RESTRICTEDWORLD TRADE
ORGANIZATIONS/C/W/173
6 October 2000
(00-4111)
Council for Trade in Services Original:  English
COMMUNICATION FROM HONG KONG, CHINA;
JAPAN AND KOREA
Matters Arising from the MFN Exemption Review
The attached paper has been received from the delegations of Hong Kong, China; Japan and
Korea with the request that it be circulated to Members of the Council for Trade in Services.
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I. BACKGROUND
1. The MFN principle is one of the most important pillars for achieving trade liberalisation in
the multilateral trading system and is also one of the essential principles of the WTO Agreement.  In
other words, the MFN exemption is a deviation of such an essential principle.
2. Paragraph 6 of the Annex on Article II Exemptions states that "[i]n principle, such
exemptions should not exceed a period of 10 years."  All exemptions, therefore, are of a temporary
nature and need to be eliminated when the ten-year period expires.
3. The Annex also states that all MFN exemptions are subject to negotiation in subsequent trade-
liberalising rounds.
4. Paragraph 3 of the Annex stipulates that "[t]he Council for Trade in Services shall review all
exemptions granted for a period of more than five years.  The first such review shall take place nomore than five years after the entry into force of the WTO Agreement."  This 5-year review is being
conducted primarily as an educational process for the purpose of sharing the information on the MFN
exemptions that each Member registers.
II. SUMMARY OF THE REVIEW
5. The review exercises in the past couple of special sessions of the CTS have proved successful
for the sharing of information in detail on many, if not all, exempted measures, including that
concerning the principal character of the measures, the conditions creating the need for exemption,
and their policy backgrounds.  We believe that such positive results will contribute to the future
negotiations aimed at reducing and eliminating exempted measures.
6. It is also encouraging to note that some  Members have expressed their intentions to
voluntarily reduce or eliminate their exemptions or at least to give consideration to making such
reductions or eliminations.  Efforts to reduce the MFN exemptions will certainly contribute to further
liberalising trade in services.S/C/W/173
Page 2
7. During the course of the review, several systemic matters related to MFN exemptions have
been raised, and the Council for Trade in Services has reached a consensus to commence discussions
on these issues.  For the purpose of contributing to such discussions, we would like to put forward our
ideas on the issues yet to be identified, together with our preliminary thoughts on each item.
III. ISSUES ARISING FROM THE REVIEW
A. THE RELATION WITH THE BILATERAL INVESTMENT AGREEMENT
8. It is noted that only a few Members have entered MFN exemptions with respect to bilateral
investment agreements.  Bilateral investment agreements are seen to have relevance to the GATS.
However, it has not been understood in clear terms what the relations are.  Therefore, work should be
conducted in order to have a common understanding on this issue.
B. MEASURES RELATED TO RECOGNITION
9. Article VII:1 of the GATS stipulates that recognition "may be achieved through
harmonization or otherwise, may be based upon an agreement or arrangement with the country
concerned or may be accorded autonomously".  This recognition is not limited to just the sectors
where Members have made commitments.  Therefore, no exemption is necessary so long as
recognition measures are consistent with Article VII of the GATS.  Nevertheless, the following two
points deserve attention.
(i) Members are prohibited to accord recognition "in a manner which would constitute a
means of discrimination between countries in the application of its standards or
criteria for the authorization, licensing or certification of services suppliers, or
disguised restriction on trade in services", as stipulated in Article VII:3 of the GATS.
(ii) Members need to meet the notification requirements as stipulated in
Article VII:4(b) of the GATS: "Each Memb er shall promptly inform the Council for
Trade in Services as far in advance as possible of the opening of negotiations on an
agreement or arrangement in order to provide adequate opportunity to any other
Member to indicate their interest in particip ating in the negotiations before they enter
a substantive phase".
C. MEASURES RELATED TO MARITIME TRANSPORT SERVICES
10. Until the conclusion of the negotiations on maritime transport services, the MFN principle
(Article II and Annex on Article II Exemptions) does not apply to maritime transport services,
i.e. international shipping, auxiliary services, and the access to and use of port facilities, for which no
commitments are inscribed in Members' schedules.  Members should, therefore, share the view that it
is not necessary to register MFN exemptions under that condition.
D. PROCEDURE ON AUTONOMOUS REDUCTIONS OR ELIMINATIONS OF MFN E XEMPTIONS
11. In the review, some Members expressed their intentions to eliminate some of their
exemptions.  However, no established procedures exist in the GATS for such purpose.  Establishing
the procedure for voluntary elimination will serve to the trade liberalisation of services.  It is our
opinion that, in such cases, paragraph 7 of Annex on Article II Exemptions, mutatis mutandis , should
apply, enabling Members to eliminate their exemptions through notification to the Council for Tradein Services.  The procedure for reducing or levelling down MFN exemptions also need to be explored.S/C/W/173
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E. CLARIFICATION OF THE TERM, "INDEFINITE " IN THE COLUMN OF "INTENDED DURATION "
12. Paragraph 6 of the Annex on Article II Exemptions states that " [i]n principle, MFN
exemptions should not exceed a period of 10 years".   In this regard, an MFN exemption, even with
the term "indefinite" in the column of "Intended duration", should be eliminated by the time of the
expiry period of 10 years, in principle.  In any event, all MFN exemptions should be deleted from thelist, in principle, by the end of the period of 10 years.
13. Paragraph 6 of the same Annex states, "[i]n any event, all exemptions shall be subject to
negotiation in subsequent trade-liberalizing rounds".  It should be clearly understood that any MFN
exemption, even with the term "indefinite" in th e column of "Intended duration", is subject to
negotiation before the end of the 10-year period.
F. R
ECIPROCITY
14. Many exemptions are listed on the grounds of reciprocity, which is not compatible with the
MFN principle. Special treatment or benefits that only certain Members can enjoy, however, should
be altered so that such benefits can be extended to all Members on an MFN basis, especially if we are
to commit ourselves to the multilateral trading system.  It is worthy to note that, as a result of each
Member's explanation during the sessions, many m easures exempted on the grounds of reciprocity
have never been used.  This perhaps shows the lack of need of such measures.
15. The further liberalisation expected from the on-going services negotiations would guarantee
the conditions of service suppliers for one Member having access to the market of another, possibly
leading, therefore, to a diminishing need for reciprocal measures. Thus, promoting trade liberalisation
through the active participation of Members in the negotiation will be extremely important.  In the
meantime, Members maintaining reciprocal measures  should seriously consider their elimination
during the process of the negotiations.
G. REGIONAL CO-OPERATION
16. Economic integration agreements which meet the strict conditions provided for in Article V
of the GATS do not require MFN exemption. Taking into account the significance of this Article, it is
not desirable to easily authorise such integration agreements that do not fulfil the specificrequirements therein through the MFN exemption track.
H. D
EVELOPMENT POLICY
17. The Preamble of the GATS recognises the establishment of "a multilateral framework of
principles and rules for trade in services" as "a means of promoting ... the development of developing
countries", and Article IV provides that the increasing participation of developing countries should be
facilitated through specific commitments. While recognising the importance of the development
policy, persuasive arguments have yet to be found concerning such questions as: (a) whether a certainexemption directly and necessarily relates to a certain development policy; and (b) whether the
economic development of a developing country would inevitably be affected by the relationship with
another country due to the geographical or historical factors.  In this situation, it would be useful to
consider ways to verify, in an objective manner, to what extent preferential trade relations in services,
as opposed to an MFN-based one, between a developing country and another Member are able tocontribute to the former's economic development.S/C/W/173
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I. POLICY FOR THE PROMOTION OF CULTURES
18. The importance of protecting cultural identities should be recognised.  However, this
reasoning should not be overused in order to legitimatise MFN exemptions.  It is essential, therefore,
for Members to specify the cultural identities that are to be protected, and to explore the effective
ways of maintaining such identities.  Particular attention should be paid as to whether there exists anyother method than MFN exemptions for protecting cultural identities which are more consistent with
the GATS and to list the disciplines that need to be observed to forestall misuse when exceptions on
cultural grounds are sought.
J. M
EASURES TAKEN BY LOCAL GOVERNMENTS
19. Some Members register a measure taken by local governments on the list.  As is defined in
Article I of the GATS, there is no doubt that "Measures taken by regional or local government" shall
be subject to MFN exemptions.  That automatically means that measures taken by local governmentsshall also be subject to negotiation in trade-liberalizing rounds.
K. MFN E
XEMPTIONS WHICH PURPORT TO GRANT LESS FAVOURABLE TREATMENT
20. There is a number of MFN Exemptions which purport to give less favourable treatment to
Members than is set out in the Schedule of Specific Commitments of the Member taking the
Exemption.  We do not believe that this type of exemption is consistent with the GATS.  The specificcommitments represent the minimum level of access that a Member has undertaken to grant.  An
MFN exemption cannot further reduce this.  The position is clearly set out in paragraph 5,
Job No. 2061 of 15 September 1993, which is an explanatory note from the (GATT) Secretariat on the
listing of MFN Exemptions.  This matter deserves to be seriously discussed by Members.
L. S
PECIFICITY OF LISTED MEASURES
21. According to paragraphs 3 and 4 of th e current guidelines for MFN exemptions
(Job No. 2061), an MFN exemption should make it very clear "that the essential element in describing
a measure is the treatment inconsistent with the pa ragraph 1 of Article II".  However, some of the
existing MFN exemptions only refer to the names of conventions, regional agreements or internal
laws.  In extreme cases, they are simply "existing or future laws".  In this light, strict observance ofthe guidelines in paragraph 15 would prevent potential problems from arising.
M. G
UIDELINES FOR MFN E XEMPTIONS
22. The current guidelines for MFN Exemptions are set out in Job No. 2061 of 1993.  Given the
many issues identified above, it would certainly be very useful to revisit these guidelines, so that they
may be amended to reflect any agreed conclusions that emerge.
N. OTHER POINTS
23. Discussions on systemic issues should be considered by taking into account the following
points.
(i) In principle, an MFN exemption should not exceed a 10 years-period.  In any event, it
shall be subject to negotiation in any subsequent trade-liberalizing rounds, as
stipulated in paragraph 6 of the Annex on Article II Exemptions.  Paragraph 6
deserves special attention: as noted in sub-paragraph III:E above, it is reasonable tosay that an MFN exemption which exceeds a period of 10 years should, in principle,S/C/W/173
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be deleted, whereas, in a procedural terms, such deletion is a consequence of the
negotiation.
(ii) Another alternative way than MFN exemptions, which are able to achieve the same
objectives, should be explored.
(iii) As is the case for this review, Members with MFN exemptions must continue to hold
the burden of proof, as stipulated in paragraph 4(a) of the Annex on Article II
Exemptions, which requires other Members to be provided with sufficient
information to "examine whether the conditions which created the need for the
exemption still prevail".
24. We wish to have fruitful discussions on each of these issues in the future meetings of the CTS
and thereby to find a useful and concrete step forward.
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