European Union WT/TPR/S/102
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IV. DEVELOPMENTS IN SELECTED SECTORS
(1) AGRICULTURE1
(i) Main characteristics2
1. The cultivated surface area of the Community covered some 130 million hectares in 2000
(Table IV.1).  Agriculture (and hunting, forestry and fishery activity) accounted for 4.3% of the
employed civilian population of the 15 Member States  in 2000, down from 4.7% at the time of the last
Review.  In relation to 30 years ago, Eurostat notes that the sector has lost 49% of its work force in
the nine Member States whose membership in the EU spans that time period, due to "the reduction in
the number of holdings, to the increased size of holdings, to the concentration of labour in bigger
holdings, and to gains in productivity".3
Table IV.1
Selected agricultural statistics for Member States, 2000 and 2001
Utilized area Final agricultural
productionShare of
household
expenditure on
food, beverages
and tobaccoaShare of
employment
in civilian
working
populationbReal income
(1995=100)
('000 hectares) (€ million) (%) (%) 2001 % change
from 2000
Austria 3,399 4,964 15.2 6.1 97.1 10.9
Belgium 1,396 6,928 16.9 1.9 101.4 5.3
Denmark 2,666 8,324 17.7 3.7 107.1 12.3
Finland 2,211 3,640 18.7 6.2 120.7 4.7
France 29,865 62,281 .. 4.2 108.6 0.7
Germany 17,067 43,823 15.7 2.6 123.9 9.9
Greece 3,901 10,662 21.3 17 99.4 1.5
Ireland 4,418a5,811 18.2 7.9 101.8 7.8
Italy 15,401a41,065 17.5 5.2 115.0 0.2
Luxembourg 135 252 .. 2.4 98.6 -0.6
Netherlands 1,976 19,202 14.8 3.3 83.8 2.4
Portugal 3,881 5,558 22.7 12.5 119.1 11.8
Spain 25,425 33,265 18.7 6.9 118.2 2.6
Sweden 2,980 4,964 16.8 2.9 122.5 5.0
United
Kingdom15,722 24,028 17.8 1.5 60.5 3.5
Total 130,443 274,768 17.0 4.3 107.6 3.3
a 1999.
b Agriculture, hunting, fishing and forestry.
.. Not available.
Source: DG Agriculture (2002), Table 2.0.1.2;  and information provided by Commission officials.
2. Agricultural income rose by 3.3% in 2001, mainly due to the continuing reduction in the
volume of agricultural labour input (down 2%), although Member States’ individual experiences were
                                                     
1 Annex 1 of the WTO Agreement on Agriculture defines the scope of agriculture as HS Chapters 01 to
24 less fish and fish products (Chapter 3), plus selected items from Chapters 29, 33, 35 38, 41, 43, 50, 51, 52
and 53.
2 DG Agriculture (2002).
3 Eurostat, "Thirty years of agriculture in Europe:  Changes in agricultural employment", Theme 5 –
14/2001.WT/TPR/S/102 Trade Policy Review
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highly divergent, and higher real agricultural income (up 1.2%).4  The strongest growth rates were
observed in Denmark, Portugal, Austria, Germany,  Ireland, and Belgium.  In 2001, real incomes were
above their 1995 levels in 10 of the 15 Member States, with the sharpest decline (-39.5%) in the
United Kingdom.  However, farmers often complement  their agricultural income by non-farm sources
of income.
3. In terms of value, milk continues to be the single most important agricultural product
category, accounting for 13.8% of EU agricultural production.5  Milk is also important in the
agricultural production of most Me mber States, which may explain the political sensitivity of reform
in the sector (see below).  Cattle is another leading agricultural product, contributing at least 5% of
agricultural production in all Member States except Greece.  This explains the magnitude of the ripple
effects from the crisis of confidence of consumers in eating meat as a result of cases of Bovinespongiform encephalopathy (BSE) and foot-and-mout h disease (FMD) in 2000 and 2001 (see below).
4. The EU is self-sufficient in most agricultural products subject to the Common Agricultural
Policy (CAP).  The highest level of self-sufficiency (domestic production divided by consumption) is
attained in whole-milk powder (370%), followe d by skimmed milk powder (247%), sugar (128%),
wheat (120%), and butter (116%); exports are ther efore an important outlet for domestic production.
In 1999, EU exports of individual commodities accounted for a substantial portion of world trade:
wine (41.5%), milk powder (32%), cheese (31.9%), butter (20.5%), wheat (15.1%), and sugar
(13.5%).  The EU was the world's leading importer of agricultural products in 2000, with imports of
US$63 billion (20.6% of total world trade), and the leading exporter, with exports of US$60.2 billion;
agricultural products accounted for 6.2% of the EU's exports and 5.7% of its imports.
(ii) Common Agricultural Policy (CAP)
(a) Overview
5. The main mechanisms of the CAP are guaranteed common prices and Common Market
Organisations (CMOs) for 18 product categories.  According to the Commission, one type of CMO –
which includes arable crops (cereals, oilseeds, protein crops), beef and sheepmeat – provides direct
aid to producers linked to factors of production such as land or livestock, subject to reference periods
and production-limiting programmes;  a second type of CMO – covering olive oil, tobacco, cotton,certain processed fruit and vegetables such as citrus fruit, tomatoes, prunes, and table wine – provides
direct aid that is proportional to production levels, but is also subject to ceilings based on historical
levels of production;  a third type of CMO – dairy products and sugar – provides support within
production quotas, whose cost is mainly borne by the consumer;  and a fourth type allows the market
to fluctuate with a minimum of intervention, and applies to fruit and vegetables, quality wines,pigmeat, poultry meat, eggs, and honey.
6. A significant development during the period since the last Review of the EU is the reform of
the banana regime to settle the longstanding WTO dispute settlement proceeding on the matter
(Chapter II(4)), which entered into effect on 1 July 2001.
6  The settlement provides for the
introduction of a tariff-only regime as from 1 January 2006 at the latest, with WTO waivers coveringthe transitional period.  Other policy developments during the period under review concerned:  price
decreases for cereals and bovine meat, as agreed at the Berlin European Council in 1999 (see below);
the integration of flax and hemp into the arable crop system
7;  the simplification of arrangements for
                                                     
4 Eurostat News Release 49/2002.
5 DG Agriculture (2002), Table 3.1.1.
6 Council regulation 216/01.  See European Commission Press Release IP/01/628.
7 European Commission Press Release PRES/00/264.European Union WT/TPR/S/102
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payments for the processing of certain fruit and vegetables (tomatoes, peaches and pears, citrus fruit)8;
the extension of the sugar regime until 2006 (see below); and the extension of the milk-quota regime
until 2008 (see below).  Proposals made by the Comm ission during the period under review address:
the reform of the rice regime to integrate the crop into the arable crop system to ensure full
substitutability across all covered crops9;  and the reform of the sheepmeat regime.10  A  m i d - t e r m
review is under way in the course of 2002, focussing notably on the cereals, beef, and milk subsectors,with potential for adjustment of objectives and/or funding. It should also be noted that agricultural
product markets are affected by standards of animal health and food safety (Chapter III(1)(viii)).
7. The amount spent on the CAP was € 40.4 billion in 2000, accounting for around 43.9% of
Community expenditure (Chapter III(3)(iii)).  Expenditure is channelled mainly through the European
Agricultural Guarantee and Guidance Fund (EAGGF)
11, managed by Member States and monitored
by the Court of Auditors.12  The objectives and funding for the CAP for the period 2000-06 were set
in the context of the political agreement on Agenda 2000 reached at the Berlin European Council of
March 1999.13  Appropriations for the guarantee secti on of the EAGGF for 2001 were € 44 billion, up
9% from € 40.5 billion in 2000.14  France received the largest share of EAGGF assistance in 2000, in
line with its 22.7% share in overall EU agricult ural production, followed by Germany, Spain, and
Italy (Table IV.2).
Table IV.2
EAGF Guarantee and Guidance expenditure by Member State, and national expenditure on agriculture, 2000
Share in EU
productionEAGF
GuaranteeEAGF
GuidanceTotalShare in
totalNational expenditure on
agriculturea
(%) (€ million) (€ million) (€ million) (%) (€ million)
Austria 1.8 1,019 7 1,026 2.5 884
Belgium 2.5 955 5 960 2.3 395
Denmark 3.0 1,305 0 1,305 3.1 286
Finland 1.3 728 16 744 1.8 1,385
France 22.7 8,982 94 9,076 21.7 3,243
Germany 15.9 5,642 310 5,952 14.2 1,600
Greece 3.9 2,597 43 2,640 6.3 135
Ireland 2.1 1,678 36 1,714 4.1 397
Italy 14.9 5,031 384 5,415 12.9 1,655 a
Luxembourg 0.1 21 0 21 0.1 34 c
Netherlands 7.0 1,397 2 1,399 3.3 1,090
Portugal 2.0 652 405 1,057 2.5 295
Spain 12.1 5,469 13 5,482 13.1 1,372a
Sweden 1.8 798 16 814 1.9 420
UnitedKingdom8.7 4,059 57 4,116 9.8 1,111
Total 100.0 40,467 1,387 41,854 100.0 14,302
a Provisional data.
b Data do not include regional expenditures.
c 1999.
Source: DG Agriculture (2002), Tables 2.0.1.2 and 3.4.10.
                                                     
8 European Commission Press Release IP/00/772.
9 European Commission Press Release IP/00/584.
10 European Commission Press Release IP/01/708.
11 Council Regulations 1260/99 and 1257/99.
12 Court of Auditors (2001).
13 Berlin European Council, 24 and 25 March 1999, Presidency Conclusions [Online].  Available at:
http://ue.eu.int/en/Info/eurocouncil/index.htm [15 March 2000].
14 DG Agriculture (2002) ,Table 3.4.4.WT/TPR/S/102 Trade Policy Review
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8. In terms of products, the largest share of EAGGF expenditure was devoted in 2000 to arable
crops (41.2%), followed by beef and veal (11.2%);  emergency measures were taken in 2001 for beef
and veal in the light of the renewed crisis in confidence (see below).  Member States also make
expenditures on agriculture, estimated at € 14.5 billion in 2000.  Although national expenditures have
remained at about the same level since 1995, this is mainly the result of a steep decline in national
expenditure on agriculture by Germany since then (down 40%), as national expenditures rose rapidlyin Ireland (up 322%), Portugal (122%), the Netherlands (74%), Sweden (67%), Belgium (64%), and
the United Kingdom (60%).  The trend to increasing national expenditure is likely to have continued
in 2001 as a result of emergency funds granted to agricultural producers affected by FMD, BSE, and
the crisis in confidence in meat.
9. When internal prices exceed world market levels, tariffs are the basic mechanism at the
border, with imports mainly taking place within tariff quotas.  The simple average tariff on
agricultural products was estimated at 16.1% in 2002 (Chapter III(1)(iv)).  However, this estimate
does not factor-in the tariff treatment of imports under tariff quotas, which provide for reduced or
duty-free treatment up to a ceiling quota level;  estimates refer to out-of-quota imports only.  The
estimate also does not include the "snapback" tariffs imposed by the EU when using the specialsafeguard (SSG) regime of the WTO Agreement on Agriculture, which continued to be used during
the period under review (Chapter III(1)(vii)).  In general, tariffs are low on agricultural products not
produced in the EU (e.g., coffee, tea, spices), but are considerably higher on primary CAP products
and products processed therefrom (Table AIII.1).
10. Another policy instrument at the border is the refunds needed for the purpose of exporting
surplus Community production, subject to limits on the value and volume of subsidized exports under
the WTO Agreement on Agriculture.  The Commission notified an allocation of  € 5.6 billion toexport subsidies in the marketing year 1999-2000
15, principally to milk and milk products (30%),
sugar (25%), arable crops (15%), and beef meat  (12%).  The amounts involved for milk and milk
products represented an increase over the allocation for the previous marketing year of 1998-9916,
within the export subsidy roll-over limits, to permit stocks to be run down (see below).
11. The OECD evaluates the level of assistance granted by its members to their domestic
producers from all interventions in relation to prices of key CAP products on world markets (producer
support estimates or PSE).17  Aggregate EU support to agricultural producers declined in 2000 to
US$90.2 billion, from an estimated US$114.9 billion in 1999, mainly due to world market prices
rising faster than domestic prices, as well as currency movements, rather than changes in policy:  In
absolute terms, the EU provided more suppor t to its producers in 2000 than any other OECD
members, ahead of Japan (US$59.9 billion)  and the United States (US$48.9 billion).
12. In percentage terms, the PSE of the EU dec lined to 38% in 2000 from an estimated 43% in
1999, and remains below the peak level of 44% reached in 1986-88;  in comparison, the OECD
estimated the PSE of Japan at 64% in 2000 and that of the United States at 22%.18  The PSE declined
in all product categories in 2000, with the exception of poultry and oilseeds (Table AIV.1), with thehighest level of support given to the beef and veal sector (a PSE of 75%), followed by poultry (57%),
                                                     
15 WTO document G/AG/N/EEC/32.
16 WTO document G/AG/N/EEC/23.
17 OECD (2001a).
18 The PSE has a broader scope than the Aggregate Measurement of Support (AMS), which is the basis
for commitments under the WTO Agreement on Agriculture.  The AMS exempts certain forms of "blue-box"support (G/AG/N/EEC/17).  The PSE methodology compares domestic product prices with current worldmarket prices, while the AMS compares current administered domestic prices with a fixed external referenceprice calculated for the base period 1986-88 (WTO, 1995, Vol. 1, p. 79).European Union WT/TPR/S/102
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sheepmeat (52%), and sugar (49%).  The OECD ha s also found that CAP reforms have shifted the
composition of support to producers in the EU from market price support (59%) to payments made on
the basis of area planted or herd sizes (25%). In a study of the economic effects of the EU’s policies
released in 2000, the OECD noted that "agriculture has traditionally been the most protected sector in
the Community".19
(b) Future directions for the CAP
13. The prospect of enlargement continues to pose a challenge to financing the CAP.  In
January 2002, the Commission proposed to finance the addition of ten new Members (eight from
Central and Eastern Europe and two from the Mediterranean) as of 2004 within the existing funding
guidelines through a progressive introduction of direct payments:  equivalent to 25% of the present
system in 2004, rising to 30% in 2005, to 35% in 2006 and to 100% in 2013.20  I n  t e r m s  o f
expenditure, the payments would be:  € 2.1 billion in 2004, € 3.6 billion in 2005 and € 3.9 billion in
2006.  The Commission is of the view that this progressivity is needed to preserve incentives to
restructure small and semi-subsistence farms in the acceding countries, but new Members would be
allowed to top-up payments to farmers.
14. The EU has also been an active participant in the negotiations under Article 20 of the WTO
Agreement on Agriculture to continue the reform process in the sector.  These negotiations began in
March 2000 and are now part of the DDA.21
15. Also of significance to the future of the CAP is the decline of public confidence in the
programme, which has been attributed by the Commission to renewed concerns over BSE and the
outbreak of FMD (see below).  Although most respondents to a survey on the issue continued to
endorse the objective of healthy and safe products for agricultural policy, only 37% agreed, in mid
2001, that the EU’s policy was fulfilling its role down from 52% in September 2000.22  This decline
has occurred despite the measures taken to meet food safety concerns (Chapter III(1)(viii)).
(iii) Developments in selected subsectors
Arable crops
16. One quarter of all arable land is devoted to cereals, of which just under half is planted to
wheat.  The area under cereals cultivation was 35.7 million hectares in 1997, about the same as in1987, but land set-aside following the 1992 CAP reform  has reduced surfaces cultivated, mainly for
barley;  5.7 million hectares in marketing year 2000/01 were set aside.  Despite the reduction in
surfaces cultivated, Eurostat notes that "production was hardly checked and yields rose steadily".
23
Cereal production (excluding rice) in EU-15 reached a new record level of 211 million tonnes in2000, due to the combined effects of enlargement in 1995 and increased yields.
17. During the period under review, the Commission implemented the 15% reduction agreed in
May 1999, to the intervention price at which agencies must buy in cereals:  from € 119.19/tonne in
marketing year 1999/00 to € 110.25/tonne in marketing year 2000/01 to € 101.31/tonne for marketing
                                                     
19 OECD (2000).
20 European Commission Press Release IP/02/170 and MEMO/02/13.
21 European Commission MEMO/01/28, SPEECH/00/497 and SPEECH/01/473.  The EU’s proposals
are available at:  http://europa.eu.int/agriculture .
22 European Commission Press Release IP/01/1636.  See Eurobarometer Flash Survey 85 and
Eurobarometer 55.2 [Online]  Available at:  http://europa.eu.int/agriculture  [5 February 2002].
23 Eurostat, "Thirty years of agriculture in Europe:  Cereals still the staple crop", Theme 5 – 15/2000.WT/TPR/S/102 Trade Policy Review
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year 2001/02;  further modifications could be made in the context of the mid-term review of the CAP
under way in 2002.  The impact of reduced intervention prices on farm incomes is being partly
compensated (50%) by an increased area payment:  from € 54.34/tonne in marketing year 1999/00, to
€ 58.67/tonne in marketing year 2000/01, to € 63/tonne for marketing year 2001/02 for an indefinite
period.  The area eligible for payment is subject to  ceilings set in regionalization plans, and to a
minimum 10% set-aside obligation.
18. For oilseeds, the Community intends to align area payments on those for cereals for
marketing years from 2002/03 onwards to ensure horizontal incentives across crops.  The
Commission anticipates an increasing use of oilseeds for animal feed purposes, substituting for
mammalian meat and bone meal (MBM), banned in the wake of the BSE crisis.  The EU is the
leading importer of oilseeds on the world market, accounting for 34% of world imports.
19. For the future, the Commission issued cereal market projections in July 2001 for the period
2001-08, which foresee a balanced cereals market, except for rye where an accumulation of stocks is
foreseen.24  The Commission anticipates that export subsidy commitments would continue to be
respected.  The Commission notes, however, that these projections for cereals depend on a favourable
external and internal economic environment and an exchange rate that continues to ensure exportcompetitiveness for Community cereals production.
Beef
20. During the period under review, the beef subsector was severely affected by a renewed crisis
in public confidence regarding consumption of meat due to cases of BSE in cattle, linked to Variant
Creutzfeld-Jakob Disease (VCJD) in humans.
25  At the time of the last review in mid 2000, the first
beef crisis of 1996 appeared to have been resolved, with consumption back up to the pre-BSE level in
the EU as a whole, and a resumption of exports to traditional markets.  The Community startedimplementing the 20% cut to the support price for beef and veal in three equal steps of  € 214, starting
in the marketing year 2000/01, with the goal of reaching € 2,780/tonne in marketing year 2002/03.
Intervention has been eliminated and replaced with a private storage scheme.  The impact of reduced
intervention prices on farm incomes has been partly compensated by an increased livestock unit
payment, subject to ceilings.
21. Renewed food safety concerns caused a brutal reversal of the situation in Q3 2000, and
bovine meat consumption ended the year down by 5% and exports down by about one third, with
another 6% decline in consumption in 2001.  A key factor was the rising number of Member States
detecting cases of BSE
26, despite the ban as from 1994 on the feeding of mammalian MBM to
ruminants, demonstrating the risk from cross-contamination of feed for ruminants with feed for otherspecies.
27  The crisis accelerated as a result of the outbreak of FMD in the sheep population of the
United Kingdom in February 2001, leading the Commi ssion to require Member States to impose bans
on imports of all live animals and meat products from affected areas within the Community.28  Bans
were also applied by trading partners;  in early 2001, the Commission reported that 94% of third
country markets for EU beef exports were blocked due to temporary FMD and BSE measures by third
                                                     
24 DG Agriculture (2001).
25 European Commission MEMO/00/89.
26 Office International des Epizooties online information.  Available at:  http://www.oie.int
[3 February 2002].
27 European Commission SPEECH/01/116.
28 For a chronology of events, see Europa online information.  Available at:
http://europa.eu.int/comm/food/fs/ah_pcad/ah_pcad_47_en.pdf  [26 March 2002].  For a discussion of the
implications see European Commission MEMO/01/123.European Union WT/TPR/S/102
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countries.29  On 21 January 2002, the OIE declared that the United Kingdom had regained its status of
FMD-free without vaccination, joining other Member States in this respect.
22. As of March 2002, third-country bans related to FMD had been removed for the most part,
while those related to BSE remained in place.  (A ll intra-Community bans related to BSE have been
lifted, with the exception of France, whose ban on imports of beef from the UK has been the subject
of an infringement proceeding.30)  Third countries have generally banned imports from the EU of live
cattle, beef, and several other products of animal origin.
23. Following the onset of the crisis of confidence in late 2000, the Commission decided to
encourage the slaughter of animals (purchase-for-destruction for animals over 30-months old not
tested for BSE31, and special purchase scheme to stock negative-tested meat32) and the reduction of
suckler cows, thus rebalancing supply of cattle to lower meat demand levels.33  The Commission also
intends to encourage organic beef farming and extensive production methods.  Emergency financial
assistance was granted at Member State level to compensate farmers for income losses.34
24. Measures have also continued to be taken during the period under review to restore public
confidence in meat by addressing risk throughout the supply chain from the stable to the consumer.
On 17 July 2000, the EU decided on a system for the identification and registration of cattle and themandatory labelling of beef products sold to consumers as from 1 September 2000 to ensure full
"traceability" from farm to fork;  third countries are also required to observe these labelling
requirements, but for imports of beef products, only the identification of the country of origin is
mandatory.
35    The Commission has also mandated BSE- testing of all animals older than 30 months
as of 1 January 2001, and consolidated all BSE-relevant legislation.36  A ban on mammalian MBM in
all animal feed was put into place as of 1 January 2001, and has been extended without deadline,
pending a new policy on animal by-products.37
25. Other measures taken include the removal of specified high-risk materials (SRM) as of
1 October 2000, applied equally in the EU and to imported products, except from countries classified
in category 1 of "Geographical BSE Risk (GBR)", which is the highest risk category.38 GBR
assessment, category 1 to 5, is conducted by the Scientific Steering Committee of the EU according to
established methods last revised in January 2002.  These methods include an assessment of theexposure of the country to BSE as a result of imports of live animals from the EU and responses by
the country to a questionnaire.  According to th e Commission, the categories of countries and the
measures to be applied are in line with the international standards of the Office International des
Epizooties (OIE).
26. Although not directly related to BSE, the legi slation banning hormones as growth promoters
was revised as of 1 July 2001, on the basis of scientific evidence collected by the Commission.
39  The
                                                     
29 European Commission MEMO/01/107.
30 Court of Justice Press Release 68/2001.
31 European Commission Press Release IP/00/1456.
32 European Commission Press Release IP/01/302.
33 European Commission Press Release IP/01/195.
34 European Commission MEMO/01/55.
35 Regulation 1760/2000.  See European Commission Press Release IP/00/799.  See European
Commission Press Release IP/01/1913 for tighter rules applicable from 1 January 2002.
36 Regulation 999/2001.  See European Commission Press Release IP/01/641.
37 European Commission MEMO/01/236.
38 European Commission Press Release IP/01/490.
39 European Commission Press Release IP/00/519.WT/TPR/S/102 Trade Policy Review
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original legislation was the subject of a WTO dispute settlement proceeding in the context of which
certain, mainly agricultural, EU exports have undergone sanctions in Canada and the United States.
Modifications of the Directive to bring EU legi slation into compliance with the WTO ruling are
currently under discussion in the Council and the European Parliament.40
Dairy
27. The reform of the dairy subsector is politically sensitive due to its importance in most
Member States.  The reform agreed as a result of the Berlin European Council of March 1999 is to
start as of 2005/06, with a cut of 15% in three equal steps for the intervention prices for butter (€
328.20/tonne) and skimmed milk powder (€ 205.52).  The milk-quota regime, according to which
production is capped in each Member State (109 million tonnes for the EU as a whole) and subject to
a "dissuasive" levy in the event of over-runs, has been extended until March 2008.  As compensationfor the 15% price decline, an increase of 2.4% in quota levels is to be implemented as from marketing
year 2002/03.  However, the mid-term review of the CAP in 2002 may lead to changes being made.
28. The Court of Auditors published a special repo rt in 2001 on the milk-quota system in relation
to the objectives of controlling production and achieving market equilibrium.
41  The report notes that
the quota regime, which was introduced in 1984, has successfully managed production with minimalout-of-quota production (less than 1%).  However, with regard to the objective of market equilibrium,
it notes that the level of the quota is too high in relation to demand, leading to structural surplus:  of
the total 120 million tonnes produced, 15 million t onnes are sold on world markets using subsidies,
and 10 million tonnes are sold internally.  The quantity of skimmed milk powder in storage rose by
60% between 1997 and 1999, although stocks were reduced in 2000 by use of export subsidies (see
above).  Other weaknesses identified in the report include the fact that the consumer is "still paying a
considerably higher price for his milk", and that "substantial financial support will still be necessaryfor the disposal of milk surpluses", which would probably be increased upon enlargement.  The report
concludes that the Commission should "make already in 2002 proposals for a fundamental reform of
the dairy sector to achieve equilibrium between overall milk production and unsubsidised internal
consumption plus potential unsubsidised exports and should provide for the ending of the quota
regime while ensuring a fair standard of living for dairy farmers".
29. The Commission, in its responses, notes that the Court’s report implies a 20% cut in quotas to
achieve market equilibrium, but points out that "adapting milk production to the level of internal
consumption was neither a political nor an economic objective" of the Council.  In its view, the quota
regime has been a vital tool in restraining the budgetary cost of the milk CMO, the elimination of
which would have a very substantial budgetary cost.  It rejects the criticism of the cost to consumers,stating that "the Commission does not feel that libe ralisation of the milk market on the same basis as
for cereals, would, generally speaking, mean lower costs to consumers".
30. Although not treated as such by the Court of Auditors or the Commission, the trade
implications of the milk CMO are considerable.  As noted above, the EU has a very high self-
sufficiency ratio in milk powder and other dairy products, which reduces the scope for imports fromthird countries.  Refunds are required to export surplus Community production, crowding out
opportunities for unsubsidized trade.  The EU accounted for a substantial share in world trade of dairy
products in 1999.
                                                     
40 COM(2001)320.
41 Court of Auditors, "Special Report No. 6/2001 on milk quotas, together with the Commission’s
replies" (OJ C 305/1 of 30/10/2001).European Union WT/TPR/S/102
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Sugar
31. On 1 July 2001, the arrangements on intervention prices and production quotas in the sugar
CMO were extended for an additional five-year period to expire in 2006.  While the Commission had
proposed a shorter two-year period to fuller reform of the sugar regime42, the Council decided on a
longer extension.  However, a permanent reducti on of 115,000 tonnes in the beet-sugar production
quota was agreed (0.8% of the 14.2 million tonnes of beet sugar produced under quota), as well as theelimination of compensation for storage costs. No change was made during the period under review to
the "self-financing" aspect of the sugar CMO, according to which production levies partly (53%)
finance the refunds paid to export surplus Community production of refined sugar.
32. A special report on the management of the sugar CMO published by the Court of Auditors in
2000, noted that it has remained untouched by CAP reform proposals in 1992 or under Agenda2000.
43  The report notes that the EU is the second leading producer of sugar on the world market
(behind Brazil), self-sufficiency is high, and pressures for change have arisen from chronic world
over-supply of sugar, leading to depressed prices:  29% of world production is placed for sale on
world markets.  The report notes that EU sugar is not competitive on world markets, with subsidies in
the order of 75% of the intervention price required for sales to take place.  It also notes the constraintsplaced on subsidized exports under the WTO Agreem ent on Agriculture, which imply growing stocks
of sugar under unchanged internal demand conditions. The Court also underlines the high cost of the
regime to consumers, and the limited benefits from the programme, which mainly accrue to a small
number of beet farmers and sugar processors in the EU.  The Court concludes that "despite a situation
of structural overproduction, the Commission has repeatedly limited itself to proposing the
continuation of the sugar regime and maintaining the levels of quotas and prices unchanged".
33. The Commission’s responses emphasize the importance of the trade arrangements for the
ACP countries, which remain very attached to maintaining the Sugar Protocol.  The Commission also
notes that exports of EU sugar take place under unsubsidized conditions as this is the requirement
placed on out-of-quota production of sugar.  Furt hermore, the Commission has stressed the extent to
which excess supply on world markets is linked to increases in production in other countries.  The
Commission also notes that, in purchasing power te rms, the price of sugar in the EU is among the
lowest in the world.  Finally, the Commission notes the substantial budgetary implications of reform
of the sugar regime under the 1992 format, which are incompatible with the funding guidelines
established at the Berlin European Council in 1999.
(2) F
ISHERIES
(i) Main characteristics
34. The EU has a 200-mile fishing zone off the coastal areas of the North Atlantic and the North
Sea, which is fished by Community fishing vessels as well as those from countries that have
concluded bilateral agreements with the EC.  In addition to fishing Community waters, the fishing
vessels of the Member States exploit the territorial waters of other countries in the Mediterranean and
off the coast of Africa under the terms of bilateral agreements, as well as fishing in international
waters, covered by regional fisheries management organizations.
                                                     
42 European Commission Press Release IP/00/1109.
43 Court of Auditors, "Special Report No. 20/2000 concerning the management of the common
organisation of the market for sugar, together with the Commission’s replies" (OJ C 50/1 of 15/2/2001).WT/TPR/S/102 Trade Policy Review
Page 78
35. According to  data for 1999 (the latest availa ble), the Community fishing fleet consisted of
about 99,000 vessels, of a gross tonnage of about 2 million, and of a power of 78 million kilowatts.44
Greece, Italy, and Spain have the highest number of vessels among the 13 Member States with afishing capacity, but Spain has the highest tonnage, reflecting the relatively large size of its fishing
vessels, while Italy has the highest total kilowatts.  Jobs at sea amounted to almost 244,000, and
factoring in about 1.5 jobs in the processing industr y per job at sea, yielding total employment in the
sector of about 600,000 for the EU as a whole in 1999.  Fishing and related activities are, however,
relatively important for certain coastal regions, such as Galicia in Spain, the Hebrides in Scotland,
Brittany in France, and the Aegean in Greece.
45
36. The EU's consumption of fishery products consistently exceeds its production, as a result of
which the EU imports 60% of its needs, with net imports increasing over time.  According to the latestavailable data, the EU imported 4.4 million tonnes of fish in 1999, while exporting 1.6 million tonnes;
in value terms, imports in 1999 were € 10.7 billion and exports € 1.9 billion.  The EU is a net importer
of all major types of fish products consumed domestically, notably fresh or chilled salmon and cod;
frozen yellowfin tuna, cod, and hake, or frozen fillets thereof;  salted cod;  and preserved tuna.
37. According to the assessments made by the Inte rnational Council for the Exploration of the
Seas (ICES), which provides scientific advice to  the Commission, the stocks of many species have
declined significantly in the past quarter century.
(ii) Common Fisheries Policy (CFP)
(a) Objectives and instruments
38. Article 32 of the EC Treaty includes fisheries in agriculture, and the objectives stated for the
Common Agricultural Policy (CAP) under Article 33 cons equently apply to fisheries.  These are: to
increase production, provide a fair income for producers, stabilize markets, assure the availability ofsupplies, ensure they reach consumers at reasonable prices, and ensure the principle of non-
discrimination.  In addition, the objectives of a Co mmon Fisheries Policy (CFP), first articulated on a
separate basis in 1983, "shall be to protect and conserve available and accessible living marine aquatic
resources, and to provide for rational and responsible exploitation on a sustainable basis, in
appropriate economic and social conditions for the sector, taking account of its implication for themarine ecosystem, and in particular taking account of the needs of both producers and consumers".
46
39. To achieve these objectives, the Community intervenes in four areas:  conservation of fish
stocks;  structural adjustment, including fleet ma nagement;  common organization of markets;  and
relations with third countries through bilateral and multilateral fisheries agreements.  By the end of
2002, the EU must undertake a thorough reform of its CFP as a result of the expiry of and need torenew the rules of access to the 6-12 mile limit, to the Shetland Box, and to the North Sea.  The
Commission had not made any specific proposals to the Council as of 15 April 2002.  The
Commission issued a Green Paper in March 2001 on the operation of the CFP in the light of its
objectives.
47  Since the Green Paper was issued, a development of potential significance to the debate
within the Community is the agreement reached at the WTO Fourth Ministerial Conference onmultilateral negotiations on fishery subsidies in the context of the Doha Development Agenda.
                                                     
44 DG Fisheries, Statistical Bulletin , p.4 [Online].  Available at:  http://europa.eu.int/comm/fisheries
[12 October 2001].
45 COM(2001)135, Vol. II.
46 Article 2 of Council Regulation 3760/92.
47 COM(2001)135.European Union WT/TPR/S/102
Page 79
(b) Conservation of fish stocks48
40. The Commission's Green Paper on the future of the CFP after 2002 stated that "from a
biological point of view, the sustainability of a high  number of stocks will be threatened if the current
levels of exploitation are maintained".49  The Commission attributes the cause to "too much fishing by
a fleet that is too large for the amount of fish that should be caught and by conservation measures
which have not been effective or selective enough to protect fish stocks and marine ecosystems".50
These problems are due, according to the Commission, to the conflicting policy objectives in the
sector – supporting fishing activity while attempting to protect increasingly fragile fishery resources
and short-term measures.
41. The main instrument of Community action on the conservation and management of fishery
resources is the setting of total allowable catches (TACs), complemented by fleet management andreduction programmes (see below).  TACs establish upper limits on the amount of fish of various
species that can be caught in a year, allocated through quotas to the Member States and to third
countries under the terms of bilateral agreements.
51  These are complemented by "technical" measures
to limit fishing, including mesh sizes, closed area s, recording of catches and landings in special log
books. The implementation of the CFP by Member States is subject to control and monitoring.52  In
June 2000, the Council adopted a regulation on the collection and management of fisheries data to be
made available to the scientific community to enable  it to provide scientific advice needed for the
implementation of the CFP.53
42. The Commission established a recovery plan for cod and Northern hake in December 2001, as
well as control and monitoring measures to ensure the implementation of the technical rules.
Emergency measures were taken to protect cod in the Irish Sea, North Sea, and in the west of
Scotland54; and to help the recovery of the Northern hake stock from Skagerrak to the Bay of
Biscay.55  The Commission proposed long-term recovery plans, in December 2001, to help rebuild
these stocks56, which are under consideration by the Council, and intends to present a revised package
of technical measures including those to protect immature cod and hake.
43. In December 2001 the European Commission proposed to introduce conservation measures
for deep-water fish stocks.57 Exploitation of these species is relatively recent but has been increasing.
Recent scientific advice indicates that many of the deep-sea fish stocks are too heavily exploited and
are considered to be actually or potentially outside safe biological limits. As a first step, the
Commission proposed to set catch limitations in the form of TACs for a number of deep-water fish
stocks, which is under consideration by the Council.
                                                     
48 Council Regulation 3760/92.
49 COM(2001)135, p. 6.
50 DG Fisheries Press Release 18/01.
51 Council Regulation 2848/2000 sets the TACs and quotas for 2001.  See European Commission Press
Releases IP/01/1733 and IP/01/1854 for TACs and quotas agreed for 2002.
52 Council Regulation 2847/93, as amended.  The Commission last reported to the Fisheries Council in
November 2001 for the period 1996-99, at which time it also reported serious infringements of the CFP in 2000(European Commission MEMO/01/390).  The Commission noted improvements made by Member States, butalso remaining serious weaknesses.
53 Council Regulation 1543/2000.
54 Commission Regulations 304/2000, 259/2001, and 456/2001.
55 Commission Regulation 1162/2001.
56 COM(2001)724.  See European Commission Press Release IP/01/1790.
57 COM(2001)764.   See European Commission Press Release IP/01/1779.WT/TPR/S/102 Trade Policy Review
Page 80
44. In December 2001, the Council adopted a revised set of TACs for 2002.  The Commission
had proposed substantial reductions in TACs, on the basis of scientific advice.58  These reductions
were deemed necessary in the light of the parlous state of stocks, and in keeping with its multi-annual
strategy for fisheries conservation (e.g., cod, hake).  The Council, however, did not fully endorse the
Commission’s proposals for TAC reductions, but agreed to make revisions to ensure no further
deterioration of certain stocks (e.g., cod in the Kattegat and the Northern hake stock).59
(c) Structural adjustment
45. The Financial Instrument for Fisheries Guidance (FIFG) is the leading form of financial
assistance to the subsector, and has a dual purpose:  to assist the reduction of fishing efforts under a
Multi-annual Guidance Programme (MAGP), decided by the Council, which sets out for each
Member State the objectives for fleet restructuring and the means to achieve them;  and to provide forinvestment, including for fleet renewal and modernization of fishing vessels.
60  In its notification to
the WTO, the Community indicates that  € 3.7 billion have been budgeted to the FIFG for 2000-06, up
from € 2.7 billion during 1994-99.  It also states the trade effects of the aid as follows:  "The
Community has a shortfall in fishery and aquaculture products and is a major importer of these
products from non-Community countries.  The structural aid has only a very small influence on thissituation."
61
46. Regarding Member State assistance, the rules on structural assistance require entries and exits
from the subsector to be consistent with the objectives set in the MAGP, to prevent further
development of excess capacity.62  Estimates from DG Fisheries indicate that Member State assistance
was about 45% of the expenditure on FIFG over the period 1994-99.
47. With respect to the objective of conservation of  fishery resources, the over-capacity of the
fleet is an enduring difficulty, according to the Commission.  Between 1992 and 1998, the number ofvessels (in EU-12) declined by 5%, tonnage by 14%, and power by 11%.  However, technological
progress is making vessels more efficient.  As a result, the EU fleet has almost twice the capacity
needed to catch the available fish.
63 MAGP (IV), adopted for the period 1997-01, was extended until
mid 2002, as were the conditions for public aid under FIFG.64  On the latter, changes were made to the
capacity that must be withdrawn for the introduction of new capacity with public aid in the segmentswhere objectives have not been met (135% rather than the previous 130%), and to the possibilities to
revise objectives where modernization to improve safety leads to an increase in capacity, which is
restricted to vessels under 12-metres that are not trawlers. New provisions designed to fight illegal
fishing were included and in particular that "public aid should not be made available for the
permanent transfer of fishing vessels to certain third countries that have been identified by the
relevant regional fisheries organisations as countries that permit fishing in a manner which jeopardises
the effectiveness of international conservation measures".
65
                                                     
58 European Commission Press Release IP/01/1733.
59 European Commission MEMO/01/446.
60 Council Regulation 1263/99.
61 WTO document G/SCM/N/71/EEC, p.47.
62 Council Regulation 2792/1999.  See also "Guidelines for the examination of state aid to fisheries and
aquaculture" (OJ C 19/05 of 20/1/2001).
63 European Commission Press Release IP/01/1733.
64 Council Decision 2002/70/EC.  For news on the Commission’s proposal for the next MAGP
programme, see Financial Times , 24 April 2002.
65 Council Regulation 179/2002.European Union WT/TPR/S/102
Page 81
(d) Common organization of markets
48. During the period under review, the last major revision of the CMO, which was adopted in
December 1999, was implemented as from 1 January 2001.66  The CMO for fishery and aquaculture
products comprises: common marketing standards for fresh products on quality, grades, packaging
and labelling of both Community and imported fisheries products;  producers' organizations (POs)
established in each Member State, which are composed of fishermen, and which implement thesupply-side instruments of the CMO; a price support  system, which sets minimum prices below which
fish products cannot be sold;  and rules for trade with non-Community countries.
49. To ensure a minimum income for producers, the CMO continues to provide for "withdrawal"
prices to be set, at which POs may take fish of f the market.  They provide compensation to their
members and apply for Community aid.  However, in order to decrease the quantities of fish taken offthe market and reduce waste, the volumes eligible  for compensation have been reduced in the new
CMO, from 14% to 8% of POs production or landings, except for pelagic species, where the new
ceiling is 10% of annual landings.  Furthermore, the compensation itself was also reduced.  Storage
and carryover arrangements were modified, however, to increase assistance for this purpose.
50. An allowance is paid to producers of tuna for processing under certain conditions, originally
designed to compensate them for the suspension of  tariffs on frozen tuna products implemented in
1970.  It is paid to POs when market prices and import prices fall below a trigger level.  The reform of
the CMO has lowered the trigger level from 91% to 87% of the Community producer price.  The
allowance is computed in relation to the quantities of tuna sold to Community processors.
51. Expenditure on price support within the CMO was budgeted at € 16.7 million for 2001 under
the new rules, up 19% from € 14 million in 2000, before the new rules went into effect;  according to
Commission estimates, the amount budgeted for price support in 1999 (€ 20 million) amounted to lessthan 0.5% of the landings of the species covered.
67  However, the amount for price support actually
spent in 2000 was € 9.5 million, down from € 11 million in 1999.   The Community claims, in its
notification to the WTO on subsidies, that the CMO has no trade effects "in so far as the Common
Organization of Markets aims at regularizing prices and not at artificially raising their level".68
52. Withdrawal prices are fixed in relation to Community-wide "guide" prices, set each year on
the basis of the Member States’ average market prices over the previous three years. For 2002, the
Council adopted the Commission proposal of raising guide prices with increases varying from 1% to
3% for most species, except for tuna destined for the processing industry, where the 2001 price level
was maintained.69
53. The new CMO contains expanded consumer information requirements on live, fresh, and
chilled fishery products.70 The implementing Commission regulation, which applies from
1 January 2002, requires consumers to be informed about the production method, the catch area, and
the exact commercial designation of the product they buy, as well as introducing traceability of
fisheries products.71 These requirements also apply to imports from third countries.
                                                     
66 Council Regulation 104/2000 on the common organisation of the markets (CMO) in fishery and
aquaculture products.  See DG Fisheries (1999).
67 WTO (2000a), Vol. 2, p. 236.
68 WTO document G/SCM/N/71/EEC, p.48.
69 European Commission MEMO/01/355.
70 Article 4 of Council Regulation 104/2000.
71 Commission Regulation  2065/2001.WT/TPR/S/102 Trade Policy Review
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54. With respect to the common commercial policy on fishery products, the new CMO has led to
the suspension of tariffs, totally or partially, as well as the opening of new tariff quotas, on an
autonomous basis, on fishery products intended for the processing industry (Table IV.3).  In certain
cases, the benefit of the tariff reduction cannot be invoked when the import price is lower than the
reference price, in which case the full tariff is applied.72  These new trade measures complement a
regime for imports of fishery products that is generally open, by virtue of low tariffs (Table AIII.1),and the effects of preferences on originating products granted under regional trade agreements
(notably EFTA and the Cotonou Agreement) and G SP.  The Commission estimates that about 70% of
Community imports of fishery products are free of duty.
Table IV.3
Old and new tariff suspensions and tariff quotas for fishery products
Product Old rules New rules
Alaska Pollack, frozen fillets
and meatAn autonomous suspension opened each year.
Agreed rate for 1999: 4%Imports of an unlimited amount at 0% (for an
indefinite period)
Cod, fresh, chilled or frozen,excluding liver and roesAn autonomous quota opened each year.  Quota
for 1999: 75,000 tons at 3%Imports of an unlimited amount at 3% (for an
indefinite period)
Cod and fish of the speciesBoreogadus Saida, salted or in
brine, but not dried or smokedAn autonomous quota opened each year.  Quota
for 1999: 8,000 tons at 2.5%An autonomous quota opened for 3 years.
Quota for 2001-03: 10,000 tons at 0% for each
year
Surimi, frozen An autonomous quota opened each year.  Quota
for 1999: 15,000 tons at 3.5%Imports of an unlimited amount at 3.5% (for
an indefinite period)
Blue Grenadier, frozen filletsand meatAn autonomous quota opened each year.  Quota
for 1999: 20,000 tons at 3.5%Imports of an unlimited amount at 3.5% (for
an indefinite period)
Prawns, in shell, fresh, chilled or
frozenAn autonomous quota opened each year.  Quota
for 1999: 12,000 tons at 0%Imports of an unlimited amount at 0% (for an
indefinite period)
Shrimps and prawns, cooked and
peeledAn autonomous quota opened each year.  Quota
for 1999: 4,000 tons at 6%An autonomous quota opened for 3 years.
Quota for 2001-03: 5,000 tons at 6% for each
year
Tuna loins An autonomous quota opened each year.  Quota
for 1999: 1,000 tons at 6%An autonomous quota opened for 3 years.
Quota for 2001-03: 4,000 tons at 6% for each
year
Herring, fresh, chilled or frozen An autonomous quota opened each year.  Quota
for 1999: 20,000 tons at 0%An autonomous quota opened for 3 years.
Quota for 2001-03: 20,000 tons at 0% between
1 November and 31 December of each year
Herring, spiced/vinegar cured, inbrine, preserved in barrels of at
least 70 kg. net drained weightAn autonomous quota opened each year.  Quota
for 1999: 4,000 tons at 6%An autonomous quota opened for 3 years.
Quota for 2001-03: 5,000 tons at 6% for each
year
Source: DG Fisheries (1999), Information Notes:  "Reform of the Common Organisation of the Markets in fishery and
aquaculture products, Annexes III a nd IV [Online].  Available at:  http://europa.eu.int/comm/fisheries
[12 October 2001].
(e) External agreements73
55. An important aspect of the Community fisheries policy, in the light of fragile fish stocks
within its territorial waters and fleet over-capacity, is the development of fishing opportunities
elsewhere, either through bilateral agreements or, on the high seas, through regional fishery
                                                     
72 The reference prices, below which tariff reductions do not apply, may be fixed for products that are
the subject of:  (i) tariff reduction or suspension arrangements; (ii) autonomous tariff suspensions for anindefinite period of time adopted within the framework of the reform of the CMO; and (iii) other trade
arrangements which provide for compliance with a reference price and which are in line with the Community
international undertakings (Council Regulation 2574/2001). For 2002, the species concerned by reference pricesare herring, cod of the species Gadus morhua , deep water prawns of the species Pandalus borealis, and Alaska
Pollack.
73 IFREMER (1999).European Union WT/TPR/S/102
Page 83
management organizations.  The Community’s "Southern" agreements concern mainly African and
Indian Ocean countries, and provide for access by Community fishing vessels in exchange for
Community financial assistance and fees from vessel operators.  The tuna agreements provide for no
direct competition between Community and loca l fishing fleets.  The "Northern" agreements
exchange fishing opportunities/rights between Community  fleets and the fleets of third countries, and
financial compensation is provided by the Community to Greenland and the Baltic countries.  For2002, the Community budget earmarked for fisheries agreements is almost € 189 million.  The
Community has implemented a series of trade measures related to international resource management
and conservation agreements such as the International Commission for the Conservation of the
Atlantic Tunas (ICCAT) or the Commission for the Conservation of Antarctic Marine Living
Resources CCAMLR (Chapter III(1)(vi)).
(g) Sanitary and health regulations
56. The placement of fishery products on the Community market, whether of domestic or imported
origin, is subject to sanitary regulations to protect the health of the consumer;  these are applied on a
national treatment basis.
74  The test applied to imports is whether the hygiene conditions under which
production is carried out in the country of origin can be considered to be equivalent to that requiredfrom Community producers;  a competent authority responsible for the public health aspects of
fishery products must also exist.  A Commission Decision sets the specific conditions for imports into
the Community based on a report of a mission of experts.
57. A Commission Decision sets out the list of 102 countries from which imports of fishery
products into the Community are permitted;  imports of fishery products from countries not on the list
are not permitted.
75  Part I of the list identifies the 58 origins that have been the subject of a
Commission Decision setting out the specific conditions for imports into the Community.  Thesecountries are designated as fully harmonized with the Community practices and legislation, and
originating imports are authorized subject only to spot checks and verifications.  Part II of the list
identifies the other 44 "pre-harmonized" countri es for which a Commission Decision has not been
taken, but from which guarantees have been received concerning their inspection system and their
legal sanitary requirements.
76  Imports are authorized on the basis of documentary evidence, receiving
provisional approval until Community inspection is effected.  Part II of the list was valid until
December 2000, but has been extended to December 2003, due to delays and the possibility of revised
legislation as a result of the White Paper on Food Safety.77
(3) FINANCIAL SERVICES
(i) Main characteristics
58. Financial services cover three main subsectors:  banking, encompassing all types of credit
institutions; insurance, covering life and non-life insurance markets; and securities, covering the
listing and public offer of securities, as well as the provision of certain investment services.  As
regards the allocation of savings by EU households, the share of household financial assets held
directly in securities ranged from 13% in Austri a to 38% in Italy, with the remainder held in
                                                     
74 Council Regulation 91/493/EC concerns fishery products and Council Regulation 91/492/EC
concerns live bivalve molluscs.  See DG Fisheries online information for other food hygiene legislation of
application to fishery products.
75 Commission Decision 2001/935/EC.
76 Council Decision 95/408/EC, as amended.
77 Council Decision 2001/4/EC.WT/TPR/S/102 Trade Policy Review
Page 84
"intermediated" investments (from banks, insurance companies, or mutual funds).78  Insurance
companies and pension funds were the leading intermediaries in the Netherlands, Sweden, and the
United Kingdom, while banks were in the leading position elsewhere.  Mutual funds had a significant
presence only in Italy (over one third of intermediated investments) and Sweden (one quarter).
59. According to the latest available data, there were 8,330 credit institutions in the EU in 1999,
down by 16% from 1994, indicating a marked consolidation trend.79  Just over 4% of credit
institutions were branches of non-EEA enterprises, with the most significant presence in the United
Kingdom (about one quarter), which also has the most concentrated banking sector (0.8 institutions
per 1 million inhabitants).  Luxembourg has the highest relative employment level in the sector (12%
of the labour force), and the highest ratio of banks’ balance sheet to GDP (3,299%).  Net interest
income in the EU as a whole (€ 241 billion) is about 2.3 times higher than net commission income (
€ 105 billion), although the ratio has been declining since 1994 as enterprises increasingly turn to
capital markets to raise funds.
60. In 1999, there were 3,853 insurance companies in the EU, of which 27% were providers of
life insurance and 56% were non-life insurance companies.80  These enterprises wrote € 756 billion of
premiums in 1999, making the EU insurance market the third largest in the world, behind the UnitedStates and Japan.  One third of all premiums were written by UK insurance enterprises (e.g., Lloyd’s).
Of total life and non-life insurance premiums, 44% were written by life insurance companies ( € 329
billion);  a portion of the premiums written by composite insurance enterprises ( € 170 billion) is also
for life insurance.  Over time, the insurance industry has been consolidating, while premiums written
have risen, especially in the life insurance segment.  On a per capita basis, average spending on life
insurance was highest in the United Kingdom and in Ireland (spending in Luxembourg is inflated by
the premiums written for non-residents), and lowest in Portugal and Spain;  average spending wasmore homogeneous in the non-life area.
61. In 2000, the stock exchanges of five Member States were among the world's ten largest in
terms of the market capitalization of domestic companies  London, Euronext Paris, Deutsche Borse,
Italy and Euronext Amsterdam – although in each case, well below that of the New York Stock
Exchange, the world leader.
81  European equity markets experienced a sharp slowdown in the value of
market capitalization during 2000 as a result of the downward revisions of the value technology,
media, and telecoms companies, prospects of slowing growth, and monetary policy geared to
containing inflationary pressures.  In the course of 2001, market sentiment improved although a high
degree of uncertainty over the course of future economic developments remains apparent.
62. A significant feature of the period under review is the emergence of new pan-European
structures in financial markets, under the impetus of the euro.  In September 2000, Euronext brought
together the Paris, Amsterdam, and Brussels stock exchanges to offer investors an integrated trading
platform for equities, bonds, derivatives, and commodities.  In October 2001, Euronext acquired the
London International Financial Futures and Options Exchange (LIFOE), to create the second leading
derivatives market in the EU, behind Eurex (resulting from the merger of the German and Swiss
                                                     
78 Eurostat News Release 128/2001.
79 Eurostat, "Statistics on Credit Institutions", Theme 4 – 25/2001.
80 The remainder were composite (6.1%) and specialist (10%) companies.  Eurostat News Release
11/2002;  Eurostat, "Insurance Services Statistics", Theme 4 – 28/2001.
81 Comparisons on the value of share trading cannot be made directly as a result of the adoption of
different systems of compiling turnover statistics.European Union WT/TPR/S/102
Page 85
derivatives markets).82  Thus, although many stock exchanges remain focussed on national markets, a
trend to financial market integration is apparent.
(ii) Policy developments
(a) Overview
63. Since the last Trade Policy Review of the EU  in mid 2000, the legislative efforts to complete
the internal market in financial services by 2005 have intensified in the framework of the "FinancialServices Action Plan (FSAP)" adopted in 1999 under the impetus of the euro.
83  The objective of
completion is a central plank of the Community’s strategy for economic growth.  According to the
Commission, "the bigger and more integrated financial markets we build, the more effectively risk
will be pooled, the lower the costs and the higher the economic growth".84
64. The regulatory framework for financial services covers the right of establishment and the
freedom to provide services throughout the internal market;  the sector is also subject to Community
rules on competition and state aid (Chapter III(3)(ii) ).  The core principle is the "European passport"
or "single passport", according to which the "host" Member State recognizes the authorization granted
to the financial service provider by the "home" Member State, thus obviating the need for host
country authorization.  However, the host country may impose requirements on a financial serviceprovider to achieve imperative objectives (the principle of the "general good").
85  Home-country
control applies to financial supervision of the head office and branches, although cooperation with
host Member States is extensive.  A single procedure also applies to the reorganization and
winding-up of financial institutions.
65. Another core principle is harmonization of essential requirements applying to financial
service providers to ensure that the consumer is protected and the integrity of the financial system is
safeguarded.  Harmonization applies to prudential obligations, to ensure that EU financial serviceproviders meet minimum standards throughout the EU, and to accounting systems, to ensure sound,
transparent, and comparable business management systems.
66. EU policies are directly relevant for third-country financial service providers due to the
commitments made by the EU in the Fifth Protocol to the GATS, which entered into force on
1 March 1999.
86  These commitments extend the principle of the single passport to third-country
providers subject to limitations placed on national treatment.  Third-country financial service
providers enjoy the new access opportunities created by the progress of FSAP, but must also assume
the new obligations on financial service providers established in the EU.
                                                     
82 Euronext, "Next Facts", No. 5, November 2001 [Online].  Available at: http://www.euronext.com
[30 November 2001].
83 COM(1999)232.
84 European Commission SPEECH/01/17 [Online].  Available at:  http://europa/eu.int/rapid
[13 December 2001].
85 WTO (2000), Box IV.6.  See, for example, Commission interpretation of the freedom to provide
services and general good in insurance (COM(2000)43).
86 WTO document GATS/SC/31/Suppl.4/Rev.1 as implemented by Council Decision 1999/61/EC.  The
content of the EU's commitments is covered in WTO (2000), Annex IV.2, and on the Commission’s onlineinformation.  Available at:  http://gats-info.eu.int  [1 October 2001].WT/TPR/S/102 Trade Policy Review
Page 86
(b) Financial Services Action Plan (FSAP)
67. Efforts to achieve an internal market for financial services date from the Single Market
Programme at the end of the 1980s, but were renewed in the FSAP adopted in 1999.   It has four
objectives:  ensuring a single market for wholesale financial services;  open and secure retail markets;
state-of-the-art prudential rules and supervision;  and any other conditions needed for an optimal
financial market.  The FSAP consists of legislative and non-legislative measures to achieve theseobjectives, with a schedule for adoption and implementation.  Progress is monitored periodically by
DG Internal Market and reported upon by the Financial Services Policy Group (FSPG), composed of
representatives of Finance Ministers and the ECB.
68. Between the beginning of 2000 and the end of March 2002, the Council and the European
Parliament adopted 15 legislative measures under the FSAP concerning banking, insurance andsecurities, as well as legislation of cross-sectoral application (Table IV.4). The legislation adopted
includes completing the regulatory frameworks for banking and insurance with provisions on
reorganization and bankruptcy of undertakings, money laundering, and reducing the cost of cross-
border payments in euro.  Horizontal legislative actions also of relevance to cross-border restructuring
in financial services include the European Company Statute adopted in October 2001 forimplementation by 2004 (Chapter III(3)(i)).
Table IV.4
Legislative measures of the Financial Services Action Plan adopted between 2000 and March 2002
Measure EU document Implementation
Directive on the taking up and pursuit of credit institutions Directive 2000/12/EC 5 May 2004
Fourth Motor Insurance Directive Directive 2000/26/EC 20 July 2002
Amendment to the Directive on the taking up and pursuit of credit institutions
as regards banking supervision Directive 2000/28/EC4 April 2001
Directive on the taking up, pursuit of and prudential supervision of electronic
money institutions Directive 2000/46/EC27 April 2002
Amendment of Directives 85/611/EEC, 92/49/EEC, 92/96/EEC and
93/22/EEC as regards exchange of information with third countries Directive 2000/64/EC17 November 2002
Directive on the reorganisation and winding up of credit institutions Directive 2001/24/EC 5 May 2004
Regulation on cross-border payments in euro Regulation 2560/2001 1 July 2002
Directive on the reorganisation and winding up of insurance undertakings Directive 2001/17/EC 20 April 2003
Directive on the admission of securities to official stock exchange listing and
on information to be published on those securities Directive 2001/34/EC26 July 2001
Amendment of Directive 79/267/EEC as regards solvency margin
requirements for life insurance undertakings Directive 2002/12/EC1 January 2004
Amendment of Directive 73/239/EEC as regards solvency margin
requirements for non-life insurance undertakings Directive 2002/13/EC30 September 2003
Amendment of Directive 85/611/EC on UCITS Directive 2001/108/EC 13 February 2003
Amendment of Directive 85/611/EC on UCITS to regulate management
companies and simplified prospectuses Directive 2001/107/EC13 February 2003
Amendment to the anti-Money Laundering Directive 91/308/EC Directive 2001/97/EC 15 June 2003
Amendments to the 4th and 7th Company Law Directives to allow fair value
accounting Directive 2001/65/EC1 January 2004
Source: COM(2001)712 and Eur-Lex database.
69. A mid-term review of the FSAP was undertaken in early 2002 to, according to the
Commissioner in charge, "re-inject the necessary political energy and will"87, as a large number of
legislative proposals are under consideration by the Council and European Parliament for adoption in
                                                     
87 European Commission SPEECH/01/492.European Union WT/TPR/S/102
Page 87
2002 and 2003 (Table IV.5).  The Barcelona European Council confirmed the political commitment to
the deadlines of 2003 for an integrated securities market and 2005 for completion of the FSAP.  The
European Council also agreed that priority attent ion should be given in 2002, by the Council and the
European Parliament, to adoption of the proposed Directives on collateral, market abuse, insurance
intermediaries, the distance marketing of financial services, financial conglomerates, prospectuses,
occupational pension funds, and the IAS Regulation. The Commission has issued a revised proposalfor a Directive on the taxation of savings income of individuals
88, as part of a package of three
measures on taxation to be adopted by the end of 2002 (Chapter III(3)(i)), and intends to issue a
revised proposal for a Takeover Bids Directive.89
Table IV.5
Legislative programme of the Financial Services Action Plan, 2002-03
Measure EU document
referenceAdoption
schedule
Insurance Intermediaries Directive COM(2000)511 2002
Directive on the Prudential Supervision of Supplementary Pension Funds COM(2000)507 2002
Regulation on International Accounting Standards (IAS) COM(2001)80 2002
Prospectus Directive COM(2001)280 2002
Directive on Insider Dealing and Market Manipulation COM(2001)281 2002
Regular Reporting … 2003
Amendment to the 10th Company Law Directive … 2002
Directive on financial collateral arrangements COM(2001)168 2002
14th Company Law Directive … 2003
Upgrade of Investment Services Directive … 2003
Modernisation of the accounting provisions of the 4th and 7th Company Law Directives … 2003
Directive on the Distance Marketing of Financial Services COM(1999)385 2002
Takeover Bids Directive … 2003
Directive on taxation of interest income from cross-border investment of savings … 2002
Directive on Prudential Rules for Financial Conglomerates COM(2001)213 2002
… Not available.
Source: COM(2001)712, "Progress on the Action Plan for Financial Services" [Online].  Available at:  
http://europa.eu.int/comm/internal_market  [1 February 2002].
(c) Banking
70. Banks benefit from the single passport since 1993, subject to harmonized conditions on
capital adequacy requirements, deposit-guarantee schemes, and regulatory supervision based on thehome-country principle.  At the time of its last Review in mid 2000, the EU had simplified the
regulatory framework by consolidating the two core  Banking Directives and subsequent legislative
measures as amended into a banking code.  This code was complemented during the period under
review by the adoption of a measure on the reorga nization and winding-up of credit institutions with
                                                     
88 COM(2001)400.   See European Commission Press Release IP/01/1026 and MEMO/01/266.
89 Following the rejection of the proposed Takeover Bids Directive by the European Parliament in a
vote on 4 July 2001, the Commission established a High Level Group of Company Law Experts to examineissues identified by the European Parliament for further harmonization;  a report was made in early 2002(European Commission Press Release IP/02/24).WT/TPR/S/102 Trade Policy Review
Page 88
branches in several Member States.90  In addition, the legislative framework for banking was extended
to electronic money institutions.91
71. A significant development during the period under review is the adoption of the regulation on
cross-border payments in euros to achieve a single payments area.92  The regulation provides for the
principle of non-discrimination to apply to bank charges for national and cross-border payments in
euros, to be implemented by 1 July 2002 for card payments and cash dispensers, and by 1 July 2003for cheques and credit transfers.  Commission studies have indicated persistently high and variable
levels of charges on cross-border payments, with little change since 1993, despite repeated
exhortations to banks to eliminate the practice.
93  According to the regulation, cross-border movement
should not distinguish a payment from a national one, where uniform charges apply irrespective of
distance as a result of mutualization.94  The Commission does not, however, anticipate a rise in bank
charges as a result of implementation.95
72. For the future, a major objective of the FSAP in the area of banking legislation is the revision
of the capital adequacy requirements for banks, which also apply to investment firms.96  The process
of developing a new EU framework for capital adequacy is in parallel with the elaboration of a new
Basle Accord on Capital Adequacy by the Basle Committee, on which certain Member States arerepresented, to replace the 1988 Accord and its amendments.
97  Capital charges for credit risk (bank
lending to customers) are the main focus of the changes being considered by the Commission,
specifically:  adaptation of capital charges to the nature of risks assumed, incentives for prudent risk
management, elimination of waivers, and a wider scope of consolidation.98  The new requirements are
anticipated to be in place by 2007, following the Basle Committee’s decision to extend its timetable
for consultation and implementation from 2004 to 2005.
(d) Insurance
73. Insurance undertakings have benefited from the single passport since 1994, subject to
harmonized solvency margin requirements and regulatory supervision based on the home-country
principle.  At the time of the last Review of  the EU in mid 2000, the Commission had submitted a
proposal to the Council and European Parliament for the simplification of the regulatory framework
for life insurance by consolidating the existing directives and their amendments in a single text.99 This
framework is expected to be adopted in the course of 2002, given the adoption in March 2002 of the
two Directives on revised solvency margin requirements for life and non-life undertakings, to be
adjusted in relation to the risks assumed under policies (e.g., higher for maritime, aviation, and
general liability business).  The existing framework was also completed during the period under
review by the adoption of the Directive on the reorganisation and winding up of insuranceundertakings with agencies in several Member States, to ensure that policyholders in different
Member States are subject to a single procedure and have the same protection as home-country
                                                     
90 Directive 2001/24/EC.
91 Directive 2000/46/EC.
92 Regulation 2560/2001.
93 European Commission MEMO/01/294.
94 European Commission Press Release IP/01/1084.
95 European Commission SPEECH/01/492.
96 Capital adequacy requirements ar e charges to be assumed by credit institutions and investment firms
to cover the risks associated with the loans and inve stments made with funds available, including deposits.
97 DG Internal Market (1999).
98 Directives 92/30/EEC and 93/6/EEC provide for waivers from capital adequacy requirements for
certain group structures.
99 COM(2000)398.European Union WT/TPR/S/102
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policyholders.100  Additional measures adopted during the period under review are:  the Fourth Motor
Insurance Directive to provide improved information, easier procedures and quicker settlement of
claims to motorists visiting from other EU Member States.101
74. The Commission has issued a proposal to extend the freedom to establish and to provide
services in the single market to intermediaries (insurance agents and brokers).102  Once adopted, this
measure could have a significant impact on the state of competition on the retail side of the insurancemarket, since consumers will have easier access to a greater choice of insurance policy options.
(e) Securities
75. The Stockholm European Council decided in March 2001 on the deadline of 2003 to
complete the single market in securities.  Following the recommendations of the Committee of Wise
Men
103, a new "Lamfalussy" approach to securities market regulation has been established:  "core
level 1" legislation is to establish essential principles, while "core level 2" implementing powers are to
be conferred by the Council and the European Parliament upon the Commission104, whose decisions
are to be subject to approval by a newly established European Securities Committee (ESC), advised
by a Committee of European Securities Regulators (CESR).105  The Committee of Wise Men also
recommended extensive consultations in the pre-proposal stage of the legislative proposals made bythe Commission.  The change in the nature of legislation is intended to accelerate the process of
adopting legislation, and ensure responsiveness to technical changes and market developments
without needing to restart the legislative process.  The CESR is to advise the Commission on the
nature of technical implementing measures to be adopted, and strengthen coordination of national
efforts on implementation.
76. Proposed changes to existing EU regulation concern several aspects of securities transactions.
Since 1996, investment firms have benefited from the single passport under the 1993 InvestmentServices Directive (ISD), subject to the application of home-country rules in the interest of protecting
investors, harmonized (with banks) capital adequacy requirements, and supervision under the home
country principle.  Stock exchanges, which provide the services of listing and trading, are "regulated
markets" under the ISD, which also contains provisions on remote access to clearing and settlement.
77. The Commission has identified gaps in this regime, and intends to submit a proposal to
upgrade the ISD in the course of 2002, in line with the Lamfalussy approach, and following the
extensive consultations that have taken place.  Key changes would include making the single passport
work more effectively by clarifying the distincti on between the "professional investor" (aware of the
risks) and other investors (more in need of protection) for the purpose of imposing
conduct-of-business rules on investment firms from another Member State under Article 11 of theISD.
106  Other changes to investor protection clauses would be designed to take into account new
                                                     
100 European Commission Press Release IP/01/216.
101 Directive 2000/26/EC.
102 COM(2000)511.  See European Commission Press Release IP/00/1048.
103 "Final Report of the Committee of Wise Men on the Regulation of European Securities Markets"
[Online].  Available at:  http://europa.eu.int/comm/internal_market  [28 January 2002].
104 See Commission declaration of 4 February 2002 on the implications of the enhanced executive role
of the Commission on such legislation with respect to the position of the Parliament in the legislative process.
105 Commission Decisions 2001/528/EC and 2001/527/EC, respectively. The ESC is an advisory
Committee composed of Member State representatives and chaired by the Commission; it will operateaccording to the regulatory procedur e under legislation proposed for adoption. The CESR is an advisory
Committee and will remain as such.  See WTO (2000a), Vol. I, Box II.2, p. 21.
106 COM(2000)722.  See European Commission Press Release IP/00/1314.WT/TPR/S/102 Trade Policy Review
Page 90
possibilities, such as online trading, or to deal with potential inconsistencies with the electronic
provision of investment services under the e-Commerce Directive (section (5)), which entered into
force on 17 January 2002.  A Communication would be issued on the future of European clearing and
settlement systems.
78. One proposal, already submitted by the Commission to the Council and European Parliament,
concerns insider dealing and market manipulation (market abuse).107  Although a Directive on insider
dealing has been in place since 1989, it does not deal with market manipulation, and its scope is
confined to regulated markets under the ISD.  The proposal, which is in line with the Lamfalussy
approach, is intended to close these gaps, and also requires a single regulatory and supervisory
authority to be designated in each Member State to  deal with market abuse, to ensure a uniform
approach.  The proposal does not mandate the harmonization of penalties for market abuse, becausethis was considered to be the competence of Member States, but does encourage them to set penalties
to promote compliance with the requirements of the proposed ISD.
79. Another major proposal, which is also in line with the Lamfalussy approach, is to establish a
single prospectus acceptable across Europe, replacing the 15 existing regimes and 15 different
standards.
108  The proposal would require compulsory automatic recognition to prospectuses drafted in
accordance with the Directive, with a single set of documents providing a single passport for issuers
in the EU market.  In addition, the introduction of enhanced disclosure standards, in line with
international standards, is intended to facilita te admission in third-country markets. In 2001, the
regulatory framework for the admission of securities to official stock exchange listings, and on the
information to be published on them, was simplified by the consolidation of existing directives and
their amendments in a single text.109
80. Mutual funds (known as undertakings for collec tive investment in transferable securities
(UCITS)) are also subject to the single passport regime.  Since 1986, funds licensed by the home
country have been able to offer units for sale throughout the EU, subject to harmonized requirements
on regular reporting and investment policies.  The Commission has proposed extending the licensing
regime to collective investment vehicles other than those investing just in transferable stocks and
bonds (e.g., deposits, money market instruments, derivatives), and to apply the single passport regimeto the enterprises providing fund management services.
110
81. The Commission has also issued a proposal for a Community-wide framework for collateral,
which was valued at some US$900 billion for govern ment securities alone in 2000, about half the size
of the United States’ market.111  The proposal is intended to resolve certain problems affecting the
cross-border use of collateral in wholesale financial markets in order to encourage their development.
82. The Commission is planning to issue a proposal, also in line with the Lamfalussy approach, to
revise the regular disclosure requirements for issuers whose securities are admitted to a regulated
market.112  To this end, a pre-consultation exercise was carried out in 2001.
                                                     
107 COM(2001)281.  See European Commission Press Release IP/01/758 and MEMO/01/203.  Market
abuse arises when investors have been unreasonably disa dvantaged by others who:  (a) used information that is
not publicly available (insider dealing);  and/or (b) distorted the price-setting mechanism of financialinstruments or disseminated false or misleading information (market manipulation).
108 COM(2001)280.  See European Commission Press Release IP/01/759 and MEMO/01/204.
109 Directive 2001/34/EC.  See European Commission Press Release IP/00/822.
110 COM(2000)329 and COM(2000)331).  See European Commission Press Release IP/00/567.
111 COM(2001)168.  See European Commission Press Release IP/01/464 and MEMO/01/108.
112 To amend Directive 82/121/EC.European Union WT/TPR/S/102
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(f) Other
83. Directive 2001/97/EC, amending the 1991 Directive on money laundering, extends the scope
of application to proceeds from all crime, not just drug offences, in accordance with the 1996 revision
of the 40 Recommendations of the Financial Action Task Force (FATF), the leading international
body devoted to the fight against money laundering.113  The amendment extends coverage to a series
of non-financial activities also deemed vulnerable to misuse by money launderers, including lawyers,art dealers, real estate agents, and casinos.
(4) T
ELECOMMUNICATIONS
(i) Main characteristics114
84. The EU telecommunications services market was valued at € 218 billion in 2001, roughly on
a par with the U.S. market (Table IV.6).  Revenue in the sector expanded rapidly in 2001, up 14%over 2000, due largely to mobile telephony.  The EU’s mobile subscriber base was 263 million in
August 2001, up 36% on the previous year's level, gi ving a 70% mobile penetration rate in the EU.
115
Table IV.6
Telecommunication markets in the EU, 2001(€ billion)
MEMBERSa
EU B DK D EL E F IR I L NL A P FI SU K
Total 218 5.6 3.6 46.6 5.0 22.8 34.3 2.7 32.3 0.3 10.8 5.1 4.5 2.8 5.3 36.0
Voice 110 2.8 1.9 26.5 2.7 10.5 17.9 1.6 14.8 0.15 5.2 2.3 2.2 1.1 2.8 17.5
Mobile 82 2.1 1.3 14.0 2.1 10.9 10.9 1.0 14.7 0.1 4.6 2.3 2.0 1.3 2.0 12.6
Network 26 0.8 0.4 6.1 0.2 1.4 5.5 0.2 2.8 0.05 1.0 0.4 0.3 0.4 0.5 5.9
a B:  Belgium;  DK:  Denmark;  D:  Germany;  EL:  Greece;  E:  Spain;  F:  France;  IR:  Ireland;  I:  Italy;  L:  Luxembourg;  
NL:  The Netherlands;  A:  Austria;  P: Portugal;  FI:  Finland;  S:  Sweden;  UK:  United Kingdom.
Source: COM(2001)706.
85. The "new economy" has also continued to ad vance in the EU since its last Review in
mid 2000.  Use of information and communications technology (ICT) is well advanced among largeEuropean enterprises, to achieve efficiencies internally and in relations with suppliers and customers;
consequently, business-to-business (B2B) e-commerce has developed strongly.  Use of ICT is less
advanced, however, among small and medium-sized enterprises (SMEs).  In addition, just over 36%
of households have home Internet access (Table IV.7), compared with over one-half in the United
States.  A "digital divide" has emerged between Member States in the north and south, of which theformer have much higher rates of Internet penetration.
116
                                                     
113 See European Commission Press Release IP/01/1608.
114 The main source of data is COM(2001)706.
115 The penetration rate is measured as the ratio of subscribers to population.  This is distinct from the
proportion of the population that are mob ile users, due to multiple handsets.
116 Other "digital divides" are also of concern to the Commission, including generational (use among
young people is far more advanced than in middle-aged or senior segments of the population), and regional(well-serviced urban areas compared with remote rural areas).WT/TPR/S/102 Trade Policy Review
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Table IV.7
Internet penetration rates, 2001
(% of households)
MEMBERSa
EU B DK D EL E F IR I L NL A P FI SU K
Internet 36.1 34.7 58.9 37.9 11.7 23.4 26.2 46.2 32.9 43.6 58.5 46.2 23.4 48.1 64.3 46.5
a B:  Belgium;  DK:  Denmark;  D:  Germany;  EL:  Greece;  E:  Spain;  F:  France;  IR:  Ireland;  I:  Italy;  L:  Luxembourg;  
NL:  The Netherlands;  A:  Austria;  P: Portugal;  FI:  Finland;  S:  Sweden;  UK:  United Kingdom.
Source: Eurobarometer Flash 103 , June 2001.
86. Although the PC and the standard telephone line remain the primary means of Internet access,
faster and always-on (broadband) connections are available through ADSL (asymmetric digitalsubscriber line) connections.  However, these wire-based Internet access technologies are unlikely to
offer the prospect of universal Internet access, which the Commission anticipates will be secured by
wireless access technology, where the EU claims a leadership position.
117  In 2001, operators began
commercializing wireless services on the basis of new handsets (GPRS technology), which provide
access to the Internet.  The launch of third-generation (3G) wireless services, which combines
wireless mobile technology with high data transmission capacities, is anticipated for 2002.  However,
concerns on the launch of 3G have emerged because of the heavy front-end expenses resulting fromfees paid for licences (€ 130 billion), the costs of installing the necessary infrastructure and marketing
new services, under deteriorating capital market conditions for telecoms operators.
(ii) Policy developments
(a) Overview
118
87. Liberalization and harmonization of the telecommunications sector, together with initiatives
to foster e-commerce (section (5)), form the core of the policy programme to bring the benefits of an
"information society" to consumers and businesses, a central objective of the EU’s strategy for
economic growth (Chapter I(3)).  Prior to the st art of liberalization, state-owned telecom operators
(incumbents) had monopoly positions due to exclusive privileges to provide services and own and
operate infrastructure.  In this context, entry of  new suppliers of telecoms services was anticipated
when (a) the incumbents’ exclusive privileges to provide services were abolished, and/or (b) new
entrants were assured of access to the network infrastructure controlled by the incumbents.
88. Starting in 1990, the Commission used its powers under competition rules to remove the
incumbents' privileges over non-voice telephony services, followed by voice telephony services,
infrastructure services, radio-based communications services and networks, satellite communications,and cable networks.
119  As of 1 January 1998, all telecoms infrastructure and service segments were
                                                     
117 COM(2001)141.
118 The main source is Commission Staff Working Document, "Europe’s Liberalised
Telecommunications Market – A Guide to the Rules of the Game", October 2001 [Online].  Available at:http://europa.eu.int/ISPO/infosoc/telecompolicy/en/userguide-en.pdf  [15 September 2001].
119 Liberalization directives are issued by the Commission under Article 86 of the EC Treaty, which
concerns the rules on competition applying to public undertakings and undertakings to which special or
exclusive rights have been granted.  The Commission firs t tackled the rights of incumbents over the importation,
sale, and commercialization of telecommunications equipment (Commission Directive 88/301/EC), followed bynon-voice telephony services (Commission Directive 90/388/EC), voice telephony and infrastructure services(Commission Directive 96/19/EC), radio-based communications services and networks (CommissionEuropean Union WT/TPR/S/102
Page 93
open to competition (Greece met the deadline on 31 December 2000.  As a result of the EU’s
commitments under the Fourth Protocol to the GATS, the framework regulating EU nationals is
extended to all foreign operators, with minor limitations on market access and national treatment.120
89. A harmonized framework for national legislation is the second dimension of policy in the
sector.  Conditions of access are set down in a common European regulatory framework addressing
licensing and access to the network based on the c oncept of open network provision (ONP).  During
the period under review, a regulation was adopted on local loop unbundling (LLU) to foster
infrastructure-based competition on the local access network.121  In February 2002, the Council
adopted the new regulatory framework for electr onic communications, consisting of a Framework
Directive on electronic communications networks and services122, and directives on access and
interconnection123, authorization or licensing124, universal service obligations125, as well as a decision
on a regulatory framework for radio spectrum policy in the EU126;  adoption of a proposed Directive
on the protection of privacy is under consideration.127  Transposition of adopted legislation is to take
place by May 2003, with implementing powers conferre d on the Commission, to be assisted by a new
Communications Committee (COCOM), and advise d by the High Level Communications Group
(HLCG).128  The new legislative framework is to be complemented by a Commission Directive
consolidating the rules of competition for the sector under previous liberalization initiatives.129
90. In addition to sector-specific regulation, telecoms, like other sectors, is subject to the
application of Community-level competition rules in the event of actions having a European
dimension130, or the application of national competition law.  This dual regime, consisting of ex-ante
sector-specific regulation and ex-post  application of competition rules, is expected to evolve towards
greater reliance on competition rules as markets become more competitive.  The new regulatory
framework is a step in this direction by more fully integrating competition policy concepts into sector-specific regulation.
                                                                                                                                                                    
Directive 96/2/EC), satellite communications (Com mission Directive 94/46/EC), and cable networks
(Commission Directives 95/51/EC and 1999/64/EC).
120 GATS/SC/31/Suppl.3 adopted by Council Decision 97/838/EC.  The content of the EU's
commitments is covered in WTO (1997), p. 112 and in the Commission’s online information.  Available at:web-site http://gats-info.eu.int  [1 October 2001].
121 Regulation 2887/2000.
122 Directive 2002/21/EC.
123 Directive 2002/19/EC.
124 Directive 2002/20/EC.
125 Directive 2002/22/EC.
126 Decision 676/2002/EC of the European Parliament and the Council.
127 COM(2000)385.
128 The COCOM is composed of Member State representatives, chaired by the Commission, operating
according to the advisory or regulatory procedure de pending on the provision (see Box II.2, WTO (2000),
Vol. I, p. 21).  The HLCG is an advisory Committee composed of national regulatory authorities (NRAs) andchaired by the Commission.
129 "Notice by the Commission concerning a draft directive on competition in the markets for electronic
communications services" (OJ C 96, 27/3/2000) consolidates  all liberalization directives in a single Competition
Directive, with deletion of obsolete provisions (European Commission Press Release IP/00/76).
130 "Notice on the application of competition rules to access arrangements in the telecoms sector"
(OJ C 265/2, 22/8/98) and "Guidelines on the application of EEC competition rules in the telecoms sector"(OJ C 233/2, 6/9/91).WT/TPR/S/102 Trade Policy Review
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(b) Local loop unbundling (LLU)
91. The LLU Regulation, which applied as from 30 December 2000, required incumbents to
provide competitors with physical access to the local loop under conditions designed in accordance
with the dominant position of the incumben t and resulting incentive to limit competition.131  S u c h
access was to be provided by means of a Reference Unbundled Offer (RUO), addressing the three
principal  means of LLU:
− full unbundling of the local loop: the incumbent rents the copper pair to a third party for its
exclusive use to provide a full range of telecoms services to the customer;
− shared use of the copper line: the incumbent continues to provide telephone service, while the
third party delivers high-speed data services over the same local loop using its own high-
speed ADSL modems; and
− high speed bit stream access:  the incumbent installs the ADSL connection and makes it
available to third party high-speed service providers.
92. Although collocation and facility sharing in th e local exchanges was provided for under the
Interconnection Directive, and LLU was introduced on this basis in Denmark, Germany, the
Netherlands, Austria, Finland, and Sweden, other countries lagged behind.  As a result, in most
Member States, the incumbent has retained a dominant share of the local calls and Internet calls
segments, while its share in the national and international calls segments has been reduced by theactivity of resellers and alternative operators (Table AIV.2).  Another motivation for the LLU
Regulation was to ensure a relatively high degree of uniformity in LLU across Member States.
93. Among the anticipated results is a reduction in the prices of local calls, which appear to be
inversely related to Internet penetration rates.
132  In addition, new entrants are expected to compete
with the incumbents to offer hi gher bandwidth on the local loop, by upgrading the "twisted pair"
copper cable infrastructure to ADSL.  This would be of particular benefit to SMEs and residential
customers.  It is also intended that the implementation of LLU in all the Member States at the same
time will avoid the emergence of a new form of "digital divide" within Europe, this time due to
significant variations in the quality and capability of access platforms for the Internet.
94. The Commission noted in November 2001 that, although implementation of LLU had taken
place, the situation was, in practice, "very disappointing" as the number of lines actually unbundled
was very low (640,000 in the EU as a whole), and shared access to the local loop was available onlyin four Member States, the number being limited to a few hundred.
133
                                                     
131 Unlike other elements of Community telecoms legislation, LLU legislation is in the form of a
regulation, which means it is binding and directly applicable in all Member States.  In contrast, directivesrequire transposition into Member State law.
132 OECD (2001b).
133 European Commission Press Release IP/01/1679.European Union WT/TPR/S/102
Page 95
(c) New regulatory framework134
National Regulatory Authorities (NRAs)
95. Full independence of the National Regulatory Au thority (NRA), both from suppliers and from
government, is a requirement under the existing regulatory framework, and has been strengthened in
the new Framework Directive.   In particular, "Member States that retain ownership or control of
undertakings providing electronic communications networks and or services shall ensure effectivestructural separation of the regulatory function from  activities associated with ownership or control."
This is significant because, although privatization has proceeded in the past decade, state involvement
is over 50% in Austria, Belgium, Finland, France, Greece, and Germany, and continues to a very
minor but symbolically important degree in Ireland, It aly, Portugal, and Spain;  it is absent only in
Denmark and the United Kingdom.
Authorization
96. The new authorization regime for telecoms operators is designed to replace the existing
licences.   The main changes proposed are:
− requiring all electronic communication services and networks to be covered by the general
authorization and limiting the use of specific rights to the assignment of radio frequencies and
numbers only, with attached conditions to be more limited in scope;
− requiring NRAs to publish administrative costs and charges annually, and adjust charges
accordingly if they exceed costs; and
− allowing only fees for rights of use of the radio spectrum, numbers or rights of way that are
"objectively justified and proportionate in relation to their intended purpose".
97. These changes are designed to address shortcomings in the existing regime.  The Licensing
Directive establishes the general authorization as preferred to the individual licence, mainly becausethe former allows the licensing of all potential entrants capable of providing a service under the
established conditions.  In practice, however, the European Commission notes "there is no approach
to authorising market entry for communications serv ice providers, but a patchwork of fifteen national
regimes which are widely divergent in their basic approach and specific detail".
135  A study on the
issue of authorizations states "this could compromise the creation of a really competitive internal
market for telecommunications."136
98. The Member States have also taken different approaches to other provisions.  This was
demonstrated recently in the divergent approaches of Member States to allocating the spectrum  for
the purpose of establishing 3G wireless networks.137  Some Member States chose a comparative
bidding process (beauty contest), others a competitive bidding process (auction), with some Member
                                                     
134 The main source is DG Information Society (undated).
135 COM(2000)386, p. 2.
136 European Telecommunications Office (ETO) (1999).
137 According to Decision 128/1999 of the European Parliament and the Council on a coordinated
approach to UMTS, an authorization process was to be in place by 1 January 2000 in Member States, with the
purpose of allocating licences to operators to introduce third-generation wireless networks on their territory by
2002.  A coordinated approach is required for roaming between 3G wireless national networks to be possible bythat date, thereby ensuring a seamless Community-wide service coverage;  this operational pan-European 3Gsystem is to be compatible with the 3G mobile system called International Mobile Telecommunications-2000(IMT 2000) developed by the International Telecommunications Union (ITU).WT/TPR/S/102 Trade Policy Review
Page 96
States opting for a hybrid system containing elements of the two.138  The Commission has noted:
"The level of the licence fees achieved in the auctions which have occurred to date, in particular those
in the United Kingdom and Germany, as well as the divergence between the different methods used,
has given rise to considerable debate throughout the EU, and certain operators have complained that
the way in which licences have been awarded in certain Member States was not in conformity with
Community law".139
Interconnection
99. The new regulatory framework makes no change to the requirement under the existing
Directive that virtually all operators have a basic right and obligation to negotiate interconnection.
Operators with "significant market power" (SMP) have additional obligations including meeting all
reasonable requests for access to the network, acting in a non-discriminatory manner andcommunicating agreements to the NRA, for possible circulation to third parties.  Wire-based operators
with SMP are required to offer cost-oriented interconnection
140, publish a reference offer, unbundle
interconnection charges, and maintain accounting separation between their interconnection and other
activities.141  The NRA has powers of intervention if necessary, including dispute resolution.
100. In the new regulatory framework, the concept of SMP is aligned with the competition law
notion of dominance.  Implementing guidelines under public consultation in early 2001 reveal that
"dominance concerns normally arise only in the case of undertakings with market shares of over
40%", while SMP is currently defined at a 25% market share threshold.142  In addition to these
guidelines, the Commission intends to adopt a "Recommendation on Relevant Product and Service
Markets", whose characteristics are such as to justify ex ante  regulation.  In the current framework,
SMP obligations have been placed on operators based on aggregate market share alone, rather than
being based on market conditions defined in accordance with competition policy criteria.  In the newframework, regulatory obligations will be lifted in all markets where competition is deemed effective,
that is, where there are no dominant undertakings.
Universal service
101. The scope of universal service obligations and provisions for their financing are maintained in
the new regulatory framework, subject to periodic review.  The basic requirement will continue to beconnection to a public telephone network at a fixed location and at an affordable price, as well as
directory services and public payphones
143;  this will also permit functional Internet access, a new
universal service requirement.  Financing universal service will continue to be assumed primarily by
the designated network operators, although there is provision for supporting the service from taxpayer
funds or by a levy on other market participants.  An other aspect of the new framework is to introduce
number portability for mobile phone subscribers to ensure that switching service providers is less
                                                     
138 DG Information Society, Mobile Communications [Online].  Available at:
http://europa.eu.int/information_society/topics/telecoms/radiospec/mobile/index_en.htm  [15 September 2001].
139 COM(2000)814, p. 26.
140 As of 2002, the Commission discontinued the "best-practice" guidelines for interconnection pricing,
put in place in 1998, as a result of operators providi ng NRAs with appropriate cost-accounting information to
ensure that interconnection charges were cost-oriented.
141 The Interconnection Directive applies to both wire-based and wireless communications, but mobile
operators with SMP on the national market for interconnection are required only to offer cost-oriented
interconnection.  In practice, because the national market for interconnection covers fixed-fixed, fixed-mobile
and mobile-mobile interconnection, most mobile operators’ charges for terminating traffic from the fixednetwork are not subject to cost orientation.
142 COM(2001)175.
143 Directive 98/10/EC.European Union WT/TPR/S/102
Page 97
costly, just as was mandated for wire-based operators with SMP, who also continue to be required to
offer carrier selection and carrier pre-selection.144
(5) E-C OMMERCE
(i) Main characteristics
102. E-commerce (electronic commerce) refers specifically to the sale or purchase of goods and
services over the Internet, one of several platforms for the "distance" selling of goods and services(others are the telephone, mail-order and fax).
145  Categories distinguished include business-to-
business (B2B) and business-to-cons umer (B2C) e-commerce, both of which exploit the expanded
range of information available to the business or consumer through the Internet.  In the case of B2B,
enterprises use e-commerce to lower costs of inputs, improve efficiency and productivity, and provide
better customer service.  In the case of B2C, consumers enjoy an alternative channel for purchasing
products (e.g., books and music) and services (e.g., entertainment and travel).  In both cases,
enterprises gain access to a larger, in theory global, market via the World Wide Web.
103. Internet access is a necessary condition for e-commerce to take place.  While Internet access
is commonplace in medium- and large-sized EU enterprises, and is substantial among small
enterprises, just over 36% of EU households have home Internet access, compared with over one-halfin the United States (section (4)).  Among adults with home Internet access, one third engages in
online shopping and one quarter does banking online.
146
(ii) Policy developments
(a) Overview
104. The accelerated take-up of e-commerce by enterprises and consumers was identified as a goal
in the context of the e-Europe initiative, first launched in 1997147, and set to be renewed at the Sevilla
European Council in June 2002.  The initiative identified the increased penetration of the Internet as aprimary objective (section (4)), as well as the need to (a) build trust and confidence in the Internet
through protection of personal data and, for online transactions, information requirements from web
merchants, security and legal protection;  and (b) prevent the fragmentation of the single market for
information society services by ensuring a consistent EU regulatory framework and pre-empting the
adoption of divergent legislation by Member States.
105. At the time of the last review of the EU in  mid 2000, the EU had adopted several elements of
the planned regulatory framework, which concerned the definition of information society services and
exchange of information on national legislation
148, the recognition of the legal effect of electronic
signatures and mechanisms to develop their use.149  During the period under review, the regulatory
framework was extended by the adoption of Directives on:  electronic money institutions, under
                                                     
144 Number portability allows users to retain their numbers independently of the enterprise providing
the service.  Carrier selection and pre-selection allow users to make calls by using a short prefix.
145 The definition adopted by the WTO for the purposes of the work programme on e-commerce, is "the
production, distribution, marketing, sale or delivery of goods and services by electronic means" (WTO
document WT/L/274).
146 Eurobarometer Flash 103, June 2001.
147 COM(97)157.
148 Directive 98/34/EC.  See WTO (2000), Annex IV.1.
149 Directive 1999/93/EC.  See WTO (2000), Annex IV.1.WT/TPR/S/102 Trade Policy Review
Page 98
financial services regulation (section (3));  a legal framework for e-commerce150;  a regulation on
jurisdiction and the enforcement of judgments in civil and commercial matters151, with application to
relations between e-merchants in one country and customers in another;  protection of copyright and
neighbouring rights in the information society (Cha pter III(3)(iv));  and the indirect taxation of
services delivered by electronic means.  The Commission also adopted several decisions affecting
transfers of personal data to non-EU third countries, which have been the source of friction with majortrading partners.
106. For the future, the Commission is focussing on the development of a fully integrated market
for financial services, whether these are provided off-line or online, under the FSAP (section (3)).
152
The Commission has also proposed a Directive on data privacy under its regulatory framework forelectronic communications (section (4)).
107. At a multilateral level, e-commerce has been the subject of a work programme, first
established by the WTO Ministerial Conference in Geneva in 1998, and continued under a mandate
from the Fourth Ministerial Conference in Doha in 2001.  The Commission is of the view that
e-commerce either involves the physical delivery of goods and is thus merchandise trade within the
scope of GATT 1994, or involves electronic delivery, and therefore falls within the scope of theGATS.
153  As a result, off-line delivery from or to a tr ading partner is subject to the Community rules
and procedures regarding the importation and exportation of products (Chapter III(1) and (2)), while
electronic delivery is subject to the rules on services.  The Community joined the consensus reached
by WTO Members, expressed in a Ministerial Declaration adopted at the Fourth Ministerial
Conference in Doha in 2001, on not imposing customs duties on electronic transmissions, at least until
the next Ministerial Conference in 2003.
(b) E-commerce Directive
108. The e-commerce Directive was adopted in June 2000 and was to be implemented by Member
States by 16 January 2002;  according to the Commission, as of 1 March 2002, three Member States
had met this deadline.  Its scope in terms of information society services is comprehensive and
includes services provided on-line such as newspapers, databases, professional services, entertainment
(e.g., video-on-demand), and financial services.154
109. The first objective of the e-commerce Directive is to confirm that the single market principles
of free movement of services and freedom of establishment apply to information society service
providers established in a Member State, if they comply with the laws of the home Member State.155
Prior authorizations are not permitted.  This "country of origin" approach is designed to ensure thatinformation society providers need only abide by one set of laws instead of 15, and that is the set with
which they are most familiar.  The Commission has clarified that the term "establishment" is to be
interpreted in accordance with the EC Treaty and the jurisprudence of the Court of Justice, according
to which establishment arises when an economic activity is pursued using a fixed establishment for an
indeterminate duration.  The Commission has stated that the freedom to provide information society
                                                     
150 Directive 2000/31/EC.
151 Regulation 44/2001 replaced the 1968 Brussels Convention and the 1988 Lugano Convention.
152 See European Commission Press Release IP/01185 and MEMO/01/33.
153 WTO document WT/GC/W/306.
154 Defined by Directive 98/34/EC.
155 Exceptions are:  copyright and neighbouring rights, unsolicited communications by e-mail,
value-added tax (VAT) arrangements for electronic transmissions, as well as electronic money institutions,regulated under financial services (section (3)), and insu rance activities and the advertising of UCITS, on which
the host-country principle applies.European Union WT/TPR/S/102
Page 99
services does not extend to EU branches of non-EU companies, as these are not European companies
within the meaning of Article 48 of the EC Treaty.
110. The second objective of the e-commerce Directive is to establish that contracts concluded by
electronic means are recognized as such, and barriers to their conclusion are removed, complementing
the e-signatures Directive.156  Consumer confidence in the conclusion of such contracts is to be
bolstered by transparency requirements on the steps to be followed to conclude a contract andcommercial communication requirements.  However, the Directive does not deal with the aspects of
contract law covered by the Regulation on jurisdiction and the enforcement of judgments in civil and
commercial matters, which entered into force on 1 March 2002, and the 1980 Rome Convention on
the law applicable to contractual obligations.
157  The new Regulation contains changes to the Brussels
Convention to ensure that consumers in the EU have the right to sue foreign Internet providers ofgoods and services in the consumer's local court.
158  However, the Rome Convention continues to
permit parties to a contract to agree on the law applicable to their contracts, which web merchants
typically define as their country of origin.
111. E-commerce is subject to the existing "general good" requirements designed to protect
consumers in sales situations in general (e.g., prohibition of misleading advertising) and distancesituations in particular;  Member States may impose additional limits on these grounds.  Although
retail financial services were excluded from the scope of the consumer protection requirements for
distance selling
159, the Commission has proposed a Directive to fill this gap.  The proposed new
Directive would (i) prohibit abusive marketing practices;  (ii) restrict unsolicited marketing practices;
(iii) require the consumer to be provided with a comprehensive set of information before a contract is
concluded;  and (iv) provide for a right of withdrawal (cooling-off period) for consumers.160  These
provisions would apply to the distance selling of financial services on the Internet as well as otherplatforms, such as mail, telephone, and fax.
(c) Processing of personal data and protection of privacy
112. Under the Data Protection Directive, which entered into force in 1998, all individuals
(whether they are EU citizens or not), have the right, as "data subjects", to have their personal data
handled lawfully, and may be required to give their prior consent to its processing, and to access thatdata to ensure its accuracy.
161  "Data controllers", who decide the purpose and means of processing
(e.g., enterprises operating an Internet web-site), have obligations when processing personal data, and
are subject to supervision in each Member State, including when they are branches of non-EU
enterprises operating in the EU.  Transfers of personal data to a non-EU country are permitted only if
it is determined as providing an "adequate" level of protection, or under limited conditions, on theargument that "without such rules, the high standards of data protection established by the Directive
                                                     
156 Exceptions include contracts covered by family la w, succession law, or requiring the involvement of
a notary or registration with a public authority.
157 OJ C 27, 26/01/1998.
158 Article 2 establishes that the courts of the defendant’s country of domicile have jurisdiction, except
for insurance, employment, and consumer contracts, in which case the consumer, as the weaker party, is allowedto bring the action in the courts of his domicile.
159 Directive 97/7/EC.
160 COM(1999)385.  See European Commission Press Release IP/01/1325.
161 Directive 97/66/EC.  See DG Internal Market (2001a).  Directive 95/46/EC concerns the protection
of individuals with regard to the processing of personal data, and took effect in October 1998, while Directive
97/66/EC translates its principles to the telecoms sector, and took effect in October 2000.  Article 29 ofDirective 95/46/EC established a Data Protection Working Party to draft implementing measures for adoptionby the Commission, and Article 31 established an advisory Committee composed of Member Staterepresentatives.WT/TPR/S/102 Trade Policy Review
Page 100
would quickly be undermined, given the ease with which data can be moved around on international
networks".162
113. The Commission may, upon request, recognize a non-EU third country as providing an
adequate level of protection on the basis of an analys is of data protection laws and dialogue with the
authorities.  In July 2000, the Commission adopted decisions recognizing the adequacy of the data
protection regimes of Hungary, Switzerland, and of U.S. companies participating in the "safe harbour"arrangement introduced by the Department of Commerce as from November 2000.
163  O n
14 January 2002, an "adequate" level of protection was also recognized for transfers of certain
personal data from the EU to certain locations in Canada.164
114. For non-EU countries not recognized as offering adequate protection, or for U.S. companies
not covered by the "safe harbour" arrangement, personal data transfers are in principle not possible,unless the individual has explicitly agreed to the transf er of his personal data, or if the transfer is made
to fulfil a contract involving the data subject, or unless an alternative safeguard exists.  On the latter
point, one possibility is for the supervisory authority in a Member State to grant approval under ad
hoc arrangements.  To foster a harmonized EU approach to such authorization, the Commission
decided in June 2001 on standard contractual clauses for a "data importer" and "data exporter", whichobliges supervisory authorities of Member States to recognize that the condition of adequate
protection is met.
165  A "lighter" format of the contract was decided in December 2001, after
consultations with a large number of interested parties, for transfers of personal data from a data
controller in the EU to data processors in non-EU third countries not recognized as offering adequate
protection, which were deemed to present lower risks than general data transfer situations;  it entered
into force on 1 April 2002.166
115. As part of its proposals for a new electronic  communications framework, the Commission has
proposed to update and clarify the existing framework for the processing of personal data and the
protection of privacy for all electronic communications services, including the Internet, to ensure
technologically neutral rules.167  In particular, the proposal would establish a harmonized opt-in
system for unsolicited e-mail and for the inclusion of personal data in public subscriber directories.
The Commission has noted that unsolicited mail is costly to Internet users mainly due to theconnection charges that are assumed to download messages from the Internet.
168
                                                     
162 European Commission MEMO/01/228.
163 Commission Decisions 2000/519/EC, 2000/518/EC and 2000/520/EC, respectively.  See European
Commission Press Release IP/00/865.  The arrangement wi th the United States provides that EU citizens who
have a complaint about the way their data is handled by a safe harbour participant will be able to have recourseto an independent dispute resolution mechanism (European Commission Press Release IP/00/301 andMEMO/00/47).  The Department of Commerce holds a list of 160 enterprises that have joined the "safeharbour" arrangement (U.S. Department of Commerce online information.  Available at:
http://www.export.gov/safeharbor ).
164 Commission Decision 2002/2/EC.  See European Commission Press Release IP/02/46.
165 Commission Decision 2001/497/EC.  See European Commission Press Release IP/01/851 and
MEMO/01/228.
166 Commission Decision 2002/16/EC.  See European Commission Press Release IP/02/102.  U.S.
providers of financial services are excluded from the "safe harbour" and negotiations have taken place between
the Commission and the U.S. Treasury Department on bringing the benefits of an adequacy finding to the sector
in the light of the implementation in 2001 of the Gramm-Leach-Bliley Act of 1999 and Fair Credit ReportingAct (USTR, 2001, p.138).
167 COM(2000)385.
168 DG Internal Market (2001c).European Union WT/TPR/S/102
Page 101
116. Personal data processing by software or hardware used for communications over the Internet
is not covered by the proposal as it is in princi ple already subject to the existing framework on the
processing of personal data and protection of privacy.  This matter has been examined by the Data
Protection Working Party, which has called on the industry to develop privacy-compliant products,
and is considering the development of a European standard or a certification procedure to enable
consumers to identify privacy-compliant products.169
(d) Indirect taxation of deliveries of goods and services contracted over the Internet
117. Off-line delivery of goods resulting from e-commerce through imports into the Community
are subject to value-added tax (VAT) on the basis of the national-treatment principle.  VAT is
assessed on goods supplied within the Community on the basis of the destination principle, except
when goods are supplied by a registered business in one Member State to a private consumer inanother, to which the VAT arrangements for distance sales apply.  VAT is applied at the point of
origin up to a threshold for sales (between € 35,000 or € 100,000) established by the Member State of
destination, beyond which Community sellers are required to be registered for VAT in the Member
State of destination and, where appropriate, have a taxable representative there in order to submit the
necessary tax returns.  However, the Court of Audit has indicated that there is little incentive for aseller to voluntarily register, or for a Member State to enforce this requirement.
170  Goods exported
outside the territory of the Community are VAT-exempt.
118. With respect to electronic deliveries to consumers in the EU from service providers
established outside the EU, the Community does not apply VAT, while service providers established
in the EU are assessed VAT for electronic deliveries to consumers in the EU on the basis of the
country-of-origin principle.171  The Commission proposed to modify these rules on the argument that
they "distort competition to the detriment of EU operators"172, and the proposal was adopted by the
Council in May 2002.173  Accordingly, the VAT arrangements for exports and imports of
merchandise, which are based on the destination principle, will apply to electronic services (e.g.,
software, data processing, supply of information).174  The EU will be considered the place of taxation
for a service supplied electronically by an operator established in another country to a recipient in the
EU and, conversely, a service supplied electronica lly by an operator established in the EU to a
recipient in another country will not be assessed Community VAT.  Assessment of VAT will occur
for foreign suppliers of digital products to consumers (B2C), but they will be allowed to register with
only one tax administration, completing all their obligations online, to simplify implementation of the
rules.
                                                     
169 DG Internal Market (2000).
170 Special Report No. 9/98 (OJ C 356, 1998).
171 Directive 77/388/EC.
172 COM(98)374.
173 European Commission Press Release IP/02/763.
174 COM(2000)349.  See European Commission Press Release IP/00/583 and USTR (2001), p.138.European Union WT/TPR/S/102
Page 103
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