RESTRICTEDWORLD TRADE
ORGANIZATIONWT/REG50/M/2
WT/REG51/M/2
WT/REG52/M/2
19 March 1998
(98-1120)
Committee on Regional Trade Agreements
Sixteenth Session
EXAMINATION OF
THE EUROPEAN COMMUNITIES-HUNGARY EUROPE AGREEMENT, SERVICES;
THE EUROPEAN COMMUNITIES-POLAND EUROPE AGREEMENT, SERVICES; AND
THE EUROPEAN COMMUNITIES-SLOVAK EUROPE AGREEMENT, SERVICES
Note on the Meeting of 18 February 1998
Chairman:  Mr. Stuart Harbinson (Hong Kong, China)
1. Under Agenda Items D.VI-VIII of its Sixteenth Session, as found in Airgram WTO/AIR/769,
the Committee on Regional Trade Agreements (CRTA) took up the examinations of the European
Communities-Hungary Europe Agreement, Services;  the European Communities-Poland Europe
Agreement, Services;  and the European Communities-Slovak Republic Europe Agreement, Services.
2. The Chairman recalled that the Committee had held a first round of examination of these
three Agreements during its fourteenth session in November 1997 under the chairmanship of
Mr. John Weekes.  Summary records of that meeting had been distributed as documents
WT/REG50/M/1, WT/REG51/M/1 and WT/REG52/M/1.  The Committee's task in the day's meeting
was to continue the examination, using as a basis the Standard Formats (documents WT/REG50/1,
WT/REG51/1, and WT/REG52/1) which had been subm itted by the Parties subsequent to the first
round of examination.  In line with past practice, the Chairman proposed that the Committee make the
examinations in a grouped way, while keeping in mind that these were separate Agreements.
Delegations were thus invited to state in their interventions whether their questions or comments
related to a specific Agreement or to all three.
3. The representative of the European Communities opened by recalling that he had presented a
general overview of these three Agreements during the first round of examination and hoped that the
Standard Formats provided by the Parties would add clarity to what had been said at the last meeting.Statistics had been provided, although given the inherent difficulty in gathering statistics on services
sectors, these were perhaps not as detailed as might be desirable.  His delegation was ready to provide
further clarification as needed, beyond what had been provided in the Standard Formats.  He
explained that the Agreements had been written in the style of the European Treaties and would serve
as a framework for liberalization and integration efforts.  Given that the eventual goal was theestablishment of a single market and the accession of the three countries - Hungary, Poland, and the
Slovak Republic -to the European Communities (EC), his delegation was of the view that the
Agreements, which were comprehensive in coverage,  would lead to substantial liberalization in trade
in services.  It was the view of his delegation that the Agreements met the criteria set out in GATS
Article V and would not result in additional barriers to third countries.WT/REG50/M/2
WT/REG51/M/2
WT/REG52/M/2
Page 2
4. The representative of Canada thanked the Parties for providing the Standard Formats.  With
reference to the ten-year transition period, he wondered if it was envisaged as a maximum or whether
there was provision to extend it beyond ten years, if the Parties deemed it necessary.  According to the
Standard Format, there would be free trade in goods by the end of the transition period, but serviceswould be "progressively liberalised": did this mean that services would be completely liberalized by
the end of the transition period or would they only be progressively liberalized with no end point?  He
also wondered if the Agreements contained a ratchet clause, i.e. was liberalization automatically
locked in?
5. The representative of the United States expressed concern over the ten-year transition period
and the notion of progressive liberalization; the latter tended to be in the eyes of the beholder.  GATS
Article 5:1 had provision for transition periods, but his delegation was concerned about the lengthytransition periods of these Agreements, particularly with regard to establishing a precedent.
6. The representative of Japan also expressed concern about the ten-year transition period and
wondered if it was reasonable in accordance with GATS Article V:1.  She requested an update on the
progress of implementation of the Agreements, bearing in mind that they had entered into force four
years before.
7. The representative of the European Communities replied that the ten-year transition period
was a maximum.  On the linked questions of progressive liberalization and a ratchet clause, he said
that the objectives of the Agreements had be taken into account.  The objectives were to integrate
economies in terms of harmonizing legislation and liberalizing the provision of services, thereby
creating a single market.  For trade in services this involved a significant amount of legislation whichhad developed over a number of years.  Ten years was, in fact, quite an ambitious timetable for an
undertaking of this scale.  The second point to be recognized was that in the three economies in
transition to a single market services sectors were developing rapidly.  The Agreements represented a
preparatory step in the ultimate goal of enlargement of the EC to include these economies.  A ratchet
clause was not necessary given the Agreements' clear  objectives of liberalization, harmonization and
creation of a single market.  In response to the query about progress of the implementation efforts thus
far, he said that the various committees and s ub-committees responsible for detailed implementation
had been established and that the harmonization of legislation was progressing well.
8. The representative of the United States said that, while he recognized that these countries
were in transition, the ten-year transition period, nonetheless, seemed lengthy and set a bad precedent.
With regard to progressive liberalization and the notion that there was no turning back from
liberalization because of the three countries' eventual  EC membership, he wondered to what extent the
approximation of measures in these three countries was less liberal than that in the EC.  This was
important in the context of the objectives of GATS Ar ticle V:1.  Part of the difficulty in determining
this was due to the fact that the Committee had only the interim Agreements and it was the Europe
Agreements which had the details on the services aspects.
9. In response to the comment about the ten-year transition period setting a bad precedent, the
representative of the European Communities said that agreements should be examined on a case-by-
case basis, and that longer periods should be possibl e if economies were of different types.  On the
question of approximation and harmonization of measures, he said that the process of harmonization
was, in itself, liberalizing and would result in a situation where WTO rules remained in force and
additional liberalization was added.WT/REG50/M/2
WT/REG51/M/2
WT/REG52/M/2
Page 3
10. The representative of the United States asked to what extent liberalization had taken place on
existing measures.  The provision in GATS Article V was somewhat different from the provision in
GATT Article XXIV in respect of the overall assessment of an agreement.  GATS Article V:4
contained an obligation not to take measures which "raise the overall level of barriers to trade inservices within the respective sectors or subsectors ...".  Thus the Committee had the obligation under
GATS Article V to examine elimination measures.  It was on this basis, as well as for the purposes of
transparency, that he had requested this information.  It was not the remit of the Committee to judge
whether the overall understanding was acceptable, though harmonizing standards and measures in the
area of services with the EC ones certainly constituted a very important liberalization feature.
11. The representative of the European Communities agreed to provide further information on
how approximation and harmonization was planned to take place, how it worked in practice and its
effects  on third Parties.  He added that the recent negotiations under the GATS on
Telecommunications and Financial Services had provided a good example of the benefits of gradual
approximation and had demonstrated that approximation could mean liberalization.
12. The representative of Japan said that in the context of the interpretation of GATS Article V:1,
tabled by her delegation as a non-paper in summer 1997, she questioned whether the Agreement was
compatible with GATS Article V:1(a) which called for "substantial sectoral coverage", as it did not
cover certain important sectors or subsectors.  Air transport services, inland-waterways transport
services, and maritime cabotage transport services were described as temporary exemptions.  Other
exclusions were agriculture, forestry and fishing (n ot including the processing of them), ownership,
sale, long-term lease or user right on real pr operty, land and natural resources and so on.  She
requested an explanation for these exemptions.  In the area of air transport services, her delegation
was of the view that at least three subsectors, namely aircraft repair and maintenance services, the
selling and marketing of air transport services, and computer reservation system services should be
included.
13. The representative of Canada expressed his delegation's reservation about the assertion made
by the Parties that, in principle, no sector was excluded and that there was no a priori  exclusion of any
mode of supply.   It was his delegation's view that the degree of liberalization was not as
comprehensive as the Parties claimed.  For instance, he understood that national treatment, which was
one of the cornerstone obligations in the services area, was only granted gradually and to certain
sectors over time.  How could the Parties claim th at all sectors were covered when a key component,
national treatment obligations, was not, in fact, extended, or only extended on a phase-in basis, to a
number of sectors?  A number of sectors were not included, or would not be included at the end of the
transition period.  For example, in the EC-Poland Agreement, national treatment in the construction
sector was only granted after five years.  Additionally, there were many sectors which were excluded
from the scope of application of national treatment.  He added financial services, legal services,
agency activities for real estate and activities re lated to natural resources and pipelines to those
already mentioned by the representative of Japan.  Thus, the breadth of coverage was not as thoroughas envisaged and he wondered  to what extent the Agreements provided for further discussion to
liberalize remaining sectors.  It was difficult to see why this mechanism was not in existence, given
that there was already a fairly lengthy ten-year transition period and a number of key services sectors
would still be excluded at the end of it.  He would appreciate an explanation from the Parties as to
how this could be justified in terms of GATS Article V.
14. The representative of Australia agreed with the reservations expressed by the delegations of
Canada and Japan with respect to the coverage of the Agreement.  There remained a number of
restrictions, as mentioned, in areas such as financial services, legal services, the transport sector andWT/REG50/M/2
WT/REG51/M/2
WT/REG52/M/2
Page 4
so on.  Her delegation was interested to know if there was a provision for including these remaining
sectors into the Agreements over time.
15. The representative of the United States said that other delegations had given examples of
sectors which were either not covered, or which had specific activities and modes of delivery which
were not subject immediately to the obligations of the Agreement.  Given the inventory of items not
covered, there was some question as to whether GATS Article I was satisfied.  He conceded,
however, that many agreements (including those being examined in the day's meeting) had some
sectoral exclusions and the Committee needed to judge whether this nonetheless qualified them under
GATS Article V.
16. The representative of European Communities replied that it was useful to bear in mind, as had
the representative of the United States, that there was no explicit requirement to cover all sectors.  All
three Agreements had exclusions and services sectors which were not covered in their entirety.  In
terms of modes, there was a requirement not to exclude any mode a priori .  It was important to look at
the balance of the sectors and to take account of the fact that no mode was excluded.  The Agreements
were based on a negative list approach, which contrasted considerably with the positive list system of
the GATS.  Under such an approach, there might seem to be more sectors excluded than was actuallythe case.  In terms of the specific exclusions mentioned, his delegation stood by its comment that no
sector was, in principle, excluded given that there were various provisions in the texts of the
Agreements for revising and examining exclusions.  The Association Council, the main body charged
with the implementation of the Agreement, had the responsibility for examining ways of including the
excluded sectors or speeding up their coverage in the course of the transition period.  The transitionperiod was a maximum and the process could be accelerated, given favourable conditions.  In terms of
transport services, there were two important provisions in the Agreements.  First, the Parties were
required to examine ways of concluding a se parate transport agreement; thus coverage and
liberalization were envisaged and progress had been made on that front.  Second, there was a further
provision for the harmonization of legislation and measures which affected the inland and airtransport sectors.  For example, Article 57.5 of the EC-Slovak Republic Agreement said that "during
the transitional period, the Slovak Republic shall progressively adapt its legislation including
administrative, technical and other rules to that of  Community legislation existing at any time in the
field of air and inland transport in so far as it serves liberalisation purposes".  Thus it was not the case
that these sectors were completely excluded.  On the question of maritime transport and inlandwaterways, he pointed out that both of these were specific in nature, as evidenced by discussions
under the GATS.   The maritime sector was a rather difficult area; given that inland- waterways traffic
required geographical proximity, his delegation had considered it reasonable not specifically to
include this sector.  As regards the comment made by the representative of Japan on the ownership
and various restrictions on real estate, natural resources and so on, he pointed out that, while listed
under the section on establishment, these were exclusions of a general nature which would not have
much bearing on services industries. The various restrictions on gambling, betting, and lotteries whichappeared in some of the Agreements fell under Article XIV of the GATS where there was provision
for taking action in support of public policy.  In summary, he said it was important to look at the
balance of sectors and the way they were treated.
17. In response to the point made by the representative of Canada about the construction sector,
the representative of Poland replied that national treatment had been granted in the construction sector
as regards the establishment and operation of companies from the entry into force of the Europe
Agreement, not after five years.
18. The representative of the United States said that each of the three Agreements had a provision
stating that "a company or firm set up in accordance with the laws of each Party" must possess a "real
and continuous link" with the economy of one of the Parties.  He asked for clarification of whatWT/REG50/M/2
WT/REG51/M/2
WT/REG52/M/2
Page 5
constituted a "real and continuous link" and what standards had to be established to meet this test.
This was related to GATS Article V:6 where rights were associated with suppliers engaged in
"substantive business operations".  The representative of Australia echoed this query.
19. The representative of European Communities explained that this was a standard provision
which had been written into EC schedules, w ithin their commitments  in the GATS.  The
understanding was that it would not be sufficient, for instance, for an establishment just to have a
post-box address; there needed to be ongoing economic activity.  Parameters would be set through
jurisprudence in the European Court of Justice which would be the ultimate arbiter.  She agreed to
provide specific jurisprudence to Members, if available, to assist them in their understanding of this
point.
20. The representative of Canada said that his comment related to the foregoing discussion on the
denial of benefits.  He had seen that in some of the Agreements there was a sort of anti-circumvention
clause, which stated that the "provisions of this Agreement shall not prejudice the application by each
Party of any measure necessary to prevent the circumvention of its measures concerning third-country
access to its market through the provisions of this Agreement".  This seemed to be an open-ended
provision allowing Parties to adopt any measure they wished in the case of alleged circumvention.  Itgave the Parties the right to set the standard, yet Article V:6 of the GATS provided clear guidance as
to what the standard ought to be, i.e. "substantive business operations".  His delegation had taken note
of the explanation provided earlier that this was something that needed to be examined on a case-by-
case basis and that the Parties would try to provide specific jurisprudence in this area.  His delegation
would welcome further clarification of the intent and rationale behind this sort of open-ended clauseand whether there was more guidance in terms of th e implementation of this particular clause in the
Agreements.
21. The representative of the European Commun ities replied that there was nothing in this
particular clause which would raise barriers.  Rather, it preserved the existing rights of the Parties to
take action as necessary; it did not confer additional rights.  A general point to be borne in mind wasthat these Agreements predated the GATS and thus did not always correspond to the provisions of the
GATS.  His delegation was of the view that the GATS provisions applied also in this case;  in
addition, third Parties were accorded legal protection under the GATS and any measure taken in the
light of this particular provision could be referred to dispute settlement, if necessary.  The Parties did
not view this particular clause either as creating new rights or undermining existing rights of otherMembers under the GATS.
22. The representative of Canada replied that there seemed to be a difference of opinion about the
purpose of GATS Article V:6;  the issue was not that  new barriers could be introduced, but, rather, it
concerned the right of an established juridical person, constituted under the laws of one of the Parties,
to benefit from the provisions of the Agreements.  Thus it was not a case of raising barriers, but of
enjoying the benefits of liberalization.  This was a fundamental difference in terms of how the test of
GATS Article V:6 was met.  His delegation needed assurance that a company duly constituted underthe laws of one of the Parties would enjoy the benefits of the Agreements, irrespective of whether it
was owner-controlled by the Parties or by third Parties.
23. The representative of the United States agreed with the representative of Canada that this was
a problem.  The representative of the European Communities had mentioned earlier that this might be
associated with the fact that some of the provisi ons were drafted prior to the GATS.  The situation
might be remedied by updating the text of the Agreements.WT/REG50/M/2
WT/REG51/M/2
WT/REG52/M/2
Page 6
24. The representative of the European Communities reaffirmed that under GATS Article V:6, a
service supplier of any third-Party Member who was a juridical person had the right to enjoy the same
benefits as those of the Parties, subject to the constraints set out in that paragraph, notably the
reference to engagement in "substantive business operations".  He added that, where a company wasset up by a third Party within the territory of one of the Parties, that company had exactly the same
rights and was considered as a national or domestic company.  If a third Party set up a branch in one
of the Parties, which was directly established from its own country and would therefore not have a
juridical person or a juridical status within the Party to the Agreement, different treatment might be
applied, perhaps for prudential reasons.  But this was not covered by GATS Article V:6.  Where a
juridical person had been established, that person would enjoy all the rights of a domestic company.
25. The representative of Canada requested a further clarification: did this mean that this
particular provision (for example Article 48.4 of the EC-Poland Agreement) could not be invoked on
a company owned by a non-national of the Parties that was established and had a juridical status in
one of the Parties to the Agreement?  The repres entative of the European Communities replied in the
affirmative.
26. The representative of Japan asked for clarification regarding the safeguard provisions:  were
they applicable in the situation where the im plementation of the liberalization commitment was
delayed or had failed or did they also cover injury to domestic industry even after the Parties had
completed  the implementation?  If the latter case applied, under which conditions would the measure
be taken and in which sectors?  What were the exceptional circumstances in which exchange rate
restrictions could be applied?
27. The representative of Canada said that he had an extensive list of questions on the safeguard
provisions.  In particular, his delegation wanted to understand how the safeguard clause would apply
in practice.  What were the grounds for a safeguard action, who and what would be the objective of
the procedure, what criteria needed to be satisfied before a safeguard action could be taken, what
procedures were to be followed by the country invoking the safeguard action,  and what remedialmeasures were contemplated?  His delegation had noted that one possible remedial action might be
the denial of access or right to establish.  Given that this would require the Parties to differentiate
between a domestic and a foreign service provider, how could this be implemented?  The
representative of the European Communities had just stated that there was no ownership or control
test of anyone who was already established as a juridical person in one of the Parties.  How couldremedial action be taken in those circumstances?  What were the basic criteria that needed to be
satisfied before such an action could be taken?  For instance, his delegation had noted that there was
some consideration of whether the industry was unde rgoing restructuring, or was newly emerging, or
facing serious difficulties.  It would be useful to have better guidance on how these various criteria
would be applied in practice.  He would provide the questions in writing, but would also welcome any
explanation that the Parties could provide in the day's meeting.
28. The representative of the European Communities replied that his delegation would provide a
written response to the questions of the delegations of Canada and Japan.  In general terms some
points were worth making about safeguards.  Apart from ongoing discussions on emergency
safeguards, no real safeguard provision existed in the GATS.  As regards the safeguard provision
concerning establishment, he pointed out that it did not apply to the EC, but only to the other Parties
in the three Agreements.  So it was not an extensive safeguard provision.  Moreover, no distinctionwas made between the treatment of EC companies and third-country companies established by the
EC.  They had equal access to the markets of the Slovak Republic, Poland and Hungary.WT/REG50/M/2
WT/REG51/M/2
WT/REG52/M/2
Page 7
29. The representative of the European Communities continued, saying that where commitments
had been undertaken within the GATS they would have precedence.  If those commitments needed to
be reviewed because of a particular difficulty, provisions within the GATS would be applied, for
example in relation to balance of payments problems, or Article XXI for the modification ofschedules.  Furthermore, there was a provision for amicable consultation in the safeguard mechanism
of the Agreements, to try to avoid a safeguard action entering into force.  Thus far, to the extent of her
knowledge, no safeguard had been applied.  The safeguard clause was, in effect, more of a safety
clause to assist the countries involved, given their particular situation at the time of the drafting of the
Agreements.
30. The Chairman asked that the delegations of Canada and Japan submit their questions in
writing to enable the Parties to respond in a more precise manner.
31. The representative of the United States said that the full text of Agreements covering goods
was normally circulated to Members.  Where could her delegation get the full text of the Agreements
being examined here?  The representative of Japan supported this request.  The Chairman  said that the
full text of the Agreements was quite substantial.  Copies could be obtained from the Secretariat or theParties.  The representative of the European Communities pointed out that the services provisions
were included in the Agreements covering goods.  The representative of the United States  replied that
it was the Interim Agreements which had been circulated, and these did not contain all the servicesprovisions.
32. The Chairman said that this was correct, but reiterated that copies of the Agreements could be
obtained, if required.  He added that this concluded the examination of the services component of the
Europe Agreements between the EC and Hungary, Poland and the Slovak Republic.  The Parties had
promised additional information in a few areas and some delegations would submit written questions.
He asked the Secretariat to prepare the record of the meeting and said that further discussions would
be necessary before the drafting of the examination report.
33. The Committee took note of the comments made.
__________