RESTRICTEDWORLD TRADE
ORGANIZATIONS/C/W/102
5 March 1999
(99-0885)
Council for Trade in Services Original:  English
SYSTEMIC ISSUES ARISING FROM ARTICLE V OF THE GATS
Communication from Hong Kong, China
The following communication has been received from the Permanent Delegation of
Hong Kong, China with the request that it should be distributed to all Members.
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I. INTRODUCTION
1. This paper deals with the Economic Integration Agreements on Services (EIAS). Hong Kong,
China believes there is a lack of clarity with respect to many of the key terms of the relevant GATS
provisions.
2. This paper attempts to identify the issues that arise from the interpretation and application of
GATS Article V and related provisions of the GATS.  The list of issues raised is non-exhaustive, and
is without prejudice to the positions of any WTO Members on the subject.  The purpose of the paperis to stimulate discussion in this important area of the GATS.  Hong Kong, China believes the issue is
of sufficient importance to warrant examination no t only in the CRTA but also in other relevant
bodies of the WTO including the CTS.
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II. INDIVIDUAL PROVISIONS IN ARTICLE V
3. The language in the chapeau of GATS Article V:1 - “This Agreement shall not prevent any of
its Members from being a party to or entering into an  agreement liberalizing trade in services” - raises
a question regarding the scope of the exemption granted to EIAS.  More specifically, does it create acover for the departure of an EIAS from not only the MFN obligation, but also other obligations of the
GATS, and if so, which obligations?  The critical issue here is the meaning of the words “shall not
prevent”.  In other words, which obligations of the GATS, other than the MFN obligation, would
“prevent” Members from “being a party to or entering into an agreement” that meets the test of
Article V?
4. Article V:1(a) establishes a requirement of “substantial sectoral coverage”, and footnote 1
spells out the factors that are to be considered in assessing whether this condition has been met.
Specifically, footnote 1 calls for an examination of the number of sectors, volume of trade affected
and modes of supply covered by the liberalization provisions of the agreement.  But it is unclear what
it means.  There has already been discussion in the CRTA as to whether a whole service sector can beexcluded and if the EIAS would still pass the test .  Should due account be taken of the volume of
trade affected?  In other words, should the language  in footnote 1 be viewed as providing a basis for
assigning weights to the sectors covered by the liberalization provisions, or as establishing three
separate factors to be considered in making an overall judgement?  Are the factors exhaustive?
                                                     
1 Hong Kong, China has made a similar submission to the CRTA (WT/REG/W/34).S/C/W/102
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Would it be helpful to provide further guidance on what constitutes “substantial coverage”, e.g. a
proportion of the total number of sectors or volume of trade?
5. Footnote 1 of Article V:1(a) also states that the “agreements should not provide for the
a priori exclusion of any mode of supply”.  Does this mean that any EIAS has to cover investment
and labour mobility in the sense of Modes 3 and 4 as it relates to trade in services?  Is this requirementfor labour mobility circumscribed by the provisions of paragraph 2 of the Annex on Movement of
Natural Persons Supplying Services under the Agreement?  Paragraph 2 of the Annex provides that
the GATS “shall not apply to measures affecting natural persons seeking access to the employment
market of a Member, nor shall it apply to measures regarding citizenship, residence or employment on
a permanent basis.”  Could a reasonable interpretation of this language be that an economic
integration agreement on services must provide labour mobility for natural persons employed by firms
supplying services, or for natural persons with established contracts to supply services?
6. Article V:1(b) states that a GATS-consiste nt EIAS should provide “for the absence or
elimination of substantially all discrimination, in the sense of GATS Article XVII” (on national
treatment), with certain enumerated exceptions.  This raises questions both with respect to the
meaning of the term “substantially all” and the scope of the exceptions.  How should “substantially”
be interpreted?  Would it be desirable to give this term greater precision?  The term “substantially all”is the same term that is used by GATT Article XXIV.  Does the discussion of the meaning of this term
as applied in GATT Article XXIV:8 provide any insights with respect to its meaning in GATS
Article V?
7. Article V:1(b) excepts measures permitted under Articles XI (IMF Provisions on Payments
and Transfers), XII (Balance of Payments), XIV (Gen eral exceptions related to health, safety, taxation
and public order), and XIV bis (National Security).  This list does not cover for instance, Article VII
(Recognition), Article X (Emergency Safeguard Measures), Article XIII (Government Procurement),Article XV (Subsidies), the Annex on Air Transport Services and the Annex on Financial Services.
This raises several questions:
• Does this mean that Members of an EIAS cannot discriminate against each other in
the application of domestic measures related to the licensing of professionals, the
granting of domestic subsidies, government procurement, air traffic rights, and
prudential supervision?
• Does it mean that they are not allowed to apply Emergency Safeguard Measures in
their trade with each other?  How does this square with the requirement of Article X:1
that “There shall be multilateral negotiations on the question of emergency safeguardmeasures based on the principle of non-discrimination” ?  On the basis of a literal
reading, the requirements of Article V:1(b) and Article X:1 would seem to be in
conflict, unless one were to adopt an expansive interpretation of the language in the
chapeau of Article V:1.
• Do all existing EIAS meet the test of Article V:1(b) that all forms of discrimination
with respect to the regulation of professional services, air transportation services and
financial services are eliminated?  Do they all provide for the elimination of all formsof discrimination in government procurement of services or in the provision of
subsidies to services suppliers?
• How should the requirements of Article V:1(b) be interpreted with respect to the
further negotiations contemplated under Articles VII, X, XIII, XV, and the various
annexes to the GATS?S/C/W/102
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8. Article V:1(b) requires that the EIAS eliminate discriminatory measures “either at the entry
into force of that agreement or on the basis of a reasonable time-frame.”  What is a “reasonable time-
frame”?  Does Article XXIV:5(c) of the GATT, as interpreted by the Understanding on the
Interpretation of Article XXIV of the GATT 1994, provide a useful reference point?
9. Article V:2 provides that an evaluation of the conditions under the provisions of Article V:1
may consider the relationship of the EIAS “to a wider process of economic integration”.  This raises
at least two questions.  First, what does a “wider  process of economic integration” mean?  Second,
how should the existence and content of such a “wider process of economic integration” affect the
evaluation of whether the conditions under paragraph 1(b) are met?
• A wider process of economic integration could be interpreted in at least two different
ways.  First it could mean a process involving not only the elimination of barriers totrade in services, but also the elimination of barriers to trade in goods.  Second, it
could mean a process that went beyond the elimination of discrimination to theharmonization of government regulatory measures among Members of an EIAS.
These two interpretations are not mutually exclusive.
• Nothing in Article V:2 itself points to the intent of the provision.  One possible
meaning of Article V:2 is that the existence of a wider process of economic
integration could lower the threshold of what would be considered acceptable interms of the remaining areas of discrimination among members.  Thus, for example, a
wider process of harmonization of regulatory measures in professional services could
be expected to lead to the elimination of all forms of discrimination in the regulation
of professional services.  Another possible interpretation of Article V:2 is that the
time-frame for a parallel liberalization of trade in goods should affect what should beconsidered a “reasonable time frame” for the elimination of all forms of
discrimination affecting trade in services.
10. Article V:3(a) gives developing countries “flexibility” in meeting the conditions of
Article V:1, particularly with respect to its s ubparagraph (b).  A number of questions arise with
respect to this provision.
• What is the implication of the reference to Article V:1 to the flexibility that might be
provided in applying Article V:1(a), which requires that an EIAS provide substantial
sectoral coverage?  Does it imply that only limited flexibility should be provided in
applying the condition in subparagraph (a)?  If so, how might that flexibility be set
out?
• Does the reference to flexibility in the application of the conditions of Article:1(b)
apply to the elimination of “substantially all discrimination” as well as to the
“reasonable time frame” for accomplishing this goal?  Would it be useful to elaborate
on the extent of “flexibility” available to developing countries?  Would it be desirable
to spell out a rationale for the flexibility granted to developing countries, e.g. shieldthem from international competition in underdeveloped sectors or subsectors, give
them time to develop the competitiveness of particular sectors or subsectors, or give
them time to develop a functioning regulatory system in particular sectors or
subsectors?  Would it be possible, on the basis of a particular rationale, to set out that
flexibility in an appropriate fashion?
• Does the notion of “in accordance with the level of development of the countries
concerned” in Article V:3(b) limit the “flexibility” to only the services regime of theS/C/W/102
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developing country Members in the case of  an EIAS comprising both developed and
developing countries Members?
11. Article V: 4 states that EIAS “shall not in respect of any Member outside the agreement raise
the overall level of barriers to trade in services within the respective sectors or subsectors compared tothe level applicable prior to such an agreement.”  A number of questions arise in interpreting and
applying this provision.
• What system is to be used in testing whether or not the overall level of barriers to
trade in services vis-à-vis outsiders has been raised in individual sectors orsubsectors?  Does this test have to be met with respect to both the sectors and the
subsectors?
• How can the level of barriers be evaluated on an objective basis in practice?  In most
cases, differences in regulatory mechanisms and the well known absence of detailed
data on services would make it practically impossible to calculate an overall level for
the barriers in effect before the implementation of the EIAS.  In theory one could
convert all barriers into tariff equivalents, and all of these tariff equivalents could be
converted into an average tariff for the members of the EIAS. The calculation of such
a tariff equivalent, however, would run into insurmountable data and methodologicalproblems in practice.
• A related question is under what circumstances an EIAS will entail changes to the
level of barriers to trade in services with Members outside the EIAS.  Are they relatedto some forms of harmonization/alignment among members to the EIAS as to their
respective treatments of third parties, in a way similar to that envisaged in theexternal trade regime of customs unions for goods?  Does it relate also to the concept
of “wider process of economic integration” in Article V:2?  Would Article V:5 imply
that to withdraw or modify the Annex to Article II Exemption was not permissible
and that the Article XXI route was required for any withdrawal or modification of
commitments?
• Since it may be impossible to calculate the overall level of barriers in effect before
the adoption of the EIAS, Members might want to consider an alternative test.  One
alternative approach would be to require that an EIAS not reduce the level of trade in
any sector or subsector, or that it not reduce the growth of trade in any sector or
subsector below a historical trend.  This alternative approach might also behandicapped by a shortage of detailed data, but it would run into fewer
methodological problems.
12. Article V:3(b) allows an EIAS involving only developing countries to grant “more favourable
treatment” to service suppliers owned by “juridical  persons owned or controlled by natural persons of
the parties to such an agreement.”  Does the requirement of Article V: 4 put an effective limit on the
more favourable treatment that can be granted to companies owned by citizens of such an EIAS, by
requiring that the overall level of barriers in each sector and subsector be no higher than before?
Would it be possible further to clarify the degree of favourable treatment that might be accorded by
establishing some limits on the degree of more favourable treatment, or by establishing conditions for
the granting of more favourable treatment?  For example could more favourable treatment be reserved
to enterprises that are not globally competitive?
13. Article V:6 grants a service supplier of another Member certain rights under the EIAS
“provided that it engages in substantive business operations”.  How is the “substantive business
operations”, a concept also found in GATS Article X XVIII:(m)(i), to be interpreted?  Is this termS/C/W/102
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meant to distinguish a service supplier producing services from one selling  services?  Or is it meant to
distinguish between a service supplier actively producing and/or selling services from one which is
merely properly legally established but without as yet any production and sales activities?  Or is it
intended to distinguish between service suppliers who may be “carrying on” a service (without being
formally established) from those who are properly legally established?
14. Article V:7 requires prompt notification of th e establishment or modification of EIAS. How
does the requirement for prompt notification relate to the requirement of Article V:5 for at least
90 days advance notice of the withdrawal or modification of a Member’s schedule in connection with
the conclusion, enlargement or modification of an EIAS?  Does Article V:5 in effect define “prompt”
as used in the context of Article V:7 as requiring notification of the conclusion, enlargement or
modification of an EIAS 90 days before it takes effect?
III. GENERAL DISCUSSION OF ARTICLE V
15. A general question that might be explored is whether there are any inter-linkages between
GATS Article V and GATT Article XXIV.  One such link could arise, for example, from a possible
interpretation of the provisions of Article V:2 of the GATS, which links an examination of the
conditions established in Article V:1(b) to the existence and content of “a wider process of economic
integration or trade liberalization among the countries concerned.”  If the term “a wider process ofeconomic integration” is interpreted to mean a process involving the liberalization of goods as well as
services, such a link might be seen to exist.
IV. CONCLUSIONS
16. This paper clearly shows that there is a large number of important and basic questions that
need to be addressed regarding EIAS.  Some suggestions on ways forward are floated in the paper.
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