WORLD TRADE
ORGANIZATIONS/CSS/W/127
30 November 2001
(01-6109)
Council for Trade in Services
Special SessionOriginal:  English
COMMUNICATION FROM THE REPUBLIC OF KOREA
A Thought on the Alternatives to MFN Exemptions in the Annex on Article II Exemptions
The following communication has been received from the delegation of the Republic of
Korea with the request that it be circulated to the Members of the Council for Trade in Services.
_______________
I. BACKGROUND
1. MFN principle is one of the few pillars on which the whole WTO regime is built. The
importance of the MFN principle is manifested by the fact that it appears at the outset of the WTO
agreements as the first Article of the GATT 1994, and as Article II of the GATS, only after the scopeand definition of the services. Without MFN, a multilateral agreement may lose its reason to exist. In
this vein, Article II of the GATS requires Me mbers to “accord immediately and unconditionally”
MFN treatment.
2. Despite the necessity of preserving this fundamental principle, individual Members could
have difficulties in fulfilling the MFN obligation, and GATS provides several layers for the flexibility
in accommodating special circumstances which the individual Members face. Paragraph 3 of
Article II provides the first layer in that Members may confer or accord “advantages to adjacentcountries in order to facilitate exchanges.” Other layers include those provided by the Recognition  in
Article VII, by Economic Integration  in Article V, and more generally by General Exception  in
Article XIV. All these provisions, however, are not without strict conditions under which such
flexibility is allowed.
3. Most far reaching among these layers of flexibility is the one provided by the Annex on
Article II Exemption, and the annex specifies conditions under which Members are exempted from the
MFN obligations. The conditions in the annex, however, are different from the other layers in that the
annex only specified conditions for procedures, and not the conditions for ‘exceptional circumstances’
under which a Member needs to be exempted from the MFN obligation.
4. Many, if not all, Members have sought MFN exemptions under the Annex , and as many as
over 400 measures were exempted from the MFN ob ligations. Almost all the measures did not have
the definite date for termination, even though the Annex  stipulates that the duration be 10 years, in
principle. In accordance with the Annex , the first review in the year 2000 was held and extensive
discussions took place, only to show a substantial amount of work and efforts are needed to streamline
the wide spread derogation from the most fundam ental principle of the WTO agreements. In this
respect, there is a need to examine the current MF N exemptions regarding the conditions creating the
need for exemptions and the duration, with a view to exploring the possibility of streamlining the
MFN exemptions.S/CSS/W/127
Page 2
II. EXAMINATION OF CONDITIONS CREATING THE NEED FOR MFN
EXEMPTION
5. OECD has recently released a very comprehe nsive paper on the MFN exemptions under the
GATS (TD/TC/WP(2001)25), titled “Trade in Services: A Roadmap to GATS MFN Exemptions.”
The paper includes a section containing an in-depth analysis on the conditions creating the need forMFN exemptions. According to the analysis, as many 92% of the exemptions relate to reciprocity and
international agreements.
6. Members cited reciprocity as a means to secure equal access or treatment in foreign markets.
However, securing equal access or treatment in specific sectors goes against the general practice in
multilateral trade negotiations where participants seek balance or trade-off of concessions across
sectors. Moreover, seeking MFN exemptions when equal access or treatment was not secured cannot
constitute ‘exceptional circumstances’ upon which usual exemptions from the fundamental principlesare allowed in a multilateral framework. Having said that, Members now may secure such access or
treatment during the upcoming concession negotiations.
7. Existence of international agreement constitutes 55% of all MFN exemptions according to the
OECD study. This high percentage is all the more significant if we consider that several layers for
flexibility were provided in the GATS, including provisions on contiguous areas, Recognition  and
Economic Integration . Regarding international agreement, GATS can benefit from the 50 years of
experience in GATT history. GATT has dealt with the relationship between MFN principle and the
international agreements (which cannot qualify as Customs Union or Free Trade Agreements),
through granting waivers. Examples include ECSC in Europe, US-Canada Automotive Products
Agreement, the Benelux Association, and EU’s Lome Convention.
8. According to the aforementioned OECD analysis , there are 11 categories of MFN exemptions
from description of conditions. Upon scrutiny, many, if  not all, conditions such as foreign policy and
security considerations, social objectives and environment and conservation, would qualify as general
exceptions or waivers, or can be addressed during the upcoming negotiations, instead of MFN
exemptions under the Annex .
III. EXAMINATION OF DURATION OF MFN EXEMPTIONS
9.  The Annex stipulates that the duration of MFN exemptions is 10 years in principle. However,
98% of the exemptions have unspecified duration, the principle became an exception. Mexico has
submitted in October 2001 a meaningful contribution in this regard, and strongly argued that 10 year
duration should be strictly observed.
10. Korea believes that this 10 year duration should not be viewed as a minimum period of
exemptions, but should be viewed as a maximum period of transition for the Members. Ten years isnot a period during which Members are securely exempted from obligations without doing anything,
but a period during which Members should actively seek ways to bring these MFN inconsistent
measures in conformity with the general principles of the GATS. In general, 10 year period is a long
period of transition in the WTO regime, during which inconsistent measures are brought into
conformity with the WTO principles.
IV. AN ALTERNATIVE TO MFN EXEMPTION THROUGH WAIVER
11. The analysis above suggests that Members should exert efforts during the remaining 5 years
to search ways to bring MFN inconsistent measures into conformity with the GATS principles. Also
most of the conditions creating the need for MFN exemptions can be addressed during the upcomingS/CSS/W/127
Page 3
concession negotiations, and still remaining conditions can be dealt with by means other than MFN
exemption under the Annex.
12. One such means is already stipulated in paragraph 2 of the Annex: waiver in paragraph 3 of
Article IX of Marrakesh Agreement Establishing the WTO. Waiver in that article is a means available
in the WTO regime where ‘exceptional circumstances’ can be adequately addressed.
V. CONCLUSIONS
13. Korea believes that the fundamental principle of MFN should be reinforced in GATS at the
earliest possible date. In doing so, Korea would like to urge Members to eliminate and/or reduce MFN
inconsistent measures before the end of 10 year period, considering the 10 year period as a maximum
period. Members can also address the conditions creating the need for MFN exemptions during the
upcoming concession negotiation. Still remaining conditions can be first dealt with by several
flexibilities given in the GATS, and lastly by the waiver provision. Korea does not believe that thissuggestion leaves no other options, and welcomes  comments and other suggestions regarding MFN
exemptions.
_________