrangements continue to be prevalent and many of the countries with which Mexico has such 
arrangements are under no obligation to reduce the ra tes they negotiate.  T hus, Mexico submits, it 
would not be reasonable to expect Mexico to unilaterally reduce its accounting rates to domestic 
interconnection levels and yet face high accounting rates for outgoing calls.437 
4.239  Mexico  also deems it pertinent to compare Mexico 's settlement rates with the United States 
with those of other countries with the United St ates.  According to Mexico, because the current 
accounting rate arrangement between United St ates and Mexican carriers provides for lower 
settlement rates than the accounting rate arrange ments of United States carriers with a number of 
other countries, Mexico's rates must be deemed reasonable.438 
4.240  Mexico  also submits that reasonableness must be  judged in the light of all relevant 
circumstances which could include the technology u sed.  Mexico notes that technology reduces costs, 
                                                                                                                                                                     
conditions are not 'reasonable ' under Section 2.2 if they permit a major supplier to 'restrict the supply of a 
scheduled basic telecom service.'  (United States' submission, paragraph 165).  Please comment. "). 
433 See Mexico's second written submission, paragraph 115.  See also  Mexico's answer to question 
No. 15 of the Panel of 19 December 2002.  For question No. 15, see footnote 432 of this Report. 
434 See Mexico's second written submission, paragraph 117. 
435 See Mexico's second written submission, paragraph 118.   See also  Mexico's answer to question 
No. 15 of the Panel of 19 December 2002.  For question No. 15, see footnote 432 of this Report. 
436 See Mexico's second written submission, paragraph 90.  See also  Mexico's answer to question 
No. 13(a) of the Panel of 19 December 2002 (" Elements to be included in determining whether rates are 
reasonable (a) What elements should be included in determining whether cost-oriented interconnection prices 
are 'reasonable'? "). 
437 See Mexico's second written submission, paragraph 91.   See also  Mexico's answer to question 
No. 13(a) of the Panel of 19 Decem ber 2002.  For question No. 13(a), see footnote 436 of this Report. 
438 See Mexico's second written submission, paragraph 92.  See also  Mexico's answer to question 
No. 13(a) of the Panel of 19 Decem ber 2002.  For question No. 13(a), see footnote 436 of this Report. WT/DS204/R 
Page 74  
 
especially in the long run.  However, in the tel ecommunications sector technological change has been 
very rapid, so much so that fixed asset obsolescence has led to high depreciation rates and, consequently, higher costs.  Currently there is an excess of transmission capacity that must be 
depreciated very quickly, but with a very low cap acity utilization and profitability.  Mexico submits 
that it is not an exception to this global problem.
439 
4.241  According to Mexico , another consideration to be take n into account is that technological 
change does not take place instantly and obsolete eq uipment cannot be immediately discarded.  This 
factor results in cost reductions that are less dramatic than desired.440 
4.242  Mexico  also points out that developing countries  are usually technology consumers, not 
producers, and thus have to pay a higher price for technology than developed countries.  Relative to 
developed countries, this drives costs for devel oping countries up, not down.  In addition, a 
technology consumer country must spend extra m onies to adapt and make compatible different 
vendors' technologies.441 
4.243  Mexico  further submits that, contrary to recen t inflated expectations, the bulk of 
telecommunications revenues (around 80%) still come  from voice (or voice-related) services, where 
new technology does not yet represent a perfect s ubstitute for the traditional (circuit-based) one.442 
4.244  Thus, Mexico  concludes, technology, in the present circumstances, for a developing country 
such as Mexico, does not reduce but rather in creases costs, especially with respect to its 
counterparts.443 
4.245  Mexico  claims that the United States has ignored th e following statements in the preamble of 
the GATS: 
"Desiring the early achievement of progressive ly higher levels of liberalization in 
trade in services … while giving due r espect to national policy objectives; 
Recognizing the right of Members to regulate, and to introduce new regulations, on the supply of services within their territories in order to meet national policy objectives and, given asymmetries existing with  respect to the degree of development 
of services regulations in different countri es, the particular need of developing 
countries to exercise this right; Desiring to  facilitate the increasing participation of 
developing countries in trade in services and the expansion of their service exports including, inter alia, through the strengthening of their domestic services capacity and its efficiency and competitiveness …"
444I 
4.246  In Mexico 's view, from the statements above, al ong with the Schedules themselves, it is 
obvious that the overall goal of liberalization does not provide a justification for the United States 
interpretation.  Neither the GATS in general nor the Fourth Protocol in particular were intended to 
eliminate immediately all restrictions and charges on trade in services.445 
                                                      
439 See Mexico's answer to question No. 13(b) of the Panel of 19 December 2002 (" Elements to be 
included in determining whether rates are reasonable. (b) Does the answer depend on the technology used? "). 
440 See Mexico's answer to question No. 13(b) of the Panel of 19 December 2002.  For question 
No. 13(b), see footnote 439 of this Report. 
441 Ibid. 
442 Ibid. 
443 Ibid. 
444 See Mexico's first written submission, paragraph 183. 
445 Ibid.  WT/DS204/R 
 Page 75 
 
 
4.247  Mexico  further asserts that the United States interp retation leads to an absurd result.  If 
carried to its logical conclusion, the United Stat es argument implies that any charge for access is 
unreasonable, because any fee higher than zero conceivably "restricts" supply.446 
4.248  The United States  replies that it is not arguing that an y charge for interconnection or that any 
term or condition imposed upon interconnection is  unreasonable.  Rather, the determination of 
reasonableness must be made on a case-by-case basis.  In this case, the facts clearly show that Mexico 
has failed to ensure that the terms and conditions  for interconnection with Telmex are reasonable - 
that is, Mexico has failed to ensure that those te rms and conditions reign in Telmex's ability to abuse 
its market power and restrict the supply of basic telecommunications services.  The result of Mexico's 
failure to ensure interconnection on reasonable te rms and conditions is th at Telmex has indeed 
restricted the supply of scheduled services.447 
4.249  Mexico  replies that the United States' qualification highlights a fundamental flaw in the 
United States' claim.  According to Mexico, what the United States is now arguing is that whether or 
not the rate is reasonable depends on how much it restricts the supply rather than the fact that it 
restricts supply in the first place.  Under this new legal test posited by the United States, a multitude 
of facts could have a bearing on "how much is t oo much".  Accordingly, the fact that a measure 
"restricts the supply of a scheduled service" is no longer determinative of "reasonableness" and the 
entire basis for this claim is eviscerated.448 
(ii) Whether Telmex interconnection rates are "reasonable " 
4.250  The United States  argues that, because Mexico has given Telmex de jure  monopoly power to 
set and maintain interconnection ra tes with foreign operators enabling it to restrict the supply of 
scheduled services, it has failed to ensure that Telm ex provides interconnection at reasonable rates.  
According to the United States, Mexico has enable d, through its ILD Rules, its major supplier to 
affect the supply of scheduled basic telecom serv ices through its exclusive negotiating authority and 
power to set interconnection rates for all Mexican ca rriers.  The United States alleges that, on their 
face, the ILD Rules prevent Telmex from providing interconnection as required by Section 2.2 of the 
Reference Paper.  Instead, the rules establish a struct ure and process that allow Telmex to set inflated 
interconnection rates and insulate Telmex from an y competitive pressures that would otherwise lead 
to rates that are reasonable.  The United States explains that Rule 13 grants Telmex alone the 
exclusive authority to negotiate the interconnection ra te with cross-border suppliers, while Rules 3, 6, 
10, 22, and 23 prohibit any alternatives to this Telm ex-negotiated rate.  As a result, the United States 
argues, these particular ILD Rules prevent Mexico  from fulfilling its obligations under Section 2.2 
and, for that reason, are inconsistent with that provision. 449 
4.251  The United States  further contends that Mexico h as failed to honour its commitments under 
Section 2.2(b) by rejecting proposals from United St ates and Mexican suppliers to approve alternative 
interconnection agreements that would exert comp etitive pressure on the Telmex-negotiated rate.  
According to the United States, since 1998, Unite d States and Mexican suppliers have tried to 
convince Mexican authorities to permit competitive alternatives to the Telmex-negotiated cross-
border interconnection rates.  However, Mexican aut horities either rejected or ignored each request.  
The United States alleges that, these examples rein force the conclusion that Mexico has taken 
affirmative steps to prevent any competition to the Telmex-negotiate d interconnection rate.450 
                                                      
446 See Mexico's first written submission, paragraph 184. 
447 See the United States' second written submission, paragraphs 74-75. 
448 See Mexico's second oral statement, paragraph 87. 
449 See the United States' first written submission, paragraphs 167-175. 
450 See the United States' first written submission, paragraphs 178-179. WT/DS204/R 
Page 76  
 
4.252  The United States  argues that Mexico has failed to ensure that Telmex provides 
interconnection on reasonable terms and conditions and therefore has not honoured its commitments 
under Section 2.2(b) of the Reference Paper.
451 
B. SECTION 1.1 OF THE REFERENCE PAPER : PREVENTION OF ANTI -COMPETITIVE PRACTICES IN 
TELECOMMUNICATIONS  
4.253  The United States  claims that Mexico's ILD Rules ope rate to prevent competition in the 
termination of cross-border switche d traffic, hold international interconnection rates artificially high, 
and allow foreign suppliers no choi ce but to pay Telmex-negotiated rate if they want to supply 
services on a cross-border basis .  According to the United States, Mexico's ILD rules empower 
Telmex to engage in monopolistic practices with re spect to interconnection rates for basic telecom 
services supplied on a cross-border basis and to create an effective cartel dominated by Telmex to set 
rates for such interconnection.452  The United States therefore claims  that Mexico has failed to honour 
its commitments under Section 1.1 of the Reference Paper453, which provides that "[a]ppropriate 
measures shall be maintained for the purpose of pr eventing suppliers who, alone or together, are a 
major supplier from engaging in or c ontinuing anti-competitive practices."454 
4.254  Mexico  replies that its ILD Rules are not subject to the obligations of the Reference Paper, 
and therefore, cannot be incons istent with its Section 1.1.455 456  Mexico further points out that, even if 
its ILD Rules were subject to the obligations of th e Reference Paper, the United States, in order to 
succeed in its claim, must present a prima facie case  that Mexico has not maintained "appropriate 
measures... for the purpose of preventing suppliers  who... are major supplier from engaging in or 
continuing anti-competitive practices".  According to Mexico, the United States has not done so.457  
Mexico also submits that the United States has misinterpreted the obligations of Section 1.1.458  
Mexico also points out that, although its ILD Rules are not subject to the obligations of the Reference Paper, it has maintained appropriate measures for the purpose of preventing Telmex from engaging in 
anti-competitive practices.
459  According to Mexico its measures meet the standards of Section 1.1 of 
the Reference Paper and the Mexican regulatory fr amework contains the requisite of "Competitive 
Safeguards".460  
1. Panel's standard of review 
4.255  Mexico  submits that the fact that the United States may have different goals centered on 
promoting the interest of its own carriers shoul d not influence the manner in which the Panel 
interprets Section 1 in the light of the objectives of the GATS, which include: 
                                                      
451 See the United States' first written submission, paragraph 188. 
452 See the United States' first written submission, paragraph 206. 
453 See the United States' first written submission, paragraph 31. 
454 See Mexico's Reference Paper, page 8, GATS/SC/56/Suppl.2. 
455 See Mexico's first written submission, paragraph 197. 
456 The United States maintains that Mexico's Reference Paper obligations apply to the terms and 
conditions of cross-border interconnection between Te lmex and suppliers from the United States.  Mexico 
disagrees and contends that the settlement rates that ca rriers from the United States have agreed to pay to 
Telmex under the accounting rate regime  are not subject to Mexico's comm itment under Section 2.1 and 2.2 of 
the Reference Paper.  Moreover, Mexico argues that it di d not agree to grant cross-bo rder access in its Schedule 
of specific commitments and that the Reference Paper has no  application in this context.  For more information 
regarding the discussion on the scope of  application of the Reference Paper, see Section IV.A.1 of this Report. 
457 See Mexico's second written submission, paragraph 122. 
458 See Mexico's first written submission, paragraph 199. 
459 See Mexico's first written submission, paragraph 204. 
460 See Mexico's first written submission, paragraph 205.  WT/DS204/R 
 Page 77 
 
 
"Desiring the early achievement of progressively higher levels of liberalization in 
trade in services … while giving due respect to national policy objectives; 
Recognizing the right of Members to regulate … the supply of services within their 
territories in order to meet national polic y objectives and, given wide asymmetries 
existing with respect to the degree of deve lopment of services regulations in different 
countries, the particular need of developing countries to exercise this right; 
Desiring to facilitate the increasing participation of developing countries in trade in 
services and the expansion of their service exports including, inter alia, through the 
strengthening of their domestic services capacity and its efficiency and competitiveness …"
461 
4.256  Mexico also submits that Section 1.1 does not requi re a Panel to act as a domestic anti-trust 
authority, as, Mexico indicates , the United States implicitly argues.  In Mexico's view, Section 1.1 
sets out "principles and definitions" for regulator y authorities and does not mean that a single and 
common regulatory system should be imposed in the territory of all WTO Members.462 
2. Section 1.1 of Mexico's Reference Paper 
(a) Purpose of Section 1.1 
4.257  According to  the United States , Section 1.1 of Mexico's Reference Paper provides for the 
maintenance of appropriate measures to prevent majo r suppliers from engaging in or continuing anti-
competitive practices.463  The United States recalls that those appropriate measures are intended to 
prevent anti-competitive conduct by suppliers who "a lone or together" are a major supplier.  The 
United Sates submits that the "or together" language  in Section 1.1 indicates that the negotiators 
attached relevance to horizontal coordination be tween suppliers.  The United States also points out 
that, although this phrase has dire ct relevance to the definition of  "major supplier," it also lends 
context to the interpretation of the term "anti-co mpetitive practices," which the United States contends 
includes, at the very least, horizontal price-fixing agreements.464 
4.258  According to Mexico , the obligation in Section 1.1 is to maintain "suitable or proper" 
measures with the object or the intention of pr eventing Telmex from engaging in anti-competitive 
practices.465  Mexico claims that Section 1.1 is drafted in such manner that it allows Mexico a large 
measure of discretion in deciding what measures  would be suitable or proper to accomplish the 
intended objectives and cannot be interpreted to mean that Mexico is required to prevent all suppliers 
from even engaging in or continuing anti-competitiv e practices, as suggested by the United States.466  
Mexico further submits that, Section 1.1 creates an obligation of means, not an obligation of result.467  
(b) Extent of the requirement under Section 1.1 
4.259  Mexico maintains that Section 1 of the Referen ce Paper does not require markets to be 
opened to competition.  According to Mexico, the ope ning of markets is a market access issue that is 
                                                      
461 Mexico refers to the preamble of the GATS.  See Mexico's answer  to question 17(a) of the Panel of 
19 December 2002, paragraph 273 (" Are Mexican rules that impede price competition among Mexican 
companies terminating incoming international calls consistent with the GATS and the Reference Paper? ").  
462 See Mexico's first written submission, paragraph 204. 
463 The United States refers to Section 1.1 of Mexico's Schedule, Reference Paper, Sec 1, 
GATS/SC/56/Supp.2, p.7, Spanish Version.  See the United States' first written submission, paragraph 191. 
464 See the United States' second written submission, paragraph 80. 
465 See Mexico's first written submission, paragraph 201. 
466 See Mexico's first written submission, paragraph 202. 
467 See Mexico's first written submission, paragraph 203. WT/DS204/R 
Page 78  
 
dealt with in Mexico's Schedule of Specific Commitments.  Mexico submits that Section 1 requires only that appropriate measures be maintained fo r the purpose of preventing major suppliers from 
engaging in or continuing anti-competitive practices.
468 
4.260  The United States  submits that it is not arguing that Section 1 requires a guaranteed result 
and agrees that it is the maintenance of  appropriate measures that is required.469  According to the 
United States, what matters is that a Party maintain measures of some sort to prevent, not stimulate or 
condone, anti-competitive marketplace conduct.470  The United States further submits that it does not 
claim that Section 1 of the Refe rence Paper contains language requiring a market to be opened to 
competition or that the requirement of the Refere nce Paper can only be met by opening a market to 
competition.  According to the United States, Mexi co's obligation to open various markets derives 
from the broad range of market access commitmen ts on basic telecommunications contained in its 
Schedule.471 
(i) "Appropriate measures" 
aa) Whether the ILD Rules are "appropriate measures" under Section 1.1  
4.261  The United States  asserts that the FCC has identified Rule 13 as restricting competition, 
limiting the ability to achieve cost-based  cross-border interconnection rates.472  According to the 
United States, Rules 13 and 23 prevent Mexican and foreign suppliers from agreeing to alternative 
rates that could exert competitive pressures on the rate exclusively negotiated by Telmex.473  T h e  
United States submits that Mexico's ILD Rules ar e the opposite of "appropriate" measures to prevent 
anti-competitive practices, as required by Section 1.1 of the Reference Paper.474   
4.262  Mexico contends that Section 1.1 does not require Me xico to ensure that Telmex does not act 
in an anti-competitive manner.  Mexico submits that it is obliged to put in place "appropriate 
measures" aimed at preventing anti-competitive practices475 and that it has maintained appropriate 
measures for the purpose of preventing Telmex from engaging in anti-competitive practices.476  
According to Mexico, it must be recognized that the ILD Rules pursue legitimate policy development 
objectives, and, in fact, constitute appropriate me asures to encourage and ensure competition among 
domestic long-distance carriers.477  In Mexico's view, the United States' claim under Section 1 fails, 
even under its incorrect interpretation of the oblig ation in Section 1.1, since the ILD rules do not 
require anti-competitive practices.478 
4.263  Mexico submits that Rule 13 grants to the largest car rier of outgoing international traffic to a 
particular country the right to negotiate the rate for terminating incoming international calls from that 
country.  Mexico indicates that the uniform se ttlement rate policy ensures that all Mexican 
international service providers that terminate intern ational calls are paid the same negotiated rate.  
Mexico further points out that the proportional re turn policy, ensures that each Mexican provider 
                                                      
468 See Mexico's answer to question 17(b) of the Panel of 19 December 2002 (" Does Section 1 of the 
Reference Paper require that markets be opened to competition? ").  
469 See the United States' first oral statement, paragraph 36. 
470 See the United States' second written submission, paragraph 83. 
471 See the United States' answer to qu estion 17(b) of the Panel  meeting of 19 December 2002.  For 
question No. 17(b), see footnote 468 of this Report. 
472 See the United States' first written submission, paragraph 201. 
473 See the United States' first written submission, paragraph 202. 
474 See the United States' first written submission, paragraph 206. 
475 See Mexico's first oral st atement, paragraph 54. 
476 See Mexico's first written submission, paragraph 213. 
477 See Mexico's first oral statement, paragraph 54.   See Mexico's first oral statement, paragraph 8. 
478 See Mexico's first written submission, paragraph 213.  WT/DS204/R 
 Page 79 
 
 
receives fees proportionate to the number of calls it actually handles.479  According to Mexico, the 
combination of these policies prevents a large carrier  taking advantage of that authority by retaining 
an unfair share of the revenue from incoming inte rnational traffic, or otherwise undercutting new 
entrants.480 
4.264  According to the  United States , preventing price competition by new entrants to protect a 
major supplier's high price cannot possibl y be understood as promoting competition.481  The United 
States submits that Mexico has offe red no evidence that the new entran t carriers at issue need to be 
protected from a competitive market or from Telmex.  In its view, their best prospects of building 
market share and challenging Telmex’s dominance in f act lie in the freedom to compete with Telmex.  
The United States argues that Mexico’s general co mpetition law and its competition authority, the 
CFC, can address any attempts by Telmex, alone or in collusion with others, to engage in 
exclusionary or predatory conduct, once the constraints of the ILD rules are lifted.482  T h e  United 
States argues that although Mexico maintains a general competition statute, it also maintains measures that require its telecommunications carriers to adhe re to a Telmex-led horizontal price-fixing cartel, 
restrict competition for the termination of inte rnational switched telecommunications traffic and 
otherwise restrict the supply of scheduled telecommunications services.
483  The United States claims 
that these measures stifle market challengers and allow Telmex to maintain artificially high prices.484  
4.265  The United States recalls Mexico's report to the OECD's Committee on Competition Law 
and Policy in which Mexico stated that its own ILD Rules may not be the most favourable for 
competition.485  The United States claims Telmex is exactly  the sort of former official monopoly that 
the Reference Paper meant to be restrained in order to allow a competitive basic telecom services 
trade to develop.486  The  United States also claims that the OECD's Report on Regulatory Reform in 
Mexico has recognized that Mexico's ILD Rul es prevent competition in the termination of 
international traffic and prevents prices from decre asing for consumers, to the benefit of the Mexican 
telecommunications operators.  The United States further points out that the OECD Secretariat concluded that an immediate price reduction on intern ational calls would follow the elimination of the 
Mexican system.
487 
4.266  Mexico  submits that its ILD Rules are not per se anti-competitive, they just form part of 
Mexico's regulatory framework, which is aime d at increasing competition in its domestic 
telecommunications market.488  Mexico claims that Rule 13 of the ILD in combination with its 
uniform settlement policy and the requirements of proportional return, serves to preserve competition 
                                                      
479 See Mexico's first written submission, paragraph 208. 
480 See Mexico's first written submission, paragraph 209. 
481 See the United States' first oral statement, paragraph 38. 
482 See the United States' answer to question No. 25 of the Panel of 14 March 2003, paragraph 62 
("Please explain whether the effect of Rule 13 of th e ILD Rules is pro-competitive or anti-competitive, and 
support your argument with the appropriate illustrative figures and examples "). 
483 The United States refers to Mexico's ILD Rules. See the United States' first written submission, 
paragraph 196.  See the United States' answer to question 17(a) of the Panel of 19 December 2002, paragraph 86.  
For question No. 17(a), see footnote 461 of this Report. 
484 See the United States' first written submission, paragraph 200. 
485 The United States refers to OECD, CLP, Working Party No.2 on Competition and Regulation, 
"Competition and Regulation Issues in Telecommunications," submitted by Mexico (18 May 2001), 
DAFFE/CLP/WP2/WD(2001)25, at 3-4.  See the United States' first written submission, paragraph 199. 
486 See the United States' first written submission, paragraph 199. 
487 The United States refers to the OECD, Regulatory Reform in Mexico (1999) .  See the United States' 
first written submission, paragraph 205. 
488 See Mexico's first written submission, paragraph 206. WT/DS204/R 
Page 80  
 
among domestic carriers and to promote invest ment in the domestic telecommunications 
infrastructure, and cannot be evaluated in isolation.
489 
4.267  The United States considers that Mexican ILD Rules, wh ich contain an explicit restriction on 
price competition together with the division of s upply among market participants, have the classic 
features of a cartel.  The United States says that Mexi co admits that the effect of its ILD Rules is to 
prevent smaller carriers from undercutting Telmex on price.490  The  United States submits that ILD 
Rule 13, in combination with other provisions of the ILD rules, affirmatively requires and promotes 
per se anti-competitive conduct.  According to the Unite d States, the effect of Mexico's rules is to 
maintain rates for international interconnection th at are well in excess of cost, eliminating any 
competitive incentive to lower inte rnational interconnection rates.  The United States further points 
out that the reduction of international interconnection rates, as have occurred, cannot be attributed to 
this anti-competitive scheme.491 
4.268  According to  the United States , the impact of ILD Rule 13 is to prevent new entrant 
international carriers in Mexico, some of which are affiliated with United States or other foreign 
providers, from undercutting the above-cost prices char ged by Telmex, thereby attracting more traffic 
for themselves.  The United St ates claims that Mexico has acknowledged its concern about new 
entrant carriers engaging in a "price war" with Telmex.492  The United States submits that Mexico's 
maintenance of ILD Rule 13, in other words, is not  directed at preventing harm to competition but 
rather is directed at preventing the natural results of competition.  The United States further points out 
that Mexico prohibits price competition in the ma rket for interconnection provided to United States 
suppliers operating on a cross-border basis, and jus tifies this prohibition as necessary to prevent such 
competition from reducing rates.  In the United States' view, this can only be regarded as 
anti-competitive.493 
4.269  Mexico  alleges that its ILD rules governing settleme nt rates and proportionate return are not 
only appropriate, but necessary to prevent a major supplier from engaging in anti-competitive 
practices in the Mexican domestic market for long- distance services, and to promote the development 
of the nation's telecommunications infrastructure to  meet fundamental goals such as broader consumer 
access to service.494  According to Mexico, the requirem ents for uniform settlement rates and 
proportionate return in ILD Rule 13 are crucial:  (i) to preserve competition in Mexico's domestic 
market for long-distance services;  and (ii) to prom ote infrastructure development by ensuring that 
carriers' shares of the settlement rate revenue fro m incoming calls are proportionate to their success in 
                                                      
489 See Mexico's first written submission, paragraph 207.  See Mexico's first oral statement, paragraph 
53. See Mexico's answer to question No. 18 of the Panel of 19 December 2002, paragraph 284 (" Do you agree 
with Mexico's claim that ILD Rule 13 promotes competition? If so, plea se explain how, giving illustrative 
examples of desired and undesired outcomes ");  and Mexico's answer to question No. 25 of the Panel of 
14 March 2003, paragraph 132.  For question No. 25,  see footnote 482 of this Report. 
490 The United States refers Mexico's first written submission, paragraph 79.  See the United States' first 
oral statement, paragraph 38. 
491 See the United States' answer to question No. 18 of the Panel of 19 December 2002, paragraph 89. 
For question No. 18, see footnote 489 of this Report. 
492 The United States refers to Mexico first written submission, paragraph 79.   See the United States' 
answer to question No. 24 of the Panel of 14 March 2003 (" Are there examples of WTO Members other than 
Mexico who maintain measures similar to ILD Rule 13  – granting one supplier the right to negotiate with 
foreign suppliers a settlement rate that is applicable to all other domestic suppliers? "). 
493 See the United States' answer to question No. 24 of the Panel of 14 March 2003, paragraph 48.  For 
question No. 24, see footnote 492 of this Report. 
494 Mexico refers to the preamble of the GATS.  See Mexico's answer  to question No. 17(a) of the 
Panel of 19 December 2002, paragraph 273.  For question No. 17(a), see footnote 461 of this Report.  WT/DS204/R 
 Page 81 
 
 
penetrating the domestic market for outgoing internati onal calls.  This is why, in Mexico's view, the 
ILD rules must be evaluated in their totality.495 
4.270  The United States submits that its concern that Telmex is engaging in anti-competitive 
behaviour in its accounting rate ne gotiations with United States carriers is exacerbated by the fact 
that, under Rule 13 of the regulations issued by Mexico's Secretariat of Communications and 
Transport, Telmex negotiates accounting rates for all Mexican carriers.496  As a result, the United 
States contends, Telmex has de jure monopoly power in its negotiations with United States carriers.  
The United States submits that its suppliers have  no choice but to interconnect with the Mexican 
public network at the border, since under Mexico's ILD Rule 3, only "international port operators" 
may interconnect with the public networks of fo reign operators.  The United States recalls that 
Mexican law permits only Mexican facilities-based ope rators to hold a concession to supply long-
distance services.497  The United States further points out that  Mexico leaves no choice but to pay the 
Telmex-negotiated interconnection rates, to s uppliers from the United States willing to provide 
scheduled services on a cross-border basis.  The Un ited States claims that Mexico does not allow 
"resale" which requires the use of private lease circ uits for the purpose of providing circuit switched 
telecommunication traffic.498 
4.271  Mexico argues that the United States' arguments are an attempt to force Mexico to permit 
ISR.499  According to Mexico, its commitments were  limited to allow international traffic only 
"through the facilities of an enterprise that h as a concession granted by the Secretaría de 
Comunicaciones y Transportes".  Mexico argues that Section 1.1 cannot be construed to indirectly grant carriers, from the United States, access to IS R when Mexico has an express limitation that 
allows it to prohibit ISR.
500  According to Mexico, the end resu lt of the United States approach would 
be to affect competitive long-distance carriers in  Mexico and thereby cut down domestic market 
competition with the argument of reducing costs for AT&T and Worldcom.  It further argues that the 
United States, incidentally, has not offered any in formation whatsoever on how elimination of the 
ILD Rules would promote competition in the Unite d States, where WorldCom and AT&T together 
control more than 90 per cent of United States traffic to Mexico.  In its view, even with Rule 13, the 
negotiating power of the duopsony (exclusive market power of two buyers on a market ) on the 
United States side has been so dominant, and th e volume of traffic southwards so great, that 
historically the settlement rate has been drastically reduced.501 
4.272  In response to a question by the Panel, Mexico  indicated that it is not aware of any other 
WTO Member that has a de jure  Rule 13.  However, it argues, most Members, including the United 
States, have a de facto Rule 13, since the carrier  with the highest market share is the one that 
negotiates the corresponding accounting rates (and theref ore the settlement rates) with its counterpart, 
which also has the highest corresponding market share, and the remaining carriers on both sides 
follow their leaders.  Mexico explains that, in the United States, for example, the ISP establishes 
uniform settlement rates and proportional return rule s that result in a de facto Rule 13 for all United 
States carriers.  However, if one of the economic effects of Rule 13 could be said to prove "anti-
competitive", most, if not all, WTO Members have regulatory measures producing that effect.  As is 
the case with ILD Rule 13, there are legitimate gr ounds for such measures and the measures should 
                                                      
495 See Mexico's answer to question No. 18 of the Pa nel of 19 December 2002.  For question No. 18, 
see footnote 489 of this Report. 
496 See the United States' first written submission, paragraph 201. 
497 The United States refers to Mexican law.  See the United States' first written submission, 
paragraph 204. 
498 See the United States' first written submission, paragraph 203. 
499 Mexico refers to the United States first written submission, paragraphs 203-204.   See Mexico's first 
written submission, paragraph 211. 
500 See Mexico's first written submission, paragraph 212. 
501 See Mexico's answer to question No. 25 of the Panel of 14 March 2003.  For question No. 25, see 
footnote 482 of this Report. WT/DS204/R 
Page 82  
 
not be prohibited simply because one of the e ffects might be "anti-competitive" according to a 
particular criterion or measure.
 502 
4.273  The United States  submits that Mexico finally admits  that no other WTO Member maintains 
a measure similar to Rule 13, and fails to iden tify any WTO Members, other than purportedly the 
United States, which it claims "have a de facto Rule 13."  The United States submits that Mexico then 
repeats its false charges that United States rules and policies are similar to those of Mexico, and again 
makes no attempt to rebut the evidence put fo rward by the United States showing that the 
United States  International Settlements Policy requires nondiscr iminatory rather than uniform rates, 
that ISP non-discrimination and proportionate requirements apply only to arrangements with 
dominant carriers that maintain high rates, a nd that all United States carriers negotiate rates 
independently. 503 
bb) Whether a proportionate return system could be an anti-competitive measure  
4.274  Mexico claims that Rule 13 prevents internationa l anti-competitive activities.  According to 
Mexico, the United States fails to mention that the two other major Mexican long distance carriers are 
affiliates of carriers from the United States and also  fails to explain how allowing those carriers to 
dictate rates to their Mexican affiliates would ser ve any anti-competitive purpose.  Mexico submits 
that its ILD Rules were adopted to mirror those of the United States, which otherwise would give 
carriers from the United States an unbalanced negotiating advantage over Mexican carriers.504  
Mexico contends that its rules have prevente d large foreign carriers from pressuring their own 
affiliated Mexican companies to agree to predat ory, uneconomic prices that would serve only the 
interest of companies from the United States to th e detriment of the Mexican market, undermining the 
opportunity to expand access to basic telecommuni cations services to those who now lack such 
services, and who comprise two-thirds of Mexican households.505 
4.275  The United States replies that its international regul atory scheme upon which Mexico's ILD 
Rules were allegedly based is qualitatively different  from Mexico's rules.  According to the United 
States, its rules are designed to prevent monopolistic abuses where th e potential for them still exists, 
not to authorize and mandate such abuses like Mexico's ILD Rules.  According to the United States its 
uniform or nondiscriminatory settlement rate and proportionate return requi rements only apply to 
foreign carriers with market power, whereas Mexico's rules apply to all foreign carriers regardless of their market power.  The United States claims that it s rules encourage all its carriers to negotiate cost-
oriented rates .  The United States further points out that Me xico's rules prohibit all carriers, except 
Telmex, from negotiating rates and thus encourage ar tificially high rates, the exact opposite of cost-
based.
506  The United States submits that it has not at any time given one carrier the exclusive 
authority to negotiate international interconnec tion rates for itself and other competitive carriers.507 
4.276  Mexico contends that, despite the United Stat es claim that it applies its International 
Settlements Policy in a narrowly targeted fashion, it has waived the policy only for 15 countries, and 
                                                      
502 See Mexico's answer to question No. 24 of the Panel of 14 March 2003, paragraphs 128-129.  For 
question No. 24, see footnote 492 of this Report. 
503 See the United States' comments on Mexico's answer to question No. 24 of the Panel of 14 March 
2003, paragraph 67. 
504 See Mexico's first written submission, paragraph 210.    See Mexico's answer to question No. 17(a) 
of the Panel of 19 December 2002, paragraph 256.  Fo r question No. 17(a), see f ootnote 461 of this Report. 
505 See Mexico's answer to question No. 17(a) of the Panel of 19 Decem ber 2002, paragraph 256.  For 
question No. 17(a), see footnote 461 of this Report. 
506 See the United States' first oral statement, paragraph 40. 
507 See the United States' first oral statement, paragraph 41.  WT/DS204/R 
 Page 83 
 
 
it deems virtually every major foreign carrier to have market power, including all local exchange 
carriers in the countries to which the Policy applies.508 
4.277  In the  United States ' view, the use of a proportionate return system is not an anti-competitive 
practice where it is used solely to prevent the abuse of market power .  The United States claims that it 
applies proportionate return requirements only to cr oss border suppliers that both (1) possess market 
power at the foreign end of the international route, and (2) maintain high settlement rates.509  
According to the United States, proportionate return is applied to dominant s uppliers with high rates 
in order to prevent those dominant suppliers from using their control of return traffic to obtain 
additional concessions from competi ng suppliers in the United States .  The United States claims that, 
except for dominant suppliers with high rates, cr oss-border suppliers into the United States are not 
subject to proportionate return .  The United States refers that all suppliers, from all countries, that do 
not possess market power at the foreign end of the re levant international route, including all Mexican 
suppliers except Telmex, are not subject to pr oportionate return, and may terminate unlimited 
amounts of bound traffic in the Unite States with any supplier.510 
4.278  The United States claims that it is pro-competitive rath er than anti-competitive to apply a 
proportionate return system narrowly in order to pr event dominant suppliers with high settlement rates 
from using their market power to receive increased above-cost subsidies.  The  United States points 
out that Mexico has established a "proportional retu rn" system under which Mexican carriers receive a 
share of the above cost payments associated with  inbound international traffic in relation to their 
outbound international traffic.511  In the Unites States' view, Me xico does not apply proportionate 
return to prevent the abuse of market power, bu t just requires all suppliers to comply with 
proportionate return, irrespective of whether they possess market power.  The United States submits 
that Mexico's proportionate return requirement ope rates "in combination with" the Telmex monopoly 
on rate negotiations and the requirement for un iform rates to prevent one Mexican supplier 
"undercutting" any other Mexican supplier, or otherwise competing to increase its share of traffic received from cross-border suppliers from the United States.
512  The United States contends that 
Mexico applies proportionate return broadly to all suppliers with the purpose of maintaining payment 
of above-cost subsidies resulting from th e abuse of market power by Telmex.513   
4.279  The United States  submits that Mexico has failed to explain why a Mexican carrier, even if 
minority owned (but not controlled) by a United St ates. carrier, would ignore its responsibility to its 
majority shareholders and agree to predatory, uneco nomic prices for international interconnection.  In 
its view, the impact of ILD Rule 13 is to prevent ne w entrant international carriers in Mexico, some of 
which are affiliated with United States or other foreign providers, from undercutting the above-cost 
prices charged by Telmex, thereby attracting more traffic for themselves.  Mexico has acknowledged 
its concern about new entrant carriers engaging in a "price war" with Telmex.  Mexico’s maintenance 
                                                      
508 See Mexico's comments on the United States' answer to  question No. 19(b) of the Panel of 14 March 
2003, paragraph 41. 
509 The United States refers to the International Settlement Policy Reform, IB Docket No. 02-234, 
Notice of Proposed Rulemaking .  See the United States' answer to question No. 19(d) of the Panel of 
19 December 2002, paragraph 96 (" Does a proportional return system necessarily constitute an anti-competitive 
practice? "). 
510 See the United States' answer to question No. 19(d ) of the Panel of 19 December 2002, paragraph 
96.  For question No. 19(d), see footnote 509 of this Report.  See the United States' second written submission, 
paragraph 95. 
511 The United States refers to Mexico's ILD Rules 16 and 17.  See the United States' first written 
submission, paragraph 198. 
512 The United States refers to paragraph 207- 209 of Mexico's first written submission.  See the United 
States' answer to question No. 19(d) of the Panel of 19 December 2002, paragraph 97.  For question No. 19(d), see footnote 509 of this Report. 
513 See the United States' answer to question No. 19(d ) of the Panel of 19 December 2002, paragraph 
97.  For question No. 19(d), see footnote 509 of this Report. WT/DS204/R 
Page 84  
 
of ILD Rule 13, in other words, is not directed at preventing harm to competition but rather is directed 
at preventing the natural results of competition.  Me xico prohibits price competition in the market for 
interconnection provided to United States suppliers operating on a cros s-border basis, and justifies 
this prohibition as necessary to prevent such co mpetition from reducing rates.  This can only be 
regarded as anti-competitive.
 514 
4.280  In Mexico 's view, the proportional return system is  a pro-competitive practice, directed at 
Mexico's legitimate policy objectives.515  According to Mexico, its ILD Rules promote competition in 
the Mexican domestic market, while protecting Mexican  carriers from being played off each other by 
foreign carriers.  Mexico submits that among ot her pro-competitive features, ILD Rules prevent 
negotiation by one supplier of a settlement rate th at could undercut other suppliers because it would 
be unprofitable for them (i.e., a predatory settlement rate) .  Mexico points out that the United States 
tries to dismiss the pro-competitive goals of the IL D rules as irrelevant, persisting in its claim that 
Mexico's Reference Paper requires competition in the negotiation of ac counting rates regardless of the 
negative impact on competition that this would bring to the domestic market, including the impact on international calling services to consumers.
516 
(ii) "Major supplier" 
4.281   The United States explains that Mexico's ILD Rule 13 provides that the carrier with the 
greatest share of outgoing international calls in the last six months is given the exclusive authority to negotiate the interconnection rates with foreign carri ers.  The United States points out that Telmex has 
always been the carrier with the largest outgoing in ternational calls, holding the exclusive negotiating 
authority.  The United States further points out that ILD Rules require all Mexican long-distance basic 
telecom suppliers to charge foreign suppliers onl y the Telmex-negotiated cross-border interconnection 
rate, even if Telmex is not a party to that agreement.
517  The United States therefore contends that 
Mexico's rules empower and require Telmex to ope rate a cartel dominated by itself to fix rates for 
international interconnection and mandate that all Mexican carriers must adhere to those rates.518   
4.282  The United States  submits that Section 1.2 of the Reference Paper defines "major supplier" 
as a "supplier which has the ability to materially aff ect the terms of participation (having regard to 
price and supply) in the relevant market519 for basic telecommunications services as a result of:  
(a) control over essential facilities; or (b) use of its position in the market."520  According to the 
United States, Telmex satisfies this definition of "major supplier" because it has the ability, in the 
Mexican market, to use its position to materially affect the prices charged and the supply of services.
521  The United States further submits that Mexi can competition law, in determining whether 
an economic agent has "substantial power in the rele vant market", considers "the possibility to fix 
prices unilaterally or to restrict supply in the rele vant market, without competitive agents being able, 
presently or potentially to offset such power", a nd other factors including "existence of entry 
barriers", existence and power of … competitors",  and possibility of access … for sources of inputs.522  
                                                      
514 See the United States' answer to question No. 25 of the Panel of 14 March 2003, paragraphs 63-64. 
For question No. 25, see footnote 482 of this Report. 
515 See Mexico's answer to question No. 19(d) of th e Panel meeting of 19 December 2002.  For 
question No. 19(d), see footnote 509 of this Report. 
516 See Mexico's second oral statement, paragraph 92. 
517 The United States refers to Mexico's ILD Rules 13 and 23.  See the United States' first written 
submission, paragraph 197. 
518 See the United States' first written submission, paragraph 190. 
519 As regards the parties' argumentation on the "relevant market", see also Section IV.A.4(a). 
520 See the United States' first written submission, paragraph 68. 
521 See the United States' first written submission, paragraph 71. 
522 The United States refers to the unofficial tran slation of the Mexican Federal Law of Economic 
Competition, Chapter II, Article 13 (issue d December 24, 1992).  Exhibit US-18.  See the United States' first 
written submission, paragraph 80.  WT/DS204/R 
 Page 85 
 
 
The United States defines the relevant market as the termination of voice telephony, facsimile and 
circuit-switched data transmission services supplied on a cross-border ( i.e., international) basis from 
the United States into Mexico, which, in its view , is demonstrated by well-accepted principles of 
market analysis which derive from competition law.523  The United States recalls that Mexican 
competition law provides that in order to determin e a relevant market, it is necessary to evaluate 
"[t]he possibilities of substituting the goods or services in question, with others of domestic or foreign 
origin, considering technological possibilities, and th e extent to which substitutes are available to 
consumers and the time required for such substitution".524 
4.283  Mexico  argues that the United States has not demons trated that the interconnection at issue 
concerns a "major supplier"525 and has not presented a prima facie case that Telmex is a "major 
supplier" within the meaning of the Reference Paper.526  In Mexico's view, the United States' 
analysis527 in which it sets out its argument that Telmex is a "major supplier" is flawed.528  In t hi s  
regard, Mexico submits that the United States has fail ed to clearly define the services at issue and how 
they are supplied.529  It further contends that, even if assuming that the services at issue are the 
transportation and transmission of telecommunications signals and that the mode of supply at issue is 
mode 1 (cross-border), the United States has failed to  explain how the "relevant market" it defines is 
relevant to the cross-border supply of such services.   
4.284  As regards the United States' definition of "r elevant market" as "the termination of voice 
telephony, facsimile and circuit-sw itched data transmission services", Mexico  submits that 
"termination services", to the extent that they are provided by a carrier in a WTO Member, are 
provided on a mode 3 (commercial presence) basis and not on a cross-border basis.  Mexico claims 
that the United States' analysis confuses two dis tinct modes of supply, cross-border and commercial 
presence.  Mexico further claims that the United St ates relies on a relevant market resolution by the 
Mexican competition authority that is under review by Mexican courts precisely because the data it 
was based upon.530  Mexico also argues that, assuming that defining the relevant market as 
"termination services" is relevant, it is unclear wh ether a carrier in Mexico, such as Telmex, is 
providing "termination services" in the light of th e technical distinction between the traditional 
accounting rate procedure and a termination regime.  It  further argues that, even if a carrier in Mexico 
does provide termination services for foreign carriers wishing to terminate calls within Mexico, "termination services" and how to schedule those services was a specific topic of discussion during the negotiations on basic telecommunications.  There was no agreement on these services and, even if 
there was, Mexico has not inscribed in its Schedul e any specific commitments with respect to these 
services, for example, by using the approach proposed by Australia during the negotiations.
531 
4.285  The United States  responds that Mexico's assertion that termination services are not 
interconnection is refuted by the plain language in Section 2.1 of Mexico's Reference Paper definition 
of "interconnection".  Additionally, the United States submits that the European Commission has 
described call termination as "the most basic interconnection service provided" and that in its 
                                                      
523 See the United States' first written submission, paragraph 73. 
524 The United States refers to the unofficial tran slation of the Mexican Federal Law of Economic 
Competition, Chapter II, Article 13 (issue d December 24, 1992).  Exhibit US-18.  See the United States' first 
written submission, paragraph 74. 
525 See Mexico's second oral statement, paragraph 68. 
526 See Mexico's second oral statement, paragraph 74. 
527 Mexico refers to paragraphs 68-99 of th e United States' first written submission.   
528 See Mexico's second oral statement, paragraph 69. 
529 See Mexico's second oral statement, paragraph 70. 
530 See Mexico's second oral statement, paragraph 71. 
531 See Mexico's second oral stat ement, paragraphs 72-73. WT/DS204/R 
Page 86  
 
submissions during the negotiations, Australia stated  that termination of international traffic is 
interconnection, and there is no indication that an y other Member objected to this characterization.
532 
4.286  Mexico  submits that, basically, Mexico and the United States differ on what constitutes the 
relevant market in which competition must be prom oted and protected.  Mexican policy, as shown by 
the ILD Rules, is that domestic carriers should sh are in and split agreements for incoming calls in 
terms of their success in securing a share on the dom estic market and genera ting outbound calls.  The 
United States sees it differently (apparently, solely fo r the purposes of its argument in this case), i.e. 
the only "market" worth protecting is the one for term inating United States traffic to Mexico.  Mexico 
contends that the United States is acting as if new operators should compete to carry incoming 
international traffic calls instead of competing for end-customers in Mexi co.  According to the 
criterion set by the United States, it argues, an operator who has made a minimal investment in 
Mexican infrastructure should be allowed to do so on an unlimited basis, taking all the revenue for 
international calls from the operators who have ma de such investments and have obtained successful 
results in acquiring a share of the market. 533 
4.287  The United States  claims that Mexico is attempting to  justify its anti-competitive ILD rules 
by alleging that the United States "is acting as if new operators should compete in order to carry 
incoming international traffic calls instead of comp eting for end-customers in Mexico."  The United 
States submits that Mexico misstates the United St ates position.  In the view of the United States, 
Mexico’s WTO obligations require it to allow new carriers to compete both to carry inbound 
international calls and for customers in Mexico.  Likewise, it argues, Mexico implies that it is wrong 
for the United States to assert th at carriers that have made "minimal" investments in Mexican 
infrastructure should be allowed to engage in "un limited" competition.  The United States maintains 
that a carrier’s ability to compete, either for inb ound international calls, Mexican customers or in any 
other area, is limited only by the limitations, if any, in Mexico’s Schedule.  Mexico cites no 
requirement in its Schedule that links a supplier’s ab ility to compete for inbound international calls to 
that supplier’s level of investment in Mexican fa cilities.  Additionally, Mexico does not restrict 
competition for inbound international traffic merely  for those suppliers with an undefined level of 
"minimal investment."  Instead, Mexico's ILD ru les restrict competition for inbound international 
traffic for all commercially present suppliers, irresp ective of their level of investment in Mexican 
facilities. 534 
(iii) "Anti-competitive practices " 
aa) Definition of anti-competitive practices  
4.288  The United States  explains that apart from three illust rative practices included in Section 1, 
the Reference Paper does not define  the term "anti-competitive practices".  The United States 
considers that this term encompasses, at a mini mum, what are usually characterized as "abuses of 
dominant position" and/or "monopolization" offences as well as "cartelization", which, according to 
the United States, are common antitrust concepts gene rally included within the universe of business 
practices usually found to be anti-competitive under national regulatory schemes and competition 
laws and policies .  The United States claims that Mexico's antitrust law generally prohibits behaviour 
of this sort.535  The  United States  further indicates that the 1999 Report of the WTO Working Group 
                                                      
532 See the United States' comments on Mexico's answer to question No. 17 of the Panel of 14 March 
2003, paragraph 59. 
533 See Mexico's answer to question No. 25 of the Panel of 14 March 2003, paragraph 132.  For 
question No. 25, see footnote 482 of this Report. 
534 See the United States' comments on  Mexico's answer to question No. 25 of the Panel of 14 March 
2003, paragraphs 68 and 69. 
535 The United States refers to the WTO, Working Group on the Interaction between Trade and 
Competition "The Fundamental Principles of Competition Policy " (7 June 1999), Exhibit US-42;  "Overview of 
Members' National Competition Legislation " (Rev. 2,4 July 2001);  ABA Sec tion of Antitrust Law, Competition  WT/DS204/R 
 Page 87 
 
 
on the Interaction Between Trade and Competition Policy describes the nature and consequences of 
"horizontal" agreements which are likely to have a direct, negative impact on competition and to give 
rise to the exercise of market power.536 
4.289  Mexico indicates that a definition of "anti-competiti ve practices" is provided in Section 1.2, 
which states that:  
 "The anti-competitive practices referr ed to in the above paragraph shall 
include in particular : 
(a) Engaging in anti-competitive cross-subsidization; (b) using information obtained from competitors with anti-competitive results;  
and 
(c) not making available to other service s suppliers on a timely basis technical 
information about essential facilities and commercially relevant information which are necessary for them to provide service."  (emphasis added)
537 
4.290  Mexico  argues that the term "shall include" indi cates that the list is non-exhaustive and that 
the addition of the words "in particular" demonstr ate a focus on certain types of activities – namely, 
actions taken by private companies to gain an adva ntage over their competitors.  Mexico claims that 
carriers from the United States are not competing with Mexican carriers when they enter into bilateral 
accounting rate arrangements since they do not offer service to Mexican customers.  Mexico submits 
that, even if the legal requirement that all Mexican  carriers charge the same settlement rate somehow 
could be construed as a "horizontal price fixing agreement" by private companies, such an agreement would not be encompassed by Section 1 because all Mexican carriers would be participating in the 
conspiracy and none would be harmed by it.
538 
bb) Government intervention  
4.291  According to the United States , the fact that anti-competitive conduct is compelled by the 
government does not change the underlying nature of the conduct as anti-competitive.539  In its view, 
even if an activity engaged in by Mexico's ma jor supplier, Telmex, is immunised from domestic 
enforcement action under Mexican law, or is in some  sense the act of the Me xican State itself, that 
does not alter the anti-competitive char acter of the activity at issue.  The United States notes that it is 
Mexico's failure to observe the obligations of Section 1 that is at issue in this dispute, not Telmex 's 
failure to observe those obligations.  According to the United States, if a WTO Member were able to 
immunize itself from the obligation incumbent upon it under Section 1 to take measures to prevent 
anti-competitive conduct by major suppliers by simp ly requiring anti-competitive conduct by major 
suppliers, the entire purpose of Section 1 would be undermined.  The United States says that such an 
                                                                                                                                                                     
Laws Outside the United States I (2001) Chapter 1, Exhibit US-49; OECD "Recommendation of the Council 
Concerning Effective Action against Hard Core Cartels (1998) ";  Mexican Federal Law of Economic 
Competition, Arts. 8 and 9, Exhibit US-18.   See the United States' first written submission, paragraph 193.  See 
the United States' first oral statement, paragraph 34.  See the United States' answer to  question No. 17(a) of the 
Panel of 19 December 2002, paragraph 86.  " Are Mexican rules that impede price competition among Mexican 
companies terminating incoming international calls consistent with the GATS and the Reference Paper? ".  See 
the United States' second written submission, paragraph 79. 
536 See the United States' first written submission, paragraph 194. 
537 See Mexico's answer to question No. 19(a) of the Panel of 19 December 2002, paragraph 287  
("How do you define "anti-competitive practices " in the sense of Section 1.1 of the Reference Paper? "). 
538 See Mexico's answer to question No. 19(a) of the Panel of 19 Decem ber 2002, paragraph 288.  For 
question No. 19(a), see footnote 537 of this Report. 
539 See the United States' first oral statement, paragraph 42. WT/DS204/R 
Page 88  
 
interpretation of Section 1 would encourage Memb ers affirmatively to maintain measures requiring 
anti-competitive conduct, rather than put in place measures to prevent anti-competitive conduct.
540 
4.292  Mexico  submits that the United States has failed to establish that Section 1 disciplines 
regulatory "measures" of a WTO Member that have an anti-competitive effect.541  In Mexico's view, 
"anti-competitive practices" refer to the practic es of a major supplier and not to governmental 
measures that may have an anti-competitive effect.542  Mexico recognizes that all regulation of 
economic activity, by definition, interferes  with the operation of a freely competitive marketplace, 
including rate-setting by governmental  authorities, but claims that such government regulation itself is 
not typically understood to be capable of  violating competition rules.543  According to Mexico, if the 
United States' interpretation is to be accepted,  all government regulatory measures in the 
telecommunications sector that restrain the actions of  a major supplier in a manner that interferes with 
the operation of a freely competitive marketplace would be prohibited .  Mexico claims that this is not 
what was intended by Section 1 of its Reference Pape r.  Mexico submits that there is no basis in the 
text of Section 1 to judge the legitimacy of a WTO Member's internal regulatory policies in 
circumstances where no multilaterally agreed-upon benc hmarks exist.  Mexico further contends that 
in order to justify its own anti-competitive meas ures, the United States e ssentially distinguishes 
between anti-competitive measures that, in its view , have legitimate policy objectives and those that, 
in its view, do not.  In Mexico's view, if the dr afters of Section 1 meant to include government 
regulatory measures, surely they would have incl uded text to take into account such important 
distinctions and to provide obj ective benchmarks for assessing th e legitimacy of such measures.544 
                                                      
540 See the United States' answer to question No . 17(c) of the Panel of 19 December 2002  ("Can the 
fixing of a uniform price be anti-competitive practice in violation of the obligation under the Reference Paper if 
uniform prices are required by law? "). See the United States' answer to questi on No. 23(a) of the Panel of 14 
March 2003, paragraph 31.  For question No. 23(a), see footnote 545 of this Report. 
541 See Mexico's second oral statement, paragraph 10. 
542 See Mexico's answer to question No . 19(a) of the Panel of 19 Decem ber 2002, paragraph 287.  For 
question No. 19(a), see footnote 537 of this Report. 
543 See Mexico's second written submission, paragraph 128. 
544 See Mexico's second oral statement, paragraph 10.  WT/DS204/R 
 Page 89 
 
 
 
cc) Price fixing as an anti-competitive practice  
4.293  Answering a Panel's question545, the  United States submits that, if price-fixing is anti-
competitive, then it is anti-competitive even if require d by law.  According to the United States, even 
if an activity engaged in by Mexico's majo r supplier, Telmex, is immunized from domestic 
enforcement action under Mexican law, or is in some  sense the act of the Me xican state itself, that 
does not alter the anti-competitive character of the activity at issue.546  The United States further 
submits that Telmex's ability to negotiate uniform settlement rates is per se anti-competitive.  In its 
view, this is, by definition, a horizontal price-fixing cartel that fits within virtually any definition of 
anti-competitive practice.  The United States notes that horizontal price fixing is condemned both as a 
per se violation of its own law under Section 1 of  the Sherman Act and as an absolute monopolistic 
practice under Article 9 of Mexico's FLEC.547  The United States affirms that it is the setting of the 
rate by a monopolist (since Telmex is given the exclus ive authority, it is acting as a monopolist in this 
context) and the use of this rate by all other supp liers (horizontal price-fixing) that comprise the anti-
competitive practices that form the basis for the Un ited States' claim under Section 1 of the Reference 
Paper.  It submits that the fact that the govern ment requires the anti-competitive practice does not 
change the nature of the practice as anti-competitive.548 
4.294  Also in answer to a Panel's question, Mexico  submits that the fixing of a uniform price cannot 
be an anti-competitive practice in violation of the obligations under the Reference Paper if uniform 
prices are required by law.549  Mexico further submits that Telmex's ability to negotiate uniform 
settlement rates is not per se anti-competitive since Mexican law does not give Telmex the authority 
to negotiate the rate.  According to Mexico, Rule  13 provides the carrier having the greatest share of 
outgoing traffic to a particular country is authorized  to negotiate the rate.  Mexico claims that new 
entrant carriers have been gaining important shares of outgoing traffic on certain routes, and therefore 
may soon have the right to negotiate the rates for those routes.550 
4.295  Mexico  further submits that, in the economic sense, monopolies may be "anti-competitive".  
However, it cannot be said that a domestic regulator y regime that establishes and permits a monopoly 
or small number of exclusive service suppliers to ex ist is equivalent to requiring an "anti-competitive 
practice" within the meaning of Section 1 of Mexi co's Reference Paper.  GATS Article VIII explicitly 
contemplates that WTO Members can maintain  monopolies and exclusive service suppliers.  
Moreover, many WTO Members who have inscrib ed a Reference Paper maintain monopolies or 
exclusive service suppliers under thei r domestic law.  Section 1 of Me xico's Reference Paper and the 
                                                      
545 Namely, question No. 17(c) of the Panel of 19 December 2002.  For question No. 17(c), see 
footnote 540 of this Report, and question No. 23(a) of the Panel of 14 March 2003 (" Explain why the Mexican 
legal requirement that all Mexican su ppliers must apply the settlement rate  negotiated by the major supplier, 
amounts to requiring an 'anti-competitive practice ' in violation of Section 1.1 even if Mexican suppliers do not 
collude and do not distort competition voluntarily. "). 
546 See the United States' answer to question No. 17(c ) of the Panel of 19 December 2002, paragraph 
88.  For question No. 17(c), see footnote 540 of this Report.  See the United States' answer to question No. 23(a) 
of the Panel of 14 March 2003, paragraph 31.  For question No. 23(a), see footnote 545 of this Report. 
547 See the United States' answer to question No. 19(c) of the Panel of 19 December 2002, paragraph 95 
("Do you consider that Telmex's ability to negotiate uniform settlement rates is  per se anti-competitive? "). 
548 See the United States' answer to question No. 23(a) of the Panel of 14 March 2003, paragraph 31.  
For question No. 23(a), see footnote 545 of this Report. 
549 See Mexico's answer to question No 17(c) of the Panel of 19 December 2002, paragraph 283.  For 
question No. 17(c), see footnote 540 of this Report. See also  Mexico's comments on the United States' answer to 
question No. 23(a) of the Panel of 14 March 2003, paragraphs 48-51. 
550 See Mexico's answer to question No. 19(c) of the Panel of 19 Decem ber 2002, paragraph 292.  For 
question No. 19(c), see footnote 547 of this Report.  See also  Mexico's comments on the United States' answer 
to question No. 23(a) of the Panel of 14 March 2003, paragraph 52. WT/DS204/R 
Page 90  
 
equivalent provisions in the Refe rence Papers of other WTO Member s cannot be interpreted to nullify 
a right that exists under GATS Article VIII.  Mexico  submits that the obligations in the Reference 
Paper were negotiated specifically to prevent majo r carriers in regulated markets from abusing their 
market positions by engaging in anti-competitive "priva te" actions.  With respect to "the use of the 
[Telmex] rate by all other suppliers", such acti on is not the result of anti-competitive practices of a 
major supplier – the focus of Section 1 of Mexico's  Reference Paper – rather, it is the result of a 
legitimate government regulatory scheme.
551 
4.296  The United States responds that there is no basis for Mexico's assertion that GATS 
Article VIII contemplates Mexico's restrictions  on competition through the ILD rules, and therefore 
somehow precludes any challenge to such measu res under Article 1 of the Reference Paper.552  
Article VIII only applies to monopolists and "exclu sive service suppliers, where a Member, formally 
or in effect, (a) authorizes or establishes a small number of suppliers and (b ) substantially prevents 
competition among those suppliers in its territory."  Mexico has placed no limitation on the number of concessionaires, either formally or in effect, and Article VIII therefore does not apply.  Mexico's 
Schedule contains no Article XVI:2(a) limitation on the number of service suppliers, and as of 
September 2002 Mexico had gran ted no fewer than 27 concessions  for domestic long-distance 
service, 11 of which are authorized to operate international ports.
553 
(c) Relationship between Section 1.1 and Se ction 2.2(b) of the Reference Paper 
4.297  The United States  submits that a Member that scheduled the Reference Paper as an 
additional commitment is required by Section 1 of the Reference Paper to maintain appropriate 
measures to prevent its major supp lier from engaging in or contin uing anti-competitive practices, and 
is also obliged under Section 2.2(b) to ensure in terconnection with that major suppliers on reasonable 
terms, conditions and rates.  The United States c onsiders that depending on the facts at issue, a 
conduct could be both anti-competitive and restrict  the supply of basic telecommunication services, 
leading to a violation of both Sections 1 and 2.2(b).554  T h e  United States also submits that the 
purpose of Section 1 of the Reference Paper is to  support the parallel goals  of de-monopolization and 
market access by protecting and fostering competition among basic telecom competitors, and that it 
complements the more specific interconnection rules for major suppliers found in Section 2.555 
4.298  Mexico  submits that Sections 1 and 2 of Mexi co's Reference paper do not cover the same 
subject matter.  In Mexico's view, independent  meaning must be given to each provision and 
overlapping interpretati ons must be avoided.556  According to Mexico, what is "not reasonable" under 
Section 2.2 and what is "anti-competitive" under Sec tion 1.1 are measured against different standards, 
there being no relationship between the two.557 
                                                      
551 See Mexico's comments on the United St ates' answer to question No. 23( a) of the Panel of 14 March 
2003, paragraphs 50-51. 
552 See Mexico's second oral stat ement, paragraphs 100-01. 
553 See the United States' comments on Mexico's answer to question No. 25 of the Panel of 14 March 
2003, footnote 82 to paragraph 70. 
554 See the United States' answer to question No. 19(b ) of the Panel of 19 December 2002, paragraph 
94, " How do you view the relationship between an 'anti-competitive practice' in the sense of Section 1.1 and a 
practice that is not "reasonable " in the sense of Section 2.2(b)? ". 
555 See the United States' first written submission, paragraph 192. 
556 See Mexico's answer to question No . 19(b) of the Panel of 19 Decem ber 2002, paragraph 290.  For 
question No. 19(b), see footnote 554 of this Report. 
557 See Mexico's answer to question No . 19(b) of the Panel of 19 Decem ber 2002, paragraph 291.  For 
question No. 19(b), see footnote 554 of this Report.  WT/DS204/R 
 Page 91 
 
 
(d) Relationship between Sections 1.1 a nd 3 of Mexico's Reference Paper 
4.299  In response to question No. 23(b) of  the Panel meeting of 13 March 2003558, Mexico  explains 
that there is no legal relationship between Sections 1.1 and 3 of its Referenc e Paper.  According to 
Mexico, those Sections relate to different subj ects and lay down different  obligations.  Mexico 
submits that Section 3 has not been the subject of th is dispute.  In Mexico's view, Section 1.1 does not 
regulate measures by a Member with a side-effect that may prove anti-competitive from a particular 
standpoint.  Mexico contends that Section 3 rela tes to the maintenance of a type of specific 
governmental measure for the universal service oblig ation, which includes laying down obligations on 
domestic carriers to provide unive rsal service coverage over a Member's territory and that such 
measure be, inter alia , administered in a "transparent, non- discriminatory and competitively neutral" 
manner. 
4.300  Mexico  submits that, for the purposes of this disput e, it is notable that when a governmental 
measure must be regulated in accordance with Mexi co's Reference Paper, it is done explicitly as in 
Section 3, so that it identifies the exact government al measure in question (i.e. a "universal service" 
measure and not a general governmental regulator y measure, which would be the outcome of the 
United States interpretation of Section 1.1 of Mexi co's Reference Paper) and the specific disciplines 
that apply (i.e., "competitively ne utral", contrary to "anti-competitive practices", which are more 
subjective and general).  According to Mexico, th is confirms its position that Section 1.1 of its 
Reference Paper does not regulate a Member's measur es, but the "practices" of a "major supplier".559 
4.301  The United States  replies noting that Mexico's ILD Rules are not "legislative 
requirement[s]," but regulatory requirements imposed by Cofetel.  According to the United States, 
Mexico's ILD Rules 13 and 23 implement per se an ti-competitive practices under Section 1.1 of the 
Reference Paper, which are not mitigat ed by any application of Section 3.560 
4.302  The United States  submits that Section 3 allows a Member to "define the kind of universal 
service obligation it wishes to maintain".  The Unite d States claims it is aware of no universal service 
obligation implemented or defined by the Mexican authorities, and no such obligation is defined by 
the ILD rules.  The United States further submits th at Mexico has not even identified or defined a 
universal service obligation that would, were it identified or defined, "not be regarded as 
anti-competitive per se," pursuant to Section 3.  In the United States view, since Mexico has not 
identified or defined a universal service obligation,  it is not entitled to the presumption against per-se 
anti-competitiveness included in Section 3.561 
4.303  The United States  further submits that even if Mexi co had defined a universal service 
obligation and Section 3 were to apply, Mexico would not be entitled to this presumption, since its 
ILD rules also breach the additional requirements th at the defined obligation be "administered in a 
transparent, non-discriminatory and competitively neutral manner and … not [be] more burdensome 
                                                      
558 See Mexico's answer to question No. 23(b) of the Panel of 14 March 2003, paragraphs 124-126.  
"Please also elaborate on the relationship between Section 1.1 and Section 3 of the Reference Paper, i.e. under 
what conditions can a legislative requirement that all domestic suppliers must apply the settlement rate 
negotiated by the major domestic supplier be considered as a 'non-discriminatory and competitively neutral ' 
universal service obligation that is not 'regarded as anti-competitive per se ' in the sense of Section 3 of the 
Reference Paper. " 
559 See Mexico's answer to question No. 23(b) of the Panel of 14 March 2003, paragraph 127.  For 
question No. 23(b), see footnote 558 of this Report.  
560 See the United States' answer to question No. 23(b) of the Panel of 14 March 2003, paragraphs 49 
and 50.  For question No. 23(b), see footnote 558 of this Report. 
561 See the United States' answer to question No. 23(b) of the Panel of 14 March 2003, paragraph 51.  
For question No. 23(b), see footnote 558 of this Report. WT/DS204/R 
Page 92  
 
than necessary for the kind  of universal service defined by the Member."
562  Specifically, the United 
States argues that, at present, any alleged universal service obligations levied against foreign suppliers 
are apparently hidden in interconn ection rates paid to Telmex.  There is no transparency when 
universal service obligations are hidden in interconn ection rates paid to the major supplier.   The 
United States submits that a transparent process mu st, at a minimum, identify the level of charges 
associated with the universal service obligati on. The ILD rules also fail to provide the 
"non-discriminatory and competitively neutral" ad ministration of the defined universal service 
obligation that is required by S ection 3.  Because the ILD rules only address interconnection rates 
paid by cross-border suppliers, they ensure that the entire burden of any universal service obligation 
implemented in this way falls upon cross-border supp liers. Finally, the United States notes that the 
ILD rules fail to identify the monetary level of  the obligation and ensure  that the charges are 
commensurate with that obligation.  Because Mexico  has not defined a universal service obligation, it 
cannot determine what level of charges would be "n ecessary" to meet that obligation.  Similarly, 
levying charges allegedly associated with that obl igation are by definition more burdensome than 
necessary.563 
C. SECTION 5 OF THE GATS  ANNEX ON TELECOMMUNICATIONS  
4.304  The United States  claims that Mexico has failed to  honour its commitments under the GATS 
Annex on Telecommunications.  According to the Unit ed States, the Annex requires Mexico to ensure 
that service suppliers of other Members can ac cess and use public tel ecommunications transport 
networks and services on reasonable and non-discri minatory terms and conditions to provide a 
scheduled service.564  In the United States' view, Mexico has not fulfilled its obligations under either 
Section 5(a) or 5(b) of the Annex for the provision of the scheduled services.565 
4.305  Mexico  submits that the scheduled services - i.e.  the market-access commitments - that the 
United States alleges that Mexico has made and which are the basis for the claim under the Annex do 
not exist.  In Mexico's view, the United States is incorrectly arguing that the Annex confers rights to supply basic telecommunications services when the Annex applies only to access to and use of those 
services.  Therefore, Mexico submits that the provisions of the Annex cited by the United States
566 do 
not apply to the facts of this dispute.  Mexico fu rther submits that even if Sections 5(a) and 5(b) 
applied, the United States has failed to present a prima facie case that these provisions have been 
violated.  According to Mexico, the measures the United States is challenging are consistent with 
paragraphs 5(e), 5(f) and 5(g) of the Annex.567 
1. Application of the Annex 
4.306  The United States  submits that the GATS Annex on Telecommunications addresses 
telecommunications as a means of transporting sche duled services.  In its view, the Annex requires 
Members to ensure that users of telecommunications  (e.g., service suppliers) have access to, or use of, 
telecommunications – free from obstacles – to deliver their services.568  It further submits that the 
Annex grew out of a recognition that telecommuni cations represent the primary delivery mechanism 
for many services, particularly those offered on a cross-border basis.  Without telecommunications, it 
                                                      
562 See the United States' answer to question No. 23(b) of the Panel of 14 March 2003, paragraph 52.  
For question No. 23(b), see footnote 558 of this Report.   See also  the United States' comments on Mexico's 
answer to question No. 23(b) of the Panel of 14 March 2003, paragraphs 62-66. 
563 See the United States' answer to question No. 23(b) of the Panel of 14 March 2003, paragraphs 53-
55.  For question No. 23(b), see footnote 558 of this Report. 
564 See the United States' first written submission, paragraph 32. 
565 See the United States' first written submission, paragraph 33. 
566 Mexico refers to Sections 5(a) and (b) of the Annex on Telecommunications. See Mexico's first 
written submission, paragraph 220. 
567 See Mexico's first written submission, paragraph 220. 
568 See the United States' first written submission, paragraph 207.  WT/DS204/R 
 Page 93 
 
 
would be impossible for many service suppliers to deliver their services.569  The United States claims 
that access to telecommunications as a transpor t mechanism depends on those entities which control 
telecommunications networks and offer telecomm unications services.  Such entities – principally 
monopolies or former monopoly providers – have re presented the principal obstacle to access and use 
of telecommunications as a transport mechanism.570  Like the Reference Paper, the Annex represents 
an effort to prevent dominant telecom provide rs from using their control over public telecom 
networks and services to undermine the supply of a scheduled service and to ensure that dominant 
telecom suppliers cannot nullify the services commi tments that their home country undertakes.571 
4.307  Mexico  contends that enhanced services and supp liers of services in sectors other than the 
telecommunications sector rely on "access to a nd use of" the existing public telecommunication 
network.  According to Mexico, the Annex establishes general obligations to ensure that such services 
have access to and use of the public networ k on non-discriminatory and reasonable terms and 
conditions.  Mexico claims that the Annex does not  confer any right to supply telecommunications 
transport networks and services (i.e. basic telecommunications services) other than as provided in a Member's Schedule.  It further submits that  market access rights for the supply of basic 
telecommunication services were the subject of th e later negotiations that led to the Fourth 
Protocol.
572 
4.308  The United States  maintains that the Annex requires each WTO Member to ensure that 
foreign service suppliers have reasonable and non-discriminatory access to and use of public 
telecommunications networks and services to supply a scheduled service.  According to Section 5 of 
the Annex: 
"(a) Each Member shall ensure that any service supplier of any other Member is 
accorded access to and use of public te lecommunications transport networks 
and service on reasonable and non-discr iminatory terms and conditions for 
the supply of a service included in its Schedule.  This obligation shall be applied, inter alia , through paragraphs (b) through (f) [footnote omitted]. 
(b) Each Member shall ensure that service suppliers of any other Member have 
access to and use of any public teleco mmunications transport network or 
service offered within or across the border of that Member, including private leased circuits."
573 
4.309  The United States  submits that for each service inscrib ed in its Schedule, including basic 
telecom services, each WTO Member must ensure th at foreign service suppliers may access or use 
public telecommunications networks and services – whether through interconnection or any other 
form of access and use – to transport their service.574  According to the United States the scope of this 
obligation is wide and extends to any public telecom network and service offered within or across the 
border of that Member.  The definition of such networks and services is br oad enough to encompass 
all types of public networks and services that a telecom provider may offer. 575 
4.310  Mexico submits that the focus of the Annex on Telecommunications services is as a transport 
means for other economic activities, and not the supply of basic telecommunications services.576  The 
term "access to and use of" is not defined in the A nnex, but paragraphs (b) and (c) of Section 3 of the 
                                                      
569 See the United States' first written submission, paragraph 208. 
570 See the United States' first written submission, paragraph 209. 
571 See the United States' first written submission, paragraph 210. 
572 See Mexico's first written submission, paragraph 216. 
573 See the United States' first written submission, paragraph 211. 
574 Ibid. 
575 See the United States' first written submission, paragraph 212. 
576 See Mexico's first written submission, paragraph 221. WT/DS204/R 
Page 94  
 
Annex define the terms "public telecommunications transport service"
577 and public 
telecommunications transport networks"578.  In Mexico's view, the Annex applies to access to and use 
of a Member's available basic telecommunications  services.  The services for which "access to and 
use of" is provided are something othe r than basic telecommunication services.579  Mexico contends 
that the United States' claims under the Annex must be assessed within the context of these 
definitions.  Mexico points out that the United States  is arguing that the Annex grants to its suppliers 
of basic telecommunications services the right to "supply" basic telecommunications services cross-
border into Mexico by interconnecting with the pub lic network or by interconnecting with private 
leased or owned circuits in Mexico.  It further point s out that the United States is also arguing that the 
Annex grants foreign companies the right to own 100  per cent of operators established in Mexico who 
will be entitled to supply such servi ces cross-border into the United States.580 
4.311  The United States  claims that Mexican law prevents  foreign suppliers from owning public 
telecom networks and services in Mexico, leaving them  no choice but to rely on Mexican operators to 
provide the access to and use of the public networks  and services they need to deliver scheduled basic 
telecom services from abroad into Mexico.  Because of Telmex's monopoly over the negotiation of 
settlement rates and the requirement that all other Me xican carriers must charge the rate negotiated by 
Telmex, all Mexican operators are require d to charge rates that exceed cost.581  According to the 
United States, the entire purpose of Section 5 of th e Annex is to require WTO Members to prevent 
this very form of behavior.  The United States clai ms that Members drafted the Annex to ensure that 
their suppliers of public networks and services – whether they are monopolies, major suppliers, or 
competitive suppliers – do not hold access to, and use of, their networks and services hostage to 
monopoly rates, or any other form of unfair or  anti-competitive conduct that would undermine the 
supply of scheduled services.582 
4.312  In Mexico 's view, the purpose of the Annex is not to allow facilities-based and non-facilities-
based basic telecommunications suppliers to supply their services cross-border, but to provide supplementary or additional obligations to allo w "access to" and "use of" Mexico's existing public 
telecommunications transport network and services
583.  It submits that the terms "access to" and "use 
of" have different meanings from the term "supply", wh ich is frequently used in the text of the GATS.  
The term "supply" is defined as meaning "provide or furnish a thing needed".  Mexico claims that the 
Annex applies only to measures which affect "access to or use of public telecommunications transport 
networks or services, and it does not apply to measures that affect "supply" of telecommunications transport services cross-border.
584  According to Mexico, the United States is confusing "market 
access" with "access to and use of" existing public telecommunications trans port networks operated 
by domestic concessionaires.  Mexico contends that "market access" is dealt with in the market-access commitments made under Article XVI of the GATS in scribed in Mexico's Schedule, whereas "access 
to and use of" public telecommunications networks is dealt with in the Annex.
585 
                                                      
577 "Public telecommunications transport service" means any telecommunica tions transport service 
required, explicitly or in effect, by a Member to be offe red to the public generally.  Such services may include, 
inter alia , telegraph, telephone, telex, and data transmission typically involving the real-time transmission of 
customer-supplied information between two or more points without any end to end change in the form or content of the customer's information.  See Mexico's first written submission, paragraph 223. 
578 "Public telecommunication transport network" m eans the public telecommunications infrastructure 
which permits telecommunications between and among defined network termination points.  See Mexico's first 
written submission, paragraph 220. 
579 See Mexico's first written submission, paragraph 224. 
580 See Mexico's first written submission, paragraph 225. 
581 See the United States' first written submission, paragraph 243. 
582 See the United States' first written submission, paragraph 244. 
583 See Mexico's first written submission, paragraph 226. 
584 See Mexico's first written submission, paragraph 227. 
585 See Mexico's first written submission, paragraph 228.  WT/DS204/R 
 Page 95 
 
 
4.313  In Mexico 's view, the Annex was not drafted to pr ovide "market access" to foreign suppliers 
of basic telecommunications services586.  According to Mexico, paragraph (c) of Section 2 of the 
Annex provides important exemptions from the application of the Annex: 
"Nothing in this Annex shall be construed: 
(i) to require a Member to authorize a service supplier of any other Member to 
establish, construct, acquire, lease, operate, or supply telecommunications 
transport networks or services, other than as provided in its Schedule; or 
(ii) to require a Member (or to require a Member to oblige service suppliers under 
its jurisdiction) to establish, constr uct, acquire, lease, operate or supply 
telecommunications transport networks or services not offered to the public 
generally."587 
4.314  According to Mexico , the services at issue in this dispute are "telecommunications transport 
… services", governed by Mexico's Schedule.  In Mexi co's view, pursuant to Section 2(c)(i), nothing 
in the Annex can be construed to require Mexico to  authorize service suppliers from the United States 
to supply these services beyond the terms and conditions inscribed in its schedule.588  T h e  
United States  submits that Section 1 of the Annex states that telecommunications has a "dual role as 
a distinct sector of economic activity and as th e underlying transport means for other economic 
activities."  It further submits that Section 2(a) states that the Annex applies to "all measures" affecting access to and use of public telecommuni cations transport networks and services, which 
would include measures regulating telecommunications "as a distinct sector of economic activity . . ."  The United States also recalls Section 5(a), which imposes obligations "for the supply of a service 
included in [a Member's] Schedule," without imposing any limits on the type of service that would be 
relevant, including basic telecommunications services scheduled by Mexico.
589 
4.315  Mexico  maintains that the fact that Section 1 (entitled "Objectives") of the Annex on 
Telecommunications refers to a "dual" role of the telecommunications services sector does not mean that the Annex covers both aspects of this "dual" ro le.  In Mexico's view, Section 1 simply confirms 
that the Annex is based on the recognition that , beyond constituting a service sector of their own, 
telecommunications services and networks are essen tial tools for other economic activities, such as 
banking, insurance, etc.  According to Mexico th e fact that these other activities rely heavily on 
telecommunications services as an underl ying transport means that is the raison d'être of the Annex, 
supporting Mexico's view that the Annex is aimed at addressing the second aspect of the dual role.  
The first aspect – the supply of basic telecommuni cations services – was dealt with under the basic 
telecommunications negotiations that led to the Fourth Protocol to the GATS in 1997.
590  Although 
Section 1 refers to a "dual" role of the telecomm unications services sector, it also stipulates that the 
Annex was agreed to "with the objective of elabor ating upon the provisions of the Agreement with 
respect to measures affec ting access to and use of public telecommunications transport networks and 
services".591  The reference in Section 1 of the Annex to "measures affecting access to and use of" 
PTTNS must be contrasted with the scope of the provisions of the GATS Annex on Financial 
                                                      
586 See Mexico's first written submission, paragraph 229. 
587 See Mexico's first written submission, paragraph 230. 
588 See Mexico's first written submission, paragraph 231. 
589 See the United States'  answer to question No. 21 of the Pa nel meeting of 19 December 2002, 
paragraph 99, (" Can Mexico reconcile its argument that the 'Annex only address telecommunications transport 
services as the underlying transport means for other economic activities ' with the reference, in the GATS Annex, 
to a 'dual' role of the telecommunications service sector? "). 
590 See Mexico's  answer to question No. 21 of the Panel meeting of 19 December 2002, paragraph 299.  
For question No. 21, see footnote 589 of this Report;  see also  Mexico's first written submission, paragraph 214. 
591 See Mexico's  answer to question No. 21 of the Panel meeting of 19 December 2002, paragraph 300.  
For question No. 21, see footnote 589 of this Report. WT/DS204/R 
Page 96  
 
Services.  Section 1(a) of that Annex states "[t]hi s Annex applies to measures affecting the supply of 
financial services.  Reference to the supply of a fina ncial service shall mean the supply of a service as 
defined in paragraph 2 of Article I of the Agre ement".  Thus, where the negotiators of the GATS 
intended that an annex apply to the "supply" of a service within the broader meaning of the GATS, 
they did so explicitly.
592 
4.316  According to Mexico  the Annex distinguishes between access to and use of public 
telecommunications transport networks and services,  which is relevant to telecommunications 
services as an underlying transport mean s for other economic activities, and the supply of such 
services, which is relevant to trade in telecommuni cations services as a distinct sector of economic 
activity.593  In Mexico's view, Section 2 of the Annex ma kes clear that the Annex is devoted solely to 
the guarantees of access and use.  It explains that Pa ragraph (a) of Section 2 stipulates that the Annex 
"shall apply to all measures of a Member that affe ct access to and use of public telecommunications 
transport networks and services".  In Mexico's view, the Annex is limited in scope and deals only with 
the right to access and use public telecommunicati ons transport networks and services and not the 
right to provide and supply them.594 Mexico contends that the services at issue in this dispute are the 
transport of customer-supplied information or data  between two or more points, being themselves 
"public telecommunications transport networks and services", which cannot be supplied through 
access to and use of another Member's PTTNS.595  It further submits that, by definition, Mexico's 
suppliers of "public telecommuni cations transport networks and services" cannot transport public 
telecommunications transport services supplied by other suppliers.  It explains that, in the 
circumstances of this dispute, when suppliers from the United States hand off traffic to a Mexican 
supplier at the border, they rely on the PTTNS pr ovided by that supplier and do not supply their 
services into Mexico.  Mexico contends that b asic telecommunications services are the underlying 
transport means for other economic activities and Mexi co fails to see how they could be viewed as a 
transport means for the same economic activity, whic h is the implication of the United States' position 
in this dispute.596 
4.317  Answering a question by the Panel597, Mexico submits that Section 5 of the Annex refers to 
access to and use of a Member's PTTNS "for the su pply of a service included in its schedule", that 
applies only until the services scheduled by a Member can be supplied by access to and use of another 
Member's PTTNS.598  According to Mexico, the services that are the subject of this dispute are 
telecommunications transport and transmission services, which cannot ipso facto  be supplied through 
access to and use of another Member's PTTNS since the latter are, in themselves, "public 
telecommunications transport networks and services".599  Mexico contends that the United States 
interpretation would lead to the conclusion that the Mexican postal authority would be transporting 
                                                      
592 See Mexico's  answer to question No. 21 of the Panel meeting of 19 December 2002, paragraph 301.  
For question No. 21, see footnote 589 of this Report. 
593 See Mexico's  answer to question No. 21 of the Panel meeting on 19 December 2002, paragraph 302.  
For question No. 21, see footnote 589 of this Report. 
594 See Mexico's  answer to question No. 21 of the Panel meeting on 19 December 2002, paragraph 303.  
For question No. 21, see footnote 589 of this Report. 
595 See Mexico's  answer to question No. 21 of the Panel meeting on 19 December 2002, paragraph 306.  
For question No. 21, see footnote 589 of this Report. 
596 See Mexico's  answer to question No. 21 of the Panel meeting on 19 December 2002, paragraph 307.  
For question No. 21, see footnote 589 of this Report. 
597 See question No. 26 of the Panel of 13 March 2003, (" Please explain why Mexico says at paragraph 
307 of its Responses to questions that 'by definition, Mexico's suppliers of ' public telecommunications transport 
networks and services' cannot transport public telecommunications transport  services supplied by other 
suppliers.' "). 
598 See Mexico's  answer to question No. 26 of the Panel meeting on 13 March 2003, paragraph 135.  
For question No. 27, see footnote 597 of this Report. 
599 See Mexico's  answer to question No. 26 of the Panel meeting on 13 March 2003, paragraph 136.  
For question No. 27, see footnote 597 of this Report.  WT/DS204/R 
 Page 97 
 
 
United States postal services by delivering mail se nt from the United States and handed over at the 
border, that a pipeline within Mexican territory would be transporting United States pipeline services 
when it transports oil received from a United Stat es pipeline that stops at the border, and that a 
Mexican transport company would be performing Un ited States transport services when it delivers the 
freight that was transferred to it at the border.   In Mexico's view, Mexican service suppliers – 
including public telecommunications transport suppliers – only supply their own transport service.600 
4.318  The United States  contends that Mexico's assertion that the services at issue are "transport 
and transmission" services, is erroneous, as it ignores the text of the CPC codes Mexico has inscribed 
in its Schedule.  In the view of the United Stat es, Mexico's Schedule does not limit its cross-border 
commitment to only a portion of the service defined in the CPC codes, but the entirety of a telephone 
call's path, from its point of origin to its point of termination.601  The United States further disagrees 
with the analogy that Mexico draws with regard to the transport of oil or of goods sent via mail.  In 
case of the transport of goods, the goods are sep arate products, while a basic telecommunications 
service – a telephone call or a "communication" is an inseparable part of the service itself.  Section 1 of the Annex draws an explicit distinction between  telecommunications services as a distinct sector of 
economic activity and as the underlying tran sport means for other economic activities.
602   
2. Application of Sections 5(a) and 5(b) of the Annex 
4.319  The United States submits that, its claims are related to five distinct situations for which, in 
the United States' view, Mexico has made specific commitments, and for which Mexico must comply 
with its Annex obligations.  According to the Un ited States, under the first two situations, in 
accordance with Section 5(a) of the Annex, Mexico  must ensure that foreign facilities-based and non-
facilities based suppliers of cross border telecommuni cations services are acco rded access to and use 
of public telecommunications transport netw orks and services (PTTNS) on reasonable and non-
discriminatory terms and conditions.603  Under the third and fourth situations, the United States claims 
that, according to Section 5(b) of the Annex, Mexico  must ensure that these suppliers have access to 
and use of private leased circuits.604  The United States further points out that locally established non-
facilities based operators (commercial agencies) mu st likewise be afforded access to and use of 
private leased circuits to supply international telephone services.605 
(a) Claims under Section 5(a) of the Annex 
4.320  According to the United States , pursuant to the Annex, services suppliers from the 
United States are entitled to access and use of public  telecommunications networks and services.  The 
United States claims that interconnection is the means by which service suppliers from the 
United States access and use Mexico's public te lecommunications networks and services.  The 
United States asserts that its service suppliers must interconnect with the Mexican network in order to 
ensure they can transport their scheduled service to its final destination in Mexico.  The United States 
further points out that without such access, a servi ce supplier from the United States could never 
supply a scheduled facilities-based or non -facilities-based basic telecom service.606 
                                                      
600 See Mexico's  answer to question No. 26 of the Panel meeting on 13 March 2003, paragraph 137.  
For question No. 26, see footnote 597 of this Report. 
601 See the United States' comments on Mexico's answer to question No. 26 of the Panel of 14 March 
2003, paragraph 71. 
602 See the United States' comments on Mexico's answer to question No. 1 of the Panel of 14 March 
2003, paragraph 5. 
603 See the United States' first written submission, paragraph 211. 
604 See the United States' first written submission, paragraph 213. 
605 See the United States' first written submission, paragraph 214. 
606 See the United States' first written submission, paragraph 216. WT/DS204/R 
Page 98  
 
4.321  United States  submits that Section 5 of the Annex requires Mexico to ensure that for the 
supply of a service included in its Schedule, any se rvice supplier of any other Member is accorded 
access to and use of public telecom transport networks and services on reasonable terms and 
conditions.
607  
4.322  The United States  claims that Mexico undertook market access and national treatment 
commitments for public basic telecom service s supplied by facilities-based operators and 
non-facilities-based operators ("commercial agencies").  In the United States' view, Mexico undertook 
these obligations on a cross-border basis, with few limitations, applying to th e supply of cross-border 
public basic telecom services supplied by fac ilities-based operators and commercial agencies.608 
4.323  The United States  also claims that Mexico's Annex ob ligations apply to any service supplier 
from the United States (whether facilities-based or  non-facilities-based) wishing to supply the 
scheduled basic telecom services.609  
4.324  The United States  submits that the Annex imposes a broad obligation upon Members to 
ensure - by whatever measures necessary610 – that service suppliers have broad access to and use of 
public telecom networks and services to transport their services.611  In the United States' view, 
interconnection, as defined by Section 2.1 of the Reference Paper612, is the principal method for 
suppliers from the United States to obtain access and use of Mexican public telecommunications 
networks and services for the cross-border supply of scheduled basic telecom services.613 
4.325  The United States  claims that Mexican law prohibits foreign suppliers from owning public 
telecom networks and services in Mexico614, preventing such suppliers of scheduled basic telecom 
services to originate and terminate services over th eir own networks.  The United States submits that 
its suppliers have no choice but to rely on Mexican suppliers of public telecom networks and services 
– such as Telmex and others – to transp ort their service to its final destination.615  According to the 
United States, this interconnection of its suppliers can take two principal forms:  (1) a facilities-based 
supplier of the scheduled basic telecom services who links its network with that of a Mexican 
supplier616;  or (2) a supplier who does not own faciliti es and interconnects by leasing circuits from 
other operators with Mexican  public networks and services.617 
4.326  Mexico  contends that in its Schedule, for th e subsector of "Telecommunications services 
supplied by a facilities based public telecommunicat ions network through an y existing technological 
medium …", it specifically inscrib ed in the column "Limitations on Market Access" the following 
limitations on the modes of supply of (1) cross border-supply and (3) commercial presence: 
"(1) None, except the following: 
                                                      
607 See the United States' first written submission, paragraph 218. 
608 See the United States' first written submission, paragraph 219. 
609 See the United States' first written submission, paragraph 220. 
610 The United States refers to Section 2(a), note 14 of the GATS Annex on Telecommunications.  See 
the United States' first written submission, paragraph 222. 
611 See the United States' first written submission, paragraph 222. 
612 As regards the definition of the term "interconnection", see Section IV.A.2 of the United States' first 
written submission.  See also  the United States' first written submission, paragraph 224. 
613 See the United States' first written submission, paragraph 223. 
614 The United States refers to Mexico's Federal Te lecommunications Law, art. 12, Exhibit US-16.  See 
the United States' first written submission, paragraph 225. 
615 See the United States' first written submission, paragraph 225. 
616 See the United States' first written submission, paragraph 227. 
617 See the United States' first written submission, paragraph 228.  WT/DS204/R 
 Page 99 
 
 
 International traffic must be routed through the facilities of an enterprise that 
has a concession granted by the Ministry of Communications and Transport (SCT). 
 … 
(3) A concession from the SCT is require d.  Only enterprises established in 
conformity with Mexican law may obtain such a concession. 
 Footnote 1 – Concession: The granting of  title to install, operate or use a 
facilities-based public tele communications network."
618 
4.327  The United States  submits that unlike the term "non-discriminatory", the Annex does not 
define "reasonable".  In the United States view, to  determine the scope of "reasonable" terms and 
conditions, a treaty interpreter should look to the ordi nary meaning of "reasonable" in its context and 
in light of the object and purpose of the Annex and the GATS.619  According to the United States, the 
terms and conditions that Mexico has imposed ar e unreasonable under the object and purpose of the 
Annex and the GATS.620 
4.328  Mexico  contends that the term "reasonable" set out in Section 5(a) of the Annex does not 
have the same meaning as the term "reasonable" set out in Section 2.2 of the Reference Paper.621  In 
Mexico's view, although the ordinary meaning is  applicable to the term "reasonable" in both 
provisions, Section 5(a) of the Annex and Sectio n 2.2(b) of Mexico's Reference Paper provide 
different contexts for interpreting its meaning.622 
4.329  Mexico  submits that in US – Definitive Safeguard Measures on Imports of Wheat Gluten from 
the European Communitie s, the Appellate Body stated that "[i]n view of the identity of the language 
in the two provisions, and in the absence of any contra ry indication in the context, we believe that it is 
appropriate to ascribe the same meaning to this phrase in both Articles 2.1 and 2.2".623  In Mexico's 
view, where identical language is used in two pr ovisions, it is only appropriate to ascribe the same 
meaning to the language where ther e is an "absence of any contrary indication in the context".  
Mexico contends that the different context of th e term "reasonable" in the two provisions necessitates 
that a different meaning be ascribed to the term.  According to Mexico, Section 5(a) of the Annex 
applies to "access to and use of public teleco mmunications transport networks" on terms and 
conditions that are inter alia , "reasonable", while Section 2.2(b) applies to interconnection with a 
major supplier on, inter alia , cost-oriented rates that are "reasonable".  In its view, the two provisions 
address different subject matters.  Mexico claims that these different contexts are important, particularly when interpreting the meaning of a wo rd like "reasonable".  Mexico further submits that 
reasonableness can be judged only within the context of all relevant facts and circumstances because 
it is those facts and circumstances that provide a basis for reason and expectation.
624  Mexico further 
points out that,  in determining whether a service supplier of another Member is accorded "access to 
                                                      
618 See Mexico's first written submission, paragraph 233. 
619 The United States refers to the customary rules of treaty interpretation reflected in Article 31(1) of 
the Vienna Convention.  See the United States' first written submission, paragraph 232. 
620 See the United States' first written submission, paragraph 232. 
621 See Mexico's  answer to question No. 23 of the Panel meeting of 19 December 2002, paragraph 315 
("Does the term 'reasonable ', as set out in Section 5(a) of the Annex on Telecommunications, have the same 
meaning as in Section 2.2 of the Reference Paper? "). 
622 See Mexico's  answer to question No. 23 of the Panel meeting of 19 December 2002, paragraph 316.  
For question No. 23, see footnote 621 of this Report. 
623 Mexico refers to paragraph 96 of the Appellate Body Report, US – Wheat Gluten .  See Mexico's 
second written submission, paragraph 163.  
624 See Mexico's  answer to question No. 23 of the Panel meeting of 19 December 2002, paragraph 318.  
For question No. 23, see footnote 621 of this Report. WT/DS204/R 
Page 100  
 
and use of public telecommunications transpor t networks" on terms and conditions that are inter alia,  
"reasonable", the Panel must examine all relevant facts and circumstances related to access to and use of PTTN.
625 
(b) Claims under Section 5(b) of the Annex 
4.330  The United States  submits that Section 5(a) of the Annex requires Mexico to ensure that 
service suppliers of other Members can access a nd use public telecom networks and services on 
reasonable terms and conditions to provide a scheduled service.626  The United States further submits 
that, to this end, Section 5(b) of  the Annex requires Mexico to ensure that foreign suppliers can access 
and use private leased circuits offered within and across Mexico's borde r and interconnect those 
circuits with public networks and services.627  Consequently, both facilities and non-facilities based 
suppliers of cross-border telecom services must have access to and use of private leased circuits.  
Further, established non-facilities b ased operators (commercial agenci es) must likewise be afforded 
access to and use of private leased circuits under reasonable terms and conditions,  to supply scheduled 
basic telecom services.  In the United States' view , Mexico's measures preclude foreign suppliers from 
offering scheduled basic telecom services over privat e leased circuits;  and are therefore violating the 
basic obligation to provide access to and use of priv ate leased circuits for the provision of a scheduled 
service by Mexico.628 
4.331  Mexico contends that under Mexican law, only companies established in Mexico and 
qualifying for a "concession" may "install, operate or use a facilities-based public telecommunications 
network".  It contends that under Mexican law, suppliers of facilities-based telecommunications 
services from the United States are not permitted to  provide facilities-based telecommunications 
services in Mexico.  Mexico further submits that it made clear, by specifically inscribing limitations in 
its Schedule, that suppliers of facilities-based te lecommunications services from the United States 
would not be permitted to supply basic telecommunications services cross-border.629 
4.332  The United States  submits that Section 5(b) cont emplates both principal forms of 
interconnection, as follows: 
"Each Member shall ensure that service suppliers of any other Member have access to 
and use of any public telecommunications transport network and service offered 
within or across the border of that Member, including private leased circuits, and to this end shall ensure, subject to paragra phs (e) and (f), that such suppliers are 
permitted . . . (ii) to interconnect privat e leased or owned circuits with public 
telecommunications transport networks or w ith circuits leased or owned by another 
service supplier."
630 
4.333  Mexico  claims that there is no basis for the a llegation from the United States that Mexico 
committed itself to cross-border access for faciliti es-based suppliers of basic telecommunications.631 
According to Mexico, the language of Section 5( b) explicitly demonstrates that WTO Members 
intended and expected that "access to and use of any public telecommunications transport network or 
service" was something that could be "offered" or not "offered", within or across the border of a 
particular Member.  Mexico claims that it did not "offer" or commit itself to "access to or use of" a 
                                                      
625 See Mexico's  answer to question No. 23 of the Panel meeting of 19 December 2002, paragraph 319.  
For question No. 23, see footnote 621 of this Report. 
626 See the United States' first written submission, paragraph 247. 
627 Ibid. 
628 See the United States' first written submission, paragraph 248. 
629 See Mexico's first written submission, paragraph 234. 
630 The United States refers to Section 5(b) of the GATS Annex on Telecommunications.  See the 
United States' first written submission, paragraph 229. 
631 See Mexico's first written submission, paragraph 240.  WT/DS204/R 
 Page 101 
 
 
public telecommunications transport network or service either within Mexico or across its border.  In 
Mexico's view, two provisions of a treaty - Sections  2(c)(i) and 5(b) - should not be interpreted in a 
manner which renders one of them ineffective or inutile.632 
4.334  According to the United States , Section 5(b) specifically guarantees that foreign service 
suppliers may obtain access to and use of Mexican  public telecom networks and services through 
interconnection of private leased or owned circuits.633  The United States mainta in that, in both cases, 
its service suppliers must rely on interconnection with a Mexican supplier of public telecom networks 
and services – such as Telmex – in order to access  and use Mexican public telecom networks and 
services for the supply of a scheduled basic teleco m service between the United States and Mexico.  
In the United States' view, Mexico must therefor e ensure – under Section 5 of the Annex – that 
suppliers of scheduled basic telecom services from the United States may interconnect with Mexican 
suppliers on reasonable terms and conditions.634 
4.335  In Mexico 's view, Section 2(c)(i) of the Annex exempts Mexico from allowing non-facilities-
based suppliers of basic telecommunications services to supply their services cross-border over capacity that they lease from operators in Mexico .  Mexico claims that to interpret the Annex 
otherwise would not only be inconsistent with the provisions of Section 2(c)(i) of the Annex, but 
would also undermine and render ineffective th e express language of the limitations on Market 
Access inscribed in Mexico's GATS Schedule.
635 
4.336  According to the United States , private leased circuits are es sentially lines that a user leases 
from a public telecom operator over which it transports (or supplies) its service.  As an example, the 
United States explains that a bank might lease a line from a public telecom operator over which it 
sends financial information from its branch in Mexico City to its home office in New York, or a 
telecommunications company may lease a line from a public telecom operator over which its sends a 
phone call from its customer in Los Angeles to the e nd-user in Montreal.  In the United States' view, 
in both cases the service supplier (the bank or the phone company) needs access to a line (a public 
telecom network or service) to provide a scheduled service (a financial service or a basic telecom 
service).636  It claims that Mexico has not ensured that suppliers from the United States have access to 
and use of any public telecommunications network and service for the supply  of the basic telecom 
services inscribed in Mexico's Schedule637, failing to honour its commitments under the Annex.638 
4.337  Mexico  submits that, even if the Annex were to a pply to this dispute, the terms and conditions 
that Mexico applies on access to and use of PTTNS  would have to be considered reasonable.  
According to Mexico, the Annex allows WTO Member s great latitude to regulate access to and use of 
PTTNS.  In Mexico's view the word "reasonable" in Section 5(b) would have to  be interpreted broadly 
to include all relevant facts and circumstances related to interconnecti on, including the economic 
feasibility of the terms of access to  the Mexican carrier and Mexico.639 
4.338  According to the United States , Section 5(b) of the Annex requires Mexico to ensure that 
service suppliers of any other Member.  " (ii) interconnect private leased  or owned circuits with public 
telecommunications transport networks and services or  with circuits leased or owned by another 
                                                      
632 See Mexico's first written submission, paragraph 239. 
633 See the United States' first written submission, paragraph 230. 
634 See the United States' first written submission, paragraph 231. 
635 See Mexico's first written submission, paragraph 242. 
636 See the United States' first written submission, paragraph 213. 
637 See the United States' first written submission, paragraph 214. 
638 See the United States' first written submission, paragraph 215. 
639 See Mexico's  answer to question No. 25 of the Panel meeting on 19 December 2002, paragraph 322 
("If the Annex were to apply to the services in question, would Mexico  consider that the 'terms and conditions ' it 
applies on access to and use of Public Telecommunications Transport Networks and Services (PTTNS) are 
'reasonable'? "). WT/DS204/R 
Page 102  
 
supplier ".  In the United States view, because the obligatio n in Section 5(a) of the Annex apply to 
paragraph (b), Mexico must ensure that foreign supp liers have access to and use of such private leased 
circuits on reasonable terms and conditions for the supply of scheduled services.  The United States 
further points out that in this case, the analysis  need not to extend to whether the "terms and 
conditions" are reasonable and non-discriminatory, because Mexico has failed to ensure any access to 
and use of private leased circuits  for the supply of scheduled services
640, acting inconsistently with its 
obligations under Section 5(a) and (b) of the Annex.641 
4.339  The United States  claims that Mexico has failed to comp ly with Section 5 of the Annex with 
respect to the market access and national tr eatment commitments it undertook for the:  (1) 
cross-border (mode 1) supply of facilities-based ba sic telecom services;  and (2) the cross-border 
(mode 1) and domestic (mode 3) supply of non-facilities-based basic telecom services.  The United 
States submits that, to avoid any confusion, the clai ms it makes related to private leased circuits 
address the delivery of scheduled public basic te lecom service using private leased circuits.642 
4.340  The United States  contends that Mexico scheduled market access and national commitments 
to allow non-facilities-based suppliers ("commercial  agencies") to provide basic circuit-switched 
telecom services to third parties over a private (i.e., dedicated) circuit that it leases from a 
concessionaire.643  The United States recalls that according to Mexico's Schedule, commercial 
agencies do not supply basic telecom services over their owned facilities but over capacity they lease 
from a licensed facilities-based telecom operator.644  The United States points out that the supply of 
telecommunications over leased capacity is typically  known as "resale", but Mexico's Schedule uses 
the phrase "commercial agencies".645  The United States recalls that  "leased capacity" is essential to 
the supply of this scheduled service, because w ithout access to such capac ity, a commercial agency 
cannot, according to Mexico's definition, supply its service.  The United States submits that private leased circuits – not defined in the Annex – are generally understood to mean telephone lines leased 
from a phone company that are specifica lly dedicated to a customer's use.
646 
4.341  The United States  submits that Mexico undertook these commitments for the cross-border 
supply of services (mode 1) over leased capacity from the territory of one Member (e.g., the United 
States) into the territory of any other Member (i.e ., Mexico).  According to the United States, Mexico 
limited this mode 1 commitment to ensure that fore ign commercial agencies route international traffic 
through the facilities of a "concessionaire".  The Unite d States claims that Mexico committed to allow 
a foreign, non-facilities-based supplier to offer telecom services from the territory of the United States 
into the territory of Mexico over capacity leased from a public network conce ssionaire (i.e., private 
leased circuits).  The United States points out that  the cross-border supply of a basic telecom service 
over leased capacity is typically known as International Simple Resale (ISR).647 
4.342  The United States  recalls that Mexico also underto ok commitments for locally-established 
(mode 3) commercial agencies, with certain limitations.  The United States points out that a foreign service supplier should be able to own 100 per cent of a locally established commercial agency, 
because Mexico did not schedule a foreign ownershi p limitation for such services.  The United States 
                                                     
 
640 See the United States' first written submission, paragraph 249. 
641 See the United States' first written submission, paragraph 250. 
642 See the United States' first written submission, paragraph 251. 
643 See the United States' first written submission, paragraph 254. 
644 The United States refers to Mexico's Sc hedule, GATS/SC/56/Suppl.2., note 2.  See the 
United States' first written submission, paragraph 252. 
645 See the United States' first written submission, paragraph 252. 
646 See the United States' first written submission, paragraph 253. 
647 See the United States' first written submission, paragraph 255.  WT/DS204/R 
 Page 103 
 
 
argues that, because Mexico did not indicate otherw ise, this mode 3 commitment allows a locally 
established commercial agency to provide interna tional basic telecom services over leased capacity.648 
4.343  The United States  contends that Mexico undertook m ode 1 and mode 3 commitments for 
services, which require access to and use of private leased  circuits for their supply.  The United States  
claims that its suppliers cannot supply basic tel ecom services over leased capacity on a cross-border 
basis if they cannot lease private leased circuits from a Mexican supplier.  The United States further 
points out that its suppliers can not establish a commercial presence to supply international basic 
telecom services over leased capacity if they ca nnot lease private leased circuits from a Mexican 
supplier.  The United States recalls that Mexico do es not permit its basic telecom service suppliers to 
lease such circuits for these servi ces and therefore precludes the supply of mode 1 and mode 3 
commercial agency services.649 
4.344  Mexico  submits that with respect to access through commercial presence for non-facilities 
based suppliers, the United States argues that Mexi co committed to the establishment of commercial 
agencies and to the provisions of services by su ch agencies through private leased circuits, i.e .  ISR.650 
Mexico claims that its mode 3 (commercial presence) commitment for commercial agencies is subject 
to the following limitations: 
"A permit issued by the SCT is required .  Only enterprises set up in accordance with 
Mexican law may obtain such permit. 
Foreign governments may not participate in  an enterprise set up in accordance with 
Mexican law nor obtain any authorization to provide telecommunication services. 
Except where specifically approved by the SCT, public telecommunications network 
concessionaires may not participate, directly  or indirectly, in the capital of a 
commercial agency. 
The establishment and operation of commercial agencies is invariably subject to the 
relevant regulations .  The SCT will not issue permits for the establishment of a 
commercial agency until the corresponding regulations are issued."651 
4.345  Mexico  submits that the permit requirement is centra l to the limitation.  According to Mexico, 
because at the time the limitation was inscribed, pe rmits were not issued by the SCT, then it is 
equivalent to a zero quota, falling the requirement within the category of "limitations on the number 
of service suppliers" in paragraph (a) of GATS Article XVI:2.652 
4.346  Answering a Panel's question653, the United States contends that Mexico's refusal to adopt 
regulations necessary to issue commercial agen cy permits violates Mexico's obligation under 
Section 5(b) of the Annex on Telecommunications to  ensure that service suppliers have access to and 
                                                      
648 See the United States' first written submission, paragraph 256. 
649 See the United States' first written submission, paragraph 257. 
650 Mexico refers to paragraphs 252-257 and 265- 294 of the United States' first written submission.  See 
Mexico's first written submission, paragraph 243. 
651 See Mexico's first written submission, paragraph 244. 
652 See Mexico's answer to question No. 6(a) of the Panel of 19 Dec 2002, paragraph 90.  For question 
No. 6(a), see footnote 282 of this Report.  For more information regarding the discussion on the scope of 
Mexico's commitments, see Section IV.A.3 of this Report. 
653 Namely, question No. 6(c) of the Panel of 19 December 2002 (" Mexico has inscribed in its Schedule 
that it will not issue permits for the establishment of a commercial agency until the corresponding regulations 
are issued'. Does Mexico Mode 3 commitment regarding co mmercial agencies include an  obligation, at present, 
to issue permits for the establishment and operation of such agencies? "). WT/DS204/R 
Page 104  
 
use of private leased circuits.
654  The United States further submits that Telmex, through its subsidiary 
in the United States, assured the FCC that Mexico 's WTO commitments requires Mexico "promptly" 
to adopt the relevant regulations and issue reseller permits.655 
4.347  The United States  submits that Mexico also undert ook cross-border market access and 
national treatment commitments for specific public basic telecom services supplied by a 
facilities-based operator.  According to the United St ates, Mexico limited this commitment to ensure 
that foreign service suppliers route internati onal traffic through the facilities of a Mexican 
concessionaire.  The United States contends that , for the supply of these public facilities-based 
services from the territory of the United States into the territory of Mexico, Mexico promised to 
accord market access and national treatment to supp liers of these services provided that the service 
supplier, from the United States, routes interna tional traffic through the facilities of a Mexican 
concessionaire.656 
4.348  According to the United States , access to and use of private leased circuits is essential to the 
supply of the following services inscribed in Mexi co's Schedule:  (a) facilities-based services 
(i.e., voice telephone, circuit-switche d data, facsimile services by a facilities-based operator from the 
United States into Mexico) supplied on a cross-bor der basis;  (b) commercial agencies (i.e., basic 
telecom services by a non-facilities-based operator ove r leased capacity from the United States into 
Mexico) supplied on a cross-border basis;  and (c) locally established commercial agencies (i.e., basic 
telecom services by a non-facilities-based opera tor over leased capacity from Mexico into the 
United States).  The United States claims that Mexico  has failed to ensure that private leased circuits 
are available for the supply of these scheduled services.657 
4.349  The United States  submits that Mexico committed under S ection 5(a) and (b) to ensure that 
foreign facilities-based suppliers, foreign commerc ial agencies and locally established commercial 
agencies have access to and use of  private leased circuits to s upply scheduled international basic 
telecom services over such circuits and can interconn ect such circuits with public telecom networks 
and services.  The United States contends that becau se Mexican suppliers offer private leased circuits 
to their customers, then Mexico must ensure that these circuits ar e available to all suppliers of 
scheduled basic telecom services.658  The United States claims that foreign suppliers do not have 
access to and use of private leased circuits to  supply scheduled basic telecom services.  The 
United States further submits that Mexican suppliers  have refused to provide these circuits, Mexican 
law prevents foreign basic telecom service suppliers from using such circuits, and Mexican authorities 
continue to refuse to permit the supply of schedul ed services over leased capacity.  According to the 
United States, these restrictions prevent foreign service suppliers from accessing and using private 
leased circuits to supply scheduled basic telecom services.659 
4.350  The United States  submits that its suppliers based in the United States have no access to 
private leased circuits for the supply of scheduled  basic telecom services a nd even if they did, 
Mexican ILD Rules prevent foreign suppliers from in terconnecting private leased circuits with public 
telecom network services, violating the obligation to provide access to an d use of private leased 
circuits.660  It claims that Telmex has refused to make  private leased circuits available for the cross-
                                                      
654 See the United States'  answer to question No. 6(c) of the Panel of 19 Dec 2002, paragraph 32.  For 
question No. 6(c), see footnote 653 of this Report. 
655 The United States refers to the Consolidated Opposition of Telmex/Sprint Communications, L.L.C. 
to Applications for Review, page. 7, Exhibit US-54.  See the United States'  answer to question No. 6(c) of the 
Panel of 19 Dec 2002, paragraph 34.  For question No. 6(c), see footnote 653 of this Report. 
656 See the United States' first written submission, paragraph 258. 
657 See the United States' first written submission, paragraph 261. 
658 See the United States' first written submission, paragraph 266. 
659 See the United States' first written submission, paragraph 267. 
660 See the United States' first written submission, paragraph 268.  WT/DS204/R 
 Page 105 
 
 
border supply of scheduled voice telephone services661, and that Mexican authorities have done 
nothing to ensure that Telmex or any other supp lier provides these leased circuits to suppliers from 
the United States for the cross-border suppl y of scheduled basic telecom services.662 
4.351  The United States contends that Mexico not only has failed to ensure that its suppliers 
provide private leased circuits to foreign supplie rs for the cross-border supply of scheduled basic 
telecom services but has also maintained measures that preclude foreign suppliers from ever using 
these circuits to supply such services.663  The United States recalls that under Mexico's ILD Rule 3664, 
a foreign supplier cannot interconnect a private circu it leased in Mexico with foreign public networks 
and services for the provision of scheduled basic telecom services.665  The United States submits that 
according to this Rule, only "international port operators" may interconnect with the public 
telecommunications networks of foreign operators  in order to supply basic telecom services, but 
Mexican ILD Rules require an international port oper ator to be a supplier with a concession to supply 
long-distance services and Mexican law prohib its non-Mexican entities from holding such a 
concession, since Mexico inscribed this nationalit y restriction for concessionaires in its Schedule.666 
4.352  The United States  contends that the interconnection of a private circuit leased in Mexico with 
the public telecom network in the United States is  essential to the cross-border provision of public 
basic telecom services over private leased circuits , which is a commitment included in Mexico's 
Schedule.  Because a non facilities-based service supplier cannot be a long-distance concessionaire, it cannot interconnect a private circuit leased in Me xico with the public telecom network in the 
United States, as it is unable to supply the scheduled public telecom service.
667 
4.353  The United States  submits that Mexico undertook cross-border commitments for 
"commercial agencies", which Mexico defined as the supply by non-facilities-based providers of 
telecommunications services to third parties over capacity leased from a Mexican concessionaire.  According to the United States, by Mexico's defin ition, the supply of this international "resale" 
service requires a Mexican concessionaire to provide a foreign service supplier access to and use of private leased circuits.  The Unite d States claims that without such circuits, foreign suppliers cannot 
provide cross-border telecom services as commercial agencies.
668  The United States recalls that 
Sections 5(a) and (b) of the Annex ensure that foreign commercial agencies have access to and use of 
these circuits and can interconnect  these circuits with public telecom networks and services on 
reasonable terms and conditions to provide "resale" services on a cross-border basis – services that cannot be supplied without such circuits.  In the United States' view, Mexico has failed to comply 
with these commitments, prohibiting foreign service s uppliers from offering this "resale" service that 
it scheduled.  The United States further points out that  even if Mexico permitted foreign suppliers to 
offer this "resale" service, ILD Rule 3 preclud es the supply of this service by preventing all 
commercial agencies (domestic and foreign) from inte rconnecting private leased circuits with foreign 
telecom networks.
669 
4.354  The United States  submits that the policy of the Mexican Government – since undertaking 
commitments for commercial agencies – has been  to refuse to permit any foreign carrier from 
supplying international "resale" services (i.e., in ternational telecom services supplied over private 
leased circuits).  Eight months after finalizing its "commercial agencies" commitments, the then-Secretary of Mexico's Secretariat of Communications and Transportation (SCT) wrote a letter to 
                                                     
 
661 See the United States' first written submission, paragraph 269. 
662 See the United States' first written submission, paragraph 272. 
663 See the United States' first written submission, paragraph 274. 
664 See the United States' first written submission, paragraph 275. 
665 See the United States' first written submission, paragraph 274. 
666 See the United States' first written submission, paragraph 275. 
667 See the United States' first written submission, paragraph 276. 
668 See the United States' first written submission, paragraph 278. 
669 See the United States' first written submission, paragraph 279. WT/DS204/R 
Page 106  
 
the then-Chairman of the FCC stating that the polic y of his Government was to forbid the resale of 
"long-distance public network capacity in Mexico".
670  The United States claims that, in other words, 
although Mexico had committed to its WTO partners  that it would permit commercial agencies to 
provide all forms of telecommunications services to th ird parties over resold capacity, Secretary Ruiz 
Sacristán affirmed that Government of Mexico ha d no intention of allowing telecom operators to do 
so.671  The United States further submits that Secretar y Ruiz Sacristán reaffirmed this position in a 
8 May 1998 letter to then-USTR Charlene Barshefs ky.  According to the United States, Ambassador 
Barshefsky wrote to both Secretary Ruiz Sacr istán and Secretary Herminio Blanco Mendoza 
(then-Secretary of Commerce and Industrial Deve lopment) on 4 April 1998 to express her deep 
concern over Mexico's implementation of its GATS basic telecom commitments, including "Mexico's 
failure to permit unrestricted domestic and inte rnational resale of telecommunications services 
(including international simple resale)".672  The United States recalls th at Secretary Ruiz Sacristán 
responded that Mexico's WTO commitments did not include these services.673 
4.355  The United States  contends that, by expressing his Government's refusal to permit the 
domestic and international resale of telecommunication services, Secretary Ruiz Sacristán 
acknowledged Mexico's failure to honour its scheduled commitment to allow "commercial agencies" 
to supply cross-border telecommunications services to third parties over leased capacity (i.e., private leased circuits).
674 
4.356  According to the United States , Mexico undertook a mode 3 commitment for commercial 
agencies promising to permit foreign suppliers to  acquire a 100 per cent interest in a local non-
facilities-based supplier and offer international te lecommunications services to third parties over 
capacity leased from a Mexican concessionaire.  The Un ited States points out that the supply of this 
international "resale" service requires a Mexican concessionaire to provide a foreign service supplier 
access to and use of private leased circuits.675  The United States further submits that  Sections 5(b) of 
the Annex obliges Mexico to ensure that foreign ser vice suppliers:  (1) have access to and use of the 
private leased circuits they need to supply this sch eduled resale service;  and (2) can interconnect such 
circuits with public telecom networks and services.  The United States claims that Mexico has failed 
to comply with these obligations by not permitti ng non-facilities-based service suppliers (commercial 
agencies) to establish locally and supply intern ational telecom services from Mexico over private 
leased circuits.  The United States further points out that ILD Rule 3 prevents all commercial agencies 
from interconnecting private leased circuits with foreign telecom networks, preventing Mexico from 
complying with its commitments under the Annex.676 
4.357  The United States  submits that to its knowledge, Mexico does not permit foreign 
non-facilities-based suppliers to establish locally  and supply third parties international 
telecommunications services over private leased circuits.677  The United States recognizes that Mexico 
conditioned the mode 3 supply of "commercial agenci es" on the issuance of th e relevance regulations, 
but claims that over five years have elapsed since Me xico finalized this commitment in February 1997 
(and four years have elapsed since this commitment entered into force in February 1998), and Mexico 
still has not issued – and has indicated no intention to  issue – the relevant regulations.  According to 
                                                      
670 The United States refers to the letter from Secr etary Carlos Ruiz Sacris tán to Chairman Hundt, 
22 October 1997, Exhibit US-46.  See the United States' first written submission, paragraph 281. 
671 See the United States' first written submission, paragraph 281. 
672 The United States refers to the Letter from Amba ssador Charlene Barshefsky to Secretary Carlos 
Ruiz Sacristán, 4 April 1998, Exhibit US-47.  See the United States' first written submission, paragraph 282. 
673 The United States refers to the Letter from Secretary Carlos Ruiz Sacristán to Ambassador Charlene 
Barshefsky, 8 May 1998, Exhibit US-48.  See the United States' first written submission, paragraph 282. 
674 See the United States' first written submission, paragraph 283. 
675 See the United States' first written submission, paragraph 291. 
676 See the United States' first written submission, paragraph 292. 
677 See the United States' first written submission, paragraph 293.  WT/DS204/R 
 Page 107 
 
 
the United States, the refusal to issue such regula tions raises questions about whether Mexico ever 
intends to implement this scheduled mo de 3 commitment for commercial agencies.678 
4.358  Mexico  replies that there is nothing in the word ing of the limitations that indicates that 
Mexico has made a commitment to issue the corr esponding regulation within a certain time-frame.  
According to Mexico, the issuance of the regulati on is at the discretion of the Mexican authorities 
taking into account the transition occurring in th e Mexican telecommunications market.  Mexico 
claims that the fact that the regulation has not  yet been issued does not nullify the limitation.679  
Furthermore, Mexico has issued regulations fo r the establishment and operation of commercial 
agencies for pay-telephone public services.  Base d on those regulations, Mexico has granted 59 
permits for public pay phone commercial agencies.  35 of those agencies have begun operations and 
five of them have foreign capital.680 
4.359  The United States submits that it is not inconsistent w ith the obligation under Section 5(b) of 
the Annex to require that cross-border service suppliers route traffic through the facilities of a 
Mexican concessionaire.  According to the United Stat es, the routing requirement is one way in which 
a member may satisfy the obligation in Section 5(b).  In its view, the routing requirement included in 
Mexico's Schedule, interpreted according to the rules of interpretation in the Vienna Convention , 
permit service suppliers from the United States to provide basic telecommunications services into Mexico over capacity leased from a Mexican concessionaire.
681 
4.360  In response to question No. 27 of the Panel on 19 December 2002, Mexico  submits that 
Section 5(b) relates to "access to and use of" priv ate leased circuits and the interconnection of those 
circuits with the PTTNS or with other leased circuits .  Mexico notes that, in the context of the claims 
being raised by the United States, this provision does not entitle service suppliers of any other 
Member to supply public telecommunications services over private leased circuits.  In Mexico's view, 
Section 5(b) does not entitle service suppliers of the United States to offer ISR into Mexico.  According to Mexico, this interpretation is confirmed by Section 2(c)(i) which:  (i) refers to Schedule 
limitations;  and (ii) which refers to availabl e services and networks.  Mexico submits that its 
Schedule, which includes the routing restriction, denies any market access for service suppliers from 
the United States to provide ISR into Mexico.
682  In the same line, Mexico submits that ISR services 
are prohibited under Mexican law as manifested in its  Schedule.  Therefore, ISR was "not offered to 
the public generally" within the meaning of Section 2(c)(i) of the Annex.683 
3. Application of Sections 5(e), 5(f) and 5(g) of the Annex  
4.361  Mexico  contends that, even if the Annex were to apply to this dispute, the United States has 
failed to present a prima facie case under Section 5 of the Annex, because it has not attempted to 
establish the requisite elements for a challenge under that provision.684  Mexico submits that although 
the United States acknowledges that the obligation in Section 5(a) must be a pplied through paragraphs 
                                                      
678 See the United States' first written submission, paragraph 294. 
679 See Mexico's first written submission, paragraph 245. 
680 See Mexico's answer to question No. 6(d) of the Panel of 19 December 1992 , paragraphs 111-113.  
For question No. 6(d), see footnote 21 of this Report. 
681 See the United States'  answer to question No. 27 of the Panel of 19 December 2002, paragraph 111 
("How does the routing requirement under mode 1 relate to the obligation in Section 5(b) to ensure access to 
and use of leased circuits? "). 
682 See Mexico's  answer to question No. 27 of the Panel of 19 December 2002, paragraph 329.  For 
question No. 27, see footnote 681 of this Report. 
683 See Mexico's  answer to question No. 27 of  the Panel of 19 December 2002, paragraph 326-331.  For 
question No. 27, see footnote 681 of this Report. 
684 See Mexico's first written submission, paragraph 247. WT/DS204/R 
Page 108  
 
5(b) through 5(f)
685, it interprets Sections 5(a) and 5(b) in isolation.  Mexico claims that one cannot 
demonstrate a violation of Section 5 without adduc ing evidence sufficient to raise a presumption that 
the measures at issue are inconsistent with pa ragraphs (e) and (f) of Section 5, as follows: 
"(e) Each Member shall ensure that no condition is imposed on access to and use 
of public telecommunications transport networks and services other than as 
necessary: 
(i) to safeguard the public service responsibilities of the 
suppliers of public telecommuni cations transport networks 
and services, in particular their ability to make their networks or services available to the public generally; 
(ii) to protect the technical integrity of public 
telecommunications transport networks or services: or 
(iii) to ensure that services suppliers of any other Member do not 
supply services unless permitted pursuant to commitments in the Member's Schedule. 
 … 
(f) Provided that they satisfy the criteria set out in paragraph (e), conditions for 
access to and use of public telecommunications transport networks and services may include: 
(i) restrictions on resale or shared use of such services; (ii) a requirement to use specified technical interfaces, including 
interface protocols, for inter-connection with such networks 
and services;  
(iii) requirements, where necessar y, for the inter-operability of 
such services and to encourage the achievement of the goals set out in paragraph 7(a); 
(iv) type approval of terminal or  other equipment with interfaces 
with the network and technical requirements relating to the attachment of such equipment to such networks; 
(v) restrictions on inter-connecti on of private leased or owned 
circuits with such networks or services or with circuits leased or owned by another service supplier; or 
(vi) notification, registration and licensing."
686  
4.362  Mexico  submits that since the general obligation in  Section 5(a) is required to be applied 
through paragraphs (e) and (f), the United States cannot  establish a violation of paragraphs (a) and (b) 
of Section 5 without also demonstrating that Mexi co's measures are not permitted by paragraphs (e) 
and (f).  According to Mexico, these paragraphs ar e part of the same provision and must be read 
                                                      
685 Mexico refers to paragraph 249 of th e United States' first written submission.  See Mexico's first 
written submission, paragraph 250. 
686 See Mexico's first written submission, paragraph 251.  WT/DS204/R 
 Page 109 
 
 
together to determine the meaning of a Member's obligation under Section 5.687  Mexico contends that 
in EC – Hormones688, the Appellate Body found that a gene ral rule-exception relationship between 
Articles 3.1 and 3.3 of the Agreement on the Application of Sanitary and Phytosanitary Measures  did 
not exist, bringing to the complainant the burden of  proof to establish a case of inconsistency with 
both Articles 3.1 and 3.3.  In Mexico's view, si nce there is no general ru le-exception relationship 
between Section 5(a) and 5(b) of the Annex, the Un ited States, as complaining party, has the burden 
of establishing a case of inconsistency with all four provisions.689  Mexico claims that even if the 
obligations in Section 5(a) and (b) of the Annex we re found to apply to the measures at issue, those 
measures are consistent with Mexico's rights a nd obligations under paragr aph (e), (f) and (g) of 
Section 5 of the Annex.690  Mexico further submits that its restrictions on access to and use of public 
telecommunication transport networks and services ar e no more than necessary to ensure that foreign 
suppliers of facilities-based and non-facilities-base d telecommunications transport services do not 
illegally bypass the accounting rate regime contrary to  the clear intention of the limitations on market 
access set forth in Mexico's Schedule.  Mexico r ecalls the definition of "necessary" as interpreted by 
the Appellate Body in the context of pa ragraph (d) of Article XX of the GATT 1994.691  
4.363  The United States  contends that it does not consider Sections 5(e) and 5(f) necessary to 
establish a claim under Section 5(a) and 5(b) of th e Annex and considers that Mexico's conditions on 
access and use are not justified by Section 5(e) and 5 (f).  As an example, the United States refers to 
Mexico's argument that its restriction on resale are consistent with Section 5(e) as necessary to 
enforce the limitations on market access inscribed in its Schedule692, which, according to the 
United States is not accurate, since Mexico's Sche dule authorizes cross-border suppliers to provide 
basic telecommunications services, subject only to th e limitation that they route traffic through the 
facilities of a concessionaire.693 
4.364  According to the United States , Sections 5(e) and 5(f) are not elements of a prima facie claim 
under Sections 5(a) or (b) of the Annex.  It disag rees with the analogy to Articles 3.1 and 3.3 of the 
Agreement on the Application of Sanitary and Phytosanitary Measures.  In the United States' view, 
the Mexican assertion that "there is no general rule -exception relationship" between Sections 5(a)-(b) 
and 5(e)-(f) of the Annex694, has no support.  The United States points out that, like Section 5(f), 
Article XX of the GATT includes a list of measures that may fall within the scope of the provision 
(Articles XX(a)-(j)).  It further points out that like  Section 5(e), Article XX(d) requires that to fall 
within the scope of the provision, a measure must be  deemed "necessary" to achieve a particular goal.  
The United States claims that, in the context of Article XX(d), the Appellate Body has expressly 
found that the burden of satisfying the "necessity " test falls on the Member invoking the provision.695 
                                                      
687 See Mexico's first written submission, paragraph 253. 
688 Mexico refers to paragraph 104 of the Appellate Body Report, EC – Hormones .  See Mexico's first 
written submission, paragraph 256.  
689 See Mexico's first written submission, paragraph 256. 
690 See Mexico's first written submission, paragraph 258. 
691 Mexico refers to paragraph 161 of the Appellate Body Report, Korea – Various Measures on Beef .  
See Mexico's first written submission, paragraphs 261-262.  For a detailed discussion of the routing requirement 
in Mexico's specific commitments, see Section IV.A.3(c)(ii) of this Report.  
692 The United States refers to Mexico's first written submission, paragraph 264.  See the United States' 
first oral statement, paragraph 49. 
693 See the United States' first oral statement, paragraph 49. 
694 The United States refers to paragraph 256 of Mexico's first written submission.  See the 
United States'  answer to question No. 26 of the Panel of 19 Dec 2002, paragraph 109 (" Is it necessary to 
consider Section 5 (e) and (f) to establish a claim under Section 5 (a) and (b)? Please explain "). 
695 The United States refers to paragrap h 157 of the Appellate Body Report, Korea – Various Measures 
on Beef .  See the United States' answer to qu estion No. 26 of the Panel of 19  December 2002, paragraph 109.  
For question No. 26, see footnote 694 of this Report.  WT/DS204/R 
Page 110  
 
4.365  Mexico  submits that the obligations in Section 5( a) and 5(b) are qualified in an important 
manner by Section 5(e) and 5(f), constraining th e rights of users under Section 5(a) and (b).  
According to Mexico, it is incorrect to argue that  it has to provide unconditional access to and use of 
Mexico's PTTNS and to allow the use, and interconn ection with the public networks, of private leased 
lines facilities-based and non-facilities-based suppliers fro m the United States.  It further submits that 
paragraphs 5(e) and 5(f) are not of the nature of exceptions or affirmative defences, but key 
substantive provisions that define the rights of regu lators to restrict the access to and use of public 
telecommunications transport networks and services.  In Mexico's view, the United States has the burden of establishing that the terms and conditi ons on access and use maintained by Mexico exceed 
or go beyond Mexico's rights as a regulator.
696 
4.366  The United States  submits that in any event, while Me xico may have imposed conditions on 
access to and use of public telecommunications tran sport networks and services that fall within the 
meaning of Section 5(f), those conditions are "oth er than as necessary" to satisfy the criteria in 
Sections 5(e)(i)-(iii).  According to the United States,  since the conditions do not "satisfy the criteria 
set out in Section 5(e)", Mexico is not permitted to maintain those conditions, pursuant to Section 
5(f).697 
4.367  According to the United States , three conditions are inconsistent with Sections 5(a) or 5(b) of 
the Annex and not necessary to achieve the goals liste d in Section 5(e)(i)-(iii);  first, under ILD Rule 
13, Mexico conditions United States suppliers' ac cess to and use of public telecommunications 
networks and services on negotiating exclusively with Telmex698;  second, the refusal to make private 
leased circuits available to United States facilitie s-based suppliers, United States non-facilities-based 
suppliers ("commercial agencies") and locally-est ablished commercial agencies for the supply of 
scheduled voice telephone services699; and third, to limit the author ity to interconnect private leased 
circuits to international port operators .  The United States claims that even if United States facilities-
based suppliers, United States non-facilities-based suppliers ("commercial agencies") and locally-
established commercial agencies were granted access to and use of private leased circuits from 
Mexican suppliers, ILD Rule 3 prohibits them from interconnecting those leased circuits with foreign 
public networks and services.  The United States r ecalls that Rule 3 limits the authority to 
interconnect private leased circuits to an inte rnational port operator, which must be a Mexican 
entity.700  In the United States' view, each of these three conditions is "other than as necessary" to 
satisfy the criteria of Section 5(e)(i)-(iii).  The Un ited States considers that the Panel does not need to 
define precisely what degree of "necessity" is required here.701 
4.368  Mexico  contends that even if the obligations in S ections 5(a) and (b) of the Annex were found 
to apply to the measures at issue, those measures ar e consistent with Mexico's rights and obligations 
under paragraph (g) of Section 5.702 
4.369  The conditions or restrictions applied by Mexico on access to or use of public 
telecommunications networks and services by fore ign suppliers of faciliti es-based and non-facilities-
based basic telecommunications are "necessary" to enforcing the limitations on market access 
specifically inscribed in Mexico's Sc hedule.  Mexico's ban of ISR is c onsistent with Mexico's level of 
development and "place[s] reasonable conditions on  access to and use of public telecommunications 
transport networks and services necessary to strengthen its domestic telecommunications 
                                                      
696 See Mexico's  answer to question No. 26 of the Panel of 19 December 2002, paragraph 322.  For 
question No. 26, see footnote 694 of this Report. 
697 See the United States' second written submission, paragraph 109. 
698 See the United States' second written submission, paragraph 110. 
699 See the United States' second written submission, paragraph 111. 
700 See the United States' second written submission, paragraph 112. 
701 See the United States' second written submission, paragraph 113. 
702 See Mexico's first written submission, paragraph 258.  WT/DS204/R 
 Page 111 
 
 
infrastructure and service capability and to increas e its participation in international trade 
telecommunications services" within the meaning of paragraph (g) of Section 5 of the Annex.  These 
measures are integral conditions to the li mitations specified in Mexico's Schedule.703 
4.370  The United States  contends that Section 5(g) exp licitly requires that any conditions 
restricting access to and use of private leased ci rcuits, as in Mexico, "shall be specified in the 
Member' s Schedule."  However, Mexico specified  no such condition prohibiting the use of private 
lines in its Schedule.  Mexico's inclusion of a routing restriction under mode 1 does not provide a 
basis for Mexico to prohibit the use of private leased circuits.  As long as the circuit is leased from a 
concessionaire, it is consistent with the requirement to route international traffic through the facilities 
of a concessionaire.  For this reason alone, Mexico ca nnot rely on Section 5(g).  Even if Mexico had 
included such a condition in its Schedule, there is no basis to conclude that the prohibition on the use 
of private leased circuits in Mexico otherwise sa tisfies the criteria of Section 5(g).  Mexico's assertion 
that this restriction is "necessary to strengthen its domestic telecommunications infrastructure and 
service capacity and to increase its participation in international trade in telecommunications services" 
is unsupported, and cannot substitute for evidence an d cannot form the basis for the factual findings 
that would be necessary to justify Mexi co's invocation of this subparagraph.704 
V. ARGUMENTS OF TH E THIRD PARTIES  
5.1 From the third parties in these proceedings, i.e . Australia, Brazil, Canada, Cuba, the 
European Communities, Guatemala, Honduras, India,  Japan and Nicaragua, only Australia, Brazil, the 
European Communities and Japan filed their co mments within the deadline and presented Oral 
Statements during the third party session. 
A. AUSTRALIA 
1. Informal Understanding on Accounting Rates 
5.2 Australia recalls that this dispute raises the issue of the informal Understanding on 
Accounting Rates (informal Unders tanding) which has been in place since the 1996 Negotiations on 
Basic Telecommunications, and is reflected in th e Report of the Group on Basic Telecommunications 
of 15 February 1997.705 
5.3 In Australia's view, as the informal Unders tanding was never affirmed by the Council for 
Trade in Services or the General Council, and so di d not become a formal Understanding, it therefore 
does not present a legal barrier to disputes being taken by WTO Members in respect of the application of accounting rates.
706 
5.4 Furthermore, Australia contends that even if the moratorium did at any time present a legal 
barrier to such disputes, then that legal barrier  no longer exists as it expired on 1 January 2000, in 
accordance with the clear intention of the WTO Members as reflected in the informal 
Understanding.707 
2. Scope of "interconnection" in Section 2 of the Reference Paper 
5.5 Australia submits that this dispute raises the i ssue of the scope of the term "interconnection" 
as used in section 2 of the Reference Paper.708  Australia recalls that the scope of "interconnection" 
                                                      
703 See Mexico's first written submission, paragraphs 264-265. 
704 See United States' second submission, paragraphs 124-125. 
705 See Australia's third party submission, paragraph 3. 
706 See Australia's third party submission, paragraph 4. 
707 See Australia's third party submission, paragraph 5. 
708 See Australia's third party submission, paragraph 6. WT/DS204/R 
Page 112  
 
has important implications for the application of  the obligations in the mentioned section of the 
Reference Paper.
709 
5.6 In view of the above, Australia contends th at the issue at stake is whether the term 
"interconnection" should be understood as applying only to interconnection within the borders of a 
Member that has inscrib ed the Reference Paper in its Sc hedule of Commitments (in-country 
interconnection), or whether it also applies to the interconnection of public telecommunications 
networks within such a Member's borders with telecommunications networks external to that 
Member's borders (inter national interconnection)710;  and whether "interconn ection" as used in section 
2 of the Reference Paper covers accounting rates.711 
5.7 Australia states that, as the Reference Paper does not explicitly restrict interconnection to in-
country interconnection then, in principle, the Refe rence Paper obligations re lating to interconnection 
apply to international interconnection.712 
3. Interconnection and accounting rates 
5.8 Australia notes that in its view, "accounting rat es" are specific sets of arrangements for the 
pricing of a subset of interconnection arrangements .  Australia considers that, as the Reference Paper 
applies to international interconnection, these pric ing arrangements must be consistent with the 
Reference Paper obligations with respect to interconnection.713 
5.9 Australia notes that underpinning the inform al Understanding on Acc ounting Rates is the 
assumption of Members that interconnection obligati ons under the Reference Paper would apply to 
international interconnection and, in the absen ce of the Understanding, give rise to disputes.714 
4. Meaning of "cost-oriented" rates in section 2.2(b) of the Reference Paper 
5.10 Australia considers that the Reference Paper provides a framework for the competitive supply 
of telecommunications services in markets where there is a major supplier that can affect the terms of 
participation through control over essential f acilities or by use of its market position.715 
5.11 In Australia's view, a main concern is to de velop greater clarity concerning, and acceptance 
of, interconnection obligations, and particularly in re lation to the requirement stated in paragraph 2.2 
of the Reference Paper.716 
5.12 Australia further points out that the Reference Paper does not elaborate on what is meant by 
"cost-oriented rates".  Australia submits that any interpretation of "cost-oriented rates" should be 
consistent with these criteria of transparency , reasonableness, economic feasibility and unbundled 
elements.  Australia submits that the Panel must form a view of the meaning of "cost-oriented rates" that is consistent with these criteria so that the Reference Paper promotes telecommunications 
competition (and through that, trade in telecommunica tions services).  Australia's view is that an 
interpretation of "cost-oriented rates" that is t oo broad would undermine the effect of the Reference 
Paper as a whole, and is clearly contrary to its intent.
717 
                                                      
709 See Australia's third party submission, paragraph 7. 
710 See Australia's third party submission, paragraph 6.a. 
711 See Australia's third party submission, paragraph 6.b. 
712 See Australia's third party submission, paragraph 8. 
713 See Australia's third party submission, paragraph 9. 
714 See Australia's third party submission, paragraph 10. 
715 See Australia's third party submission, paragraph 11. 
716 See Australia's third party submission, paragraph 12. 
717 See Australia's third party submission, paragraph 13.  WT/DS204/R 
 Page 113 
 
 
5.13 According to Australia, recommendations of the ITU provide some guidance on relevant cost 
components in the development of cost-based rates .  In addition, Australia submits that the Panel 
should, in its interpretation of "cost-oriented ra tes", consider the application of dynamic costing 
models for interconnection in GATS Member count ries that are encouraging the competitive supply 
of telecommunications networks and services. 718 
B. BRAZIL 
1. Introduction 
5.14 According to Brazil, to analyse this dispute the Panel should take into account the scope and 
reach of the specific commitments  of market access and national treatment undertaken by Mexico .  
Brazil considers that, for that purpo se, the Panel should analyse Mexico 's commitments in light of the 
national treatment discipline of the GATS as set out in its Article XVII and as qualified by footnote 
15 of the GATS .  Brazil submits that in conducting this analys is the Panel should take into account the 
applicability of the national treatment discipline in relation to the four modes of supply of services, as defined in GATS Article I:2(a) to (d ), particularly as regards "mode 1".
719 720 
5.15 Brazil states that the Panel should consider wh ether the national treatment discipline applies 
individually to each mode of supply or whether it applies across all modes noting that, for the 
purposes of the application of the GATS Annex on  Basic Telecommunications, the disciplines of 
"non-discrimination" contained in Article II (M ost-Favoured Nation) and Article XVII (National 
Treatment) of the Agreement are qualified by the c oncept of "like circumstances", as set out in 
footnote 15 of the GATS.721 
5.16 Brazil submits that it can be inferred from Arti cle XVII.1 and footnote 15 that the meaning 
and the scope of the national treatment obligation lies in the definition of likeness .  Brazil considers 
that this determination can only be made in rela tion to each mode of supply and not "across modes" .  
Under Brazil's view, the scope of the national treatme nt obligation is given mu ch more legal certainty 
by the interpretation that it applies for and within  each mode of supply individually, with likeness 
being defined on the basis of the concept of "like circumstances".722 
5.17 According to Brazil it seems inconsistent to  compare with the same common reference 
different categories of service suppliers and the servi ces they supply, because in  that thinking a full 
National Treatment in mode 3 would be necessary to grant full national treatment in modes 1, 2 and 4, 
since they would be "like" services suppliers.723 
2. Scope and reach of specific commitments 
5.18 Brazil submits that, in the first column of its Schedule of Specific Commitments, Mexico, 
confined the definition of "Telecommunication Se rvices" to those services "supplied by a facilities-
based public telecommunications network (wire- based and radioelectric) through any existing 
technological medium" .  Accordingly, Brazil states that one could conclude that Mexico has not 
                                                      
718 See Australia's third party submission, paragraph 14 where it refers to the recognition of the role of 
the ITU by the GATS Annex on Telecommunications. 
719 See Brazil's third party submission, paragraph 3. 
720 See Brazil's oral statement, paragraphs 5-6. 
721 See Brazil's third party submission, paragraph 3. 
722 See Brazil's oral statement, paragraph 11. 
723 See Brazil's oral statement, paragraph 18. WT/DS204/R 
Page 114  
 
committed to ensure the rights and obligations est ablished in the GATS to suppliers that are not 
"facilities-based".
724 
5.19 However, Brazil argues that under subsector "o – Other" of its Schedule of Specific 
Commitments, Mexico undertook commitments rega rding "commercial agencies", which according to 
Mexico's are those "which, without owning tran smission means, provide third parties with 
telecommunication services by using capacity leased from a public network concessionaire" .  
According to Brazil this definition seems equal to the one provided by the United States in paragraph 
24 of its submission .  Brazil submits that the supply of basic telecom services over leased capacity is 
referred to in the industry as "resale".725 
5.20 According to Brazil, although Mexico's definition of "Telecommunications services" would 
suggest that its commitments were applicable ex clusively to "facilities-based suppliers", Mexico 
undertook specific commitments for "commercial agencies/resale" .  In this regard, Brazil notes that 
commitments under mode 1 for "facilities based su ppliers" are the same as  those undertaken for 
"private-leased circuits".726 
5.21 Brazil contends that Mexico's specific commit ments regarding "commercial agencies" read, 
for mode 1, in the market access column  "none, except as indicated in 2.C.1".   Brazil recalls that in 
2.C.1, for mode 1, the Schedule reads: "none, except the following:  international traffic must be routed through the facilities of an enterprise that  has a concession granted by the "Ministry of 
Communications and Transport (SCT)" .  Therefore, under Brazil's point of view, the limitation 
inscribed in 2.C.1 is equally valid for the market access column in mode 1 for "commercial agencies".   
Brazil recalls that in the National Treatment column , for mode 1, is written "none" for "commercial 
agencies".
727 
3. Non-discrimination and the con cept of "like circumstances" 
5.22 Brazil submits that one of the main objec tives of the GATS is the achievement of 
progressively higher levels of liberalization and one  of the main ways of accomplishing that goal is 
the elimination of all discrimination between services and services suppliers of the Parties to the 
Agreement .  According to Brazil, that seems to be the basic rationale  behind Articles II ("Most-
Favoured Nation") and XVII ("National Treatment").728 
5.23 According to Brazil, footnote 15 of the GATS go es one step further and establishes that: the 
term "non-discriminatory" is unde rstood to refer to most-favoured-n ation and national treatment as 
defined in the Agreement, as well as to reflect s ector-specific usage of the term to mean "terms and 
conditions no less favourable than those accorded to  any other user of like public telecommunications 
transport networks or services under like circumstances".729 
5.24 In Brazil's view, it can be inferred from Article XVII.1 and footnote 15 that the meaning and 
the scope of the national treatment obligation li es in the definition of "like services and service 
suppliers" and "under like circumstances".  According to Brazil, there is nothing in the language of 
Article XVII and of footnote 15 suggesting that the m ode of supply is a consid eration in defining the 
"likeness" of a service or of a service supplier .  However,  Brazil recalls that GATS' commitments are 
                                                      
724 See Brazil's third party submission, paragraph 5 where it refers to Mexico's Schedule of Specific 
Commitments. 
725 See Brazil's third party submission, paragraph 6 where it refers to the definition provided in the 
WTO web page. 
726 See Brazil's third party submission, paragraph 7. 
727 See Brazil's third party submission, paragraph 8 where it refers to footnote 2 in Mexico's Schedule 
of Specific Commitments. 
728 See Brazil's third party submission, paragraph 15. 
729 See Brazil's third party submission, paragraph 16.  WT/DS204/R 
 Page 115 
 
 
inscribed in national schedules by mode of supply,  which allows for the perception that the whole 
architecture of the Agreement stems from the clear separation between the four modes, as defined in 
Article I of the GATS .  Brazil submits that even when full comm itments are entered in all four modes 
in a given sector or subsector, the extent to which services and services suppliers operating in 
different modes can be considered "like" remains unclear .  Therefore it is not evident, for Brazil, how 
national treatment should apply to them .  According to Brazil, the same situation arises in regard to 
the interpretation of Mexico's commitments.730 
5.25 In view of the above, Brazil contend that tw o possible interpretations  should be considered .  
The first interpretation borrows from one of the a pproaches identified in the "jurisprudence" on trade 
in goods, which is to define likeness in terms of the essential characteristics of the products .  In a 
services context this would perhaps mean that servi ces and/or service suppliers would be considered 
"like" on the basis of the nature of the economic act ivity being performed regardless of the territorial 
presence of the supplier and the consumer.  Under this point of view all service suppliers operating in 
the same sector would be considered "like service suppliers" and all the services supplied in the same 
sector would be considered "like services" .  In this case, if all services suppliers are "like" services 
suppliers, the only possible way of defining the na tional treatment obligation is to compare the 
treatment granted to all foreign services suppliers altogether regarding the treatment granted to 
national services suppliers based in their home country .  Brazil states that, if the determination of 
likeness is independent of the mode of supply, it fo llows that national treatment applies across modes 
in relation to a same common reference: na tional services suppliers in their home country.731 
5.26 Brazil further points out that in the second possi ble interpretation, the definition of "like 
services and service suppliers" would be based on a co mparison of the service suppliers that operate 
under like circumstances, as mentioned in footnote 15 of GATS .  Brazil considers that this logic 
follows the other approach to likeness identified in jurisprudence on trade in goods, which is to define 
it on the basis of the "aims and effects" or of the regulatory objective being pursued by a certain 
measure affecting the product or its producers.  Br azil notes that in this connection, services and/or 
service suppliers would be considered "like" only  if they are subject to the same regulatory 
framework.  According to Brazil, in this interpre tation, likeness becomes a function of the mode of 
supply, being defined only within each mode indi vidually.  Brazil states that in this possible 
interpretation, if one assumes that there are four categories of services suppliers, it seems inconsistent 
to compare those services suppliers and the servi ces they supply with the same common reference.732  
5.27 Brazil submits that the question to be answered seems to be:  is Mexico under the obligation 
of granting foreign services and service suppliers the same treatment it accords Mexican services and 
services suppliers in mode 1 - for instance, the same treatment Mexico would grant to Mexican 
service suppliers based outside the territory of Mexi co - or is Mexico under the obligation of granting 
foreign services and service suppliers the same trea tment it accords to Mexican services and service 
suppliers based in the Mexican territo ry?  According to Brazil, if this  question is not given an answer, 
it seems to be impossible to judge any claimed violation of Mexican commitments, including as 
regards, for instance, Mexico's obligations under  paragraphs 5(a) and 5(b) of the Annex on 
Telecommunications in relation to the supply of  scheduled telecommunication services in mode 1.733 
5.28 Brazil contends that the legal uncertainty re garding the scope of the national treatment 
obligation seems to be greatly redu ced by the interpretation that this  basic obligation applies for and 
within each mode of supply individually, with "lik eness" being defined on the basis of the concept of 
"like" circumstances.  Brazil submits that this inte rpretation would be much more in conformity with 
the four-mode logic that constitutes the very foundati on of the GATS.  Brazil considers that this logic 
                                                      
730 See Brazil's third party submission, paragraph 17. 
731 See Brazil's third party submission, paragraph 19. 
732 See Brazil's third party submission, paragraph 20. 
733 See Brazil's third party submission, paragraph 21. WT/DS204/R 
Page 116  
 
implies that services and services suppliers opera ting through different modes cannot always be 
treated as "perfect substitutes" because, in realit y, they will be subject to different regulatory 
frameworks.  Brazil recalls that this approach is in keeping with the "pri nciple of equality" (from 
which flows the concept of like circumstances ), according to which the same treatment must be 
accorded to persons under the same condition and similarly situated.
734 
C. EUROPEAN  COMMUNITIES 
5.29 The European Communities recalls that the United States' claims, in its first written 
submission to this Panel, are based exclusivel y on alleged violations of Mexico's additional 
commitments on Telecommunications under Article XVIII of the GATS as incorporated via the Fourth Protocol to the GATS and based on the Re ference Paper (Sections 1.1, 2.1 and 2.2); and 
alleged violations of the Sections 5(a) a nd 5(b) of the GATS Annex on Telecommunications.
735 
5.30 The European Communities notes that the requ est for the establishment of the Panel and 
therefore the Panel's terms of reference also in clude Article XVII of the GATS.  The European 
Communities recall that the original request for the es tablishment of a panel in this case also alleged 
violation of Article VI:1, VI:5, XVI:1, XVI:2, XVII:1, XVII:2 and XVII:3 of the GATS as well as 
many other provisions of the Reference Paper a nd the Annex on Telecommunications.  Under the 
European Communities point of view these additi onal claims now seem to have been abandoned.736 
5.31 Under the European Communities' view, a correct an alysis of Mexico's obligations has to start 
by considering the relevant specific commitments of Mexico.737 
1. Interpretation of Mexico's specific commitment under mode 1 
5.32 The European Communities recalls that the re levant commitment in telecommunications 
services under mode 1 and the limitations column contains the following: 
"(1) None, except the following: International traffic must be routed through  the facilities of an enterprise that has a 
concession granted by the Ministry of Communications and Transport."
738 
5.33 According to the European Communities, this  commitment is rendered obligatory and must 
therefore be read in the light of Article XVI of the GATS.739 
5.34 The European Communities further points out that the basic obligation expressed in 
Article XVI:1 is to "accord services and service suppliers of any other Member treatment no less 
favourable than that provided for under the terms, li mitations and conditions agreed and specified in 
its Schedule", and that Article XVI:2 provides an exhaustive list of measures that Members shall not 
maintain or adopt unless otherwise specified in its schedule.  The European Communities submits that 
these are various kinds of quantitative limitations and restrictions on the types of legal en tity or joint 
venture (and foreign participation th erein) that may be used to supply the service.  According to the 
European Communities a Member is not restricted under Article XVI:1 from regulating the supply of 
services on its territory in any way other than thr ough the measures specified in Article XVI:2.  The 
                                                      
734 See Brazil's third party submission, paragraph 22 where it refers to Black's Law Dictionary 
definition of equality. 
735 See European Communities' third party submission, paragraph 5. 
736 See European Communities' third party submission, paragraph 6. 
737 See European Communities' third party submission, paragraph 7. 
738 See European Communities' third party submission, paragraph 8. 
739 See European Communities' third party submission, paragraph 9.  WT/DS204/R 
 Page 117 
 
 
European Communities clearly states that there are other obligations under th e GATS that the Member 
has to respect.740 
5.35 The European Communities submits that the "exception" to the commitment on 
telecommunication services under mode 1 inscribed by  Mexico in its Schedule is pointless since the 
measure that is specified (an obligation to route international traffic through the facilities of an 
enterprise that has a concession gran ted by the Ministry of Communications and Transport) is not a 
measure of the kind listed in Article XVI:2.741 
5.36 The European Communities recalls that the measure mentioned in the "exception" is 
regulatory in nature and is expressed to apply to  all international traffic (whether foreign service 
supply or a foreign service supplier is involved or not).742 
5.37 The European Communities notes that it is in fact precisely because the supply of 
telecommunication services is so susceptible to being affected, and even rendered impossible, by regulatory measures that the adoption of additiona l commitments concerning telecommunications 
services was so important and that the Reference Pa per was a central element in the negotiations on 
basic telecommunications.
743 
5.38 According to the European Comm unities, Mexico relies to a great extent in its first written 
submission on the contention that additional commi tments under Article XVIII of the GATS can only 
cover measures that are not subject to scheduli ng under Articles XVI and XVII of the GATS.  The 
European Communities agree with this approach.744 
5.39 However, under the European Communities' point of view the correct conclusion for this case 
is the opposite of that which Mexico submits.   According to the European Communities the 
"exception" on which Mexico seeks to rely should  be included as a limitation to any additional 
commitments made on regulatory measures.745 
5.40 In the European Communities' vi ew the "exception" to the comm itment in Mexico's Schedule 
has no legal effect since it was not necessary for the purpose of allowing Mexico to maintain the 
measure described.  According to the Europ ean Communities the "exception" to the specific 
commitment can only be read as an additional inform ation to the reader about the legal situation in 
Mexico.  The European Communities contends that the United States is correct in basing its claim 
only on the additional commitments of Mexico, wh ich do not include the exception on which Mexico 
relies.746 
5.41 The European Communities note th at the "exception" inserted by Mexico in its Schedule of 
Commitments refers to the obligation to route tra ffic through the facilities of an enterprise that has a 
concession granted by the Ministry of Communi cations and Transport.  According to the 
European Communities this obligation does not ex clude foreign telecommunications suppliers from 
supplying services in a cross-border manner provided th at those suppliers reach an agreement with a 
Mexican enterprise, which has been granted a con cession, to terminate its traffic within Mexico.747 
                                                      
740 See European Communities' third party submission, paragraph 10. 
741 See European Communities' third party submission, paragraph 12. 
742 See European Communities' third party submission, paragraph 13. 
743 See European Communities' third party submission, paragraph 14. 
744 See European Communities' third party submission, paragraph 15. 
745 See European Communities' third party submission, paragraph 16. 
746 See European Communities' third party submission, paragraph 17. 
747 See European Communities' third party submission, paragraph 18. WT/DS204/R 
Page 118  
 
5.42 With regard to Brazil's concern based on the in terpretation of Mexico's Schedule of Specific 
Commitments,
748 the European Communities contends that the condition in the Spanish language is 
that the service has to be provided "por", which in context means through or over a public telecommunication network, not limiting the concession to facilities based suppliers.
749  
2. Mexico's commitments under mode 3 
5.43 In the European Communities' view, the two sente nces of the statement in Mexico's Schedule 
referring to permits for the establishment of comme rcial agencies under mode 3 cannot be read in 
combination as making the coming into effect of the entire commitment subject to the discretion of Mexico.
750  According to the European Communities a cons istent reading is that the regulations will 
be issued before permits are granted so as to en sure that no commercial agencies will be allowed to 
have "acquired rights" to operate without respecting the regulations.751 
5.44 The European Communities considers that this position is supported by the explanatory note 
containing Guidelines for the Scheduling of Comm itments (MTN.GNS/W/164/A dd.1) which specifies 
under Point 8 that "according to the agreed sche duling procedures, schedules should not contain 
general references to laws and regulations as it is  understood that such references would not have 
legal implications under the GATS".  Thus, limitati ons to scheduled commitments must be set out 
explicitly in the schedule and not incorporat ed by reference to national regulations.752 
5.45 The European Communities considers that Me xico's commitments for market access for 
commercial agencies are in force subject to the limitations legitimately included in the Schedule.753 
5.46 The European Communities recalls that, on th e relationship between specific commitments 
and additional commitments, there is no basis for holding that additional commitments cannot prevail 
over specific commitments, as argued by Mexico in  paragraphs 211 and 212 of its first written 
submission.  According to the European Communities there is no limitation of this kind in Article XVIII of the GATS.
754 
5.47 The European Communities contends that the Annex on Telecommunications is an integral 
part of the GATS (Article XXIX) and as such, restrictions listed as "limitations" to specific 
commitments cannot derogate from GATS obligations  except as specifically provided.  In the 
European Communities' view this is why the Annex on Telecommunications contains language 
expressly stating that it does not require the author ization of services other than as provided for in its 
Schedule.755 
                                                      
748 See Brazil's third party submission paragraph 5. 
749 See European Communities' oral statement, paragraphs 5 and 7. 
750 See European Communities' third party submission, pa ragraph 19 where it refers to paragraphs 265 
and 294 of the United States' first written submission. 
751 See European Communities' third party submission, paragraphs 20-23. 
752 See European Communities' replies to questions from the Panel, paragraph 14. 
753 See European Communities' third party submission, paragraph 24. 
754 See European Communities' third party submission, paragraph 25. 
755 See European Communities' third party submission, paragraph 28 where it refers to Section 2(c)(I) 
of the Annex on Telecommunications of the GATS.  WT/DS204/R 
 Page 119 
 
 
3. Application of the interconnection rules contained in the Reference Paper 
5.48 The European Communities disagrees with Me xico's view that the obligations on 
interconnection contained in the Re ference Paper do not apply to term ination of international calls 
under the accounting rate system.756 
5.49 According to the European Comm unities the term "interconnection", as used in Section 2 of 
the Reference Paper, interpreted in  accordance to Article 31 of the Vienna Convention  appears to 
relate to all modes of linking two operators.  In  the European Communities view the wording of 
Section 2.1 of the Reference Paper which de fines "interconnection" supports this idea.757 
5.50 The European Communities contends that the very object and purpose of the GATS is the 
liberalisation of international trade in services.  In the European Communities view it is difficult to 
maintain that an interpretation of the Reference Pa per should be limited to e nhancement of "national" 
competition to the detriment of "international" one.758 
5.51 The European Communities contends that the ne gotiations which led to the final Reference 
Paper were conducted on the assumption that termina tion of international calls under the accounting 
rate system is not fundamentally different from domes tic interconnection, and it tends to suggest that 
accounting rates may indeed be considered as a form of "international interconnection".759 
5.52 In this regard, the European Communities belie ves that the ordinary meaning of the term 
"interconnection" covers both na tional and international linking.760  
5.53 The European Communities adds in reply to a question from the Panel that the opening words 
of Section 2.1 of the Referen ce Paper ("This section applies , on the basis of the specific commitments 
undertaken ... ") means that Section 2 of the Reference Paper only applies to the extent that there are 
specific commitments and cannot be used to require market access where this  does not result from the 
specific commitments.  According to the Europ ean Communities, the additional commitment is 
intended to facilitate the effective exploitation of market access to whic h a Member has committed 
itself in its Schedule.  The European Communities is of the view that Mexico has committed to 
provide market access under mode 1 and must therefore ensure that the major supplier provides 
interconnection in accordance with Section 2.761 
4. Rates relating to termination of international calls 
5.54 In the European Communities' view, Telmex should be obliged to provide cost-oriented 
interconnection, taking into consideration Mexico 's commitments.  Due to the ample divergence 
between "costs" and "rates", the European Commun ities considers that it is upon Mexico to provide 
the Panel with proof of those costs that would justify Mexico's rates.762 
5.55 As regard Japan's argument that the Spanis h term "basadas en costos", which has been 
included in Mexico's additional commitments, requir es a stricter adherence to costs than the term 
"cost oriented", the European Communities subm its that the additional commitments introduced 
through the Fourth Protocol to GATS, were ba sed on a common Reference Paper to ensure that 
                                                      
756 See European Communities' third party submission, paragraph 29 where it refers to paragraph 37 
and heading IV.A.3 of the United States first written submission. 
757 See European Communities' third party submission, paragraphs 30-31. 
758 See European Communities' third party submission, paragraph 32. 
759 See European Communities' third party submission, paragraph 34. 
760 See European Communities' third party submission, paragraph 35. 
761 See European Communities' replies to questions from the Panel, paragraphs 3-4. 
762 See European Communities' third party submission, paragraphs 38-39. WT/DS204/R 
Page 120  
 
identical obligations were undertaken by all except where expressly intended otherwise.
763  T h e  
European Communities submits that the term "cost-or iented" in English and "basadas en el costo" in 
Spanish were intended to be equi valent.  It points out that the European Communities' additional 
commitments which are authentic in all three WTO languages uses the term "cost-oriented" in English 
and "basadas en el costo" in Spanish.764  Since the additional commitments of the European 
Communities are an integral part of the GATS and were  accepted by all parties to the Fourth Protocol, 
it is clear that the two terms were intended to be equivalent.  According to the European Communities 
a different interpretation would vary the scope  of WTO Members' obligations depending on the 
choice of authentic language for additional commitments.765 
5.56 The European Communities further points out the fact that cost-orientation has been 
discussed extensively in the ITU, and some gui dance can be found in ITU-T Recommendation D.140, 
entitled "Accounting Rate Principles for the International Telephone Service", and ITU-T 
Recommendation D.150 entitled "New System fo r Accounting in International telephony".766  It notes 
that commercially, contractually and technically, both accounting rates and interconnection can cover 
many different situations:  where tw o operators' networks connect physi cally at a given point that they 
own together, where two operators' network connect physically at a given point that is owned by 
either of them of by a third party, where two operators own jointly a link between their respective 
networks.767 
5.57 The European Communities notes that the Refere nce Paper does not contain the detail of the 
ITU Recommendations and does not specify which cost standard should be applied.  In the European 
Communities view, national authorities have discretion as to the choice of cost standard, provided that 
it properly reflects the cost of interconnection and is applied in a transparent, consistent and non-
discriminatory way.768 
5. The meaning of "reasonable" 
5.58 The European Communities contends that the inte rpretation of the term "reasonable" as linked 
to conditions of competition is not appropriate .  According to the European Communities the 
interpretation should be in line with the negotiatin g history of the Reference Paper, according to 
which this term it is normally used to refer to "a reasonable  rate of return of the capital employed".769 
5.59 In answer to a question from the Panel, the European Communities added that the 
requirement of reasonableness  is to be understood  as a discipline on the model used by national 
authorities to calculate the 'real' cost of interconn ection.  It recalls that there are several models 
(bottom-up or top-down models, looking at historical or  current costs, in a fully-distributed or stand 
alone manner, among other).  The European Commun ities considers that the Reference Paper does not 
mandate the use of one particular model, but the mode l chosen must reflect economic reality so that if 
the model fails to reflect reality, the resulting interconnection prices cannot be regarded as 
reasonable.770 
5.60 In the European Communities' view, the expr ession 'having regard to economic feasibility' 
must be understood as a general qualification of (or limitation on) the obligation for major suppliers to 
provide interconnection on:  (1) terms;  (2) condi tions;  and (3) cost-oriented rates which are (a) 
                                                      
763 See European Communities' oral statement, paragraph 5 where it refers to paragraph 5 of Brazil's 
third party written submission. 
764 See document GATS/SC/31/Suppl.3. 
765 See European Communities' oral statement, paragraph 10. 
766 See European Communities' oral statement, paragraph 16. 
767 See European Communities' replies to questions from the Panel, paragraphs 22-28. 
768 See European Communities' oral statement, paragraph 23. 
769 See European Communities' third party submission, paragraphs 40-42. 
770 See European Communities' replies to questions from the Panel, paragraphs 31-33.  WT/DS204/R 
 Page 121 
 
 
transparent and (b) reasonable.  It confirms that rates must be oriented towards, not 'equal to' or 
'identical to', actual cost and that operators are a llowed a reasonable rate of return on investment and 
provides a safeguard to ensure that major supplie rs do not have to meet demands that could be 
excessively expensive, bearing in mind the reve nues to be generated by the interconnection 
agreement.  The European Commun ities submits that the ambiguity in the drafting of the different 
language versions of the text should be resolved in a manner that makes them consistent with one 
another, and which acknowledges that economic feasibility is a general qualification of (or limitation 
on) the obligation for major suppliers to provide interconnection on reasonable and transparent terms, 
conditions and rates.771 
6. Requirements of Section 1 
5.61 According to the European Communities, Mexico  is clearly right that Section 1 imposes an 
obligation of means, not of result.772  Section 1 requires Mexico to maintain appropriate measures for 
the purpose of preventing major suppliers from enga ging in or continuing anti-competitive practices 
and does not require Mexico to open all its teleco mmunication markets.  In view of the above, the 
European Communities contends that if Mexi co chooses not to allow competition between 
telecommunication operators on a certain matter, there is no scope for anti-competitive practices 
relating to that matter.  In that regard, the Eur opean Communities points out that it is not possible to 
restrict competition where competition is not allowed.773  
5.62 In view of the above, the European Commun ities contends that one  matter that could 
constitute an anti-competitive practice would be the negotiation by the major supplier of an 
accounting rate that restricts competition by other suppliers, because it would be unprofitable for them 
and this must be the subject of competitive safeguards.774 
5.63 The European Communities submits that one an ti-competitive practice that the United States 
seems to be complaining of is the fixing of prici ng and the high level thereof.  However, it argues the 
fixing of a uniform price cannot be an anti-competitive practice since uniform prices are required by law.  In its view, the same goes for the revenue sh aring system ("proportional return") since this is 
also mandated by law.
775 
5.64 The European Communities submits that Sec tion 1 of the reference paper does create 
obligations in sectors that are not covered by specific commitments. 776 
7. Applicability of the Annex on Telecommunications 
5.65 The European Communities recalls it shares the United States view that the GATS Annex on 
Telecommunications was meant to benefit not onl y non-telecom providers, and providers of value-
added telecommunications, but also providers of basic telecommunications.  The European 
Communities considers that to restrict the scope of  the Annex to non-telecom providers would fail to 
give effect to one of the two distinct roles of the telecommunications sector.777 
                                                      
771 See European Communities' replies to questions from the Panel, paragraphs 34-39. 
772 See European Communities' third party submission, paragraph 48. 
773 See European Communities' third party submission, paragraph 49. 
774 See European Communities' third party submission, paragraph 52. 
775 See European Communities' third party submission, paragraph 53.  
776 See European Communities' third party submission, paragraph 56. 
777 See European Communities' third party submission, paragraph 58. WT/DS204/R 
Page 122  
 
5.66 The European Communities furthers point out that the GATS Annex on Telecommunications 
was never meant to provide wider market access obligations for WTO Members than those established in their Schedules as regards basic telecommunications.
778 
5.67 According to the European Communities ev en though the Annex on Telecommunications 
does not create market access commitments that are not  contained in the Schedules, it is intended to 
facilitate the exploitation of market access comm itments that are contained in the Schedules.779  The 
European Communities also recalled that the obligations contained in the Annex only relate to " public  
telecommunications transport networks and ser vices", which means "any telecommunications 
transport service required, explicitly or in effect, by a Member to be offered to the public 
generally ".780 
8. The notion of likeness  
5.68 With respect of the notion of likeness, the Eu ropean Communities asserts that footnote 15 
relates only to the meaning of the term non-discr iminatory in the Annex on Telecommunications and 
is not relevant to the interpretation of "like service s and service suppliers" as they appear in Articles II 
and XVII of the GATS.  In the European Communiti es' view, footnote 15 cannot in the absence of a 
clear textual indication to the contrary, be relevant  to the interpretation of "like services and service 
suppliers," especially since this must have the sa me meaning for all service sectors.  The European 
Communities further points out that the existing case-law ( Canada – Autos781) clearly suggests that 
the notion of "like services and service suppliers" re quires a comparison of the activity involved and 
that the mode of supply is irrelevant.782 
D. JAPAN 
1. Validity for an action by the United States 
5.69 Japan contends that the Panel should first dete rmine whether it is proper for the United States 
to use the dispute settlement pro cedure under the DSU to object to "interconnection" rates charged by 
Telmex based on the accounting rate system.783 
5.70 Japan submits that the "Group" addressed the subject of matters that may not give rise to an 
action before a panel in its repor t dated 15 February 1997, which includes the application of the 
accounting rate system.784 
5.71 Japan further points out that the position of th e "Group" as to whether accounting rates could 
give rise to an action by Members under the DSU is further addressed in the report dated 10 March 
1997, where the Chairman stressed that the report was merely an understanding, which could not and was not intended to have binding legal force and di d not take away from Members the rights they have 
under the DSU.
785 
5.72 Japan considers that the "understanding" of the "Group" concerning the proper scope and 
treatment of "accounting rates" is not entirely clear.  In Japan's view it is not clear whether the "rates" 
                                                      
778 See European Communities' third party submission, paragraph 59. 
779 See European Communities' third party submission, paragraph 60. 
780 See European Communities' third party submission, paragraphs 62-63. 
781 See Panel Report, Canada – Autos . 
782 See European Communities' oral statement, paragraphs 28- 29. 
783 See Japan's third party submission, paragraph 5. 
784 See Japan's third party submission, paragraph 6 where it refers to the Report of the Group on Basic 
Telecommunications of 15 February 1997, S/GBT/4. 
785 See Japan's third party submission, paragraph 7 where it refers to the Report of the Group on Basic 
Telecommunications of 10 March 1997, S/GBT/M/9.  WT/DS204/R 
 Page 123 
 
 
described in Section 2.2(b) of the Reference Paper in  fact cover accounting rates, and are thus capable 
of being disputed under the DSU mechanism.786 
5.73 According to Japan, given the lack of clarity concerning the proper scope and treatment of 
accounting rates, the panel needs to determine whet her it is proper for the United States to bring 
before the panel its objections concerning  the accounting rates negotiated by Telmex.787 
2. The term "cost oriented" 
5.74 According to Japan, the meaning of the term " basadas en costos ", as used in Mexico's 
Reference Paper, does not automatically apply to the term " cost-oriented " that appears in the 
Reference Paper of other Members.  Japan asserts that in its submission the United States provides its interpretation of the term " basadas en costos ", as used in the context of Mexico's Reference Paper.  
Japan further points out that in the course of its s ubmission, the United States at times appears to use 
the terms " basadas en costos ", "cost based" and "cost-oriented" interchangeably, and implies that 
these terms have equivalent meanings.
788 
5.75 Japan submits that if the meaning of " basadas en costos " is based upon  the term's alleged 
English language equivalent, " based in cost ", such meaning in Japan's view cannot automatically be 
applied to the term " cost oriented " that appears in the Reference Papers which are attached to the 
Schedules of specific commitments of other Memb ers, which chose English to be authentic.789 
3. The term "cost-based" 
5.76 Japan submits that in the English language Re ference Paper of many Members, the English 
language equivalent of the term " basadas en costos " appears as "cost-oriented".  Japan points out that 
the term "cost-oriented" is not defined in any Me mber's Reference Paper, and its meaning is not 
addressed in any other part of the WTO Agreement or  in the report of any panel or Appellate Body.  
Japan considers that "cost-oriented" rates has an or dinary meaning that is less specific, and therefore 
less constraining, than "cost-based" rates, "cost-equiva lent" rates, or rates calculated by application of 
the total element long run incremental costs adopted in the United States.790 
5.77 In Japan's view the term "cost-oriented" must basically be interpreted in accordance with its 
ordinary meaning as stipulated under Article 31(1) of the Vienna Convention.  Japan further points 
out that the determination of whether interconnection rates are "cost-oriented" cannot be limited to an 
examination of only the specific manner in which interconnection rates are established.791 
5.78 According to Japan the implementation of an interconnection rate system that meets the 
general principles of the Reference Paper is left  to the discretion of each Member's government.792 
5.79 Japan notes that, according to the negotiating hist ory of the Reference Paper,  Members were 
not only unable to agree on an exact definition of "cost", but also avoided closely binding themselves 
to the term by using the expression "cos t-oriented" rather than "cost-based".793 
                                                      
786 See Japan's third party submission, paragraph 9. 
787 See Japan's third party submission, paragraph 10. 
788 See Japan's third party submission, paragraphs 12-13. 
789 See Japan's third party submission, paragraph 14. 
790 See Japan's third party submission, paragraph 15. 
791 See Japan's third party submission, paragraph 16 where it refers to the Vienna Convention on the 
Law of Treaties. 
792 See Japan's third party submission, paragraph 18. 
793 See Japan's third party submission, paragraph 21. WT/DS204/R 
Page 124  
 
5.80 Japan considers that Members adopted the term "cost-orient ed" during the Negotiations on 
Basic Telecommunications ("NBT") on account of its ambiguity. 
794 
4. Election of a uniform accounting rate  and proportionate return system 
5.81 Japan submits that the Spanish term "razonabl es, económicamente factibles" grants Mexico 
additional flexibility in determining interconnection ra tes.  According to Japan , in the absence of any 
argument concerning the inapplicability of the quali fication created by the term "económicamente 
factibles", the panel has insufficient information before it to find that the interconnection rates 
imposed by Mexico are not "razonables".795  
5.82 Japan recalls that following the conclusion of the negotiations on basic telecommunications, a 
number of Members liberalized aspects of their acc ounting rate systems.  However, many Members 
(including Japan and the United States), continue to  maintain pre-existing accounting rate systems for 
settling interconnection rates with carriers from certain countries.  Japan points out that it applies such 
pre-existing system only to non-WTO Member carri ers while the United States applies it to carriers 
with market power, either WTO-Member or non-Me mber.  According to Japan, these systems are 
similar to Mexico's accounting rate system presently under discussion.796 
5.83 In Japan's view it is hard to determ ine that Mexico is acting unreasonably per se  insofar as it 
elects to maintain a uniform accounting rate and pr oportionate return system similar to that which 
continues to be used by many Members (including  the United States) to settle rates with certain 
countries.  According to Japan, the United States ha s to provide a compelling argument that the mere 
maintenance of a uniform accounti ng rate and proportionate return sy stem triggers a violation of 
Section 2.2(b) of the Reference Paper.  Neverthel ess, Japan notes its strong concern with Mexico's 
indiscriminate practice of applying uniform accoun ting rate and proportionate return system in 
determining accounting rates with carriers from every country, regardless of whether the country in question possesses multiple carriers or has a competitive environment.
797 
                                                      
794 See Japan's third party submission, paragraph 22. 
795 See Japan's third party submission, paragraph 24. 
796 See Japan's third party submission, paragraph 26. 
797 See Japan's third party submission, paragraph 27.  WT/DS204/R 
 Page 125 
 
 
VI. INTERIM REVIEW 
6.1 On 10 July 2003, pursuant to Article 15.1 of the DSU, the Panel issued the draft descriptive 
part of its Report.  As agreed, on 25 July 2003 both parties commented on the draft descriptive part.  The Panel issued its Interim Report on 21 Novemb er 2003.  On 15 December 2003, pursuant to 
Article 15.2 of the DSU, the United States and Mexi co provided comments and requested the revision 
and clarification of certain aspects of the Interim Report.  None of the parties requested that the Panel 
hold a further meeting with the parties.  In the absen ce of a meeting and further to paragraph 16 of the 
Panel's Working Procedures
798, the parties were given until 15 Ja nuary 2004 to submit further written 
comments on the other party's Interim Review comments.  Only the United States filed further comments on that date. 
6.2 Following the comments of the parties, the Panel has reviewed the claims, arguments and 
evidence submitted by the parties during the panel pr ocess.  Where it considered it appropriate to 
ensure clarity and avoid misunderstandings, the Pane l has revised the findings section of its Report, 
including the correction of typographical and editorial  mistakes.  It is important to note that in the 
findings section of a Report, a panel cannot be expected  to refer to all the statements and arguments of 
the parties.  Failure to do so does not therefor e imply that the Panel has ignored statements or 
arguments of the parties.  Taking into considerati on this last statement, the Panel has addressed the 
following comments raised by the parties. 
6.3 Generally, the United States' comments concern some  additions or deletions to the text of the 
findings as a matter of clarity.  The United States  notes that it disagrees with the Panel's conclusion 
that Mexico's Schedule allows Mexico to prohib it market access for the cross-border supply of the 
services at issue into Mexico over capacity leased by the supplier (i.e., on a non-facilities basis) in 
Mexico.  However, the United States states that it woul d not repeat its arguments in this respect in the 
comments provided to the Panel on the Interim Report. 
6.4 On the other side, Mexico's comments refer to precise aspects of the Interim Report, including 
the identification of some evidence,  the clarification of some definitions and the identification of the 
services at issue.  Mexico submits that the review  of all these aspects will help to clarify its position 
on certain issues. 
6.5 Mexico notes in its submission dated 15 December  2003 that in paragraph 7.6 of the Interim 
Report (which has been deleted in this Report)  and corresponding footnote the Panel identifies the 
services at issue in this dispute as "certain basi c public telecommunications services" referring to a 
definition contained in paragraph 7.32 of the Interi m Report to describe them.  According to Mexico, 
the text quoted in paragraph 7.32 is from the definition of "Public telecommunications transport 
services"  in Article 3(b) of the Annex on Telecomm unications.  Mexico further states that it 
understands that the Ministerial Decision on Negot iations on Basic Telecommunications refers to 
"basic telecommunications" as "telecommunications transport networks and services" , but states that 
the latter term is not defined in the GATS Anne x on Telecommunications.  According to Mexico, 
Article 3 of the Annex on Telecommunications sets ou t two distinct definitions for the terms "Public 
telecommunications transport service" and "Public telecommunications transport network".  Mexico 
states that it has argued that the services at issue in  this dispute are transmission or transport services 
of customer-supplied information or data.  In partic ular, Mexico requests that the Panel clarifies its 
                                                      
798 Paragraph 16 of the Panel's Working Procedures reads as follows:  "Fo llowing issuance of the 
Interim Report, the parties shall have no less than 7 days  to submit written requests to review precise aspects of 
the Interim Report and to request a further meeting with th e Panel.  The right to request such a meeting must be 
exercised no later than at that time.  Following recei pt of any written requests for review, in cases where no 
further meeting with the Panel is requested, the parties shall have the opportunity within a time-period to be 
specified by the Panel to submit written comments on the other parties' written requests for review.  Such 
comments shall be strictly limited to referenci ng the other parties' written requests for review." WT/DS204/R 
Page 126  
 
definition of "basic public telecommunications services" and its description of the nature of the services at issue.  The United St ates alleges in its submission dated 15 January 2004 that it is not 
necessary for the Panel to provide a precise definition of the broad term "basic public telecommunications services."  According to the Unite d States, in order to resolve the dispute, the 
Panel needs only define the specific services to wh ich the claims relate and the services subject to 
Mexico's commitments.  In consideration of th ese comments, the Panel modified footnotes 745 and 
753 (footnotes 829 and 840 of this Report) to clarify the link between "basic public telecommunications services" and the definition of the term "public telecommunications transport 
services". 
6.6 With regard to paragraph 7.11 (paragraph 7.10 of this Report) Mexico disagrees with the 
translation of ILD Rule 2:XI and requests it to be m odified.  It also requests to add a sentence at the 
end of paragraph 7.11 (paragraph 7.10 of this Report)  in order to include a reference to ILD Rule 
2:VIII according to its own translation.  The Unite d States asserts that Mexico has not previously 
disputed the English-language copy of the ILD Ru les provided to the Panel by the United States in 
Exhibit US-1 and that the same translation of IL D Rule 2:XI was provided in paragraph 2.8 of the 
draft descriptive part and was not contested by Me xico.  The United States submits that it considers 
accurate its own translation of the ILD Rules and that it does not consider accurate the translation 
offered by Mexico.  The Panel declines to amend th e translation of ILD Rule 2:XI as requested by 
Mexico because the text conforms with the transl ation provided by the WTO Secretariat of the ILD 
Rules (annexed to the Report) and does not appear , in substance, to differ from the modification 
proposed by Mexico.  As regards Mexico's request to add a sentence at the end of paragraph 7.11 
(paragraph 7.10 of this Report), the Panel consider s the additional language suggested by Mexico to 
refer to a matter already addressed in paragr aph 7.12 (paragraph 7.11 of this Report). 
6.7 Mexico considers that in para graphs 7.23-7.25 (paragraphs 7.22- 7.23 and 7.26 of this Report), 
the Panel has summarised the arguments of the Un ited States on what constitutes the service at issue 
and the manner in which they are provided, but has not summarised the arguments of Mexico.  
Mexico requests the Panel to summarise in paragra phs 7.23 to 7.25 (paragraphs 7.22-7.23 and 7.26 of 
this Report), its description of the precise nature of the services at issue and the manner in which those 
services are supplied.  Mexico also requests the Pane l to clarify its description of the nature of the 
services at issue and to make a finding on whethe r the services at issue constitute transport and 
transmission services.  The United States submits that  beyond identifying the service sectors at issue 
as including voice telephony, circuit-switched data transmission and facsimile services, the Panel also 
engaged in a detailed review of the definition of those services sectors according to, among other 
things, the Central Product Classification codes included in the sector column of Mexico's Schedule.  According to the United States it is incorrect to suggest that the Panel has not directly addressed 
Mexico's argument that the services at issue were  only transmission and transport as it is rejected in 
paragraph 7.36 of the Interim Report.  In the Un ited States' view, the Panel's discussion extends 
beyond paragraphs 7.23-7.25 (paragra ph 7.22-7.23 and 7.26 of this Report) to include the discussion 
culminating in paragraph 7.46 (paragraph 7.45 of th is Report).  The United States also submits that 
although paragraph 7. 46 (paragraph 7.45 of this Report) alr eady provides a concise description of the 
services at issue, the Panel may consider providing a precise definition of the "services at issue", at the end of that section.  In view of Mexico's concerns, the Panel has modified the discussion of "services at issue" to clarify that this term on its own focuses on the service sectors, and not on the 
modes of supply raised in the United States' claim. 
6.8 Mexico submits that it did not make the argumen t referred by the Panel in paragraph 7.27 of 
the Interim Report.  According to Mexico, it argued that in order for a United States-based supplier to 
supply services from the United States territory into the Mexican territory, it must supply telecom transport services over the whole of the "full circuit"  without having a commercial presence within the 
meaning of GATS Article XXVIII(d).  Mexico further submits that it also explained how a full circuit 
regime does not require commercial presence within the meaning of the GATS.  Mexico requests the 
Panel to replace the fourth sentence of paragraph 7. 27 of the Interim Report and to add a new sentence  WT/DS204/R 
 Page 127 
 
 
after the third sentence of the same paragraph.  As regards Mexico's alle gation, the United States 
considers that it is entirely reasonable for the Panel to have understood that under Mexico's 
interpretation, a foreign service supplier must "operate " in some sense in a foreign territory to provide 
scheduled services via  the cross-border mode of supply.  According to the United States, the Panel 
may clarify this by moving the fourth sentence of paragraph 7.27 of the Interim Report and making it 
the first sentence of paragraph 7.28 of the Interi m Report, including some new editing.  The United 
States suggests that it may be helpful for the Panel to  adopt a uniform formulation such as "operates in 
some fashion, or is located" when  it uses the word "present", "pr esence", "operate" or "located" in 
diverse paragraphs of the Interim Report.  The United States submits that Mexico's assertion that the Panel did not address the argument made by Mexico  is not accurate, since the Panel did in fact 
address and reject the relevance of Mexico's argument  at paragraph 7.39 of the Interim Report.  For all 
these reasons the United States asks the Panel to rej ect Mexico's request to add an additional sentence 
to paragraph 7.27 of the Interim Report.  The Panel has amended the text of paragraphs 7.27 and 7.28 
of the Interim Report to clarify Mexico's argument  and adopted a uniform formulation regarding the 
word "present", "presence" etc., ac companied by an explanatory footnote, to clarify that the terms 
were not intended to refer to "commercial presence". 
6.9 In relation to paragraph 7.28 of the Interim Repor t, Mexico submits that the issue before the 
Panel was whether the services provided by United Stat es-based suppliers in the circumstances of this 
dispute cross the border into Mexico, and not whet her cross-border "occurs only if the supplier itself 
operates, or is present, in the territory of both Members".  Mexico requests that paragraph 7.28 of the Interim Report be accordingly replaced.  In refere nce to the Mexico's comments, the United States 
submits that the reason the Panel addressed the ques tion of whether "cross-border 'occurs only if the 
supplier itself operates, or is present, in the territo ry of both Members'" is because Mexico made that 
argument.  The United States requests that the Panel rejects the replacement text proposed by Mexico 
for paragraph 7.28 of the Interim Re port.  In consideration of  Mexico's comments, the Panel modified 
the wording of paragraph 7.28 of the Interim Re port to define in more precise wording the "issue 
before the Panel" referred to in the paragraph. 
6.10 Mexico, for the same reasons explained in its  comments on paragraph 7.27 of the Interim 
Report, requests that the Panel clarifies whether by using the word "present" in  paragraphs 7.28, 7.32, 
and 7.35 of the Interim Report, and the word "pr esence" in paragraphs 7.39, 7.40 and 7.88 of the 
Interim Report (paragraphs 7.39, 7. 40 and 7.90 of this Report), it meant "commercially present" and 
"commercial presence" within the meaning of the GATS.  Regarding the use of these terms, the 
United States refers the Panel to its discussion re garding Mexico's comments on paragraph 7.27 of the 
Interim Report. The approach taken by the Panel to  address the question posed by Mexico is described 
above in the paragraph dealing with Mexico's in itial comment regarding the use of these terms in 
paragraph 7.27 of the Interim Report.  
6.11 As regards paragraph 7.36 of the Interim Re port, the United States requests the Panel to 
rectify a typographical error when referring to "t elephony services".  The Panel notes that the term 
"telephony" does not appear in W/120 or the CPC.  Ho wever, it is used in the translation of Mexico's 
scheduled service commitments, in the ITU contexts, a nd by the parties to this dispute.  The Panel 
considers appropriate the suggested modification.  Fo r clarification, the Panel also added a footnote to 
paragraph 7.45 (paragraph 7.43 of this Report) st ating that it considers the terms "telephony" and 
"voice telephony" (as used in the English translati ons of Mexico's Schedule and the claims by the 
United States) to be equivalent to the terms "t elephone services" and "voice telephone services" (as 
used in the GATS sectoral classification the CPC). 
6.12 Mexico submits that the Panel refers to  "communications services supplied between 
Members" in paragraph 7.38 of the Interim Report.   Since, according to Mexico, the United States has 
limited its challenge to "certain basic public te lecommunications services", Mexico requests that the 
Panel clarifies what is meant by the terms "commu nications services" and make  additional findings on 
whether and how such services are supplied by Unit ed States-based suppliers on a cross-border basis WT/DS204/R 
Page 128  
 
from the United States into Mexico .  According to the United St ates, the Panel's reference to 
"communications services" is equivalent to "teleco mmunications services," but suggests that the Panel 
may clarify it.  With respect to Mexico's comments on  the interpretation of the services at issue in this 
dispute, the United States recalls its discussion rega rding Mexico's comments on paragraphs 7.23-7.25 
(paragraphs 7.22-7.23 and 7.26 of th is Report).  To address Mexico's concern, the Panel modified the 
first sentence of paragraph 7.38 of the Interim Re port, replacing the word "communications" with 
"basic telecommunications". 
6.13 Mexico also notes that in paragraph 7.39 of th e Interim Report the Panel states that "the CPC 
definition of the basic telecommunications services at issue provides for an especially high degree of 
interaction between operators on each side of the bor der".  Mexico requests that the Panel identifies 
the specific definition to which it refers.  Mexico re quests that the Panel clarifies its statement in the 
fourth sentence of the paragraph and explain the le gal basis for that statement.  With respect to 
Mexico's comment that it "fails to see which CPC definition provides for interaction between 
operators 'on each side of the border'," the United St ates finds entirely clear that the CPC definition to 
which the Panel refers is CPC 75212 and that the Panel is applying the definition to the specific facts 
of the dispute.  The Panel addressed Mexico's con cern by amending paragraph 7.39 of the Interim 
Report to specify more precisely the reasoning that leads us to consider that the CPC definition 
foresees an especially high degree of interaction also  between operators located in different Members. 
6.14 As regards paragraph 7.41 of the Interim Re port (paragraph 7.41 of this Report), Mexico 
recalls that the Panel states that "…all telecommunications traffic currently crossing borders would then fall outside the scope of the GATS".  Mexico un derstands from this statement that the Panel is of 
the view that "telecommunications traffic currently  crossing borders" is within the scope of the 
GATS.  Mexico requests that the Panel clarifies wh at is meant by "traffic" and the legal basis for 
referring to that term.  The United States consider s that Mexico's comments speak to its arguments 
about the interpretation of the services at issue in this  dispute.  Therefore, the United States refers the 
Panel to its discussion regarding Mexico's comment s on paragraphs 7.23-7.25 (paragraphs 7.22-7.23 
and 7.26 of this Report).  Regarding Mexico's co mment on the term "traffic", the United States 
maintains that the Panel's reference to "telecommuni cations traffic currently crossing borders" is clear 
but suggests that the Panel could amend it to refer to "telecommunications services currently crossing 
borders."  To address Mexico's concern the Panel ha d modified the third sentence of paragraph 7.41 of 
the Interim Report (paragraph 7.41 of this Report)  to refer telecommunications "services". 
6.15 Mexico contends that paragraph 7.44 of th e Interim Report implies that under Mexico's 
arguments, the cross-border supply of basic teleco mmunications services would not be technically 
feasible.  According to Mexico this is not the argument it made.  Mexico states that it did not argue that the cross-border supply of basic telecomm unications services required commercial presence, but 
rather explained how cross-border supply could occu r in a "full-circuit" regime.  Under Mexico's 
arguments, cross-border trade in telecommunications transport service is technically feasible and does 
not require "commercial presence" within the m eaning of the GATS.  For these reasons, Mexico 
requests that the Panel modifies paragraph 7.44.  In the United States' view, the first sentence of this 
paragraph expresses the Panel's conclusion that the examples  and definition of "cross-border" supply 
asserted by Mexico would virtually exclude from th e cross-border supply of facilities-based services 
all situations in which the supplier does not have a commercial presence.  According to the 
United States, it was quite reasonable for the Panel to  conclude that the examples of a "full-circuit" 
regime cited by Mexico usually would only occu r through commercial presence and suggests that the 
Panel rejects Mexico's proposed modifications.  In  view of Mexico's comments, the Panel deleted 
paragraph 7.44, since the reasoning in that paragr aph relied to a large extent on a supposition that 
Mexico's argument  did imply that commercial presence was virtually necessary to conduct cross-
border supply on a facilities basis.   
6.16 As regards paragraph 7.45 (paragraph 7.43 of this  Report) Mexico requests the Panel to add a 
sentence at the beginning, in order to better reflect its position.  The United States notes that Mexico  WT/DS204/R 
 Page 129 
 
 
provides no citation to an earlier submission in which it raised the argument "that there is a relevant 
distinction between services supplied 'through' th e use of telecommunications transport service and 
telecommunications transport service itself," and belie ves that Mexico has not previously made this 
argument.  Moreover, despite Mexico's attempt to introduce the argument, the purported distinction is 
not relevant to the purpose of the quotation, which is  to explain that the Explanatory Note supports the 
view that cross-border supply does not imply the pr esence of the service supplier in the market where 
the service is delivered.  For these two reasons, the United States asks the Panel to reject Mexico's 
comment and proposed text.  The Panel declined Mexico's request because it considers that the 
proposed addition is not directly related to the rest  of paragraph 7.45 (paragraph 7.43 of this Report). 
6.17 Mexico claims that the Panel refers to the "ser vices at issue" in paragraph 7.46 of this Report 
without further explanation and concludes that they  are supplied cross-border within the meaning of 
the GATS.  Mexico requests that the Panel clarify wh at is the precise nature of the services at issue 
and explain how they are supplied cross-border.  According to the United St ates, Mexico's comments 
reiterate its arguments about the interpretation of th e services at issue in this dispute and therefore 
refers the Panel to its discussion regarding Mexi co's comments on paragraphs 7.23-7.25 (paragraphs 
7.22-7.23 and 7.26 of this Report).  Regarding Mexi co's comments, the Panel notes that it has already 
clarified what is meant by the "services at issue".  And that paragraph 7.46 of this Report is a conclusion intended to summarise the preceding analysis rather than to repeat it. 
6.18 Mexico submits that the Panel statement in pa ragraph 7.48 (paragraph 7.47 of this Report) 
does not accurately reflect Mexico's arguments.  Me xico refers to its arguments summarized at 
paragraphs 63 to 76 of its second written submission, where it explained its view that in order to 
ascertain the nature of Mexico's mode 1 commitment s, it is first necessary to define the services at 
issue.  According to Mexico, in order to determ ine whether its market access commitments allow the 
cross-border supply  of such services into Mexico , the Panel had to determine whether Mexico's 
Schedule permits public transmission or transport services provided by United States suppliers to 
cross the border into Mexico.  Mexico argues that it has not inscribed specific commitments that allow 
such trade, because of the limitati ons inscribed in its Schedule.  Mexico recalls that it argued that by 
inscribing commercial presence and nationality re quirements in its mode 1 column, Mexico has 
prevented the suppliers of other WTO Members (both facilities-based and non-facilities-based) from 
supplying telecommunications transport services cross- border into Mexico.  Referring the Panel to its 
discussion regarding Mexico's comments on paragra phs 7.23-7.25 (paragraphs 7.22-7.23 and 7.26 of 
this Report), the United States states that, in para graphs 7.48-7.49 (paragraphs 7.47-7.48 of this 
Report), the Panel has accurately summarised Mexico's arguments on the definition of the services at 
issue and whether those services can be provided on a cross-border basis.  The Panel declined to 
amend the paragraph on the basis of  Mexico's co mment because it considered that paragraphs 7.48-
7.49 (paragraphs 7.47-7.48 of this Report) together do reflect, in summary, the points that Mexico explains above.   
6.19 Mexico submits that the Panel's statement in pa ragraph 7.49 (paragraph 7.48 of this Report) 
does not accurately reflect Mexico's arguments.  According to Mexico, its argument that the limitations inscribed in its Schedule make it impossi ble for cross-border supply to take place must be 
read in conjunction with its submissions on the nature  of the services at issue.  Mexico also notes that, 
as drafted, the first sentence of paragraph 7.49 (par agraph 7.48 of this Report) suggests that Mexico 
has argued that it did not undertake any commitment in respect of basic telecommunications.  Mexico 
submits that, on the contrary, it has argued that it has scheduled a "standstill" under mode 1.  In 
Mexico's view, this constituted a commitment, but di d not accord market access to suppliers for cross-
border supply.  Mexico further submits that it inscr ibed commitments under mode 3.  Mexico requests 
that the first and second sentence of paragraph 7.49 (paragraph 7.48 of this Re port) be appropriately 
modified.  According to the United States, Mexi co asserts that the Panel has mischaracterized 
Mexico's argument by stating that it "did not  undertake any commitment in respect of basic 
telecommunications."  The United States notes that Mexico did in fact make this argument and 
considers that the Panel has accurately summarise d Mexico's arguments.  In view of Mexico's WT/DS204/R 
Page 130  
 
concern, the Panel modified the first sentence of paragraph 7.49 (paragraph 7.48 of this Report) to 
more clearly state the Panel's understanding of Mexico's arguments. 
6.20 As regards paragraphs 7.51-7.61 (paragraphs 7.58-7.68 of this Report), the United States 
submits that in several places in this section the read er could be left with the mistaken impression that 
the Panel has used the Model Schedule and Chairman 's Note in a manner other than to confirm the 
ordinary meaning of a term, as provided for in the customary rules of interpretation of public 
international law reflected in the Vienna Conventio n on the Law of Treaties.  The United States 
particularly recalls that the use of the words "inter pret" and "interpretative" in paragraphs 7.51, 7.57, 
and 7.61 of the Interim Report may lead to this  mistaken impression.  The United States further 
submits that the Panel has correctly stated its appr oach in paragraphs 7.15-7.17 (paragraphs 7.14-7.16 
of this Report).  In order to avoid any potential mistaken impressions, the United States suggests that 
the Panel more precisely indicates that these documents are simply being used to confirm the ordinary 
meaning of the terms employed.  In view of the United States' comments, the Panel considered it 
appropriate to modify the section concerned to iden tify more clearly its application of the rules of 
interpretation of the Vienna Convention on the Law of Treaties to the Model Schedule and the 
Chairman's Note with regard to Mexico 's commitments on the services at issue. 
6.21 The United States, in connection with the preceding comment, suggests modifications to the 
first sentence of paragraph 7.61 (paragraph 7.67 of th is Report).  According to the United States, the 
second sentence of paragraph 7.61 (paragraph 7.68 of this Report) appears to address exclusively the 
interpretation of schedules which are not at issue in this dispute.  Accordingl y, it suggests that the 
sentence be omitted from the final report.  As regard s the first sentence of paragraph 7.61, the Panel 
changed the wording but did not use the formulati on specified by the United States.  On the second 
suggestion, the Panel disagrees with the United Sates.   The Panel declined the modification requested 
by the United States because it considers it to be su fficiently clear that, in citing an example of a 
schedule without categories, the Panel is simply illustrating the importance of the implications of the Model Schedule and the Chairman's Note, and not indi cating how the Panel would rule with respect to 
such a schedule. 
6.22 With regard to paragraph 7.77 (paragraph 7.79 of  this Report) Mexico requests that the Panel 
clarifies whether it is the "international traffic" or  the transportation or transmission of such traffic 
that is supplied cross-border.  According to the United States, Mexico's comment essentially repeats 
its arguments about the interpretation of the services at issue in this dispute, and its insistence that 
those services are not provided on a cross-border b asis.  The United States refers the Panel to its 
responses to Mexico's comments on paragraphs 7.23- 7.25 (paragraphs 7.22-7.23 and 7.26 of this 
Report) and 7.27 of the Interim Report.  According to  the United States, further clarification of those 
issues is neither required nor appropriate in this paragraph.  The Panel declines Mexico's request 
because it considers the relevance of Mexico's requested clarification to be unclear but believes that it 
appears to make a link with Mexico's previously  rejected definition of cross-border supply.  
6.23 Mexico also requests that the Panel clarifies what is meant by the term "cross-border service 
suppliers" in the last sentence of paragraph 7.77 (p aragraph 7.79 of this Repor t).  The United States 
believes the meaning of the quoted phrase in the fi nal sentence is sufficiently clear, but suggests the 
Panel to consider changing the te rm to "suppliers of scheduled services on a cross-border basis".  
Although the Panel considers the meaning of the phrase to be clear, the Panel accepts the suggestion 
made by the United States to modify this term in paragraph 7.77 (paragraph 7.79 of this Report). 
6.24 Mexico requests that in paragraph 7.88 (parag raph 7.90 of this Report) the Panel clarifies 
what is meant by the terms "potential cross-border supplier" and the "supply of services by [the cross-
border] mode".  The Panel considers the meaning of the phrases concerned to be sufficiently clear in their context and, thus, declines Mexico's request fo r clarification.  However, the Panel notes that the 
word "potential", was meant simply to indicate th at no cross-border supply into Mexico is actually 
permitted.  To avoid any misunde rstanding, the Panel has deleted the word "potential".    WT/DS204/R 
 Page 131 
 
 
6.25 Mexico requests the Panel to add a new sentence to paragraph 7.108 (paragraph 7.110 of this 
Report) in order to fully reflect Mexico's position on the use of ILD Rules to define "interconnection".  
The United States considers Mexico's suggested te xt misplaced in a paragraph that describes the 
conclusions of the Panel rather than the arguments of the Parties.  The United States therefore requests 
that the Panel rejects Mexico's proposed text.  The Panel considers the paragr aph concerned to contain 
the reasoning of the Panel, not the arguments of th e parties and, therefore, declines the modification 
requested by Mexico. 
6.26 With regard to paragraph 7.111 (paragraph 7.113 of this Report) Mexico requests the Panel to 
clarify how competition occurs in the context of  an international setting and to explain what 
constitutes the "services offered in each others' mark et".  The United States believes that the meaning 
of the quoted sentences is sufficiently clear.  The Panel does not consider the point referred to by 
Mexico to be unclear and, thus, declin es to amend the paragraph concerned.  
6.27 Mexico notes that its comment on paragraph 4. 54 of the descriptive part of the Report 
released on 6 June 2003 (paragraph 4.56 of this Re port) pointed out that, in response to a specific 
request from the Panel for a list of the differences  between accounting rate agreements and domestic 
interconnection agreements, Mexico had submitted copies of standard agreements and asked the Panel 
to reproduce the list of the important differences identified by Mexico.  Mexico claims that this 
comment is not reflected in the Interim Report.  Mexico further notes that at paragraph 7.112 (paragraph 7.114 of this Report), the Panel states that, "[a]fter reviewing the evidence," it agrees with the United States that there are no significant differences between accounting rate and domestic 
interconnection agreements.  However, Mexico subm its that it is not aware that the United States 
submitted any evidence in response to the pertinent question of the Panel.  For these reasons, Mexico 
requests that the Panel identifies the evidence on which it relied in making the finding in paragraph 
7.112 (paragraph 7.114 of this Report), and that it modifies paragraph 7.112 (paragraph 7.114 of this 
Report) to accurately reflect Mexico's position by listing the differences between the two types of 
contracts identified by Mexico.  With respect to  Mexico's request regarding the phrase "[a]fter 
reviewing the evidence," the United States observes th at it is within the Panel's discretion to have 
found that arguments raised by the United States de monstrated that Mexico's arguments and evidence 
lacked relevance and probative value.  As rega rds the descriptive part, the Panel had not accepted 
Mexico's suggestion made earlier because it consider ed that the paragraph concerned adequately  
summarised Mexico's submission.  However, in view  of the importance Mexico has attached to this 
point, the Panel has included a new sentence to para graph 4.56 of this Repor t listing the differences 
between accounting rate agreements and domestic in terconnection agreements described by Mexico.  
With regard to the contested phrase the Panel agrees  to clarify it, in its own language, to avoid any 
misinterpretation.  The Panel also accepted a Un ited States' suggestion to insert a citation of the 
specific source of the United States' statements in  paragraph 7.112 (paragraph 7.114 of this Report). 
6.28 With regard to paragraph 7.114 (paragraph 7.116  of this Report) Mexico submits that the 
Panel considers only the evidence provided by the Un ited States.  Mexico suggests this paragraph to 
be amended to fully reflect Mexico's position by adding a new sentence after the first one.  The 
United States considers Mexico's suggested text to  be misplaced since the paragraph provides the 
findings of the Panel rather than a recitation of argum ents of the parties.  The Panel declines Mexico's 
request because paragraph 7.114 (paragraph 7.116 of this Report) contains the Panel's reasoning, and 
sets out what the Panel considers are the relevant  arguments for arriving at its conclusion.   
6.29 
According to Mexico, in paragraph 7.117 (parag raph 7.119 of this Report) the Panel does not 
deal with the evidence submitted by Mexico that the current contractual arrangements lowering the 
accounting rate have been implemented by Mexican  and United States' carriers notwithstanding that 
the United States' FCC has refused to approve them and still officially lists the United States-Mexico 
accounting rate as US$0.38 (equating to a US$0.19 settleme nt rate).  In Mexico's view, this evidence 
verifies that, to enforce an accounting rate arrange ment, a domestic body would need jurisdiction over 
parties beyond its border.  Mexico requests that th e Panel adds a new sentence at the end of paragraph WT/DS204/R 
Page 132  
 
4.67 of the Interim Report.  According to the Unite d States, Mexico raises an argument, with respect 
to the position of the United States' FCC on United States-Mexico accounting rates, that Mexico did 
not make during the Panel proceedings.  The Un ited States considers Mexico's suggested text 
misplaced in a paragraph that describes the conclusions  of the Panel rather than the arguments of the 
parties.   The United States therefore urges the Pa nel to reject Mexico's proposed text.  The Panel 
declines Mexico's request to insert Mexico's pr oposed sentence, because paragraph 7.117 (paragraph 
7.119 of this Report) contains th e Panel's reasoning, and sets out what the Panel considers are relevant 
arguments for arriving at its conclusion. 
6.30 As regards paragraph 7.118 (paragraph 7.120 of this Report), the United States requests the 
Panel to add a footnote referencing the paragraphs to which the final sentence of the paragraph refers.  
In view of the United States' request, the Panel decide d to delete "as discussed later in this section", 
since the subsequent discussions do not address the issu e alluded to in exactly the same context as in 
this paragraph and because it considers that the c onclusion in this paragraph stands on its own. 
6.31 Mexico requests that the Panel clarifies, in pa ragraph 7.119 (paragraph 7.121 of this Report), 
how telecommunications transport services are actuall y supplied cross border and explain what is the 
nature of the services that cross the border.  Acco rding to the United States, Mexico's comments again 
speak to its arguments about the interpretation of the services at issue, and its insistence that those 
services are not provided on a cross-border basis.  The United States sees no justification for further 
discussion of those issues in this paragraph.  The Pa nel declines the clarification requested by Mexico 
with respect to this paragraph and notes that it has already dealt with the matter regarding the 
"services at issue", above.    
6.32 With regard to paragraph 7.138 (paragraph 7.14 0 of this Report), Mexico submits that in 
paragraph 170 of its first written submission, it di d argue that accounting rates and termination 
services were consciously excluded from the Reference Paper which is confirmed by the fact that they are "on the table" in the Doha Round of negotiations .  Mexico requests that the Panel clarify how this 
argument was taken into account or respond to this argument.  The United States notes that the 
argument cited by Mexico is only one of many pu t before the Panel on this issue, and as such, it 
would not be appropriate to single it out in this paragraph.  The Panel reviewed the arguments and 
decided to insert additional text at the end of pa ragraph 7.138 (paragraph 7.140 of this Report) to 
reflect Mexico's argument and how it was taken into account.  
6.33 Mexico requests that the Panel identifies th e evidence on which it relied in reaching the 
conclusion in paragraph 7.140 (paragraph 7.142 of this Report) that "many of the 55 WTO Members 
which have committed to cost-oriented interconn ection are unlikely to apply traditional accounting 
rate arrangements to a significant portion of their in ternational traffic….".  According to Mexico, it 
submitted reports from the United States' FCC that  establish that United States' carriers have 
accounting rate arrangements with vi rtually every country, and that in  2001 a majority of international 
calls to and from the United States were made thro ugh "traditional settlement".  The United States 
notes that support for the Panel's conclusion may be  found in paragraph 38 and footnote 25 of the 
United States' oral statement of 13 March 2003 and paragraph 48 and footnote 51 of the United States' 
submission of 30 April 2003.  The Panel's findings already demonstrate that it does not agree with 
Mexico regarding the significance of the submissions it cites.  However, to accommodate Mexico's concerns, the second sentence of paragraph 7.140 (par agraph 7.142 of this Report) is modified and a 
footnote is added to identify the evidence on which we relied to reach our conclusion. 
6.34 Mexico submits that paragraph 7.149 (paragraph 7.151 of this Report), is ambiguous in that it 
does not clearly define what is the service supp lied by the United States suppliers and under what 
mode.  Mexico requests that the Panel clarifies:  the definition of the "services at issue" and the 
relevant mode of supply; whether the "Mexican operators" referred to in the paragraph are also 
"suppliers" of such "service" or "services"; what is meant by the term "termination of the service"; 
whether the United States suppliers "terminate" the "service" or "services" in question; and what is  WT/DS204/R 
 Page 133 
 
 
meant by the term "outgoing services".  According to  the United States, Mexico's comments repeat its 
arguments about the interpretation of the services at issue in this dispute and its insistence that those 
services are not provided on a cross-border basis.  Re garding Mexico's references to the Panel's use of 
the terms "termination of the service" and "outgo ing services",  the United States submits that the 
Panel is not employing those terms to further define  the services at issue in this dispute.  The United 
States further submits that the Panel is properly usin g those terms to define the relevant market, for 
the purpose of determining whether Telmex is a "maj or supplier".  With respect to the definition of 
the "services at issue" the Panel notes that it has already addressed the matter, above.  As to whether 
the "Mexican operators" referred to in the paragr aph are also "suppliers" of such "service" or 
"services", the Panel does not consider this distinction to  be relevant.  With regard to what is meant by 
the term "termination of the service", the Panel considers it appropriate to add a footnote to 
paragraph 7.23 (paragraph 7.22 of this Report) to clar ify that the term is used in our findings to refer 
to forms of "linking" that falls within the scope of  "interconnection".  As to whether the United States 
suppliers "terminate" the "service" or "services", the Panel considers its reasoning makes clear that 
suppliers do not need to "terminate" services to be "supplying" them.  As regards what is meant by the 
term "outgoing services" the Panel has changed the term to "outgoing traffic". 
6.35 Mexico argues that, in paragraph 7.150 (paragra ph 7.152 of this Report), the Panel refers to 
the market for "termination services" and to domestic  and international "comm unication".  In the light 
of Mexico's arguments on the meaning of "ter mination services" Mexico requests that the Panel 
clarifies and makes additional findings on what it means when it refers to "termination services", 
whether "termination services" are "basic telecommun ications services" or a service sector at issue in 
this dispute, the mode of supply of such services,  and whether United States or Mexican suppliers 
provide such services.  Mexico also requests that the Panel clarifies whether a "communication" is a 
service at issue in this dispute.  The United Stat es submits that with respect to Mexico's comments 
regarding the Panel's use of the term "termination se rvices," the Panel is not employing this term to 
further define the services at issue in this disput e – that is, the services to which the United States' 
claims relate and the services subject to Mexico's  commitments.  Rather, the United States reads the 
paragraph as using that term to pr operly define the relevant market for the purposes of determining 
whether Telmex is a "major supplier."  The Pane l does not  accept the inferences made by Mexico 
with respect to the Panel's use of  the term "termination services".  However for clarification, the Panel 
is replacing "termination services" with "termination", to emphasise that the Panel is not using that term to refer in any way to  services at issue in this dispute, but rather to defi ne the relevant market for 
the purposes of determining whether Telmex is a "major supplier".  To address the second concern, 
the Panel is replacing the term "communication" with "telecommunications service".  
6.36 With regard to paragraph 7.154 (paragraph 7. 156 of this Report), Mexico requests a new 
sentence to be added to the paragr aph in order to reflect Mexico's position.  The United States submits 
that Mexico's request is not necessary or accurate.  According to the United States, the decisions by 
the CFC were provided by the United States at Exhibits US-20 and US-21.  The United States notes 
that the CFC's decisions relied in part on the rest rictive provisions in the ILD Rules discussed at 
length by the Panel.  The Panel accepts Mexico's point and has added the suggested sentence to the 
paragraph in order to reflect Mexico's argument on these points. 
6.37 Mexico submits that the Panel concludes in paragraph 7.157 (paragraph 7.159 of this Report) 
that Telmex is a "major supplier", with respect to the "services at issue" in  that it has the ability to 
materially affect the price of termination of calls from the United States into Mexico.  Mexico 
requests that the Panel clarify what is meant by th e "services at issue" and whether the "termination of 
calls" is a service at issue in this dispute.  The United States submits that the Panel has already 
adequately described the services at issue in this dispute, as well as the "relevant market" in which 
Telmex is a major supplier.  The Panel's conclusi on in paragraph 7.157 (paragraph 7.159 of this 
Report) speaks to the definition of the relevant mark et and whether Telmex is a major supplier in that 
market.  To clarify this point, the United Stat es suggests that the Panel amends paragraph 7.157 WT/DS204/R 
Page 134  
 
(paragraph 7.159 of this Report) by adding in th e first sentence the phrase "termination of".  The 
Panel accepts the suggestion made by the United States. 
6.38 With regard to paragraph 7.200 (paragraph 7. 202 of this Report) the United States asks the 
Panel to note that it has presented evidence of th e difference between the aggregated component 
prices and the rates charged to United States supplie rs for each of the three individual "zones" in 
Mexico.  The Panel amended the text to make clear  that it is aware that the United States presented 
evidence of the difference between the aggregated component prices and the rates charged to United 
States suppliers for each of the three individual zones. 
6.39 Mexico refers to paragraphs 7.206-7.208 (par agraphs 7.208-7.210 of this Report) and 7.324-
7.326 (paragraphs 7.326-7.328 of this Report) and cl aims that the Panel has adopted the United States 
characterisation of settlement rates as "access charg es" or "termination rates."  Therefore, Mexico 
considers that it is especially important that the Pane l set forth the factual natu re of settlement charges 
as described by Mexico in paragraph 29 of its fi rst written submission.  Mexico also requests an 
addition at the end of paragraph 7.206 (paragraph 7.208 of this Report) to ensure that Mexico's 
arguments are fully and accurately presented.  The Un ited States submits that Mexico's suggested text 
is misplaced and inappropriate in paragraphs 7. 206-7.208 (paragraphs 7.208- 7.210 of this Report).  
Therefore the United States urges the Panel to reject  Mexico's proposed text. The Panel considers that 
the arguments of the parties on differences between  settlement rates and termination rates do not 
belong to this section and makes no change  to the text of the paragraph.   
6.40 With regard to paragraph 7.210 (paragraph 7. 212 of this Report), the United States submits 
that the paragraph contains a lengthy statement from the United States, but does not provide the 
specific source of the statement.  The Panel accepts  the United States request and inserts the indicated 
reference in a footnote. 
6.41 According to Mexico, in paragraph 7.214 (parag raph 7.216 of this Report), in arriving at its 
finding that "interconnection rates charged by Telm ex to United States suppliers of the services at 
issue are not cost-oriented", the Panel did no t address facts and arguments presented by Mexico. 
According to Mexico there is a widespread practic e, both in domestic and international contexts, of 
using target rates to determine whether rates are acceptable, and the United States stated that "WTO 
Members do not have explicit requirements for settle ment rates to be cost-based."  Mexico also 
contends that the United States agreed with it that Members "can reasonably rely on competitive 
market dynamics to yield cost-based settlement rat es".  The United States submits that Mexico is 
inaccurately quoting the United States.  According to  the United States, it did not state that "WTO 
Members do not have explicit require ments for settlement rates to be cost-based."  Nor did it agree 
that currently in Mexico, Members "can reasonabl y rely on competitive market dynamics to yield 
cost-based settlement rates," which is what Mexico  is presumably implying.  The Panel declines to 
make any amendments on the basis of Mexico's co mments because the quotes a ppear to be inaccurate 
or out of context;  even if true, they are not relevant to argument presented in this paragraph. 
6.42 According to Mexico its settlement rates with th e United States are consistent with the target 
rate recommended by ITU Study Group 3 for Mexico.  According to the United States, Mexico incorrectly states that the Panel did not address Mexi co's argument that its settlement rates with the 
United States are consistent with the target ra te recommended by ITU Study Group 3 for Mexico.  
The Panel believes that is has adequately addressed  Mexico's arguments and notes that, in any case,  
ITU "target rates" are just that, and are not, themselves, cost oriented rates. 
6.43 Mexico submits that its settlement rates are al so sufficiently below the benchmark rate for 
Mexico set by the United States' FCC to establis h, under the FCC's own guidelines, that there is 
"meaningful economic competition" in Mexico.  More over, the application by the United States of its 
benchmarks policy to WTO Members is  inconsistent with a belief that the Fourth Protocol applies to 
accounting rates.  The United States submits that relevant United States' arguments are included at  WT/DS204/R 
 Page 135 
 
 
paragraph 36 of the United States' answers of 27 Ma rch 2003, and at footnote 42 of its second written 
submission of 5 February 2003.  The Panel notes that  it does not accept the implications of Mexico's 
arguments and notes, further, that the FCC benchmark rates are not, and are not claimed to be, "cost oriented" rates. 
6.44 Mexico claims that the United States compar es ISR rates from the United States to various 
countries with the United States-Mexico accounting ra tes, rather than comparing the United States 
accounting rates with those countries to the United St ates-Mexico accounting rates.  The United States 
submits that relevant United States' arguments in this regard are included at paragraph 34 of the 
United States' answers of 27 March 2003, and at pa ragraph 121 of its first written submission and at 
Exhibit US-5.  The Panel considers that Mexico's argument is not relevant since the United States' 
accounting rates are not subject to any claims in this  dispute. Furthermore, the Panel is of the view 
that the United States uses ISR rates not as a substitute for accounting rates, but as a proxy for 
illustrating what costs may be. 
6.45 With regard to paragraph 7.225 (paragraph 7.2 27 of this Report), Mexico requests that the 
Panel clarifies what is meant by the "services at i ssue" and whether the "termination … of the services 
at issue" means the "termination of calls".  The United States submits that, as noted above in the 
United States' responses to Mexico's comments concerning paragraphs 7.149, 7.150 and 7.157 
(paragraphs 7.151, 7.152 and 7.159 of this Report ), the Panel's statements at paragraph 7.225 
(paragraph 7.227 of this Report) speak to the definiti on of the relevant market, and whether Telmex is 
a "major supplier" in that market.  To clarify this point, the United States suggests that the Panel 
amend the first sentence of paragraph 7.225 (parag raph 7.227 of this Report).  The Panel declines 
Mexico's request because it notes that the issue of "services at issue" and "termination" have already 
been adequately addressed in response Mexico's comments above. 
6.46 Mexico requests the Panel to clarify in paragr aph 7.226 (paragraph 7.228 of this Report) of 
the Interim Report that under the Panel's finding, i ndividual gateway operators other than Telmex are 
not, themselves, "major supplier[s]" within the mean ing of Section 1 of Mexi co's Reference Paper.  
The United States submits that the additional language requested is inappropriate and requests that the 
Panel reject the modification requested by Mexico.  According to the United States, the parties have 
made no arguments and presented no evidence regard ing whether Mexican gateway operators other 
than Telmex are, "viewed individually or together,"  "major suppliers".  The Panel declines Mexico's 
request because the Panel does not consider it nec essary or relevant to make such a finding as to 
whether the other suppliers are not "major suppliers".   
6.47 According to Mexico, in paragraphs 7.237-7.24 3 (paragraphs 7.239-7.245 of this Report), the 
Panel sets out its reasoning that leads to its conc lusion that practices requi red under Mexico's law can 
be "anti-competitive practices" within the meaning of Section 1 of Mexico's Reference Paper.  Mexico 
submits that the Panel reasoning is incomplete.  In  Mexico's view, Section 1.1 of Mexico's Reference 
Paper is aimed at anti-competitive "practices" by major suppliers, not "measures" implemented by a 
WTO Member, otherwise the language of Section 1 would have gone further to prohibit Members 
from introducing or maintaining "anti-competitive measures
".  According to the United States, the 
Panel has included Mexico's argument in paragraph 4.257 of the Interim Report.  The United States' 
rebuttal to Mexico's argument is included in para graph 66 of the United States' comments on 30 April 
2003 on Mexico's answers. The United States al so notes that the Panel addressed at length the 
relationship between "measures" and "practices" at  paragraphs 7.237-7.243 (paragraphs 7.239-7.245 
of this Report).  In view of Mexico's concerns, th e Panel has added a sentence after the first sentence 
of paragraph 7.239 (paragraph 7.241 of this Report) to better reflect that Mexico's argument was taken 
into account. 
6.48 According to Mexico, important legal context is provided by Article VIII:5 of the GATS. 
This provision imposes disciplines in situations where a WTO Member authorises or establishes a 
small number of service suppliers and substantially prevents compe tition among those suppliers in its WT/DS204/R 
Page 136  
 
territory.  Mexico submits that the Panel's interp retation of Section 1 of Mexico's Reference Paper 
must take into account this GATS provision so as not to  undermine its meaning.  In the United States' 
view, the Panel addressed Mexico's argument, and th e United States rebuttal thereto, in paragraphs 
4.260-4.261 of the Interim Report. Having re-e xamined the submission containing the argument 
referred to by Mexico, the Panel declines to accep t Mexico's request because the Panel considers the 
argument to be recorded as adequately as possible in the paragraphs cited by the United States. 
6.49 In Mexico's view,  there is no basis in the text  of Section 1 of Mexico's Reference Paper to 
make important and complicated distinctions betw een permissible and impermissible anti-competitive 
"measures" or to judge the leg itimacy of a WTO Member's internal  policies in circumstances where 
no agreed-upon benchmarks exist.  According to  the United States, the Panel addressed Mexico's 
argument at paragraphs 4.257 of the Interim Repor t, 7.228-7.236, and 7.263-7.267 (paragraphs 7.230-
7.238 and 7.265-7.269 of this Report).  As addre ssed in paragraphs 7.233- 7.234 (paragraphs 7.235-
7.236 of this Report), there are international agre ements on certain types of anti-competitive practices 
that should be prohibited, including in particular price-fixing cartels.  The Panel declines Mexico's 
request, noting that it has already addressed Mexico 's argument at paragraph 7.263-7.267 (paragraphs 
7.265-7.269 of this Report). 
6.50 According to Mexico, at paragraphs 7.237-7.24 3 (paragraphs 7.239-7.245 of this Report), the 
Panel sets out its reasoning that leads to its c onclusion that practices required under Mexico's law 
could be "anti-competitive practices" within the mean ing of Section 1 of Mexi co's Reference Paper.  
At paragraphs 7.255-7.262 (paragra phs 7.257-7.264 of this Report), the Panel sets out its reasoning 
that leads to its conclusions that the uniform settle ment rate and proportionate  return system under the 
ILD Rules require practices by a major supplier, Telmex, that are "anti-competitive" within the 
meaning of Section 1 of Mexico's Reference Pape r.  In Mexico's view, it has presented detailed 
arguments that the measures at issue had "pro-c ompetitive" effects and were aimed at legitimate 
policy objectives.  Mexico submits that although the Panel Report identifies some of these arguments, 
the Panel does not explain how Section 1 of Mexico 's Reference Paper prohibits measures that have 
pro-competitive effects and legitimate policy objectives where, at the same time , they also have some 
anti-competitive effects.  Mexico further submits th at the Panel refers only to "horizontal practices 
such as price-fixing among competitors" and "market sharing arrangements", private actions that do 
not have the pro-competitive effects and legitimate policy objectives of Mexico's measures.  Mexico's 
argument that its measures are distinguishable from such private actions and are not "anti-competitive 
practices" within the meaning of Section 1 and its argument that all government regulatory measures 
have some anti-competitive effects have not been ad dressed by the Panel.  The United States contends 
that although Mexico asserts that the Panel i gnored its arguments that the ILD Rules have 
"pro-competitive effects," the Panel in fact dem onstrates that it considered this argument at 
paragraphs 7.221, 7.239, 7.256, 7.259 and 7.261 (par agraphs 7.223, 7.241, 7.258, 7.261 and 7.263 of 
this Report).  In paragraph 7.259 (paragraph 7.26 1 of this Report), the Panel expressly evaluated 
Mexico's assertions, concluding that Mexico faile d to provide evidence or well-founded reasons to 
support its assertions.  Moreover, as noted above, the Panel addressed, in paragraphs 7.237-7.243 
(paragraphs 7.239-7.245 of this  Report) of the Interim Report, whether practices required under a 
Member's laws can be "anti-competitive practices" within the meaning of Section 1.1 of Mexico's 
Reference Paper.  The Panel does not accept Mexico's  request, noting that it has dealt with Mexico's 
arguments, as pointed out in the United States' comm ents, in paragraphs 7.221, 7.239, 7.256, 7.259 
and especially 7.261 (paragraphs 7.223, 7.241, 7.25 8, 7.261 and 7.263 of this Report).  The Panel 
confirms that its deliberations took fully into acc ount the points and arguments identified by Mexico 
in its comments on the reasoning of this particular  conclusion.  However, the Panel declines Mexico's 
request because, as noted at the outset  of this section, a panel cannot be  expected to restate all of the 
statements and arguments of the parties in the findings section of a Report.   
6.51 According to the United States, in paragraph 7. 240 (paragraph 7.242 of this Report), the Panel 
discusses cross-subsidisation as an illustrative exam ple of an anti-competitive practice listed in 
Section 1.2 of the Reference Paper.  The United St ates notes that the language of Section 1.2 of the  WT/DS204/R 
 Page 137 
 
 
Reference Paper does not explicitly refer to cross- subsidisation per se, but rather anti-competitive 
cross-subsidisation.  To conform to the phrasing used in the Reference Paper, the United States 
suggests the text to be amended.  The Panel not es the United States' comment and has modified the 
text to reflect the concern raised. 
6.52 With regard to paragraphs 7.272-7.286 (parag raphs 7.274-7.288 of this Report) , Mexico 
submits that the Panel sets out its reasoning that leads to its conclusion that the Annex applies to 
measures of a Member that affect access to and use of public telecommunications transport networks and services by basic telecommunications suppliers of any other Member.  According to Mexico, the 
Panel's summary of Mexico's argument is incomple te. In Mexico's view, the Panel does not identify 
nor respond to Mexico's argument that the service at issue is not a "telephone call" or any other 
customer-supplied information or data, but, rather , is telecommunications transport networks or 
services that involve the transport or transmission
 of information or data be tween two or more points.  
As such, Mexican suppliers of telecommunications  transport networks and services cannot transmit 
other telecommunications transport networks or ser vices and cannot, therefore, constitute a mode of 
delivery for those services.  Mexico requests that the Panel incorporate this argument in paragraph 
7.274 (paragraph 7.276 of this Re port) and make additional findings on the nature of the services at 
issue.  In particular, Mexico requests that the Panel clarifies what constitutes the "supply of basic 
telecommunications services" and "international s upply of basic telecommunications services".  The 
United States submits that Mexico's comments repe at comments on the interpretation of the services 
at issue in this dispute and recalls its respon ses to Mexico's comments on paragraphs 7.23-7.25 
(paragraphs 7.22-7.23 and 7.26 of this Report).  The United States maintains the issues raised here 
require no further development at this point in the report.  The Panel declines Mexico's request, noting 
that Mexico's comments essentially relate to ar guments and conclusions concerning the services at 
issue in this dispute that are alread y addressed earlier in this is section. 
6.53 With regard to paragraph 7.317 (paragraph 7. 319 of this Report), Mexico fails to see how 
paragraph 7.178 of the Interim Report cited in foot note 924 (footnote 1023 of this  Report) is relevant 
to the Panel's statement and requests that the Panel clarifies this. The United States submits that with 
respect to Mexico's comments regarding footnote 924 (footnote 1023 of this Report), the Panel may 
have intended to refer to paragr aph 7.40 in this Report or one of  the surrounding paragraphs.  The 
Panel has reviewed the reference and corrected foot note 924 (footnote 1023 of this Report) to refer to 
paragraphs 7.40-7.45 of this Report. 
6.54 Mexico also submits that the quoted statement in paragraph 7.317 (paragraph 7.319 of this 
Report) does not clearly describe the nature of th e "basic telecommunications services" at issue and 
how foreign suppliers actually supply such service s into Mexico.  Thus, Mexico requests that the 
Panel clarifies and makes additional finding on:  wh at "services" require suppliers to link their 
networks to those of other suppliers; whether the "services at issue" are the transport or transmission of information or data between two or more points; how Mexican suppliers can tran smit "transport 
and transmission" services of other suppliers; and whether United States suppliers supply "transport 
and transmission services" into and within Mexico .  According to the United States, Mexico's 
comments repeats those on the interpretation of the services at issue in this dispute and recalls its 
responses to Mexico's comments on paragraphs 7.23- 7.25 (paragraphs 7.22-7.23 and 7.26 of this 
Report).  The United States maintains the issues rais ed here have been amply addressed and require 
no further development at this point in the Report.  The Panel notes that Mexico's comments relate to 
arguments and findings that have alrea dy been addressed earlier in this section. 
6.55 As regards paragraph 7.322 (paragraph 7.324 of this Report), the United States considers that 
it would be helpful for the Panel to include a cross-re ference to the paragraphs it has in mind when it 
refers, at the beginning of the third sentence of this  paragraph, to "our earlier analysis."  The United 
States also suggests that the thir d sentence of paragraph 7.322 (parag raph 7.324 of this Report) should 
be re-arranged in harmony to paragr aph 7.304 (paragraph 7.306 of this  Report).  The Panel accepts the WT/DS204/R 
Page 138  
 
United States suggestions and adds a footnote cro ss-referencing paragraph 7. 304 (paragraph 7.306 of 
this Report).  It also modifies the paragr aph as suggested by the United States.  
6.56 As regards paragraph 7.369 (paragraph 7.371 of this Report), Mexico requests that the Panel 
clarifies and notes the fact that Mexico has issued  regulations for the establishment and operation of 
commercial agencies for pay-telephone public ser vices.  The United States notes that Mexico's 
argument is reflected in paragraph 4.323 of the Inte rim Report.  If Mexico's request is accepted by the 
Panel then the United States requests that the Pane l also note the United States' observation that the 
service suppliers at issue in the United Stat es' claim under Section 5(b) of the Annex on 
Telecommunications are locally-established commercial agencies offering international 
telecommunications services over private circuits leas ed from a Mexican concessionaire.  Noting  that 
pay phone services are not subject to the claims made  by the United States in this dispute, the Panel 
does not consider it necessary to include in the Pane l's findings the argument identified by Mexico on 
this point. 
VII. FINDINGS 
A. I
NTRODUCTION  
7.1 The United States presents three main claims.  Firs t, that Mexico has failed to ensure that its 
major telecommunications supplier provides inte rconnection "on terms, conditions … and cost-
oriented rates that are … reasonable", in acco rdance with Section 2 of its Reference Paper 
commitments.  Second, that Mexico has not main tained appropriate measures to prevent Telmex, a 
major supplier, from engaging in "anti-competitive pr actices", in accordance with Section 1 of its 
Reference Paper commitments.  Third, that Mexico  has failed to ensure "access to and use of" its 
public telecommunications transpor t networks and services, including private leased circuits, on 
"reasonable and non-discriminatory terms and cond itions", in accordance with its obligations under 
Section 5 of the GATS Annex on Telecommunications. 
7.2 This case is the first panel proceeding in the WT O to deal solely with trade in services under 
the GATS.  It is also the first WTO panel proceedi ng to deal with telecommunications services.  The 
Panel is fully aware that the interpretation of the complex layers of GATS Articles, Annexes, 
Protocols and Schedules with GATS market access commitments, national treatment commitments and additional commitments poses many challeng es to WTO Members and WTO dispute settlement 
bodies.  This is especially so in the early years of GATS jurisprudence when  the sometimes different 
approaches used by governments in the drafting of  their respective GATS schedules may give rise to 
divergent understandings and exp ectations. Just as the interpretation and application of GATT 
provisions have dynamically evolved in respon se to the several hundred GATT dispute settlement 
proceedings since 1948, so the interpretation and clar ification of GATS provisions is likely to evolve 
over time.  The diverse backgrounds of the panelis ts, and the assistance granted by the Secretariat 
pursuant to Article 27.1 of the DSU, have ensured that this Panel was fully aware of the legal and 
technical complexity of the regulation of te lecommunications services, including their rapid 
technological evolution
799 and the drafting history of GATS provisions to which both parties to this 
dispute referred extensively. 
7.3 The Panel's legal task is "to examine, in the light of the relevant provisions of the covered 
agreements cited by the United States in documen t WT/DS204/3, the matter referred to the DSB by 
the United States in that document, and to make su ch findings as will assist the DSB in making the 
recommendations or in giving the rulings provided for in  those agreements".  This task requires us, as 
provided in Article 3.2 of the DSU, "to clarify the existing provisions of those agreements in 
accordance with customary rules of interpretation of p ublic international law" in order "to preserve the 
                                                      
799 For instance, some of the telecommunication provisions seem to be technology-specific and may no 
longer reflect prevailing industry practices.  WT/DS204/R 
 Page 139 
 
 
rights and obligations of Members under the cove red agreements" and to provide "security and 
predictability to the multilateral trading system".  We have approached our daunting task with the 
utmost prudence and, in several parts of our findi ngs, have decided to exercise "judicial economy". 
WTO negotiators sometimes praise the political wis dom of resorting to "constructive ambiguity" as a 
diplomatic means of enabling consensus on WTO rules.800  The limited legal task of dispute 
settlement findings is very different.  It is to deci de on the legal claims, in a particular dispute, based 
on the "ordinary meaning" of the WTO provisions  c oncerned "in their context" and in light of the 
"object and purpose" of the agreement.  Our legal findings are thus limited to the disputed meaning 
and scope of certain GATS obligations and commitments  of Mexico in the very particular context of 
this bilateral dispute, and do not go beyond what we  consider indispensable for deciding on the legal 
claims submitted to this Panel.  Our focus on telecommunications services may mean that certain 
elements of our findings in this particular services sector may not be relevant for other services sectors with different legal, economic and technical  contexts.  Our findings also do not adversely 
affect the large degree of regulatory autonomy which WTO Members, individually and collectively, retain under the GATS, including the right to m odify specific GATS commitments pursuant to the 
procedures and conditions set out in Article XXI of the GATS.  
1. Telecommunications in the WTO 
7.4 This case concerns obligations undertaken by  Mexico as part of the GATS.  The GATS, 
which is an integral part of the WTO Agreement, co nsists of a number of articles in its main body and 
several annexes, including an Annex on Telecommuni cations (the "Annex").  Both the main body of 
the GATS and the Annex are applicable to every WTO Member.  In addition, each WTO Member has 
attached its own schedule to the GATS, in which the Member makes individual specific commitments 
on market access, national treatment, and any additional commitments the Member may wish to make.  These specific commitments are inscribed by service sector and mode of supply of the service, 
and may be subject to limitations on market access and national treatment. 
7.5 Special GATS negotiations intended to d eepen and widen commitments in basic 
telecommunications were concluded in 1997.  Memb ers participating in these negotiations made 
commitments, or further commitments, in their schedules on market access or national treatment.  
Many, including Mexico, also made additional commi tments in the form of a "Reference Paper", 
which contained a set of pro-competitive regulator y principles applicable to the telecommunications 
sector. 
2. Measures at issue in this dispute 
7.6 The government measures at issu e in these proceedings are: 
(a) The "Federal Telecommunications Law" ("FTL") ( Ley Federal de 
Telecomunicaciones ) of 18 May 1995. 
(b) The "Rules for Long Distance Service" ( Reglas del Servicio de Larga Distancia ) 
published by the Secretariat of Comm unications and Transportation ("SCT") 
(Secretaría de Comunicaciones y Transporte)  on 21 June 1996. 
(c) The International Long Dist ance Rules ("ILD Rules") ( Reglas para prestar el servicio 
de larga distancia internacional ) published by the SCT on 11 December 1996.
801 
                                                      
800 Cf. former WTO Director-General Mike Moore, " A World Without Walls – Freedom, Development, 
Free Trade and Global Governance ", Cambridge, Cambridge University Press, 2003, p. 111. 
801 See footnote 25 of this Report.  WT/DS204/R 
Page 140  
 
(d) The "Agreement of the SCT establishing the procedure to obtain concessions for the 
installation, operation or exploitation of  interstate public telecommunications 
networks, pursuant to the Fede ral Telecommunications Law" ( Acuerdo de la SCT por 
el que se establece el procedimiento para ob tener concesión para la instalación, 
operación o explotación de redes públicas de  telecomunicaciones interestatales, al 
amparo de la Ley Federal de Telecomunicaciones ) published on 4 September 1995. 
3. Mexico's legal framework for the regul ation of telecommunications services 
7.7 The Federal Telecommunications Law (the "FTL" ) of Mexico provides the legal framework 
for the regulation of telecommunications activities in Mexico.
802  The FTL authorizes the  SCT, 
inter alia , to grant concessions required for "ins talling, operating or exploiting public 
telecommunications networks".803  A concession may only be grante d to a Mexican individual or 
company, and any foreign investment therein may not exceed 49%804, except for cellular telephone 
services.805 
7.8 Special rules apply to " comercializadoras " ("commercial agencies").806  A commercial 
agency is any entity which, "without being the owner or possessor of any transmission media, 
provides telecommunications services to third parties using the capacity of a public 
telecommunications network concessionaire."807  A concessionaire of a public telecommunications 
network may not, without permission of  the SCT, have "any direct or indirect interest in the capital" 
of a commercial agency.808  The establishment and operation of  commercial agencies is "subject, 
without exception, to the respective regulatory provisions".809 
7.9 The "interconnection" of public telecommunica tions networks with foreign networks is 
carried out through agreements entere d into by the interested parties.810  Should these require 
agreement with a foreign government, the concessiona ire must request the SCT to enter into the 
appropriate agreement.811 
7.10 International Long-Distance Rules ("ILD Rules") are issued by the Federal 
Telecommunications Commission (" Comisión Federal de Telecomunicaciones "), a semi-autonomous 
agency of the Secretariat of Communications and Transportation.812  The ILD Rules serve "to regulate 
the provision of international long-distance serv ice and establish the terms to be included in 
agreements for the interconnection of public telecommunications ne tworks with foreign networks."813  
                                                      
802 See FTL (" Ley Federal de Telecomunicaciones "), published in the Federal Gazette (" Diario oficial 
de la Federación ") on 7 June 1995, entered into force on 8 June 1995. 
803 See FTL, Article 11. 
804 See FTL, Article 12.  Foreign investment in cellula r telephone services may however be greater than 
49%, with the permission of the Commission on Foreign Investment. 
805 See FTL, Article 12. 
806 Also referred to in English la nguage translations of the F TL as "telecommunications service 
marketing companies". 
807 See FTL, Article 52. 
808 See FTL, Article 53. 
809 See FTL, Article 54. 
810 See FTL, Article 47, paragraph 2. 
811 See FTL, Article 47, paragraph 4. 
812 See Rules for the Provision of International Long-Distance Service To Be Applied by the Licensees 
of Public Telecommunications Networks Authorized to Provide this Service (Reglas para Prestar el Servicio de 
Larga Distancia Internacional que deberán aplicar los Co ncesionarios de Redes Púb licas de Telecomunicaciones 
Autorizados para Prestar este Servicio) . Issued by the Commission;  published in the Federal Gazette on 
11 December 1996; entered into  force on 12 December 1996. 
813 See ILD Rule 1.  WT/DS204/R 
 Page 141 
 
 
International long-distance service is defined as the service whereby all international switched traffic 
is carried through long-distance exchanges authorized as international gateways".814 
7.11 Direct interconnection with foreign public te lecommunications networks in order to carry 
international traffic may only be carried  out by "international gateway operators".815  These are long-
distance service licensees authorized by the Co mmission "to operate a switching exchange as an 
international gateway"816, that is, the exchange is "interconnected to incoming and outgoing circuits 
authorised by the Commission to carry international traffic".817  Traffic is "switched" when it is 
"carried by means of a temporary connection betw een two or more circuits between two or more 
users, allowing the users the full and exclusiv e use of the connection until it is released."818 
7.12 Each international gateway operator must appl y the same "uniform settlement rate" to every 
long-distance call to or from a given country, regardless of which operator originates or terminates the 
call.819  The uniform settlement rate for each country  is established, throug h negotiations with the 
operators of that country, by the long-distance ser vice licensee having the greatest percentage of 
outgoing long-distance market share for that country in the previous six months.820 
7.13 Each international gateway operator must also a pply the principle of "proportionate return".  
Under this principle, incoming  calls from a foreign country must be distributed among international 
gateway operators in proportion to each intern ational gateway operator's market share in outgoing  
calls to that country.821 
4. Rules of interpretation 
7.14 The GATS constitutes an integral part of the WTO Agreement.  As such, the GATS 
(including its annexes and schedules of specific commi tments that are made an integral part of it 
under GATS Article XX:3) is one of the "covered agre ements" and is therefore subject to the Dispute 
Settlement Understanding (the "DSU"). 
7.15 Article 3.2 of the DSU provides that panels are to clarify the provisions of "covered 
agreements" in accordance with customary rules of interpretation of public international law.  In US – 
Gasoline , the Appellate Body stated that the fundamental rule of treaty interpretation as set out in 
Articles 31 and 32 of the Vienna Convention on th e Law of Treaties (the "Vienna Convention")822 had 
"attained the status of a rule of customary or ge neral international law" and "forms part of the 
'customary rules of interpretati on of public international law'".823  Since the commitments provided for 
in Mexico's Schedule are part of the terms of th e treaty, the only rules which may be applied in 
interpreting the meaning of a commitment are the general rules of interpretation as set out in the 
Vienna Convention.824 
                                                      
814 See ILD Rule 2:XI. 
815 See ILD Rules 3, and 6. 
816 See ILD Rule 2:VII. 
817 See ILD Rule 2:VIII. 
818 See ILD Rule 2:XV 
819 See ILD Rules 2:XII(a) and (b); and 10. 
820 See ILD Rule 13. 
821 See ILD Rules 2:XII, 10, 13, 16, 17, and 19. 
822 Vienna Convention on the Law of Treaties, done at Vienna, 23 May 1969, 1155 U.N.T.S. 331; 
(1969) 8 International Legal Materials 679. 
823 See Appellate Body Report, US – Gasoline , DSR 1996:I, 3, at 16. 
824 See Appellate Body Report, EC – Computer Equipment , paragraph 84.  The conclusions of the 
Appellate Body in that case applied to concessions made by Members in their GATT Schedules.  We consider 
that such conclusions can equally well be applied to commitments made by Members in their GATS schedules.  WT/DS204/R 
Page 142  
 
7.16 Article 31(1) of the Vienna Convention requires a treaty interpreter to determine the meaning 
of a term in accordance with the "ordinary meaning" to be given to the term "in its context", and in 
light of the "object and purpose" of the treaty.  If, after applying the rule of interpretation set out in Article 31(1), it is desirable to confirm the meani ng of the term, or the meaning of the treaty term 
remains ambiguous or obscure or leads to a result that  is manifestly absurd or unreasonable, Article 32 
allows the treaty interpreter to have recourse to "supplementary means of interpretation, including the 
preparatory work on the treaty and the circumstances of its conclusion".
825 
5. Order of analysis of the claims 
7.17 The United States has presented its two claims concerning Mexico's Reference Paper 
commitments first, followed by its claim concer ning Section 5 of the Annex on Telecommunications. 
We have decided to examine these claims in th e order presented by the United States since we 
consider that this order will allow us to an alyse the issues in the most efficient manner. 
B. WHETHER MEXICO HAS FULFILLED ITS COMMITMENTS UNDER SECTIONS 2.1 AND 2.2 OF THE 
REFERENCE PAPER  
7.18 The United States claims that Mexico has not met its commitment under Sections 2.1 and 2.2 
of its Reference Paper with respect to certain basic telecommunications services supplied cross-border 
into Mexico by facilities-based and non-facilities-ba sed United States suppliers.  In particular, the 
United States claims that Mexico has failed to ensure that Telmex provide interconnection to 
United States basic telecommunications suppliers on  a cross-border basis w ith cost-based rates and 
reasonable terms and conditions.  Mexico contests this  claim, stating that its GATS schedule contains 
no specific commitments that would trigger the Sect ion 2 commitments in the Reference Paper, and 
that in any case the Reference Paper provisions on interconnection do not extend to services which 
originate abroad, or are subject to international acco unting rates.  Even if interconnection in the sense 
of the Reference Paper were to apply, Mexico cl aims that Telmex is not a "major supplier", as 
specified under Section 2.2, and that, in any case, the terms and conditions of  interconnection offered 
to United States telecommunications suppliers are in fact "reasonable", and the rates are "cost-
oriented". 
7.19 The basis of this first claim by the United St ates are Sections 2.1 and 2.2 of the Reference 
Paper, as incorporated in Mexico's GATS schedule under additional commitments.826  These 
provisions state, in relevant part: 
"2. Interconnection  
2.1 This section applies, on the basis of the specific commitments 
undertaken, to linking with suppliers providing public 
telecommunications transport networks or services in order to allow 
the users of one supplier to communicate with users of another 
supplier and to access services provided by another supplier. 
2.2 Interconnection to be ensured  
 Interconnection with a major s upplier will be ensured at any 
technically feasible point in the network.  Such interconnection is 
provided 
 … 
                                                      
825 See Appellate Body Report, EC – Computer Equipment , paragraph 86. 
826 Mexico has undertaken specifi c commitments for telecommunicat ions services (Schedule of 
Specific Commitments) under Articles XVI (Market Acce ss), XVII (National Treatment), and Article XVIII 
(Additional Commitments).  Its additional commitments consist of undertakings known as the "Reference 
Paper". These commitments are reproduced in Annex B.    WT/DS204/R 
 Page 143 
 
 
(b) in a timely fashion, on terms, conditions (including technical 
standards and specifications) and cost-oriented rates that are transparent, reasonable, having regard to economic feasibility, and sufficiently unbundled so that the supplier need not pay for network components or facilities that it does not require for the 
service to be provided;  … "
827 
7.20 In determining whether commitments in Sections  2.1 and 2.2 have been met by Mexico, we 
shall first examine whether Mexico has undertaken  an interconnection commitment with respect to 
the telecommunications services at issu e in this case.  In the event that we conclude that Mexico has 
indeed undertaken an interconnection commitment in  respect of the telecommunications services at 
issue, we will then determine whether, with  respect to the services at issue, Mexico has fulfilled any 
Section 2 interconnection commitment. 
1. Whether Mexico has undertaken an interconnection commitment, in Section 2 of its 
Reference Paper, with respect to th e telecommunications services at issue 
7.21 Section 2.1 of Mexico's Reference Paper co mmitment on interconnection specifies that it 
applies only "on the basis of the specific commitments undertaken" (" respecto de los cuales se 
contraigan compromisos específicos ").  We must first therefore determine what the services  at issue 
are, and through which of the four modes specified  in Article I:2 of the GATS they are supplied.828  
Only then can we determine whether Mexico h as undertaken, with respect to these services, a 
commitment "on the basis" of which the interconnec tion commitment in Section 2.2 applies.  Finally, 
in determining whether Mexico has undertaken in terconnection commitments with respect to the 
services and modes of supply at issue, we must ex amine whether the "linking" of suppliers referred to 
in Section 2.1 of the Reference Paper covers  not only domestic interconnection, but also international  
interconnection, understood as the linking of suppliers  cross-border, including linking which involves 
traditional "accounting rate" regimes. 
(a) What are the services at issue? 
7.22 The United States focuses its first claim on the supply of certain basic public 
telecommunications services829 for which United States suppliers s eek to interconnect at the border 
                                                      
827 English translation.  The authentic version of M e x i c o ' s  S c h e d u l e  i s  S p a n i s h .   I t  r e a d s :    
 "2 Interconexión 
2.1 Esta sección es aplicable a la conexión  con los proveedores de redes públicas de 
telecomunicaciones de transp orte o de servicios a fin de permitir a los usuarios de un pr oveedor comunicarse 
con los usuarios de otro proveedor y tener acceso a los servicios suministrados por algún otro proveedor, 
respecto de los cuales se contraigan compromisos específicos. 
2.2 Interconexión a ser garantizada 
La interconexión con un proveedor principal qued ará asegurada en cualquier punto técnicamente 
factible de la red.  Tal interconexión se llevará a cabo: 
... 
(b) de manera oportuna, en términos, condiciones (incluyendo normas técnicas y 
especificaciones) y tarifas basadas en costos que sean  transparentes, razonables, económicamente factibles y 
que sean lo suficientemente desagregad as para que el proveedor no neces ite pagar por componentes o recursos 
de la red que no se requieran para qu e el servicio sea suministrado; ... " 
828 The modes of supply are commonly known as:  (a) cross-border supply;  (b) consumption abroad;  
(c) commercial presence;  a nd (d) presence of natural persons.  They are also referred to numerically as modes 
1, 2, 3 and 4.  For the text of Article I:2 of the GATS, see paragraph 7.29. 
829 For the definition of basic public telecommunication services, see Section 3(b) of the GATS Annex 
on Telecommunications, which defines "public telecommunications transport services" as "any telecommunications transport service required, explicitly or in effect, by a Member to be offered to the public 
generally.  Such services may include, inter alia , telegraph, telephone, telex, and data transmission typically 
involving the real-time transmission of customer-supplie d information between two or more points without any WT/DS204/R 
Page 144  
 
with Telmex, or other Mexican  operators, for termination
830 in Mexico, and for which, according to 
the United States, Mexico has undertaken specific co mmitments in its schedule.  The specific public 
telecommunications services subject  to the claims are voice te lephony, circuit-switched data 
transmission and facsimile services.  These services ar e, according to the United States, of two types 
depending on how the service is provided.  First, there are "facilities-based" services, whereby the 
service supplier provides the services over its own f acilities.  Second, there are "non-facilities-based" 
services (services supplied by "comercializadoras" or "commercial agencies"), whereby the service 
supplier provides telecommunications services us ing facilities leased from other operators.831   
7.23 We will refer to the public voice telephony, ci rcuit-switched data transmission and facsimile 
services, both  "facilities-based" and by a "commercial ag ency", that are raised by the United States in 
its first claim as "the services at issue".832      
7.24 The United States' claims regard ing the services at issue relate to the GATS mode of supply 
known as cross-border supply of these services.  However, the parties to do not  agree that the services at issue are actually being supplied by this mode of  supply.  Consequently, the Panel must 
now turn to the issue of whether or not th e services at issue are supplied cross-border. 
(b) Are the services at issue supplied cross-border? 
7.25 The United States contends that their claims rega rding  the services at issue relate to the cross 
border supply of these services.  According to the United States, these services are supplied from the 
United States into Mexico, within the meaning of GATS Article I:2(a), which defines what is commonly referred to as "cross-border" trade in services.
833  Specifically, facilities-based operators in 
the territory of the United States deliver traffic c onsisting of the services at issue from United States 
customers to the Mexican border where, under Mexican  law, the traffic is transferred to Mexican 
operators, who then terminate the United States operators ' traffic, consisting of the services at issue, in 
Mexico.  According to the United States, non-facilities-based operators  (commercial agencies) would, 
if permitted by Mexican regulations, also supply services on a cross-border basis into Mexico.834  
Whether a service is facilities-based or non-facilities based, for the supply of cross-border services, is 
determined, according to the United States, by the use or not of a supplier's own facilities in the 
market from which the service is supplied.835 
7.26 To illustrate the cross-border supply of the servi ces at issue, the United States points to the 
supply of services by AT&T, WorldCom and Sprint which, as facilities-based operators, "use their own networks in the United States to offer voice  telephony, circuit-switched data and facsimile 
                                                                                                                                                                    
 
end-to-end change in the form or content of the customer 's information."  This definition is applicable because 
the Ministerial Decision on Negotiations on Basic Telecommunications (part of the Final Act of the Uruguay 
Round) specified that "telecommunications  transport networks and services" were "basic telecommunications", 
a term which would encompass both "public telecommunications transport services" and non-public "telecommunications transport services". 
830 The word "termination" is used in our findings to refer to one of the forms of "linking" that falls 
within the scope of the "interconnection".  This is suppo rted by the language of Sec tion 2 which states that the 
section applies to linking "in order to allow the users of one supplier to communicate with users of another 
supplier". 
831 See the United States' first written submission, paragr aph 59.  These services are listed in Mexico's 
Schedule under headings 2.C.(a), (c) and (d). 
832 The Panel considers the terms "telephony" and "voice telephony" (as used in the English translations 
of Mexico's Schedule and the claims by the United States) to be equivalent to the terms "telephone services" and 
"voice telephone services" (as used in the GATS sectoral classification and the CPC). 
833 See the United States' first written submission, paragraph 54. 
834 See the United States' first written submission, paragraph 57. 
835 See the United States' answer to question No. 2(a) of the Panel of 14 March 2003.  For question 
No. 2(a), see footnote 212 of this Report.   WT/DS204/R 
 Page 145 
 
 
services between the United States and Mexico".836  These operators must link their network at the 
border to that of a Mexican operator.  The Unite d States does not illustrate the current supply of 
"commercial agency" services from the United States into Mexico, claiming that Mexico maintains 
measures that prohibit the cross-border supply of this type of service. 
7.27 Mexico claims that the services at issue are not supplied cross-border in accordance with the 
terms of Article I:2(a).  According to Mexico, the essential nature of the services at issue is the 
transmission  of customer data.  In order to transmit  customer data cross-border "from" one Member 
"into" another Member, the supplier must  itself  transmit  the customer data within the territory of that 
other Member.  Mexico's view is that no country imposes restrictions on the quantity of incoming or 
outgoing calls, but rather only on services relating to the transmission of the calls, and therefore that 
the GATS commitments would be meaningless if th ey related to the calls rather than their 
transmission.  Thus, an operator who simply "han ds off" traffic at the border to another operator 
would not, argues Mexico, be supplying cross-border w ithin the meaning of Article I:2(a).  According 
to Mexico, a hand-off of traffic at the border amounts to a "half-circuit" provision of telecommunications services; only "full-circuit" or  "end-to-end" provision by the same operator 
constitutes cross-border supply within the meaning of Article I:2(a).
837 
7.28 Mexico's argument that the supplier must  itself  transmit  the customer data within the territory 
of that other Member implies, in effect,  that cr oss-border supply within the meaning of Article I:2(a) 
can only occur if the supplier operates, or is present838 in some way, on the other side of the border.  
Absent this, the supplier would presu mably not have the capability to itself transmit there .  The issue 
before us is therefore whether, with respect to the telecommunications services at issue, cross-border 
supply between two Members under Article I:2(a) occurs only if the supplier itself  operates, or is 
present, on the other side of the border, or if cross-border supply can occur also if a supplier simply "hands off" traffic at the border.  We now examine this fundamental issue. 
7.29 The scope of the GATS is defined in Article I:1 as covering "measures by Members affecting 
trade in services".  Trade in services is then define d in Article I:2 as "the supply of a service" through 
any of four modes of supply:  
"(a) from the territory of one Member in to the territory of any other Member; 
(b) in the territory of one Member to the service consumer of any other Member; 
(c) by a service supplier of one Memb er, through commercial presence in the 
 territory of any other Member; 
(d) by a service supplier of one Member, through presence of natural persons of 
 a Member in the territory of any other Member." 
7.30 Subparagraph (a) describes what is referred to  as "cross-border", or "mode 1", supply of trade 
in services.
839  The ordinary meaning of the words of this provision indicate that the service  is 
supplied from the territory of one Member into the territory of another Member.  Subparagraph (a) is 
silent as regards the supplier  of the service.  The words of this  provision do not address the service 
                                                      
836 See the United States' answer to question No. 2(a) of the Panel of 14 March 2003, paragraph 2.  For 
question No. 2(a), see footnote 212 of this Report. 
837 See Mexico's answer to question No. 3(a) of the Panel of 19 December 2002, paragraph 56.  For 
question No. 3(a), see footnote 187 of this Report. 
838 Mention in this section of the Report of the "prese nce" of a service supplier,  or of a service supplier 
that is "present", should be understood in the general  sense of these terms.  The use of the terms "present" and "presence" in this section are not intended to refer specifically to the supply of a service through "commercial 
presence", in the sense of Article I:2(c). 
839 See footnote 828. WT/DS204/R 
Page 146  
 
supplier or specify where the service supplier must  operate, or be present in some way, much less 
imply any degree of presence of the supplier in the territory into which the service is supplied.  The 
silence of subparagraph (a) with respect to the supplier suggests that the place where the supplier 
itself operates, or is present, is not directly re levant to the definition of cross-border supply. 
7.31 We now examine the context of subparagraph (a ) to determine whether our interpretation, 
based on the ordinary meaning of the words of the provision, is correct.  S ubparagraph (a) is one of 
four modes of supply which, as indicated above, are list ed in Article I:2.  If we look at the wording of 
the other modes of supply, we note that the silen ce in subparagraph (a) as regards the presence of the 
supplier of the service is in marked contrast to the modes of supply described in subparagraphs (c) 
("commercial presence") and (d) ("presence of natu ral persons").  In both cases, the presence of the 
service supplier within the territory where the ser vice is supplied is specifically mentioned.  The 
context provided by subparagraphs (c) and (d) therefore suggests that, where the presence of the 
service supplier was required to define a particul ar mode of supply, the drafters of the GATS 
expressed this clearly. 
7.32 Further contextual evidence that cross-border s upply of the services at issue does not require 
the supplier to operate, or be present in some way,  on both sides of the border is suggested by the 
definition of the basic telecommunications services at issue, which are defined in the GATS Annex on Telecommunications.  The services at issue are "basic" telecommunications services and involve: 
"the real-time transmission of customer-supplied information  between two or more 
points  without end-to-end change in the form or content of the customer's 
information."
840 (emphasis added) 
7.33 We note that this definition contains two clo sely linked elements that are relevant to our 
analysis:  the transmission  itself, and that which is transmitted – customer-supplied information.   In 
our view, reading the word "transmission" alone as constituting the service, as Mexico does, fails to 
recognize the close link explicit in this definition.  Moreover, the ownership or control of the means of 
transmission are nowhere addressed in this definition. 
7.34 According to the definition, basic telecommunications services are services supplied 
"between two or more points".  The definition nowhere indicates that a single  supplier must undertake 
the transmission between the "points".  The words "b etween two or more points" suggest, in fact, the 
contrary.  Transmission to the various "points" re quested by a customer requires ownership of or 
access to an expansive transmission infrastructure.  It would be unreasonable to assume that the definition of telecommunications services applies only where a telecommunications supplier itself 
owns or controls a complete global infrastruct ure allowing it to reach every potential "point" 
requested by its customers.  Had WTO Members inte nded this to be the case, they surely would have 
made it explicit in the definition. 
7.35 We note that most WTO Members, in cluding Mexico, scheduled their basic 
telecommunications services using the 1991 UN Provisional Central Product Classification 
("CPC").
841  The CPC references provide more detailed descriptions of the services included in the 
GATS sectoral listing.842  With respect to the facilities-based telecommunications services at issue, 
further support for our conclusion that cross-borde r supply under Article I:2(a) does not require a 
supplier to operate, or to be present in some way,  on both sides of the border, is provided by an 
                                                      
840 GATS Annex on Telecommunications, section 3(b).  See also  footnote 829. 
841 United Nations, Statistical Papers , Series M No. 77, Provisional Central Product Classification, 
1991. 
842 The Scheduling of Initial Commitments in Trade in Services: Explanatory Note, MTN.GNS/W/164 
(3 September 1993), paragraph 16, states that "[w]here it is necessary to refine further a sectoral classification, 
this should be done on the basis of the CPC or other internationally recognized  classification".  WT/DS204/R 
 Page 147 
 
 
examination of the CPC description of "public long distance voice telephone services" (CPC 75212), that is referred to under the item "voice telephone services" in the GATS sectoral list (W/120).
843  The 
CPC description of this service states, in relevant part: 
"Switching and transmission services necessary to establish and maintain 
communications between local calling areas.  This service is primarily designed 
(used) to establish voice communications, but may serve other applications such as 
text communication (facsimile or teletex) and may be provided on a toll or flat fee 
basis.  This service provides the customer with access to the supplier's and 
connecting carrier's entire telephone network  or, in some instances, to a limited 
number or exchange areas (WATS service)."  (emphasis added) 
7.36 This definition makes clear that the service of  long-distance telephony consists of giving a 
customer access to both "the supplier's and connecting operator's  entire telephone network" 
(emphasis added).  The definition of voice telephony  services thus anticipates interworking of both 
operating networks in order for the service to be pe rformed.  No element of the definition implies or 
requires "end-to-end" service by one and the same op erator.  Moreover, when more than one operator 
is involved, the service supplied to customers in cludes access to the "entire networks" of both 
operators.  The service supplied is not therefore the simple transmission of a voice message "up to" a connecting operator's network; rather, the service is  defined as spanning both operators' networks.  It 
therefore follows that supply  of the service involves call completion spanning both operators' 
networks. 
7.37 The CPC definition also specifies that the switching and transmission services supplied are 
those "necessary to establish and maintain communica tions" between local calling areas.  We note the 
statement made by the United States on this point that: 
"[m]aintaining 'communications' requires active coordination between operators on 
each side of the border, and is not tw o discrete services provided by different 
companies.  For example, in order to complete a call, AT&T's switch must 
communicate with Telmex's switch, which is located within Mexico, not on the 
border."
844 
7.38 We observe that basic telecommunications services supplied between Members do require, 
during the delivery of the service, a high degree of interaction between each other's networks, since 
the service typically involves a continuous, rapid and often two-way flow of intangible customer and operator data. The interaction results in a seamles s service between the originating and terminating 
segments, which suggests that the service be considered as a single, cross-border service.   
7.39 Mexico seeks to draw an analogy with services involving the distribution of tangible 
products, such as mail, trucking or pipeline services.  Mexico argues that the se services are similar to 
the telecommunications services at issue, in that they are not supplied cross-border unless the supplier 
operates, or is present in some way, on both sides of the border.  It is not in the Panel's mandate to 
make findings on whether, or to what extent, s ituations regarding the supply of these services fall 
within the scope of Article I:2(a), and we expressly do not make such findings.  We observe, however, 
that the CPC definition of the "public long distance voice telephone services", one of the basic telecommunications services at issue, provides for an especially high degree of interaction between operators.  The CPC definition does not explicitly r estrict the scope of these services to those supplied 
between operators within the same jurisdiction.  We infer that the CPC definition foresees an 
especially high degree of interaction also between ope rators located in different Members.  Because of 
                                                     
 
843 Services Sectoral Classification List , Note by the Secretariat.  MT N.GNS/W/120, 10 July 1991.  See 
also footnote 858. 
844 See the United States' second oral statement, paragraph 18. WT/DS204/R 
Page 148  
 
this high degree of interaction implicit in the defin ition of the service, we do not agree that these other 
services mentioned by Mexico provide persuasive evidence of the argument presented by Mexico. 
7.40 A basic telecommunications operator, in other wo rds, must typically link with other operators 
in order to supply a complete service to its custom ers.  Likewise, those other operators will link with 
it, in order to give their customers a complete ser vice.  Public telecommunications networks are in 
fact often legally obligated to interconnect.  In sum, telecommunications services normally involve or 
require linking with another operator to complete the service, and the operation, or presence in some 
way, of the supplier on both ends of the service cannot therefore be a necessary element of the definition of cross-border supply. 
7.41 If linking with another operator implied that  the originating operator were no longer 
"supplying" the service, an absurd consequence would result.  Not only would telecommunications 
services delivered in this manner not be "supplied" cross-border in the sense of Article I:2(a), they 
would also not be "supplied" under any of the other modes of supply under the GATS.  Nearly all 
telecommunications services currently supplied across borders would then fall outside the scope of the 
GATS.  Present and future liberalization of this fo rm of international telecommunications trade would 
not be possible within the WTO, without a new or amended treaty.  Such an  interpretation would be 
inconsistent with the fact that the GATS "applies to ... trade in services" (Article I:1), and that "trade 
in services" is defined comprehensively as the supply of services through four modes of supply.
 845  
The GATS creates a wide-ranging agreement covering all services and modes of supply, in order to allow progressive liberalization of trade in services between Members.  This suggests that the supply 
of basic telecommunications services –  the "trans mission of customer supplied information" – must 
include supply by means which involve or require lin king to another operator to complete the service. 
7.42 More generally, a supplier of services under th e GATS is no less a supplier solely because 
elements of the service are subcontracted to another firm, or are carried out with assets owned by another firm.  What counts is the service that th e supplier offers and has agreed to supply to a 
customer.  In the case of a basic telecommunications service, whether domestic or international, or 
supplied cross-border or through commercial presence, the supplier offers its customer the service of 
completing the customer's communications.  Having done so, the supplier is responsible for making 
any necessary subsidiary arrangements to ensure that the communications are in fact completed.  The 
customer typically pays its supplier the price of the end-to-end service, regardless of whether the 
supplier contracts with, or uses the assets of, another firm to supply the service. 
7.43 Additional evidence, for the view that cross-border supply does not imply the presence of the 
service supplier in the market into which the servi ce is delivered, is contained in a document entitled 
"Scheduling of Initial Commitments in Trade in Services:  Explanatory Note" (the "Explanatory 
Note"), issued by the GATT Secretariat as a wo rking document for the Group of Negotiations on 
Services.
846  The Explanatory Note states that the supply of a service through telecommunications is 
an example of cross-border supply "since the service supplier is not present within the territory  of the 
Member where the service is delivered".847  (emphasis added)  We accord substantial interpretative 
weight to this statement.  The Explanatory Note was requested by the Group of Negotiations on Services, and issued in September 1993, during a pe riod of intense drafting of initial commitments to 
meet the deadline for the completion of schedules in  December of that year.  During and after that 
                                                     
 
845 The comprehensive coverage of the GATS is also  reflected in Article I:3(b) of the GATS which 
provides that "services" – for the pu rposes of the Agreement – "includes any services in an y sector except 
services supplied in the exercise of governmental auth ority".  The Preamble to the GATS also refers in 
expansive terms to the "growing importance" of trade in  services for the "world economy", and the desire to 
establish a multilateral framework of principles and rules for the "expansion" of such trade in order to promote 
"economic growth" and "development". 
846 Scheduling of Initial Commitments in Trade in Services:  Explanatory Note . MTN.GNS/W/164 
(3 September 1993).  We refer to this document as the "Explanatory Note". 
847 Ibid.,  paragraph 19(a).   WT/DS204/R 
 Page 149 
 
 
period, the Explanatory Note was heavily relied upon by negotiators to interpret their own and other 
negotiators' commitments.  The Explanatory Note was revised somewhat in 2001 – without however 
modifying the statement with respect to the presence  of cross border suppliers – and was adopted by 
the Council on Trade in Services as "Guidelines for th e scheduling of specific commitments under the 
General Agreement on Trade in Services (GATS)" (the "Scheduling Guidelines").848  Even though the 
Explanatory Note and the Scheduling Guidelines each  state that they cannot be considered as 
"authoritative" or "legal"  interpretations of the GAT S, we find that the source, content, and use by 
negotiators of the Explanatory Note, together w ith its later adoption by Members as the Scheduling 
Guidelines, provides an important element with which to interpret the provisions of the GATS. 
7.44 In interpreting the scope of cross border supply in Article I:2(a) of the GATS, we need not 
decide whether the Explanatory Note provides "con text" (as an agreement or instrument made in 
connection with the conclusion of the GATS) unde r paragraph 2 of Article 31 of the Vienna 
Convention, or whether it can be "taken into acco unt", together with the context, as a subsequent 
agreement or practice under paragra ph 3 of the same provision.  In any case, we consider that the 
source, content and use of the Explanatory Note make  it part of the "circumstances" of the conclusion 
of the GATS, within the meaning of Article 32 of the Vienna Convention.  We may therefore properly 
have recourse to the Explanatory Note to conf irm our understanding of the ordinary meaning of 
Article I:2(a) of the GATS.849 
7.45 For these reasons, we find that  the services at  issue, in which United States suppliers link 
their networks at the border with those of Mexican  suppliers for termination within Mexico, without 
United States' suppliers operating, or being present in some way, in Mexico, are services which are 
supplied cross-border within the meaning of Article I:2(a) of the GATS.   
(c) Has Mexico undertaken commitments on the cr oss-border supply of the services at issue? 
7.46 The United States argues that Mexico, with resp ect to the cross-border supply of the services 
at issue, has inscribed in its schedule commitmen ts granting full national treatment and full market 
access.  The one apparent limitation (the "routing r estriction"), which Mexico has inscribed in the 
market access column does not, accord ing to the United States, fall within the defined categories of 
market access restrictions in Article XVI:2, and therefore does not limit the full market access which Mexico has committed with respect to the cross-border services at issue. 
7.47 Mexico initially argues that it cannot have unde rtaken any cross-border commitments with 
respect to the supply of the services at issue through the linking of networks of different operators at 
the border, since the supply of these services in this  manner is not within the definition of cross-
border trade in services in the sense of Article I:2(a).  We have rejected this argument in the previous 
section. 
7.48 Mexico then argues that, even if cross-border supply were understood to include the linking 
of networks of different operators at the border,  Mexico has still undertaken no commitment to allow 
the cross-border supply of the services at issue, beca use the limitations Mexico has inscribed in its 
schedule make it impossible for cross-border supply to  take place.  In particular, Mexico argues that 
the routing requirement in its commitments requir es a cross-border supplier to link its network with 
that of a Mexican operator at the border and that this  requirement, read together  with other restrictions 
in its schedule, requires a potential cross-borde r supplier to obtain a "concession". To obtain a 
                                                     
 
848 Guidelines for the scheduling of specific commitments under the General Agreement on Trade in 
Services (GATS) , adopted 23 March 2001, S/L/92 (28 March 2001), chart following paragraph 26, and 
paragraph 28.  We refer to this document as the "Scheduling Guidelines". See discussion of the Guidelines in 
paragraph 7.67. 
849 See paragraphs 7.53-7.57.  WT/DS204/R 
Page 150  
 
concession, Mexico argues, foreign suppliers woul d have to have both a commercial presence in 
Mexico and Mexican nationality. 
7.49 It remains for us therefore to examine whether, in the light of the limitations inscribed in its 
schedule, Mexico has made any specific commitments with respect to the cross-border supply of the 
services at issue and, if so, whether these repr esent full market access and national treatment 
commitments, in the sense of Articles XVI and XVII. 
(i) Cross-border services in Mexico's Schedule 
7.50 We first examine Mexico's Schedule to determine which service sectors  Mexico has made 
subject to cross-border commitments.  We will start our analysis by looking at the inscriptions that 
Mexico has made in the sector  column of its schedule, with respect to the services at issue. 
aa) Service sectors inscribed in Mexico's Schedule
 
7.51 Mexico has set out the telecommunications services sectors that are subject to commitments 
by it by making the following inscription in the service sector column of its schedule:850 
"2.C. Telecommunications Services  
Telecommunications services supplied by a facilities based public 
telecommunications network (wire-based and radioelectric) through any existing 
technological medium, included in subpara graphs (a), … (c), (f), … and (o). 
   …  
(a)  Voice telephony (CPC 75211, 75212)   …  (c)  Circuit-switched data tr ansmission services (CPC 7523*) 
(f)  Facsimile services (CPC 7521** + 7529**) 
(o)  Other 
 – …  
 – Commercial agencies
3 
 – … 
3Agencies which, without owning transmi ssion means, provide third parties with 
telecommunications services by using capacity leased from a public network 
concessionaire ." 
                                                      
850 The Spanish language version, which Mexico has designated as the only authentic version, reads:  
"2.C. Servicios de Telecomunicaciones 
Los servicios de telecomunicaciones, suministrados por una red pública de telecomunicaciones  basada en  infraestructura  (alámbrica y radio-eléctrica) a través de cualquier medio tecnológico 
actual, incluidos en las literales a), … c), f), … y o). 
  …  (a) Servicios de telefonía (CCP 75211, 75212) 
  …  
(c) Servicios de transmisión de datos con conmutación de circuitos (CCP 7523**) 
(f) Servicios de facsímil (CCP 7521**+7529**) 
(o) Otros  -  … 
 - Comercializadoras
3 
 -  … 
3 Empresas que, sin ser propietarias o poseedoras de medios de transmisión, proporcionan a 
terceros servicios de telecomunicaciones mediante el uso de capacidad arrendada de un 
concesionario de redes públicas de telecomunicaciones. "  WT/DS204/R 
 Page 151 
 
 
7.52 The services listed in Mexico's Schedule – "voice telephony", "circuit-switched data 
transmission services", "facsimile services", and "commercial agencies" – appear to cover the services at issue raised by the United States in this case.   However, these services  are listed under, and are 
subordinate to, a introductory heading, that describes the listed services as "[t]elecommunications 
services supplied by a facilities based public telecommunications network (wire-based and 
radioelectric) through any existing technological medi um".  We must therefore carry our examination 
further and determine whether, or to what extent, the introductory heading affects the scope of the 
individual listed services. 
bb) Introductory heading
 
7.53 The parties interpret differently the introductory  heading, and disagree on its implications for 
the scope of the commitments undert aken.  Mexico argues that the introductory heading refers only to 
"the physical and technical aspects of signal transmis sion" and "does not define the specific nature of 
either the services or the supply thereof".851  Mexico implies, therefore,  that the introductory heading 
has little or no effect.  The United States takes a di fferent view, maintaining that the introductory 
heading limits the scope of the sector generally  to services of suppliers who, in the market from  which 
the service is supplied, own facilities.  Services of suppliers who lease  facilities in the market from 
which the service is supplied are, according to the United States, nonetheless covered by the particular subsector on "commercial agencies".
852  
7.54 We recall that the introductory heading of Me xico's Schedule covers "[t]elecommunications 
services supplied by a facilities based public telecommunications network (wire-based and 
radioelectric) through any existing technological me dium".  A simple parsing of the terms of the 
heading indicates that telecommunications services within its scope must have four main attributes:  
these services must be supplied by:  (i) a " telecommunications network", that is;  (ii) "public";  (iii) "facilities based";  and (iv) utilises "any existing technological medium".  In examining the first two requirements – that the service be supplied by a "t elecommunications network" that is "public" – we 
recall the definition in the GATS Annex on Teleco mmunications of a "public telecommunications 
transport network".  This is defined in the Anne x as the public telecommunications "infrastructure" 
which permits telecommunications between a nd among defined networ k termination points.
853  
Moreover, the meaning of "public" is revealed in the accompanying definition in the Annex of "public 
telecommunications transport service", which refers to  a service "explicitly or in effect ... required to 
be offered to the public generally."854  The first two requirements of the introductory heading thus 
appear to be straightforward, indicating simply that the service supplied is for public use , and is based 
on some sort of network infrastructure .  Likewise, the fourth requirement – that supply be through 
"any existing technological medium" is straightforw ard, excluding "new" technologies from the scope 
of the commitments.   The parties do not dispute the claims made by the United States that the 
services at issue relate to "public" services, tran sported over a "network", and using "existing" 
technologies. 
7.55 However, the meaning of the third requirement of  the introductory heading – that the service 
be supplied by a "facilities-based" network – is  much less clear.   The ordinary meaning of the term 
"facilities", with respect to a telecommunications ser vice, suggests "infrastructure", or the physical 
elements by means of which the service is su pplied.  The term "facilities-based", under this 
                                                      
851 See Mexico's answer to question No. 2(c) of the Panel of 14 March 2003, paragraphs 2 and 3 ( What 
does the phrase "by a facilities based public telecommunications network " add to the sector inscription in 
Mexico's Schedule?  Without these words in the sector co lumn, what other forms of supplying services would be 
allowed?).  
852 See the United States' answer to question No. 2(c) of the Panel of 14 March 2003, paragraph 19.  
For question No. 2(c), see footnote 851 of this Report. 
853 See GATS Annex on Telecomm unications, Section 3(c). 
854 See GATS Annex on Telecommunications, Section 3(b). WT/DS204/R 
Page 152  
 
interpretation, would on its face suggest that th e telecommunications services committed in Mexico's 
Schedule must be supplied by or through telecomm unications "infrastructure".  Yet if the term 
"facilities-based" simply means "infrastructure", th en the term would add little or no meaning to 
Mexico's commitment, since a service supplied by  or through a public telecommunications network 
must, as the Annex on Telecommunications suggests, be  ultimately supplied by or through some form 
of telecommunications infrastructure.  The introduct ory heading in Spanish, which is the authentic 
language of Mexico's Schedule, uses the term " basada en  infraestructura", which gives rise to the 
same interpretative difficulties.
855 
7.56 We recognize that, in examining the meaning of the expression "facilities-based" in Mexico's 
introductory heading, we need to give meaning and effect to all its terms, and not adopt an 
interpretation that would result in re ducing any of its terms to redundancy.856  In seeking to give 
meaning to the term "facilities-based", we observe that the requirement that the supply of the service 
be "based" on facilities logically implies that there could in principle exist supply that is not "based" 
on facilities.  This suggests that a "facilities-b ased" network refers not to the existence of 
infrastructure (upon which any telecommunication ser vice ultimately has to rely), but to the 
relationship  between the infrastructure and the service.  Under this interpretation, the term "facilities-
based" in the introductory heading of Mexico's Sche dule could plausibly refer to services transported 
by an operator over its own infrastructure, and not over infrastructure leased from another operator. 
7.57 Under this interpretation, a further issue ari ses as to whether the meaning of "facilities-based" 
qualifies only those services transported by an ope rator over its own infrastructure in the market from 
which  the service is supplied, as the United States sugg ests.  Examining the ordinary meaning of the 
terms in Mexico's Schedule, in their context, the words "facilities-based public telecommunications 
networks" do not, on their own, suggest any geographical  distinction.   Mexico has placed this phrase 
in the column of its schedule entitled "sector", whic h suggests that the phrase refers to the overall 
nature of the service, and not to the nature of the ser vice with respect to  any particular location of the 
supplier.  Aspects of the supply of the service that relate to the location of the supplier are addressed 
in GATS by the four modes of supply.  In a sche dule, the inscriptions that inform the reader 
concerning the nature of the commitments in relation to the four modes of supply are found in the market access and national treatment columns, not in the sector column.  Thus, the inscriptions in the 
market access and national treatment columns must be used to determine what limitations, if any,  may  affect the supply of a service based on the location of the supplier or its status (facilities-based or not)  in a particular location.  We therefore see no reason to read this geographical qualification into 
the meaning of "facilities-based".  Accordingly, we are not convinced by the United States' argument 
that the phrase "facilities-based public telecommunica tion networks" found in the sector column of 
Mexico's Schedule means, in itself,  that Mexico's commitments extend to any of the services at issue 
supplied by a cross-border supplier that uses its own infrastructure (and not leased capacity) in the 
market from which it is supplying , regardless of how these services are terminated in Mexico. 
cc) Supplementary documents used to schedule commitments
 
7.58 We have arrived at this interpretation of the introductory heading in Mexico's Schedule based 
on the wording of the heading within the context of  the schedule.  We now seek confirmation of the 
meaning of the introductory heading in the light of three important documents used by Members to provide guidance in drawing up their schedules:  th e Draft Model Schedule, the related Note by the 
Chairman, and the Scheduling Guidelines.  We refer to these documents as the "supplementary 
documents". 
i) Description of the supplementary documents
 
                                                      
855 See Spanish text of the main sector heading reproduced in footnote 850. 
856 See Appellate Body Report , US – Gasoline , DSR 1996:I, 3, at 21.  WT/DS204/R 
 Page 153 
 
 
– Draft Model Schedule  
7.59 The Draft Model Schedule arose from discussions by negotiators at the close of the Uruguay 
Round.  Once the Negotiating Group on Basic Teleco mmunications was established in May 1994, the 
Secretariat was asked to provide a Note on the background on the previous Uruguay Round discussions on basic telecommunications.  The resulting Note included the Draft Model Schedule that, 
after discussion in the Group, was reissued with minor revisions.
857  The Draft Model Schedule was 
specifically intended  "to assist participants in the drafting of their offers and final schedules."  It 
contains a list of basic telecommunications sectors based on the standard GATS sectoral classification list (W/120)
858, including cross-references to the Un ited Nations CPC, and explanatory notes.859    
7.60 The Draft Model Schedule lists the services subsectors, considered as the basic 
telecommunications services subject to the negotiations, as follows: 
"2.C. Telecommunications Services    UNCPC 
a. Voice telephone services     7521 
b. Packet-switched data transmission services   7523** c. Circuit-switched data transmission services   7523** 
d. Telex services       7523** 
e. Telegraph services      7522** f. Facsimile services      7521**+7529** g. Private leased circuit services     7522**+7523** o. Other" 
7.61 The "sector or subsector" column of the Draft Model Schedule also lists a number of 
"categories" into which the services can be furthe r subdivided.  The Draft Model Schedule explains:
860 
"Depending on the services being offered or on the limitations existing in the 
regulatory regime concerned, the specific commitments on these services [a. through g. and o.] may be subdivided into the categories as noted." 
7.62 The listed "categories" are reproduced as follows:
861  (emphasis added) 
 "Local/long distance/international service 
  – wire-based 
  – radio-based   –  on a resale basis  
  –  facilities-based  
                                                     
 
857 Formulated by negotiators during 1993, prior to the conclusion of the Uruguay Round, it was 
included in a formal document at the outset of the telecom negotiations, as an attachment to  Negotiations on 
Basic Telecommunications, Note by the Secretariat,  TS/NGBT/W/1, 2 May 1994.  It was slightly revised by the 
Group and reissued in  Draft Model Schedule of Commitments on Basic Telecommunications, Informal  Note by the 
Secretariat, Job. No. 1311, 12 April 1995. 
858 Services Sectoral Classification List , Note by the Secretariat.  MTN.GNS/W/120, 10 July 1991. 
Subsectors (h) to (n) of the standard WTO sectoral listing for telecommunications services contained in 
document W/120 were considered to be "value-added", not "basic", telecommunications services, and therefore 
omitted.  The asterisks appearing against CPC number s indicate that the listed subsector comprises only part of 
that CPC code. 
859 United Nations, Statistical Papers, Series M, No. 77, Provisional Central Product Classification, 
1991. 
860 Draft Model Schedule, Footnote b.  See footnote 857. 
861 Note by the Chairman, 16 January 1997.  S/G/W/2/Re v.1.  The Note states th at a category has to be 
explicitly mentioned in a Member's sector column in order to have effect. WT/DS204/R 
Page 154  
 
  – for public use   – for non-public use" 
7.63 We note particularly the use of the terms "on a resale basis" and "facilities-based" as 
categories by which specific commitments may be subdivided. 
– The Note by the Chairman 
 
7.64 A Note by the Chairman of the Negotiating Group on Basic Telecom, entitled "Notes for 
Scheduling Basic Telecom Services Commitments" was issued on 16 January 1997.862  The purpose 
was "to produce a brief and simple note on assumptions  applicable to the scheduling of commitments 
in basic telecoms."863  Although the Note states that it is " not intended to have any binding legal 
status", it specifies that its purpose is "to assist de legations in ensuring the transparency of their 
commitments and to promote a better unders tanding of the meaning of commitments."864  The Note 
draws on the Draft Model Schedule, restating its categories and confirming that they are to be used in scheduling commitments.  The Note states an importa nt assumption:  that, "unless otherwise noted in 
the sector column" any telecommunications service listed in the sector column "encompasses" or 
"may be provided" by or through all of the different "categories" of the service. 
7.65 The Note by the Chairman wa s attached to the final Report of the Group on Basic 
Telecommunications, which was adopted on 15 February 1997.
865  The Report states that the 
Chairman issued a Note "reflecting his understandi ng of the position reached in discussion of the 
scheduling of commitments" and that this Note " set out a number of assumptions applicable to the 
scheduling of commitments and was intended to  assist in ensuring the transparency of 
commitments".866  
– Scheduling Guidelines  
7.66 The Note by the Chairman, together with the Draft Model Schedule, were attached to the 
"Guidelines for the Scheduling of Specific Comm itments under the General Agreement on Trade in 
Services (GATS)", (the "Scheduling Guidelines") which were adopted by Members in the Council on 
Trade in Services on 23 March 2001.867  The Scheduling Guidelines were an update of the 
Explanatory Note issued in 1993 for the Group of Negotiations on Services.868  The objective of the 
Scheduling Guidelines is "to explain, in a concis e manner, how specific commitments should be set 
out in schedules in order to achieve precision and clarity."  
ii) Interpretative value of the supplementary documents  
7.67 The Draft Model Schedule and the Note by the Chairman were documents given considerable 
prominence by Members, since they were attached  to the final Report adopted by the Negotiating 
Group on Basic Telecommunications in 1997.869  Members gave further prominence to these two 
documents by attaching them to the Scheduling Guidelines adopted by the Council for Trade in 
Services in 2001.  Annex 2 of the Scheduling Guid elines is entitled "List of attached documents 
                                                      
862 Notes for Scheduling Basic Telecommunications Services Commitments, Note by the Chairman. 
S/GBT/W/2/Rev.1. 
863 Note by the Chairman, 16 January 1997.  S/G/W/2/Rev.1, preamble. 
864 Note by the Chairman, 16 January 1997.  S/G/W/2/Rev.1, preamble. 
865 Report of the Group on Basic Telecommunications, S/GBT/4 of 15 February 1997. 
866 Report of the Group on Basic Telecommunications, S/GBT/4 of 15 February 1997, paragraph 5. 
867 Guidelines for the scheduling of specific commitments under the General Agreement on Trade in 
Services (GATS) , adopted 23 March 2001, S/L/92 (28 March 2001). 
868Scheduling of Initial Commitments in Trade in Services:  Explanatory Note . MTN.GNS/W/164 
(3 September 1993). 
869 Report of the Group on Basic Telecommunications, S/GBT/4 of 15 February 1997.  WT/DS204/R 
 Page 155 
 
 
relevant  for scheduling purposes". (emphasis added)  Nonetheless, a footnote to the title of Annex 2 
states that "[t]he fact that these documents are a nnexed to these guidelines should not be interpreted as 
changing their status."  We accept that the footnot e means that the attachment of the Draft Model 
Schedule and the Note by the Chairman to the Sc heduling Guidelines should not in itself affect the 
existing interpretative status of the two documen ts.  However, the footnote does not affect the 
interpretative status that the Draft Model Schedul e and the Note by the Chairman might otherwise 
have, including the interpretative value derived from being attached to the Report by the Negotiating 
Group on Basic Telecommunications.  Consequently, ev en if the Draft Model Schedule and the Note 
by the Chairman cannot be seen as part of the "cont ext" under paragraph 2 of Article 31, nor be "taken 
into account" under Article 31 – a lega l question that we leave open –  we find that these documents 
are, with respect to the GATS Protocol on Tel ecommunications (to which Mexico's Schedule was 
attached) an important part of the "circumstances of  its conclusion" within the meaning of Article 32 
of the Vienna Convention.  Under the terms of Article 32, we may therefore use the Draft Model 
Schedule and the Note by the Chairman to confir m the ordinary meaning, arrived at through the 
application of Article 31 of the Vienna Conve ntion, of Mexico's GATS commitments on 
telecommunications services. 
7.68 Confirmation of the interpretative value of the supplementary documents is provided by the 
extensive use in Members' schedules of the categor ies indicated in the Chairman's Note and Draft 
Model Schedule.  Schedules on occasion indicate even finer distinctions in categories, where needed, 
to reflect accurately the nature of the services on which Members were undertaking commitments.  In 
some cases, the categories are used to limit the sco pe of a subsector by distinguishing the categories 
of services that are being committed.  In other cases, the categories are used to specify different levels 
of commitments for some categories of a subsect or, as compared with other categories of the 
subsector.  Typical examples in schedules include co mmitments that offer greater levels of access for 
a given service supplied on a facilities basis, or that specify that public telephony remains under 
monopoly while non-public telephony does not.  The cate gories are often cited in the sector column of 
schedules, as provided in the Chairman's Note.  In  some schedules, however, categories are listed in 
the market access column instead of  the sector column.  In these c ases, the entries nonetheless appear 
to clarify the category or categories of service  to which the market access limitation itself applies.  
Indeed, for those schedules that use not categori es at all, it is only by reference to these 
understandings that there can be certainty that th e commitments "encompass" all of the forms in 
which the services may be supplied.  Because of this extensive use in Members' schedules of 
principles set out in the Draft Model Schedule and the Note by the Chairm an, we consider that 
substantial interpretative weight can be  given to the supplementary documents. 
dd) Mexico's cross-border te lecommunications commitments  
7.69 We now examine the sector column of Mexico's  Schedule in the light of the Model Schedule 
and the Chairman's Note.  We recall that the intr oductory heading in Mexico's Schedule is contained 
in the column which describes services, and our earlier reasoning that this heading must therefore 
qualify a type of service.   We next observe that the words "facilities based", "public", "wire-based" 
and "any … technological medium" used in Mexico's  Schedule all reflect categories included in the 
Chairman's Note.870  Mexico appears therefore to have adopt ed the sectoral appr oach set out in the 
Chairman's Note, and can be assumed to have  scheduled its commitments according to the 
assumptions contained in that Note.  
7.70 The category "facilities-based" which appears in the Chairman's Note and the Draft Model 
Schedule is used solely to describe the "facilities- based" supply of a service, and not generally to 
describe the simple existence of a network infrastruct ure. As indicated in the Chairman's Note "unless 
otherwise noted in the sector column", the commitme nt is presumed to encompass all of the categories 
cited in the Note.  We recall that these categori es include "facilities-based" and "on a resale basis".  If, 
                                                      
870 See our previous discussion of the Chairman's Note in paragraphs 7.62-7.68 of this Report. WT/DS204/R 
Page 156  
 
as discussed earlier, Mexico's reference to supply by  or through "facilities" were understood simply to 
refer to supply by means of an infrastructure, th en the term would be redundant, since any supply of 
the service is ultimately possible only through a network of physical assets of some operator. In 
consideration of the categories of the Chairman's Note, however, it becomes apparent that such an 
interpretation would also make redundant the cont rasting categories of supply – "facilities-based" and 
"by resale".  Were this the case, it would not be possible, as provided by  the Chairman's Note, for 
Members to use these categories as a basis for distinguishing between types of supply of basic 
telecommunications services being committed and those that are not. 
7.71 We find therefore that the use of the word  "facilities-based" in the phrase "facilities-based 
public telecommunication network" contained in the introductory heading to Mexico's 
telecommunications commitments means that Mexico  has undertaken commitments for the services at 
issue supplied only on a facilities basis over such ne tworks – and not by resale or leased capacity.  
The examination of the supplementary documents t hus confirm our interpretation of the ordinary 
meaning of the terms "facilities-based" in Mexico's Schedule. 
7.72 Nonetheless, Mexico's services sector listing do es contain a subsector listing for "commercial 
agencies" (" comercializadoras "), defined as "[a]gencies which, without owning transmission means, 
provide third parties with telecommunications services by using capacity leased from a public network concessionaire."  This subsector listing can be read only as an exception, for the services at 
issue that are supplied through leased capacity, to th e general exclusion of such services expressed in 
the introductory heading.  The separate commit ment on supply of telecommunications services 
through leased capacity  has meaning in the context of Mexico's Schedule, since supply in this manner 
is subject to market access limitations that are some what different from those inscribed with respect to 
facilities-based supply. 
(ii) Market access and national treatment commitments for cross-border supply 
7.73 We now consider what cross-border commitments Mexico has undertaken with respect to the 
services listed in the sector column of its schedule.  For the services at issue, Mexico has inscribed 
certain cross-border commitments for mark et access and national treatment.  In the national treatment  
column of its schedule, Mexico has inscribed "N one".  This term is a GATS scheduling convention 
which means "no limitations" – in other words, a full commitment.
871  Mexico has therefore 
undertaken a full  national treatment  commitment fo r the cross-border supply of the services at issue. 
7.74 With respect to market access  for the cross-border supply of the services at issue, Mexico has 
inscribed the following: 
"None, except the following:  International traffic must be routed through the 
facilities of an enterprise that has a concession granted by the Ministry of 
Communications and Transport (SCT)."872 
7.75 The words "None, except" appear at the beginni ng of Mexico's inscription.  The words that 
follow indicate that Mexico intends to grant fu ll market access, subject only to the limitation 
described.  Since Article XVI and scheduling convent ions require that the inscription of a limitation 
                                                      
871 Scheduling of Initial Commitments in Trade in Services:  Explanatory Note . MTN.GNS/W/164 
(3 September 1993) paragraph 24.  See also Guidelines for the scheduling of specific commitments under the 
General Agreement on Trade in Services (GATS) .  Adopted 23 March 2001.  S/L/92 (28 March 2001), 
paragraph 42. 
872 In Spanish:  " 1) Ninguna, excepto la siguiente: el tráfico internacional debe ser enrutado a través de 
las instalaciones de una empresa con una concesión otor gada por la Secretaría de Comunicaciones y Transportes 
(SCT). "  WT/DS204/R 
 Page 157 
 
 
must be read to mean that full market access is granted, subject only to any measures specifically 
inscribed, the inscription of the wo rds "None, except" was not necessary.873 
7.76 We now examine what sort of limitation, if an y, on market access is achieved by Mexico's 
inscription that "[i]nternational traffic must be rout ed through the facilities of an enterprise that has a 
concession …".  Article XX:1(a) sets out the general requirement for Members to "specify" the terms, 
limitations and conditions on market access for comm itted sectors in their schedule.  "Specifying" 
requires that an entry describe each measure conc isely, indicating the elements that make it 
inconsistent with Article XVI:2.874  
(iii) Mexico's "routing restriction " 
7.77 We now examine whether the terms of the "routi ng restriction" in the market access column 
of Mexico's Schedule indicate that it comes within the scope of Article XVI:2.  This provision 
contains six categories of measures that restrict market access.  These categories differ depending on whether they place limitations on: 
 (a) the number of service suppliers;  (b) the value of services transactions or assets; 
 (c) the number of service operations or quantity of service output; 
 (d) the number of natural persons that may be employed;  (e) the forms of legal entity; or  (f) the participation of foreign capital.
875 
                                                      
873 Scheduling of Initial Commitments in Trade in Services:  Explanatory Note , MTN.GNS/W/164 
(3 September 1993), paragraph 4. 
874 Scheduling of Initial Commitments in Trade in Services:  Explanatory Note , MTN.GNS/W/164 
(3 September 1993), paragraphs 21 and 25. 
875 A summary of the six categories.  GATS Article XVI:2 reads in full: 
 "In sectors where market-access commitments ar e undertaken, the measures which a Member 
shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire 
territory, unless otherwise specifie d in its Schedule, are defined as: 
(a) limitations on the number of service suppliers whether in the form of numerical 
quotas, monopolies, exclusive service suppli ers or the requirements of an economic 
needs test; 
(b) limitations on the total value of service transactions or assets in the form of numerical 
 quotas or the requirement of an economic needs test; 
(c) limitations on the total number of service operations or on the total quantity of  service output expressed in terms of designated numerical units in the form of quotas 
 or the requirement of an economic needs test; 
(d) limitations on the total number of natural persons that may be employed in a 
particular service sector or that a servi ce supplier may employ and who are necessary 
for, and directly related to, the supply of a specific service in the form of numerical quotas or the requirement of an economic needs test; 
(e) measures which restrict or require specific types of legal entity or joint venture 
 through which a service supplier may supply a service;  and (f) limitations on the participation of foreign capital in terms of maximum percentage 
 limit on foreign shareholding or the total value of individual or aggregate foreign 
 investment." WT/DS204/R 
Page 158  
 
7.78 Mexico's routing restriction contains three main elements.  The first element relates to 
"international traffic".  The second element concerns traffic that "must be routed through the facilities 
of" an enterprise.  The third and final element c oncerns "an enterprise that has a concession".  We 
assess each of these elements in turn, with respect to their relevance to the six categories of market 
access measure set out in Article XVI:2. 
aa) "International traffic
" 
7.79 The first element of the routing restriction narro ws its scope to "international traffic".  This 
element reflects one of the "categories" contained in  the Chairman's Note, and can be contrasted with 
other categories of local and domestic long-distance service.  Since the services at issue are services 
supplied cross-border, they would necessarily involve tra ffic that is international in character.  Even if 
"domestic" services were to transit borders, they w ould do so as international "traffic".  Therefore, 
Mexico has not, through use of this element, placed a substantive limitation on the number of 
suppliers of scheduled services on a cross-border basis, the quantity of the cross-border services 
supplied, or on any of the other categorie s of measure described in Article XVI:2. 
bb) "Routed through the facilities " 
7.80 The second element requires that international tr affic "must be routed through the facilities" 
of a Mexican concessionaire.  The United States ar gues that the requirement that services supplied 
cross-border "through the facilities" of a Mexican concessionaire means simply that United States 
calls must be terminated using the assets or equipment of a Mexican concessionaire, and that these 
include the use of leased lines and other leased capacity.876  Mexico disagrees, specifying that 
"through the facilities" means "through an internatio nal gateway" of a Mexican concessionaire, which 
it claims is its meaning in Mexican legislation. 
7.81 In examining the meaning of this element of the routing restriction, we note that the ordinary 
meaning of the term "facilities" (in the Spanish authentic text " instalaciones "), on its own, is very 
broad.  A specialized telecommunications dictionary defines "telecommunications facilities" as follows: 
"The aggregate of equipment, such as telephones, teletypewriters, facsimile 
equipment, cables, and switches, used for various modes of transmission, such as 
digital data, audio signals,  image and video signals." 
7.82 The same dictionary defines "transmission facility" as:    
"A piece of a telecommunication system thro ugh which information is transmitted for 
example, a multi pair cable, a fiber optic cable, a coaxial cable, or a microwave 
radio."
877 
7.83 Neither of these broad definitions makes clear whether supply of the services at issue routed 
through the "facilities" would include supply using capacity  leased  to another operator.  It is therefore 
necessary to examine further the meaning of the term "facilities", viewed in its context within 
Mexico's Schedule. 
7.84 We recall that the Chairman's Note provided guidance for Members making commitments in 
basic telecommunications.878  The use of the word "facilities" in  the Note corresponds to a possible 
category by which a service sector could be narrowed down or refined.  The category is referred to as 
                                                      
876 See the United States' first written submission, paragraph 57. 
877 Newton's Telecom Dictionary, 19th Edition, March 2000. 
878 See paragraphs 7.58-7.68 of this Report.  WT/DS204/R 
 Page 159 
 
 
the "facilities-based" supply of a service.  We therefore find that the phrase "through the facilities of", placed in the context of the categories of the Chairm an's Note, refers not to a requirement simply to 
use the equipment or physical assets of a Mexican concessionaire, but to supply the service on a facilities-basis, and not through capacity leased to the cross-border supplier. 
7.85 We now assess whether this element of the ro uting restriction introduces a market access 
restriction in the sense of Article XVI:2, with r espect to the cross-border supply of the service.  To 
this end, it is necessary to assess the effect of this element on the relevant services listed by Mexico in 
its schedule. With respect to services falling under the main sectoral heading, this element would 
appear to reinforce the inscription in the main sectoral heading that the services committed must be 
supplied on a facilities-basis.  However, this element of the routing restriction also further specifies 
that the terminating segment of cross-border supply not only may, but must,  be supplied on a 
facilities-basis.  This element of th e routing restriction means, therefore, that supply of the service by 
means of one of the categories (over leased capacity) within Mexico is prohibited, and is subject to a 
zero quota in the sense of Article XVI:2(a), (b) and (c ).  We note that, while this limitation prohibits 
services that originate on a facilities basis from be ing terminated over leased circuits, it does not 
prevent these services from being supplied when they  fall within the facilities-based category with 
respect to termination. 
7.86 With respect to Mexico's commitments falling under the subsector heading of "commercial 
agencies", this element of the routing restriction would mean that even if  the originating segment of 
the cross-border service is supplied over leased capacity , it is nevertheless restricted only to facilities 
based supply on the terminating segment within Mexi co.  Therefore, with respect to the commercial 
agencies ( comercializadoras ) services described as a subsector, this routing restriction prohibits the 
cross-border supply upon termination within Mexico  by means of  the very "leased capacity" which 
defines this type of service.  While this element of the routing restriction does not expressly prohibit 
cross-border supply over leased capacity on the originating segment, it means that supply over leased capacity on the terminating segment is prohibited.  Therefore, this element of the routing restriction 
prohibits end-to-end International Simple Resale (I SR), and effectively eliminates the possibility of 
any cross-border supply of services over leased capac ity. In this sense, with respect to cross border 
services supplied by commercial agencies, the rou ting restriction falls within the scope of 
Article XVI:2(a), (b) and (c).  
cc) "Enterprise that has a concession
" 
7.87 The third element requires that the traffic be r outed through the facilities of an "enterprise that 
has a concession".  In particular, Mexico argues th at the requirement that international traffic be 
"routed through the facilities" of an enterprise that  has a "concession" must be read in conjunction 
with the use of the term "concession" contained in  its market access column for the supply of the 
services at issue through commercial presence . 
7.88 Mexico's Schedule, with respect to the supply of the services at issue through commercial 
presence reads, in relevant part: 
"A concession1 from the SCT is required.  Only enterprises established  in conformity 
with Mexican law may obtain such concession. 
1 Concession:  The granting of title to install,  operate or use a facilities-based public 
telecommunications network.  
Direct foreign investment up to 49 percent  is permitted in an enterprise set up in 
accordance with Mexican law."  (emphasis added) WT/DS204/R 
Page 160  
 
7.89 Thus, the "concession" needed to supply the services at issue through commercial presence 
requires:  (a) the establishment of an enterprise;  w ith (b) no more than 49% foreign ownership.  For 
Mexico, the use of the word "con cession" has the same meaning in the context of cross-border supply 
as it does in the context of commercial presence.  Therefore, in Mexico's view, a concessionaire 
entitled to route international traffic into Mexico mu st be a juridical person of Mexican nationality.  
Mexico then reasons that the mention of the word  "concession" in the routin g restriction for cross-
border supply "creates commercial presence and nationality requirements to supply basic 
telecommunications services in Mexico".
879  Since a foreign service supplier wishing to supply cross-
border can neither have Mexican nationality nor  supply through commercial presence, Mexico 
concludes that its cross-border commitments for th e services at issue effectively allow zero access for 
foreign service suppliers wishing to supply cross-bo rder, and that this constitutes "limitations on the 
number of service suppliers", as provided fo r in paragraph (a) of Article XVI:2.880 
7.90 Even if we were to accept Mexico's argument  that the term "concession" in its cross-border 
commitments has the same meaning as in its commercial presence commitments, we do not see how the nationality and commercial presence requirement s for the concessionaire – the entity which routes 
the calls transferred to it by United States supplie rs at the border – amounts to a commercial presence 
and a Mexican nationality requirement for a cross-border supplier , effectively preventing any supply 
by that mode.  Accepting Mexico's argument in th is regard would require acceptance of Mexico's 
argument that the same supplier must undertake the transmission of a call on both sides of the border, implying that the supplier operate, or be present in some way,  in the market being supplied.  The 
Panel has earlier examined and rejected this interpretation.
881  Based on a correct understanding of 
cross-border supply under Article I:2(a) of the GATS,  Mexico's conclusion simply does not follow.  
The third element of the routing restriction – the concession requirement – does not therefore fall into any of the six categories of market access restrictions contained in Article XVI:2. 
7.91 We find overall therefore that the inscription in Mexico's Schedule of the routing requirement 
prohibits market access for the supply of the serv ices at issue on a non-facilities basis (over capacity 
leased by an operator) in Mexico, but allows full access for the services at issue supplied on a 
facilities-basis ( not over capacity leased by an operator) in Mexico – subject to routing the traffic 
through Mexican enterprises that have a "concession".  
(d) Do Mexico's specific commitments provide "t he basis" for its additional commitment on 
interconnection? 
7.92 Section 2.1 of the Reference Paper stipulates th at Mexico's interconnection obligation applies 
"on the basis of the specific commitments undertaken" (" respecto de los cuales se contraigan 
compromisos específicos ").  The specific commitments referred to  in Section 2.1 must refer only to 
the market access and national treatment commit ments undertaken by Mexico, and not Mexico's 
additional commitments, since otherwise the interconnection provision (itself a specific commitment) 
would provide the basis for its own application.  The United States argues that once any level of 
commitment is made, Section 2 of the Reference Pa per applies fully within the modes of supply in 
which the commitments have been taken, unless ther e is an inscription in the schedule explicitly 
limiting the applicability of the Reference Paper.
882  Mexico disagrees and, basing itself on the 
                                                      
879 See Mexico's answer to question No. 2(a) of the Panel of 19 December 2002, paragraph 35.  For 
question No. 2(a), see footnote 225 of this Report. 
880 See Mexico's first written submission, paragraph 145. 
881 See paragraphs 7.28-7.45 . 
882 See the United States answer to question No. 1(c) of the Panel of 19 December 2002, paragraph 7.  
For question No. 1(c), see footnote 221 of this Report.  WT/DS204/R 
 Page 161 
 
 
language of its Reference Paper, states that Sec tion 2 applies only within the bounds of inscribed 
market access.883 
7.93 We recall that Section 2.1 reads: 
"2.  Interconnection  
 
 2.1 This section applies, on the basis of the specific commitments 
undertaken, to linking with suppliers providing public 
telecommunications transport networks or services in order to allow the users of one supplier to communicate with users of another supplier and to access services provided by another supplier."
884 
(emphasis added) 
7.94 Section 2.1 requires that the interconnection obl igation be "on the basis" of these specific 
commitments undertaken (" respecto de los cuales se contra igan compromisos específicos ").  The 
wording of this phrase suggests that the specific commitments should in some way "justify" or 
"provide the scope for" the interconnection obli gation.  This conclusion is supported by an 
examination of the phrase in its context.  The wordin g of Section 2 of the Reference Paper as a whole 
suggests that the purpose of the interconnection oblig ation is to enable suppliers supplying a basic 
telecommunications service committed by a Member in  its schedule not to be restricted by unduly 
onerous interconnection terms, conditio ns and rates imposed by a major supplier.  It would not appear 
to be the purpose of Section 2 to provide the be nefits of the interconnection to a supplier in any 
telecommunications subsector or mode of supply, simply because other  subsectors and modes of 
supply have been committed.  It would seem reasona ble to conclude, therefore, that the right to 
interconnect accorded by Section 2.2 should apply where, with respect to a particular subsector and 
mode of supply , a Member's market access and national treatment commitments specifically accords 
the right to supply that service.  We therefore do not agree with the United States argument that a 
limitation inscribed in either th e market access or the national treatment column cannot limit the 
applicability of an additional commitment under Article XVIII. 
7.95 We have found in previous sections that Me xico has undertaken specific commitments – 
national treatment and market access – with respect to the supply of services on a facilities basis (not 
over capacity leased by an operator) in Mexico.  We therefore find that these specific commitments 
form the "basis" on which Section 2.1 of Mexico's Reference Paper applies to the services at issue 
supplied on a facilities  basis in Mexico. 
(e) Do Mexico's additional commitments on interco nnection apply to suppliers of cross-border 
services? 
7.96 The United States argues that, based on ordinary  meaning, the Reference Paper applies to 
interconnection with a cross-border supplier since, in the wording of Section 2.1, there is a "linking" 
of basic telecommunications suppliers in order to  "allow the users of one supplier to communicate 
with users of another supplier".  That certain pr ovisions in Section 2 may be more relevant to 
                                                      
883 See Mexico's answer to question No . 1(b) of the Panel of 19 Decem ber 2002, paragrap hs 14-24.  For 
question No. 1(b), see footnote 232 of this Report. 
884 In the authentic Spanish version of Mexico's Schedule:   
"2. Interconexión 
2.1 Esta sección es aplicable a la  conexión con los proveedores de 
redes públicas de telecomunicaciones de transporte o de servicios a fin de permitir a los usuarios de un proveedor comunicarse con los usuarios de 
otro proveedor y tener acceso a los se rvicios suministrados por algún otro 
proveedor, respecto de los cuales se contraigan compromisos específicos. " WT/DS204/R 
Page 162  
 
domestic interconnection than to international interconnection is not determinative.  In the 
United States view, there are no important techni cal differences between international and domestic 
interconnection, and the underlying reasons for co mpetition disciplines in both cases are the same.  
Call termination is simply a form of interconnection.   According to the Unite d States, even Mexico's 
own laws and regulations governing such cross-borde r termination refer to "interconnection" with 
foreign suppliers. 
7.97 The United States further argues that the existe nce of international "accounting rate" regimes 
which may apply to certain cases of cross-border interconnection does not mean that cross-border 
interconnection is excluded from the scope of the Re ference Paper.  There are no explicit words to 
this effect.  The United States argues that, while early drafts of the Reference Paper specifically 
provided for transparency in accounting rates, it does not follow that deletion of this discipline from 
the final version indicates that interconnection unde r such regimes is excluded from the scope of the 
Reference Paper.  The United States also contends that it is not relevant that accounting rate regimes 
are temporarily exempt from WTO dispute settle ment procedures through  an understanding on 
accounting rates ("Understanding") contained in a 1997 Chairman's Note.
885  That exclusion, the 
United States points out, is non-binding, and was intended solely to provide cover from the MFN 
obligations in Article II of the GATS, and not commitments containe d in the Reference Paper.  The 
United States finally argues that International Te lecommunication Union ("ITU") instruments are not 
relevant to this dispute, since they are separat e from the WTO Agreement and, in any case, they do 
not conflict with Mexico's WTO obligations, and th e definition of "accounting rate" in the ITU is 
consistent with Section 2. 1 of the Reference Paper. 
7.98 Mexico disagrees and claims that the Refere nce Paper provisions on interconnection do not 
apply to the cross-border supply of a service.  It argues that Reference Paper commitments are 
additional commitments undertaken under Article XVIII, and they cannot therefore apply to cross-
border interconnection, a market access issue covere d by Article XVI.  Mexico further argues that 
Reference Paper commitments are a matter exclus ively of domestic regulation, and cannot cover 
cross-border supply in which the operator is located outside a Member's territory.   
7.99 Mexico also argues that the existence of acc ounting rate regimes governing the cross-border 
supply of telecommunications services between many  countries, and which are inconsistent with 
Reference Paper obligations, shows that these cr oss-border services were never intended to be 
covered by the Reference Paper disciplines on interc onnection.  In addition, Mexico argues that the 
negotiating history of the Reference Paper must be used as a supplementary means of interpretation.  
Although a section containing obligations relating e xplicitly to accounting rates was contained in 
early drafts of the Reference Paper, Mexico argues, they were later removed.  Mexico also argues that 
the non-binding Understanding, contained in the 1997  Chair Note, which excludes the application of 
accounting rates from WTO dispute set tlement, is evidence of an intention to exclude cross-border 
interconnection from the Reference Paper. 
7.100  In order to determine whether Mexico's add itional commitment on interconnection applies on 
the basis of its commitment on cross-border  supply of the services at issue, we re-examine the terms 
of Section 2.1 of Mexico's Reference Paper.  As already indicated before, Se ction 2.1 states that the 
interconnection provisions in Section 2.2 apply to: 
"linking with suppliers providing public telecommunications transport networks or 
services in order to allow the users of one  supplier to communicate with users of 
another supplier and to access services provi ded by another supplier, on the basis of 
the specific commitments are undertaken." 
                                                      
885 See the United States' first oral  statement, paragraph 25.  See also the United States' second written 
submission, paragraph 49.  WT/DS204/R 
 Page 163 
 
 
7.101  We note that this delimitation of the type of interconnection which falls within the scope of 
Section 2.2 contains four main elements:  (a ) a "linking";  (b) with "suppliers of public 
telecommunications networks and services";  (c) "to allow the users of one supplier to communicate 
with users of another supplier and to access services provided by another supplier";  and (d) "on the 
basis of the specific commitments undertaken".  We examine the scope of the interconnection 
provided for in Section 2 in the light of these elements. 
(i) Ordinary meaning 
7.102  The ordinary meaning of the word "linking" is ve ry broad.  The general dictionary meaning of 
"link" is "a connecting part, whether in material or immaterial sense; a thing ( occas.  a person) serving 
to establish or maintain a connexion; a member of a series or succession; a means of connexion or 
communication."  Similarly, the meaning of the verb fo rm of "link" is "to couple or join with", and the 
phrase "to link up with" includes "by means of transport or system of communication".886  T h e  
dictionary meaning of the term link thus suggests that linking can involve any kind of connection 
between networks.  The ordinary meaning of linki ng is broad and does not, in particular, imply any 
particular location of the object being linked.  This ordinary meaning of link is consistent with the 
definition provided by a telecom glossary of a link as "a general term used to indicate the existence of 
communications facilities between two points".887 
7.103  Section 2 of Mexico's Reference Paper describ es the form of linking to which it applies as 
that occurring "with suppliers providing public te lecommunications transport networks or services".  
A "public telecommunications transport service "888 is defined in the Annex as:  
"a telecommunications transport service requi red, explicitly or in effect, by a Member 
to be offered to the public generally.  Such services may include, inter alia , telegraph, 
telephone, telex, and data tran smission typically involving the real-time transmission 
of customer-supplied information between tw o or more points without any end-to-end 
change in the form or content of the customer's information."889 
7.104  A "public telecommunications transport network "890 is defined in the Annex as "the public 
telecommunications infrastructure which permits  telecommunications be tween and among defined 
network termination points".891 
7.105  Accordingly, the phrase "suppliers providing p ublic telecommunications transport networks 
or services " means that, under Section 2, the "linking " is with suppliers of basic telecommunications 
services that are required to be offered to the public generally.892  Thus there is no obligation to ensure 
such linking with suppliers that do not provide basi c telecommunications services or with suppliers of 
basic telecommunications services that are not requi red to offer their services to the public generally. 
However, neither that provision, nor any other prov ision of Section 2, makes any reference to the 
                                                      
886 The Shorter Oxford English Dictionary , 3rd edition, (Clarendon Press, 1990), Vol. I, page 1219. 
887 ANS T1.523-2001, Telecom  Glossary 2000 ;  http://www.atis.org/tg2k/. 
888 (emphasis added). 
889 Annex on Telecommunications, Section 3(b). 
890 (emphasis added). 
891 Annex on Telecommunications, Section 3(c). 
892 Section 3(b) of the Annex on Telecommunications defines "public telecommunications transport 
service" as "any telecommunications transport service required, explicitly or in effect, by a Member to be 
offered to the public generally.  Such services may incl ude, inter alia, telegraph, telephone, telex, and data 
transmission typically involving the real-time transmission of customer-supplied information between two or 
more points without any end-to-end change in the form or content of the customer's information.".  Section 3(c) of the Annex on Telecommunications defines "Public telecommunications transport network" as "the public 
telecommunications infrastructure which permits telecommunications between and among defined network 
termination points." WT/DS204/R 
Page 164  
 
entity that is entitled to be linked to the public te lecommunications transport networks or services;  no 
language thus exists that would circumscribe th e scope, geographic or otherwise, of the basic 
telecommunications suppliers to be linked.  This provision therefore could not be read to exclude 
suppliers outside of Mexico from "linking" to public telecommunications transport networks and 
services in Mexico. 
7.106  Section 2 also states that the purpose of the linking is "to allow the users of one supplier to 
communicate with users of another supplier and to  access services provided by another supplier".  
Allowing the users of one supplier to communicate w ith users of another supplier should consist, at 
the very least, of allowing a basic telecommunications supplier who originates a voice telephone call for its customer to interconnect with a supplier of  public telecommunications transport networks and 
services for the purpose of terminating that call with whichever user its customer wishes to 
communicate with.  Again, there is nothing in th is wording that suggests that the geographical 
location of the users that communicate, the services to  be accessed, or service suppliers to be linked is 
relevant, much less circumscribed.  Finally, th e definition limits the scope of interconnection to 
situations "on the basis of the specific commitments undertaken".  This condition likewise is silent as 
to the location of the suppliers or the network.   
7.107  That the drafters did not explicitly limit the sc ope of Section 2 by, for example, inserting the 
word "domestic", must have some meaning.  This s ilence could be seen as an indication that the scope 
of interconnection under Section 2 is comprehensive and includes international interconnection.  
However, the fact that there is no hint of any la nguage limiting the geographi c location of the network 
of the supplier seeking to be linked in this Sec tion does not conclude our task of determining the 
meaning of interconnection under Section 2.  Othe r interpretative elements could, as argued by 
Mexico, indicate a different result.
893 
(ii) Context provided by the term "interconnection " 
7.108  We note that the "linking" referred to in S ection 2.1 falls under the Section 2 heading of 
"interconnection", and is therefore in formed by this term.  The verb fo rm "interconnect",  in its general 
dictionary sense, means simply "to be or become mutually connected".894  This suggests that the term 
"interconnection" is simply a form of linking of suppliers, which does not indicate any distinction with respect to the location of th e suppliers being linked.  Intercon nection is, however, a term which 
may be given a "special meaning", according to Article 31.4 of the Vienna Convention, "if it is 
established that the parties so intended."  Since th e provision is a technical one that appears in a 
specialized service sector, we are entitled to exam ine what "special meaning" it may have in the 
telecommunications context, and whether the "linking " referred to in Section 2.1 is circumscribed by 
that special meaning.  A specialized dic tionary meaning of "interconnection" is: 
"The linking together of interoperable system s.  The linkage used to join two or more 
communications units, such as systems, netw orks, links, nodes, equipment, circuits, 
and devices."
895 
7.109  We note that this definition makes no distinc tion with respect to the national or geographic 
origin of the supplier or the location of the supplier to be linked. 
7.110  The term "interconnection" also appears as a tec hnical term with a possible "special meaning" 
in national laws and regulations . Mexico's Federal Communications Law, for example, although it 
does not directly define "interconnection", unamb iguously uses the term to include cross-border 
                                                      
893 See Appellate Body Report, US – Carbon Steel , paragraph 104.   
894 MerriamWebster Dictionary, Merriam Webster Online, 2003; http://www.webster.com./ 
895 ANS  T1.523-2001, Telecom Glossary 2000 ; http://www.atis.org/tg2k/.   WT/DS204/R 
 Page 165 
 
 
interconnection.896  Article 47 of the law states that "[i]nterconnection of public telecommunications 
networks with foreign networks  shall be carried out through agreemen ts entered into by the interested 
parties".897  The ILD Rules likewise do not define "interc onnection" directly, but again, usage of the 
term in the Rules makes it clear that it includ es interconnection with foreign networks.  The 
introductory clauses of the ILD Rules state that the Federal Telecommunications Commission has the 
authority to "oversee the efficient interconnec tion of public telecommuni cations networks and 
equipment, including interconnection with foreign networks ".898  Likewise, the stated purpose of the 
ILD Rules is to "regulate the provision of international long-distance service and establish the terms to be included in agreements for the interconnection  of public telecommunications networks with 
foreign networks ."
899  This confirms that the term "int erconnection" is used in Mexico for 
interconnection between domestic  networks, and between dom estic and foreign networks. 
7.111  We have not been provided evidence of laws or regulations of other Members which offer 
definitions or usage that indicate that the definitio n of "interconnection" is inconsistent with the 
ordinary meaning of the term "linking" in  Section 2 of Mexico's Reference paper.900  We note that 
under EC law, the term "interconnec tion" is defined comprehensively in a manner that is consistent 
with the ordinary meaning of the term "linking": 
"the physical and logical linking of pub lic communications networks used by the 
same or a different undertaking in order to allow the users of one undertaking to communicate with users of the same or another undertaking, or to access services provided by another undertaking.  Services may be provided by the parties involved 
or other parties who have access to the networ k.  Interconnection is a specific type of 
access implemented between public network operators."
901 
7.112  A "special meaning" of the term "interconnection"  in Section 2, inconsistent with the ordinary 
meaning of this term, is also not evident from an examination of the differences between domestic and 
international interconnection from commercial, contractual, or  technical points of view. 
7.113  From a commercial  perspective, we disagree with Mexi co that international interconnection 
under a traditional, "joint service" regime is dis tinctive because the two ope rators cooperate, and do 
not compete for the same customers,  unlike in domestic interconnection.  In a domestic setting, it is 
true that two operators in the same geographic area and providing the same type of service will 
usually compete directly for the same customers.  In an international se tting, two operators may 
however also compete for the same customers through subsidiaries or services offered in each others' 
                                                      
896 A glossary published by Cofetel, does, however, offer a formal definition of interconnection, in 
similar terms to Section 2.2(b) of Mexico's Reference Paper:  "Physical and logical connection between two 
public telecommunications networks, that allows the ex change of switched public traffic between the switching 
central offices of both networks.  The interconnection a llows the users of one of th e networks to interconnect 
and exchange public switched traffic with the users of the other network and vice versa, or to use the services 
provided by the other network." English translation.   Source: www.cft.gob.mx/html/la_era/glo_pub2de4.html#I. 
897 Federal Communications Law, Article 47.  (emphasis added) 
898 Rules for the Provision of International Long-Dist ance Service to be Applie d by the Licensees of 
Public Telecommunications Networks Authorized to Prov ide this Service, Decision  No. RES PC 961207 of 
4 December 1996 ("ILD Rules").  Preambular clause.  (emphasis added) 
899 ILD Rules, Rule 1. (emphasis added) 
900 See notably, for the United States: "Interconnection is the linking of two networks for the mutual 
exchange of traffic.  This term does not include  the transport and termination of traffic.  "  47 CFR Ch. 1 §51.5 
(10-1-02 Edition) (FCC) [Interconnection regulations implementing ss. 251-252 of the Communications Act of 1934];  
901 Article 2 of EC Directive 2002/19/EC (Access Directive) (OJ 2002 L108, p. 33).  In this respect, see 
also the "Commission guidelines on mark et analysis and the assessment of significant market power under the 
Community regulatory framework for electronic communications networks and services" (2002/C 165/03), 
Official Journal of the European Communities 165/6, 11.7.20 02.  The Panel is awar e that the EC Access 
Directive regulates a common market for tel ecommunications among EC member States.  WT/DS204/R 
Page 166  
 
markets.  Even if they do not, there is still an incentive for a major supplier to set interconnection rates 
at anti-competitive rates, and not to provide optimal  service to the other supplier in terms of quality 
and timeliness.  Domestic and international interc onnection do not therefore differ significantly in this 
respect. 
7.114  From a contractual  perspective, we also find that there are no significant differences between 
the domestic and international inte rconnection, including through accounting rate arrangements.  We 
cannot accept Mexico's assertion that "most of the provisions of one agreement are either not applicable or can never be a provision in the other agreement."
902  From a contractual point of view, 
domestic and international interc onnection, including the accounting rate regime, do not form two 
distinct regimes that cannot overlap.  After revi ewing the evidence before it, including copies of 
standard agreements furnished by Mexico, and th e arguments of the parties, the Panel agrees 
substantially with the statement by the United States that interconnection agreements between 
suppliers in the same or different countries,  including through accounting rate regimes: 
"may include a wide variety of rates, terms and conditions concerning such matters as 
specific services covered by the agreement, the rates applicable to specific services, 
payment schedules, procedures for dispute resolution, time duration of the agreement, 
restrictions on assignments of rights, and va rious network technical considerations.  
Interconnection arrangements may provide fo r one-way or two-way traffic flows, 
with the same or different rates applying in each direction, and two-way traffic flow.  Interconnection arrangements may also provi de for 'net' payment arrangements under 
which the two carriers set off their interc onnect payments with one carrier remitting 
the balance to the other carrier."
903 
7.115  Even Telmex's contractual arrangements with United States suppliers do not adhere fully to 
the traditional accounting rate regime described by the ITU in which "a net settlement payment is 
made on the basis of excess traffic minutes, multiplied by half the accounting rate".904  I n  f a c t ,  
United States suppliers are charged three different rates depending on the destination zone in Mexico, 
while a still different rate applies to tr affic from Mexico to the United States. 
7.116  From a technical  perspective, we find that the United States provides convincing evidence 
that the "mid-point" cross-border link-up, which Mexico argues is particular to international 
interconnection, arises also in certain situations of domestic interconnection.905  More generally, we 
consider that technical issues arise under both domes tic and international interconnection, including 
through accounting rate arrangements, and that these are solved in both cases through the use of 
technical standards and agreements, joint planning and coordination. 
7.117  In sum the ordinary meaning, in the heading of Section 2 of Mexico's Reference Paper, of the 
term "interconnection" – that it does not dis tinguish between domestic and international 
interconnection, including through accounting rate re gimes – is confirmed by an examination of any 
"special meaning" that the term "interconnection" may have in telecommunications legislation, or by 
taking into account potential commercial, contractual or  technical differences i nherent in international 
interconnection.  We find that any "special meaning"  of the term "interconnection" in Section 2 of 
                                                      
902 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002.   For question No. 8, see 
footnote 77 of this Report.  See also  Mexico's answer to question No. 17 of the Panel of 14 March 2003.  For 
question No.17, see footnote 146 of this Report. 
903 See United States' answer to question No. 8 of the Panel of 19 December 2002, paragraph 44.  For 
question No. 8, see footnote 77 of this Report. 
904 Accounting Rate Reform Undertaken by ITU-T Study Group 3 , Communication from the 
International Telecommunication Union, Informal Note , Council for Trade in Services, Job. no. 2947, 
11 May 2000, paragraph 2. 
905 See the United States' answer to qu estion No. 8 of the Panel of 19 December 2002, paragraph 47.  
For question No. 8, see footnote 77 of this Report.  WT/DS204/R 
 Page 167 
 
 
Mexico's Reference Paper does not justify a restricted interpretation of interconnection, or of the term 
"linking", which would exclude international interc onnection, including accounting rate regimes, from 
the scope of Section 2 of the Reference Paper. 
(iii) Other contextual elements 
7.118  We now consider whether any other contextual  elements within Mexico's Reference Paper 
may assist us in our interpretation of the scope of  interconnection within Section 2.  Mexico argues 
that certain obligations which arise from the in terconnection commitment in Mexico's Reference 
Paper indicate that international interconnection, including through accounting rate regimes, should be 
excluded.  Section 2.2 requires that interconnection be  ensured "at any technically feasible point in the 
network".  However, as already noted, this would not , contrary to Mexico's views, exclude linking to 
a point in a Mexican concessionaire's network that is located at the border.  There is no reason why 
such a point would not be a "technically feasible poi nt" in a network.  Likewise, the requirement in 
Section 2.2(a) that the interconnection takes place "under non-discriminatory terms … and rates" does 
not in itself indicate that interconnection is restricted to domestic calls.  Further, for the purposes of Section 2, it is just as necessary to ensure the in terconnection of a cross-border service supplied "on 
the basis of the specific commitments", as it is for a supplier who is commercially present in the 
market. 
7.119  The existence of dispute settlement provisions in Section 2.5 does not, in our view, provide 
contextual evidence that the scope of interconnecti on is restricted to domestic networks only.  
Section 2.5 provides for an "independent domestic  body", which will "resolve disputes regarding 
appropriate terms, conditions and rates for interconnection within a reasonable period of time, to the 
extent that these have not been established previous ly."  The fact that the adjudicating body is 
"domestic" does not suggest that it would have no  jurisdiction over the conditions of linking of a 
foreign network with a domestic network at the bo rder.  Domestic regulations applicable within a 
Member, and subject to adjudication by the domestic bodies of that Member, can clearly also be applied by that Member at the border. 
7.120  A further element that may be taken into account, together with the context, in interpreting the 
notion of interconnection is "subse quent practice" by WTO Members.  Article 31.3(b) of the Vienna 
Convention requires that the treaty interpreter take  into account "any subsequent practice in the 
application of the treaty which establishes the agreem ent of the parties regarding its interpretation".  
The Appellate Body has defined this concept as a "concordant, common and consistent" sequence of 
acts or pronouncements which is sufficient to estab lish a discernible pattern implying the agreement 
of the parties [to a treaty] regarding its interpretation
".906  Mexico claims that "all fifty-five WTO 
Members that inscribed the interconnection commitme nts in Section 2.2(b) of the Model Reference 
Paper maintain the traditional joint service accoun ting rate regime", including the United States.  
However, maintenance of a "joint service regime" that may be inconsistent with Reference Paper 
obligations does not necessarily establish that interconnection commitments under Section 2 were 
meant to exclude coverage of all international  interconnection.  
(iv) Object and purpose 
7.121  A consideration of the object and purpose  of the treaty – the GATS – would support the 
interpretation of "interconnection" derived through an examination of the ordinary meaning of the 
term in its context.  Article I:1 of the GATS provides that the agreement extends to "measures 
affecting trade in services".  Trade in services is defined in Article I:2 to include the cross-border 
supply of a service "from the territory of one Member  into the territory of any other Member".  This 
mode of supply, together with supply through commer cial presence, is particul arly significant for trade 
in international telecommunications  services.  There is no reason to suppose that provisions that ensure 
                                                      
906 See Appellate Body Report, Japan – Alcoholic Beverages II , DSR 1996:I, 97, at 106. WT/DS204/R 
Page 168  
 
interconnection on reasonable  terms and conditions for telecommuni cations services supplied through 
the commercial presence should not be nefit the cross-border supply of th e same service, in the absence 
of clear and specific language to that effect.  Si nce the GATS deals specifically with international 
trade in services by four modes of supply that are considered comprehensive, it would indeed be unusual for interconnection disciplines not to ex tend to an obvious and important mode of 
international supply of telecommunications services – cross border. 
(v) Supplementary means – the "Understanding " 
7.122  The rules of the Vienna Convention provide th at "supplementary means" of interpretation 
may be applied in two cases.
907  First, to confirm  the meaning resulting from the application of the 
primary rules of interpretation – tho se we have applied up to this point.908  Second, to determine  the 
meaning when the application of the primary ru les leaves the meaning "ambiguous or obscure" or 
leads to a result that is "manifestly absurd or unreasonable".  The supplementary means of 
interpretation include the preparatory work of th e treaty and the circumstances of its conclusion.909 
7.123  Mexico has presented extensive arguments, b ased on the preparatory work of the GATS and 
the circumstances of its conclusion, to show that a reading of the term "interconnection" to include 
interconnection with foreign supplie rs and networks would lead to a result which is "manifestly 
absurd or unreasonable".  Mexico refers specifically to  early drafts of the Reference Paper, and to an 
understanding on accounting rates reached by nego tiators.  In order to "confirm the meaning" 
resulting from the application of the primary rules of  interpretation, it would therefore be appropriate 
to examine these supplementary means of interpretation. 
7.124  The text cited by Mexico (t he "Understanding") is containe d in a Report by the Group on 
Basic Telecommunications made on 15 February 1997, at the close of the negotiations on the Fourth 
Protocol – the instrument which contained Memb ers' new commitments on basic telecommunications, 
including Mexico's Reference Paper commitments.  The Report, which appended the draft schedules 
of Members, states: 
"7. The Group noted that five countries had taken Article II exemptions  in respect 
of the application of differential accounting rates to services and service suppliers of 
other Members. In the light of the fact that the accounting rate system established under the International Telecommunications  Regulations is the usual method of 
terminating international traffi c and by its nature involves differential rates , and in 
order to avoid the submission of further such exemptions , it is the understanding of 
the Group that: 
- the application of such accounting rates would not give rise to 
action by Members under dispute settlement under the WTO; and 
- that this understanding will be  reviewed not later than the 
commencement of the further R ound of negotiations on Services 
Commitments due to begin not later than 1 January 2000." 
(emphasis added) 
7.125  The Report was introduced by the Chair of th e Group on Basic Telecommunications at the 
15 February meeting in the following terms (as reported in a Secretariat note): 
                                                     
 
907 Vienna Convention, Article 32, supra , footnote 822. 
908 The "primary" rules of interpretation are set out in  Article 31, the "supplementary" rules are set out 
in Article 32. 
909 Vienna Convention, Article 32, supra , footnote 822.  WT/DS204/R 
 Page 169 
 
 
"Introducing the revised draft of this repor t, the Chairman drew attention to a new 
paragraph dealing with accounting rates systems. It had been noted that some delegations had submitted Article II exemp tions with respect to accounting rates 
systems; though their right to do so was not in question, it would have been undesirable that a large number of other delegations felt it necessary to take similar 
exemptions on the basis of uncertainty ab out the interpretation of the issue of 
accounting rates in these negotiations. In order to avoid such an outcome he suggested that a paragraph be inserted in  the Report recording the understanding of 
the Group that the application of ac counting rates under the International 
Telecommunications Regulations would not give rise to dispute settlement action 
under the WTO. The Chairman stressed that this was merely an understanding, which 
could not and was not intended to have binding legal force . It therefore did not take 
away from Members the rights they have under the Dispute Settlement Understanding; it was merely intended to give Members who had not taken MFN 
exemptions on accounting rates some degree of reassurance . He also drew attention 
to the statement in the paragraph that th is understanding will be reviewed before the 
commencement of the next Round of negotia tions. Some delegations suggested some 
other changes, which were incorporat ed in the Report." (emphasis added) 
7.126  In interpreting the Understanding, it is important  to note at the outset that it cannot affect 
directly  the scope of Mexico's obligations under Section 2 of the Reference Paper.  The 
Understanding is not, under the WTO Agreement, an agr eed interpretation (Article IX:2), or a waiver 
(Article IX:3), or an amendment (Article X) of a provision, all of which require special rules and 
procedures.  Even according to its own terms,  the Understanding is e xplicitly non-binding, and 
concerns only procedural rights to dispute settlement , not substantive obligatio ns.  Any interpretative 
value of the Understanding must lie in the guidan ce it may lend in determining the scope of the 
interconnection provision in Section 2 of Mexico's Reference Paper. 
7.127  The operative clause of the Understand ing is that "the application of such accounting rates  
would not give rise to action by Members unde r dispute settlement under the WTO" (emphasis 
added).  The term "such accounting rates" refers to an earlier statem ent in the Understanding that the 
"accounting rate system established under the Inte rnational Telecommunicati ons Regulations is the 
usual method of terminating international traffic a nd by its nature involves differential rates".  The 
accounting rates referred to in the Understanding can therefore be taken to be those imposed under an 
accounting rate system:  (a) "established under th e International Telecommunications Regulations", 
and;  (b) that "involves differential rates".  The underlying purpose of the Understanding is "to avoid 
the submission of [MFN] exemptions", by providing  temporarily "some degree of reassurance" for 
Members to maintain "differential" rates. 
7.128  The main interpretative issue arising from the Understanding is whether the non-binding 
decision to exclude from the scope of WTO dis pute settlement "differential" accounting rates 
"established under the International Telecommuni cation Regulations" for the purposes of the MFN 
obligation, implies also an intent to exclude from the substantive scope of the Reference Paper 
international interconnection – in particular, the in ternational linking of the networks of Mexican and 
United States suppliers. 
7.129  In addressing this issue, we need first to examine what is meant in the Understanding by 
"differential" accounting rates "established under th e International Telecommunication Regulations".  
The International Telecommunication Regulations are a binding set of rules with treaty status, last 
revised in 1988, and agreed by ITU members, which include both Mexico and the United States.910  
The Regulations are intended to "establish genera l principles which relate to the provision and 
                                                      
910 Forming part of the Final Acts of the World Administrative Telegraph and Telephone Conference, 
Melbourne, 1988 (WATTC-88). WT/DS204/R 
Page 170  
 
operation of international telecommunications ser vices offered to the public as well as to the 
underlying international telecommunications tran sport means used to provide such services".
911 
7.130  The Regulations deal in part with "accounting rates", which are defined as "the rate agreed 
between administrations in a given relation that is used for the establishment of international 
accounts."  An "administration" includes a "recognized private operating agency".912  A "relation" is 
defined as the "exchange of traffic between two te rminal countries".  The principal obligation with 
respect to accounting rates is set out in Article 6.2: 
"6.2 Accounting rates 
6.2.1 For each applicable service in a given relation, administrations shall by 
mutual agreement establish and revise acc ounting rates to be a pplied between them, 
in accordance with the provisions of Appe ndix I and taking into account relevant 
CCITT Recommendations and relevant co st trends." [footnote omitted] 
7.131  Article 6.2 refers to Appendix I, which sets out in more detail the establishment and settling 
of accounts.  Article 1.1 of the Appendix prov ides two methods of establishing accounting rates.  
First, by mutual agreement of administrations, ta king into account ITU recommendations and "trends 
in cost".913  Second, by each administration establishing terminal and transit shares, and adding these 
together.914 
7.132  According to the ITU, the most common system  of remuneration historically has been the 
"accounting rate revenue division procedure".915  This envisages an international call as a single 
"joint-service", for which the two operators negotia te an agreed "accounting rate".  The accounting 
rate is then divided in half (the "settlement rate ") and applied to traffic flows in both directions.916  
Since both traffic flows are priced the same, the scheme results overall in a net payment from the 
operator originating more traffic to the operator orig inating less traffic, based solely on the difference 
in volume of traffic in each direction. 
7.133  The traditional "accounting rate revenue divisi on procedure" based on a negotiated rate 
resulted in pricing which, in practice, depended on many factors other than cost, including the 
dynamics of different bilateral negotiations.  When the supplier, public or private, had monopoly 
rights within a Member's territory, any di fferent pricing of services that occurred  on the basis of a 
Member's territory might also, under GATS Article  VIII:1, lead to MFN inconsistencies under GATS 
Article II.  Under Article VIII:1, a Member "shall ensure that any monopoly supplier of service in its 
territory does not, in the supply of the monopoly service in the relevant market, act in a manner inconsistent with that Member's obligations under Article II [MFN] and specific commitments."  This 
possible inconsistency with the MFN principle was the particular concern that was addressed in the 
Understanding, which speaks of "differential rates" being inherent in accounting rates. 
                                                     
 
911 ITR Article 1.1(a). 
912 The use of the word "administrations" is systematic ally footnoted in the ITRs to include "recognized 
private operating agency(ies)". 
913 ITR, Appendix 1, Article 1.1. 
914 ITR, Appendix 1, Article 1.2. 
915 Accounting Rate Reform Undertaken by ITU-T Study Group 3 , Communication from the 
International Telecommunication Union, Informal Note, Council for Trade in Services, Job. no. 2947, 11 May 2000, paragraph 2. See also Exhibit MEX-59 (which presents Section 8 on "International Interconnection" of 
ITU Trends in Telecommunications Reform:  Interconnection Regulation , 3rd edition, pp. 93-107). 
916 This assumes that the traffic does not transit through third countries.  WT/DS204/R 
 Page 171 
 
 
7.134  Relevant, non-binding recommendations  referred to in Article 6.2 of the Regulations are the 
ITU-T Recommendations D.140 and D.150.917  They deal with methods of compensating 
administrations for the cost of international tel ecommunications. At the time of the WTO negotiations 
on basic telecommunications, Recommendation D.140 already contained the principle of cost-orientation, transparency and non-discriminati on.  Subsequent to the WTO negotiations, ITU 
Members modified these Recommendations, adding pr inciples for determining costs, transitional 
periods for achieving cost oriented rates, and exp licit alternatives to the traditional accounting rate 
procedures between administrations. 
7.135  Read together, the Regulations, its Appendix,  and the related Recommendations result today 
in a number of different ways in which operators  in different countries can be compensated for 
international traffic exchanged between them, ranging from traditional methods to more modern 
alternatives.
918  Regardless of whether the traditional or new alternative arrangements are being used, 
the ITU instruments require that the arrangement s be cost-oriented and non-discriminatory.   
7.136  We therefore conclude that the accounting rat es described in the Understanding should be 
understood to be limited to:  (a) a traditional accounting ra te that is not cost-oriented;  (b) that can be 
interpreted as a measure of a Member, or that tr iggers a Member's obligations under Article VIII on 
monopolies;  and (c) that applies discriminatory rates on the basis of the national origin of the cross-border traffic, and thus may be inconsiste nt with the MFN principle in Article II. 
7.137  Based on this delineation of the "accounting rates" that are within the scope of the 
Understanding, we can make several observations.  First, not all international interconnection pricing 
was excluded from dispute settlement by the Understa nding, only traditional accounting rate regimes 
with "differential rates".  Second, the exclusion was from dispute settlement, not from the substantive 
obligations of the GATS, including its schedules of  commitments.  Third, the explicit aim of the 
exclusion was the MFN obligation under GATS Article II.  Other obligations or specific commitments 
in the GATS, such as Section 2 of Mexico's Refe rence Paper were not specified.  Fourth, not all 
traditional accounting rate regimes would be MFN inconsistent, even if they were not cost-oriented.  
In order to demonstrate the MFN inconsistency of  a traditional accounting system regime, one would 
have to show that the rate is either a "measure " of a Member, or that it falls within a Member's 
obligations under Article VIII:1 on m onopolies, and that different ra tes for different international 
routes amount to treatment less favourable with resp ect to one "like service" compared to another 
"like service".  Finally, the existence of the Unders tanding demonstrates that, even though negotiators 
considered at length the issue of rates for intern ational interconnection, they chose not to adopt 
wording that would have expressly excluded certain types of interconnection from the scope of the 
Reference Paper. 
7.138  In sum, the Understanding seeks to exempt a very limited category of measures, temporarily, 
and on a non-binding basis, from the scope of WTO dispute settlement.  Simply because Members 
wished to shield a certain type of cross-border interconnection from dispute settlement, because of 
possible  MFN inconsistencies (with respect to differential rates), it does not follow that they wished to 
shield all forms of cross-border interconnection  from dis pute settlement.  The clear intention to do so 
is not expressed in the Understanding.  This suggests that the content and purpose of the 
                                                     
 
917 The CCITT no longer exists. Its functions have been subsumed by the ITU-T, whose Study Group 
3 is responsible for development and revision of ITU-T D Series Recommendations such as D.140 and D.150. 
918 ITU Recommendation ITU-T D.150, (06/1999) paragraph 2.  Recommendation D.150, which has 
existed in some form since 1968 was revised in 1999 to reflect the new telecommunication environment.  In its present form,  Section 2 describes different procedures fo r remuneration that include modern alternatives to the  
"accounting rate revenue division procedure".  See also , Accounting Rate Reform Undertaken by ITU-T Study 
Group 3 , Communication from the International Telecommunication Union, Informal Note, Council for Trade 
in Services, Job. no. 2947, 11 May 2000, paragraph 2.  See also  Exhibit MEX-59 (which presents Section 8 on 
"International Interconnection" of  ITU Trends in Telecommunications Refo rm:  Interconnection Regulation, 3rd 
edition , pp. 93-107). WT/DS204/R 
Page 172  
 
Understanding is of limited assistance in interpre ting the scope of application of the term 
"interconnection" in Section 2.1 of Mexico's Reference Paper. 
7.139  Before leaving the Understanding, we note that the Understanding could arguably be 
considered as part of the interpretative "contex t" under the primary rules of interpretation in 
Article 31.2 of the Vienna Convention.  In th at case, the Understanding has to be seen as an 
instrument made "in connection w ith the conclusion of the treaty", and "accepted by the other parties 
as an instrument related to the treaty".  Since the Report attaches draft schedules of commitments, 
including Mexico's Reference Paper commitments,  to be appended to the Fourth Protocol, the 
Understanding might well be viewed as being made "i n connection with the conclusion of the treaty".  
As the Understanding reflects the common view of  negotiators on a matter affecting access to WTO 
dispute settlement on telecommunications matters, it w ould be difficult for parties to deny that it was 
an instrument "related to" the Fourth Protocol.  However, even if viewed as "context", and not as a 
"supplementary means" of interpretation under Article  32 of the Vienna Conven tion, we would arrive 
at the same interpretative conclusion. 
(vi) Supplementary means – other 
7.140  In addition to the Understanding, Mexico refers to the drafting hi story of the Reference Paper. 
Mexico provides evidence that a tr ansparency requirement with respect to accounting rates existed in 
earlier drafts of the Reference Paper, but asserts th at these references were subsequently deleted, 
indicating the intention to exclude accounting rat es from its scope.  However, the opposite argument 
can equally well be made that negotiators cons idered, based on the plain meaning of the word 
"interconnection", that the matter was covered, a nd that the special provision was no longer needed.  
The available records of the negotiations simply do not contain sufficient material to permit the Panel 
to determine the reason for the deletion of the separate provision.
919  In the absence of a clear record 
of the negotiations on this point, which might give firm evidence of the reasons for the deletion, we find it difficult to arrive at the interpretation which Mexico is seeking.
920  The introduction and 
deletion of the specific provision on accounting rate tran sparency is therefore not helpful in arriving at 
an interpretation of the scope of the provisions of  Mexico's Reference Paper on "interconnection".  
Mexico argues further that the conscious exclusi on from the Reference Paper of accounting rates and 
termination services is confirmed by the fact that  they are "on the table" in the Doha Round of 
negotiations.  The Panel does not however see this as  providing the confirmation that Mexico claims.  
In the Doha Round, the main issue for Members wi th respect to the Understanding has been whether 
it should be maintained, and not what its scope mi ght be. With respect to termination services, a 
proposal by a Member to make specific commitmen ts on these services demonstrates no more than an 
interest, on the part of one Member, in market access or national treatment commitments for these services.  These discussions do not lead to any particular conclusion with respect to the scope of Section 2 of the Reference Paper. 
7.141  Finally, consideration must be given to Me xico's argument that the interpretation of 
"interconnection" in Section 2 of the Reference Pa per as including international interconnection leads, 
under Article 32 of the Vienna Convention, to a resu lt that is "manifestly absurd or unreasonable".  
Mexico claims that such an interpretation would require all 55 WTO Members who have accepted cost-oriented interconnection to apply th ese low rates to terminate traffic from all other WTO 
Members, even from the 89 WTO Member with no co st-oriented pricing commitments because they 
have not committed to the Reference Paper.  Mexico states that this situation would result in a net 
outflow of payments from countries subject to cost-oriented pricing disciplines, which would lead to 
operators in those countries to "choose between bankruptcy and refusing to pay".
921  This would result 
                                                      
919 Available records of the negotiations consist of all documents in the series S/NGBT/1 - 18 and 
S/NGBT/W1 – W19 and in the series S/GBT/1 – 4, S/GBT/M1 – M9, and S/GBT/W1 – W13.   
920 See Appellate Body Report, India – Quantitative Restrictions , paragraph 94.  
921 See Mexico's second written submission, paragraph 34.  WT/DS204/R 
 Page 173 
 
 
in "the complete collapse of the accounting rate re gime without a viable replacement, possibly even 
leading to interruptions in international traffic."922 
7.142  We are not convinced by Mexico's argument th at a broad interpretation of interconnection 
would lead in this sense to a result that is "manif estly absurd or unreasonable".  First, a large and 
increasing proportion of all international traffic is  routed outside the traditional accounting rate 
system.923  Second, the "outflows" predicted by Mexi co would only occur if those other countries 
without cost-oriented international interconnecti on were able to maintain high interconnection 
charges, and at the same time were high net recipi ents of incoming calls.  Third, traditional accounting 
rate regime charges are falling quickly, unde r influences such as the ITU-T D.140 Annex E 
Benchmarks, the 1997 United States FCC Benchmarks , use of leased lines, and new technology such 
as voice-over-IP.  In sum, Mexico has not demons trated that a requirement for Members having 
undertaken Reference Paper commitments to grant international interconnection at cost-oriented 
pricing to all other WTO Members would lead to  results which were "manifestly absurd or 
unreasonable". 
7.143  We find, therefore, that Section 2 of Mexico's  Reference Paper applies to the interconnection 
of cross-border suppliers.  
7.144  Since we have already found that Mexico has undertaken market access and national 
treatment commitments in its schedule with respect to  the cross-border supply of  the services at issue; 
and that these commitments can provide the basis fo r interconnection commitments in Section 2.2(b) 
of Mexico's Reference Paper;  we are able to find overall that Section 2.2(b) of Mexico's Reference 
Paper applies to United States service suppliers s upplying or seeking to supply the services at issue. 
2. Whether Mexico has fulfilled its interconnectio n commitment, in Section 2.2(b) of its 
Reference Paper, with respect to the services at issue 
7.145  We now consider whether Mexico has fulfilled  the commitment contained in Section 2.2 of its 
Reference Paper, notably to ensure, with a major s upplier, cost-oriented interc onnection.  We consider 
first the preliminary issue of whether Telmex is a "major supplier". 
(a) Is Telmex a "major supplier"? 
7.146  The United States claims that Mexico has not met its commitment under Sections 2.1 and 2.2 
of its Reference Paper because it has failed to ensure that Telmex, a major supplier, provides 
interconnection to United States basic telecommunicati ons suppliers on a cross-border basis with cost-
based rates and reasonable terms and conditions.  Me xico refutes this claim and also contests the 
United States assertion that Telmex is a major supplier.   
7.147  We examine first the definition of the term "m ajor supplier", as it appears in the Reference 
Paper: 
"A major supplier is a supplier which has the ability to materially affect the terms of 
participation (having regard to price and supply) in the relevant market for basic 
telecommunications services as a result of:  
(a) control over essential facilities; or  
                                                      
922 See Mexico's second written submission, paragraph 34.  
923 Estimates are that as much as half of all interna tional traffic is outside the traditional accounting rate 
system.  ITU Trends in Telecommunications Reform 2000-2001, Section 8.2 (Exhibit MEX-59). WT/DS204/R 
Page 174  
 
(b) use of its position in the market."
924 
7.148  It is not in dispute that Telmex is a supplier  of basic telecommunications services.  In order to 
determine whether Telmex is a "major supplier", Mexico's Reference Paper indicates that we must examine three factors.  First, what the "relevant ma rket" is.  Second, whether, in that market, Telmex 
has "the ability to materially affect the terms of participation (having regard to price and supply) in 
that market".  Third, whether that ability results  either from "control over essential facilities", or "use 
of its position in the market".  We consider each of these factors in turn. 
(i) What is the "relevant market for basic telecommunications services "? 
7.149  The United States argues that the relevant market is the termination  of the services at issue – 
voice telephony, facsimile and circuit-switched da ta transmission services – supplied cross-border 
from the United States to Mexico.  A ccording to the United States, this results from an application of 
basic principles of United States antitrust law and Me xican competition law, which define the relevant 
market in terms of demand substitution.  Under th is principle, it contends that international 
telecommunications services (whether supplied cr oss-border or through commercial presence) cannot 
substitute for domestic telecommunications ser vices.  Likewise, within international 
telecommunications services, originating traffic cannot  substitute for terminating traffic, which is a 
separate market.
925 
7.150  Mexico contests this analysis.  It argues that the United States fails to explain how the supply 
of cross-border services is relevant to the market for termination , which are supplied through 
commercial presence, a different mode of supply.  Even if the market for termination were in principle relevant, Telmex does not provide such ser vices, and Mexico does not permit trade in them.  
Instead, it argues, Telmex completes international calls on a shared-revenue basis, under a traditional 
accounting rate regime, and the relevant market would thus have to include two-way traffic.
926 
7.151  The services at issue are basic telecommunications services – voice, switched data and fax – 
originating in the United States, and for which Un ited States suppliers are seeking interconnection 
with Mexican concessionaires for termination of the service in Mexico.  United States suppliers have 
a choice of Mexican operators with whom they ma y interconnect and terminate, even though these 
operators, by Mexican law, must charge a single pri ce set by the operator with the largest volume of 
outgoing traffic, and Telmex contro ls the majority of international gateways necessary to terminate 
the services.  Contrary to Mexico's arguments,  therefore, there does exist supply and demand – a 
"market" – in Mexico for termination.  The fact that arrangements for inte rconnection and termination 
may take the form of "joint service" agreements, and may not be price-oriented, does not change the 
fact that the market exists.  Nor is it pertinent to the determination of the "relevant market", as Mexico 
suggests, that most WTO Members have not undertak en market access commitm ents specifically in 
"termination services";  facilities for the termination and interconnection are essential  to the supply of 
the services at issue in this case. 
7.152  Is this market for termination the "relevant" market?  For the purposes of this case, we accept 
the evidence put forward by the United States, and uncontested by Mexico, that the notion of demand 
                                                      
924 In the authentic Spanish version: 
"Proveedor principal , es aquel proveedor que tiene la capacidad de afectar 
materialmente los términos de participación en el mercado relevante de servicios básicos de telecomunicaciones  (teniendo en cuenta el precio y la 
oferta), como resultado del: 
(a) control sobre los recursos esenciales; o (b) uso de su posición en el mercado. " 
925 See the United States' first written submission, paragraphs 72-78. 
926 See Mexico's second oral stat ement, paragraphs 67-74.  WT/DS204/R 
 Page 175 
 
 
substitution – simply put, whether a consumer woul d consider two products as "substitutable" – is 
central to the process of market definition as it is  used by competition authorities.  Applying that 
principle, we find no evidence that a domestic telecommunications service is substitutable for an international one, and that an outgoing call  is c onsidered substitutable for an incoming one.  One is 
not a practical alternative to the other.  Even  if the price difference between domestic and 
international interconnection would change, such a price change would not make these different 
services substitutable in the eyes of a consumer.  We accept, therefore, that the "relevant market for 
telecommunications services" for the services at issue – voice, switched data and fax – is the termination of these services in Mexico. 
(ii) Does Telmex have "the ability to materially affect the terms of participation (having regard to 
price and supply) " in that market? 
7.153  The United States maintains that, within the mark et for termination, Telmex "can materially 
affect the terms of participation (having regard to  price and supply)".  It argues that this notion 
corresponds to the concepts of "market power", used by United States competition authorities, and 
"substantial power", used by Mexican competition aut horities.  A firm has market power if it has the 
ability profitably to maintain prices above competitive levels for a significant period of time, which 
implies both the ability to maintain prices well ab ove costs, and protection (either governmental 
limitations or market circumstances) against a rival's entry or expansion.  The United States argues that, in determining whether a firm has market  power, United States antitrust authorities examine 
factors such as market share, ba rriers to entry, capacities of firm s in the market, availability of 
substitutes, and opportunities for coordinated behaviour among firms.
927 
7.154  Within the market for termination in Mexico, the ILD Rules accord Telmex special powers.  
ILD Rule 13 provides: 
"The long-distance service licensee having the greatest percentage of  outgoing long-
distance market share for the six months pr ior to negotiations with a given country 
shall be the licensee that is au thorized to negotiate settlement rates with the operators 
of said country.  These rates shall be subm itted to the Commission for its approval." 
7.155  Rule 13 effectively grants to the long-distan ce licensee with the highest volume of outgoing 
traffic on a particular international market the so le right to negotiate settlement rates which, under 
Rule 10, all other operators must apply.  Since Te lmex has always had the largest share of outgoing 
traffic in every international market, including to the United States, it is, and has consistently been 
under the Rules, the "licensee authorized to negotiate settlement rates".  In th ese circumstances, since 
Telmex is legally  required to negotiate settlement rates for the entire market for termination of the 
services at issue from the United States, we find that  it has patently met the definitional requirement 
in Mexico's Reference Paper that it have "the ability to materially affect the terms of participation", 
particularly "having regard to price". 
(iii) If Telmex has the ability to materially affect the terms of participation in that market, does it 
result from "control over essential facilities ", or "use of its position in the market "? 
7.156  The United States argues that Telmex has market power with respect to the termination of the 
services at issue mainly because of its right under the International Long Distance Rules ("ILD 
Rules") to determine the single price applicable to all suppliers in the market.  It contends that 
Mexico's own competition authority, the CFC, fou nd in 2001 that Telmex ha d substantial power in 
international  services markets based on:  a market share of  74% in international traffic, control of 
nearly 75% of international gateway capacity, a right to  set prices because of its large market share, as 
well as advantages arising from vertical integration.  Mexico for its part argues that the United States 
                                                      
927 See the United States' first written submission, paragraphs 79-81. WT/DS204/R 
Page 176  
 
relies on a market determination by the Mexican  competition authority that is under review by 
Mexican courts precisely because it was ba sed on data from 1996, that is, when the 
telecommunications market was not yet fully open.
928  The United States argues that the substantial 
power of Telmex in the international market would apply automatically to the market for termination , 
since the ILD Rules guarantee that Telmex, as an or iginator of international services, is entitled to 
terminate services in the same proportion.  The United States notes that the FCC has also made a 
finding that Telmex is dominant in the provisi on of international telecommunications services 
between the United States and Mexico.929 
7.157  The United States also argues that Telmex continu es to have market power with respect to the 
cross-border termination of the services at issue.   It contends that Telmex has over 60% of the 
Mexican international switched market, and has never been below that level;  that the United States 
market is over 80% of that market; that it is  not necessary to analy se separately incoming and 
outgoing minutes, since the proportionate return system links the two; that there have been no significant new entrants since competition was opened in the Mexican international 
telecommunications market; and that Telmex has de monstrated the ability over a sustained period to 
maintain prices well above costs.
930 
7.158  In examining this issue, we have alread y shown that Telmex possesses the "ability to 
materially affect the terms of participation" in the relevant market, primarily through its ability to 
impose its negotiated settlement rate for an intern ational route on its competitors.  The ability to 
impose uniform settlement rates on its competitors is the "use" by Telmex of its special "position in 
the market", which is granted to it under the ILD Rules. 
7.159  Overall, we find therefore that Telmex is a "major supplier", with respect to termination of the 
services at issue, in that it has the ability to materially affect the price of termination of calls from the 
United States into Mexico, as a result of its special  position in the market, which allows it to set a 
uniform price applying to all its competitor s on terminating calls from the United States. 
(b) Are the Telmex interconnection rates "cost-oriented"? 
7.160  The United States claims that the interconnection rates negotiated by Telmex are not cost-
oriented.  The United States argues that the ordinary meaning of "cost-oriented" suggests that the cost 
at issue must be "related to the cost incurred in providing the good or service".931  This meaning is 
amplified, according to the United States, by the use of this term in many WTO Members' 
telecommunications laws and regulations, a usage wh ich amounts to a "special meaning" in the sense 
of Article 31 of the Vienna Convention.  The te rm "cost-oriented" in the context of Mexico's 
Reference Paper should therefore be interpreted as "the cost incurred  in providing interconnection".932  
The United States contends that this meaning is confirmed through the practice of WTO Members, 
including the United States, the European Communities and Mexico.933  Mexican law, in particular, 
requires the use of "long run average incremental co st" ("LRAIC") principles,  which are consistent 
with interconnection rates that relate to the cost of providing that service.934  Furthermore, according 
to the United States, this meaning is consistent  with the pro-competitive object and purpose of the 
Reference Paper commitments, since requiring a majo r supplier to set interconnection rates based on 
                                                      
928 Mexico's argument on this issue is summar ized at paragraph 4.156 of this Report. 
929 See the United States' first written submission, paragraphs 82-92. 
930 See the United States' first written submission, paragraphs 93-98. 
931 See the United States' first written submission, paragraph 107. 
932 See the United States' first written submission, paragraph 108. 
933 See the United States' first written submission, paragraphs 109 and 112. 
934 See the United States' first written submission, paragraph 110.  WT/DS204/R 
 Page 177 
 
 
the cost of providing the interconnection is an im portant way of ensuring that competitors are on an 
equal footing.935 
7.161  The United States argues that, to the extent that the term "having regard to economic 
feasibility" qualifies the term "cost-oriented" rates, it simply confirms that interconnection rates should cover "both direct costs and common costs,  and should permit a reasonable return on the 
investor's investment".
936  According to the United States, the LRAIC method used by Mexico to 
develop its domestic interconnecti on rates includes the cost of capital to finance interconnection 
facilities, which already includes a r easonable rate of return.  The United States agrees with the EC 
that the language in the EC Interconnection Direc tive served as a model for the phrase "having regard 
to economic feasibility", and it is intended there simply to ensure the return on an operator's 
investment is "reasonable".937 
7.162  The United States also argues that the phrase "hav ing regard to economic feasibility" does not 
temper the obligation to provide interconnection at co st-oriented rates, in light of an overall policy 
goal such as expanding a country's telecommunicati ons infrastructure.  Section 2.2(b) requires a 
relationship between interconnec tion rates and the cost of interconnection , not the cost of national 
infrastructure roll-out.938  According to the United States, its in terpretation is contextually supported 
by Section 2.2(b), which provides that a purchaser  of unbundled interconnection "need not pay for 
network components or facilities that it does not re quire for the [interconnection] service to be 
provided", and by Section 3, which provides sep arate and particular requirements for Members 
wishing to impose universal service obligations.939 
7.163  The United States presents detailed eviden ce aimed at showing that the current 
interconnection rates for terminating United States cal ls charged by Telmex and approved by Mexican 
authorities (5.5 cents, 8.5 cents, or 11.75 cents per minute, depending on the geographical area in 
Mexico where the call is terminated) are much hi gher on average than the prices Telmex charged for 
purely domestic use of the same network component s.  The United States also uses three other proxy 
methods, showing that the interconnection rates th at Telmex charges Unit ed States cross-border 
suppliers greatly exceeds grey market retail rat es for calls into Mexico, wholesale rates for the 
termination of calls into other countries, and rat es Mexican operators charge each other for settling 
accounts relating to international calls. 
7.164  Mexico argues that the United States incorrectly defines "cost-oriented" rates as requiring that 
the rate equal the "bare cost" of providing the service.  Instead, according to Mexico, the term " tarifas 
basadas en costos " ("cost-oriented rates") must be inte rpreted taking into account the qualifying 
phrase " que sean transparentes, razonabl es, económicamente factibles " ("that are transparent, 
reasonable, economically feasible") which also appears in Section 2.2(b) of its Reference Paper.  In 
assessing whether cost-oriented rates were "reasonable", Mexico states that relevant factors include the state of a WTO Member's telecommunications  industry; the coverage and quality of its 
telecommunications network; the return on invest ment;  and whether the rates derive from an 
accounting rate regime.  In assessing whether the co st-oriented rates were "economically feasible", 
Mexico states that rates meet this standard if they  are "consistent with the efficient use of income and 
wealth that is suitable, reflecting the needs of the operator and the policy goals of the country".
940  In 
this respect, account had to be taken of Mexico 's policy goal of promoting universal access to 
telecommunications services, which depended to a large extent on accounting rate revenues.   
                                                      
935 See the United States' first written submission, paragraphs 115-116. 
936 See the United States' second written submission, paragraph 68. 
937 See the United States' answer to question No. 14(a ) of the Panel of 19 December 2002, paragraph 
76.  For question No. 14(a), see footnote 359 of this Report. 
938 See the United States' second written submission, paragraph 71. 
939 See the United States' first written submission, paragraph 107. 
940 See Mexico's second written submission, paragraphs 87-97. WT/DS204/R 
Page 178  
 
7.165    In resolving the issue of whether Mexico h as ensured that Telmex charges "cost-oriented 
rates" to United States suppliers of the services at issu e, we first examine the meaning of this term.  In 
the light of this, we then determine whether the United States has provided evidence that Mexico has 
failed to ensure that Telmex has met this standard. 
(i) Meaning of "cost-oriented " rates 
7.166  Section 2.2(b) of Mexico's Reference Paper re quires that Mexico ensure interconnection "at 
cost-oriented rates that are ... reasonable, having regard to economic feasibility".
941  We will first look 
at the ordinary meaning of the wording.  
7.167  With respect to the term "cost-oriented", we note that Japan, a third party to these 
proceedings, drew the Panel's attention to a di screpancy between the or iginal Spanish term " basadas 
en costos " and its translation into English "cost-oriented".   It was said that the correct translation of 
"basadas en costos " should have been "based on costs" and th at there was a difference in the meaning 
between those two terms.  Although the Panel agreed with this sec ond translation as being the closer 
to the original Spanish, both parties indicated to  the Panel that they did not see any substantive 
difference in meaning between " basadas en costos " and "cost-oriented".  Therefore, in the absence of 
disagreement between the parties on this  point, the Panel considers that " basadas en costos " and 
"cost-oriented" are interchangeable. 
7.168  In examining the ordinary meaning of "cost-oriented", we note that the dictionary meaning of 
"to orient" is "to adjust, correct, or bring into  defined relations, to known facts or principles".942  Rates 
that are "cost-oriented" thus suggest rates that are brought into a defined relation to known costs or 
cost principles .  Rates that are "cost-oriented" would not n eed to equate exactly to cost, but should be 
founded on cost.  The degree of flexibility inherent in the term "cost-oriented" suggests, moreover, 
that more than one costing methodology  could be used to calculate "cost-oriented" rates. 
7.169  As we did in the case of the term "interconnection", we will now examine whether the term 
"cost-oriented" has a "special meaning", in the sense of Article 31:4 of the Vienna Convention since it 
is a technical term that may have such a meaning in the telecommunications sector.  As already noted, 
this provision requires that "a special meaning shal l be given to a term if it is established that the 
parties so intended".  We consider that Article 31. 4 includes cases in which the term at issue is a 
technical one that is in common use in its field, and which the parties can be presumed to have been 
aware of.  We find this to be the case with "cost-oriented rates". 
7.170  The term "cost-oriented rates" is of centr al importance in national and international 
telecommunications regulation.  Within the ITU, the notion of "cost-oriented rates" is a key concept 
which has been in common use since 1991.  It fi gures in a key ITU-T series Recommendation D.140, 
which lays down guidelines for establishing accoun ting rates for international telephone services.943  
Recommendation D.140 states that accounting rates "s hould be 'cost-orientated' and should take into 
account relevant cost trends", and that cost-o rientation should apply "to all relations on a non-
discriminatory basis".944 
7.171  Recommendation D.140 also enumerates the cost elements  to be taken into account when 
determining accounting rates. Annexed guidelin es enumerate these "cost elements":  network 
elements (international transmission facilities, in ternational switching facilities, and the national 
extension), related costs (direct, and indirect or  common costs – including a "reasonable return on 
                                                      
941 In the authentic Spanish version:  " en ... tarifas basadas en costos que sean …, razonables, 
económicamente factibles ". 
942 The Shorter Oxford English Dictionary , 3rd edition, (Clarendon Press, 1990), page 1463. 
943 ITU Recommendation ITU-T Rec. D.140 (06/2002) paragraph 1. 
944 ITU Recommendation ITU-T Rec. D.140 (06/2002) paragraph 2.  WT/DS204/R 
 Page 179 
 
 
equity"), and "other related costs" to be agreed between the parties.945  The guidelines specify that 
several of the related direct costs are relevant only "if applicable", or "directly attributable" to the 
particular international telephone service.  Likewi se, related indirect or common costs "cannot be 
solely attributed to the international telephone ser vice and thus must be allocated".  The guidelines 
suggest therefore that the relevant cost elements are only those that relate to the actual cost of 
providing the service. 
7.172  The principle of "cost-orientation" is conf irmed in a related ITU Recommendation, D.150, 
which was amended in 1999 to describe possibl e procedures for the "remuneration of the 
Administration of the country of destination" for international telecommunications traffic.  These 
procedures are:  flat rate price, traffic-unit price, accounting revenue division, settlement rate, 
termination charge, and "other" procedures.  For each of these procedures, the Recommendation states 
that administrations "should apply the principles of … cost-orientation".946 
7.173  Recommendation D.140 also specifies that cost el ements need be valued according to a cost 
model in order to arrive at specific cost figures.  A set of principles adopted in 1999 and annexed to 
the Recommendation D.140 requires that administra tions, in developing and using a cost model, 
adhere to a "principle of causality" between th e service and the resources used to provide it: 
"Principle of causality  
The demonstration of a clear cause and e ffect relationship between service delivery 
on the one hand and the network elements a nd other resources used to provide it on 
the other hand, taking into account the relevant underlying cost determinants."947 
7.174  In sum, Recommendation D.140 requires in  its present form that the cost elements  and the 
cost model  both be clearly related to the cost of deliver ing the service.  This special meaning of "cost-
orientated", in the context of the ITU, is thus cons istent with the ordinary meaning of the term as it 
appears in Section 2.2(b) of Mexico's Reference Pape r.  As both parties to this dispute as well as most 
WTO Members are also members of the ITU, the special definition adds precision to the ordinary meaning by classifying allowable cost  elements , and establishing the causality between the cost 
elements and the services provided.  While leaving a margin of discretion to national authorities to 
choose the precise cost  method   by which to arrive at "cost-orie nted" rates, the ITU recommendations 
indicate that the term "cost-oriented rates" can be understood as rates related to the cost incurred in 
providing the service . 
7.175  In examining further the "special meaning" of the term "cost-oriented", we note that the ITU 
states in a report that "incremental cost methodologies are becoming the de facto standard for 
interconnection pricing around the world".
948  These methods focus on the additional future fixed and 
variable costs that are attributable to the service. Setting rates in line with long run incremental costs 
reflects the view that the regulator should require  prices from dominant or major suppliers that most 
closely imitate a fully competitive market, wher e prices are driven down towards marginal or 
                                                      
945 ITU Recommendation ITU-T Rec. D.140 (06/2002) Annex A. 
946 ITU Recommendation ITU-T D.150, (06/1999) paragraph 2.  Although the Recommendation uses 
the form "cost-orientation", we do not attach any interpretative significance to this. 
947 ITU Recommendation ITU-T Rec. D.140 (06/2002) Annex F. 
948 ITU, Trends in Telecommunications Reform:  Interconnection Regulation , 3rd edition, sec. 4.2.1.2, 
p. 40.  This paragraph also states that countries that apply long run incremental cost methodologies include 
United States, Australia, EC, Colombia, and South Africa, and that "numerous developing countries have 
adopted or proposed" some form of this model. WT/DS204/R 
Page 180  
 
incremental costs.
949  The increasing use of incremental cost methodologies indicates the special 
meaning that the term "cost-orient ed" is acquiring among WTO Members.  
7.176  Mexico is among the WTO Members that implem ents a type of long run incremental cost 
methodology, known as LRAIC.  Article 63 of Mexi co's Federal Law on Telecommunications gives 
the authority to impose on any public telecommuni cations licensee with substantial market power 
rates that aim at "recovery, at least, of  the long run average incremental cost".950  T h i s  m e a s u r e  i s  
aimed at avoiding predatory pricing.  
7.177  We find therefore that the increasing and wide-spread usage of incremental cost 
methodologies among WTO Members supports the inte rpretation of the term "cost-oriented" as 
meaning the costs incurred in suppl ying the service, and that the use of long term incremental cost 
methodologies, such as those required in Mexican law, is consistent with this meaning. 
7.178  So far, we have examined the meaning of "cost- oriented rates" without taking into account the 
subsequent phrase in Section 2.2(b) of Mexico's Re ference Paper:  "that are transparent, reasonable, 
having regard to economic feasibility".  We now ex amine what interpretative effect should be given 
this phrase.  We recall that Section 2.2(b) requi res a Member to ensure that interconnection is 
provided by a major supplier: 
"in a timely fashion, on terms, conditions (including technical standards and 
specifications) and cost-oriented rates that are transparent,  reasonable, having regard 
to economic feasibility,  and sufficiently unbundled so that the supplier need not pay 
for network components or facilities that it does not require for the service to be 
provided … "951 (emphasis added) 
7.179  We first examine the relationship of the phrases "reasonable" and "having regard to economic 
feasibility" with the other elements of the Section 2. 2(b).  We note that the provision isolates certain 
key elements in the relationship of interconnection between a supplier and a major supplier – "terms", 
"conditions" and "rates".  It then lists some gene ral qualifiers – including "reasonable", and "having 
regard to economic feasibility". 
7.180  The phrase "terms and conditions" is commonly used  to designate the elements of a contract 
or an agreement.  The word "terms", in its speci alized legal sense, can m ean "conditions, obligations, 
rights, price, etc., as specified in contract or instrument"952;  while "condition" may be defined as "a 
provision in a will, contract, etc., on which the force or effect of the document depends."953  Therefore 
"rates" can be seen as special types of "terms" or "conditions", and that whatever qualifies "terms" or "conditions" also qualifies "rates".  Further, it is clear that "reasonable" must qualify "terms" and 
"conditions", since these two e xpressions are not otherwise qua lified.  Based on these two 
observations, we conclude that the term "reasonable" must also, at a minimum, impart some meaning to "cost-oriented rates". 
                                                     
 
949 ITU, Trends in Telecommunications Reform:  Interconnection Regulation , 3rd edition, sec. 4.2.1.2, 
p. 40. 
950 Federal Law on Telecommunications, Article 63. 
951 In the authentic Spanish version: 
"(b) de manera oportuna, en términos, condiciones (incluyendo normas 
técnicas y especificaciones) y tarifas basadas en costos que sean transparentes, razonables, económicamente factibles y que sean lo 
suficientemente desagregadas para que  el proveedor no necesite pagar por 
componentes o recursos de la red que no  se requieran para que el servicio 
sea suministrado;... ". 
952 Black's Law Dictionary , 6th edition, 1990. 
953 See Panel Report, US – Stainless Steel , paragraph 6.75.  WT/DS204/R 
 Page 181 
 
 
7.181  The phrase "having regard to economic feasibility" could act as a general qualifier in the same 
way as "reasonable" or, because it begins with the c onnecting participle "hav ing ...", it could be 
interpreted as being attached to and qualifying only the word "reasonable" which precedes it.  Either 
way – directly or through qualifying the term "reasonable" – the phrase imparts meaning to "cost-
oriented rates".  We note, however, that because the word "rates" is qualified directly and specifically 
by the expression "cost-oriented", that this expression should have a pr eponderant weighting. 
7.182  We now consider what additional meaning the terms "reasonable" a nd "having regard to 
economic feasibility" impart to "cost-oriented rat es".  We start with the term "reasonable".  The 
ordinary meaning of the word "reasonable" suggests something that is "not irrational, absurd or 
ridiculous".954  Defined positively, reasonable can be defi ned as something "of such an amount, size, 
number, etc., as is judged to be appropriate or suitable to the circumstances or purpose ".955  The term 
"reasonable" thus suggests that the interconnection rates should be "suitable to the circumstances or 
purpose" – in other words, that they reflect the overall objectives of the provision that the rates represent the costs incurred in providing the service.  The word "reasonable" thus emphasizes that the 
application of the cost model chosen by the Memb er reflects the costs incu rred for the interconnection 
service.  Flexibility and balance are also part of the notion of "reasonable".
956 
7.183  The qualification of "cost-oriented rates" by the word "reasonable" would not therefore permit 
costs to be included in the rate that were not in curred in the supply of the interconnection service.  
Thus, contrary to Mexico's position, the general state of the telecommunications industry, the 
coverage and quality of the network, and whethe r rates are established under an accounting rate 
regime, are not relevant to determ ining a proper cost-oriented rate. 
7.184  We now examine the qualifier "having regard to economic feasibility".  We have established 
that the phrase imparts meaning to "cost-oriented" e ither directly, or indirectly through the term 
"reasonable".  Normally, however, a "cost-orient ed" rate must meet an "economic feasibility" 
standard, since the cost-oriented rate by definitio n covers all incurred costs, including a reasonable 
rate of return.  The application of the "economic fe asibility" standard would thus appear to have more 
meaning when applied to "terms" and "conditions".  It s use here to qualify "cost-oriented rates" serves 
merely to underline that the major supplier is  entitled to rates that allow it to undertake 
interconnection on an "economic" basis, that is, to make a reasonable rate of return. 
7.185  This interpretation is supported to some exte nt by negotiating history.  The phrase "having 
regard to economic feasibility" was, according to  the United States, adap ted from language being 
developed for the EC Interconnection Directive.  The European Communities claims that this phrase 
is understood to mean that the operators must  be allowed a "reasonable rate of return on 
investment."957 
                                                      
954 The Shorter Oxford English Dictionary , 3rd edition, (Clarendon Press, 1990), Vol. II, page 1758. 
955 Ibid. 
956 The Appellate Body in US – Hot-Rolled Steel  stated:  "…The word 'reasonable' implies a degree of 
flexibility that involves consideration of all of the circumst ances of a particular case.  What is 'reasonable' in one 
set of circumstances may prove to be less than 'reasonable'  in different circumstances.  This suggests that what 
constitutes a reasonable period or a reasonable time, under Article 6.8 and Annex II of the  Anti-Dumping 
Agreement,  should be defined on a case-by-case basi s, in the light of the sp ecific circumstances of each 
investigation.  In sum, a "reasonable period" must be inte rpreted consistently with the notions of flexibility and 
balance that are inherent in the concept of "reasonablene ss", and in a manner that allows for account to be taken 
of the particular circumstances of each case.  This was in the context of the Anti-Dumping Agreement,  but we 
believe it is equally pertinent in the context of GATS."  See Appellate Body Report, US – Hot-Rolled Steel , 
paragraphs 84-85. 
957 Article 7(2) of the EC Interconnection Dir ective (Directive 97/33/EC) of 30 June 1997 on 
interconnection in Telecommunications with regard to en suring universal service and interoperability through 
application of the principles of Open Network Provision (ONP), (OJ 1997 L 199, p. 32) which provides WT/DS204/R 
Page 182  
 
(ii) Does Telmex interconnect United States suppliers at cost-oriented rates? 
7.186  We now examine whether the United States has presented evidence demonstrating that 
Mexico has not ensured that Telmex has interconnect ed United States suppliers of the services at issue 
at cost-oriented rates, as required by S ection 2.2 of Mexico's Reference Paper. 
7.187  The United States uses four methods to show that  Telmex does not charge cost-oriented rates 
to United States suppliers of the services at issue.  First, it presents evidence that the same network 
elements used to interconnect United States supplie rs, when used for domestic interconnection, cost 
on average 75% less.  Second, it presents evidence that grey market rates for a variety of international 
routes to Mexico are far lower than the rates char ged by Telmex.  Third, it presents evidence that 
wholesale rates to terminate calls between various  countries with competitive long-distance operators 
is much lower than the rates charged by Telmex.  F ourth, the United States presents evidence that the 
financial arrangements related to "proportionate return" proc edures among Mexican operators 
pursuant to the ILD Rules show that Telmex's rates are above cost.  We examine in turn each of these 
methods. 
7.188  We note that Mexico did not offer comments on the specific methods of evaluating costs and 
settlement charges presented by the Un ited States, nor did it take up the Panel's invitation to submit its 
own calculations.
958 
aa) Comparison with domestic prices in Mexico for the same network components  
7.189  We start with an examination of the first me thod offered by the United States to demonstrate 
that the rate charged by Telmex to United Stat es suppliers of the services at issue are not cost-
oriented.  The United States argues that, in the absen ce of Telmex data on costs, the maximum cost to 
Telmex of interconnecting a United States supplier can be estimated by identifying the network 
components used by Telmex to terminate calls fro m the United States, and then adding together the 
published prices of these components established by Cofetel or Telmex.  Since the published 
component prices are set to cover Telmex's costs, the sum total of the component prices is a "cost-
ceiling" for the aggregate network components. 
7.190  Mexico argues that the type of cost analysis  proposed by the United States is not in the 
GATS.  There is not, for Mexico, a common understanding of the meaning of the term "cost-oriented".
959  Furthermore, the United States analysis  could not apply to settlement rates for 
international calls;  it could only be used for in terconnection under a "full-circuit", and usually a 
domestic regime.960 
7.191  We find that the United States' basic methodology  provides a useful indication of the costs 
incurred by Telmex in interconnecting United States suppliers and terminating their calls in Mexico.  
                                                                                                                                                                     
"[c]harges for interconnection shall follow the principles of  transparency and cost orientation.  The burden of 
proof that charges are derived from actual costs including a reasonable rate of return on investment shall lie with 
the organization providing interconnection to its facilities". 
958 See e.g., question No. 11 (a. Does Mexico consider that the estimates of the cost of terminating 
incoming international calls in Mexico given in the United States submission are roughly correct? b.  If not, 
please give reasons and outline how more satisfactory figures might be obtained) at the first meeting of the 
Panel;  questions No. 12 (Is there a margin for an adequate rate of return that can be interpreted into the terms  
"cost-oriented rates that are … reasona ble."  If so, what would be an adequate margin of return.  Please provide 
examples.) and No. 14 (How do Mexico's considerations on elements to be included in the establishment of 
cost-oriented rates relate to its obligations under Section 3 of its Reference Paper?) at the second meeting of the 
Panel. 
959 See Mexico's first written submission, paragraph 186. 
960 See Mexico's answer to question No. 11(b) of the Panel of 19 December 2002.  For question 
No. 11(b), see footnote 407 of this Report.  WT/DS204/R 
 Page 183 
 
 
We think it is justified to presume that the aggreg ate price charged by Telmex for the use of network 
components, when used for purely domestic traffic, is  an indication of the cost-oriented rate, in the 
sense of Section 2.2(b) of Mexico's Reference Pape r, for the use of these same network components in 
terminating an international call. We cannot accept Me xico's arguments to the contrary, which it bases 
on an overly flexible meaning of "cost-oriented", a nd the fact that an "accounting rate regime" applies 
to the services at issue. We have already made findings that reject these arguments.  
7.192  In examining the application  of the United States methodology, we are not convinced that the 
implicit traffic distribution used to weigh costs a nd settlement charges of the three groups of Mexican 
localities, which would indicate that the bulk of inco ming international calls go to small localities, is 
representative of what could be expected, and we  believe might understate  the difference between 
average settlement and costs.  Nonetheless, the co st figures put forward by the United States, and 
uncontested by Mexico, are such that the conclusions  of our analysis remain substantively unchanged, 
even assuming that a greater proportion of traffic goes to the larger cities.  
7.193  We now examine the main elements of the Un ited States analysis, the individual factual 
elements of which are not contested by Mexi co despite specific requests from the Panel.961  T h e  
United States presents evid ence successively on:  the identificati on of relevant network components;  
Telmex prices for these components;  the calculati on of the aggregate component prices for each of 
three types of destination in Mexico;  and the cal culation of the differences between the aggregate 
prices and Telmex rates.  We exam ine each of these elements in turn. 
i) Relevant network components  
7.194  The United States identifies four Telmex networ k components that are used to interconnect 
United States cross-border suppliers: 
 (a) international tran smission and switching 
 (b) local links  (c) subscriber line, and 
 (d) long-distance links. 
 
7.195  These components are consistent with the cate gories recommended by the ITU, which is 
considered good international practice.  The netw ork components used for international telephone 
services are categorized as follows :  international transmission and switching facilities (component (a) 
above), and the national extensi on (components (b) to (d) above).
962  The ITU also specifically 
includes "direct" and "indirect" costs. 
7.196  The evidence presented by the United States  identifying the relevant Telmex network 
components is uncontested by Mexico.  We find, on  the basis of the evidence before us, that the 
relevant network elements are international transm ission and switching, local links, subscriber line, 
and long-distance links. 
                                                      
961 See paragraph 7.188 and footnote 958. 
962 See ITU-T Rec. D.140, footnote 945. WT/DS204/R 
Page 184  
 
ii) Prices for the relevant network components
 
7.197  The United States presents evidence that either  Telmex or Cofetel has established rates for 
each of the relevant network elements.  The rates es tablished by Cofetel are published, and relate to 
international transmission and switc hing,  and terminating interconn ection to cities where there is 
long-distance competition.  The rates established by Te lmex are also published, and relate to local and 
long-distance links.  Both Cofetel and Telmex are le gally required to set prices that recover at least 
the total cost of these network components.963 
7.198  The United States classifies all calls to Mexico into three price categories, according to the 
use they make of Telmex's network.  These three z ones are:  (1) calls terminating in Mexico City, 
Guadalajara, and Monterrey;  (2) calls terminating in approximately 200 medium  size cities;  and (3) 
calls terminating in other locati ons in Mexico.  We now examine the pricing evidence which the 
United States presents for each of these three zones. 
– Termination in Zone 1 (large cities) 
7.199  The United States presents evidence that in these cities (Mexico City , Guadalajara, and 
Monterrey) United States suppliers need only use three network components.  These components are 
charged at the following rates:  international transmission and switching (1.5 cents/minute);  local link 
(0.022 cents/minute) and subscriber line (1.003 cents/minute).  Together these charges amount to 2.525 cents/minute.  However, Telmex currently ch arges 5.5 cents per minute, or 120% more than the 
maximum cost it incurs to termin ate these calls into zone 1. 
– Termination in Zone 2 (medium cities)  
7.200  The United States presents evidence that in th ese medium-sized cities, which do not have an 
international gateway switch, an additional network component – a "long-distance link" – is needed.  
The components are charged at the following ra tes: international transmission and switching 
(1.5 cents/minute);  local link (0.022 cents/minute);  long-distance link (0.536 cents/minute); and subscriber line (1.003 cents/minute).  Together th ese charges amount to 3.061 cents/minute. However, 
Telmex currently charges 8.5 cents per minute, or  175% more than the maximum cost it incurs to 
terminate these calls into zone 2. 
– Termination in Zone 3 (other cities) 
7.201  Finally, the United States presen ts evidence for certain  cities that Telmex has not opened to 
originating competition. Telmex uses the same netw ork components for termination of calls to these 
cities as it does to zone 2 cities.  However, fo r these cities, no unbundled pricing information is 
available for the long-distance link and subscriber lin e.  The United States therefore uses a proxy cost 
(7.76 cents/minute) based on the "reventa" rate that Telmex charges its competitors to terminate calls 
to these cities. The components are charged at the following rates: international transmission and 
switching (1.5 cents/minute);  local link (0.022  cents/minute);  terminating interconnection 
(7.76 cents/minute).  Together these charges amount to  9.28 cents/minute. However, Telmex currently 
charges 11.75 cents per minute, or 27% more than th e maximum cost it incurs to terminate these calls 
into zone 3. 
iii) Difference between component prices and Telmex rates
 
7.202  Based on the aggregate component prices for the termination of calls into each to the three 
zones, the United States presents evidence of a  di fference between the aggregated component prices 
and the rates charged to United States suppliers for each of the three individual zones.  Overall, and 
                                                      
963 See the United States' first written submission, paragraph 124.  WT/DS204/R 
 Page 185 
 
 
based on figures for traffic during the months of Ma rch to May 2002, the Telmex blended cost ceiling 
is 5.2 cents/minute, and the Telmex blended rate is 9.2 cents/minute, which is 77% more than the cost 
ceiling. 
7.203  We earlier accepted in principle the United States method for determining the difference 
between interconnection rates charged by Telmex to the United States suppliers of the services at 
issue, and the aggregate costs for relevant network components.  We found earlier that it is a justified 
presumption that any substantial difference betwee n the two figures was evidence that the Telmex 
interconnection rates were not "cost-oriented" in th e sense of Article 2.2(b) of Mexico's Reference 
Paper.  The evidence reveals that the blended aver age difference in costs is in the order of 77%.  
Mindful of the fact that the cost-ceiling figures used are conservative (since they are based in part on 
retail rates for private lines, and Telmex's interconnec tion rates to cities without competition in call 
origination), we find that a difference of over 75 % above Telmex's demonstrated cost-ceiling is 
unlikely to be within the scope of regulatory flexib ility allowed by the notion of "cost-oriented" rates, 
in the sense of Section 2.2(b) of Mexico's Reference Paper.  
bb) Comparison with "grey market" prices on the Mexico-United States route  
7.204  We now examine the second method used by the Un ited States to demonstrate that the rates 
charged by Telmex to United States suppliers of the services at issue are not "cost-oriented". The 
method is based on the use of data on exchange trad ed capacity (which the United States labels grey 
market).  These grey market a rrangements, which are based on the lease of cross-border links, bypass 
the uniform settlement rates required under Mexica n regulations, and are technically illegal in 
Mexico. The United States presents evidence, derive d from a major traffic exchange company, that 
grey market rates for transport and termination of international traffic into Mexico, sold in London, 
Los Angeles and New York also show that Telm ex interconnection rates are not cost-oriented. 
7.205  Mexico objects that this method is not legitimat e, since it is based on methods of supply of 
the service (such as international simple resale) that are not permitted under Mexican law.  We do not accept Mexico's argument, since what is relevant he re is solely the determination of actual costs 
incurred in terminating an international service within Mexico, and not the legitimacy of such 
practices.  Even though Mexico does possess all the re levant information conc erning cost elements, it 
does not show that grey-market or bypass services do not cover the costs of the various components at issue, nor that any costs are not recovered in such rates.  We find therefore that recourse to this 
subsidiary method by the United States is in prin ciple justifiable for the purpose of estimating the 
costs of Telmex in interconnecting United St ates suppliers and terminating their calls.  
7.206  The United States presents evidence that rate s offered by grey market operators from 
Los Angeles, New York and London to cities in Mexico range from 1.3 cents/minute to 
9.6 cents/minute, depending on the city of des tination, compared to 5.5 cents/minute to 
11.75 cents/minute for Telmex.  Telmex rates theref ore ranged from 22% to 323% above grey market 
rates, depending on the city of destination in Mexico .  According to the United States, the grey market 
rates likely overstated the real costs of the rele vant network components within Mexico, since the 
grey market rates also included the cost of tran smission of the signal to the Mexican border, the 
regulatory risk due to the illegal nature of the activity  in Mexico, and the higher cost of low-efficiency 
links frequently used by such operators. 
7.207  As Mexico has not submitted evidence to the contrary, we find that this methodology points 
to Telmex interconnection rates in the range of 22% to 323% above grey market rates for international 
calls into Mexico.  We are not convinced however th at the use of data on exchange traded capacity is 
fully warranted, as such capacity may be priced at short-term incremental co st (well below long-term 
incremental cost as required under Mexican law for calculating interconnection charges) and may also 
result in lower service reliability and quality.  For this reason, and since these figures are based on the WT/DS204/R 
Page 186  
 
prices of only one major traffic exchange company
964 on 13 September 2002, we would not make an 
independent  finding, based solely on these figures, that  Telmex rates are not cost-based in the 
meaning of Section 2.2(b) of Mexico's Reference Paper.  We find nonetheless that the substantial 
difference in costs goes some way to support the finding under the first method described above. 
cc) Comparison with termination rates on other international routes  
7.208  We now examine the third method used by the United States to demonstrate that the rates 
charged by Telmex to United States suppliers of th e services at issue are not "cost-oriented".  The 
method is based on a comparison of the market for wholesale transportation and termination of 
international calls.  We accept that this method is  a valid method for estimating costs of network 
components used for interconnection 
7.209    The United States presents evidence, based on wholesale rates on a major exchange965 to 
terminate calls to countries, like Mexico, that have  more than one long-distance provider.  The rates 
range from 1.2 cents/minute to 6.23 cents/minute, compared to Telmex blended average interconnection rate of 9.2 cents/minute.  Telmex  interconnection rates are therefore 48% to 667% 
above these wholesale rates. 
7.210  We find that this method results in Telmex interconnection rates of between 48% to 667% 
above wholesale rates into other international market s with more than one long distance provider.  We 
find that the results of this method lend credibility to the result under the first method.  However, since this evidence is based only on the data of one  major operator on one par ticular day, and does not 
concern traffic into Mexico, we would not base a finding solely on this evidence.
966 
dd) "Proportionate return" proc edures among Mexican operators  
7.211  We now examine the fourth and final method offe red by the United States to demonstrate that 
the rates charged by Telmex to United States suppliers  of the services at issue are not cost-oriented.  
The method is based on the "proportionate return system" required under the ILD Rules.967  Under this 
system, operators of international gateways in Mexico allocate incoming  calls among themselves in 
proportion to each operator's share of outgoing  calls.  Since the operators do not always receive traffic 
at their gateways in the proportion of their outgoing calls, Rule 16 provides for a transfer of these calls 
to another gateway operator, who may deduct a fee for its gateway services.  The remainder of the 
settlement rate from the foreign operator goes to the oper ator to whom the call is transferred.  Rule 17 
allows "financial compensation agreements" to be negotiated between gateway operators, instead of 
the physical transfer of calls. 
7.212  The United States points out that, under Rule 17 financial compensation agreements: 
"operators terminate excess traffic with their own network arrangements, deduct the 
'cost' incurred in such termination from the settlement payments received for that 
traffic, and distribute the residual amount to the operator entitled to additional traffic 
under the ILD Rules.  Implementing this  financial transfer, however, requires 
operators to agree on the cost of terminating a call –  since what they transfer between 
themselves is only the 'premium' on such calls, or the amount in excess of the costs 
incurred for terminating such calls."968 
                                                      
964 The company is Arbinet.  See the United States' first written submission, footnote 134. 
965 Arbinet. 
966 Arbinet prices on 13 September 2002. 
967 ILD Rules 2:XIII, 16, 17. 
968 See United States' first written submission, paragraph 153.  WT/DS204/R 
 Page 187 
 
 
7.213  We observe that the Rule 17 arrangements,  which on the uncontested evidence of the 
United States, involve "most" of the market allo cation adjustments, can only exist if there is a 
"surplus" to distribute after the full costs of in terconnection have been deducted by the operator 
receiving the call.  This surplus can only exist if  the Telmex settlement rate does not reflect the 
operator's costs, and there is consequently somethi ng left to distribute.  We find therefore that the 
existence and use of the "financial compensation agreements", which implement the "proportionate 
allocation" rules, are further evidence of the fact  that Telmex interconnection rates are not cost-
oriented in the sense of Section 2.2(b) of Mexico's Reference Paper. 
7.214  More generally, Mexico argues that commitm ents made by developing country Members 
have to be interpreted in the li ght of paragraph 5 of the preamble  to the GATS, and GATS Article IV 
which recognize that these Members need to "s trengthen their domestic services capacity and 
efficiency and competitiveness".969  However, we note that these provisions describe the types of 
commitments that Members should ma ke with respect to developing country Members;  they do not 
provide an interpretation of commitments alread y made by those developing country Members. 
7.215   The following table summarizes the various co st estimates presented by the United States: 
                                                      
969 See Mexico's second oral statement, paragraph 81. WT/DS204/R 
Page 188  
 
Table 1 
Mexico - summary of comparisons between interconnection costs and settlement rates 
Method Cost  
(US cents/min) Settlement rate 
(in Mexico 
 US cents/min) Multiple 
(Settlement 
as multiple of cost) 
1.  Cost of components in Mexico    
    3 largest cities 2.5 5.5 2.2 
    200 medium-size cities 3.0 8.5 2.8 
    Other localities 9.3 11.8 1.3 
    Weighted average 970 5.2 9.2 1.8 
2.  Exchange traded capacity 971    
    3 largest cities 1.5   
    200 medium-size cities 6.1   
    Other localities 9.3   
3.  International comparators 972 2.5   
7.216  The Panel decided, after having received no evidence from Mexico in response to our 
questions relating to the United States cost estimates ( see paragraph 7.188 and footnote 958 above), to 
base itself on the methodologies presented to the Panel by the United States and not refuted by Mexico.  On this basis, we conclude overall that  the interconnection rates charged by Telmex to 
United States suppliers of the services at issue are not "cost-oriented" within the meaning of 
Section 2.2(b) of Mexico's Reference Paper, sin ce by any of the methodologies presented to the Panel 
by the United States, they are substantially highe r than the costs which are actually incurred in 
providing the interconnection.  Therefore, we find that Mexico has failed to fulfil its commitments 
under Section 2.2(b) of the Refere nce Paper by failing to ensure th at a major supplier in terms of 
Section 2.2 of the Reference Paper provides interc onnection to United States basic telecom suppliers 
of the services at issue on a facilities basis under cost-oriented rates.  
(iii) Are the Telmex interconnection terms and conditions "reasonable "? 
7.217  The United States argues that Section 2.2 of Mexi co's Reference Paper also requires that the 
"terms and conditions" of interconnec tion must be "reasonable".  An inte rpretation of that word in its 
context, and in the light of the object and purpose of the GATS suggests, according to the 
United States, that terms and conditions on interconn ection are not "reasonable" if they "restrict the 
                                                     
 
970 Weighted by distribution of traffic from ATT to Telmex in March-May 2002. 
971 Price per minute of circuits between Los Angeles, New York, and London and selected destinations 
in Mexico as posted by Arbinet, a major traffic exchange company, on 13 September 2002.  Figure shown in 
table is simple average of figures for individual destinations. Includes international transmission in addition to 
termination in Mexico.  
972 The simple average of  wholesale termination rates of a major operator in 29 countries having 
several long-distance providers.  The United States lists these countries in a table in paragraph 146 of its first 
written submission, and claims that the rates are those posted by Arbinet on 13 September 2002.   WT/DS204/R 
 Page 189 
 
 
supply of the service".  The United States points to the de jure  monopoly power granted by Mexican 
law to Telmex under the ILD Rule 13 to set the in terconnection rate, and impose that rate on all other 
Mexican long-distance operators;  it also points to th e rejection by Mexican authorities of requests by 
both Mexican and United States suppliers to negotia te lower interconnection rates.  For the United 
States, these measures result in "unreasonable" term s and conditions for inte rconnection with Telmex, 
since they restrict the supply of scheduled ser vices through raising pr ices, reducing demand and 
lessening competition. 
7.218  The United States argues that the term "havin g regard to economic feasibility" qualifies the 
requirement for "reasonabl e" terms and conditions.973  In this sense, it limits the obligation to provide 
interconnection on reasonable terms and cond itions in cases including where revenues from 
interconnecting operators would not  cover costs due to insufficient demand or because of increased 
costs of rapid installation of facilities. 
7.219  Mexico replies that the United States has not  shown that either the ILD Rules regarding 
settlement rates, or the Mexican refusal to permit alternative rates, are "terms and conditions" of 
interconnection with a "major supplier" that are not "reasonable".  The United States had not shown, 
according to Mexico, that factors concerning rates  of interconnection are "terms and conditions" of 
interconnection and, even it they were, that these rates were terms and conditions of interconnection 
with a "major supplier", as required by Section 2.2(b)  of Mexico's Reference Paper.  Even if Telmex 
were considered a "major supplie r", the requirements in the ILD Ru les that the United States objects 
to could hardly be said to be "unreasonable":  the need to interconnect through an international port;  
the need to interconnect through an interconnection agreement;  and the right of Telmex to negotiate 
its own settlement rates.  The fact that other Mexi can operators have to a pply the rate negotiated by 
Telmex is not, according to Mexico, a term and c ondition of interconnection with a "major supplier", 
since no one suggests that the other Mexican suppliers have that status.974  Nor does the refusal of 
Mexican authorities to permit alternative rates c onstitute "terms and conditions" of interconnection 
with a "major supplier". 
7.220  Mexico argues that the United States' interpretation of "reasonable" has no merit.  All forms 
of government regulation relate to the terms a nd conditions of supply of a service and have some 
impact on the level of supply of that service.  It c ould hardly be said, however, that merely because a 
government regulation has that effect, that it is not  "reasonable".  In any case, according to Mexico, it 
is not the "terms and conditions" of interc onnection that restrict the supply of basic 
telecommunications, but the valid limitations on cro ss-border supply that Mexi co has inscribed in its 
schedule.  Even if the United States definition of "reasonable" were accepted, argues Mexico, 
Mexico's ILD Rules do not violate that standard, in th at they do not restrict in any way the supply of a 
scheduled service.  
7.221  We do not consider it necessary for our findings on Mexico's commitments under 
Section 2.2(b) of the Reference Paper to also decide  on the additional claims by the United States that 
Mexico has failed to ensure that the terms a nd conditions of interconnection with Telmex are 
reasonable as required by Section 2.2(b) of the Re ference Paper.  Having found that the phrase "terms 
and conditions" may cover also interconnection rates, we are inclined to find that the approval by the 
Mexican authorities of the above cost rate (includi ng reasonable profits) – and the imposition of that 
above cost rate as a uniform interconnection rate  in a manner excluding price competition in the 
relevant Mexican market – may also constitute, as cl aimed by the United States, "failure" by Mexico 
to "ensure" that interconnection with a majo r supplier is provided on reasonable terms and 
conditions.975  We note, however, that the interpreta tion of "reasonable terms and conditions" of 
interconnection with a major supplier in Section 2.2( b) of the Reference Paper may also be informed 
                                                      
973 See the United States' second written submission, paragraph 68. 
974 See Mexico's second written submission, paragraph 103. 
975 See paragraph 7.180 WT/DS204/R 
Page 190  
 
by the interpretation of Mexico's obligations und er Section 1 of the Reference Paper regarding 
"competitive safeguards", which we examine in the fo llowing Section C of our report.  Moreover, in 
Section D of our report, we have to examine the claim by the United States that Mexico does not 
permit interconnection of United States suppliers on "reasonable terms and co nditions" contrary to 
Section 5(a) of the GATS Annex on Telecommunica tions.  Having already found an inconsistency 
with Mexico's obligations under Section 2.2(b) of  the Reference Paper, we consider it wiser and 
justified to exercise "judicial economy" with rega rd to the United States claim of an additional 
inconsistency with the requirem ent in Section 2.2(b) of "reasonable" terms and conditions.  
C. W
HETHER MEXICO HAS MET ITS COMMITMENT UNDER SECTION 1 OF ITS REFERENCE PAPER  
7.222  The United States argues that Mexico has not met the requirements of Section 1.1 of its 
Reference Paper, which provides that "[a]ppropriate measures shall be maintained for the purpose of 
preventing suppliers who, alone or together, are a major supplier from engaging in or continuing anti-
competitive practices."  In the absence of a preci se definition of "anti-competitive practices", the 
United States argues that the term encompasses, at  a minimum, practices usually proscribed under 
national law:  abuse of dominant position, monopo lization, and cartelization.  The United States 
argues that, far from proscribing such be haviour, Mexico maintains measures that require Mexican 
telecommunications operators to adhere to a horiz ontal price-fixing cartel led by Telmex.  This 
requirement is contained in ILD Rule 13, which obliges the Mexican operator with the most outgoing 
traffic on a particular international route to nego tiate with the suppliers of that country a single 
settlement rate, which then applies, by virtue of ILD Rule 23, to all other Mexican operators.  Anti-
competitive practices are also evidenced, accord ing to the United States, by the required 
"proportionate return" system defined in ILD Rule 2:XIII, by which a Mexican operator is entitled to 
receive as much incoming traffic as it sends outgoing traffic. 
7.223  In response, Mexico argues that its Reference Paper commitments apply only to matters 
within its border, and not to services supplied unde r an accounting rate regime.  In any case, Mexico 
contends, it has put in place "appropriate measures"  to prevent anti-competitive practices under its 
general competition laws.  As for the ILD Rules th ey are, according to Mexico, aimed at increasing 
competition – by stopping new entrants from being undercut on pricing, and by preventing foreign 
operators from dictating prices to their Mexican a ffiliates.  The United States had not shown that 
Telmex is a "major supplier" in the relevant ma rket, and behaviour legally required under Mexican 
law could not be an "anti-competitive practice".  
7.224  We examine first the terms of Section 1.1 of  Mexico's Reference Paper.  It reads: 
"Prevention of anti-competitive practices in telecommunications   
Appropriate measures shall be maintained  for the purpose of preventing suppliers 
who, alone or together, are a major supplier from engaging in or continuing anti-competitive practices.
 "976  
7.225  We note that Section 1.1 contains three key el ements:  (i) a "major supplier";  (ii) "anti-
competitive practices";  and (iii) "appropriate meas ures" which must be maintained.  We examine 
each of these elements in turn. 
                                                      
976 In the authentic Spanish version: 
"1.1 Prevención de prácticas anticompetitivas en telecomunicaciones: 
Se mantendrán las medidas apropiadas, con el propósito de prevenir que, los proveedores que 
se constituyan, de manera indi vidual o conjunta, como proveedor  principal, se involucren en, 
o continúen con prácticas anticompetitivas. "  WT/DS204/R 
 Page 191 
 
 
1. Is Telmex a "major supplier"? 
7.226  Section 1 provides that the anti-competitive practices to be prevented are those of "suppliers 
who, alone or together, are a major supplier".  The United States claims that Telmex has always had 
the largest share of the United States – Mexico market for the termination of voice telephony, facsimile and circuit-switched data  transmission services, and it is t hus a "major supplier" in that 
market.  Mexico counters that the market for "ter mination" services is not relevant to the case, since 
termination services can only be supplied throug h commercial presence, and not on a cross-border 
basis.  Even if termination services were potentiall y relevant, Mexico argues that Telmex does not in 
fact provide these services. 
7.227  In our earlier analysis of the United States cl aim under Section 2.2 of Mexico's Reference 
Paper, we found that Telmex is a "major supplier" within the meaning of Mexico's Reference Paper, 
with respect to the services at issue.
977  We based this finding on the ability of Telmex to affect the 
terms of participation through use of its position in the relevant ma rket, which we found to be the 
termination in Mexico of the services at issue.  We see no reason to alter our analysis of the same term, with respect to same services, in examin ing Mexico's commitments under Section 1 of its 
Reference Paper.  We find therefore that Telmex, fo r the purposes of Section 1 of its Reference Paper, 
is a "major supplier." 
7.228  We note that Section 1 establishes an obligatio n with respect to "suppliers who, alone or 
together, are a major supplier".  The practices at  issue involve not only Telmex, but all the other 
Mexican suppliers who are gateway operators.  Sin ce we have already found that Telmex alone is a 
"major supplier" within the meaning of Section 1, and that the practices at issue involve acts of all the 
Mexican suppliers who are gateway operators, we ca n conclude also that Telmex and all the other 
Mexican gateway operators are together  a "major supplier". 
2. What are "anti-competitive practices"? 
7.229  We next examine the meaning of "anti-competitiv e practices", and whether such practices can 
result from the requirements of a Member's laws. 
(a) Meaning of "anti-competitive practices" 
7.230  The term "anti-competitive practices" is not defined in Section 1 of Mexico's Reference 
Paper.  The dictionary meaning of the word "practi ces" is very general.  Its meanings include "the 
habitual doing or carrying on of something; usua l, customary, or constant action; action as 
distinguished from profession, theory, knowledge, etc.;  conduct."
978  The word "practices" thus 
indicates "actions" in general, or can mean actions that are "usual" or "customary".  The dictionary 
meaning of the word "competitive" includes "charact erized by competition; organized on the basis of 
competition".979  The word "competition", in its relevant ec onomic sense, is in turn defined as "rivalry 
in the market, striving for custom between tho se who have the same commodities to dispose of".980  
Consistent with these meanings, the word "anti-comp etitive" has been defined as "tending to reduce or 
discourage competition.981  On its own, therefore, the term "anti-competitive practices" is broad in 
scope, suggesting actions that lessen ri valry or competition in the market. 
                                                      
977 See paragraph 7.159 of this Report. 
978 The Shorter Oxford English Dictionary , 3rd edition, (Clarendon Press, 1990), Vol. II, page 1645. 
979 Ibid,  page 382. 
980 Ibid. 
981 Merriam Webster Dictionary , Merriam Webster Online, 2003; http://www.webster.com/. WT/DS204/R 
Page 192  
 
7.231  We now examine the term "anti-competitive practic es" in the context of the Reference Paper.  
Examples of "anti-competitive practices" are set out in paragraph 2 of Section 1, which states that 
such practices "shall include in particular": 
 "(a) engaging in anti-competitive cross-subsidization;   (b) using information obtained from comp etitors with anti-competitive results; and  
 (c) not making available to other services suppliers on a timely basis technical 
information about essential facilities and comm ercially relevant information which 
are necessary for them to provide services." 
7.232  The list is introduced by the phrase "shall include in  particular", indicating that this list is not 
exhaustive and that therefore the above exampl es do not represent all "anti-competitive practices" 
within the scope of the provision.  The examples do however illustrate certain practices that were 
considered to be particularly relevant in the te lecommunications sector.  The first example – on cross-
subsidization – indicates that "anti-competitive practices" can include pricing actions  by a major 
supplier.  All three examples show that "anti-co mpetitive practices" may also include action by a 
major supplier without collusion or agreement with other suppliers.  Cross-subsidization, misuse of 
competitor information, and withholding of releva nt technical and commercial information are all 
practices which a major supplier can, and might normally, undertake on its own. 
7.233  Further context is provided by the narrowing of the scope of Section 1 of Mexico's Reference 
Paper to practices of a "major s upplier".  We recall that the term "major supplier" is defined in 
Mexico's Reference Paper as: 
"a supplier which has the ability to materially  affect the terms of participation (having 
regard to price and supply) in the rele vant market for basic telecommunications 
services as a result of: 
(a) control over essential facilities; or (b) use of its position in the market." 
7.234  The use of the term "major supplier" in Section 1, examined in the light of the definition of 
this term, suggests that the focus of "anti-competitiv e practices" is on a supplier's "ability to materially 
affect the terms of participation (having regard  to price and supply)" – in other words, on 
monopolization or the abuse of a dominant position in ways that affect prices or supply.  The definition of a major supplier in terms of supplie rs "alone or together" and the requirement in 
Section 1.1 of "preventing suppliers from engaging in or continuing anti-competitive practices" also 
suggests that horizontal coordination  of suppliers may be relevant .  This is supported by the 
requirement in Section 1.1 of "preventing supplie rs from engaging in or continuing anti-competitive 
practices." 
7.235  The meaning of "anti-competitive practices" is al so informed by the use of this term in 
Members' own competition legislation.
982  Many WTO Members maintain laws to ensure that firms 
do not undermine competition in their markets.  The term "anti-competitive practices" is often used in 
these laws to designate categories of behaviour th at are unlawful.  The range of anti-competitive 
practices that are prohibited varies between Memb ers, but practices that are unlawful under the 
competition laws of Members having such laws incl ude cartels or collusive horizontal agreements 
                                                      
982 "Overview of Members' National Competiti on Legislation", Note by the Secretariat, 
WT/WGTCP/W/128/Rev.2, 4 July 2001.  WT/DS204/R 
 Page 193 
 
 
between firms, such as agreements to fix prices or sh are markets, in addition to other practices such as 
abuse of a dominant position and vertical market restraints. 983  
7.236  In addition, the meaning of "anti-competitive prac tices" is informed by related provisions of  
some international instruments that address comp etition policy.  Article 46 of the 1948 Havana 
Charter for an International Trade Organization alre ady recognized that rest rictive business practices, 
such as price-fixing and allocation of markets and of customers, coul d adversely affect international 
trade by restraining competition and limiting market  access.  The importance of ensuring that firms 
refrain from engaging in horizontal price fixing agreements, market or customer allocation 
arrangements and other forms of collusion is lik ewise emphasized in the United Nations Set of 
Multilaterally Agreed Equitable Principles and Ru les for the Control of Restrictive Business 
Practices.984  It is also worth pointing out, since both Me xico and the United States are members of the 
OECD, that the OECD has adopted a Recommenda tion calling for strict prohibition of cartels.985  In 
the work of the WTO Working Group on the In teraction between Trade and Competition Policy, 
reference has been made to the pernicious effects of cartels, and to the consensus that exists among 
competition officials that price-fixing "hard core cartels" ought to be banned.986  Cartels were also 
described as the most unambiguously harmful kind of competition law violation.987 
7.237  An examination of the object and purpose of the Reference Paper commitments made by 
Members supports our conclusion that the term "a nti-competitive practices", in addition to the 
examples mentioned in Section 1.2, includes horiz ontal price-fixing and market-sharing agreements 
by suppliers which, on a national or international le vel, are generally discouraged or disallowed.  An 
analysis of the Reference Paper commitment s shows that Members recognized that the 
telecommunications sector, in many cases, was characterized by monopolies or market dominance.  
Removing market access and national treatment barr iers was not deemed suff icient to ensure the 
effective realization of market access commitm ents in basic telecommunications services.  
Accordingly many Members agreed to additional commitments to implement a pro-competitive regulatory framework designed to prevent c ontinued monopoly behaviour, particularly by former 
monopoly operators, and abuse of dominance by these or any other major suppliers.  Members wished 
to ensure that market access and national treatme nt commitments would not be undermined by anti-
competitive behaviour by monopolies or dominant supp liers, which are particularly prevalent in the 
telecommunications sector.  Mexico's Reference Paper commitment to the prevention of "anti-
competitive practices" by major suppliers has to be read in this light. 
7.238  Based on this analysis, we find that the term "anti-competitive practices" in Section 1 of 
Mexico's Reference Paper includes practices in additi on to those listed in Section 1.2, in particular 
horizontal practices related to price-fixing and market-sharing agreements. 
(b) Whether practices required under a Member's law can be "anti-competitive practices"  
7.239  We now take up the issue of whether acts by  a major supplier can be "anti-competitive 
practices" if they are required  by a Member's law, and not freely undertaken by a major supplier.   
7.240  The United States argues that anti-competitive practices do not change their nature simply 
because they are required by national laws and regula tions.  In the view of the United States, "[j]ust 
because Mexican regulation requires  the suppliers to collude does not mean they are not indeed 
                                                     
 
983 Ibid. 
984 United Nations Set (1980), Part D, paragraph 3. 
985 OECD Council Recommendation Concerning Effective Action Against Hardcore Cartels (adopted 
by the OECD Council at its 921st Session on 25 March 1998 [C/M(98)7/PROV]). 
986 Report (2002) of the Working Group on the In teraction between Trade and Competition Policy to 
the General Council (WT/WGTCP/6), paragraph 61. 
987 Report (2003) of the Working Group on the In teraction between Trade and Competition Policy to 
the General Council (WT/WGTCP/7), paragraph 41. WT/DS204/R 
Page 194  
 
colluding or, in other words, engaging in horizontal price fixing."  It argues further that any other interpretation would render the provision self-defeating and meaningless, since a Member "could easily avoid the obligation to maintain appropriate measures to prevent 'anti- competitive practices' by 
formally requiring such practices."
988 
7.241  Mexico argues that the ILD Rules are part of the regulatory framework of laws intended to 
increase competition.  Mexico also contends that in  any case the focus of Section 1.1 of its Reference 
Paper is on anti-competitive "practices " by a major supplier that are not required under a Member's 
law.  Otherwise, the language of Section 1.1 woul d have gone further and specifically prohibited anti-
competitive "measures" implemented or main tained by a WTO Member.  The European 
Communities, as third party to these proceedings, belie ves that under the ILD Rules "the fixing of a 
uniform price cannot be an anti-competitive practice since uniform prices are required by law. The 
same goes for the revenue sharing system ("propor tional return") since this is also mandated by 
law."989  The European Communities concludes that "[ if] Mexico chooses not to allow competition 
between telecommunications operators on a certain  matter, there is no scope for anti-competitive 
practices relating to that matter.  It is not possibl e to restrict competition where competition is not 
allowed."990 
7.242  We have examined the meaning of the term an ti-competitive practices in the previous section.  
We now look at whether anti-competiti ve practices, as this term is used  in Section 1 of the Reference 
Paper, also covers practices by a major supplier that are required by a Member's law.  The first illustrative example in Section 1.2 of anti-co mpetitive practices is anti-competitive cross-
subsidization.  Cross-subsidization was and is a common practice in monopoly regimes, whereby the 
monopoly operator is required by a government to cr oss subsidize, either explicitly or in effect, 
usually through government determ ination or approval of rates  or rate structures.  Once monopoly 
rights are terminated in particular services sectors,  however, such cross-subsidization assumes an anti-
competitive character.  This provision, therefore, provides an example of a practice, sanctioned by measures of a government, that a WTO Member should no longer allow an operator to "continue".  
Accordingly, to fulfil its commitments with respect  to "competitive safeguards" in Section 1 of the 
Reference Paper, a Member would be obliged to re vise or terminate the measures leading to the cross-
subsidization.  This example clearly suggests th at not all acts required by a Member's law are 
excluded from the scope of anti-competitive practices. 
7.243  Sections 1 and 2 of Mexico's Reference Paper impose obligations  on Members with respect to 
the behaviour of major suppliers.  Section 2.1 illu strates that Members did not hesitate to undertake 
obligations, with respect to a major supplier, th at defined an objective outcome – "cost-oriented" 
interconnection.  There is no reason to suppose, a nd no language to suggest, that the desired outcome 
in Section 1 – preventing major suppliers from engaging in anti-competitive practices – should 
depend entirely on whether a Member's own laws made such practices legal. 
7.244  The Panel is aware that, pursuant to doctrines applicable under the competition laws of some 
Members, a firm complying with a specific legislative requirement of such a Member (e.g. a trade law 
authorizing private market-sharing agreements) ma y be immunized from being found in violation of 
the general domestic competition law.  The reason fo r these doctrines is that, in most jurisdictions, 
domestic legislatures have the legislative power to  limit the scope of competition legislation.   
International commitments made under the GATS "f or the purpose of preventing suppliers ... from 
engaging in or continuing anti-competitive practices"
991 are, however, designed to limit the regulatory 
powers of WTO Members.  Reference Paper commitm ents undertaken by a Member are international 
                                                      
988 See the United States' answer to question No. 23(a) of the Panel of 14 March 2003, paragraph 47.  
For question No. 23(a), see footnote 545 of this Report. 
989 See the European Communities' third party submission, paragraph 53. 
990 See the European Communities' third party submission, paragraph 49. 
991 Section 1.1 of the Reference Paper.  WT/DS204/R 
 Page 195 
 
 
obligations owed to all other Members of the WT O in all areas of the relevant GATS commitments.  
In accordance with the principle established  in Article 27 of the Vienna Convention992, a requirement 
imposed by a Member under its internal law on a major supplier cannot unilaterally erode its 
international commitments made in its schedule to  other WTO Members to prevent major suppliers 
from "continuing anti-competitive practices".993  The pro-competitive obligations in Section 1 of the 
Reference Paper do not reserve any such unilate ral right of WTO Members to maintain anti-
competitive measures.  
7.245  For these reasons, we conclude that practices  required under Mexico's law can be "anti-
competitive practices" within the meaning of Section 1 of Mexico's Reference Paper. 
3. Do the ILD Rules require a major supplier to engage in "anti-competitive practices"? 
7.246  We now examine whether, as the United Stat es claims, the ILD Rules do require "anti-
competitive" practices by  "suppliers who, alone or together, are a major supplier" , and would therefore 
not be "appropriate measures" within the meaning of Section 1 of Mexico's Reference Paper.  We first 
identify the relevant requirements placed by the ILD Rules on Telmex and other Mexican operators, 
and then assess whether these requirements woul d constitute "anti-competitive practices." 
(a) What acts do the ILD Rules require of Telmex and other Mexican operators? 
7.247  The relevant measures invoked by the United Stat es are the ILD Rules that require Mexican 
operators to apply a "uniform settlement rate", a nd to ensure a "proportionate return" of incoming 
calls, compared to outgoing calls. 
(i) Uniform settlement rate 
7.248  The ILD Rules require all "international gate way operators", including Telmex, to apply a 
uniform settlement rate in the following terms:  
"[t]he same settlement rates are applied by  international gateway operators to all 
long-distance calls from a given country, regardless of which operator originates the call abroad and which licensee terminat es the call within Mexican territory."
994  
7.249  The uniform settlement rate is implemented th rough ILD Rule 13, which gives the Mexican 
operator with the greatest share of outgoing calls to a particular country in the previous six months – 
in this case Telmex – the sole right to negotiate se ttlement rates with the operators of that country.  
ILD Rule 13 states: 
"The long-distance service licensee having th e greatest percentage of outgoing long-
distance market share for the six months pr ior to negotiations with a given country 
shall be the licensee that is au thorized to negotiate settlement rates with the operators 
                                                      
992 See the Vienna Convention on the Law of Treaties, 1969, Art. 27.  See also  Ian Brownlie, Principles 
of Public International Law (Clarendon Press, 1998, 5th ed.), page 34.  
993 Section 1.1 of the Reference Paper. 
994 Rule 2:XII(a), also confirmed by Rule 10.  
"Regla 2. Para efectos de las presentes Reglas, los siguientes términos tendrán el significado que a 
continuación se indica: 
XII. Sistema de tarifas de liquidación uniformes: aquél por el cual: a) las mismas tarifas de liquidación son aplicadas por los operadores de puerto internacional a las 
llamadas de larga distancia provenientes de un país determinado, independientemente del operador que las 
origine en el extranjero y del concesionario que las termine en territorio nacional, y … "  WT/DS204/R 
Page 196  
 
of said country.  These rates shall be submitted to the Commission for its approval."
995 
7.250  Telmex is an "international gateway opera tor", and the "long-distance service licensee" 
authorized to negotiate settlement rates with Un ited States operators on the United States – Mexico 
route. 
(ii) Proportionate return 
7.251  The ILD Rules also require international gateway operators to apply the system of 
"proportionate return",  and distribute among themselves incoming  calls from a country in proportion 
to the outgoing  calls the operator sends to that country.996  The system is implemented through ILD 
Rule 16 and 2:XIII. 
7.252  Rule 2:XIII sets out, in relevant part, the principle of the scheme: 
"international gateway operators shall have th e right to receive, regardless of the type 
of call, incoming call attempts from a gi ven country during any one-month period, 
based on the percentages established for the previous monthly period."997 
7.253  Rule 16 provides for the redistribution of calls: 
"In the event that an international gate way operator receives a greater share of 
incoming traffic than that to which it is entitled under the terms of subparagraph XIII 
of Rule 2, the operator shall distribute th e surplus to another international gateway 
operator as to remain within th e bound of its own percentage."998 
7.254  In redistributing the incoming traffic, ILD Rule 17 provides that operators may also 
"negotiate financial compensation agreements am ong themselves, according to the rights that are 
generated for each of them".  These agreemen ts are notified to and approved by Mexican 
authorities.999 
7.255  The principle of a uniform settlement rate must be applied by operators to all international 
incoming and outgoing traffic, and the principle of proportionate return must be applied by operators 
to all international incoming traffic, and both must appear in all interconnection agreements made by 
Mexican operators with foreign operators.1000  
                                                      
995 ILD Rule 13.  
"El concesionario de servicio de larga distancia que tenga el mayor porcentaje del mercado de larga 
distancia de salida de los últimos seis meses anteriores  a la negociación con un país determinado, será quien 
deba negociar las tarifas de liquidación con los operadores de dicho país. Estas tarifas deberán someterse a la aprobación de la Comisión. " 
996 ILD Rule 2:XIII. 
997 "los operadores de puerto internacional tendrán derecho a recibir, en forma aleatoria respecto del 
tipo de llamada, los intentos de llamadas de entrada provenientes de un país determinado en cualquier periodo 
de un mes, en función a los porcentajes establecidos en el periodo mensual anterior ". 
998 "En caso de que un operador de puerto internacional reciba tráfico de entrada en una proporción 
mayor a la que le corresponde conforme al inciso XIII de la Regla 2, dicho operador deberá distribuir a otro 
operador de puerto internacional el excedente para cumplir  con el porcentaje correspondiente. En tal caso, el 
operador deberá descontar la contraprestación a que tiene derecho por prestar los servicios de conmutación, 
enrutamiento y contabilidad en el puerto internacional, y pagar el monto restante de la tarifa de liquidación a 
los operadores de puerto internacional a los que transfiera  dicho tráfico. A su vez, estos últimos deberán pagar 
la tarifa de interconexión correspondiente al operador local que termine la llamada. " 
999 ILD Rule 17. 
1000 ILD Rule 23.  WT/DS204/R 
 Page 197 
 
 
7.256  In sum, these measures impose two main requirements on Telmex, which is the "major 
supplier", on the United States – Mexico route.  Firs t, Telmex must negotiate a settlement rate for 
incoming calls with suppliers in the other markets wishing to supply the Mexican market and apply, 
subject to approval by the Mexican authorities and in common with the other Mexican suppliers, that 
single rate to interconnection for incoming traffic fro m the United States.  Second, Telmex must give 
up traffic to, or accept traffic from, other supplie rs depending on whether the proportion of incoming 
traffic surpasses, or falls short of, its proportion of ou tgoing traffic.  To this end, Telmex may enter 
into "financial compensation agreements"1001 with other operators, which are to be approved by 
Mexican authorities. 
(b) Are the acts required of Telmex and other Mexican operators "anti-competitive practices"? 
7.257  The United States argues that the uniform settlement rate (that restricts price) together with 
the proportionate return system (that allocates mark et shares) has the "classic features of a cartel".1002  
According to the United States: 
"It is the setting of the rate by the monopo list (since Telmex is given the exclusive 
authority, it is acting as a monopolist in this context) and the use of this rate by all 
other suppliers (horizontal price fixing) th at comprise the anti-competitive practices 
that form the basis for the United States ' claim under Section 1 of the Reference 
Paper."1003 
7.258  Mexico argues that the principles of uniform ra tes and proportionate return contained in the 
ILD Rules in fact favour  competition. According to Mexico, th e uniform rate requirement protects 
new entrants from predatory pricing by incumbent suppliers, and from being played off against each 
other by major foreign operators, while the proporti onate return system prevents foreign operators 
from imposing predatory pricing on their Mexican affiliates. 
7.259  In addition, Mexico states that it differs with  the United States with respect to the relevant 
market in which competition must be promoted and protected.1004  Mexico states: 
"Mexican policy, as shown by the ILD Rules, is that domestic carriers should share in 
and split agreements for incoming calls in terms of their success in securing a share 
on the domestic market and generating out bound calls.  The United States sees it 
differently … the only market worth protecting is the one for terminating United States traffic to Mexico.  The Unite d States is acting as if new operators 
should compete to carry incoming internationa l traffic calls instead of competing for 
new customers in Mexico.  According to the criterion set by the United States, an 
operator who has made a minimal investme nt in Mexican infrastructure should be 
allowed to do so on an unlimited basis, taki ng all the revenue for international calls 
from the operators who have made such investments and have obtained successful results in acquiring a share of the market."
1005 
7.260  We now examine the two specific elements of  the ILD Rules that the United States has 
invoked. 
                                                      
1001 ILD Rule 17. 
1002 See the United States' first oral statement, paragraph 38. 
1003 See the United States' answer to question No. 23(a) of the Panel of 14 March 2003, paragraph 47.  
For question No. 23(a), see footnote 545 of this Report. 
1004 See Mexico's answer to question No. 25 of the Panel of 14 March 2003, paragraph 132, (" Please 
explain whether the effect of Rule 13 of the ILD Rules is pro-competitive or anti-competitive, and support your argument with the appropriate illustrative figures and examples ".).   
1005 See Mexico's answer to question No. 25 of the Panel of 14 March 2003, para 132.  For question 
No. 25, see footnote 1004 of this Report. WT/DS204/R 
Page 198  
 
(i) Uniform settlement rate 
7.261  With respect to the uniform settlement rate, we have found that the ILD Rules require Telmex 
to negotiate a price, that is then approved by Me xican authorities and applied by Telmex and the other 
Mexican suppliers to the termination of the services at issue.  Mexico justifies this uniform pricing 
scheme as pro-competitive since, according to Mexi co, it removes the possibility that Telmex, or 
Mexican operators which are foreign affiliates, engage  in predatory pricing, or are played against each 
other by major foreign operators.  This Mexican  argument admits that one purpose of the uniform 
pricing requirement is to limit price competition su ch as "predatory pricing".  Yet Mexico gives no 
evidence that its existing competition laws are inadequate  to deal with predatory pricing, or that it has 
well-founded reasons for believing that predatory pr icing or unfair treatment by foreign affiliates 
would occur in Mexico absent the uniform settlement rate in the ILD Rules.  Nor does Mexico show 
that predatory pricing could not be dealt with by telecommunications regulations in ways other than 
through uniform pricing. 
7.262  We find the United States argument convincing that the removal of price competition by the 
Mexican authorities, combined with the setting of th e uniform price by the major supplier, has effects 
tantamount to those of a price-fixing cartel.  We ha ve previously found that horizontal practices such 
as price-fixing among competitors are "anti-comp etitive practices" under Section 1 of Mexico's 
Reference Paper.  We have also found that a GATS obligation "of preventing suppliers … from 
engaging in or continuing anti-competitive practices " cannot be unilaterally abrogated by a national 
regulation requiring  such an anti-competitive practice within the meaning of Section 1 of Mexico's 
Reference Paper (see paragraphs 7.243 to 7.245 above).  For the same reasons, anti-competitive price 
fixing by telecommunications suppliers cannot be unilaterally exempted from the scope of Section 1 
by a government requirement imposing such pric e fixing.  To find otherwise would enable WTO 
Members unilaterally to detract from the effectiven ess of their Section 1 obligations to maintain 
competitive safeguards by requiring such anti-compe titive practices.  We find, therefore, that the 
uniform settlement rate under the ILD Rules requires practices by a major supplier, Telmex, that are 
"anti-competitive" within the meaning of Section 1 of Mexico's Reference Paper. 
(ii) Proportionate return 
7.263  With respect to the "proportionate return" sy stem, we have found that Telmex and other 
Mexican operators terminating the services at issue ar e required under the ILD Rules to give up traffic 
to, or accept traffic from, one another depending on whether the proportion of incoming traffic 
surpasses, or falls short of, their proportion of outg oing traffic.  We have also found that Mexico 
permits Mexican suppliers to ne gotiate financial compensation agreements between themselves 
instead of actually transferring surplus traffic amon g themselves.  Mexico justifies this system on 
substantially the same grounds as the uniform settlement system which the proportionate return 
system supports.  For the reasons explained alread y in paragraph 7.261 above , we are not convinced 
by Mexico's justification of this restrictive allo cation among competing suppliers of incoming traffic 
calls and market shares. 
7.264  We find that the allocation of market shar e between Mexican suppliers imposed by the 
Mexican authorities, combined with  the authorization of Mexican ope rators to negotiate financial 
compensation between them instead of physically tr ansferring surplus traffic, has effects tantamount 
to those of a market sharing arrangement between su ppliers.  We have previously found that certain 
horizontal practices, such as market sharing a rrangements, are "anti-competitive practices" in 
Section 1 of Mexico's Reference Paper.  We recall our previous finding that practices of a major 
supplier, even if they result from a legal require ment, can be anti-competitive practices within the 
meaning of Section 1 of Mexico's Reference Paper.  We find theref ore that the proportionate return 
system under the ILD Rules requires practices by a major supplier, Telmex, that limit rivalry and 
competition among competing suppliers and are "anti-co mpetitive" within the meaning of Section 1 of 
Mexico's Reference Paper.   WT/DS204/R 
 Page 199 
 
 
4. Has Mexico maintained "appropriate measures"  to prevent anti-competitive practices 
by a major supplier? 
7.265  Section 1.1 requires Mexico to maintain "appropriate measures" to prevent anti-competitive 
practices by a major supplier.  The word "appropria te", in its general dictionary sense, means 
"specially suitable, proper".1006  This suggests that "appropriate measures" are those that are suitable 
for achieving their purpose – in this case that of "preventing a major supplier from engaging in or 
continuing anti-competitive practices".  
7.266  We recognize that measures that are "appropriate " in the sense of Section 1 of Mexico's 
Reference Paper would not need to forestall in every case the occurrence of anti-competitive practices 
of major suppliers.  However, at a minimum, if a measure legally  requires  certain behaviour, then it 
cannot logically be "appropriate" in preventing  that same behaviour.  Since we have found already 
that Mexico maintains measures (the ILD Rule s concerning uniform interconnection rate and 
proportionate return) which legally require anti-compe titive conduct  by a major supplier, we find that 
Mexico has failed to maintain "appropriate measures" to  prevent such acts, contrary to Section 1 of its 
Reference Paper.  As Mexico has not claimed that its general competition law is applicable to the anti-
competitive practices mandated by the ILD rules, we do not consider it necessary to examine the 
broader issue of whether Mexico's competition laws are, in general, "appropriate measures" in terms 
of Section 1.1. 
7.267  We underline that our interpreta tion of Section 1 of the Refe rence Paper does not unduly limit 
the broad regulatory autonomy of WTO Members in the field of trade in services, including telecommunications.  Although we find that measure s required by a Member under its internal laws 
may fall within the scope of Section 1, the measur es addressed in the case before us are exceptional, 
and require  a major supplier to engage in acts which are tantamount to anti-competitive practices 
which are condemned in domestic competition laws  of most WTO Members, and under instruments 
of international organizations to which both parti es are members.  Section 1 is a voluntary, additional 
commitment to maintain certain "appropriate" me asures, which reserves a degree of flexibility for 
Members in accepting and implementing such an add itional commitment.  Finally, the measures to be 
maintained under Section 1 refer only to practices of "major suppliers" and not to those of other 
suppliers in the market. 
7.268  We also recognize that – beyond our findings regarding horizontal price-fixing and market 
allocations among competing suppliers of basic telecommunications services – the term "anti-
competitive practices" in Section 1 of the Reference Paper may be interpreted differently by different 
WTO Members.  Our finding is limited to the in terpretation of Mexico's  GATS obligations under 
Section 1 of its Reference Paper, with respect to  the United States, and with respect to the very 
specific anti-competitive measures in the relevant  market for telecommunications discussed above. 
7.269  We therefore find that Mexico has failed, in viol ation of Section 1.1 of its Reference Paper, to 
maintain "appropriate measures" to prevent anti- competitive practices by maintaining measures that 
require anti-competitive practices among competing s uppliers which, alone or together, are a major 
supplier of the services at issue. 
D. W
HETHER MEXICO HAS MET ITS OBLIGATION UNDER SECTION 5 OF THE GATS  ANNEX ON 
TELECOMMUNICATIONS  
7.270  The United States claims that Mexico has not met its obligations under Section 5 of the 
GATS Annex on Telecommunications ("the Annex"), that  is, to ensure that United States suppliers of 
basic telecommunications services have access to and use of Mexico's public telecommunications 
transport networks and services.  In particular, the United States argues that Mexico does not permit 
                                                      
1006 The Shorter Oxford English Dictionary , 3rd edition, (Clarendon Press, 1990), page 94. WT/DS204/R 
Page 200  
 
interconnection of United States suppliers on reasonable  terms and conditions,  contrary to Section 
5(a), and prohibits altogether access to private leased circuits,  contrary to Section 5(b). 
7.271  The United States claim relates to five distinct situations for which, the United States argues, 
Mexico has made specific commitments, and for whic h Mexico must comply with Annex obligations:  
− Under Section 5(a) of the Annex, the United States argues that Mexico must ensure 
that: 
 (i) suppliers of facilities-based  basic telecommunications services from 
the United States into Mexico (c ross-border) are accorded access to 
and use of "public telecommunications transport networks and services" on "reasonable terms and conditions"; 
 (ii) suppliers of basic telecommunications services on a non-facilities 
basis from the United States into Me xico (cross-border) are accorded 
access to and use of public telecommunications transport networks and services on reasonable terms and conditions; 
− Under Section 5(b) of the Annex, the Unite d States argues Mexico must ensure that: 
 (iii) suppliers of facilities-based  basic telecommunications services from 
the United States into Mexico (cross-border) have access to and use 
of private leased circuits, and must  be permitted to interconnect these 
private leased circuits to public telecommunications transport networks and services in Mexico; 
 (iv) suppliers of basic telecommunications services on a non-facilities 
basis from the United States into Mexico (cross-border) have access to and use of private leased circuits, and must be permitted to 
interconnect these private l eased circuits to public 
telecommunications transport networks and services in Mexico;   
 (v) suppliers of basic telecommunications services on a non-facilities 
basis  through a commercial presence  in Mexico must likewise be 
afforded access to and use of priv ate leased circuits to supply 
international telephone services. 
7.272  Mexico argues that the Annex does not a pply to the access to and use of public 
telecommunications transport networks and serv ices for the supply of basic telecommunications 
services.  Further, it reiterates that it has not made any commitments on cross-border supply, either for 
facilities-based suppliers or commercial agencies, and that it therefore has no Annex obligations 
related to such services.  With r espect to locally established commerc ial agencies, Mexico states that 
it has not committed to issue permits for their establishment prior to issuing the corresponding 
regulations. 
7.273  Before we consider whether Mexico has violat ed obligations arising from Section 5 of the 
Annex, we will examine whether the Annex  applies  to the telecommunications services at issue, 
which we have described in detail in Part B of these findings as basic telecommunications services.    WT/DS204/R 
 Page 201 
 
 
1. Whether the Annex imposes obligations on Mexi co to ensure access to  and use of public 
telecommunications transport networks a nd services for the supply of the basic 
telecommunications services scheduled by Mexico 
(a) Does the Annex apply to access to and use of pu blic telecommunications transport networks 
and services for the supply of basic telecommunications services? 
7.274  Mexico submits that the Annex appli es only to access to and use of public 
telecommunications transport networks and services as a transport  means for other economic 
activities, and not to the supply of basic telecommunications services per se .1007 
7.275  The United States argues that the Annex states in  Section 1 that telecommunications has a 
"dual role as a distinct sector of economic activ ity and as the underlying transport means for other 
economic activities".  As further context, it points out  that Section 2(a) states that the Annex applies 
to "all measures ...  that affect access to and use of public  telecommunications transport networks and 
services", which would include measures regulating telecommunications "as a distinct sector of economic activity".  Finally, Sec tion 5(a) imposes obligations "for the supply of a service included in 
[a Member's] Schedule".
1008  
7.276  Mexico maintains that the Annex does not c over access for the purpose of supplying basic 
telecommunication services, but only access for services that require basic telecommunications services as an underlying means of transport, incl uding enhanced telecommunications services.  In 
Mexico's view, the fact that Section 1 (entitled "Obj ectives") of the Annex refers to a "dual" role of 
the telecommunications services sector does not impl y that the Annex covers both aspects of that 
"dual" role.  Rather, Section 1 simply confirms that the Annex is based on the recognition that, 
beyond constituting a service sector of their own,  telecommunications services and networks are 
essential tools for other economic activities, such as banking or insurance services.  According to 
Mexico, the fact that these other activities rely  heavily on telecommunications services as an 
underlying means of transport points to the fundame ntal purpose of the Annex.  Section 1 therefore 
shows that the Annex is aimed at addressing the second aspect of the dual role.  Mexico argues that 
the first aspect – the supply of basic telecommuni cations services – was dealt with under the basic 
telecommunications negotiations that led to the Fourth Protocol to the GATS in 1997. 
7.277  Our first task is to establish whether the A nnex applies to measures affecting access to and 
use of public telecommunications transport ne tworks and services by suppliers of basic 
telecommunications services.  We start with Secti on 2 of the Annex, entitled "Scope".  It reads: 
"2. Scope 
 (a) This Annex shall apply to all measures of a Member that affect 
access to and use of public telecommunications transport networks and services.
14 
  (footnote original) 14 This paragraph is understood to mean that each 
Member shall ensure that the obligations of this Annex are applied with 
respect to suppliers of public telecommunications transport networks and services by whatever measures are necessary. 
 (b) This Annex shall not apply to measures affecting the cable or 
broadcast distribution of radio or television programming.  
                                                      
1007 See Mexico's answer to question No. 21 of the Panel of 19 December 2002, paragraph 303.  For 
question No. 21, see footnote 589 of this Report. 
1008 See the United States' first oral statement, paragraph 45. See also the United States' second written 
submission, paragraphs 99-100.  See also  the United States' answer to qu estion No. 21 of the Panel of 
19 December 2002.  For question No. 21, see footnote 589 of this Report. WT/DS204/R 
Page 202  
 
 (c) Nothing in this A nnex shall be construed: 
  (i)  to require a Member to authorize a service supplier of any 
other Member to establish, cons truct, acquire, lease, operate, 
or supply telecommunications tr ansport networks or services, 
other than as provided for in its schedule;  or 
  (ii) to require a Member (or to require a Member to oblige 
service suppliers under its jurisdic tion) to establish, construct, 
acquire, lease, operate or supply telecommunications transport networks or services not offered to the public generally." 
7.278  Section 2(a) provides that the Annex shall appl y to "all measures" of a Member that affect 
access to and use of public telecommunications trans port networks and services.  We observe that the 
wording of Section 2(a) does not specify that th e provision is limited to measures affecting access to 
and use of public telecommunications transport networks and services by only certain  services or 
service sectors.  The ordinary meaning of the words in Section 2(a) suggests therefore that the scope 
of the Annex includes all measures that affect access to or use of public telecommunications transport 
networks and services with regard to all services, including basic telecommunications services. 
7.279  In further assessing whether the Annex a pplies to access to and use of public 
telecommunications transport networks and servic es, we next examine the context provided by 
Section 1 of the Annex, entitled "Objectives": 
"Recognizing the specificities of the tel ecommunications services  sector and, in 
particular, its dual role  as a distinct sector of economic activity and as the underlying 
transport means for other economic activiti es, the Members have agreed to the 
following Annex with the objective of el aborating upon the provisions of the 
Agreement with respect to measures affecting access to and use of public 
telecommunications transport networks a nd services.  Accordingly, this Annex 
provides notes and supplementary provisions to the Agreement."  (emphasis added) 
7.280  We note that Section 1 recognizes the dual role of the telecommunications services sector as 
"a distinct sector of economic activity and as th e underlying transport means for other economic 
activities".  Such recognition is not however conclu sive as to whether the Annex contains provisions 
addressing  telecommunications services as a "distinct sector of economic activity", and not only as an 
"underlying transport means for other economic activiti es".  Section 1 goes on to state, however, that 
the purpose of the Annex is "elaborating on the provisi ons of the Agreement with respect to measures 
affecting access to and use of public telecommunicati ons transport networks and services".  As in the 
case of Section 2(a) on scope, Section 1 on objectives contains no language suggesting that access to 
and use of public telecommunications transport networks and services for the supply of basic 
telecommunications services is meant to be exclude d from the scope of the Annex.  The "notes and 
supplementary provisions to the Agreement" that the Annex "provides" do not appear in any way to 
exclude any measures covered by the Agreement, including measures affecting the access to and use of public telecommunications transport ne tworks and services for the supply of basic 
telecommunications services. 
7.281  Similarly, we note that Section 5 (a) of the A nnex states that the obligation to ensure access to 
and use of public telecommunications transport ne tworks and services shall apply for the benefit of 
"any service supplier of any other Member" for the supply of "a service included in its schedule".  
This language does not explicitly exclude suppliers  of basic telecommunications services.  On the 
contrary, Section 5(a) speaks of "any" service supplie r.  It also speaks of a "service included" in a 
Member's schedule which, in the case of any Me mber, can, and for many Members does, include  WT/DS204/R 
 Page 203 
 
 
basic telecommunications services.  We consider this to be a further indication that the Annex is not limited in its application to exclude measu res ensuring the access to and use of public 
telecommunications transport networks and service s for the supply of any service, including basic 
telecommunications services. 
7.282  Mexico contrasts the scope provision of th e Annex with the provisions on "Scope and 
Definition" contained in Section 1 of the Annex on  Financial Services, and argues that the former 
only applies to access to and use of public tel ecommunications transport networks and services, 
whereas the latter applies to "supply".  Mexico is of  the view that, where the negotiators of the GATS 
intended that an Annex was to apply to the "suppl y" of a service, they stated this explicitly.  
According to Mexico, the Annex distinguishes between access to and use of public 
telecommunications transport networks and services,  which is relevant to telecommunications 
services as an underlying transport mean s for other economic activities, and the supply of such 
services, which is relevant to trade in telecommuni cations services as a distinct sector of economic 
activity.
1009 
7.283  We agree that the Annex addresses measures affecting "access to and use of" public 
telecommunications transport networks and services, and not the supply of services.  However, 
"access to and use of" public telecommunications trans port networks and services are to be granted in 
order to enable the supply of services.  Section 5 explicitly seeks to ensure that access to and use of 
public telecommunications transport ne tworks and services is granted " for the supply of a service 
included in [a Member's] Schedule".1010  While the Annex is neutral as to the services that can be 
supplied through access to and use of public telecomm unications transport networks and services, the 
Annex on Financial Services only "applies to measu res affecting the supply of financial services".1011  
The fact that Members devoted an annex to measur es affecting the supply of services in one specific 
services sector – financial services – does not provide a basis for interpreting the scope of another annex – on telecommunications networ ks and services – which differs significantly in structure and 
objective.   
7.284  Mexico further argues that basic telecommuni cations are excluded from the Annex, since 
these services "as a distinct economic activity" we re dealt with through Members making specific 
commitments only after the Annex entered into forc e; therefore, basic telecommunications services 
were not included in the GATS until 1997, when the Fourth Protocol was agreed.
1012  The provisions 
of the GATS, however, do not support this argument.  Article I:1 of the GATS provides that the "Agreement applies to measures by Members affecting trade in services".  Article I:3 (b) clarifies that 
the term "services" "includes any service in any sector except services supplied in the exercise of 
governmental authority" (emphasis added).  The sectoral listing used by Members to schedule 
commitments on trade in services (document "W/120" ) explicitly lists a set of telecommunications 
services that includes both basic and value adde d services.  Therefore all telecommunications 
services, like all other services, were part of the sectoral coverage of the GATS at the time the Annex 
entered into force.  The fact that many Memb ers made substantive specific commitments on basic 
telecommunications services only in 1997 should not be  confused with the question of whether basic 
telecommunications was a services sector within the scope of the Agreement.    
7.285  An interpretation of the Anne x to exclude measures ensuring access to and use of public 
telecommunications transport networks and serv ices for the supply of basic telecommunications 
                                                     
 
1009 See Mexico's answer to question No . 21 of the Panel of 19 Decembe r 2002, paragraphs 301-302.  
For question No. 21, see footnote 589 of this Report. 
1010 (emphasis added) 
1011 See Annex on Financial Services, Section 1 (a) (S cope and Definition):  "This Annex applies to 
measures affecting the supply of financial services.  Reference to the supply of a financial service in this Annex 
shall mean the supply of a serv ice as defined in paragraph 2 of Article I of the Agreement." 
1012 See Mexico's first written submission, paragraph 214. WT/DS204/R 
Page 204  
 
services would lead to unreasonable results.  Pub lic voice telephone services, for example, can only 
be supplied properly through access to and use of pu blic telecommunications transport networks and 
services of other suppliers, except in markets where monopoly supply is maintained.  While 
monopoly supply can and does exist in domestic telecommunications markets, the international market has always involved multiple suppliers.  With  respect to the supply of public voice telephony, 
whether on a cross-border basis or through commercia l presence, it is essential that suppliers be able 
to access and use public telecommunications transpor t networks and services of other suppliers to 
complete calls placed by their customers to  a user on another supplier's network. 
7.286  While access to and use of public telecommunicati ons transport networks and services may be 
important generally for the supply of services, such  access is indispensable fo r the supply of basic 
telecommunications services.  If the Annex did not apply to measures affecting access to and use of 
public telecommunications transpor t networks and services for basic telecommunications services, 
Members could effectively prohibit any supply other th an that which originated and terminated within 
the same suppliers' network, even  where commitments were undertaken, thereby rendering most basic 
telecommunications commitments without economic value.   
7.287  Finally, if Members had made such a far-reaching decision, they would surely have stated 
specifically that basic telecommunications services we re excluded from the application of the Annex, 
in the same way that they specifically stated in  Section 2(b) that the Annex "shall not apply to 
measures affecting the cable or broadcast distribution of radio or television programming". 
7.288  It would thus be unreasonable to suppose that the access and use of public 
telecommunications transport networks and services that is essential to the international supply of 
basic telecommunications services was not intended to be covered by the Annex.  We find therefore 
that the Annex applies to measures of a Member that affect access to and use of public  telecommunications transport networks and service s by basic telecommunications suppliers of any 
other Member. 
(b) Does Section 5 of the Annex apply to the b asic telecommunications commitments scheduled 
by Mexico? 
7.289  The United States maintains that the "obligations under the Annex trigger only to the extent to 
which [a Member] has undertaken  commitments in its schedule".
1013  Mexico expresses a similar 
view, arguing that the Annex neither overrides a sch edule, nor imposes obligations without regard to 
specific commitments taken.1014  We now examine whether, and to what extent, Section 5 applies to 
the basic telecommunications commitments scheduled by Mexico. 
7.290  We recall the wording of Section 2(c)(i) of th e Annex, which determines the scope of the 
Annex.  It states, in relevant part: 
"Nothing in this Annex shall be construed: 
(i) to require a Member to authorize a service supplier of any other Member to 
establish, construct, acquire, lease, operate, or supply telecommunications 
transport networks or services, other than as provided for in its Schedule ;"  
(emphasis added) 
7.291  This provision is explicit.  The Annex does not require a Member to authorize the supply of a 
basic telecommunications transport service "other than as provided for in its Schedule".   
                                                      
1013 See the United States' first written submission, paragraph 219. 
1014 See Mexico's first written submission, paragraphs 229-231.  WT/DS204/R 
 Page 205 
 
 
7.292  Paragraph (e)(iii) of Section 5 provides furthe r support for this interpretation, clarifying 
Members' rights to prevent the supply of services th at are not permitted in the Members schedule.  It 
reads: 
"(e) Each Member shall ensure that no condition is imposed on access to and use 
of public telecommunications transport networks and services other than as 
necessary: 
 (iii) to ensure that service suppliers of any other Member do not supply 
services unless permitted pursuant to commitments in the Member's 
Schedule ."  (emphasis added) 
7.293  We infer, and the parties recognize, that th e obligations contained in the Annex, and 
particularly in Section 5, are aimed at facilitati ng the exploitation of scheduled commitments, and do 
not create a right to supply a service where no commitments exist.  
7.294  We have earlier examined Mexico's specific co mmitments with regard to the cross-border 
supply of telecommunications services supplie d on both a facilities and non-facilities basis.   We 
concluded that Mexico, through its description of the services committed, and through the inscription 
of a routing requirement, prohibits market access fo r the cross-border supply of the services at issue 
over capacity leased by the supplier (i.e. on a non-facilities basis) in Mexico.1015  Absent a 
commitment, we find that the Annex cannot trigger a ny obligations on the part of Mexico to ensure 
access to and use of private leased circuits with regard to the s ituations described under (iii) and (iv) 
of the United States claim, in paragraph 7.271. 
7.295  We will therefore examine, under Section 5(a) of  the Annex, obligations arising with regard 
to basic telecommunications services supplied on a facilities-basis in Mexico, for which we have 
found that Mexico has granted market access thr ough cross-border supply (situations (i) and (ii)).1016  
We will then examine whether Mexico has an oblig ation resulting from Section 5(b) with regard to 
the basic telecommunications services supplie d on a non-facilities-basis in Mexico, through 
commercial presence (situation (v)).1017 
2. Whether Mexico has fulfilled its obligations under Section 5 of the Annex 
7.296  With respect to Section 5 of the Annex, the United States claims that Mexico has violated 
paragraphs (a) and (b).  Paragra ph (a) is a general obligation to en sure access to and use of public 
telecommunications transport networks and services  on "reasonable and non-discriminatory terms and 
conditions".  Paragraph (b) is a more specific obligation to ensure access to and use of public 
telecommunications transport networks and servi ces, including "private leased circuits". 
7.297  Mexico, however, claims that a violation of pa ragraphs (a) or (b) of Section 5 cannot be 
determined without also examini ng paragraphs (e) and (f).  Paragr aph (e) prohibits the imposition of 
any "condition" on access to and use of public tel ecommunications transport networks and services 
                                                      
1015 See paragraph 7.91. 
1016 See, paragraph 7.271:  claim by the United States that Mexico must ensure that:  (i) suppliers of 
facilities-based basic telecommunications services from  the United States into Mexico (cross-border) are 
accorded access to and use of public telecommunications tr ansport networks and services ("public networks") 
on "reasonable terms and conditions"; and (ii) suppliers of basic telecommunications services on a non-facilities 
basis from the United States into Mexico (cross -border) are accorded access to and use of public 
telecommunications transport networks and services ("public networks") on reasonable terms and conditions. 
1017 See paragraph 7.271:  claim by the United States that Mexico must ensure that suppliers of basic 
telecommunications services on a non-facilities basis through a commercial presence  in Mexico must likewise 
be afforded access to and use of private leased ci rcuits to supply international telephone services. WT/DS204/R 
Page 206  
 
"other than as necessary" to achie ve any of three stated policy objectives.  Paragraph (f) sets out an 
illustrative list of six types of regulatory conditio ns through which these objectives may be achieved. 
7.298  Our first interpretative task is therefore to ex amine the structure of Section 5 and determine 
the relationship between the paragra phs at issue in this dispute. 
(a) Structure of Section 5 
7.299  In Mexico's view, Section 5 has to be interpre ted as a whole, and paragraphs (a) and (b) are 
qualified by paragraphs (e) and (f).  The paragraphs of Section 5 are, for Mexico, part of the same 
provision and must be read together to determine the meaning of a Member's obligation under that 
provision.  Since the general obligation in Section 5( a) is required, by its language, to be applied 
through  paragraphs (e) and (f), a violation of paragra phs (a) and (b) cannot be demonstrated without 
also showing that Mexico's measures are not permitte d by paragraphs (e) and (f).  Mexico maintains 
that, as the complaining party, the United States has the burden of establishing a case of inconsistency with all four provisions.
1018 
7.300  The United States contests that Sections 5(e) and (f) are elements of a  prima facie  case under 
Sections 5 (a) and (b) of the Annex.  According to  the United States, Sections (e) and (f) relate to 
these obligations like exceptions, much as Article XX of the GATT relates to GATT obligations.  
Therefore,  for the United States, the burden of proof rests on the party invoking these exceptions.1019 
7.301  Our first task is to determine whether a clai m under paragraph (a) or (b) requires examination 
of any of the elements contained in other para graphs of Section 5.  Paragraph (a) reads: 
"Each Member shall ensure that any ser vice supplier of any other Member is 
accorded access to and use of public tel ecommunications transport networks and 
services on reasonable and non-discriminatory terms and conditions for the supply of 
a service included in its Schedule.   This obligation is applied, inter alia, through 
paragraphs (b) through (f)." [footnote omitted]  
7.302  We note that the obligation in pa ragraph (a) "shall be applied, inter alia , through paragraphs 
(b) through (f)".  This wording differs from the text  of the GATT provisions referred to by the United 
States.  The provision on "General Most-favoured Nation Treatment" in GATT Article I does not 
include a similar proviso that it shall be applie d through the "General Exceptions" provision in GATT 
Article XX.  An obligation cannot be applied "through"  another provision if that obligation is read in 
isolation from that provision.  For an obligation in  one provision to be a pplied "through" another 
provision, it is evident that the two provisions must  be interrelated and must inform each other. We 
read paragraph (a), in other words, as containing an obligation that informs  paragraphs (b) through (f), 
and must be read taking into account paragraphs (b) through (f). 
7.303  We now examine paragraph (e), which reads: 
"(e) Each Member shall ensure that no condition is imposed on access to and use 
of public telecommunications transport networks and services other than as 
necessary : 
                                                      
1018 See Mexico's first written submission, paragraphs 253-256. 
1019 See the United States' second written submission, paragraph 107.  See also  the United States' 
answer to question No. 26 of the Panel of 19 December 2002.  For question No. 26, see footnote 694 of this 
Report.  WT/DS204/R 
 Page 207 
 
 
(i) to safeguard the public servi ce responsibilities of suppliers of 
public telecommunications tran sport networks and services, 
in particular their ability to make their networks or services available to the public generally; 
(ii) to protect the technical integrity of public 
telecommunications transport networks or services;  or 
(iii) to ensure that service suppliers of any other Member do not 
supply services unless permitted pursuant to commitments in the Member's Schedule."  (emphasis added) 
7.304  Paragraph (e) requires Members to ensure that  the only conditions th at are imposed on access 
to and use of public telecommunications transpor t networks and services are those "necessary" to 
achieve the three policy objectives set out  in subparagraphs (i) to (iii).  
7.305  Paragraph (f) contains an illustrative list of types of regulatory conditions that may be 
imposed if "necessary" to achieve a policy goal men tioned in paragraph (e).   Paragraph (f) reads: 
"(f) Provided that they satisfy the criteria set out in paragraph (e), conditions for 
access to and use of public telecommunications transport networks and 
services may include: 
 (i) restrictions on resale or shared use of such services;  (ii) a requirement to use specified technical interfaces, including 
interface protocols, for inter-connection with such networks and services; 
 (iii) requirements, where necessary,  for the inter-operability of such 
services and to encourage the achievement of the goals set out in paragraph 7(a); 
 (iv) type approval of terminal or other equipment which interfaces with 
the network and technical requirements relating to the attachment of 
such equipment to such networks; 
 (v) restrictions on inter-connection of  private leased or owned circuits 
with such networks or services or with circuits leased or owned by another service supplier; or 
 (vi) notification, registration and licensing." 
7.306  We determined earlier that paragr aph (a) should be read together with the other paragraphs of 
Section 5.  We note that paragraph (a) addr esses "terms and conditions" for access to public 
telecommunications transport networks and services, which must be "reasonable and non-
discriminatory".  Paragraph (e) requires that no cond ition other than as necessary to achieve any of 
three policy objectives contained in subparagraphs (e)(i ) to (iii) shall be imposed by a Member.  We 
infer that whenever a condition is "necessary" under pa ragraph (e), it must, in addition, be "reasonable 
and non-discriminatory" under paragra ph (a).  Conversely, if a condition is not "necessary" to fulfil at 
least one of the three policy objectives set out under subparagraphs (i) to  (iii), paragraph (e) prohibits  
the imposition of such a condition, which suggests that  there may be no need to analyse in that case 
whether that condition would otherwise be  "reasonable and non-discriminatory".   WT/DS204/R 
Page 208  
 
7.307  We next examine the relationship of paragraph (b) of Section 5 with the other elements of 
Section 5.  This relationship is more straightforwar d.  Paragraph (b) obligates Members to ensure that 
suppliers of other Members "have access to and use of any public telecommunications transport 
network or service offered within or across the border of that Member, including private leased 
circuits".  To this end, suppliers must be permitted, "subject to paragraphs (e) and (f)":  
"(i) to purchase or lease and attach terminal or other equipment which interfaces 
with the network and which is necessary to supply a supplier's services; 
(ii) to interconnect private leased  or owned circuits with public 
telecommunications transport networks a nd services or with circuits leased or 
owned by another service supplier; and 
(iii) to use operating protocols of the service supplier's choice in the supply of any 
service, other than as necessary to ensure the availability of 
telecommunications transport networks and services to the public generally." 
7.308  The obligations in paragraph (b) apply "subject to paragraphs (e ) and (f)".  We understand this 
to mean that the obligations in paragraph (b) are subordinated  to, and are, therefore, qualified by , 
paragraphs (e) and (f).  The obligati ons in paragraph (b) are therefore subject to  any condition that a 
Member may impose that is necessary to achieve one  of the policy objectives set out in paragraph 
(e)(i) to (iii).
1020  We recall that paragraph (b) is inform ed also by paragraph (a), and that the 
obligation in the latter provision to ensure reas onable and non-discriminatory access also applies to 
paragraph (b). 
7.309  Based on the foregoing, we make the following conc lusions with respect to Sections 5(a) and 
5(b).  We conclude that the obligation contained in Section 5(a) informs the other paragraphs of 
Section 5, and is likewise informed by elements of these paragraphs.  We cannot therefore examine 
what constitutes "reasonable terms and c onditions" for access to and use of public 
telecommunications transport networks and services in isolation from the question of whether or not a 
particular condition may be imposed, an issue that is addressed in paragraph (e).  We conclude that an 
obligation arises for a Member under paragraph 5(b) subject to any term or condition that a Member 
may impose in a manner consistent with the pr ovisions of paragraphs (a) and (e).    
(b) Claim under Section 5(a) 
7.310  Having established that the analysis of a claim under paragraph (a) requires an examination of 
whether any conditions that are imposed on access to and use of public telecommunications transport 
networks and services are "necessary" in the meaning of paragraph (e), we now examine the specifics 
of the United States claim under Section 5(a). 
7.311  The United States claims that Mexico has faile d to ensure that cross-border suppliers of 
facilities-based basic telecommunications services fr om the United States into Mexico are accorded 
access to and use of public telecommunications tr ansport networks and ser vices on reasonable terms 
and conditions.  For the United States, the rat es that foreign suppliers must pay constitute 
unreasonable, above-cost rates for access and use to  the networks and services provided by Mexico's 
long-distance operators.  Cofetel's approval of the United States – Mexico settlement rate violates 
Mexico's obligation under Section 5(a) to ensure, by whatever means necessar y, that access and use is 
provided on reasonable terms and conditions.  The United States also challenges as "unreasonable" 
the requirements that it considers responsible for th e rates that are charged by Mexican suppliers of 
public telecommunications transport networks and services.  These require that foreign suppliers must 
                                                      
1020 For an interpretation of the words subject to, see also:  Appellate Body Report, Canada – Dairy , 
paragraph 134.  WT/DS204/R 
 Page 209 
 
 
negotiate exclusively with Mexico's long-distance licensee with the greatest percentage of outgoing 
long-distance market share over the preceding six months (ILD Rule 13), and prohibit foreign suppliers from concluding alterna tive terms and conditions with ot her Mexican suppliers of such 
networks and services (ILD Rules 3, 6, 10, 13, 22 and 23). 
7.312  We now examine whether the substantive elements for a claim under Section 5 (a) are met.  
We recall that this provision reads:  
"Each Member shall ensure that any ser vice supplier of any other Member is 
accorded access to and use of public tel ecommunications transport networks and 
services on reasonable and non-discriminatory terms and conditions for the supply of a service included in its Schedule.   This obligation is applied, inter alia, through 
paragraphs (b) throug h (f)." [footnote omitted] 
7.313  The "access to and use of" referred to in this pr ovision must be granted:  (a) to "any service 
supplier of any other Member";  (b) with respect to "public telecommunications transport networks 
and services";  (c) for the supply of a "service incl uded in its schedule";  and (d) on "reasonable… 
terms and conditions".  In order to  determine whether Mexico has met the requirements of the Section 
5(a), we need to examine each of these elements.  
(i) "Any service supplier of any other Member " 
7.314  The obligation of Section 5(a) arises only with  respect to "any service supplier of any other 
Member".  It is uncontested that facilities-b ased suppliers (such as  AT&T, WorldCom/MCI, and 
Sprint) as well as commercial agencies supply or are seeking to supply the services at issue, and are 
suppliers "of any other Member", in this case, the United States. 
(ii) With respect to "public telecommuni cations transport networks and services " 
7.315  The United States submits that a United States supplier of basic telecommunications must 
access and use Mexican public telecommunications transport networks and services to transport its service (such as a phone call originating in the United St ates) to its final destin ation in Mexico.  This 
is done through interconnection, which the United St ates considers the "principal method", by which 
United States suppliers obtain access to and use of Mexican public telecommunications transport 
networks and services for the cross-border supply of scheduled telecom services.
1021  T h e  U n i t e d  
States refers to Section 2.1 of Mexico's Refe rence Paper, which defines interconnection as the 
"linking of suppliers … to allow the users of one supplier to communicate with users of another 
supplier and to access services provided by another supplier".   
7.316  We observe that Mexico's market access in scription on cross-border supply requires that 
international traffic be routed through the facilitie s of a Mexican concessionaire.  The facilities of 
Mexican concessionaires are clearly "public teleco mmunications transport networks and services", as 
this term is defined in the Section 3 of the A nnex. Mexico has not argued otherwise.  We find 
therefore that the facilities of the Mexican concessionaires which are relevant to the  United States 
claim with respect to  access and use are "public telecommunica tions transport networks and services". 
(iii) "For the supply of a service included in its schedule " 
7.317  The obligation in Section 5(a) on a Member to ensure access to and use of public 
telecommunications transport networks and services arises only "for the supply of a service included  
in its schedule".  This language might suggest that  the obligation in paragraph (a) arises as soon as 
any level of commitment is inscribed in a schedul e.  However the overall scope of the Annex, as 
                                                      
1021 See the United States' first written submission, paragraph 223. WT/DS204/R 
Page 210  
 
determined in Section 2, limits a Member's obligat ions under the Annex to those "provided for in its 
Schedule".  Similarly, paragraph (e)(iii) of Sec tion 5 permits the imposition of conditions on access 
and use "to ensure that service suppliers of any other Member do not supply services unless permitted pursuant to commitments in a Member's schedule".  In the present case, we recall our findings that 
Mexico has made market access commitments, subject  to a routing requirement, and full national 
treatment commitments on the supply of basic tele communications services.  Therefore, even under a 
restrictive reading of the obligation under paragrap h (a), these services are "included" in Mexico's 
Schedule.  
7.318  In Mexico's view, however, the services at issue in this dispute are the transport  of customer-
supplied information or data between two or more points, which, being themselves public 
telecommunications transport  networks and services, cannot be supplied through access to and use of 
public telecommunications transpor t networks and services.  Therefore, according to Mexico, its 
suppliers of "public telecommuni cations transport networks and services" cannot transport public 
telecommunications transport services supplied by other suppliers.
1022 
7.319  We have addressed earlier the question of the natu re of the services at issue, and have found 
that the Annex applies to the access to and use of public telecommunications transport networks and 
services for the supply of all transportation services, including basic telecommunications services.  
The nature of the basic telecommunications services at  issue, as inscribed in Mexico's Schedule and 
described therein with reference to CPC numbers , includes services which require suppliers to link 
their networks to those of other suppliers.1023  The definition in Section 3(b) of the Annex of "public 
telecommunications transport networks and services" also speaks of a transmission "between two or 
more points".  We therefore consider that fore ign suppliers of basic telecommunications services 
require access to and use of public teleco mmunications transport networks and services for the supply  
of their services. 
7.320  We now examine whether access to and use of p ublic telecommunications transport networks 
and services for the supply of the services at issue is accorded on "reasonable terms and conditions" .  
(iv) "On reasonable … terms and conditions" 
7.321  The United States considers that  the access to and use of public telecommunications transport 
networks and services accorded to its suppliers through interconnection, by routing through the 
facilities of a concessionaire, is not based on "reasonable terms and cond itions".  For the United States 
the exclusive negotiating right of the dominant supplier as mandated by ILD Rule 13, the impossibility of concluding alternative arrangements,  and the above-cost rates for access to and use of 
public telecommunications transport networks a nd services, are not "reasonable".  Footnote 1 to 
Section 2 of the Annex obliges Members to take "whatever measures necessary" to carry out their obligations under the Annex, incl uding the obligation to ensure that foreign suppliers have access to 
and use of public telecommunications transport networks and services on reasonable terms and 
conditions.  Therefore, in the United States view , the Annex prevents domestic operators from 
hindering the expansion of trade in scheduled services, in accordance with the trade-liberalizing goal 
of the GATS.
1024  The United States argues that the measu res taken by Mexico are anti-competitive 
and contravene the purpose of the Annex, which is to prevent suppliers of basic telecommunications 
from engaging in unfair, restrictive or anti-compe titive conduct.  Instead of ensuring access to and use 
of public telecommunications transport networks and services "by whatever measures necessary," the Mexican rules unreasonably concentrate all pow er in the hands of a dominant supplier. 
                                                     
 
1022 See Mexico's  answer to question No. 21 of the Panel meeting of 19 December 2002, paragraph 306.  
For question No. 21, see footnote 589 of this Report. 
1023 See paragraphs 7.40-7.45 of this Report. 
1024 See the United States' first written submission, paragraph 233.  WT/DS204/R 
 Page 211 
 
 
7.322  Mexico states that "reasonableness" must be ju dged only within the context of all of the 
relevant facts and circumstances.  If Section 5 were to apply in this case, it would apply to Mexico's 
accounting rate regime, and the "reasonableness" of any "terms and conditions" of that accounting 
rate regime would have to be evaluated in the li ght of all of the facts and circumstances related to  that 
regime.  The terms and conditions which the United States considers unreasonable were widespread in 
accounting rate regimes around the world, and ex isted even in the United States' regime.  
Accordingly, there was no basis for the United Stat es to demonstrate that Mexico's measures were 
"unreasonable" within the meaning of Section 5(a) of the Annex.   
aa) Rates charged for access and use  
7.323  In assessing whether Mexico h as ensured access to and use of public telecommunications 
transport networks and services on "reasonable … terms and conditions", we first examine the rates  
that are charged by Telmex and other Mexican concessionaires.  We look at whether the rates 
constitute "terms" or "conditions" in the sense of  Section 5(a), and then whether the rates are 
"reasonable".  We note that the United States does not  claim that the rates, or any aspect of the ILD 
Rules, constitute "discriminatory" terms or conditions. 
7.324  Although paragraph (a) speaks of "terms and conditions", paragraph (e) refers only to 
"conditions".  Since we earlier found that paragraphs (a) and (e) info rm each other, we now analyse 
whether "rates" are "terms", or whether they ar e "conditions".  Building on our earlier analysis,1025 if 
the rates are terms, they would have to meet the "r easonable" standard in Section (a);  if they are 
"conditions," they would, in add ition, have to meet the "necessary" standard in Section (e).   
7.325  As discussed in part B of these findings, th e words "terms and conditions" may have many 
meanings.  In relation to contracts and agreements , the word "terms" is defined to mean "conditions, 
obligations, rights, price, etc., as specified in contract or instrument"1026, while "condition" is defined, 
inter alia , as "a provision in a will, contract, etc., on which the force or effect of the document 
depends".1027  Although the words "terms" and "conditions " are closely related, and are frequently 
used concurrently, the ordinary meaning of the wo rd "terms" suggests that it would include pricing 
elements, including rates charged for access to and use of public telecommunications transport 
networks and services. 
7.326  We now examine whether the word "conditions", as used in Section 5 of the Annex, would 
also include pricing elements such as access rates.   Pricing is a fundamental element of any access and 
use.  Moreover, the importance of pricing-related measures for access and use suggests that the word 
"conditions" would also include pricing elements, such as conditions that re late to or affect the rate or 
price.  However, Section 5 (f), which lists examples  of "conditions," does not refer to specific pricing 
measures.  In fact, pricing measures do not appear to  be similar to any of the conditions included in 
paragraph (f), such as restrictions on resale or in terconnection, and requirements to use specified 
technical interfaces.  Given the importance of pricing measures for access to and use of public 
telecommunications transport networks and services,  we cannot infer that Section 5 (f) would have 
omitted pricing from its illustrativ e list, if the Annex had considered access charges to fall under 
"conditions".  Moreover, if access rates themselves constituted "conditions", a Member would have to 
ensure that no rates were imposed "other than as necessar y" to fulfil one of the policy objectives in 
subparagraphs (i) to (iii) of Section 5(e).  Yet, with respect to access to and use of public telecommunications transport networks and services s upplied on a commercial basis, it is evident that 
some type of charge will be levied.  Therefore, whet her or not to charge, or the existence of a price, 
does not appear to fit within the meaning of  the language of 5(f) and its subparagraphs. 
                                                     
 
1025 See paragraph 7.309 of this Report. 
1026 Black's Law Dictionary , 6th edition, 1990. 
1027 See Panel Report, US – Stainless Steel , paragraph 6.75. WT/DS204/R 
Page 212  
 
7.327  We find therefore that rates charged for the access to and use of public telecommunications 
transport networks and services are "terms" within the meaning of Section 5(a), but not "conditions" 
within the meaning of Section 5(e).   
7.328  We next examine whether the rates that are charged to United States suppliers for access to 
and use of Mexican public telecommunications  transport networks and services constitute 
"reasonable" terms.  The dictionary meaning of the word "reasonable" means "being in accordance 
with reason", "not extreme or excessive".
1028  The word "reasonable" implies a degree of flexibility 
that involves consideration of the circumstances of a particular case.  What is "reasonable" in one set 
of circumstances may prove to be less than "reasonabl e" in different circumstances.  The elements of 
"balance" and "flexibility", as well as the need for a "case-by-case analysis", are inherent in the notion 
of "reasonable".1029 
7.329  We note that the "terms" in paragraph (a) mu st be "reasonable and nondiscriminatory".  
Unlike the word "reasonable", the word "non-discrimin atory" is defined in the Annex.  Footnote 2 
states: 
"The term 'non-discriminatory' is unders tood to refer to most-favoured-nation and 
national treatment as defined in the Agreement, as well as to reflect sector-specific 
usage of the term to mean 'terms and conditions no less favourable than those 
accorded to any other user of like public telecommunications transport networks or 
services under like circumstances'." 
7.330  This footnote clarifies that no discrimination is permitted with respect to other foreign 
suppliers, to domestic suppliers, or to other users of like public telecommunications transport 
networks and services under like circumstances.  Th e word "non-discriminatory" therefore addresses 
the conditions of competition of service supplie rs in relation to other suppliers who are users  of public 
telecommunications transport networks and service s.  The word "reasonable" would, on the other 
hand, appear to include obligations that go be yond the non-discrimination requirement.  This 
interpretation is supported by an examination of the objectives of the Annex as expressed, for 
example, by references in Section 1 and Section 5(a) to access to telecommunications transport 
networks and services.  
7.331  We now consider Mexico's argument that the term "reasonable" in Section 5(a) cannot refer 
to rates for interconnection, b ecause such an interpretation would render a significant part of 
Section 2.2(b) of Mexico's Reference Paper redundant or inutile .1030  The Panel noted that, although 
the obligations in the Annex and the Reference Pape r may overlap in certain respects, there are clear 
differences between the two instruments.  First, the Annex sets out general obligations for access to 
and use of public telecommunications trans port networks and services, applicable to all Members and 
all sectors in which specific commitments have been  undertaken.  Reference Paper obligations, as 
additional commitments, are applicable only by Memb ers that have included them in their schedules, 
and they apply only to basic telecommunications.  S econd, while the Annex applies to all operators of 
public telecommunications transpor t networks and services within a Member, regardless of their 
                                                      
1028 Merriam Webster Online Dictionary; http://www.webster.com/cgi-bin/dictionary. 
1029 The Appellate Body in US – Hot-Rolled Steel , paragraphs 84-85,  stated that "[i]n sum, a 
"reasonable period" must be interprete d consistently with the notions of flexibility and balance that are inherent 
in the concept of "reasonableness", and in a manner that allows for account to be taken of the particular 
circumstances of each case". Although the Appellate Body was interpreting a "reasonable" period of time in the context of a different WTO Agreement, we consider that the same basic elements of the word "reasonable" also 
apply in the present context. 
1030 See Mexico's answer to questions No. 22 (If Section 5(a) and (b) of the Annex already ensure 
interconnection at reasonable rates, what is the value-added of Section 2.2 of the Reference Paper?) and No. 23 
of the Panel of 19 December 2002, paragrap hs 309-311, 313-317.  For question No. 23, see footnote 621 of this 
Report.  WT/DS204/R 
 Page 213 
 
 
competitive situation, the Reference Paper obligatio ns on interconnection apply only with respect to 
"major suppliers".  Third, the Annex broa dly deals with "access to and use of" public 
telecommunications transport networks and services, while the Reference Paper focuses on specific "competitive safeguards" and on "interconnection".   
7.332  In spite of these differences, the Annex recognizes that its provisions relate to and build upon 
the obligations and disciplines contained in the Artic les of the GATS – the Annex states expressly that 
it "provides notes and supplementary  provisions to the Agreement".
1031  Similarly, many of the 
provisions of the Reference Paper also draw from a nd add to existing obligations of the GATS, such 
as Articles III, VI, VIII and IX and the Annex on Tele communications.  Accordingly, there is a degree 
of overlap between the obligations of the Annex a nd the Reference Paper, despite their differences in 
scope, level of obligations, and specific detail provi ded.  To the extent that the Reference Paper 
requires cost-oriented interconnection on reasona ble terms and conditions, it supplements Annex 
Section 5, requiring additional obligations as rega rds "major suppliers".  The Reference Paper 
commitments do not in this sense subtract from the Annex or render it redundant. 
7.333  Consequently, we do not accept Mexico's argument that a reading of a pricing element into 
the analysis of reasonable terms in Section 5(a) would render parts of Section 2.2(b) of Mexico's 
Reference Paper inutile .  We find therefore that access to and use of public telecommunications 
transport networks and services on "reas onable" terms includes questions of pricing  of that access and 
use. 
7.334  We now examine what constitutes access to a nd use of public telecommunications transport 
networks and services on "reasonable" terms.  We ha ve previously noted that Mexico's Reference 
Paper contains obligations additional to those in the Annex.  We consider therefore that rates charged 
for access to and use of public telecommunications  transport networks and services may still be 
"reasonable", even if generally higher than rates for interconnection that are cost-oriented in terms of 
Section 2.2(b) of Mexico's Reference Paper.  If this were not the case, it would have been redundant 
for Members to have made commitments additiona l to Annex obligations on access, especially on 
cost-oriented rates for interconnection, one of the most important forms of access.  Further, those 
Members who took Reference Paper commitments di d so in order to estab lish specific disciplines 
only for major  suppliers, and especially for interconnection.   This would not have been necessary if 
Members already had an obligation to ensure that all suppliers, major or not, would have to provide 
cost-based access and use, in cluding interconnection. 
7.335  In order to arrive at a finding in the present case, we do not consider it necessary to determine 
the exact point at which a rate for access to and use of public telecommunications transport networks 
and services is no longer "reasonable".  We have alre ady determined in part B of these findings that 
the rates charged to interconnect United States suppliers of the services at issue to public 
telecommunications transport networks and servi ces in Mexico exceed cost-oriented rates by a 
substantial margin.1032  We find that rates which exceed cost -based rates to this extent, and whose 
uniform nature excludes price competition in the re levant market of the telecommunications services 
bound under Mexico's Schedule, do not provide access to and use of public telecommunications 
transport networks and services in Mexico "on reasona ble … terms".  Consequently, we conclude that 
Mexico has failed to meet its obligations under Section 5(a) of the GATS Annex on 
Telecommunications, by failing to ensure that ser vice suppliers of the United States are accorded 
access to and use of public telecommunications transport networks and services in Mexico on 
reasonable terms. 
                                                      
1031  For example, footnote 2 of the Annex expressly refers to most favoured nation treatment (Article 
II) and national treatment (Article XVII).  Section 4 (Transparency) builds upon Article III (Transparency).  The Annex further elaborates on concepts contained in Articles VI (Domestic Regulation), VIII (Monopolies and 
exclusive service suppliers),  and IX (Business Practices). 
1032 See paragraph 7.216. WT/DS204/R 
Page 214  
 
7.336  We arrived at this finding based on our determin ation that rates for access to and use of public 
telecommunications transport networks and ser vices are "terms" under Section 5(a), but not 
"conditions" under Section 5(e).  We now examine whether our finding would differ if, in the 
alternative, we considered access rates to be "cond itions" within the meaning of Section 5(e).  Under 
this alternative, Section 5(e) w ould require that no access rate is "imposed" other than "as necessary" 
to fulfil one of the objectives in subparagraphs (i) through (iii).  The question would then arise as to 
how the words "as necessary" would be interpreted. 
7.337  The word "necessary" in its ordinary meaning signifies something "that cannot be dispensed 
with or done without, requisite, essential, needful".
 1033  A law dictionary notes that the term may vary 
in meaning, in that it: 
"may import absolute physical necessity or inevitability, or it may import that which 
is only convenient, useful, appropriate, su itable, proper, or conducive to the end 
sought.  It is an adjective expressing degrees, and may express mere convenience or that which is indispensable or an absolute physical necessity."
 1034   
7.338  The term "necessary" in Section 5(e) describ es the relationship between a "condition" of 
access to and use of a public telecommunications tran sport networks and services, and one of the three 
listed policy goals.  What may be "necessary" with re spect to one policy goal may not be with respect 
to another.  As the Appellate Body has noted under a different provision in a different WTO 
Agreement, the term "necessary" can refer to a range  of degrees of necessity, depending on the 
context, and the object and purpose of the provision in which it is used.  At one end of this continuum, 
"necessary" can be understood to mean "indispensable" to achieving a policy goal;  at the other end, 
"necessary" can be taken to mean simply "making a contribution to" a policy goal.1035  
7.339  We consider first an interpretation that "necessary"  in Section 5(e) is closer in meaning to 
"indispensable".  This interpretation would imply that the rates charged for access and use would be 
"indispensable" for the attainment of one of the th ree listed objectives.  The relevant objective, with 
respect to a condition which is an access charge, woul d most likely be that listed in paragraph (e)(i): 
"to safeguard the public service res ponsibilities of suppliers of public 
telecommunications transport networks and services, in particular their ability to 
make their networks or services ava ilable to the public generally". 
7.340  Under an interpretation that "necessary" mean s "indispensable", the access rates would have 
to be set at a level that was no more than the minimum  to achieve that objective.  Minimum access 
rates, however, would imply levels that reflected  the approximate cost of access and use, because the 
policy objective listed in paragraph (e)(i) could be  fulfilled if public telecommunications transport 
networks and services were chargi ng this rate, and it would not be "indispensable" to charge more 
than this rate.  Further, it could be argued that the responsibility of operators of public 
telecommunications transport networks and services to make these public telecommunications transport networks and services available to the public generally would require that no rates be 
charged in excess of the cost incurred. 
7.341  The interpretation of the word "necessary" in Section 5(e) as meaning "indispensable" would 
however leave no room for an analysis of whether te rms were "reasonable".  If cost-based rates were 
"indispensable" to reach the policy objective, then th ese rates surely could not also be unreasonable.  
Such an interpretation would empty the "reasonable" sta ndard in Section 5(a) of much of its meaning.  
                                                     
 
1033 The New Shorter Oxford English Dictionary , (Clarendon Press, 1993) , Vol. II, page 1895.   
1034 Black 's Law Dictionary , (West Publishing, 1995) , page 1029 .  Cited in the Report of the Appellate 
Body, Korea – Various Measures on Beef , paragraph 160. 
1035 See Appellate Body Report, Korea –  Various Measures on Beef , paragraph 161.  WT/DS204/R 
 Page 215 
 
 
It would also mirror the obligation of cost-based interconnection in the Reference Paper, with the 
important difference that the general Annex obligation would encompass all suppliers of public 
telecommunications transport networks and services,  while the obligation in the Reference Paper only 
refers to major  suppliers.  The Annex would in this respect  achieve the same depth of obligation as 
the Reference Paper, but on a broa der level, and applicable to all WTO Members, making any 
particular Reference Paper commitm ents redundant.  We would therefor e reject an interpretation of 
"necessary" in Section 5(e) that would mean that a condition must be "indispensable" to achieve the 
policy goals listed in subparagraphs (i) to (iii). 
7.342  We now examine whether the word "necessary" in Section 5(e) is closer to the meaning of 
"making a contribution to" one of the objectives listed in subparagraph (e)(i) to (iii).  In this case, an 
access rate would only have to be f ound to be "making a c ontribution" to one of these policy goals, in 
order to satisfy the requirements of paragraph (e).  In this case, it would be relatively easy to meet the 
objectives listed in paragraph (e), especially subparagr aph (e)(i), and we consider that an examination 
of whether the access rates were also "reasonabl e" under paragraph (a) w ould still have to be 
undertaken.  Even if a particular level of acces s rate were considered only to be "making a 
contribution" to one of the policy goals liste d in subparagraph (e)(i), an examination under 
paragraph (a) of whether that rate was al so "reasonable" would still have meaning. 
7.343  We conclude that if access rates, in the alte rnative, were considered  to be "conditions" under 
Section 5(e), then the term "necessary" in that provision would have a meaning that required a 
determination of whether the access rates were "reas onable" under Section 5(a).  We would therefore 
arrive at the same finding that we have made in paragraph 7.334, that the access rates charged are not 
"reasonable", and that Mexico has therefore not met its obligations under Section 5(a) to ensure that 
such access rates are "reasonable". 
bb) Underlying ILD Rules  
7.344  The United States also claims that Mexico  unreasonably conditions access to and use of 
public telecommunications transport networks and se rvices in violation of Mexico's obligations under 
Section 5(a) of the GATS Annex on Telecommunica tions, by granting the exclusive authority to 
negotiate settlement rates with foreign suppliers  to the long-distance licensee with the greatest 
percentage of outgoing long-distance market shar e over the preceding six months (ILD Rule 13), and 
by imposing the rate negotiated by that operator on all other operators of public telecommunications 
transport networks and services, thereby preven ting foreign suppliers fro m reaching alternative 
agreements for access to and use of the public tel ecommunications transport networks and services in 
Mexico (ILD Rules 3, 6, 10, 13, 22 and 23).  In addition, the United States claims that Mexican 
authorities have rejected petitions by Mexican and foreign operators to be  permitted to conclude 
alternative terms and conditions. 
7.345  The United States is of the view that these IL D Rules, and their application by the Mexican 
authorities, are not reasonable, as they contravene  the purpose of the Annex, which is to prevent 
suppliers of public telecommunica tions transport networks and ser vices from engaging in unfair, 
restrictive, or anti-competitive conduct.  Far from ensuring this goal "by whatever measures 
necessary", the Mexican measures concentrate all power and control over access to and use of 
Mexico's public telecommunications transport netw orks and services in the hands of the dominant 
supplier of such networks, thereby impairing the ab ility of United States and other foreign suppliers of 
basic telecommunications services to negotiate fa ir and competitive access to and use of these 
networks.1036  
7.346  Having already found that Mexico has failed, in violation of Section 5(a) of the Annex, to 
ensure that the interconnection rates resulting from Mexico's application of its ILD Rules provide 
                                                      
1036 See the United States' first written submission, paragraphs 237-241. WT/DS204/R 
Page 216  
 
access to and use of public telecommunications transport networks and services in Mexico on reasonable terms (see paragraph 7.335 above), the Panel does not consider it necessary to examine 
whether, and to what extent, the individual ILD Ru les themselves are also inconsistent with Mexico's 
obligations under Section 5(a) of the Annex.   
(c) Claim under Section 5(b) of the Annex 
7.347  The United States argues that Mexi co has failed to ensure that  non-facilities-based, 
commercially present suppliers  (commercial agencies) have  access to and use of private leased 
circuits, and are permitted to interconnect these ci rcuits to public telecommunications transport 
networks and services or with circuits of other service suppliers.  According to the United States, 
Mexico's commitments allow locally established, foreign-owned commercial agencies to provide 
international basic telecommunications services (for example, from Mexico to United States) over 
leased capacity.
1037  Contrary to its commitments, howev er, Mexico prohibits the commercial 
presence of non-facilities-based foreign telecommunicati ons suppliers.  Even if permitted to establish, 
ILD Rule 3 would prohibit the interconnecti on of these circuits to any foreign public 
telecommunications transport networks and service , thereby preventing a foreign non-facilities based 
supplier from using a private leased circuit from an y point in Mexico to any foreign destination.1038 
7.348  According to the United States, five years had elapsed since Mexico finalized its Mode 3 
commitment in February 1997 (and four years had elapsed since this commitment had entered into 
force in February 1998), and Mexico still had not is sued – and had indicated no intention to issue – 
the relevant regulations which provide the basis for the authorization for the establishment of a 
commercial presence by commercial agencies.  Mexico 's refusal to issue such regulations raised 
questions about its intentions ever to implemen t its scheduled mode 3 commitment for commercial 
agencies.   
7.349  Mexico responds that the commitment in its  schedule, and any resulting obligation under 
Section 5(b) with respect to the non-facilities-based supply  of basic telecommunications services 
through commercial presence , are conditioned on the prior issuance of regulations which has yet to 
occur.  In Mexico's view, the entry in its schedule indicates that, at the time of the inscription, no such 
permits were being issued, which was consistent with Mexico's intention to make a "standstill" 
commitment.  According to Mexico, the entr y establishes a "zero quota" on mode 3 access for 
commercial agencies, which amounts to a market  access limitation under GATS Article XVI:2(a).1039  
Mexico is of the view that nothing in its en try committed Mexico to issuing the corresponding 
regulations.  If Mexico had made commitments to  take certain actions in the future, those 
commitments would have been inscribed in th e fourth column of its schedule as "additional 
commitments" under GATS Article XVIII, similar to  the practice other Members had followed in 
making promises of review or other conditional undertakings.1040  
7.350  The United States argues that Mexico's mode 3 limitation, if read as Mexico interpreted it, 
rendered the commitment without effect or "inutile".   The United States points to interpretations of 
                                                      
1037 See the United States' first written submission, paragraph 291. 
1038 See the United States' first written submission, paragraph 295. 
1039 See Mexico's answer to question No. 2(a) of the Panel of 19 December 2002, paragraph 39.  For 
question No. 2(a), see footnote 225 of this Report.  See also  Mexico's answer to ques tion No. 6(a) of the Panel 
of 19 December 2002, paragraphs  89-91. For question No. 6(a), see footnote 282 of this Report.  See also  
Mexico's answer to question No. 6(c) of the Panel of 19 December 2002, paragraph 108; II 135.  For question No. 6(c), see footnote 653 of this Report. 
1040 See Mexico's answer to question No. 6(c) of the Panel of 19 December 2002, paragraph 108.  For 
question No. 6(c), see footnote 653 of this Report.  WT/DS204/R 
 Page 217 
 
 
Mexico's commitments by Telmex/Sprint in testimon y given to the FCC in 1997, that indicate that 
Telmex/Sprint believed that Mexico woul d issue the required regulations shortly.1041 
7.351  We recall the terms of Section 5(b) of th e Annex, which states in relevant part: 
"(b) Each Member shall ensure that serv ice suppliers of any other Member have 
access to and use of any public tele communications transport network or 
service offered within or across the border of that Member, including private 
leased circuits, and to this end shall en sure, subject to para graphs (e) and (f), 
that such suppliers are permitted: 
 … 
(ii) to interconnect pr ivate leased or owned circuits with public 
telecommunications transport networks and services or with circuits 
leased or owned by another service supplier;" 
7.352  In examining the United States claim under S ection 5(b), we will first examine whether 
Mexico has a commitment in effect  to allow the supply of the ser vices at issue through commercial 
presence (mode 3) in Mexico by commercial agencies of other Members.  We will then examine the 
extent of any such commitments, in particular whether that commitment extends to international 
services  from Mexico to the United States supp lied through commercial agencies commercially 
present in Mexico.  Finally, we will examine whether Mexico has fulfilled its commitment under 
Section 5(b) with respect to "access to and use of" of private leased circuits, and under Section 5(b)(ii) 
to "interconnect private leased or owned circuits" with public telecommunications transport networks 
and services, or with circuits leased or owned by a nother supplier, taking into account Section 2(c)(ii) 
and Section 5(e), (f) and (g) of the Annex.  
(i) Whether Mexico has a commitment in effect to allow commercial agencies to supply the 
services at issue through commercial presence (mode 3) 
7.353  Mexico has included a commercial presence (m ode 3) commitment in its schedule with 
respect to services supplied by "commercial agencies".   It has entered "None" in the column relating 
to national treatment, and inscribed  limitations in the market access column, which read in relevant 
part: 
"A permit issued by the SCT is required .  Only enterprises set up in accordance with 
Mexican law may obtain such a permit.  …  The establishment and operation of commercial agencies is invariably subject to the 
relevant regulations.  The SCT will not issue permits for the establishment of a 
commercial agency until the corres ponding regulations are issued. "  (emphasis 
added) 
7.354  We consider first Mexico's argument that the entry in its schedule establishes a limitation on 
market access, under Article XVI:2(a) of the GATS.   This provision states that, in sectors where 
market access commitments are undertaken, the measures, which a Member shall not maintain or 
adopt, unless otherwise specified in its schedule, are :  
"limitations on the number  of service suppliers whethe r in the form of numerical 
quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test;
 "1042  (emphasis added) 
                                                      
1041 See the United States' answer to question No. 6(c) of the Panel of 19 December 2002.  For question 
No. 6(c), see footnote 653 of this Report.  See also the Unit ed States' first oral statement, paragraph 17. WT/DS204/R 
Page 218  
 
7.355  According to the first sentence in Mexico's entry, "a  permit issued by the SCT is required" for 
the supply of the service.  Such a permit, according to  the entry, may only be obtained by "enterprises 
set up in accordance with Mexican law".  This la nguage does not indicate that Mexico maintains a 
quantitative limitation "on the number of suppliers".  On the contrary, it suggests that any supplier 
who is set up in accordance with Mexican law is eligible for a permit.  
7.356  Mexico's entry goes on to state that "the est ablishment and operation of commercial agencies 
is invariably subject to the relevant regulations".  It further states that "permits for the establishment 
of a commercial agency [will not be issued] until th e corresponding regulations are issued".  Mexico 
argues that at the time when the limitation was in scribed, no permits were issued, and no market 
access was granted.
1043  Mexico appears to argue that the i ssuance of regulations is a condition, the 
fulfilment of which is entirely at the discretion of  Mexican authorities.  If the meaning of Mexico's 
entry is that Mexico has full discretion whether or not  to issue regulations, then it follows that Mexico 
has indeed not undertaken any commitment on the num ber of suppliers – in other words, it has left 
market access "unbound" with regard to the number of suppliers. 
7.357  We now consider whether Mexico's entry is equi valent to an "unbound" entry with respect to 
market access through the supply, through comme rcial presence, of the services at issue.  The 
wording of the limitation, that "permits for the establishment of a commercial agency [will not be 
issued] until the corresponding regulations are i ssued", does not specify that a numerical quota  was to 
be imposed on the issuance of permits.  Rather, the sentence seems to introduce a temporal  
qualification as to when  establishment will be permitted – namely, after the issuance of the 
regulations. 
7.358  The six categories of measures in Article XVI:2 refer to the types of market access limitations 
that can be imposed on the supply of a service.  However, none of the six categories relate to temporal  
limitations – such as dates for entry into force or  for the implementation of commitments.  This 
suggests that temporal limitations cannot constitute  limitations on market access under Article XVI:2 
of the GATS. 
7.359  Article XX:1 of the GATS provides useful context which supports this inte rpretation.  Article 
XX:1 describes how schedules are to be drawn up.  It reads: 
                                                                                                                                                                     
1042 GATS Article XVI:2 reads in full: 
"In sectors where market-access commitments ar e undertaken, the measures which a Member 
shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire 
territory, unless otherwise specifie d in its Schedule, are defined as: 
(a) limitations on the number of service suppliers whether in the form of 
numerical quotas, monopolies, excl usive service suppliers or the 
requirements of an economic needs test; 
(b) limitations on the total value of service transactions or assets in the form of 
numerical quotas or the requirem ent of an economic needs test; 
(c) limitations on the total number of service operations or on the total quantity 
of service output expressed in terms of designated numerical units in the form 
of quotas or the requirement of an economic needs test; 
(d) limitations on the total number of natural persons that may be employed in a 
particular service sector or that a service supplier may employ and who are 
necessary for, and directly related to, the supply of a specific service in the 
form of numerical quotas or the requirement of an economic needs test; 
(e) measures which restrict or require specific types of legal entity or joint 
venture through which a service supplier may supply a service;  and 
(f) limitations on the participation of foreign capital in terms of maximum 
percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment." 
1043 See Mexico's answer to question No. 6(a) of the Panel of 19 December 2002, paragraph 90.  For 
question No. 6(a), see footnote 282 of this Report.  WT/DS204/R 
 Page 219 
 
 
"Each Member shall set out in a schedul e the specific commitments it undertakes 
under Part III of this Agreement.  With r espect to sectors wher e such commitments 
are undertaken, each schedule shall specify: 
(a) terms, limitations and conditions on market access; (b) conditions and qualifica tions on national treatment; 
(c) undertakings relating to additional commitments; 
(d) where appropriate the time-frame for implementation of such 
commitments;  and 
(e) the date of entry into force of such commitments ." 
7.360  Article XX:1 provides that Members "shall speci fy" certain elements in their schedules of 
specific commitments.  The need to sp ecify entries with regard to the substantive  elements in 
Articles XVI (market access), Article XVII (national treatment), and Article XVIII (additional commitments) is dealt with in subparagraphs (a) to (c) of Article XX:1 respectively.  Article XX:1 
reiterates  the need to "specify" the limitations for ma rket access to be scheduled under Article XVI.  
Article XX:1 appears however to add to the requirements for the scheduling of national treatment 
limitations under Articles XVII (which reads "subject to any conditions and qua lifications set out [in 
the schedule]"), and additional commitments under Artic le XVIII (which reads "commitments shall be 
inscribed in a Member's schedule"). 
7.361  The need for specificity on the temporal  aspects of commitments is dealt with in 
subparagraphs (d) and (e) of Article XX:1.  Subparagraph (e) requi res that each sche dule shall specify 
the date of entry into force of the commitments undertaken.  Subparagraph (d) requires that a schedule 
"shall specify … where appropriate the time-frame for implementation of such commitments".  The 
separate listing of temporal elements of entry into  force and implementation in Article XX:1 confirms, 
in our view, that temporal elements are not part of  the substantive elements that can be market access 
limitations under Article XVI:2.   
7.362  Consequently, we find that Mexico's scheduled  requirement that commercial agencies obtain 
permits, and that these permits be based on regulations, is a temporal limitation that is not a market 
access limitation within the meaning of Article XVI:2(a).
1044 
7.363  Since we have found that Mexico's entry in the market access column of its schedule for 
services supplied by commercial agencies through commercial presence is not a market access 
limitation, we now need to determine what meani ng it does have.  We return to Article XX:1, which 
specifies how Members should inscribe their specific co mmitments in their schedules.  In particular, 
we examine Mexico's entry under the criteria set out in subparagraphs (d) (time-frame for 
implementation) and (e) (date of entry into force). 
7.364  We note at the outset that Mexico's comm itment on commercial agencies, along with 
Mexico's other commitments on basic telecommunicati ons, was attached to the Fourth Protocol on 
                                                      
1044 The Addendum to the Explanatory Note on Scheduling of initial commitments on Trade in Services 
(MTN.GNS/W/164/Add.1 , 30 November 1993, corroborates this finding:  "The requirement to obtain an approval or a licence is not in itself a trade restriction and  therefore does not need to be scheduled.  However, if 
the criteria for granting licenses or approval contain a market access restriction (e.g . economic needs test) or 
discriminatory treatment, the relevant measures would need to be scheduled if a Member wishes to maintain them as limitations under Article XVI or XVII.  It has been pointed out that in some offers the granting of 
licences is subject to review, meaning they are granted on a discretionary ba sis.  In such a case the right to 
supply the service is unbound." WT/DS204/R 
Page 220  
 
15 February 1997, and entered into force on 5 February 1998.  Mexico has not included a date in its 
schedule to indicate that its specific commitment on commercial agencies was to enter into force at a 
date different from 5 February 1998 .  We consider therefore that Mexico's entry relates to the time-
frame for implementation , and not the entry into force of the commitment.   
7.365  We recall that Article XX:1 (d) requires, w ith respect to sectors where commitments are 
undertaken, that each schedule shall specify "where appropriate the time-frame for implementation of 
such commitments".  
7.366  A "time-frame" is defined as "a period of time especially with respect to some action or 
project".
1045  The term does not require the setting of a precise date, but it does imply a beginning and 
an end of a time period.  Where not expressed by beginning and end dates, a time-frame may be also 
expressed in terms of maximum duration (for example:  within three years).  Unlike a condition which 
may or may not occur, a time-frame is not open-e nded and does not leave the time of the occurrence 
in doubt.  
7.367  We consider that the obligation to speci fy "where appropriate" a time-frame for 
implementation of a commitment must be considered  in the overall context of Article XX:1.  The 
wording of that Article seeks to ensure a high degr ee of clarity and specificity  as to the exact terms of 
commitments made by Members.  Members must be able to infer from each schedule the precise conditions for market access, national treatment and,  where inscribed in the schedule, any additional 
commitments a Member has undertaken.  By the sam e token, specificity as to when a commitment 
enters into force and when it has to be implemented is equally important.  A market access commitment that leaves in doubt wh en a commitment takes effect is of little practical value.  Unlike 
for the implementation of GATT tariff reductions whic h entered into force on 1 January 1995, and for 
which paragraph 2 of the Marrakesh Protocol provid ed a time-frame for implementation, the dates of 
entry into force and implementation of specific commitments under the GATS coincide in principle.  
7.368  Article XX:1(d) permits Members who wish to depart from this general rule to specify a 
"time-frame" within which they implement their co mmitments.  We consider that the words "where 
appropriate" in that subparagraph must be underst ood to refer to situations where the date of 
implementation differs from the date of entry into fo rce of a commitment.  The consistent practice of 
WTO Members in the scheduling of commitments s upports this understanding.  During the extended 
negotiations on basic telecommunications alone, twenty-seven Members who attached schedules of commitments to the Fourth Protocol, but wished to  implement their commitments at a later time than 
the entry into force of their sch edule, specified a time-frame for implementation – typically by 
entering dates upon which certain limitations would be  removed.  We consider that Article XX, the 
objective of which is to ensure clarity and precisi on with regard to the scheduling of commitments, 
cannot be interpreted to allow a window of discr etion with regard to temporal aspects of these 
commitments that could erode the practical value of a commitment. 
7.369  Mexico asserts that had it wished to schedule commitments to take future actions,  it would 
have done so as additional commitments  under GATS Article XVIII.  In its view, this reasoning is 
"confirmed" by a Secretariat background note whic h includes a reference to "future undertakings 
conditional upon the passing of legislation" in its de scription of measures that Members had inscribed 
in the additional commitm ents column of schedules.
1046   
7.370  In addressing Mexico's argument, we recall first that Article XX:1(d) relates to time-frames 
for implementation of commitments under either  Articles XVI, XVII, or XVIII.  We therefore cannot 
subscribe to Mexico's view that any future actions should be scheduled only as additional 
                                                      
1045 Merriam Webster Dictionary , Merriam Webster Online, 2003; http://www.webster.com/. 
1046 See, Additional Commitments Under Article XVIII of the GATS:  Note by the Secretaria t, 
S/CSC/W/34, 16 July 2002, paragraph 8.  WT/DS204/R 
 Page 221 
 
 
commitments;  we described earlier how Members have, in fact, consistently inscribed time-frames in the market access column of thei r schedules.  Second, Mexico has inscribed its commitment in the 
market access column, and not in the column rela ting to additional commitments.  This difference 
indicates Mexico's intention to make a commitment on market access (that is, to permit the commercial presence of "commercial agencies"), and not an additional commitment "with respect to 
measures affecting trade in services not subject to scheduling under Articles XVI or XVII".  Third, the 
Secretariat note mentioned by Mexico merely c ontains "examples of inscriptions found in the 
additional commitments column", and an examination of such examples in Attachment I to that note 
shows that only one of a total of fifty-two inscrip tions contains a condition similar to the one in 
Mexico's' schedule.   
7.371  We therefore consider that subparagraph (d) of Article XX:1 requires the specification of a 
time-frame for implementation should a Member wish to implement a commitment after its entry into 
force.  Where a Member does not specify a time- frame, implementation must be deemed to be 
concurrent with the entry into force of the commit ment.  We have seen that the entry in Mexico's 
Schedule does not contain language that expresses a condition "whether" regulations and permits 
would be issued, but only "when" the permits w ould be issued.  Interpreted in the context of 
Article XX, this entry implies that regulations  were not in place when Mexico finalized its 
commitments on 15 February 1997, but expresses a commitment that these regulations would be 
issued.  Even if Mexico had needed time to comple te the issuance of the regulations beyond the time 
of entry into force of its commitment on 5 February  1998, Mexico should, at the very minimum, have 
initiated that process leading to th e issuance of the regulations.  There is no evidence, however, that 
Mexico has taken any steps to comply with its commitment.  We do not consider it necessary to rule 
on the length of a time period within which th e implementation of Mexico's commitment might 
reasonably have been concluded, as more than five  years have passed since the entry into force of 
Mexico's commitment, and Mexico still has indicated no date by which it intends to issue the relevant 
regulations and permits.  Therefore, we find that Me xico's refusal to authorize the supply of services 
by commercial agencies is inconsistent with the ma rket access commitment inscribed in its schedule. 
(ii) Whether Mexico's commitments on the supply of  the services at issue by commercial agencies 
through commercial presence include the supply of international telecommunications services 
(from Mexico to the United States) through mode 3  
7.372  The United States argues that the supply of th e services at issue through commercial presence 
under mode 3 includes the supply of such ser vices from Mexico into the United States.  
7.373  In assessing this issue, we note that the supply of a service through commercial presence 
(mode 3) is defined in Article I:2 (c) of the GATS as the supply of a service "by a service supplier of 
one Member, through commercial presence in  the territory of any other Member". 
7.374  "Commercial presence" is defined in Ar ticle XXVIII (Definitions), as follows: 
"(d) 'commercial presence' means any type of business or professional 
establishment, including through 
 (i) the constitution, acquisition or ma intenance of a juridical person, or 
 (ii) the creation or maintenance of a branch or a representative office,   within the territory of a Member for the purpose of supplying a  service;" 
7.375  The definition of services supplied through a co mmercial presence make s explicit the location 
of the service supplier.  It provides that a service supplier has a commercial presence –  any type of 
business or professional establishment – in the territory  of any other Member.  The definition is silent WT/DS204/R 
Page 222  
 
with respect to any other territorial requirement  (as in cross-border supply under mode 1) or 
nationality of the service consumer (as in consum ption abroad under mode 2).  Supply of a service 
through commercial presence would therefore not excl ude a service that originates in the territory in 
which a commercial presence is established (such as Mexi co), but is delivered into the territory of any 
other Member (such as the United States).   
7.376  We observe further that the Chairman's Note for Scheduling Basic Telecommunications 
Services Commitments,  states that: 
"Unless otherwise noted in the sector column , any basic telecom service listed in the 
sector column: 
(a) encompasses local, long  distance and international services for public and 
non-public use;"
1047 
7.377  In our analysis of Mexico's commitments in  part B of these findings, we found that the 
Chairman's Note is an important part of the ci rcumstances of the conclusion of the negotiations, and 
should be given considerable weight.  We note that  Mexico did not exclude international services in 
the sector column, or elsewhere in its schedule, from the scope of services that commercial agencies 
may supply.  We are therefore entitled to assume th at Mexico's mode 3 commitment at issue includes 
supply of basic telecommunications services within Mexico, and from Mexico into any other country. 
7.378  Having concluded that Mexico has a commitment in effect to allow the supply through 
commercial presence (mode 3) of the services at is sue by commercial agencies, we now consider 
whether Mexico has fulfilled its obligations in Sec tion 5(b) to ensure that suppliers of any other 
Member have access to and use of any public te lecommunications transport networks and services 
offered within or across Mexico's borde r, including private leased circuits. 
(iii) Access to and use of private leased circuits 
7.379  Mexico argues that Section 2(c)(ii) of the Annex renders Section 5 inapplicable in this case.  
Section 2(c)(ii) establishes that nothing in the Anne x, including Section 5, "shall be construed ... to 
require a Member (or to require a Member to ob lige service suppliers under its jurisdiction) to 
establish, construct, acquire, lease, operate or supply telecommunications transport networks or 
services not offered to the public generally".  Acco rding to Mexico international simple resale is 
prohibited in Mexico, and is therefore not offered to the public generally.1048  The United States 
argues that Mexican suppliers of public telecommuni cations transport networks and services do in fact 
offer private leased circuits to the public generally.1049 
7.380  The Panel cannot accept Mexico's argument that Section 2(c)(ii) makes Section 5(b) 
inapplicable in this case.  Whether "international simple resale" (international services  transmitted 
over leased capacity) is offered to the public gene rally is a different issue from whether "private 
leased circuits" are offered to the public generally in Mexico.  Whether a supplier is entitled under 
Section 5(b) to access to and use of services, such as private leased ci rcuits, that are offered to the 
public generally is determined by a Member's scheduled commitments on the service to be supplied.  
In this respect, the fact that a particular service is restricted  under domestic law cannot be invoked 
under Section 2(c)(ii), since the obligations under Sec tion 5 refer not to domestic law but to scheduled 
GATS commitments. 
                                                      
1047 Notes for the Scheduling Basic Telecommunications Services Commitments;  Note by the Chairman. 
S/GBT/W/2/Rev.1. 
1048 See Mexico's second written submission, paragraphs 147-151. 
1049 See the United States' first written submission, pa ragraph 264, footnote 230, in which the 
United States states that COFETEL's website lists Telmex private line tariffs.   WT/DS204/R 
 Page 223 
 
 
7.381  The Panel notes that the United States presents ev idence that "private leased circuits" are in 
fact "offered to the public generally" in Mexico.  Further, the Panel recalls that it has found that, 
although Mexico has not committed to allow commerc ial agencies to use lea sed capacity for cross 
border supply, it has committed to allow commercial ag encies to use leased capacity for the supply of 
the services at issue.  We also recall that Mexico indicates no restriction on the geographic market 
(i.e. local, long distance, international) for th e services that may be supplied by the commercial 
agencies established in Mexico.  Mexico has insc ribed no routing restriction – as it did for cross 
border supply – for supply through commercial presence.   Therefore, the Panel considers Mexico to 
have undertaken commitments on the supply of the services at issue by commercial agencies through 
commercial presence, for which access to and use of pr ivate leased circuits is not only relevant but , 
by Mexico's own definition in its schedule, is essenti al.  Therefore, we find that Mexico has failed to 
ensure access to and use of priv ate leased circuits for the supply of the committed services in a 
manner consistent with the Section 5(b)  of the Annex on Telecommunications.  
(iv) Interconnection of private leased circuits 
7.382  The United States maintains that according to Section 5(b)(ii), foreign suppliers must be 
permitted to interconnect private leased circuits to foreign public telecommunications transport 
networks and services.  In its view, ILD Rule 3 would prohibit commercial agencies, even if they 
were permitted to establish, to interconnect any private leased circuits to foreign public 
telecommunications transport networks and services.  
7.383  We note that ILD Rule 3 reads: 
"Only international gateway ope rators shall be authorized to interconnect directly 
with the public telecommunications networks  of other countries' operators for the 
purpose of carrying international traffic." 
7.384  Under this rule, only international gateway op erators may interconnect with foreign public 
telecommunications transport networks and services  to supply international telecom services.  The 
ILD Rules require an international gateway operator to  be a facilities-based supplier.  ILD Rule 2:VII 
defines a gateway operator as a supplier with a c oncession to supply long distance services, and ILD 
Rule 7:3 requires such an operator to have infrast ructure in at least three Mexican states.  As 
discussed in part B, a gateway operator must alwa ys be a "concessionaire", and a commercial agency 
can never be a concessionaire.  Therefore, a commerc ial agency can never be an international gateway 
operator.  Thus, ILD Rule 3 prohibits a commercial agency to interconnect "directly with the public 
telecommunications networks of other countries' op erators for the purpose of carrying international 
traffic". 
(v) Subject to paragraphs (e) and (f) 
7.385  We note that the obligation in Section 5(b) is made subject by the terms of the provision to 
paragraphs (e) and (f).  Paragraph (e)(iii) permits Mexico to impose conditions "to ensure that service 
suppliers of any other Member do not supply ser vices unless permitted pursuant to commitments in 
the Members' Schedule".  ILD Rule 3, as discussed above, would be a restriction on resale in the 
sense of paragraph (f)(i) of Section 5.  We have  found that Mexico has undertaken a mode 3 
commitment on the supply of the telecommunications services at issue by comme rcial agencies.  This 
commitment does not exclude supply of non-facilities-based services from Mexico into any other country.  Therefore, ILD Rule 3 does not impose a condition necessary to achieve the objective set out 
in paragraph (e)(iii).  Rather, this ILD Rule preven ts interconnection to private leased circuits for a 
service on which a specific commitment has been take n.  Therefore, we find that ILD Rule 3 is 
inconsistent with Mexico's obligati ons under Section 5(b) of the Annex. WT/DS204/R 
Page 224  
 
(d) Invocation of Section 5(g) 
7.386  Mexico argues that it is necessary to cond ition access to its networks for the purpose of 
strengthening its domestic telecommunication infra structure in accordance with paragraph (g) of 
Section 5 of the Annex.
1050  According to Mexico, this Section gives cover to its measures.  
7.387  Section 5(g) reads: 
"Notwithstanding the preceding paragraphs of this section, a developing country 
Member may, consistent with its level of development, place reasonable conditions 
on access to and use of public telecommunications transport networks and services necessary to strengthen its domestic telecommunications infrastructure and service capacity and to increase its participation in international trade in telecommunications 
services.  Such conditions shall be specified in the Member's schedule." 
7.388  Section 5(g) recognizes the right of developing countries to inscribe  limitations in their 
schedules for the objectives recognized in Section 5( g).  The Panel notes that Mexico's Schedule of 
Specific Commitments does not include any limita tions referring to Section 5(g) or to the 
development objectives mentioned therein.  Without such limitations in Mexico's Schedule, Section 
5(g) does not permit a departure from specific commitments which Mexico has voluntarily and 
explicitly scheduled.  Moreover, even if – contrary  to our views – Section 5(g) could be used as a 
defence for imposing conditions inconsistent with a Member's specific commitments, Mexico has not 
demonstrated that anti-competitive price-fixing and market sharing arrangements are "reasonable" and 
"necessary" conditions for enhancing the devel opment objectives referred to in Section 5(g). 
7.389  We therefore conclude that Mexi co has failed to meet its obliga tions under Section 5(b) of the 
GATS Annex on Telecommunications, by failing to ensure that commercially present commercial 
agencies of the United States have access to and u se of private leased circuits and are permitted to 
interconnect these circuits to public telecommunica tions transport networks and services or with 
circuits of other service suppliers . 
VIII.  CONCLUSIONS AND RECOMMENDATION  
8.1 In the light of our findings, we conclude that: 
(a) Mexico has not met its GATS commitments under Section 2.2(b) of its Reference 
Paper since it fails to ensure that a majo r supplier provides interconnection at cost-
oriented rates to United States suppliers for the cross-border supply, on a facilities basis in Mexico, of the basic telecommunications services at issue ;   
(b) Mexico has not met its GATS commitments under Section 1.1 of its Reference Paper 
to maintain "appropriate measures" to prevent anti-competitive practices, since it 
maintains measures that require anti- competitive practices among competing 
suppliers which, alone or together, are a major supplier of the services at issue;   
(c) Mexico has not met its obligations unde r Section 5(a) of the GATS Annex on 
Telecommunications since it fails to ensure access to and use of public 
telecommunications transport networks  and services on reasonable terms to 
United States service suppliers for the cro ss-border supply, on a facilities basis in 
Mexico, of the basic telecommunications services at issue; 
                                                     
 
1050 See Mexico's second written submission, paragraphs 265-266.  WT/DS204/R 
 Page 225 
 
 
(d) Mexico has not met its obligations u nder Section 5(b) of the GATS Annex on 
Telecommunications, since it fails to ensure that United States commercial agencies, whose commercial presence Mexico has co mmitted to allow, have access to and use 
of private leased circuits within or acro ss the border of Mexico, and are permitted to 
interconnect these circuits to public tel ecommunications transport networks and 
services or with circuits of other service suppliers . 
8.2 The Panel has found that, contrary to claims of the United States : 
(a) Mexico has not violated Section 2.2(b) of its Reference Paper, with respect to cross-
border supply, on a non-facilities  basis in Mexico, of the basic telecommunications 
services at issue;  
(b) Mexico has not violated Section 5(a) of the GATS Annex on Telecommunications, 
with respect to the cross-border supply, on a non-facilities  basis in Mexico, of the 
basic telecommunications services at issue; 
(c) Mexico has not violated Section 5(b) of the GATS Annex on Telecommunications, 
with respect to the cross-border supply, on a non-facilities  basis into Mexico, of the 
basic telecommunications services at issue. 
8.3 The Panel notes that, pursuant to Article 12.11 of  the DSU, it has taken into account in its 
findings GATS provisions on differential and more -favourable treatment for developing country 
Members.  In particular, the Panel has examined  Mexico's arguments that commitments of such 
Members have to be interpreted in the light of Artic le IV of the GATS, paragr aph 5 of the preamble to 
the GATS, and paragraph 5(g) of the Annex on Te lecommunications  The Panel emphasizes that its 
findings in no way prevent Mexico from actively pursuing the development objectives referred to in 
these provisions by extending telecommunications ne tworks and services at affordable prices in a 
manner consistent with its GATS commitments. 
8.4 The Panel notes that Article 19 of the DSU provi des that "[w]here a panel … concludes that a 
measure is inconsistent with a covered agreement, it shall recommend that the Member concerned 
bring the measure into conformity with that agreement."
1051  Unlike some other covered agreements 
(e.g. GATT Article XXIII:1 in connection with Artic le 3.8 of the DSU), the GATS does not require 
that, in the case of a violation complaint (GATS Article XXIII:1), "nullification or impairment" of 
treaty benefits has to be claimed by the comp laining WTO Member and examined by a Panel. 
Whereas Article XXIII:1 of the GATT specifically  conditions access to WTO dispute settlement 
procedures on an allegation that a "benefit" or the "attainment of an objective" under that agreement 
are being "nullified or impaired", the correspondi ng provision in the GATS (A rticle XXIII:1) permits 
access to dispute settlement procedures if a Member "fails to carry out its obligations or specific 
commitments" under the GATS.  In this resp ect, we note that the Appellate Body in EC – Bananas III  
stated that the panel in that case "erred in extendi ng the scope of the presumption in Article 3.8 of the 
DSU to claims made under the GATS".1052  Having found that Mexico h as violated certain provisions 
of the GATS, we are therefore bound by Article  19 of the DSU to proceed directly to the 
recommendation set out in that provision.   
                                                      
1051 Footnotes in the original omitted. 
1052 See Appellate Body Report, European Communities – Regime for the Importation, Sale and 
Distribution of Bananas ("EC – Bananas III "), WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591, 
at paragraph 250. WT/DS204/R 
Page 226  
 
8.5 We therefore recommend that the Dispute Settlement Body request Mexico to bring its 
measures into conformity with its obligations under the GATS. 
  WT/DS204/R 
 Page 227 
 
 
IX. ANNEXES 
A. ABBREVIATIONS USED FOR DISPUTE SETTL EMENT CASES REFERRED TO IN THE REPORT  
SHORT TITLE  F ULL TITLE  
Canada – Autos  Panel Report, Canada – Certain Measures Affecting the Automotive 
Industry , WT/DS139/R, WT/DS142/R, adopted 19 June 2000, as modified 
by the Appellate Body Report , WT/DS139/AB/R, WT/DS142/AB/R, 
DSR 2000:VII, 3043. 
Canada – Dairy  Appellate Body Report, Canada – Measures Affecting the Importation of 
Milk and the Exportation of Dairy Products , WT/DS103/AB/R, 
WT/DS113/AB/R and Corr.1, adopted 27 October 1999, DSR 
1999:V, 2057. 
EC – Computer Equipment Appellate Body Report, European Communities – Customs 
Classification of Certain Computer Equipment , WT/DS62/AB/R, 
WT/DS67/AB/R, WT/DS68/AB/R, adopted 22 June 1998. 
EC – Hormones Appellate Body Report, EC Measures Concerning Meat and Meat 
Products (Hormones)  (" EC – Hormones "), WT/DS26/AB/R, 
WT/DS48/AB/R, adopted 13 February 1998, DSR 1998:I, 135 . 
India – Quantitative 
Restrictions  Appellate Body Report, India – Quantitative Restri ctions on Imports of 
Agricultural, Textile and Industrial Products , WT/DS90/AB/R, adopted 
22 September 1999, DSR 1999:IV, 1763. 
Japan – Alcoholic Beverages II  Appellate Body Report, Japan – Taxes on Alcoholic Beverages , 
WT/DS8/AB/R, WT/DS10/AB/R , WT/DS11/AB/R, adopted 
1 November 1996, DSR 1996:I, 97. 
Korea – Various Measures on Beef
  Appellate Body Report, Korea – Measures Affec ting Imports of Fresh, 
Chilled and Frozen Beef , WT/DS161/AB/R, WT/DS169/AB/R, adopted 
10 January 2001. 
US – Carbon Steel  Appellate Body Report, United States – Countervailing Duties on Certain 
Corrosion-Resistant Carbon Stee l Flat Products from Germany ("US – 
Carbon Steel "), WT/DS213/AB/R and Corr.1, adopted 
19 December 2002. 
US – Gasoline  Appellate Body Report, United States – Standards for Reformulated and 
Conventional Gasoline , WT/DS2/AB/R, adopted 20 May 1996, 
DSR 1996:I, 3. 
US – Hot-Rolled Steel  Appellate Body Report, United States – Anti-Dumping Measures on 
Certain Hot-Rolled St eel Products from Japan , WT/DS184/AB/R, 
adopted 23 August 2001. 
US – Stainless Steel  Panel Report, United States – Anti-Dumping Measures on Stainless Steel 
Plate in Coils and Stainless Steel Sheet and Strip from Korea , 
WT/DS179/R, adopted 1 February 2001. 
US – Wheat Gluten  Appellate Body Report, United States – Definitiv e Safeguard Measures on 
Imports of Wheat Gluten from the European Communities ("US – Wheat 
Gluten "), WT/DS166/AB/R, adopted 19 January 2001, DSR 2001:II, 717. 
 
 WT/DS204/R 
Page 228  
 
 B. M
EXICO :  SCHEDULE OF SPECIFIC COMMITMENTS , SUPPLEMENT 2 
WORLD TRADE  GATS/SC/56/Suppl.2  
  11 April 1997 
ORGANIZATION   
  (97-1326) 
 
Trade in Services  
 
 
 
  
MEXICO
 
 
Schedule of Specific Commitments  
 
Supplement 2  
 
(This is authentic in Spanish only) 
 
________________ 
  This text supplements the Telecommunication services section contained on pages 20 to 22 of 
document GATS/SC/56.  
 
  
  WT/DS204/R
 Page 229MEXICO - SCHEDULE OF SPECIFIC COMMITMENTS 
Modes of supply:  (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons 
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments 
2.C. TELECOMMUNICATIONS 
SERVICES 
 
Telecommunications services 
supplied by a facilities based 
public telecommunications network (wire-based and radioelectric) through any existing technological medium, 
included in subparagraphs (a), 
(b), (c), (f), (g) and (o). 
  
Radio broadcasting, cable television, satellite 
transmissions of DTH and 
DBS services and of audio digital services are excluded. 
  
  (1) None, except the following: 
 
International traffic must be routed through the facilities of an enterprise that has a concession granted by the Ministry of Communications and 
Transport (SCT). 
 (2) None 
 
(3) A concession
1 from the SCT is 
required.  Only enterprises 
established in conformity with Mexican law may obtain such a concession. 
  
  (1) None 
 
    
 
 (2) None 
 
(3)    None   
  Mexico undertakes the 
obligations contained in the 
reference paper attached hereto.  
 Concessions for spectrum frequency 
bands for specific uses will be granted by public invitation to tender.    
                                                      
1 Concession:  The granting of title to install, operate or  use a facilities-based public telecommunications network.  
 WT/DS204/R 
Page 230 
Modes of supply:  (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons 
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments 
  Foreign governments may not 
participate in an enterprise set up in accordance with Mexican law nor obtain any authorization to provide telecommunications services. 
   
 Direct foreign investment up to 
49 per cent is permitted in an 
enterprise set up in accordance with 
Mexican law. 
 
Telecomunicaciones de Mexico (Telecomm) has exclusive rights to links with Intelsat and Inmarsat. 
 
Services other than international long-distance services which require use of satellites must use Mexican satellite infrastructure until the 
year 2002. 
   
 (4) Unbound, except as indicated in the 
horizontal section. 
 (4) Unbound, except as indicated in the 
 horizontal section.  
(a) Voice telephony 
(CPC 75211, 75212) 
(b) Packet-switched data 
transmission services 
(CPC 7523**) 
(c) Circuit-switched data 
transmission services 
(CPC 7523**) (1) None, except as indicated in 2.C.1. 
 
(2) None  (3) As indicated in 2.C.3.  
(4) Unbound, except as indicated in the 
       horizontal section. (1) None 
 
(2) None  (3) None  
(4) Unbound, except as indicated in the 
       horizontal section.   
  WT/DS204/R
 Page 231Modes of supply:  (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons 
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments 
(f) Facsimile services 
(CPC 7521** + 7529**) (1) None, except as indicated in 2.C.1. 
 (2) None  (1) None 
 (2) None  
 (3) As indicted in 2.C.3. 
 
A permit issued by the SCT is required in order to provide a public 
facsimile service.  Only enterprises 
set up in accordance with Mexican law may obtain such a permit. 
 (4) Unbound, except as indicated in 
the horizontal section. 
 (3) None 
   
 
   (4) Unbound, except as indicated in the 
 horizontal section.  
(g) Private leased circuit 
services 
(CPC 7522** + 7523**) (1) None, except as indicated in 
2.C.1. 
 (2) None 
 
(3) As indicated in 2.C.3.  
Operators of private networks wishing to exploit services commercially must obtain a 
concession from the SCT, whereupon 
such networks assume the character of public networks. 
 (4) Unbound, except as indicated in the  
 horizontal section. 
 (1) None 
  (2) None 
 
(3) None    
 
    (4) Unbound, except as indicated in the 
 horizontal section.  
  
 WT/DS204/R 
Page 232 
Modes of supply:  (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons 
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments 
(o) Other 
 - Paging services  (PC 75291) (1) None, except as indicated in 2.C.1. 
 (2) None  (3) As indicated in 2.C.3. 
 
(4) Unbound, except as indicated in the  
 horizontal section.  (1) None 
 (2) None  (3) None 
 
(4) Unbound, except as indicated in the 
 horizontal section.  
- Cellular telephone services 
(75213**) on the "A" and "B" bands
2  (1) None, except as indicated in 
2.C.1. 
 (2) None  
(3) As indicated in 2.C.3. 
 
Foreign investment in excess of 49 per cent of an enterprise's capital will be permitted following a 
favourable decision by the Foreign 
Investment Commission 
 (4) Unbound, except as indicated in 
the horizontal section. 
 (1)    None 
  (2)    None  
(3)    None 
    
 
  (4) Unbound, except as indicated in 
the horizontal section.  
                                                      
2 Frequencies 825-835/870-880 and 835-845/880-890 Mhz.   
  WT/DS204/R
 Page 233Modes of supply:  (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons 
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments 
- Commercial agencies3 (1) None, except as indicated in 2.C.1. 
 (2) None  (3) None, except: 
A permit issued by the SCT is required.  
Only enterprises set up in accordance with Mexican law may obtain such a permit.  
Foreign governments may not participate 
in an enterprise set up in accordance with Mexican law nor obtain any authorization to provide telecommunications services.  
Except where specifically approved by 
the SCT, public telecommunications network concessionaires may not participate, directly or indirectly, in the capital of a commercial agency.  (1) None 
 (2) None  (3) None 
 
    
 
    
 
  
                                                      
3 Agencies which, without owning transmissi on means, provide third parties with teleco mmunications services by using capacity le ased from a public network 
concessionaire.   
 WT/DS204/R 
Page 234 
Modes of supply:  (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons 
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments 
 The establishment and operation of 
commercial agencies is invariably subject to the relevant regulations.  The SCT will not issue permits for the establishment of a commercial agency until the 
corresponding regulations are issued. 
 (4) Unbound, except as indicated in 
the horizontal section.  
    
 
 (4) Unbound, except as indicated in 
the horizontal section   WT/DS204/R 
 Page 235 
 
 
  
 
REFERENCE PAPER  
 Scope
 
 
 The following are principles and definitions  on the regulatory framework for the basic 
telecommunications services.  Definitions
 
 
 Users  mean service consumers and service suppliers. 
  Essential facilities
 mean facilities of a public telecommunications network of service that: 
 
 (a) Are exclusively or predominantly provided by a single or limited number of 
suppliers;  and 
  (b) cannot feasibly be economically or tec hnically substituted in order to provide a 
service. 
 
 A major supplier
 is a supplier which has the ability to materially affect the terms of 
participation (having regard to price and supply) in  the relevant market for basic telecommunications 
services as a result of:   (a) Control over essential facilities;  or 
 
 (b) use of its position in the market.  1. Competitive safeguards
 
 1.1 Prevention of anti-competitive practices in telecommunications
 
 
 Appropriate measures shall be maintained for the purpose of preventing suppliers who, alone 
or together, are a major supplier from engaging  in or continuing anti-competitive practices. 
 1.2 Safeguards
 
 
 The anti-competitive practices referred to in the above paragraph shall include in particular: 
  (a) Engaging in anti-competitive cross-subsidization;   (b) using information obtained from comp etitors with anti-competitive results;  and 
 
 (c) not making available to other services suppliers on a timely basis technical 
information about essential facilities and co mmercially relevant information which 
are necessary for them to provide services. 
 
2. Interconnection
 
 2.1 This section applies, on the basis of the specific commitments undertaken, to linking with suppliers providing public telecommunications transpor t networks or services in order to allow the WT/DS204/R 
Page 236  
 
 users of one supplier to communicate with users of another supplier and to access services provided 
by another supplier.  2.2 Interconnection to be ensured
 
 
 Interconnection with a major supplier will be en sured at any technically feasible point in the 
network.  Such interconnection is provided:   (a) Under non-discriminatory terms, cond itions (including technical standards and 
specifications) and rates and of a quality no less favourable than that provided for its 
own like services or for like services of non-affiliated service suppliers or for its 
subsidiaries or other affiliates; 
  (b) in a timely fashion, on terms, conditions (including technical standards and 
specifications) and cost-oriented rates that ar e transparent, reasonable, having regard 
to economic feasibility, and sufficiently unbundl ed so that the supplier need not pay 
for network components or facilities that it does not require for the service to be provided;  and 
  (c) upon request, at points in addition to th e network termination points offered to the 
majority of users, subject to charges that reflect the cost of construction of necessary 
additional facilities. 
 2.3 Public availability of the pro cedures for interconnection negotiations
 
  The procedures applicable for interconnecti on to a major supplier will be made publicly 
available. 
 2.4 Transparency of interconnection arrangements
 
  It is ensured that a major supplier will make  publicly available either its interconnection 
agreements or a reference interconnection offer. 
 
2.5 Interconnection:  dispute settlement
 
  A service supplier requesting interconnection with  a major supplier will have recourse, either: 
 
 (a) At any time;  or 
  (b) after a reasonable period of time which has been made publicly known  to an independent domestic body, which may be a regulatory body as referred to in paragraph 5, to resolve disputes regarding appropriate terms, c onditions and rates for interconnection within a 
reasonable period of time, to the extent that  these have not been established previously. 
 3. Universal service
 
  Any Member has the right to define the ki nd of universal service obligation it wishes to 
maintain.  Such obligations will not be regarded as anti-competitive per se , provided they are 
administered in a transparent, non-discriminator y and competitively neutral manner and are not more 
burdensome than necessary for the kind of universal service defined by the Member.   WT/DS204/R 
 Page 237 
 
 
 4. Public availability of licensing criteria  
  Where a licence is required, the following will be made publicly available:   (a) All the licensing criteria and the period of time normally required to reach a decision 
concerning an application for a licence;  and 
  (b) the terms and conditio ns of individual licences. 
  The reasons for the denial of a licence will be  made known to the applicant upon request. 
 
5. Independent regulators
 
  The regulatory body is separate from, and not accountable to, any supplier of basic telecommunications services.  The decisions of and the procedures used by regulators shall be 
impartial with respect to all market participants. 
 6. Allocation and use of scarce resources
 
  Any procedures for the allocation and use of scarce resources, including frequencies, numbers 
and rights of way, will be carried out in an obj ective, timely, transparent and non-discriminatory 
manner.  The current state of allocated frequency ba nds will be made publicly available, but detailed 
identification of frequencies allocated for specific government uses is not required.  WT/DS204/R 
Page 238  
 
 C. ILD
 RULES  
 
RULES FOR THE SUPPLY OF INTERNA TIONAL LONG-DISTANCE SERVICES 
 
To be Applied by the Licensees of Public Telecommunications Networks  
Authorized to Provide Such Services  
 
11 December 1996 
 In the margin, a stamp displaying the Mexi can Coat-of-Arms and the words "United Mexican 
States – Ministry of Communications and Trans port, Federal Telecomm unications Commission". 
 
 On the basis of Article 36 of the Basic Law on the Federal Public Administration;  Articles 1 and 3 and other relevant articles of the Federal La w on Administrative Procedure;  Articles 7 and 47, 
Transitional Article Ten, and other relevant ar ticles of the Federal Telecommunications Law;  
Articles 2 and 37 bis of the Rules of Procedure of the Mini stry of Communications and Transport;  
Articles 1, 2, 3, and 5 of the Decree establishi ng the Federal Telecommuni cations Commission, and 
other applicable provisions;  and   WHEREAS:   Pursuant to Article 7 of the Federal Telecommunications Law, the Ministry of 
Communications and Transport shall promote the ef ficient development of telecommunications, and 
foster fair competition among the various telecommuni cations service providers so that users may be 
offered a better price, ra nge, and quality of services; 
  Transitional Article Ten of the Federal Tel ecommunications Law establishes that licensees of 
public telecommunications ne tworks that have conc luded interconnection ag reements, under the terms 
of said Law, with licensees of public networks wish ing to provide national and international basic 
public long-distance telephone services, may begin to operate their respective interconnections as of 
1 January 1997;   In the Regulations on Long-Distance Services, published in the Diario Oficial de la 
Federación [Official Journal] of 21 June 1996, the Ministry of Communications and Transport has 
determined the procedures that must be followed by  licensees of public telecommunications networks 
authorized to provide basic public long-distan ce telephone services for their operations with other 
licensees or permit-holders, as well as for the supply of services to end users; 
 
 It is therefore necessary to establish the procedure applicable to those licensees of 
long-distance services wishing to establish and operate  international gateways in order to interconnect 
with foreign telecommunications networks for the pur pose of carrying international traffic, as well as 
promoting the efficient interconnection of public  telecommunications networks within Mexican 
territory;  
 By means of a decree published in the Diario Oficial de la Federación  of 9 August 1996, the 
Federal Executive established the Federal Te lecommunications Commission as a decentralized 
agency of the Ministry of Communications and Tr ansport, with technical and operational autonomy, 
for the purpose of regulating and promoting the efficient development of telecommunications; 
 
 As established in Articles 7(II) and 47 of th e Federal Telecommunications Law, as well as 
Article 37 bis (XIII) and (XIV) of the Rules of Procedures of the Ministry of Communications and 
Transport, it is within the authority of the Fe deral Telecommunications Commission to promote and 
oversee the efficient interconnection of public telecommunications networks and equipment,  WT/DS204/R 
 Page 239 
 
 
 including interconnection with foreign netw orks, as well as to approve the corresponding 
interconnection agreements and authorize the in stallation of telecommunications equipment and 
means of transmission that cross the country's borders;   Under the terms of the aforementioned pr ovisions, the Federal Telecommunications 
Commission may establish the terms to be included in agreements for the interconnection of public 
telecommunications networks with foreign networks whenever it is deemed that such agreements 
prejudice the interests of Mexico in general,  of users, or of other licensees of public 
telecommunications networks;  
 As established in Article 7(III) of the Federal Telecommunications Law, Article 2(1) of the 
Decree establishing the Federal Telecommunications Commission, and other applicable provisions of 
the said Decree, as well as in Article 37 bis (I) of the Rules of Procedure of the Ministry of 
Communications and Transport, it is within th e authority of the Federal Telecommunications 
Commission to issue administrative provisions in the area of telecommunications;  and 
 
 In view of the imminent opening up of the market for international long-distance telephone services, in a plenary session on 4 December 1996, and by means of Decision No. RES PC 961207, the Commission unanimously approved the following:  
 Rules for the Supply of International Long-D istance Services to be Applied by the 
Licensees of Public Telecommunications Networks  Authorized to Provide Such Services 
 
General Provisions 
 
 Rule 1.   The purpose of these Rules is to regulate the supply of international long-distance 
services and to establish the terms to be included in agreements for the interconnection of public 
telecommunications networks  with foreign networks. 
  Rule 2.   For the purposes of these Rules, the following definitions shall apply: 
  I. Auditor:  firm retained by the Commissi on to audit the uniform settlement rate and 
proportionate return systems, as well as to pe rform other functions authorized under these 
Rules. 
  II. Commission:  Federal Te lecommunications Commission. 
 
 III. Committee:  the Long-Distance Operator s Committee to which Chapter VI of the 
Long-Distance Rules published in the Diario Oficial de la Fed eración of 21 June 1996 refers. 
  IV. Long-distance service licensee:  natural or legal person having a licence to instal, 
operate, or exploit a public telecommunications  network authorized to provide long-distance 
services. 
 
 V Call attempt:  any call origination provided  by a foreign operator to an international 
gateway operator, regardless of whether or not the call is terminated. 
  VI. Law:  Federal Telecommunications Law. 
 
 VII. International gateway operator:  long -distance service licensee authorized by the 
Commission to operate a switching exch ange as an international gateway; 
 WT/DS204/R 
Page 240  
 
  VIII. International gateway:  switching exch ange interconnected to incoming and outgoing 
circuits, authorized by the Commissi on to carry international traffic. 
  IX. Network terminal connection point: the s ite at which end-user facilities and equipment 
are connected to a public telecommunications ne twork, or, as applicable, the site at which 
other telecommunications networks are connected to that network. 
  X. Ministry:  Ministry of Communications and Transport.   XI. International long-distance service:  service whereby all internationa l switched traffic is 
carried through long-distance exchanges authorized as international gateways. 
  XII. Uniform settlement rate system:  the system whereby:  
(a) The same settlement rates are applied by international gateway operators to all 
long-distance calls from a given country, regardless of which operator originates the 
call abroad and which licensee terminates th e call within Mexican territory;  and 
(b) The same settlement rates are applied by  the operators of a given country to 
long-distance calls originating within Mexican territory and delivered to such operators, regardless of which long-distance service licensee originates the call within 
Mexican territory or which opera tor terminates the call abroad. 
 XIII. Proportionate return system:  the syst em under which internatio nal gateway operators 
distribute call attempts entering Mexican te rritory in accordance with the following 
procedure: 
 
(c) The total settlements paid over a one-mont h period by all international gateway 
operators to all operators of a gi ven country shall be determined; 
(d) The percentage of the total amount of th e above-mentioned settle ments generated by 
each of the international gateway operators  during the said period shall also be 
determined; 
(e) Regardless of the type of call, internationa l gateway operators sha ll have the right to 
receive incoming call attempts from a give n country during any one-month period, on 
the basis of the percentages established for the previous monthly period, in 
accordance with subparagraphs (a) and (b), above;  and 
(f) For this purpose, any international gateway operator that receives incoming traffic in 
an amount exceeding its percentage pursu ant to the above subparagraph shall, 
regardless of the type of call, (i) retain its  own call attempts;  and (ii) distribute the 
excess call attempts to each of the internati onal gateway operators in order to meet 
the percentages indicated. 
 XIV.  Settlement rate:  the rate which: 
 
(g) An international gateway operator charg es a foreign operator for receiving traffic 
from a given country;  and 
(h) A foreign operator charges an internati onal gateway operator for receiving traffic 
originating in Mexican territory.  WT/DS204/R 
 Page 241 
 
 
  XV. Switched circuit traffic:  traffic which is  carried by means of the temporary connection 
of two or more circuits between two or mo re users, allowing the said users the full and 
exclusive use of the connection until it is released. 
  Rule 3.   Only international gateway operators shall be authorized to interconnect directly with 
the public telecommunications networks of other countries' operators for the purpose of carrying 
international traffic.   Rule 4.  In order to establish a private cross-borde r network, capacity must be leased form a 
long-distance service licensee.  Cross-border traffic carried through dedicated infrastructure that 
forms part of a private network shall be originated  and terminated within the same private network. 
  Pursuant to Article 47 of the Law, only intern ational gateway operators  or persons expressly 
authorized by the Commission may instal telecommu nications equipment and means of transmission 
that cross the country's borders. 
 
 International gateway operators  or persons expressly authorized by the Commission to instal 
telecommunications equipment and means of transmi ssion that cross the country's borders shall apply 
for prior authorization from the Commission before making any modifications to the said equipment or means of transmission.  
 Rule 5.   In order to provide international long-di stance services in Me xico, a licence granted 
by the Ministry under the terms of the Law shall be  required.  No foreign operator may make use of 
means of transmission or switching for the direct supply of international long-distance services in 
Mexico without the participation of a duly authorized Mexican licensee. 
 International Gateways 
 
 Rule 6.   Long-distance service licensees may only ca rry international switched circuit traffic 
through international gateways, and solely in  accordance with the provisions of these Rules. 
  Rule 7.   Only long-distance service licensees may apply to the Commission for authorization 
to operate international gateways .  For this purpose, applicants shall submit to the Commission an 
application for each of the switching exchanges they wish to establish as an international gateway and 
shall indicate which other exchanges, either belonging  to the applicant or to other licensees, will be 
interconnected with each of said international gateways.  
 Applicants for international gateway authoriza tion and a record of the exchanges that are to 
be interconnected with each such gateway shall be submitted at least ten calendar days prior to the 
date on which the applicant wishes to begin operations  at the international gateway in question.  The 
Commission shall issue its decision on an application w ithin ten calendar days of the date of receipt of 
the application.  
 The Commission shall authorize the installati on and operation of intern ational gateways to 
those long-distance service licensees that have co mplied with the obligations stipulated in their 
respective licences;  that show that they have inte rconnected, via their own infrastructure, cities in at 
least three States of Mexico;  and that have at  least one interconnection agreement, previously 
approved by the Commission, with a foreign operator. 
 
 Where the Commission decides to grant an inte rnational gateway app lication submitted by a 
long-distance service licensee, the licensee shall regist er the international gateway in question with 
the Public Telecommunications Register.  WT/DS204/R 
Page 242  
 
  Rule 8.   The Commission shall authorize exclusively the installation of international 
gateways having the capacity to identify the techni cal and commercial parameters necessary to effect 
the required invoicing and to excha nge accounts with their correspondents. 
  For this purpose, international gateways shall be equipped with the systems necessary to keep 
daily accounts comprising at least the following information: 
  I. Incoming and outgoing traffic volume in minutes for each type of call;   II. Total revenue from incoming and outgoing calls; 
 
 III. Duration of each call;   IV. Type of traffic, broken down into the following categories:  
(i) Telephone-to-telephone; 
(j) person-to-person; 
(k) country-direct; 
(l) collect-call traffic; 
(m) calls to 800 numbers; 
(n) transit traffic;  and 
(o) other categories to be established by the Commission. 
 V. Time at which call was carried; 
  VI. Operators involved in traffic interexchange;  
 VII. Countries of call origination and termination; 
  VIII.  Geographical area of destination with in Mexican territory, where applicable, when 
traffic from a given country is subject to separate settlement rates;  and   IX.  Geographical area in the destination c ountry, where applicable, when outgoing traffic 
from Mexican territory is subject to separate se ttlement rates for different geographical areas. 
  After consulting with the Committee, the Commission may at any time eliminate the requirement stated under this Rule that one or mo re systems for the identification of technical and 
commercial parameters be available at international gateways. 
 
 Rule 9.   Once an international gateway is author ized, its operator shall apply for prior 
authorization from the Commission before making any modification in the assignment of exchanges interconnected with that international gateway.  The Commission shall issue its decision on an 
application within ten calendar days of th e date of receipt of the application. 
 
 Rule 10.   International gateway operators shall carry international incoming and outgoing 
traffic, using the uniform settlement rate system and the proportionate return system. 
  WT/DS204/R 
 Page 243 
 
 
  Rule 11.   The Commission may at any time require international gateway operators to show 
that the international gateways they own are e quipped with each and every technical facility and 
capability needed to distribute traffic in accordance  with the proportionate return system, without 
prejudice to the terms of Rule 17.  
 Rule 12.   International gateway operators may suppl y, on a non-discriminatory basis, traffic 
switching, routing, and accounting services to any lo ng-distance service licensees that request them. 
 
Settlement Rate 
  Rule 13.   The long-distance service licensee having the highest percentage of the outgoing 
long-distance market for the six months prior to negotiations with a given country shall be the licensee that is authorized to negotiate settlement rates with the operators of the said country.  These 
rates shall be submitted to the Commission for approval.  
 Rule 14.   Long-distance service licensees may register  any rates or services, supplementary to 
those already filed, that they wish to offer within  Mexican territory in coordination with one or more 
foreign operators.  Their proposals shall be recorded  in the Telecommunications Register to allow the 
Commission and the Committee to make comments.  The Commission shall approve the proposal or 
request further information within 30 calendar days  of the date of its receipt.  Where the Commission 
requests further information from the long-distance service licensee, the Commission shall issue its 
decision within 15 calendar days of the date of receipt of the additional information. 
  Rule 15.   The weighted average rates long-distance service licensees charge the public for the 
supply of international long-distance services may not  be lower than the wei ghted average settlement 
rate for the specific service provided. 
 
 Notwithstanding the foregoing, the Commission reserves the right to issue any administrative 
provisions it deems appropriate in the event that rates established in accordance with this Rule are 
inconsistent with the objectives and conditions est ablished by the Law for the supply of services. 
  Rule 16.   International gateway operators that r eceive international incoming traffic shall 
charge their foreign correspondence the applicable set tlement rate and shall pay the local operator that 
terminates the call the app licable interconnection rate. 
  Where an international gateway operator receives a greater share of incoming traffic than that 
to which it is entitled under the terms of subparagraph XIII of Rule 2, the said operator shall distribute 
the surplus to another international gateway operato r so as to remain within the limits of its own 
percentage.  In such cases, the operator concerned shall deduct any offsetting adjustments due to it for 
the supply of switching, routing, and accounting ser vices at the international gateway and shall pay 
the remaining balance of the settlement rate to the international gateway operators to which it 
transfers the traffic in question.  The latter operators  shall, in turn, pay the applicable interconnection 
rate to the local operator that terminates the call. 
 
 Rule 17.   International gateway operators may ne gotiate financial compensation agreements 
among themselves, according to the rights applicab le to each of them, under the terms of the 
proportionate return system established in these Rules.   Such agreements shall be duly notified to the 
Commission and shall meet the requirements of  fair competition and non-discrimination. 
 
 Rule 18.   International gateway operators shall pa y the local operator having registered the 
destination number a percentage of the settlement rate in effect for incoming traffic, as determined in 
accordance with the applicable provisions.  WT/DS204/R 
Page 244  
 
  Rule 19.   After consulting with the parties and taking into consideration the average long-
term incremental costs, as well as the trends in international references for interconnection rates and 
settlement rates for Mexico's traffic with its principal trading partners and the growth and 
development of the telecommunications market in Mexico, inter alia , the Commission may establish 
the offsetting adjustments to which internationa l gateway operators are entitled for the supply of 
switching, routing, and accounting services for any excess international traffic they distribute pursuant 
to Rule 16.  International gateway operators sha ll require payment of the above-mentioned offsetting 
adjustments, on a uniform and non-discriminatory basis, from all long-distance service licensees that 
request the said operators to supply the above-mentioned services.  
 Rule 20.   International gateway operators that r eceive international incoming traffic or send 
outgoing collect-call traffic and that receive the corresponding settlement rate from their foreign 
correspondents shall have a period not exceeding ten work ing days as of the date of receipt of the said 
rate in which to make payment to the local operator pursuant to Rule 16.  Such payment shall be made 
at the exchange rate in effect on the day the lo cal operator is paid, in the currency in which the 
settlement rate is to be paid pursuant to the in terconnection agreement c oncluded with the foreign 
correspondent and in accordance with applicable provisions.  The local access rate shall be paid 
within the time-period agreed in the relevant contract.   If after 180 calendar days the international ga teway operator has not received payment of the 
settlement rate from his foreign correspondent, the sai d international gateway operator shall be liable 
for immediate payment of the rate to the local operator in question. 
  Rule 21.   Under the terms of Article 71 of the Law, the Ministry may penalize long-distance 
service licensees that commit acts intended to avoi d paying the local operator for international 
interconnections, without prejudice to any civil and criminal liability incurred. 
 
 Interconnection Agreements. 
 
 Rule 22.   Pursuant to Article 47 of the Law, th e interconnection of public telecommunications 
networks with foreign networks shall be carried out by means of an agreement to be concluded by the 
parties concerned. 
 
 Rule 23.   Long-distance service licensees wishing to establish interconnection agreements 
with foreign operators must submit the said agreem ents to the Commission for approval before they 
are formally concluded.  
 Such agreements shall comply with the following requirements.  They shall: 
  I. Expressly knowledge the authority of the  Commission to approve all the terms of the 
said agreements; 
  II. Recognize the principles of the unifor m settlement rate and proportionate return 
systems established in these Rules; 
  III. Stipulate that incoming and outgoing traffic may be carried only through international 
gateways previously authorized by the Commission; 
 
 IV. Establish the last day of the calendar y ear as the date of expiry of the agreement; 
  V. Establish the first five working days of each month as the period for making 
settlement payments; 
  WT/DS204/R 
 Page 245 
 
 
  VI. Set the first day of each calendar month as the deadline for making adjustments in the 
percentages determined under the proportionate return system; 
  VII. Provide mechanisms for automatic re newal and for the compulsory settlement of 
disputes that, in the Commission's view, avoid the potential interruption of traffic 
among interconnected operators; 
  VIII. Incorporate the settlement rates approved by the Commission; and   IX. Stipulate, where applicable, the geographical areas previously approved by the 
Commission in which the same settlement rate shall be applied. 
  Where a long-distance service licensee submits  an interconnection agreement to the 
Commission, the latter shall have 15 calendar days from the receipt of the respective agreement to 
issue its decision, it is being understood that th e international gateway ope rator that submits the 
interconnection agreement for the Commission's approva l shall first sign a contract with the Auditor 
for the supply of professional services.   Rule 24.   Any international interconnection ag reement between a long-distance service 
licensee and a foreign operator shall be recorded in  the Public Telecommunications Register.  Long-
distance service licensees that conclude interna tional interconnection agreements with foreign 
operators shall have 15 calendar days from the date the agreement in question is concluded to submit 
it to the Commission, which shall record it in the Public Telecommunications Register. 
 
 Contracts for the Supply of International Gateway Services 
 
 Rule 25.  In order to carry international switche d-circuit traffic, long-distance service 
licensees shall either have an inte rnational gateway or shall enter in to a contract with international 
gateway operators so that the latter may provide th e long-distance licensees with international traffic 
switching, routing, and accounting services. 
  Rule 26.  Long-distance service licensees that do not ha ve an international gateway shall be 
responsible for interconnecting with one or more international gateway operators to handle their 
traffic, and for having owned or leased capacity in or der to terminate the call at its final destination. 
  Rule 27.  Long-distance service licensees that do not have an international gateway may 
negotiate financial compensation agreements with  international gateway operators to carry the 
international traffic such licensees originate. 
  Rule 28.   The contracts to which Rule 25 refers  shall be approved in advance by the 
Commission.   If, at the conclusion of 30 calendar days fro m the submission of the request for approval of 
the contract, the Commission has not issued its decisi on, the contract shall be deemed to be approved. 
  Where the Commission determines that th e terms established in the above-mentioned 
contracts do not comply with the principles establis hed in the Law and in these Rules, it may request 
that the contracts be modified in any way it deems necessary. 
 
 Rule 29.  Any contract for the supply of international traffic switching, routing, and 
accounting services between a long-distance service licensee and an interna tional gateway operator 
shall be recorded in the Public Telecommunications  Register.  International gateway operators that 
enter into contracts with long-distance service license es shall have a period of five working days from WT/DS204/R 
Page 246  
 
 the date the contract is concluded to file it with  the Commission, which shall record it in the Public 
Telecommunications Register.   Rule 30.  Any international gateway operator invo lved in a long-distance call shall be 
responsible for the quality of the service on its  own network until the call reaches the network 
terminal connection point at which interconnection w ith the next licensee participating in the call is 
made.  For this purpose, the international gatewa y operators and licensees participating in the call 
shall establish the necessary mechanisms and procedures to maintain the levels of quality agreed upon 
by the parties and provided for in their licences or permits.    International Long-Distance Responsib ilities of the Long-Distance Operators 
Committee  
 Rule 31.  The Committee shall have the following responsibilities, inter alia :  
 
 I. To coordinate and oversee the implem entation and operation of the uniform rate 
settlement and proportionate return systems;   II. To inform the Commission of any irregu larities detected in the implementation of the 
said systems that may affect the supply of international long-distance services; 
 
 III. To hire the Auditor, subject to prior authorization by the Commission; 
  IV. To propose to the Commission the adopti on of measures for the efficient operation of 
international long-distance services and of the uniform settlement rate and 
proportionate return systems; 
 
 V. To assist the satisfactory supply of international long-distance services;  and   VI. To propose to the Commission a structure and format to be followed for the monthly 
report that international gateway operators are required to submit to the Auditor for 
the purpose of complying with the procedure for implementation of the proportionate 
return system. 
  Rule 32.  The Committee shall adopt by consensus the percentages for call attempts to which 
each international gateway operato r is entitled under the procedure established in subparagraph XIII 
of Rule 2; if no consensus is reached, the Commissi on shall have the authority to request that the 
Auditor make a recommendation concerning the establishment of such percentages. 
  Rule 33.  In the Committee, each long-distance service licensee shall have the right to express 
its opinion and may propose measures related to  international long-distance services and to the 
uniform settlement rate and proportionate return systems.  
 Proposals meeting with the consensus of  the long-distance service licensees shall be 
submitted to the Commission for its consideration.  Where any proposal formulated fails to obtain the 
consensus of all long-distance service licensees, th e procedure described in the Long-Distance Rules 
published in the Diario Oficial de la Federación  of 21 June 1996 shall be followed. 
 
 Where, in the opinion of the Commission, a di spute needs to be settled within a time-period 
shorter than that provided for under the procedur e described above, the Commission itself may settle 
the said dispute.   WT/DS204/R 
 Page 247 
 
 
  Auditor 
 
 Rule 34.  Subject to a favorable opinion by the Commission, the Committee shall hire an 
Auditor.  The Auditor shall have a recognized reput ation in the area of accounting and auditing in the 
telecommunications field. 
 
 The Auditor may not be a firm that is fina ncially controlled by the long-distance service 
licensees represented on the Committee or by the partners or shareholders of the said licensees.   Rule 35.  The Auditor shall have the following responsibilities, inter alia : 
 
 I. To recommend on a monthly basis, subject  to consultation with the Committee and to 
the approval of the Commission, for each registered  international gateway, and in accordance with 
available date on traffic, the percentages for the di stribution of international incoming traffic to the 
various long-distance service licensees and of outgoi ng traffic to the various foreign operators.  The 
percentage recommendations shall take into account ca ll duration, time of day, type, and destination, 
as well as optimal routing of traffic;   II. To ensure that each international gate way operator applies its  approved percentage; 
  III. To recommend, subject to consultation w ith the Committee and to the approval of the 
Commission, the accounting methodology to be  applied to settlements with foreign 
operators, and to ensure that each interna tional gateway operator applies the approved 
methodology; 
  IV. To define, subject to consultation with the Committee and the approval of the 
Commission, the information systems and formats to be used to transmit the 
information needed to implement and opera te the proportionate return and uniform 
settlement rate systems; 
  V. To ensure that revenue from interna tional traffic is distributed among long-distance 
service licensees and foreign operators in acco rdance with the uniform settlement rate 
and proportionate return systems; 
  VI. To inform the Committee and the Commiss ion of any irregularities detected in the 
implementation of the said systems that affect the supply of international long-
distance services; 
 
 VII. To reconcile the monthly information furnished to the Commission for that purpose 
by the international gateway operators with  respect to the rights and duties arising 
from the calculation of proportionate return s, based on the methodology established 
in these Rules.  This information shall be duly reported and confir med by the external 
auditor of each international gateway operator;  and 
 
 VIII. To fulfil other responsibilities that the Commission deems necessary for the full 
observance of these Rules. 
  Rule 36.  The cost of hiring the Auditor shall be sh ared by all long-distance service licensees 
participating in the Committee, starting on the date  each joins the Committee.  The costs shall be 
shared in accordance with a formula specified by the Committee and approved by the Commission 
that assigns a portion of the total cost of operati ng the system to each licensee on the basis of the 
activities that generate the said costs.  For this purpose, each licensee's share of the total amount of WT/DS204/R 
Page 248  
 
 international traffic and the numbe r of international gateways operated by each licensee shall be taken 
into account, inter alia . 
  In the case of special audits of internationa l gateway operators conducted on instructions from 
the Commission and arising from a dispute between  international gateway operators or as the 
consequence of an irregularity detected by the Audi tor, the costs shall be paid by the international 
gateway operator found liable for the irregularity or else by the operator(s) that requested the action 
that gave rise to the special audit if the claim of irregularity is found to be without merit. 
 
 Percentages 
  Rule 37. The Committee shall determine the percen tages for each international gateway 
operator applicable to the month following the m onth during which the traffic was originated and 
shall make such determination within the first 15 calendar days of the month following the month 
during which the traffic was originated, on the basis of the information furnished by the international 
gateway operators in accordance with Rule 42 of these Rules.  Where the Committee fails to arrive at 
a recommendation by consensus within the afor ementioned period, the Auditor shall have an 
additional several calendar days in which to recommend the percentages to be applied. 
  As of the first calendar day of the calendar month following the recommendation of the Committee or Auditor, as applicable, international ga teway operators shall adjust the percentages by 
which international incoming and outgoi ng traffic is to be distributed. 
  Rule 38.  In calculating the percentages to which th e above Rule refers, all settlements for the 
types of traffic indicated in Rule 8(IV), except for country-direct services and services provided via 
international non-geographical reversed-charge (800) numbers, shall be taken into account. 
 
 In the case of collect-call traffic, for the calculation of the percentages applicable to 
international outgoing traffic, settlements for collect -call traffic originated abroad and terminated 
within Mexican territory shall be excluded.  In cal culating the percentages for international incoming 
traffic, settlements for collect-call traffic originat ed within Mexican territory and terminated abroad 
shall be excluded. 
 
 Rule 39.   Traffic sent to a country with which Mexico does not share a border may be routed 
either directly or through an intermediate count ry.  For the purposes of calculating the percentage 
arrangement in the latter case, the traffic in question shall be counted as if it were traffic destined for 
the intermediate country. 
 
 Rule 40.  The proportionate return system established in these Rules may not be modified 
prior to the third anniversary of its entry into effect.   Notwithstanding the foregoing, after reviewing the competition and reciprocity conditions in 
effect for the operation of Mexico's telecommunications services with other countries, as well as the 
trends in international references for interconnecti on rates and settlement rates for Mexico's traffic 
with its principal trading partners and the growth  and development of telecommunications markets in 
Mexico, the Commission may decide to modify the proportionate return system established in these 
Rules prior to the above-mentioned third anniversary.   Information 
 
 Rule 41.  Within the 15 calendar days following the end of each calendar month, and for each 
of the international gateways, the internationa l gateway operators shall make the following 
information, inter alia , available to the Committee and the Commission:  WT/DS204/R 
 Page 249 
 
 
  
 I. Incoming and outgoing traffic volume in minutes;   II. Total revenue from incoming and outgoing calls; and  
 III. Any other information that the Commi ssion considers necessary and that Rule 8 
indicates must be made available. 
  Rule 42.  Within ten calendar days following the end of each calendar month, and for each of 
the international gateways, the international gatewa y operators shall make available to the Committee 
information on the settlement income and settlement payments for the calendar month in question that 
have been received from or made  to their foreign correspondents. 
  Rule 43.  International gateway operators shall estab lish the control mechanisms necessary to 
demonstrate the authenticity of the informati on they make available to the Committee and 
Commission, in accordance with criteri a to be established by the Auditor. 
  Rule 44.   Under the terms of Article 71 of the La w, the Ministry may penalize international 
gateway operators that commit any irregularity re lating to the implementation or operation of the 
uniform settlement rate or proportionate return syst ems or that furnish false information concerning 
the operation of international gateways. 
 
 Transitional Provisions 
 
 First.  These Rules shall enter into effect on th e day following their publication in the Diario 
Oficial de la Federación.  
 
 Second.   As of 1 January 1997, long-distan ce service licensees may carry international 
switched circuit traffic in accordance wi th the provisions of these Rules. 
  Third.  International gateway operators that have not carried international traffic prior to the 
date of the entry into effect of these Rules may begin sharing in the distribution of international 
incoming traffic as of 1 January 1997. 
  Fourth.  Within 15 days of the enactment of these Rules, the Commission shall make 
available to long-distance service licensees the settleme nt rates applicable to international traffic 
going out to or coming in from the various countries with which any long-distance service licensee 
has international inte rconnection agreements. 
  Fifth.  Long-distance service licensees that have, pr ior to the date of enactment of these 
Rules, concluded interconnection agreements with foreign operators or entities of an international 
nature that carry traffic between Mexican territory and foreign countries, must file those agreements, 
as well as the settlement rates in effect, with the Commission so that they may be recorded in the 
Public Telecommunications Register.  The licensee to which this provision refers shall have 15 
calendar days from the entry into effect of these Rul es to file these agreements and rates.  The terms 
of the said agreements shall not contravene the provisions of these Rules.   Sixth.  The Committee shall hire the Auditor respon sible for auditing the uniform settlement 
rate and proportionate return systems within 15 calenda r days of the entry into effect of these Rules.  
Where the Committee fails to hire the Auditor wi thin that period of time, the Commission shall 
appoint an Auditor and shall determine the terms under which it shall be hired by the Committee. 
 WT/DS204/R 
Page 250  
 
  Seventh.  International gateway operators providi ng services during the month of January 
1997, shall, for the first time, make available to the Committee and Commi ssion the information to 
which Rules 41 and 42 refer, within the first 15 work ing days of February 1997.  For international 
gateways that are not in operation during the m onth of January 1997, the said 15-day period shall 
begin on the first day of the calendar month immediately following the date on which the said 
international gateway commences operations. 
  Eighth.   Prior to 14 February 1997, and on the basis of the information which the 
international gateway operators make available to the Committee under Transitional Provision Seven 
above, the Auditor shall establish the percentages a pplicable to the distribution of international 
incoming and outgoing traffic for the month of Marc h 1997.  These percentages shall be determined 
by the Auditor on the basis of information concer ning international outgoing traffic generated during 
the month of January.  For international gateways  that are not in operation during the month of 
January 1997, the percentages shall be determin ed based on information concerning the calendar 
month following the commencement of operati ons of the said international gateway. 
 
 Mexico, D.F., 4 December 1996.  Carlos Casa sús López Hermosa, Chairman of the Federal 
Telecommunications Commission.  Initialled.   Wednesday, 11 December 1996.  
 Diario Oficial 37 44 
  Diario Oficial  Wednesday, 11 December 1996. 
 
__________