RESTRICTEDWORLD TRADE
ORGANIZATIONWT/REG39/M/2
17 June 1998
(98-2456)
Committee on Regional Trade Agreements
Seventeenth Session
EXAMINATION OF THE TREATIES ESTABLISHING
THE EUROPEAN UNION, SERVICES
Note on the Meeting of 5 May 1998
Chairman:  Mr. Claude Bouah-Kamon (Côte d'Ivoire)
1. The Committee on Regional Trade Agreements took up the examination of the Treaties
Establishing the European Union, Services under Agenda Item C.V of its Seventeenth Session, as
found in Airgram WTO/AIR/831.  The examination was conducted on the basis of the Standard
Format for Information on Economic Integration Agreements on Services and accordingly followed
its layout.  The following topics were discussed:
A. General Remarks
B. Section I Background Information on the Agreement
I.4 Economic and trade data
C. Section II Provisions Affecting Trade in Services
II.1 Sectors or sub-sectors and modes of delivery
II.4 Treatment of services and service providers from third countries
II.5 Rules of origin for Community companies
II.7 Safeguards
II.8 Subsidies and state-aidII.9 Public procurement
A. General Remarks
2. The Chairman stated that a first meeting devoted to the examination of the Treaties
Establishing the European Union, Services, had taken place on 4 November 1997.  Following the
request of delegations, the European Communities and their Members States submitted a general
presentation of these Treaties on the basis of the Standard Format, document WT/REG39/1,
distributed in mid-April.  Before opening the debate, he recalled that the Treaty which established the
European Communities (EC) had been in force for 40 years, thus having been concluded well beforethe entry into force of the World Trade Or ganization (WTO) rules on trade in services.
3. The representative of the European Communities said that it seemed strange to her to
introduce the EC and its twelve Member States, as the EC were at that time composed of fifteen
Member States.  Further, despite the fact that the EC had negotiated its liberalization and specific
commitments as one country, they had yet been asked to provide information on the nature of itsintegration agreement.  She was however pleased to demonstrate that, throughout time, the EC had
become a full-fledged economic integration agreement in the many ways foreseen in the Treaty of
Rome.  That applied also to the EC with fifteen Member States.  In fact, the EC went further than an
economic entity, as it comprised also a monetary union.  She indicated that in documentWT/REG39/M/2
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WT/REG39/1 explanation was given on how to nomin ate the EC according to different situations.
The Committee had to examine whether the EC qualified as an integration agreement in the sense of
Article V of the General Agreement on Trade in Services (GATS) and whether the Parties had
standstill and roll-back commitments among themse lves.  She said that that was the case and that
the EC went beyond economic integration.  The EC had substantial coverage and, in the whole, allGATS service sectors were covered or part of the EC agreement despite the fact that some of the EC
definitions on trade in on services differed from those of the GATS.  No single service sector was
excluded, except for services supplied in the exercise of a governmental authority, which were
non-tradeable and which were also partially excluded from the GATS under its Article I.  All GATS
modes of delivery were covered;  however, the EC had different legal concepts.  For example, the EC
equivalent to the GATS commercial presence was righ t of establishment;  the EC's supply of services
included the GATS cross-border supply of service plus the movement of the service supplier to supply
the services, thus capturing modes 1, 2 and 4 of the GATS.  GATS mode 4 was also covered by the
EC's freedom of movement of persons.  Thus, as all sectors and modes of delivery were covered by
the agreements, it remained to examine how discriminatory measures were dealt with.
4. Continuing its general statement, the representative of the European Communities said that as
from the date a country became a Party to the EC, it had to apply a total ban on nationality conditions.
Discriminatory quantitative restrictions or equivalent measures were progressively removed, with the
most significant initiative being the institution of the single market, which started in 1987 and was
subsequently confirmed by the Treaty on the European Union.  At that stage, the EC were in a process
of trade facilitation, through the approximation of laws, either by harmonization or more frequently
by mutual recognition of regulations.  As the EC had achieved fully its single market, they had notime-table for the elimination of discriminatory measures in the sense of Article XVII.  There was
however, on a daily basis, a continuation of legislation for trade facilitation.  For the de facto
discriminatory measures which could not be anticipated, the situation was redressed either through
new legislation or through the Court of Justice.  The EC provided for a very far-reaching integration,
in terms of GATS Articles XVI, XVII and others.  Th e EC had many legislation aiming at recognition
of other Parties qualifications, in particular regarding professional services.  It had also very strict
disciplines on subsidies and state-aid to the effect that these should not distort the trade among
Member States.  The rules of origin for Community companies, relevant to Article V:6 of the GATS,
meant that a company from a Member State established in another would be treated as a Community
company.  That treatment was also extended to thir d-countries, and their suppliers were not denied the
benefits of the agreement once they were established in the EC.  The EC also had rules ensuring
non-discriminatory treatment, fair, open and transparent access when the supply of a service was donethrough procurement.  Institutional provisions also existed to guarantee  that Member States complied
with the EC's four freedoms and rights and obligations.  She said that that was, in summary, the result
of more than 40 years of integration and that the Committee had to examine whether that constituted
an integration agreement in the sense of Article V of the GATS.  The Treaties being examined went
further than having a standstill and roll-back commitment, as they provided for total elimination ofrestrictions.
5. The representative of the United States thanked the European Communities for the
information provided but stated that, due to its la te arrival, he would reserve his comments for the
forthcoming Session of the Committee.
B. Background Information on the Agreement
6. Thanking the EC for the information provided  in the form of the Standard Format, the
representatives of Canada and Japan  asked when data on trade in services would be provided.  TheWT/REG39/M/2
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representative of the European Communities  responded that data would come once the means to
present all the available data in a comprehensive manner would have been found.
C. Provisions Affecting Trade in Services
7. Thanking the EC for having presented informa tion in the form of the Standard Format, the
representative of Australia asked whether, regarding the exclusion from the integration rules of
services supplied in the exercise of a governmental authority, Article I.3(c) of the GATS was relevant,as these services were not supplied on a commercial basis nor in competition with one or more service
suppliers.  He also inquired whether any of these services were of the sort that would lend themselves
to a subsequent privatization and whether the EC did tend to deprivatize any of these sectors.  The
representative of the European Communities responded that the sector excluded corresponded to those
under Article I.3(b) of the GATS, which had a narrower scope than I:3(c).
8. The representative of Canada said that the operative question in section II.4 was whether the
formation of the EC itself had increased barriers vis-à-vis  third parties. He was therefore seeking for a
confirmation that the conclusion in paragraph 3 followed from an analysis of the provisions of the
Treaties establishing the EC, and not from the reasoning presented in paragraphs 1 and 2.  Therepresentative of the European Communities said that she had problems in understanding the question
posed and that she could subsequently reply in writing to that question, but that it was difficult toreply without referring to the Schedule.  By further integrating the EC market, the EC had opened up
more without adopting legislation affecting third-country suppliers.  Thus, the EC had facilitated
access for third-country suppliers, as they benefitted from a larger internal market, from theCommunity treatment in more areas and from a single regulatory regime.  Those cases where a
different treatment was allowed for third-countries had been included in the EC's Schedule, since
the EC(12) did indeed exist before the negotiations, with a certain level of liberalization and certain
treatment vis-à-vis  third countries.  All of that was in the Schedule, which came after the
establishment of the EC.  That was also confirmed through the accession of the three new MemberStates, as Members could see that in enlarging the EC did not have to increase its barriers vis-à-vis
third countries.  The representative of Canada said that he was simply seeking a confirmation of the
statement in paragraph 3, because some parts of WT/REG39/1 might lead to a different conclusion,e.g. the conditions attached for harmonization of rights of primary establishment might have some
impact in terms of the obligations concerning the majority control of airlines to benefit from the
internal market.  The purpose of that examination was to determine whether the EC(12) had the effect
to raise any barriers vis-à-vis  third parties, and he said that the reply given provided the assurance that
there had been no barriers raised as a result of the formation of the EC(12).
9. Referring to rules of origin, the representative of Japan requested the EC to elaborate on the
relationship between a juridical person in the cont ext of Article 58 of the EC Treaty and a service
supplier in the context of GATS Article V:6, on "effective and continuous link", on "substantive
business operations" and on the differences between subsidiaries and branches.  She also asked howan effective and continuous link between a company and a Member State could be recognized.
Replying to these, the representative of the European Communities said that when Article V of the
GATS had been negotiated, a compromise had been found on the language to ensure that the benefitsof the economic integration agreement would not be denied to companies from third-countries
established in one Party of the agreement.  In the EC, such provision applied provided the companyhad an effective and continuous link in terms of substantive business operations, and that was the
general rule.  Despite the fact that some jurisprudence existed on Article 58, she could not prove that
the criteria of Articles 58 and V:6 were the same as no jurisprudence existed on the latter.  In the EC,
"effective and continuous link" were interpreted to mean that benefits were denied for letter-box
companies, and that was also what was meant by Article V:6.  Letter-box companies were thosewhereby, although the condition for establishing a company were complied with, business wasWT/REG39/M/2
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effectively carried out outside the parties to an agre ement.  For example, it would not be sufficient for
a company to be established in a Member State with the majority of board members and shareholders
from that Member State;  the company would also have to have trade with EC Member States.  She
added that she would supply additional information in writing.  The branch treatment was included in
the EC's Schedule, as the conditions for establishing a branch, which were based on prudentialregulations and of a similar nature, differed for each Member State and there was no recognition or
harmonization of legislation in that field.  A branch established in one Member State had to
re-establish in another Member State in accordance with its conditions.  While Article 58 was not
applicable to branches, it was applicable to subsidiaries, as the minimum establishment conditions
concerning subsidiaries were the same for all Member States.  The representative of the United States
asked whether a branch, which had a commercial presence established in a Member State, wasentitled to the three other modes of delivery for providing services in another Member State withouthaving to establish another branch in that county.  The representative of the European Communities
responded that that was the case, provided the EC had undertaken a commitment in the relevant sectorwhich was included in the Schedule.
10. The representative of Japan enquired whether Article 115 of the EC Treaty, which seemed to
provide for restrictions on cross-border provision of services in cases of application of safeguard
measures, would cover all GATS modes of supply.  She asked whether her delegation's understanding
that measures would not be taken to restrict the activities of foreign companies to which Article 58
applied was correct.  She also asked whether safeguard measures had been taken in the past, and if
that was the case, in which area and form.  The representative of the European Communities
responded that safeguard measures had never been used on trade in services.
11. In the light of the fact that Article 115 of the EC Treaty had not been used for services and
that the purpose of an integration agreement was to integrate so that the members could benefit from
their comparative advantage, the representative of Australia asked whether the EC had any intention
of removing the possibility of taking safeguard measures in the services sector.  He requested thatclarification be provided on the wording that safeguard measures could be considered to deal with the"execution of measures of commercial policy taken in accordance with the EC by any Member State".
His understanding on that was that the possibility for taking safeguard measures would exist in
relation to a specific measure taken by a Member State that was in accordance with Community-wide
measures, and he requested clarification on how that could work.  Stressing that safeguard measures
had never been applied, the representative of the European Communities indicated that she had taken
note of Australia's recommendation.  In reply to the request for classification, she said that theMember State concerned should apply a safeguard in a way which would be the most compatible withCommunity and international obligations.
12. The representative of Japan requested the EC to reply, in a written form, on whether, because
third-country companies established in one Member State were considered as Community companies,
the application of safeguard measures would also affect them.  She also requested that further
explanation be given on aid compatible with the common market in the context of Article 92 of theEC Treaty, as the vagueness of the wording could result in a restrictive effect on the free movement of
services.  The representative of the European Comm unities said that the best way to respond to the
question would be through examples, and that these would be submitted later in writing.
13. Commenting on the EC statement that one of the main principles of the public procurement
directions was the banning of technical specifications liable to discriminate against potential foreignbidders, the representative of Japan asked how that non-discriminatory principle was implemented.
The representative of the European Communities re plied that the requirement to comply with a
technical specification could de facto  exclude a foreign supplier from a bid, and that the EC simply
did not allow conditions that could have the effect of discriminating.  If a bidder thought that it had
been de facto excluded because of the requirements, the EC had mechanisms of control, such as theWT/REG39/M/2
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bid challenge procedures and ultimately the Court of Justice.  The best way to prevent that was to give
as many specifications as possible on what could be specified;  legislators and regulators should be
trusted.  If a tender was issued which would be diff icult for others to comply with, there was the threat
of a challenge and it would be sometimes more costly to re-do the tender than to issue it correctly and
in a non-discriminatory way from the beginning.  The representative of Japan said that if it was up to
the legislation, therefore there was no control over the substance of making the technical
specifications.  That could also be an issue for multilateral consideration.
14. Noting that a number of questions had been posed despite the late arrival of the information,
the Chairman concluded the debate for that session.  He indicated that Members had until the end of
May 1998 to submit to the Secretariat any written questions they wished to pose, and that the ECreplies should reach the Secretariat by mid-June 1998, so that the relevant documentation could be
distributed in time for the next examination of this agreement, scheduled for the July meeting of theCommittee.
15. The Committee took note  of the comments made.
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