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IV. TRADE POLICIES IN SERVICES 
(1) OVERVIEW  
1. The services sector is by far the largest contribu tor to output and employment in the U.S. 
economy and the sector's importance has continued to grow during the period under review. The 
sector accounted for 76.5% of GDP and 79.3% of total employment in 1997; the sector's average 
annual growth rate (6.0%) durin g the period 1995-97 exceeded that of the U.S. economy as a whole 
(5.6%).  Services are also playing an increasingly im portant role in U.S. trade.  In 1998, services 
accounted for 28.0% of total U.S. exports and 16.5%  of total imports.  Furthermore, whereas U.S. 
merchandise trade resulted in a deficit of US$248 b illion in 1998, its trade in services generated a 
surplus of US$78.9 billion.  The dynamism of the services sector has been fostered by the rapid 
development of information technology and the emergence of electronic commerce is likely to 
enhance the importance of services in the U.S. economy.   
2. The provision of services through commercial  presence has assumed greater significance in 
recent years.  While a majority of U.S. sales of services abroad prior to 1996 involved cross-border transactions rather than commercia l presence, the values of  sales through the two channels were about 
equal in 1996; that is, US$224.2 billion for cross- border exports compared to US$221.1 for exports 
through commercial presence.  By contrast, U.S. purchases of services from affiliates of foreign firms 
located in the United States were US$161.0 billion in 1996, considerably more than cross-border 
imports, which were US$142.0 billion.  These tr ends reflect the growing importance of GATS 
commitments made by the United States and other WTO Members to secure further market access in 
foreign markets, particularly by means of comme rcial presence (which often requires foreign direct 
investment in one form or another). 
3. In this context, the successful conclusion of negotiations on basic telecommunications and 
financial services at the WTO in 1997 was probably th e principal achievement since the last Review 
as far as services are concerned.  The United States played a vital role in the success of these 
negotiations, by improving its initial offers and en couraging other WTO Members to improve theirs.  
In telecommunications, the United States made commitments covering the entire range of basic 
telecommunication services, granting foreign firms access to local, long-distance and international 
services, using any means of technology, on a faciliti es-based or resale basis.  Nevertheless, some 
restrictions on foreign ownership remain.  In fi nancial services, the United States removed its prior 
broad MFN exemption, which it had taken in  the 1995 negotiations, and bound commitments on 
market access and national treatment for all subsect ors;  however, it introduced an MFN exemption in 
the insurance sector, but this can be applied only in a specific instance.  
4. Transportation is one service sector that rema ins somewhat insulated from international 
competition.  As in many other countries, cabotage policies restrict the provision of domestic services both in maritime and air transport to U.S.-carriers.  In  addition, while the provision of international 
services is generally open to foreign competiti on, support measures such as subsidies and cargo 
preference requirements are in place to encourage the use of U.S. carriers, especially in maritime 
transport. With regard to international aviation ser vices, the conclusion of a number of bilateral "open 
skies" agreements has promoted the grow th of air traffic in recent years.   
5. In the case of professional services, the U.S.  federal system reserves the governance of 
professions to individual states; each state has its  own licensing regulations and licensing board to 
administer the regulations.  Although the absence of a uniform regulatory regime at the national level 
and divergent market access conditions at the state level may add to the complexity of market entry 
for foreign service providers, such diversity is not necessarily more of a disadvantage to foreign WT/TPR/S/56 Trade Policy Review 
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professionals than it is to American professionals.  A number of efforts have been made to accomplish 
greater uniformity across States in recent years.  These include the use of model laws for licensing 
regulations and uniform or multiple jurisdicti on examinations through national coordinating 
professional bodies.  Additional efforts include the c onclusion of mutual recognition agreements with 
foreign professional bodies. 
(2) FINANCIAL SERVICES  
(i) Introduction 
6. The financial services sector in the United Stat es, comprising banking, insurance, securities, 
and futures and options, is in the midst of signi ficant change.  Technolog y and deregulation have 
increasingly blurred the traditional distinction betw een financial products.  These forces have also 
boosted merger and acquisition activities across different  types of financial services firms which try to 
realize economies of scale.  This has led to an in creased concentration of industry assets in a smaller 
number of companies.1 
7. Globalization is another force driving the grow th of the U.S. financial services sector.  
In 1997, U.S. banking and securities firms gene rated cross-border exports of US$11.1 billion, 
compared to US$7.0 billion in 1995.2  On the import side, the value of cross-border transactions 
increased from US$2.5 billion to US$3.9 billion duri ng the same period.  The outcome was a trade 
surplus of US$7.2 billion in 1997.  According to ava ilable data, U.S. affiliate  transactions in banking 
and securities services also recorded a trade surplus of US$6.9 billion in 1995, the latest year for 
which data is available.3  Sales by a group of 75 foreign affiliates of U.S. firms amounted to 
US$13.6 billion, compared to purchases of US$6.8 billion from U.S. affiliat es of foreign firms, 
representing a 14% and 7% increase, respectively, from 1994.  
8. In international trade in insu rance services, affiliate transactions are more significant than 
cross-border transactions.  In 1996, U.S.-owned aff iliates' sales abroad totalled US$41.3 billion, while 
foreign insurers in the United States generated US$56.0 billion through their U.S. affiliates, up from US$31.6 billion and US$48.8 billion, respectively, in 1994.  For cross-border transactions of 
insurance services
4, exports were US$2.4 billi on and imports were US$5.2 billion, recording a trade 
deficit of US$2.8 billion in 1997.  In terms of premiums, in 1997, U.S.-based insurers received 
US$6.0 billion from overseas, and paid US$15.0 billion to foreign-based insurers to cover risks in the 
                                                      
1 For instance, in 1987, the largest 36 banking companies held 25% of all the domestic office deposits 
in commercial banks and saving institutions; at the end of 1997, the same share of domestic deposits was 
controlled by only 11 companies (U.S. Department of Commerce, International Trade Administration, 1999).  
2 International trade data on banking and secur ities services encompass the fee-based commercial 
banking business and securities-related activities of financial service firms.  Fee-based commercial banking 
essentially involves banking services other than deposit-taking and lendi ng activities.  These include financial 
management and transaction services; advisory services ; custody services; credit car d services; and other credit-
related services, such as providing standby letters of credit for trade financing.  Securities-related activities 
include securities-lending services, mutual fund services , securities clearance and settlement services, securities-
trading services, private placeme nts, and underwriting services.  
3 BEA data on sales transactions between majority-o wned affiliates of U.S. financial service firms 
(excluding banking and insurance) and non-affiliated firm s are somewhat limited in order to avoid disclosing 
confidential, proprietary information pertaining to individual firms.  Consequently, the data reported for U.S. 
sales and the U.S. trade surplus are believed to understate U.S. sales and surplus (U.S. Department of Commerce (1998) October).  
4 Figures for cross-border trade in insurance services are presented on a net basis, i.e., imports comprise 
premiums paid for foreign insurance coverage, minus clai ms received from foreign in surers.  Exports comprise 
premiums received from foreign policy holders, minus payments for claims.  United States WT/TPR/S/56 
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United States.  The majority of the outbound premiums  paid to foreign-based insurers consisted of 
reinsurance, with Bermuda being the largest insure r to the U.S. market, ac counting for 29% of total 
outbound premiums.5  
Table IV.1 
Trade in financial services, 1993-97 
(US$ million and per cent)  
 
 1993 1994 1995 1996 1997  Average 
growth rate 
(%) 
Cross-border transactions      1993-97 
Exports       
Banking and securities 4,999 5,763 7,029 8,382 11,064 22.1% 
Insurance, net 1,020 1,676 1,296 1,971 2,391 28.8% 
Premiums 3,981 4,921 5,491 5,978 5,952 10.9% 
Losses 2,961 3,245 4,195 4,007 3,561 5.8% 
Imports       
Banking and services 1,371 1,654 2,472 2,995 3,906 30.4% 
Insurance, net 3,095 4,034 5,360 3,773 5,208 17.9% 
Premiums 12,093 14,075 15,284 14,652 15,036 5.9% 
Losses 8,998 10,041 9,925 10,879 9,828 2.6% 
Affiliate transactions      1993-96 
Sales by foreign affiliates       
Finance, except banking .. .. .. .. .. .. 
Insurance 27,575 31,507 38,630 41,297 .. 14.6% 
Sales by U.S. affiliates       
Finance, except banking 6,195 6,315 7,096 11,297 .. .. 
Insurance 44,327 48,805 51,562 55,986 .. 8.1% 
 
.. Not available.  
Source : U.S. Department of Commerce,  Bureau of Economic Analysis, Survey of Current Business,  October 1998. 
(ii) Recent developments 
9. Legislation governing the financial services sector in the United States has long been divided 
along the lines of financial products and of geograp hy.  There are multiple regulatory authorities both 
at the federal and state levels. Technology and fi nancial liberalization on a global scale led to the 
implementation of several pieces of legislation in the early 1990s.  Further changes took place in the period under the review (1996-98), as  discussed below.
6 
(a) Banking services 
10. Foreign banks in the United States operate in di fferent forms.  At the end of March 1998, 
271 foreign banks from 59 countries operated thr ough 469 agencies and branches, 88 U.S. banking 
subsidiaries, 144 representative offices, 12 Edge Cor porations, and three New York State Investment 
                                                      
5 Over the past five years, due to favourable business and tax treatment, Bermuda has become an 
important reinsurance centre, specializing in large catastrophe insurance and re insurance (USITC, 1998f). 
 
6 The following information is mainly based on U.S. Department of the Treasury (1998).  WT/TPR/S/56 Trade Policy Review 
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Companies; while in December 1995 there we re 270 foreign banks from 60 countries operating 
through 546 agencies and branches, 117 U.S. banking subsidiaries, 247 representative offices, 
16 Edge corporations, and five New York State Investment Companies.  These U.S. offices of foreign banks controlled US$2.1 trillion in assets, accounting for approximately 20% of the total assets of the U.S. commercial banking system.  Agencies and branches are the most common form of operation, 
accounting for over 58% of the assets of the banki ng offices operated by foreign banks. Foreign 
branches and agencies are involved primarily in wholesale banking, and seldom in retail banking; 
approximately 40% of their assets are accounted for by claims on other banks or other offices of their parent bank, 30% are loans to businesses or real est ate loans, 12% are investments in securities, and 
less than 1% are consumer loans or mortgages.  Foreign bank branches and agencies accounted for 
about 28% of all loans to U.S. businesses.  Forei gn banks may also engage  in certain non-banking 
activities permitted under the Bank Holding Company Act (see below).  
11. The centrepiece of legislation governing the opera tion of foreign banks in the United States is 
the International Banking Act (IBA) of 1978.  Since its enactment, the application of national 
treatment to foreign financial ins titutions under U.S. law and regulati on has been the principal guiding 
policy of the U.S. authorities.
7  At the same time, the United States is seeking to obtain national 
treatment for U.S. financial institutions operating abroad.  The IBA brought, for the first time, U.S. 
branches and agencies of foreign banks under federa l banking laws and regula tions, and allowed them 
to operate generally under the same conditi ons as those applicable to domestic banks.8  It also offered 
foreign banks the option of establishing federally li censed branches and agencies.   The Act also gave 
the Federal Reserve Board (FRB) responsibility for overseeing foreign bank operations.  The Foreign 
Bank Supervision Enhancement Act (FBSEA) of 1991, amending the IBA, enhanced the FRB's 
supervisory and regulator y authority over foreign banks by requiring them to seek FRB approval 
before establishing U.S. offices, whether licensed  by federal or state authorities.  The FBSEA 
prohibited the establishment of a branch, agency, or subsidiary bank by a foreign bank if the foreign 
bank was not subject to comprehensive consolidat ed supervision (CCS) by home country authorities.9  
The Riegle-Neal Interstate Banking and Branchi ng Act of 1994, again amending the IBA, has 
generally granted foreign banks the same opportunities to engage in interstate  banking and branching 
as those provided to domestic banks.10  As a result, legislation has been in place giving effect to 
interstate banking by acquisition  in all 50 U.S. states, the District of Columbia and Puerto Rico and to 
interstate branching by merger in the same jurisdictions, with the exception of two states 
(i.e. Montana and Texas), which initially exercised their "opt-out" option.  While, as of April 1998, 
inter-state branching by de novo  establishment is permitted only in 13 states, the District of Columbia 
and Puerto Rico, it is anticipated by the U.S. authorities that additional states will permit  de novo  
branching as consolidation conti nues in the banking system.  
                                                      
7 According to the U.S. Department of the Treasury (1998), providing identical treatment may not 
always be sufficient to ensure that foreign financial institutions enjoy equality of competitive opportunity in U.S. financial markets or that prudential concerns are met.  The study claims that differential treatment is 
sometimes necessary in order to accommodate legal and regulatory systems and bankin g structures in foreign 
countries that may differ from those in the United States.  
8 According to a study by the General Accounting Office, prior to the enactment of the IBA, foreign 
banks operating in the United States enjoyed many regulatory advantages compared with U.S. banks.  For instance, foreign banks could establish full-service branches in any state th at would permit their entry, while 
U.S. banks were prohibited from establishing interstate branches.  The 1978 Act was designed to eliminate these 
advantages and place foreign banks on an equal footin g with U.S. banks (General  Accounting Office (1996)).  
9 CCS is not required for establishment of a representative office.  
10 The Riegle-Neal Act permits interstate expansion through three avenues; (i) interstate banking by 
acquisition; (ii) interstate branching by merger; and (iii) interstate branching by de novo  establishment of 
branches.  United States WT/TPR/S/56 
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12. Recent regulatory developments seem to have facilitated the entry and operation of foreign 
banks in the U.S. market.  For instance, the Ec onomic Growth and Regul atory Paperwork Reduction 
Act (EGRPRA), signed into law in September 1996, relaxed the requirement contained in the IBA 
that foreign banks be subject to CCS by home country supervisory authorities in order for the FRB to 
approve the establishment of a branch or agency in the United States.  Under the EGRPRA, the FRB 
is allowed to use discretion to consider a foreign ba nk's application even if the bank is not subject to 
CCS in its home country, provided the bank's home c ountry is actively working to establish a system 
of comprehensive consolidated bank supervision.11  In addition, the EGRPRA imposes statutory time 
limits on the FRB's consideration of such applications of no later than 180 days after the receipt of the 
application.12 
13. The EGRPRA also brought the frequency of on-site examination of U.S. branches and 
agencies of a foreign bank into line with that of domestic banks, by extending to branches and agencies the exception that banks with total assets of US$250 million or less were eligible to be 
considered for an 18-month examination cycle, rather  than a 12-month cycle, if they satisfy certain 
eligibility requirements.  Otherwise, both domestic and foreign banks are examined every 12 months.  
Similarly, the EGRPRA amended the provision re garding examination fe es for foreign banks, 
declaring that examination costs would be assesse d by the FRB against foreign banks only to the 
extent that fees were collected by the FRB for ex amination of any domestic state member bank.  
Previously, the law provided that foreign banks should be assessed for the costs of examination; 
however, according to the U.S. authorities, the FRB in practice did not charge foreign banks for the 
costs of examination as there was a statutory mora torium on such charges until the issue could be 
considered further.  This change  is reflected in the U.S. GATS Schedule of Specific Commitments as 
a result of the 1997 WTO Financial Services nego tiations, by dropping the previous  national 
treatment limitations.     
14. U.S. operations of foreign banking organizati ons (FBOs) are supervised by different 
regulatory authorities at both the state and federal le vels as they are subject to different state and 
federal statutes. (Table IV.2).  The FRB may examine branches and agencies of foreign banks, 
coordinating its examinations with th e appropriate federal or state supe rvisor.  In an effort to avoid 
duplication of supervisory tasks, in 1995, the FR B, in cooperation with the other supervisory 
agencies, adopted a joint programme for supervisi ng the U.S. operations of FBOs ("FBO Supervision 
Program").  The programme encompasses all bran ches and agencies established by FBOs in the 
United States, all U.S. banks that are subsidiari es of FBOs, and all non-bank subsidiaries of FBOs 
authorized by the FRB to operate under Section 4 of the Bank Holding Company Act.
13  The objective 
of the programme is to integrate the individual ex amination findings of each U.S. office of an FBO 
into an assessment of the FBO's entire operations in the United States.  The FBO Supervision 
Program was revised in June 1998, aligning it with  the Risk-Focused Framework for the Supervision 
of Large Complex Institutions applicable to  domestic banks and bank holding companies.  
                                                      
11 Another factor the Federal Reserve must take into account is whether the bank has implemented 
procedures to combat money laundering and whether the home country of the foreign bank is developing a legal 
regime to address money laundering or is participating in multilateral efforts to combat money laundering.  
12 The FRB may extend the review period for an additional 180 days after providing notice of the 
extension to the applicant and explai ning the reasons for the extension.  
13 While the Bank Holding Company Act generally prohibits bank holding companies from engaging in 
non-financial activities.  U.S. law provides two exceptions  that are available only to foreign banks.  First, 
foreign banks that became subject to the IBA of 1978 were  grandfathered to retain any non-banking activities in 
which they were engaged at that time.  Second, in order to prevent disruptions in the relationships between 
foreign banks and their U.S.-based commercial affiliates,  these affiliates are allowed to engage in the United 
States in the same non-financial activities that they conduct abroad. WT/TPR/S/56 Trade Policy Review 
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Table IV.2 
Operations of FBOs in the United States, 31 March 1998 
Type of office Number 
of offices Total assets 
(US$ billion) Description Supervision 
Branches 296 799 Branches are legal and operational extensions of 
their parent foreign bank and have broad banking 
powers, including accepting limited uninsured 
deposits, lending, money market services, trade 
financing, and other activities related to the services of foreign and U.S. clients. FRB and either Office of 
the Controller of the Currency (OCC) if federal 
licence, or states if state 
licence.
a 
Agencies 173 120 Agencies have powers similar to branches, but 
may not accept deposits from U.S. citizens or 
residents. FRB and either OCC if 
federal licence, or states if 
state licence. 
Subsidiaries 88 300 Separately capitalized legal entity chartered in 
the U.S. with shares owned or controlled by the parent foreign bank.  Banking powers and legal 
or regulatory restrictions are the same as those of 
any other domestic bank. OCC, or FDIC and state 
regulators, or FRB and states. 
Representative offices 144 .. A marke ting office/liaison between the head 
office of the foreign bank and its customers and correspondent banks in a state or region.  May 
engage in representational and administrative 
functions, but may not make any business decisions on behalf of the foreign bank. FRB and states. 
Edge Act Corporations 
or Agreement 
Corporations 12 3 Edge Act Corporations are separate subsidiaries 
limited to international banking activities 
specified in the Edge Act.  Domestic activities 
permitted include receipt of deposits from foreign governments, financing of contracts, 
projects performed abroad , financing imports and 
exports.  Agreement Corporations are limited to essentially the same powers as Edge Act 
Corporations by agreement with FRB. Edge Act Corporations:  
FRB, Agreement 
Corporations:  FRB, states. 
Commercial lending 
companies 3 .. Specialized non-depository  institution authorized 
under state law.  May engage in borrowing and 
lending activities, including accepting deposits at 
off-shore facilities. FRB and states. 
Non-bank subsidiaries 669 497 Non-bank subsidiaries of FBOs may engage in 
activities such as underwriting or dealing in certain securities to the same extent that U.S. 
bank holding companies may engage in such 
activities. FRB, states, and other 
federal regulators, depending on activities. 
Total 1,412 2,070   
 .. Not available. 
 
a There are also a limited number of insure d branches that are supervised in part by the Federal Deposit Insurance Corporation.  
 Source : U.S. General Accounting Office, Foreign Banks - Opportunities Exist to Enhan ce Supervision Programme as Implementation 
Proceeds,  GAO/GGD-97-80, May 1997;  and the U. S. Department of the Treasury (1998), National Treatment Study . 
15. Federal banking agencies are required by law to attempt to reduce the regulatory burden on 
financial institutions.14  As part of the most recent comprehe nsive review, the FRB has revised several 
                                                      
14 In 1996, EGPRA required each appropriate federal ba nking agency to review its regulations at least 
once every ten years in order to identify outdated or otherwise unnecessary regulatory requirements on financial institutions and eliminate them as appropriate.  Simi larly, the Riegle Community Development and Regulatory 
Improvement Act of 1994 required federal banking agencies  to cooperate in conducting a systematic review of 
their regulations and written policies to improve efficiency , reduce unnecessary costs, eliminate inconsistencies, 
eliminate outmoded and duplicative requirements, promote uniformity among regulations and policies of these United States WT/TPR/S/56 
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regulations which had an impact on the FBOs' operations in the United States.  For instance, in 1997 the FRB revised Regulation Y, providing, among other things
15, for a streamlined and expedited 
review process for bank and non-bank applicati ons submitted by bank holding companies and FBOs 
qualifying as "well-capitalized"16 and "well-managed"17 under the Bank Holding Company Act. To 
provide for national treatment of FBOs, the revi sion included provisions allowing the use of capital 
standards and definitions of the home country of  an FBO for purposes of determining whether the 
FBO was meeting the "well-capitalized" requirement in the streamlined review process, provided that those standards were consistent with the Basle Capital Accord.
18   The currently proposed revisions of 
Regulation K, issued by the FRB for public comment  in December 1997, also contain several changes 
that would affect the operations of foreign banks  in the United States.  These include increased 
flexibility in having FBOs qualify for the exempti ons to the non-banking rest rictions contained in 
Section 4 of the Bank Holding Company Act;  implemen tation of statutory changes with respect to the 
interstate operations of foreign banks operating in the United States19; and a streamlined and 
expedited review process for FBOs to establish offices in the United States.  
16. The Office of the Comptroller of the Currenc y (OCC), in 1993, initiated a comprehensive 
programme to revise all of its regulations to redu ce the burden on national banks and federal branches 
and agencies.  In 1996, the OCC revised its regulatio ns related to internati onal banking activities, now 
found in Part 28, by removing the requirement for two separate filings by national banks when they 
establish a foreign branch or acquire certain forei gn investments.  Under the new regulation, the OCC 
accepts a copy of an application form, notice, or  report submitted by a foreign bank or a federal 
branch or agency to another federal regulatory agen cy that covers the proposed action and contains 
substantially the same information that would be  required by the OCC.  Revised Part 28 also 
consolidates the substantive requirements governing in ternational banking operations supervised by 
the OCC into a single, comprehensive regulation.  Th e OCC also revised Part 5, Rules, Policies, and 
                                                                                                                                                                     
agencies, and reduce the regulatory burd en "consistent with the principles of safety and soundness, statutory 
laws and policy, and public interest".  
15 The revisions also provide for a "safe harbour" to the anti-tying rules created by Section 106 of the 
Bank Holding Company Act Amendments of 1970.  The revisions created a safe harbour for transactions with corporate customers that were incorp orated or otherwise organized, and ha d their principal place of business, 
outside the United States, or with individuals who were citizens of a foreign country and were not resident in the 
United States.  
16 A "well-capitalized" bank holding company, as defined by the revision, is an organization that 
maintains a total risk-based capital ratio of 10% or greater, and tier risk-based capital ratio of 6% or greater, on a 
consolidated basis.  
17 For purposes of determining whether an FBO meets the "well-managed" requirement for the 
streamlined procedures, the revision requires that:  (i) the larg est U.S. branches, agencies, or depository 
institutions controlled by the foreign bank have received at least a "satis factory" composite examination rating 
from its U.S. banking supervisor; (ii)  U.S. branches, agencies and deposito ry institutions representing at least 
80% of the U.S. risk-weighted assets controlled by the foreign banking organization at such offices have 
received at least a "satisfactory" composite examination rating form the U.S. banking supervisors; and (iii) the 
overall rating of the foreign banking organization's combined U.S. operations is at least "satisfactory."  Further, 
no branch, agency, or depository institution many have received one of the two lowest composite ratings at its 
most recent examination.   
18 If the home country has not adopted these standards, the FBO may ask the FRB to assess whether its 
capital is equivalent to the capital that would be requ ired of a U.S. banking organization for these purposes.  
19 The proposed revisions are intended to advance the policy of national treatment in the interstate 
banking operations contained in the Riegle-Neal Act by calling for (i) a new procedure whereby a foreign bank 
could change its home state an unlimited number of times  if it can show that a domestic bank with the same 
home state would be able to change its  home state in a similar manner;  ( ii) upon a change in home state, 
retention by a foreign bank of any existing interstate bran ches if the foreign bank could establish such branches 
from its new home state under current law;  and (iii)  deletion of the home state "attribution rule", which 
provides that an FBO and all other FBOs that it controls must have the same home state. WT/TPR/S/56 Trade Policy Review 
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Procedures for Corporate Activities, providing for a streamlined rules, policies, and approval process 
for applications and corporate filings by nationa l banks, and federal branches and agencies, and for 
operating subsidiary applications.  More recen tly, the OCC also reduced the regulatory burden on 
federal branches and agencies by eliminating several regulatory requirements, including a specific allowance for loan and lease losses (ALLL); a 10% of assets threshold, used to identify concentrations 
of assets; and a numerical limit on net due from head office positions.
20 
(b) Securities services 
17. The Securities Exchange Act of 1934 (Exchange Act) grants the Securities and Exchange 
Commission (SEC) regulatory authority over U.S. secu rities markets and dealers.  National treatment 
is granted to foreign brokers and dealers regardi ng registration with the SEC.  The U.S. federal 
securities laws generally require broker-dealers, whethe r foreign or domestic, to register with the SEC 
if they seek to do business with (i .e., solicit) U.S. persons. Foreign and U.S. broker-dealers are subject 
to the same requirements.  U.S. law exempts fo reign broker-dealers from the registration requirements 
under limited circumstances.  Most states require br oker-dealers to register with the state regulatory 
authorities for business conducted within the particular  state.  The Investment Advisers Act of 1940 
grants the SEC regulatory authority over domestic and foreign investment advisers.21  States are 
precluded from requiring that SEC-registered, non-reside nt foreign investment advisers register with 
the state regulatory authorities. The Securities Act of 1933 prescribes disclosure and antifraud 
standards for offering securities in the United States , and requires registration of securities with the 
SEC prior to their offer or sale. In principle, public offering and periodic reporting requirements for 
foreign issuers are the same as those for domestic issuers, though the SEC has adjusted its disclosure 
requirements to accommodate foreign issuers because  of differences in legal and accounting practices 
between countries.22   
18. The National Securities Markets Improvement Ac t of 1996 (NSMIA), revising parts of the 
Securities Act, reallocated responsibilities related to  securities offerings between the federal and state 
governments, based on the nature of the offering.  Among other things, the Act prevents states from 
directly or indirectly prohibiting, limiting or imposing any conditions on offerings of certain 
securities, including those listed on the New York Stock Exchange, those quoted on the National Market System of the National Association and Securities Dealers Automated Quotation (Nasdaq), 
and securities issued by registered investment comp anies.  NSMIA also reallocated federal and state 
responsibilities for the regulation of investment advisers.   
19. In March 1998, the SEC issued an interpre tative release, which provides guidance on the 
application of U.S. federal securities laws to the us e of the Internet by foreign issuers, investment 
companies, broker-dealers, exchanges, and investment advisers.
23  The release states that, for purposes 
                                                      
20 Instead, to aid examiners in asse ssing the adequacy of the credit risk management processes, federal 
branches and agencies must demonstrate the maintenance of an effective loan review  system and controls in 
conformity with the current OCC polic y on the ALLL.  Examiner s will also assess the ad equacy of systems and 
procedures at a federal branch or agency that en ables the head office to m onitor and evaluate asset 
concentrations.  The adequacy of the Net Due To/From Head Office positions will be reviewed on a case-by-
case basis as part of the assessment of the parent comp any's strategies for funding the federal branch or agency 
and the overall liquidity position of the federal branch or agency.  
21 As of September 1998, approximately 370 forei gn investment advisers, a decrease of about 0.8% 
from December 1994, were registered with the SEC, out of a total of about 8,500 SEC-registered investment advisers.  
22 As of 30 June 1998, there were over 1,100 foreig n issuers representing 55 countries filing Exchange 
Act reports with the SEC, and there were over 800 fo reign issuers listed on the U.S. stock exchanges.  
23 Securities Act Release No. 7516, 23 March 1998.  United States WT/TPR/S/56 
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of registration requirements, offshore Internet offe rs, solicitations, or other communications would not 
be considered to be targeted to the United States if  issuers, broker-dealers, exchanges, and investment 
advisers implement measures that are reasonably designed to guard against sales, or the provision of services, to U.S. persons.     
20. The core participants in the U.S. government s ecurities market are 30 prim ary dealers, half of 
which are foreign-owned from six countries.
24  The Primary Dealers Act of 1988 provides that 
foreign-owned dealers are accorded essentially the same treatment as domestically owned dealers, as 
long as U.S. firms operating in the government debt markets of the foreign country are accorded "the same competitive opportunities" as domestic companies operating in those markets.
25   Pursuant to the 
Act, the FRB conducted examinations of the govern ment debt markets in the United Kingdom, Japan, 
Switzerland, Germany, France and the Netherlands, and concluded that U.S. firms were generally 
granted national treatment in dealing in government securities in those markets.  
(c) Futures and options services 
21. The U.S. commodity futures and options mark ets have experienced dramatic growth;  
exchange futures and options trading has increased  by more than 100% in the last decade (from 
295 million to 630 million contracts), and in 1997-98 alone, the number of futures and option contract 
transactions grew from almost 555 million to 630  million. The Commodity Exchange Act (CEA) 
grants the Commodity Futures Trading Commission (CFTC) regulat ory authority over futures and 
options trading in the United States.  Persons w ho transact business on designated domestic contract 
markets for either U.S. or foreign customers must  register with the CFTC as futures commission 
merchants (FCMs) and must comply with all of th e CFTC's regulatory requirements applicable to 
registrants, or must obtain appropriate exemptive relief.26  Foreign FCMs are treated no less 
advantageously than domestic firms.27  Persons located either within  or outside the United States who 
transact business for U.S. customers on foreign markets either must register with the CFTC as FCMs or must obtain appropriate exemptions. 
22. CFTC Rule 30.10 provides that persons otherwi se required to be registered as FCMs located 
outside the United States who solicit or accept orders and related funds from U.S. customers solely for 
foreign futures or option transactions and who are s ubject to a comparable re gulatory scheme in their 
home country jurisdiction may obtain exemptions from registration.
28  CFTC Rule 30.5 provides 
similar exemptive relief for foreign  persons othe r than those required to be registered as FCMs29, i.e., 
non-domestic introducing brokers (IBs), commodity pool operators (CPOs), or commodity trading 
                                                      
24 Primary dealers are firms that have established a trading relationship with the Federal Reserve Bank 
of New York, and report weekly to the FRBNY on their volume of trading and their position in government and 
government agency issues.  
25 Thus, the United States took an MFN exemption with regard to participation in issues of government 
debt securities in its GATS Schedule.   
26 An FCM is defined as any person who solicits or  accepts orders to buy or  sell futures or option 
contracts and who, in connection with an order, accepts  any money or other property (or extends credit) to 
margin, guarantee, or secure the contracts resulting from the order. 
27 As of 30 September 1998, the following foreign persons were registered with the CFTC:  six foreign 
introducing brokers out of a total of 1,571; 71 foreign commodity pool operators out of a total of 1,446; 
202 foreign commodity trading advisors out of a total of 2,733; 90 floor brokers out of a total of 9,538; 16 floor 
traders out of a total of 1,364; and 1,981 associated persons out of a total of 45,381.  No foreign firms are registered with the CFTC as futures commission merchants, but several FCMs are owned by foreign parent 
companies.  
28 As of 1 October 1998, 190 foreign firms had received exemptions under Rule 30.10.  
29 As of 1 October 1998, 22 foreign firms had received exemptions under Rule 30.5.  WT/TPR/S/56 Trade Policy Review 
Page 188 
 
 
advisors (CTAs).30  In general, properly registered or exem pt persons may offer or sell most foreign 
exchange-traded futures and option products to U.S.  persons without additio nal approvals.  Special 
procedures apply to the offer and sale of foreign st ock index and sovereign de bt products.  Conditions 
for these types of products are similar to those app licable to domestic products.  Futures on individual 
equity and other securities that are not exempt unde r the U.S. securities laws, whether domestic or 
foreign, are prohibited.   
23. In light of the changes in the futures and options industry since the adoption of the Part 30 
rules in 1987, and its experience with implementing Pa rt 30, the CFTC recently modified certain of its 
Part 30 rules.  These modifications assure that fo reign CPOs and CTAs provide protection to U.S. 
customers equivalent to those re quired of domestic CPOs and CTAs. 
(d) Insurance services 
24. With more than US$830 billion in gross insura nce premiums in 1997, the U.S. insurance 
market is the largest in the world.   The insuran ce services sector in the United States is regulated at 
the state level; insurers must meet the licensing and operating standards of each state in which they do 
business.  Solvency regulation rests primarily with  each insurer's home state but rate regulation is 
performed by all states for insurance firms operating in their respective jurisdictions.  The National 
Association of Insurance Commissioners (NAIC) , a national organization of state insurance 
regulatory authorities, coordinates or standardi zes regulatory requirements through the issuance of 
NAIC model laws.  The NAIC accredits states that ha ve enacted model laws (or their equivalent) and 
meet certain performance criteria. 
25. Since 1996, the state insurance regulators, th rough the NAIC, have pursued an initiative 
known as State Regulation 2000 (SR2000)  as part of the NAIC's ongoing effort to strengthen the 
insurance industry regulation, in particular in the areas of agent licensing, in surer licensing, rate and 
form filing, and financial reporting.  The main goals of the SR2000 are to:  (i) provide states with new 
regulatory tools to enhance their ability to regulate th e insurance industry;  (ii) eliminate licensing and 
approval barriers in multiple states;  (iii) leve rage technology and automation initiatives to achieve 
economies of scale; and (iv) increase uniformity and consistency across state boundaries. 
26. In the area of agent licensing, the Insurance Regulatory Informat ion Network, an affiliate of 
the NAIC, has developed and will implement th e Producer Database (PDB) and the Producer 
Information Network (PIN).  The PDB, an electroni c database consisting of information relating to 
insurance agents and brokers, links  participating state regulatory licensing systems into one common 
repository of producer information.31  The PDB sends an electronic notification to state users if 
administrative action is taken against a licensed produ cer in their state or if a broker  no longer holds 
an active resident licence.  The PIN is an el ectronic communication network, which links state 
insurance regulators with the entities they regulate, to facilitate the electronic exchange of producer 
information.  Data standards have been develope d for the exchange of licence application, licence 
renewal, appointment and termination information.  
                                                      
30 An IB is defined as any person who solicits or accepts orders to buy or  sell futures or option 
contracts, but who does not accept any money or other pr operty (or extend credit) to margin, guarantee, or 
secure the contracts. A CPO is any person who solicits funds from others for the purpose of pooling the funds 
for use in investing in futures.  A CTA is any person wh o, for compensation or profit, is engaged in the business 
of providing advisory services to others concerning futures or option contracts.  The CEA specifically excludes from the CTA definition certain persons, including banks  and news reporters, pub lishers, and editors, who 
provide commodity advice that is “solely incidental” to the conduct of their business or profession.  
31 The PDB also have access to other information sources such as the National Association of 
Securities Dealers (NASD) and the Regu latory Information Retrieval System.  United States WT/TPR/S/56 
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27. With respect to insurer licensing, the Unifor m Certificate of Authority Application is 
designed to allow foreign insurers to file copies of the same application for admission in numerous 
states. While each "Uniform State" still performs its own, independent review of each application, the 
need to file different applications, in different form ats, has been eliminated for all states that accept 
the uniform application.  Currently, the "Uniform St ates" are the states of Alabama, Alaska, Arkansas, 
California, District of Columbia, Indiana, Ka nsas, Maine, Nebraska, Nevada, North Dakota, 
Pennsylvania, South Carolina, West Virginia and Wyoming. 
28. The System for Electronic Rate and Form Filing (SERFF), which is a joint initiative between 
state insurance regulators and the insurance industry, enables insurers to submit rate and form filings 
electronically to state reviewers, reducing the time and cost involved in making regulatory filings.  
Currently, 25 states are licensed, with many of these ready for "live filings", while ten other states are 
waiting. In addition, 40 major insurance compan ies with over 225 companies, subsidiaries and 
affiliates are using the SERFF.  By the end of 1999, the NAIC expects to have up to 45 states 
licensed, with at least 30 states installed and using SERFF for filing reviews; and with up to 500 major companies, subsidiaries or affiliated companies using SERFF. 
29. The NAIC is undergoing an extensive rewr iting of its financial reporting programmes.
32   
Currently, the NAIC accepts the filing of annual fina ncial statement data through the Internet.  These 
include annual filings for:  pr operty and casualty; life, accident a nd health; fraternal; title; health 
maintenance organizations;  hospital, medical and dental service or  indemnity corporations;  and risk-
based capital reports.  Filing through the Internet is  an alternative method to the traditional diskette 
filing.  The Internet Filing Web Site has been  developed with the goal of added speed and 
convenience for participating companies.   
(iii) International agreements 
30. The United States played a vital role in the WTO Financial Services negotiations concluded 
in December 1997.  The United States removed its pr ior broad MFN exemption, which it had taken in 
the 1995 negotiations, and bound commitments on market access and national treatment for all 
subsectors included in the Annex on Financial Se rvices in the GATS, and in accordance with the 
Understanding on Commitments  on Financial Services.33  However, the United States introduced an 
MFN exemption in the insurance sector, which app lies in a circumstance of forced divestiture of 
U.S. ownership in other WTO Member countries.34  The United States also introduced additional 
commitments in the form of two papers: one was on harmonization of state regulation in the insurance 
sector; and the other pertained to regulatory reform  on a non-discriminatory basis in banking and 
securities, including authorization, under Section 7( d) of the Investment Company Act of 1940, for 
the SEC to permit a foreign investment company, subj ect to certain prudential fi ndings, to register and 
publicly offer its shares in the United States, and an  enhanced framework for supervision of foreign 
banks.  These are based on commitments by th e United States under the U.S.-Japan bilateral 
agreements on insurance, banking, and other financial services. 
                                                      
32 Insurance regulators in the United States require th at insurers file statements of financial results 
based on statutory accounting principles, not internatio nal accounting standards adopted by the International 
Accounting Standards Committee.  According to the U. S. authorities, statutory accounting principles are 
balance-sheet oriented and emphasize the valuation of asse ts and liabilities on a "liquidation basis" rather than 
on the "going-concern basis" used for Gene rally Accepted Accountin g Principles (GAAP).   
33 In the 1995 negotiations, the United States took the MFN exemption as it perceived that offers from 
other WTO Members were not satisfactory.  
34 Although such a measure is not likely to be invoked easily, foreign insurers could be subjected to 
non-MFN treatment by the U.S. authorities when the forced divestiture is co nsistent with the GATS 
commitments of the home country of the foreign insurer.  WT/TPR/S/56 Trade Policy Review 
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31. The new U.S. Schedule of Specific Commitments includes several improvements.  In banking 
services, the United States bound the provision of nati onal treatment with regard to the fees for FRB's 
examinations of foreign banks.  It also made commitments to provide market access and national 
treatment to foreign banks with respect to intersta te branching by merger in all U.S. jurisdictions 
except in Montana and Texas.35  However, the United States le ft interstate branching by de novo  
establishment unbound.  Some states also removed restrictions on the citizenship requirements for the 
boards of directors of depository financial ins titutions (Ohio, Oklahoma, Oregon and Virginia; 
however, West Virginia newly inscribed the restric tion in the Schedule); restrictions on the issuance 
of branches or agency licences to foreign banks (M aine, Nevada, New Hampshire, Ohio and Utah); 
and restrictions on the opening of representative offices by foreign banks (Hawaii, Nevada, New 
Hampshire, New Jersey, Ohio, Utah and West Virgin ia).  In insurance services, while some states 
removed restrictions, others added them in the Schedule.  It is difficult to assess whether the new Schedule overall constitutes more liberal commitments than the previous one.  For instance, while one 
state (Kansas) removed the citizenship requirement  for the board of directors of locally licensed 
insurance firms, two states (Oregon and New York ) added the requirements in the Schedule.  
Moreover, four states (Arkansas, Maine, Missour i and Texas) newly inscribed the citizenship 
requirements for incorporators of insurance companie s.  The state residency requirements were added 
by two states (Arkansas and North Dakota ) but withdrawn by one (New Jersey). 
32. The United States reached a bilateral agreement on insurance, with Japan in December 1996, 
which was later incorporated into the additiona l commitments of Japan's Schedule of Specific 
Commitments as a result of the WTO Financial Serv ices negotiations.  Under the agreement, Japan 
agreed to take actions to deregulate the primar y life and non-life insuran ce sectors where Japanese 
insurers had the dominant market share.  Japan al so agreed to "avoid radical change" in the third 
sector (i.e. personal accident, cancer and medical insurance), for two-and-a-half years following Japan's full implementation of those specific pr imary sector deregulation measures, as well as to 
protect non-Japanese insurers operating in the third sector from full competition from Japanese 
companies until January 2001, subject to certain conditions.  On 1 July 1998, the date set by the 
agreement for Japan to complete implementation of  the final set of its primary sector deregulatory 
measures, the United States expressed dissatisfaction with Japan's implementation of the agreement, 
in particular, regarding rating organiza tion reform and the product approval process.
36 Japan, 
however, has expressed its view that it has fu lly implemented its commitments.  A bilateral 
consultation between the two countries was held in April 1999. 
(iv) Financial market integration 
33. The U.S. financial services market has long been segmented by regulatory barriers along 
financial product lines.  The Glass-Steagall Act of  1933 has restricted banks from underwriting or 
dealing in securities of non-governmental issuers.   In general, banks and bank holding companies 
have been limited in their ability to sell and underwrite insurance.37  These regulatory barriers have 
been relaxed in recent years in response to financia l market liberalization and integration at the global 
level.  The emergence of new information technol ogy seems to have reinforced this trend.   
34. Section 20 of the Glass-Steagall Act permits subsidiaries of bank holding companies to 
underwrite and deal in securities as long as they ar e considered not to be "engaged principally" in 
                                                      
35 Under the Riegle-Neal Interstate Banking and Bran ching Efficiency Act of 1994, the States were 
given an option to enact a law to opt out of interstate branching by merger.  Montana and Texas have enacted such laws, although Texas subs equently reversed its position.  
36 USTR Press Release , 1 July 1998. 
37 National banks are permitted to sell and underwrite, and reinsure that which is credit-related or 
otherwise part of, or incidental to, the business of banking.  United States WT/TPR/S/56 
 Page 191 
 
 
underwriting and dealing.  In allowing such activities to subsidiaries, the FRB has made them subject 
to a limit on the amount of total revenue that they  can derive from the activities of these subsidiaries 
(so-called Section 20 subsidiaries) and certa in prudential restrictions (firewalls).38  The permissible 
revenue limit was increased from 10% to 25%, eff ective March 1997.  The FRB also streamlined the 
firewalls applicable to the activities of Section 20 s ubsidiaries, by eliminating restrictions that had 
proved unduly burdensome or unnecessary in light of ot her laws or regulations  and consolidating the 
remaining restrictions in a series of eight operating standards, effective 31 October 1997. 
35. The long-standing segmentation of bank and in surance businesses has also eroded.  Life 
insurers have shifted their focus from traditional life insurance products to annuities and other 
investment-type products.39  Such a trend is supported by two recent U.S. Supreme Court decisions, 
which recognized a broad permission for national ba nks to sell insurance in towns with a population 
of less than 5,000, and established that annuities were financial investment products rather than 
insurance products.40  This shift has brought life insurers in to direct competition with banks, securities 
firms and mutual funds. 
36. The U.S. Congress has been debating and cons idering modernization of U.S. financial 
legislation for many years, including the curre nt session of the 106th Congress (1999-2000). Although 
the House Banking Committee and the Senate Banki ng Committee have passed  different versions of 
the legislation, both bills have many elements in  common.  The proposed legislation would repeal 
provisions of the Glass-Steagall Act that restrict affiliations and interloc k personnel between banks 
and securities firms.  The legislation would allo w qualifying bank holding companies to control 
banking, securities, and/or insurance firms, provide d that all the insured bank affiliates are well 
capitalized and well managed. The proposed legisla tion would enhance market access and provide for 
national treatment of foreign service providers.  If existing restrictions on sales of various financial 
services by affiliated companies are relaxed, cons umers would be able to engage in "one-stop 
shopping," which would allow financial companies to  realize greater economies of scale and scope.  It 
may be necessary, however, to ensure  that such consolidation of activities in financial conglomerates 
does not result in anti-competitive outcomes.41  Under the proposed legislation, bank holding 
companies qualified to engage in an expanded range  of activities generally would be supervised by 
the FRB, and their securities, banking, and insura nce affiliates would be functionally regulated under 
other federal and state securities, banking, and in surance laws (i.e., the Securities and Exchange 
Commission for securities activities, federal/state banking regulators for banking activities, state 
insurance regulators for insura nce activities).  In the 105th Congress (1997-98), financial services 
modernization legislation was passed by the H ouse of Representatives in May 1998 by a vote of 214-
213; a different version, which came out of th e Senate Banking Committee in September 1998, was 
not adopted by the Senate before the Congress adjourned, and therefore was not enacted.  
                                                      
38 As of 30 September 1998, the FRB had approved 50 companies to engage in underwriting and 
dealing in securities; of these, 18 were owned by foreign banks.   
39 Life insurers receive premium income from three major product ar eas: life insurance,  annuities, and 
health insurance.  The growth of annuity income and the relative decline of premium income from life policies 
have constituted a recent industry trend; in 1996, life insurance policies accounted for 29.5% of premium 
income, annuities for 49.8%, and health insurance for 20.7%.  This is in sharp contrast to the situation in the 
1970s when life insura nce premiums accounted for nearly half of all income and annuities accounted for only 
21.1%. (U.S. Department of Commerce, International Trade Administration (1999)).  
40 Barnett Bank of Marion County, N.A. v. Nelson, 517 US.25 (1996); NationsBank of North Carolina 
N.A. v. Variable Annuity Life Insurance Company, 513 U.S. 251 (1995).   
41 For example, the House Banking Committee reported version of the bill requires increased 
regulatory scrutiny of large business combinations and gives the banking agencies authority to impose 
restrictions or requirements on relationships or transac tions between a bank and its affiliates in order to avoid 
conflicts of interest or other abuse that  may occur within financial conglomerates.  WT/TPR/S/56 Trade Policy Review 
Page 192 
 
 
(3) TELECOMMUNICATIONS SERVICES  
(i) Introduction  
37. The United States is the world's largest te lecommunication services market, accounting for 
about 30% of the world's estimate d US$825 billion in revenues in 1999.42  The dynamic performance 
of the U.S. telecommunications sector in recent deca des is due to fast technological innovation as well 
as the deregulation of what had previously been m onopolies at the state, regional, or local level.  
Operating revenues in telecommunications servi ces grew at an average rate 10.3% in 1995.43 
38. Cross-border trade in telecommunication services, encompassing both basic and value-added 
service44, has continued to grow relatively quickly ; exports increased from US$3.2 billion to 
US$3.8 billion and imports from US$7.3 billion to  US$8.1 billion in the period of 1995-97.45  The 
dominant mode of trade is cross-border transacti ons, which involve the placement of a call in the 
home market and the termination of the call in a foreign market (and  vice versa). 46  During the 
period, the United States recorded a large payments deficit;  that is, outgoing calls exceeded incoming 
calls.  Factors contributing to this deficit include  the average length of calls, relatively low U.S. 
international calling prices (owing, inter alia,  to strong domestic competition), the exchange rate of 
the U.S. dollar, the relatively high income per cap ita of the United States, and the overall magnitude 
of foreign direct investment abroad.47  Call-back services constitute only a small share of international 
service minutes contributing to the trade deficit;  the share is estimated to be between 4-8% of traffic on some routes. 
39. Commercial presence as a mode of supply h as recently become significant, as many public 
telecommunication operators around the world have been  partially or wholly privatized and foreign-
ownership restrictions have been liberalized unila terally or through multilateral agreements such as 
the WTO Basic Telecommunications Agreem ent.  Between 1995 and 1996, sales of 
telecommunications services by foreign affiliates of  U.S. firms almost doubled from US$3.2 billion to 
US$6.2 billion, while sales by U.S. affiliate s of foreign firms increased six-fold from 
                                                     
 
42 U.S. Department of Commerce, International Trade Administration (1999).  
43 These include SIC 4812 (radiotelephone communication), 4813 (telephone communications except 
radio telephone) and 4822 (telegraph) (U.S. Department of Commerce, International Trade 
Administration (1999)).  
44  According to the GATS Servi ces Sectoral Classification List, basic telecommunication services 
include voice telephone services, packet-switched data transmission services, circuit-switched data transmission 
services, telex services, telegraph services, facsimile serv ices, private leased circuit services and a variety of 
other services, including mobile communications, providing real-time transmission of customer supplied information. Value-added services in clude electronic mail, voice mail, on-line information and data retrieval, 
electronic data interchange, enhanced/value-added facsimile services, code and protocol conversion,  and on-
line information and/or data processing (WTO document S/C/W/74, December 1998).  
45 USITC (1998f).  Mexico, Canada, the United Kin gdom, China and Japan constituted the largest U.S. 
cross-border telecommunication export markets, although of  these countries, the United States posted a bilateral 
payments surplus only with the United Kingdom.  
46 U.S. carriers collect fees fr om domestic customers for outbound calls and periodically make 
settlement payments to foreign carriers according to bi laterally negotiated settlement rates, which are prices 
charged by carriers for terminating international calls.  U.S. settlement payments to foreign carriers are recorded 
as imports in the U.S. balance of payments, whereas settlement payments collected from foreign carriers are 
recorded as exports.  
47 USITC (1998f).  United States WT/TPR/S/56 
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US$900,00 million to US$5.5 billion.48  This reflects the relative openness of the U.S. 
telecommunications market.  
(ii) Market structure 
40. Basic telecommunication services are regulated at both the federal and the state level.  The 
Federal Communications Commission (FCC) exercises ju risdiction over interstate, international, and 
all radio-based basic telecommunications services.  The Telecommunications Act of 1996 ended the 
authority of state governments to grant monopoly or exclusive rights for intra-state telecommunications. Individual state commissions reta in the authority to regulate rates, terms and 
conditions of intra-state, non-radio-based basic telecommunications services.  On issues such as 
universal services the FCC and the states work toge ther through the Federal-State Joint Board.  
Enhanced or value-added telecommunication servi ces are unregulated at both the interstate and 
intra-state level.
49 
41. The objective of the Telecommunications Act of 1996, which amended the Communications 
Act of 1934, was to bring in far-reaching chang es in the U.S. telecommunications sector, by 
introducing more competition in local and long-di stance telephone services, cable programming and 
other video services and broadcast services.50  The FCC's most recent local  competition report shows 
that those states and areas in the United States that had no local service competitors in 1995 now have 
at least one or more local competitors.51 
42. In the long-distance telephone services market, incumbent local exchange carriers and other 
competitors have entered the market.  While the four-largest long-distance companies (i.e. AT&T, 
MCI, Sprint and WorldCom)52 continue to be the dominant service providers, their share in the total 
operating revenues of long-distance carriers decreased from 86.2% in 1995 to 80.2% in 1997.53 
43. International telecommunication services are pr ovided either on a facilities-based or pure 
resale basis.  In 1997, 52 international carrier s reported providing facilities-based services, and 
318 carriers reported offering international servi ces on a resale basis, up from 230 in 1995.54  
Although the four largest international carriers still dominate international traffic, collecting 98.1% of 
facilities-based international revenues, other carri ers have significantly increased their shares, 
accounting for 20.3% of total international service revenues in 1996 , up from 11.0% in 1995.55 
(iii) WTO Basic Telecommunications Agreement 
44. The United States played an active role in the WTO Basic Telecommunications negotiations 
concluded in February 1997.  The initial April 1996 deadline for the conclusion of the negotiations 
was extended primarily at the insistence of the Un ited States, which still considered the package of 
                                                      
48 Data on telecommunication service sales through af filiates are bundled with other services, such as 
radio and broadcasting services.  Telephone and te legraph sales constitute an estimated 80% of  
"communications" sales (USITC (1998f).   
49 WTO document S/C/W/ 91, 16 December 1998.  
50 The FCC is responsible for administering and impl ementing the Act.  The Telecommunications Act 
was covered in detail in the previous Trade Policy Review.  
51 FCC (1998a).  
52 In 1998, MCI and WorldCom merged to form MCI WorldCom.  
53 FCC (1998b).  
54 These numbers include only carriers that have filed reports with the FCC.  Many smaller carriers do 
not file such reports.  The FCC has issued authorizations  to over 1,000 carriers to provide international services.  
55 The number of resellers increased from 230 in 1995 (FCC (1998c)).   WT/TPR/S/56 Trade Policy Review 
Page 194 
 
 
commitments insufficient.56  While encouraging others to improve their offers, the United States 
improved its own initial market-access offer by re moving the restriction limiting access to submarine 
cable landing licences in its final offer. 
45. U.S. commitments cover the entire range of basic telecommunication services listed in the 
GATS Services Sectoral Classification List, as well as mobile services including analog/digital 
cellular services, personal communications services (PCS), paging services and mobile data services.  
The U.S. Schedule explicitly excludes one-way satellite transmissions of direct-to-home (DTH) and direct broadcast satellite (DBS) television services and of digital audio services, which were considered by some WTO Members to reflect an audiovisual component and therefore not covered by the negotiations on basic telecommunications.  Th is point has been the subject of disagreement 
between parties as the United  States and other countries consider that  these services ar e, in fact, basic 
telecommunications services.   At the same time, the United St ates took an MFN exemption with 
respect to the above-mentioned services.  The Un ited States also made commitments, as additional 
commitments under GATS Article XVIII, to abide by the regulatory principles contained in the Reference Paper in their entirety.  
46. Foreign firms are granted access to local, long-d istance, and international services, using any 
means of technology, including wireline, terrestrial wireless (i.e. cellular) and satellite facilities, on 
either a facilities-based or resale basis.  However,  the United States maintains some restrictions on 
foreign ownership; these are described in Section 310 of the Communications Act, as amended by the 
1996 Telecommunications Act.  More specifically, direct ownership of a common carrier radio 
licence may not be granted to or held by a foreign government or its representative; a non-U.S. citizen 
or the representative of any non-U.S. citizen; any corporation not organized under the laws of the 
United States; or any U.S. corporation of which more  than 20% of the capital stock is owned or voted 
by a foreign government or its representative, non-U.S. citizens, or their representatives, or a 
corporation not organized under the laws of the Unite d States.  However, there are no restrictions on 
indirect ownership of a common carrier radio lic ence, nor on direct owne rship of firms holding 
non-radio FCC licences, as reflected in the U.S. GATS commitments.
57  
47. The United States inscribed market-access restri ctions on satellite-based services in its GATS 
Schedule.  These restrictions involve the exclusiv e right of the Communications Satellite Corporation 
(Comsat) to provide link-ups with the Interna tional Telecommunications Satellite Organisation 
(Intelsat) and the International Ma ritime Satellite System (Inmarsat).  In October 1998, however, the 
FCC invited public comment on a proposal to permit di rect access to Intelsat, thus proposing to end 
Comsat’s exclusive access to Intelsat.58  Comsat’s exclusive access to Inmarsat will end when 
Inmarsat, currently an inter-governmental or ganization, is privatized in April 1999.59 
                                                      
56 Specifically, there were four areas of concern: (i) insufficient numb er and quality of foreign offers 
(e.g. all but one ASEAN country had tabled limited offe rs or none at all), (ii)  lack of commitments on 
international services (only 22 countries had agreed to open this market by a specific date, and more than one 
third of global traffic was not covered by acceptable offers), (iii) ambiguity  regarding satellite services (it was 
unclear to what extent other countries were commi tting to provide market access for telecommunications 
services provided over satellite facilities), and (iv) continuing restrictive investment limits in many countries, 
which would not allow foreign firms effective control of new telecommunications networks they might establish 
(U.S. Department of Commerce, International Trade Administration (1998)).  
57 For example, in August 1997 the FCC approved  the proposed 100% acquisition of MCI by British 
Telecom.  The approximately US$20 billion acquisition was cancelled later by the two companies, when a higher bid for MCI was received (WTO document S/C/W/91, 16 December 1998).  
58 FCC News,  "FCC Requests Comment on Permitting Direct Access to Intelsat System", Report 
No. IN 98-55, 22 October.  
59 WTO document S/C/W/ 91, 16 December 1998.   United States WT/TPR/S/56 
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48. To comply with U.S. commitments under th e WTO Basic Telecommunications Agreement, 
the FCC adopted the Foreign Participation Order in  November 1997.  Prior to the 1997 order, foreign 
participation in the U.S. international teleco mmunication services market was regulated by the 
Foreign Carrier Entry Order of November 1995.  The 1995 order involved an "effective competitive 
opportunities" (ECO) test60, requiring foreign carriers with mark et power in the foreign market to 
demonstrate, as a condition for their authorization to  provide service to their dominant market, that 
there were no legal or practical barriers (i.e. terms and conditions of in terconnection, competitive 
safeguards, and the regulatory framework) f acing U.S. carriers in the foreign market.61  According to 
the U.S. authorities, the ECO test  was adopted by the FCC as measur e to safeguard competition in the 
U.S. market.   More specifically, the ECO test was applied in  deciding whether or not to authorize the 
provision of international telecommunication servi ces under Section 214 of the Communications Act, 
or to relax the 25% indirect foreign owners hip benchmark of common carrier licence under 
Section 310(b)(4) of the Act. 
49. The Foreign Participation Order removed the ECO test and replaced it with an open entry 
standard for applicants from WTO Members; app licants from non-WTO members remained subject to 
the ECO test.62  According to the U.S. authorities, it w as felt that the market-opening commitments 
made in the context of the WTO Basic Telecommunications Agreement would significantly reduce 
the risk of anti-competitive effects of entry by a foreign applicant and that post-entry safeguards  
would protect competition in the U.S. telecommunications market, allowing the adoption of a streamlined procedure for granting most applicati ons.  The streamlined procedure is expected to 
reduce the number of days required to process appli cations to 35 days for S ection 214 applications, 
from 90 days under the normal procedure. However, the Order left considerable discretion to the 
FCC, which reserved the right to attach conditions to the granting of authority or to denying an 
application if it posed a "very high risk to competition" .  Additional "public interest" factors, such as 
national security, law-enforcement issues, foreign pol icy and trade concerns, raised by the Executive 
Branch, may be taken into considera tion in determining whether to gran t or deny an application.  It 
has been pointed out by some observers that th e attachment of such conditions by the FCC to 
decisions concerning licences, in support of objectives in other policy areas, may constitute barriers to 
entry to foreign participation.
63  Nevertheless, no applicants with foreign affiliations have so far had 
authorizations denied on these grounds. 
50. The Order also revised the competitive safegua rds, enhancing the FCC's ability to prevent 
foreign carriers with market power from distorting competition in the U.S. telecommunications 
market.  The Order prohibited U.S. carriers from en tering into exclusive arrangements with foreign 
carriers that possessed more than 50% of  market share in the foreign market.64  The Order also revised 
the dominant-carrier safeguards that apply to U.S.  carriers classified as dominant, owing to an 
affiliation with a foreign carrier possessing sufficien t market power, at the foreign end of a U.S. 
                                                      
60 Prior to adopting the ECO test, the FCC evaluated fo reign carriers' applications to provide service in 
the U.S. market on a case-by-case basis.  
61 According to OCED (1998d), it took several months to process each applicati on by a foreign carrier 
to provide service in the U.S. market as a result of the ECO test.  
62 The Order also ended application of an ECO-type analysis in examining the granting of licences for 
the landing and operation of submarine cables.  Under the Submarine Cable Landing Act of 1921, the FCC had the authority to withhold, revoke or condition the grant of a cable landing licence if such action would assist in 
securing right for the landing or operation of cables in foreign countries; maintaining the right and interests of 
the U.S. or its citizens; promoting the security of the United States; and assuring just and reasonable rates and 
services in the operation of the cables.  
63 See for instance, OECD (1998d).  
64 In the 1995 Foreign Carrier Entry Order, the "N o Special Concessions" rule prohibited all U.S. 
international carriers from agreei ng to accept special concessions fr om any carrier or administration.   WT/TPR/S/56 Trade Policy Review 
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international route, to affect competition in th e U.S. international telecommunications services 
market.  The Order modified the tariff-setting requirement from the 14-day advance notice requirement to a one-day advance notice.  It also  removed the requirement that foreign-affiliated 
dominant carriers obtain prior approval for circui t additions and discontinuance on their dominant 
route. 
51. Along with the Foreign Participation Order,  the International Satellite Service Order 
established a new framework to facilitate entry of foreign licensed satellites into the U.S. satellite 
services market.  An open entry policy was adopted for applicants licensed by WTO Members to provide fixed and mobile satellite services covere d by the U.S. commitments under the WTO Basic 
Telecommunications Agreement.   Like in the case of the Foreign Participation Order, the FCC 
retained discretionary power to c onsider "public interest" factors.
65  The ECO test for foreign licensed 
satellites (or the ECO-Sat test)66 applies to satellites licensed by no n-WTO members, as well as to all 
satellites providing DTH and DBS television services and direct audio services, which are not covered 
by the U.S. commitments under the WTO Basic Telecommunications Agreement.  
52. The FCC's Benchmark Settlement Rate Policy, established by the Benchmarks Order in 
August 1997, may also attach conditions to forei gn participation in the U.S. telecommunications 
market, in particular, U.S. carriers' relations with  foreign carriers.  The Benchmarks Order requires 
U.S. carriers to lower the international settlement rate s paid to foreign carriers for terminating calls to 
a level commensurate with the economic develo pment of the country where calls terminated67, and 
prohibits U.S. carriers from  engaging in international simple resale (ISR) unless 50% of the traffic on a particular route was settled at or below the benchmark settlement rates.
68  The FCC believes that 
present settlement rates, which were set artificia lly at rates greatly exceeding the actual costs, 
constitute an above-cost s ubsidy paid by U.S. consumers to foreig n carriers, therefore creating market 
distortions in the U.S. international telecommunications market.69  Many WTO Members have raised 
concerns regarding the U.S. action, and  foreign ca rriers filed a suit in the United States, challenging 
the FCC's Order.70  The FCC is currently proposing to refo rm the International Settlement Policy, 
particularly with respect to arrangements between U.S. carriers and foreign carriers that lack market 
power in the WTO Member countries.71  A final Order is expected in second quarter of 1999. 
                                                      
65 These include the effect on competition in the United States, spectrum availability, eligibility and 
operating requirements (i.e. legal, technical and financ ial qualifications), as well as national security, law 
enforcement, trade and foreign policy concerns, and "very high risk to competition" concerns.   
66 The ECO-Sat test evaluates effective competitive opportunities in the country  in which the foreign 
satellite is licensed prior to granting an application to se rve in the United States.  In May 1996, the test was 
proposed for applications from WTO Members, however, it was never adopted.  
67 A benchmark range was established at US$0.15 per minute for upper-income countries and 
US$0.23 per minute for lower-income c ountries, to be implemented over a five-year transiti on period starting 
January 1998.  
68 ISR involves routing switched traffi c over international private lines.  
69 The FCC estimated that at least 70% of the annua l settlement payment made by U.S. carriers, over 
$6 billion, constituted an above-cost subsidy pa id by U.S. consumers to foreign carriers ( FCC News , 
"Commission Adopts International Settlement Rate Benc hmarks", Report No. 97-24, 7 August, 1997).   
70 Cable and Wireless, along with other foreign carrier s, challenged this decisi on to the District of 
Columbia Circuit Court in 1997.  In January 1999, the D.C. Circuit released its opinion upholding the FCC's 
Benchmarks Order.  
71 FCC News , "FCC Proposes to Reform Intentional Settlement Policy", Report No. In 98-44, 
6 August 1998.  The Telecommunications Act of 1996 requires that, in every even-numbered year beginning in 
1998, the FCC review all regulations issued under the Co mmunications Act that apply to operations or activities 
of any provider of telecommunication se rvices, and repeal or modify any regulation, if the FCC determines it to 
be "no longer in the public interest", in particular, "as the result of meaningful economic competition between United States WT/TPR/S/56 
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53. The multilateral approach to liberalizing the telecommunication services market in the WTO 
framework appears to have contributed to the enha ncement of competition in U.S. telecommunication 
markets, particularly in the international market.  Since the entry-into-force of  the Fourth Protocol to 
the GATS in February 1998, the FCC has gran ted over 700 licences to foreign and domestic 
applicants wishing to provide international servi ces in the United States.  This includes 48 licences 
granted to foreign telecommunication carriers to ente r the U.S. market, 18 of which were for foreign 
dominant carriers.72  With respect to ISR, the number of authorized ISR routes (i.e. where 50% of the 
traffic is settled at or below benchmark se ttlement rates) increased from five to 18.73  T h e  W T O  
Agreement also seems to have provided improve d access to foreign telecommunication markets by 
U.S. carriers, as seen by the large increase in the sales by U.S. affiliates abroad.   
54. To ensure that U.S. carriers derive benefits  from the Agreement, the USTR is mandated, 
under Section 1377 of the 1988 Omnibus Trade and Co mpetitiveness Act of 1988, to review annually 
WTO Members' compliance with their commitmen ts under the WTO Agreement, as well as other 
trade agreements regarding telecommunica tion products and services (Chapter III(3)(v)). 
55. The United States and the European Union are currently in disagreement on the development 
of standards for third-generation (3G) mobile wi reless telecommunications systems. U.S. authorities 
are concerned by decisions of the European Telecommunications Standards Institute and the 
European Council of Ministers to promote the adoption of a single 3G standard, known as the Universal Mobile Telecom System, fearing that su ch decisions might disadvantage U.S. competitors, 
who often use standards known as Code Division Multiple Access (CDMA), in European and third 
country markets.  Bilateral discussions are taking place regarding the matter;  a possible outcome 
might involve negotiation of multilateral thir d-generation standards in the International 
Telecommunication Union. 
(4) T
RANSPORTATION SERVICES  
(i) Introduction 
56.  International trade in transportation services in cludes transactions of passenger fares, freight 
and port services for the transportation of goods by  ocean, air, pipeline and other means.  These 
services are often provided on an origin-to-destin ation basis and may involve a combination of 
transportation services, such as ocean- and land-transportation services.  Transportation services contribute significantly to overall U.S. cross-border trade in services.  In 1997, cross-border exports 
were US$47.8 billion and imports were US$47.2 billi on (Table IV.3); they accounted for 20.0% and 
30.2%, respectively, of total exports and imports of cross-border services. 
57. The growth of the transportation services sector has been led by passenger transport services, 
primarily air transport.   The operating profits of U.S. airlines have been growing rapidly since 1993; 
in 1997, for example, they recorded a 32% increase over the previous year.
74  The importance of air 
transport in the international shipment of U.S. goods  has increased over the p ast few years; the share 
of air freight receipts in total receipts increased from 32.8% in 1993 to 39.2% in 1997, and its share in 
total payments increased from 17.8% to 20.1% over the same period.  By contrast, the importance of 
                                                                                                                                                                     
providers of such services".  The FCC's proposal on In ternational Settlement Policy reform is part of this 
process.   
72 FCC News,  "International  Bureau Reports on Developments in International Telecommunications 
Markets", Report No. IN 98-58, 19 November, 1998.   
73 FCC News,  International Simple Resale, ISR-Approved Co untries.  Available at  http://www.fcc.gov 
(24 January 1999).  
74 U.S. Department of Commerce, International Trade Administration (1999).   WT/TPR/S/56 Trade Policy Review 
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ocean shipping has declined over time with its share falling from 47.2% to 38.9% on the receipt side 
and 72.1% to 67.4% on the payment side over the sa me period.  The expansion of integrated express 
carriers, such as FedEx and UPS, has greatly cont ributed to the growth of international air cargo 
services.75  It is estimated that integrated express carrier s accounted for 64% of total U.S. domestic air 
freight in 1996; by 2002, the percentage of freight ca rried by integrated carriers is forecast to rise to 
75%.76  Receipts and payments of "other" freight, ma inly involving trucking transportation services to 
or from Canada and Mexico, have also been grow ing rapidly in recent years; the annual average 
growth rates were 10.9% for receipts and 10.7% for payments during the 1993-97 period.  The U.S. 
trucking industry has experienced considerably incr eased traffic with the two countries as the NAFTA 
has provided for progressive relaxation of restri ctions on cross-border trucking transactions.   
Table IV.3 
Trade in transportation services, 1993-97 
(US$ million and per cent) 
  1993 1994 1995 1996 1997 Average growth 
rate (%) 
Cross-border transactions      1993-97 
Exports  Total 38,486 40,751 44,990 46,487 47,806 5.6% 
Passenger fares  16,528 16,997 18,909 20,413 20,895 6.1% 
Freight Ocean 4,056 4, 476 5,278 4,703 4,577 3.7% 
 Air 2,815 3,177 3,657 3,956 4,610 13.2% 
 Other 1,723 1,923 2,337 2,485 2,586 10.9% 
Port Services Ocean 7, 476 7,898 8,298 7, 799 7,626 0.6% 
 Air 5,753 6,135 6,361 6,971 7,359 6.4% 
 Other 135 145 149 160 153 3.3% 
        
Imports  Total 35,934 39,081 41,697 43,221 47,184 7.1% 
Passenger fares  11,410 13,062 14,663 15,818 18,235 12.5% 
Freight Ocean 10,463 11, 371 11,514 11,258 11,896 3.3% 
 Air 2,580 2,913 3,113 3,201 3,542 8.3% 
 Other 1,475 1,724 1,828 2,080 2,207 10.7% 
Port Services Ocean 2, 011 2,325 2,555 2, 231 2,186 2.7% 
 Air 7,918 7,609 7,947 8,551 9,034 3.4% 
 Other 77 77 77 82 84 2.2% 
Affiliate transactions       1993-96 
Sales by foreign affiliates  6,710 8,766 10,002 10,606 .. 16.9% 
Sales by U.S. affiliates  8,688 10,394 9,858 9,652 .. 4.1% 
.. Not available. 
Source : U.S. Department of Commerce,  Bureau of Economic Analysis, Survey of Current Busines,  October 1998. 
58. Although cross-border trade predominates, the relative importance of cross-border delivery 
and affiliate transactions varies substantially de pending upon both the type of transportation service 
provided and the geographic location of the countries involved.  For example, trade in air 
transportation services is inherently a cross-border transaction, whereas sales by affiliates play a large 
role in freight transportation in countries where re gulatory barriers prohibit cross-border trade.  Sales 
                                                      
75 These control both the ground segment and the air segment, offering door-to-door shipment.   
76 U.S. Department of Commerce, International Trade Administration (1999).  United States WT/TPR/S/56 
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by foreign-based affiliates of U.S. firms for 1996 totalled US$10.6 billi on.  Purchases from U.S.-
based affiliates of foreign firms for 1996 totalled US$9.7 billion.  
(ii) Maritime transport services 
59. The U.S. water transportation industry comp rises domestic and international water-borne 
trade.  While domestic water-borne trade is excl usively reserved for U.S.-vessels under the Jones Act 
(see below), international water-borne trade is ope n to domestic and foreign vessels alike.  Recently, 
the growth of international water-borne trade has be en a driving force in the U.S. total water-borne 
trade; in 1996, its share accounted for 51.8% (of which 32.1% for imports and 19.7% for exports) in 
total in tonnage terms, an increase from 48.1% in 1990.  Slower growth of the domestic water-borne 
trade is due to a drop in the production of Alaska's North Slope crude oil.77  International water-borne 
trade is projected to increase 3.3% between 1997 and 2002 while domestic water-borne trade is 
projected to grow 1.2% over the same period.78  Receipts and payments of  international water-borne 
trade grew at an annual average rate of around 3.5% in the period 1993-97.  The United States consecutively recorded trade deficits in the o cean freight transactions during the same period, 
reaching US$7.3 billion in 1997.  
60. The Maritime Administration of the Departme nt of Transportation is responsible for 
developing and implementing policies on water tr ansportation services, including vessel operations, 
shipbuilding and repair, and port operations, both for commercial trad e and national defence.  The 
Federal Maritime Commission (FMC), a statutory agen cy, takes actions to correct or counterbalance 
adverse, unfair or discriminatory foreign practices that affect U.S. shipping or U.S. carriers in 
international commerce.  The Commission is also responsible for economic oversight and regulation 
of shipping lines that are exempt from U.S. antitrust laws (see below).   
(a) Domestic water-borne trade  
61. Like many maritime nations, the U.S. domestic  maritime transportation services market is 
shielded from foreign competition by cabotage legislation.
79  Section 27 of the Merchant Marine Act 
of 1920, commonly referred to as the Jones Act,  reserves cargo service between two points in the 
United States (including its territories and possessions), either directly or via a foreign port, for ships 
that are registered and built (or repaired) in the United States and that are at least 75% owned and 
exclusively crewed by U.S. citizens.80  In general, the same requirements apply to the domestic 
passenger service under the Passenger Services Act of 1886.81  Cargo carried on routes covered by the 
Jones Act, including coastwise, intercoastal, Great  Lakes, and inland shipping, reached 998.8 million 
tonnes, worth about US$222 billion, in FY 1997,  accounting for 24% of the U.S. domestic cargo 
carried by all means of transport.82  Coastwise trade accounted for 24.3% of the Jones Act trade on a 
                                                      
77 U.S. Department of Commerce, International Trade Administration (1998).  
78 U.S. Army Corps of Engineers (1998);  and U.S. Department of Commerce, International Trade 
Administration (1999).  
79 Cabotage was not part of the WTO negotiations on maritime transport services.  
80 There are several exemptions from the scope of  the Jones Act.  Waterborne freight shipments 
between the U.S. Virgin Islands and other U.S. ports are exempted, and may be carried by foreign-flag vessels.  
Trade with Guam and other U.S. Pacific possessions may be carried by foreign-built U.S.-flag ships that meet 
the ownership and crewing requirements.   In addition,  under limited circumstances, individual waivers to the 
Jones Act are granted to foreign and U.S. vessels that are not protected by the Act.  
81 Limited exceptions to this law exist for the tran sport of passengers in Canadian vessels and for the 
passenger trades in the Hawaiian islands and Puerto Rico.  
82 U.S. Department of Transportati on, Maritime Administration, (1998b).  WT/TPR/S/56 Trade Policy Review 
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tonnage basis in FY 1997;  73.7% of such trad e was carrying petroleum products.  More than 80 
million passengers were also transported on domestic routes in FY 1997.  
62. The Jones Act provides a protected market not only for U.S domestic ship operators, but also 
for U.S. shipbuilders, who are the sole supplier of ships on domestic routes; however, it should be 
noted that foreign companies can establish shippi ng companies in the United States as long as they 
meet the Jones Act requirements (i.e. citizenship, crew and operation of domestic-built vessels).  The 
Jones Act vessels employ about 80,000 U.S. citizen s, and generate another 44,000 jobs in the 
shipbuilding, ship repair and related industries.83  The U.S. International Trade Commission (ITC) has 
undertaken a series of studies since 1988 to calculate the impact on the American economy of the U.S. 
law requiring the use of U.S.-flag, U.S.-built vessels in domestic water-borne trade.  These studies 
indicated that  a repeal of the Jones Act could resu lt in a U.S. "consumer welfare gain" in the range of 
US$2.8 billion to US$9.5 billion and could reduce the price of shipping services by an estimated 
26%.84  However, the accuracy of the ITC's estimates  has been questioned and debated by other U.S. 
governmental bodies.  The General Accounting O ffice (GAO) found the accuracy of the ITC's 
estimates uncertain because of limitations of the data  and the assumptions that the ITC used in its 
analysis.85  The Maritime Administration challenged the IT C's estimates as overly unrealistic, in part 
because the ITC analysis did not consider the cost of compliance with U.S. laws, including labour, tax 
and environmental laws.86 
(b) International water-borne trade 
63. The privately owned U.S.-flag fleet, at 13.2 million deadweight tons (dwt), was the eleventh 
largest merchant marine feet in the world as at 1 January 1999.  Of the  281 privately owned ships in 
the fleet87, 89 vessels engaged in international water-borne  trade and carried 2.6% of such trade in 
terms of  weight (approximately 8% in terms of value) in 1998.88  Thus, the majority of U.S. 
international ocean-borne trade is carried by fo reign-flag vessels, though many of these vessels are 
owned by U.S. citizens or U.S. companies.  At the beginning of 1998, there were 747 foreign-flag 
vessels (at 33.8 million dwt) owned by U.S. companies.89  On an ownership basis, the U.S. fleet is the 
third largest in the world. 
64. The main reason for such a small portion of trade carried by the U.S.-flag fleet is the cost of 
compliance associated with U.S.-flag registry.  V essels operating under the U.S. flag must be owned 
by a U.S. corporation,  employ U.S.-citizen mercha nt mariners, comply with U.S. labour standards, 
and pay U.S. federal and state taxes.  On the other hand, vessels operating under foreign flags are 
often exempted from corporate income tax on revenues in foreign commerce and the crews do not pay 
income tax to any country.  As a result, wage cost s of U.S.-flag vessels could be three to eight times 
higher than those of foreign-flag vessels.90  Over  the period 1994-98, the number of U.S.-flag vessels 
                                                      
83 U.S. Department of Transportati on, Maritime Administration, (1998b).  
84 USITC (1995);  USITC (1993);  and USITC (1991).  
85 U.S. General Accounting Office (1998a). 
86 Testimony of Maritime Administrator Clyde Hart, on Senate Bill S.2390, “Freedom to Transport Act 
of 1998”, before the Senate Commerce Committee, 15 September 1998.  
87 This only includes vessels that are 1,000 gross tons and over.  As of 1 January, 1999, There were  
124 vessels (6.6 million dwt) engaged in domestic trad e;  36 Military Sealift Command (MSC) chartered vessels 
(at  0.9 million dwt);  and 190 government-owned vessels (at 3.5 million dwt).  
88 U.S. Department of Transportati on, Maritime Administration (1998b).  
89 Lloyd's Register of Ships, January  1998.  
90 For instance, daily crew costs for a 100,000-125,000 dwt tanker are approximately US$11,700 for a 
U.S.-flag vessel, compared to approximately US$2,600 fo r a foreign-flag vessel.  Daily crew costs for a U.S-
flag Panamax-size bulk carrier are abou t US$9,000 and US$2,100 for a similar foreign-flag vessel.  Crew costs United States WT/TPR/S/56 
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declined from 367 to 285; of the total decline in U.S.-flag vessels, 33 involved reflagging to foreign 
registries.  
65. The Maritime Security Program (MSP) was introduced in 1996 to replace the operating-
differential subsidy (ODS) as the primary s upport for the U.S.-flag merchant marine.91  The ten-year 
MSP provides funding of up to US$100 million annually for up to 47 vessels; the stated purpose of 
the MSP is to provide a fixed payment to U.S.-flag vessel operators to assure that a limited number of 
militarily useful vessels from the commercial fleet are available to meet the nation's sealift requirements in time of war or national emerge ncies.  Net subsidy outlays for the MSP during 
FY 1997 amounted to US$121.6 million.
92  In addition, U.S. citizens owning or leasing vessels may 
obtain tax benefits through the Capital Constructi on Fund and Construction Re serve Fund to construct 
qualified vessels (Chapter III(4)(ii)).93 
66. The U.S.-flag fleet is also supported by cargo preference requirements for certain types of 
government-impelled cargoes;  50% of government-g enerated cargoes (75% fo r certain agricultural 
cargoes), 100% of military cargoes, and 100% of car goes generated by the Export-Import Bank loans 
(unless a waiver is granted by the Maritime Admi nistration) must be carried on U.S.-flag vessels.94  
Although ships may be built abroad, they must then be  registered under the U.S. -flag for at least three 
years to be eligible to carry preference cargoes.  In addition, the Alaska Power Administration Sale 
Act of 1995, while removing the prohibition on the export of Alaska crude oil, retained the pre-
existing U.S.-flag vessel carriage requirement of such exports.95  The portion of international cargo 
covered by the cargo preference system has remain ed relatively small, accounting for 0.8% , on a 
tonnage basis, of U.S. international cargoes in 1997;   they accounted for 29% of international cargoes 
carried by U.S.-flag vessels in 1997.96 
67. Finally, the FMC is statutorily authorized to take action to address foreign shipping practices 
that adversely affect U.S. shipping in foreign tr ade.  U.S. maritime legislation containing such 
reciprocity provisions includes the Merchant Marine  Act of 1920, the Shipping Act of 1984, and the 
Foreign Shipping Practices Ac t of 1988 (Title X, Subtitle A of the Omnibus Trade and 
Competitiveness Act of 1988).97  In 1997, the FMC, based on thei r factual record, came to the 
findings under U.S. law, that U.S. shipping interests were harmed by restrictive Japanese port 
practices; consequently, it envisaged barring Japane se ships from entering or leaving U.S. ports and 
imposed fines of US$1.5 million on three Japanese shippers.  Later, the U.S. and the Japanese 
                                                                                                                                                                     
for a 20,000-35,000 dwt containership are approximat ely US$13,400 for a U.S.-fl ag vessel compared to 
US$2,000 for a foreign-flag vessel (Lloyd’s Ship ping Economist and Maritime Administration data).  
91 ODS, granted on a 20-year contract basis, was provided for U.S.-flag vessels (approximately 20% of 
the privately owned fleet) operating in international trade routes in order to compensate for cost differences 
between U.S. and foreign operators.  New contracts would not be signed, while existing ODS agreements 
continue to be honoured (WTO document S/NGMTS/W/2/Add.11, 31 January 1995).  
92 U.S. Department of Transportati on, Maritime Administration (1998b).  
93 WTO document S/NGMTS/W/2/Add.11, 31 January 1995.  A 50% tariff is imposed on repairs of 
U.S.-owned vessels outside the United States and on imported equipment for vessels.  The Maritime Guaranteed 
Loan (Title XI) program extends loan guarantees to the construction of U.S. vessels for the export market and to 
U.S. shipyards for modernization and improvement projects (Chapter III(4)(ii)).  
94 Legislation governing cargo preference includes  The Cargo Preference Act of 1904 for military 
cargoes; the Merchant Marine Act of 1936, as amended by the Cargo Preference Act 1954, for government-
generated cargoes; and Public Resolution 17 of the 73 rd Congress for the Export-Import Bank loan cargoes.  
95 The exportation of Alaskan North Slope oil had been prohibited by the Export Administration Act 
and the Trans-Alaska Authorization Act of 1973 and thus the transportation of such oil to the domestic market 
was reserved to U.S.-flag vessels.  
96 U.S. General Accounting Office (1994).   
97 For detail, please see WTO (1996a).  WT/TPR/S/56 Trade Policy Review 
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Governments agreed that Japan w ould implement reform of the prio r consultation system.  In August 
1998, the  United States initiated an inquiry into Chin ese maritime policies that appeared to have an 
adverse impact on U.S. shipping.98  Since November 1998, the U.S. Government has held 
consultations with Brazil on Brazilian rules affe cting U.S. carriers with regard to government-
reserved cargoes.  
(c) Auxiliary services  
68. The movement of foreign and domestic commer ce through the U.S. port system is relatively 
concentrated.  In 1997, of a total of 350 ports handlin g water-borne trade, the 20 leading ports handled 
43.5% in tonnage terms (59.1% of foreign trade and 34.7% of domestic trade).99  According to the 
U.S. authorities, all U.S. port services are freely available on a non-discriminatory basis.  The 
United States does not grant preferential treatment to any countries with respect to the use of port and 
harbour facilities, except for limited restrictions applied on vessels of certain countries on national 
security grounds.100  The United States maintains an MFN exemption covering restrictions on 
performance of longshore work when making U.S. por t calls by crews of foreign vessels owned and 
flagged in countries that similarly restrict U. S. crews on U.S.-flag vessels from longshore work.101 
69. There are no measures limiting the provision of maritime transport auxiliary services except 
for the provision of customs brokerage services, wh ich is listed in the GATS Schedule as a service 
auxiliary to all modes of transportation.  Cu stoms brokerage services must be supplied by a 
corporation, association or partne rship, and one person in the business entity must hold a customs 
broker's licence, which is issued by the U.S. Customs Service  only to U.S. citizens.102 
(d) Recent developments  
70. The United States, like most of its trading pa rtners, exempts the liner shipping sector from 
otherwise applicable antitrust laws.103  Under the Shipping Act of 1984, liner operators can enter into 
agreements to fix prices (generally called “c onferences”), to discuss pricing policies (“discussion 
agreements”), or to share assets or cooperate  on operational matters (“ consortia” or “alliance 
agreements”).  These agreements are immune from an titrust prosecution.  Such agreements generally 
become effective on the 45th day after filing.  Howe ver, if the FMC finds that such an agreement is 
likely to lead to unreasonable rate increases or servi ce declines, it can ask that a federal court enjoin 
the agreement operations.  These provisions appl y both to U.S. and foreign operators.   
71. The Ocean Shipping Reform Act of 1998 (OSR A), passed in October 1998 and effective 
1 May 1999, has made some potentially pro-comp etitive changes to the 1984 Act.  Shipping lines 
have two ways to sell their services to users: (i) they can move goods under their “tariff” (i.e. public 
price list) rates, which by law are available to all us ers; or (ii) they can enter into “service contracts”, 
individual long-term volume deals with importers and exporters.  Under the 1984 Act, shipping lines 
                                                      
98 FMC Press Release,  "FMC Launches Inquiry into Chinese Shipping Policies", NR 98-03, 
12 August 1998.  
99 U.S. Department of Commerce, International Trade Administration (1999).  
100 These include Armenia, Azerbaijan, Cambodia, Ge orgia, Kazakhstan Kyrgyzstan, Moldova, Russia, 
Tajikistan, Turkmenistan, Ukraine, Uzbekistan, and Viet Nam.  Vessels from Cuba, Iran, Iraq, Libya, 
Democratic People's Republic of Korea, Syria and Yugoslavia  are prohibited from entering U.S. ports.  
101 WTO document S/C/W/71, 24 November 1998.  
102 WTO document S/C/W/71, 24 November 1998.  
103 “Liner” refers to operators that operate fixed- schedule services, carrying many types of cargo for 
multiple shippers; it does not include, for example, tankers , bulk ore or grain carriers that generally do not have 
fixed-schedule public services.  United States WT/TPR/S/56 
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were allowed to agree among themselves to restrict  or eliminate their use of service contracts; 
however, under the  new legislation, carrier groups can no longer restrict individuals lines from entering into contracts with shippers.  Service cont racts continue to be filed with the FMC, but the 
FMC no longer makes contract price terms public; parti es are able to agree to keep most of the terms 
of their deals confidential.  According to the U.S.  authorities, these two changes are expected to lead 
to more efficient, individually tailored lo ng-term deals between carriers and shippers. 
72. The OSRA has made a number of other regulatory changes.  Carriers no longer file their 
tariffs with the FMC; instead, they are required to make their tariffs available electronically.  The new 
legislation has authorized ocean carriers to jointly ne gotiate with truck, rail, or air carriers for inland 
transport.  While the FMC has no authority to review or reject tariff or service contract rates of 
commercial shipping lines, it retains the power to  review the rates of foreign-government-owned 
carriers and to guard against foreign-government -backed below-cost pricing.  These powers are 
enhanced under the new legislation; for example, an exemption for rates in bilateral trade is removed.  
The OSRA has also clarified the FMC's existing au thority to take action ag ainst owners, operators, 
agents or masters of foreign vessels that engage  in pricing practices that create “conditions 
unfavourable to U.S. shipping.”  The new legisla tion has also established a new licensing requirement 
for non-vessel-operating common carriers (NVOCCs)  carriers that resell space purchased from vessel 
operators).  Only NVOCCs in the United States are subject to the licensing requirement.  All NVOCCs are required to post a bond to protect user s against financial loss; however, NVOCC’s that 
are not in the United States must meet a higher bond amount (US$150,000 versus US$75,000). 
73. According to the U.S. authorities,  there has been not been serio us debate on reform of the 
Jones Act in the U.S. Congress.  In 1998, legisla tion calling for relaxation of the Passenger Vessel Act 
was sent to the Senate for consider ation, but failed to pass.  A hearing was also held in the Senate 
Commerce, Science and Transportation Committee on th e Freedom to Transport Act, which called for 
the elimination of the U.S.-built requirement for v essels and the relaxation of citizenship requirement 
for the ownership of U.S.-flag vessels.  Those seek ing reform of the Jones Act included farmers, who 
claimed that certified U.S.-flag vessels were not ava ilable for the domestic shipment of their grain.  
However, passage of reform legislation is  unlikely to occur in  the near future.  
74. The United States did not table an offer in the WTO negotiations on maritime transport 
services, suspended in June 1996, because it claimed that offers tabled by other Members did not 
constitute sufficient liberalization in the sector.  Acco rding to the U.S. authorities, the United States is 
observing a standstill agreement
104;  negotiations are expected to resume in 2000 when all services 
sectors are scheduled for negotiations.  
(iii) Air transport services 
75. The Federal Aviation Administration (FAA) at  the Department of Transportation is 
responsible for development and implementati on of safety standards in the civil aviation 
transportation sector, including the operation of the Air Traffic Control system and the certification of 
civil aircraft, operating rights and airline personnel.  The Office of the Secretary of Transportation, 
Assistant Secretary for Aviation and Interna tional Affairs, confers economic authority. 
                                                      
104 The provision to reserve the shipping of the Alaska North Slope Oil to U.S.-flag vessels was passed 
under the Alaska Power Administration Sale Act of 1995.  Several WTO Members, including the European 
Union, have expressed concerns that it may constitute a breach of U.S. commitments under the WTO Ministerial 
Decision on Negotiations on Maritime Transport Serv ices with respect to the standstill agreement (WTO 
documents S/NGMTS/W/5, 17 July 1995 and S/NGMTS/7, 16 November 1995).  WT/TPR/S/56 Trade Policy Review 
Page 204 
 
 
(a) Domestic air transport services 
76. As in most other countries of the world, the provision of U.S. domestic air services is 
restricted to U.S. carriers.  While those providi ng domestic air services in the United States are not 
required to meet a U.S.-built requirement, like U.S.  domestic shipping carriers, there are ownership 
and crew restrictions.  The ownership restriction pr ohibits foreign investors from holding more than a 
25% of voting equity of a U.S. air carrier; however, the 25% restriction does not apply to non-voting 
equity so long as it does not result in foreign control, which is prohibited.105  Crews engaged in 
domestic air passenger and freight service must be U.S.  nationals or resident aliens, while air carriers 
engaged in providing international service may use foreign nationals in their flight crews.106  T o  
operate U.S. registered aircraft, a foreign national must obtain a U.S. airman certificate from the FAA. 
77. U.S. domestic air services have been largely deregulated since the implementation of the 
Airline Deregulation Act of 1978.  The Act phased out  the federal government's control over domestic 
fares and services, invited the entry of new air car riers, and abolished the U.S. Civil Aeronautics 
Board in 1984.  The major air carriers restructured their route systems into competing "hub-and-spoke" networks
107, resulting in lower airfares and more extensive and more frequent service for most 
domestic air travellers.  The average number of  carriers per route has jumped 30% since 1977.108  As a 
result, average airfares, adjust ed for inflation, declined by 35-40% between 1978 and 1997.109  
Passenger traffic on domestic carriers more than  doubled between 1978 and 1997; from 275 million to 
600 million.  The number of scheduled departures al so increased by 50% for smaller airports, 57% for 
medium-sized airports, and 68% for large airports over the same period.110  Moreover, the growth of 
the airline industry has added new employment, which is estimated at 530,000 in 1998, a 50% 
increase over 1978.111 
78. However, there is some evidence that the be nefits of deregulati on have been unevenly 
distributed.112  For instance, a study by the General Acc ounting Office states that certain airports, 
particularly those serving small and medium-sized  communities in the east and upper midwest, have 
experience higher fares and/or less service since deregulation.113  It is also noted that various 
operating barriers, such as slot controls, restrictiv e gate leases, and limits on the number of take-offs 
and landings at the four most congested airports (Kennedy in New York City, La Guardia in New York City, O'Hare in Chicago, and National in  Washington D.C) continue to block entry at key 
airports and contribute to high fares and service problems.
114  There are some trends showing that 
competition is indeed declining; the number of "city -pair" markets in the 48 states where at least two 
airlines compete for traffic declined from 12,495 in 1992 to 8,985 in 1997.  A study by the 
Department of Transportation has also found evid ence of unfair exclusionary conduct, whereby a 
major carrier responds to new entry at its local hub market by a low-fare airline with a strategy of 
                                                      
105 In February 1995, a bill was introduced in the U.S. House of Representa tives Transportation and 
Infrastructure Committee that would enable the Department of Transportation to waive the 25% limit on foreign ownership, up to a maximum 49%, at its discretion.  
106 The requirement is described in the U.S. Immi gration and Nationality Act section 101(a)15(d) and 
its regulations from the U.S. Immigration and Naturalization Service.  
107 Hubs are strategically located airports usually dominated by one carrier and used as transfer points 
for passengers travelling from one community to another in the region surrounding the hubs.  
108 Robson (1998).  
109 U.S. Department of Transportation (1998) and Robson (1998).  
110 U.S. General Accounting Office (1996b).  
111 Robson (1998).  
112 See, for instance, U.S. General A ccounting Office (19956b) and (1996c).  
113 U.S. General Accounting Office (1996b).   
114 U.S. General Accounting Office (1998b).  United States WT/TPR/S/56 
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flooding the market with low-fare seats so  that its local revenue actually declines.115  To address these 
issues, as well as the overall competitiveness of the av iation industry, new legislation has been drafted 
and currently is being debated in Congress.  
(b) International air transport services 
79. In 1997, U.S. airlines accounted for 49.6% of the U.S. international passenger market and 
43.3% of the U.S. international freight market.116  International air services are governed by a series of 
bilateral agreements that traditiona lly grant each country's flag carriers specific traffic rights, covering 
such matters as the routes to be flown, the number of  airlines that fly the route, and the number of 
flights that can be operated.117  The United States has usually negotiated these agreements as part of a 
comprehensive exchange of rights  covering passenger and cargo services.118  During the six-year 
period ending early 1999, the United States concl uded 70 bilateral aviation agreements of varying 
scope; of these, 34 were open skies air services agreements.119  The pace of  reaching open skies 
agreements has accelerated sin ce the last Trade Policy Review; since 1996  the United States has 
concluded 21 such agreements (Table IV.4).  Othe r major liberalization agreements include those with 
Canada, Japan and France.120  These bilateral arrangements have contributed to a significant increase 
in traffic; for instance, U.S.-Can ada passenger traffic has grown by an annual average rate of 11.1% 
since the conclusion of the U.S.-Canada Aviation Ag reement in February 1995, compared to 1.4% 
prior to the agreement.121  The economic benefits of the U.S.-Japan Civil Aviation Agreement, signed 
in January 1998, are estimated to be substantial (Box IV.1). 
80. The Fly America Act requires U.S. government-financed transportation of passengers and 
cargo be carried on U.S.-flag air carriers.122  U.S.-flag air carriers are defined as those holding 
certificates under Section 401 of the Federal Aviation Act of 1958123, foreign air carriers operating 
under permits are excluded . There are some exceptions to  the requirements, such as when service by 
a U.S.-flag carrier is not available, or when an  agreement between the United States and a foreign 
partner provides for carriage of such traffic by airlines of that partner.   
                                                      
115 U.S. Department of Transportation (1998).  In April 1998, the Department of Transportation issued 
a proposed statement of enforcement policy on  unfair exclusionary conduct by airlines.  
116 Data provided by the U.S. Department of Transportation.  
117 These agreements list rights for each country’s  carriers as a group, the respective governments 
determine which airlines exercise the rights.  
118 Bilateral negotiations are conducted jointly by the Departments of State and Transportation.   
119 In the open skies market, governments no longer actively regulate pricing, limit the number of 
airlines in a given market, or dictate routes, leaving the air carriers of those countries to decide how often, where 
to, and with what equipment they fly.  
120 Under the 1995 U.S.-Canada Aviation Agreement, Ca nadian airlines gained the right to serve any 
city in the United States, and U.S. airlines gained unlimited  access to Canadian cities with the exception of 
Montreal, Toronto and Vancouver, which were subject to a three-year phrase-in  period.  The agreement with 
Japan in 1996 liberalized air cargo se rvices for carriers of both countrie s, and the 1998 agreement allowed  
several additional non-incumbent carriers, both of passeng ers and cargo, to enter the U.S.-Japan market.  The 
agreement with France added new services and removed the limit on code-sharing services.  
121 U.S. Department of Transportation, Office of  Aviation and International Economics (1998).  
122 The Act refers to Section 5 of the Internationa l Air Transportation Air Competitive Practices Act 
of 1974, as amended by Section 21 of the International Air Transportation Competition Act of 1979.  
123 Services of U.S.-flag air carriers include code-sha re operations sold under the U.S. carrier’s code, 
even if the aircraft is oper ated by a foreign air carrier.  WT/TPR/S/56 Trade Policy Review 
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Table IV.4 
New/expanded bilateral aviation agreements negotiated since 1993 (as of March 1999) 
Country Date negotiated Coverage of Agreement 
United Arab Emirates 04/99 Open Skies Agreement 
Pakistan 04/99 Open Skies Agreement 
China 04/99 Capacity, routes, code sharing, designation 
Mexico 01/99 Code shar ing, simplified filing 
Russia 01/99 Route, frequencie s, overflight, code share 
Italy 11/98 Open Skies Agreement 
Peru 05/98 Open Skies Agreement 
Republic of Korea 04/98 Open Skies Agreement 
France 04/98 Major liberalization 
Uzbekistan 02/98 Open Skies Agreement 
Japan 01/98 Additional airlin es, frequencies, routes 
Netherlands Antilles 12/97 Open Skies Agreement 
Romania 12/97 Open Skies Agreement 
Chile 10/97 Open Skies Agreement 
Brazil 10/97 Scheduled capacity, charters 
Aruba 07/97 Open Skies Agreement 
Egypt 06/97 Code sharing, fifth Fr. improvements 
Malaysia 06/97 Open Skies Agreement 
New Zealand 05/97 Open Skies Agreement 
Ukraine 05/97 New Agreement 
Nicaragua 05/97 Open Skies Agreement 
Costa Rica 04/97 Open Skies Agreement 
Honduras 04/97 Open Skies Agreement 
El Salvador 04/97 Open Skies Agreement 
Guatemala 04/97 Open Skies Agreement 
Panama 03/97 Open Skies Agreement 
Taiwan 03/97 Open Skies Agreement 
Brunei 02/97 Open Skies Agreement 
Singapore 01/97 Open Skies Agreement 
Jordan 11/96 Open Skies Agreement 
Brazil 10/96 Additional carrier, frequencies, charters 
Pakistan 08/96 New Agreement 
South Africa 03/96 New Agreement 
Japan 03/96 All-cargo liberalization 
France 03/96 Boston-Paris route, future talks 
Poland 03/96 Expanded routes, code sharing 
Germany 02/96 Open Skies Agreement 
Thailand 01/96 New Agreement 
Fiji 01/96 Routes/flexibility, code  share, charters, pricing 
China 12/95 Detroit, code sharing, etc. 
Czech Republic 12/95 Open Skies Agreement 
India 12/95  
Macau 10/95 New Agreement 
Philippines 10/95  
Hong Kong 09/95 New Agreement 
Table IV.4 (cont'd) United States WT/TPR/S/56 
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Country Date negotiated Coverage of Agreement 
Brazil 06/95  
United Kingdom 06/95  
Austria 05/95 Open Skies Agreement 
Belgium 05/95 Open Skies Agreement 
Denmark 05/95 Open Skies Agreement 
Finland 05/95 Open Skies Agreement 
Iceland 05/95 Open Skies Agreement 
Luxembourg 05/95 Open Skies Agreement 
Norway 05/95 Open Skies Agreement 
Peru 05/95  
Sweden 05/95 Open Skies Agreement 
Switzerland 05/95 Open Skies Agreement 
Ukraine 04/95 New Agreement 
Canada 02/95 New Agreement 
Germany 10/94 Amendment 
Argentina 07/94 Capacity increase 
Austria 07/94 Routes, desigs. 
United Kingdom 02/94 BAA arbitration 
Jamaica 01/94 Code sharing agreed 
Australia 12/93  
Finland 11/93 Routes 
Ireland 10/93  
Germany 09/93 Capacity Agreement 
Italy 05/93 Mini-deal DL, UA behind gateway 
Russia 05/93  
 
Source : U.S. Department of Transportation. 
81. Traffic rights, together with services directly related to the exercise of traffic rights, are 
outside the scope of the GATS.124  The United States made full commitments for aircraft repair and 
maintenance services in mode 2  and mode 3; mode 1 is unbound for reasons of technical feasibility 
and mode 4 is bound by the horizontal  provisions of its GATS Schedule.   The United States maintains 
MFN exemptions  with regard to the selling and marketing of air transport services and the operation and regulation of computer reservation systems (CRS) services, as these services are covered by 
bilateral or other air services agreements to which the United States is a party.  
82. Aircraft repair and maintenance services are subject to FAA safety requirements.  The 1988 
amendment to the Federal Aviation Regulations permits  the FAA to certify foreign repair stations as 
long as they meet all certification and personnel requireme nts of domestic repair stations.  Before this 
amendment, foreign repairs of U.S. aircraft had been  permitted only in emergencies.  In 1998, there 
were 515 certified foreign repair facilities, with  90 facilities on the waiting list for certification; 
45 facilities were issued certificates between 1997 and 1998.
125  According to the U.S. authorities, 
there are no quotas for certification .  Different standards are still applied for the certification of 
domestic and foreign stations; for instance, while ce rtificates for foreign repair stations (which are 
                                                      
124 The Annex on Transport Services further specifi es that the GATS shall not reduce or affect a 
Member's obligations under bilateral or multilateral agreements  that are in effect on the date of entry into force 
of the WTO Agreement.  
125 Data provided by the U.S. Department of Transportation.  WT/TPR/S/56 Trade Policy Review 
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under continued FAA scrutiny) are subject to a nnual and biennial renewals, domestic stations' 
certificates are valid until surrendered, suspended, or revoked.  To eliminate differences, there are 
efforts in the Congress to terminate certain provision s of the 1988 legislation pertaining to the foreign 
station rules of the FAA so as to bring sta ndards for repair stations into conformity.126 
Box IV.1:   U.S.-Japan Civil Aviation Agreement 
An agreement on civil aviation was reached between the United States and Japanese negotiators on 
30 January 1998.  The agreement eliminates a number of restrictions and allows code-sharing for the first 
time.  It also resolves the long-standing dispute over the right of U.S. incumbent "combinations carriers" (those carrying both passengers and freight in combination on the same flight) and all-cargo carriers to fly 
from Japan to other international points beyond Japan.   
Also resulting from the agreement, non-incumbent "combi nation" carriers were granted the right to offer an 
additional 90 weekly round-trip flights between the Unit ed States and Japan, nearly tripling their access to 
the Japanese market.  Moreover, two new non-incumbent carriers will be allowed to operate routes between 
the United States and Japan, one immediately and anot her in two years.  Non-in cumbent all-cargo carriers 
were granted additional rights to transport cargo to destinations beyond Japan, and an additional all-cargo 
carrier will be allowed to enter the market in 2002.  
As mentioned above, the agreement allows free code-sharing between the United States and Japanese 
carriers for the first time.  Furthermore, U.S. carriers are allowed to code-share among themselves on many 
operations to Japan and beyond, and to code-share with third-country carriers on operations to and beyond 
Japan.  As a result of the agreement, U.S. carriers have also gained the right of equal access to and national 
treatment on contracts with Japanese wholesalers and tr avel agents.  They are permitted to establish their 
own enterprises to market their servi ces directly to consumers in Japan.  
The Agreement provides additional opportunities for charter flights between the United States and Japan;  
charters are permitted to increase from 400 flights per year in 1998, to 600 in 2000, and 800 flights in 2002.  
The agreement is expected to be a firs t step towards further liberalization.  In this respect, the United States 
and Japan are scheduled to begin talks within three years regarding a fully liberalized agreement.  If that goal 
is not reached by 2002, supplemental  rights will be available.  For example, non-incumbent combination 
carriers gain the right to operate up to 35 additional weekly round-trip flights between the United States and Japan.  
Based on calculations of the President's Council of Econ omic Advisors, the United States estimates that this 
agreement will provide the following cumulative benefits  over four years:  U.S. passengers will enjoy gains 
of about US$1.2 billion (measuring the value to U.S.  passengers of more service in a more competitive 
market);  U.S. carriers will enjoy additional revenue of just over US$4 billion (due, in part, to an increase in 
their market share);  and U.S. exports of aviation se rvices will enjoy a net increase of almost US$4 billion 
(in each year, the U.S. trade surplus in this sector will be US$1 billion higher than it otherwise would be).  
Source:   U.S. Department of State.  
 
83. Computer reservation systems (CRS) services ha ve been subject to regulation since 1984 to 
prevent discrimination against participating carriers by the air carriers owning the systems.127  Major 
                                                      
126 A reform proposal, the Air Repair Station Safety  Act (H.R. 145), was introduced in the House of 
Representatives in January 1997; and a similar bill (S.1089 ) was introduced in the Senate in July 1997.  Both 
bills died in committee at the end of the 105 th Congress in 1998.  
127 CRSs are computerized systems that contain inform ation about carriers' schedules, availability, fares 
and fare rules, for which reservations can be made or tickets may be issued.  United States WT/TPR/S/56 
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revision to the CRS regulation, in 1992, included allowing travel agent subscribers to use third-party hardware and software (rather than being lim ited to the CRS services provided), mandatory 
participation of CRS-owner airlines in the CRSs owned by other airlines, and elimination of  
architectural bias (e.g., system defaults) that had favoured owner airlines.
128  Some trading partners 
have expressed concern about the potential adverse ef fect on foreign airlines of an “online” preference 
in ranking service options in U.S. CRSs, (i.e., the lis ting of connecting flights by a single carrier in the 
CRS display before itineraries involving two or more carriers).129  According to the U.S. authorities, 
their systems do not use such a preference for in ternational services; the itineraries are ranked by 
other factors, such as nature of the service (non-st op, single-plane, connecting), elapsed trip time or 
closeness of flight departure to the traveller's pref erred departure time.  Some systems incorporate an 
on-line preference for U.S. domestic flights only.  
84. The United States has been increasingly con cerned by a proposed European Union noise-
control regulation.  This regula tion would ban older aeroplanes fitted with new engines or "hush kits" 
to make them compliant with International Ci vil Aviation Organization (ICAO) Chapter 3 noise 
standards, from EU airports after 1 April 2002 (unl ess they had already been flying in Europe as of 
1 April 1999 and were maintained on the same na tional registry).  The United States has expressed 
concerns that the proposed regulation undermines  the multilateral global standard process in the 
ICAO, and that it is discriminatory because only U.S. manufacturers produce the engines and other 
equipment covered by the legislation, and EU airc raft can transfer national registry within the 
European Union.  The European Commission, on the ot her hand, states that the legislation is designed 
to prevent a patchwork of different national regul ations on aircraft noise.  Responding to the EU 
regulation, the U.S. Congress is considering legisla tion that could ban the cross-Atlantic Concorde 
service, which was granted waiver from noise sta ndards in U.S. airspace.  The two sides are 
continuing to consult with the aim of intensifyi ng U.S.-EU cooperation in the ICAO to reach a new 
"Chapter 4" noise standard. 
(c) Other related services 
85. On the issue of airport slot allocation, four U. S. airports (Kennedy, La Guardia, O'Hare, and 
National) are subject to the slot allocation rules administered by the FAA.130  The remaining airports 
with scheduled air service (some 400) have no slot lim itations for domestic or international flights.  
The slot allocation rules were first established in th e High Density Traffic Airports Rule (HDTAR), in 
1968, as a solution to the problem of congestion at five  (now four) airports;  the extensive delays had 
an impact throughout the U.S. air transport syst em.  The incumbent airlines at each high-density 
traffic airport decided how slots would be allocated , with any reallocation requiring their unanimous 
approval.  The "Buy/Sell Rule" in 1985, amendi ng the HDTAR, introduced a more market-based slot 
transfer system for domestic slots;  slots gran ted prior to the rule were grandfathered both for 
domestic and international services.  The FAA Author ization Act of 1994 further modified the rules 
by granting exemption authority to the Department  of Transportation to allow additional domestic 
services (above the otherwise applicable slot limits) at O'Hare, La Guardia, and Kennedy when  it 
"finds it to be in the public interest and the circumstances to be exceptional". The U.S. regime on 
landing slots distinguishes between the domestic market  and the international market.  Domestic slots 
can be sold, traded or leased in any combination.  International slots are allocated by the FAA and can 
only be traded on a one-for-one basis at the same air port.  According to the U.S. authorities, to the 
                                                      
128 In August 1996, the Department of Transportation issued an advanced notice of proposed 
rulemaking, asking for comments on wh ether CRS regulation continued to be necessary and, if so, what changes 
were needed in the current rules.  The applicability of the current rules has been extended until 31 March 2000.  
129 For instance, see European Commission (1998).  
130 La Guardia and National Airports are primarily dom estic airports, except for a limited number of 
flights from Canada and the Bahamas.  WT/TPR/S/56 Trade Policy Review 
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extent not inconsistent with FAA rules, the FAA allocates international slots according to the 
worldwide slot allocation system, including priority  for previously allocated slots and new entry.131 
86. Virtually all U.S. airports with commercial serv ices are public facilities run by an agency of a 
state or local government.  The provision of ground handling service132 at airports is thus under local 
jurisdiction but must meet certain federal requi rements specified as a condition for federal fund 
approval of an airport development project.  A ll commercial airports in the United States have 
accepted federal funds under the Airport and Airw ay Improvement Act of 1982 (AAIA) as amended, 
which provides for a decreasing percentage of the to tal airport development needs, currently at about 
25%.    By accepting such funds, an airport must ensu re that “each carrier using the airport shall have 
the right to service itself or to use any fixed-base operator that is authorized by the airport or 
permitted by the airport to serve any air carrier at su ch airport.”   While airports are obligated to 
permit air carriers to handle themselves, they are not  obligated to authorize fixed-base operators to 
provide handling services.  Thus, it is possible, th at a given U.S. airport might not permit “competing 
services providers” if there was no space available for additional service providers.  The AAIA also states that “there will be no exclusive right for the use of the airport by any person providing, or intending to provide, aeronautical services to the pub lic".  According to the U.S. authorities, foreign 
firms can and presently do provide ground handling services at U.S. airports that are covered by 
bilateral air services agreements.  They have indicat ed that the United States would probably consider 
subscribing to a GATS ground-handling provision if it afforded superior market access and operating 
flexibility. 
(5) 
PROFESSIONAL SERVICES  
(i) Introduction 
87. U.S. trade in professional services has grown relatively fast in recent years.  During 1993-97, 
cross-border exports of business, professional and tec hnical services rose by an average annual rate of  
13.5%, compared with 8.6% for exports of all priv ate sector services.  Imports of these services grew 
about twice as fast as imports of all private-sect or services (17.1% and 8.9%, respectively).  The 
growth of the professional services market has prompted many U.S. professional service providers to 
expand multinational operations, especia lly in accountancy (Table IV.5). 
88. Despite growing internationalization, intern ational trade in professional services remains 
hindered by complex domestic  regulations, both in the United States and abroad.  Such regulations are 
usually in place to ensure the quality of services a nd to protect consumers, since the provision of 
professional services demands specialized education and training.  These regulations include local 
presence and even nationality requirements, and rest rictions on the legal form of entry and on 
ownership.  Recent efforts to facilitate trade in professional services both at the bilateral and 
multilateral levels include the establishment of gui delines for mutual recognition agreements, and the 
negotiation of disciplines governing domestic regulati ons.  Both tasks have been undertaken by the 
WTO Working Party on Professional Se rvices with respect to accountancy. 
                                                      
131 The world’s major airlines particip ate in slot conferences held twice a year under the auspices of the 
International Air Transport Association (IATA) to rec oncile carriers’ schedule interests at slot-controlled 
airports worldwide.  
132 Ground-handling services include a variety of services provided within or around airports, ranging 
from cargo handling to passenger check-in and baggage.  United States WT/TPR/S/56 
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Table IV.5 
Trade in professional services, 1993-97 
(US$ million and per cent)  
 
1993 1994 1995 1996 1997 Average 
growth rate 
(%) 
Cross-border transactions in business,  professional and technical servicesa 
Exports 12,958 15,330 16,064 19,678 21,304 13.5% 
Of which :        
Legal services 1,442 1,617 1,667 1,973 2,085 9.8% 
Accounting, auditing, and bookkeeping 
services 164 132 181 253 255 14.5% 
Management, consulting, and public 
relations services 826 1,134 1,489 1,680 2,139 27.2% 
Construction, engineering, architectural, 
mining services 2,407 2,474 2,550 3,560 4,084 15.0% 
Imports 3,504 3,869 4,822 5,550 6,571 17.1% 
Of which:       
Legal services 321 383 469 580 568 15.8% 
Accounting, auditing, and bookkeeping 
services 103 130 170 229 335 34.5% 
Management, consulting, and public 
relations services 287 321 465 593 782 29.0% 
Construction, engineering, architectural, 
mining services 319 280 345 489 346 5.9% 
Miscellaneous       
Total private sector exports  172,031 187,760 204,229 224,213 239,215 8.6% 
Total private sector imports 111,259 123,303 133,355 142,261 156,236 8.9% 
Affiliate transactions      1992-96 
Sales by foreign affiliates       
Engineering, architect ural and surveying 
services 5,791 D D 8,611 .. D 
Accounting, research, management and 
related services 5,183 5,702 6,245 7,461 .. 8.5% 
Sales by U.S affiliates       
Engineering, architect ural and surveying 
services 3,653 2,883 2,791 2,964 .. -3.9% 
Accounting, research, management and 
related services 1,414 2,332 2,326 1,857 .. 14.6% 
 
.. Not available.  
a Business, professional, and technical se rvices include accounting, auditing and bookk eeping services;  advertising services;  
agricultural services;  computer and data processing services;  construction, engineering, architectural and mining services;  data 
base and other information servi ces;  industrial engineering;  installation, main tenance and repair of equipment;  legal servic es;  
mailing, reproduction and commercial art;  management of health care facilities;  ma nagement, consulting and public relations 
services;  medical services;  miscellaneous disbursements;   and other business, profe ssional and technical services. 
 D Suppressed to avoid disclosure of  data of individual companies. 
 
Source : U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business ,  October 1998. 
89. Under the U.S. Constitution, the power to regul ate professions is reserved for the states (or 
jurisdictions); each state or jurisdiction has its ow n licensing (or registration) regulation, and generally 
sets up licensing boards to administer licensing proce dures.  In international trade negotiations, the WT/TPR/S/56 Trade Policy Review 
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Federal Government may negotiate fra mework agreements with U.S. tr ading partners on behalf of the 
states, but the individual state regulatory/licensing bodies generally negotiate mutual recognition agreements on their own behalf.  The absence of a uni form regulatory regime at the national level, and 
divergent market access conditions at the State level,  means that a foreign service supplier established 
in the U.S. market must, like any domestic service supplier, conform to the regulatory regime in any 
state in which he chooses to do business.  This ad ds to the complexity of market entry and may 
represent a barrier to entry for foreign service supplie rs.  The federal-state division of power may also 
limit the capacity of the Federal Government to negotiate  trade agreements in an international context.   
90. According to the U.S. authorities, divergent state requirements do not necessarily constitute a 
barrier to access.  The lack of uniformity is an inhe rent characteristic of the U.S. federal system, and 
does not disadvantage foreign professionals any more than it does American professionals.  Although 
there are differences in various qualification requirements for some professions, efforts are being made to move toward uniformity through national organizations of regulatory authorities and the use 
of model rules.  In recent years, many U.S. regulatory/licensing bodies have also made it easier to obtain information on education, licensing, establishm ent, and other related requirements through the 
Internet.
133 
91. U.S. GATS commitments in professional services cover the following areas: legal; 
accounting, auditing and bookkeeping; taxation; architectural; engineering; integrated engineering; 
urban planning and landscape architectural services.134  Generally, the U.S. commitments contain only 
a limited number of market access or national treatment restrictions for modes 1, 2 and 3, except in legal services.  The most common limitations are th e requirement that partnerships are limited to 
licensed persons (legal services;  accounting, auditing and bookk eeping services); in-state office 
requirements (legal services; accounting, auditin g and bookkeeping services); residency requirements 
(legal services; accounting, auditing and boo kkeeping services; engineering and integrated 
engineering services); citizenship requirements in so me cases (legal services with respect to practice 
before the PTO; accounting, auditing and bookkeep ing services in North Carolina; engineering and 
integrated engineering services in the District of Columbia); and the requirement in Michigan that 
two thirds of the officers, partners, and/or directors in an architectural firm be licensed professionals.  Mode 4 is unbound for all professional categories excep t as indicated in the horizontal section of the 
Schedule.  U.S. horizontal commitments include the provision that intra-corporate transferees, such as 
managers, executives, and specialists (including li censed professionals), may provide services through 
a branch, subsidiary or affiliated established in the United States for a period of three years, with the 
possibility of an extension for a maximum of two additional years. 
92. The United States has taken steps, bilaterally an d plurilaterally, to facilitate trade in certain 
professional services through mutual recognition agreem ents.  One of the more comprehensive efforts 
can be found in the U.S.-Canada Free Trade Agreem ent (FTA), later incorporated into the NAFTA.  
The FTA established a framework intended to ensure  that measures applied to professional service 
suppliers did not constitute unnecessary barriers to trad e between the two countries.  In this context, 
                                                     
 
133 For example, the National Council of Examiner s for Engineering and Surveying (NCEES), the 
American Institute of Certified Public Accountants (A ICPA), the National Association of State Boards of 
Accountancy (NASBA),  and the National Council of Architectural Registration Boards (NCARB) provide information on their websites for professionals who want to provide services in th e United States.  Some of 
these sites also contain links to the websites of the individual state/jurisdiction regulatory/licensing boards. 
Some relevant website addresses are: http://www.ncees .org, http://www.aicpa.org, http://www.nasba.org, and 
http://www.ncarb.org.  
134 The United States did not make any commitments in the remaining professional services categories 
defined by the WTO's informal Servi ces Sectoral Classification List, incl uding medical and dental services; 
veterinary services; and services pr ovided by midwives, nurses, physiother apists and para-medical personnel.  United States WT/TPR/S/56 
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an agreement on "Principles of Reciprocity" was reached in 1991 for the accounting profession, and 
an Inter-recognition Agreement was re ached in 1994 for architects.  
93. Disciplines governing professional services unde r the NAFTA can be found in Chapter 12 
(Cross-Border Trade in Services) and Chapter 16 (Temporary Entry for Business People).  Article 
1210 (Licensing and Certification) of Chapter 12 calls for the elimination of citizenship and 
permanent residency requirements for the licensi ng of professionals.  A nnex 1210.5 to Article 1210 
further encourages the relevant professional bodies to develop mutually acceptable standards and 
criteria for the licensing and certification of professional service providers, and to provide recommendations on mutual recognition of credentials .  More specifically, the Annex calls for the 
establishment of regimes for licensing of foreign legal consultants and engineers.  In this context, a 
Mutual Recognition Agreement was signed in June  1995 for temporary and permanent licensing of 
the engineering profession, and a Foreign Legal Consultant Accord was signed in July 1998 by 
representatives of the relevant professional bodies of NAFTA parties. Representatives of other professions (e.g., accountants, architects, nurses, surve yors, veterinarians) have been exploring the 
possibility of mutual recognition within the NAFTA context.  Chapter 16 provides for the temporary 
entry of business persons, including professionals, by eliminating job valida tion requirements, labour 
certification or other forms of labour market tests.
135  At the same time, recognition is given to the 
need to protect the domestic labour force, perm anent employment in each member country, and 
border security. 
94. Apart from NAFTA, mutual recognition agreements  have been reached in accounting with 
Australia, and in engineering education with Australia, Canada, Ireland, New Zealand, the 
United Kingdom, and Hong Kong, China.  The United States and the European Union are discussing 
the possibility of establishing a framework for the negotiation of recognition agreements in 
professional services and other services.  U.S. archit ects, working with the International Union of 
Architects, are seeking to develop minimum standards of professional practice. 
(ii) Legal services 
95. Legal services include legal advisory and repr esentation services in various fields of law 
(e.g. criminal or corporate law), advisory and representation services in statutory procedures of quasi-judicial bodies, and legal documentation and certific ation services.  The U.S. legal services industry 
recorded revenues estimated at US$120 billion in 1997, employing 900,000 people.
136  Legal services 
are traded both on a cross-border and affiliate basis.   In 1997, cross-border exports of legal services 
totalled US$2.1 billion, up from US$1.7 billion in  1995, and imports totalled US$568 million.  The 
large trade surplus, US$1.5 billion in  1997, reflects the high demand for U.S. legal services.  Foreign 
affiliate operations have become in creasingly important in the provision of legal services, with a great 
deal of such trade involving foreign legal consulta ncy services.  In 1998, legal service exports through 
sales by foreign affiliates were estimated at US$310 million.137 
96. The legal profession is regulated at the subnational level, with each state or jurisdiction 
imposing its own requirements (such as minimum age, particular diploma or title, registration with a 
professional body, payment of a fee, etc.) and ofte n requiring non-uniform professional examinations.  
However, there are several multi-jurisdictional examina tions that are used by the states as a part of 
                                                      
135 The category includes business visitors, professionals listed in Appendix 1603.D.1, intra-company 
transferees, traders and investors.  
136 U.S. Department of Commerce, International Trade Administration (1998).  
137 U.S. Department of Commerce, International Trade Administration (1999).  WT/TPR/S/56 Trade Policy Review 
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their bar examination or as a supplement to the bar examination.138  According to the U.S. authorities, 
most American lawyers are admitted to practice in only one state and can easily find ways to represent 
their clients in other states.  Foreigners may qua lify by meeting the same state licensing requirements 
as U.S. nationals.139  Alternatively, lawyers licensed in fo reign countries may be certified as foreign 
legal consultants (FLCs), without passing an examina tion, as long as they are in good standing in their 
home country.  These two categories of legal servi ces can be found in the U.S. GATS Schedule.  
Otherwise, foreign lawyers may enter into partnershi ps with American lawyers in any U.S. state.  
97. According to the GATS Schedule, legal services (practice as a qualified U.S. lawyer) must be 
supplied by a natural person; no cross-border supply is permitted.  For Mode 3, partnership in law 
firms is limited to persons licenced as lawyers.  Citizenship is required for representation before the 
PTO, but any other nationality requirements for lice nsing of lawyers are prohibited under the U.S. 
constitution.140  Nine jurisdictions maintain the in-state  office requirement for licensing as a market 
access limitation, and 16 jurisdictions maintain in-s tate or U.S. residency requirements as a national 
treatment limitation.  
98. Currently 23 states and the District of Colu mbia provide for rules on the licensing of FLC 
without examination; 15 states and the District of Columbia bound their foreign legal consultant 
regime as part of the Uruguay Round commitments;  and additionally, eight states (i.e. Arizona, 
Indiana, Louisiana, Massachusetts, Missouri, Ne w Mexico, North Carolina and Utah) have adopted 
the FLC regime since the conclusion of the Round.141  None of the eight states require reciprocity.   
99. The scope of activities that FLCs can practice varies between states; Table IV.6 summarizes 
the U.S. commitments with regard to the scope of permitted FLC activities, licensing  requirements 
for FLCs, and limitations on market access and nationa l treatment contained in the U.S. Schedule.  
While the U.S. Schedule does not specify the activ ities in which FLCs may engage, it spells out the 
activities that FLCs may not practice, for example: (i) appearing for a person other than himself or herself as attorney in any court, or before any magistra te or other judicial officer, in this state (other 
than upon admission pro haec vice);  (ii) preparing any instrument effecting the transfer or registration 
of title to real estate located in the United States;  (iii) preparing any will or trust instrument effecting 
the disposition on death of any property located in the United States and owned by a resident thereof, 
or any instrument relating to the administration of a decedent's estate in the United States; and 
                                                     
 
138 These include: (i) the Multistate Bar Examination, used in all jurisdictions, except Indiana, 
Louisiana, Washington and Puerto Rico; (ii) the Multista te Professional Responsibility Examination, an ethics 
examination used by all jurisdictions, except Maryland, Pennsylvania, Washington, Wisconsin and Puerto Rico; 
(iii) the Multistate Performance Test, a skills test ins tituted recently and so far adopted by 14 jurisdictions 
(Colorado, District of Columbia, Georgia, Hawaii, Illinois, Iowa, Minnesota, Mississippi, Missouri, Nevada, New Mexico, Oregon, Texas, and West Virginia); an d (iv) the Multistate Essay Exam, another recently 
instituted test and so far adopted by 11 jurisdictions (A rkansas, District of Columbia, Hawaii, Idaho, Illinois, 
Kansas, Maine, Mississippi, Missouri,  Nebraska, and West Virginia).  
139 Foreign persons may take a state bar exam after completing a degree from U.S. law school 
accredited by the American Bar Associatio n.  Otherwise, many states allow fo reign persons to take the state bar 
after completing an M.C.C. or LL.M. degree, or completing an equivalent number of hours of study at an 
accredited law school.  New Yo rk State goes one step further by a llowing those with prior education and 
practice in a country whose jurisprudence is based on English common law to take the bar without additional legal education. (Pardieck, 1996, p. 457-).  
140 In the case In re Griffiths,  the U.S. Supreme Court held in 1973 that U.S. citizenship was an 
unconstitutional prerequisite for admission to practice law in a state . 
141 The 15 states for which the FLC regime was bound were Alaska, California, Connecticut, Florida, 
Georgia, Hawaii, Illinois, Michigan, Minnesota, New Je rsey, New York, Ohio, Oregon, Texas, and Washington; 
for the remaining 35 states commitments were unbound in the U.S. Schedule.  According to the U.S. authorities, 
none of the six states that later adopted the FLC regime require reciprocity.  United States WT/TPR/S/56 
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(iv) preparing any instrument in respect of the marital or parental relations, rights or duties of a resident of the United States, or the custody or care of the children of such a resident.  In general, 
FLCs can provide advice on the law of any country in  which they are qualified and on international 
law, and give counselling in international business transactions and dispute resolutions proceedings 
other than before courts, such as arbitration and mediation services.   However, they may not give 
advice on local laws without a backup opinion from a locally licensed lawyer.   
Table IV.6 
Summary of U.S. commitments in legal services 
 Number of states 
Scope of activities by FLCs  
(i) Practice of international law:  
permitted provided FLC is competent. 5 
permitted to the extent incorporated in home-country law. 11 
(ii) Practice of third-country law:  
permitted provided FLC is competent. 2 
permitted provided FLC obt ains advice from an attorney licenced in  that jurisdiction (and identifies that 
person to the client). 6 
not permitted. 8 
(iii) Practice of host-country law:  
permitted provided FLC obt ains advice from an attorney licenced in  that jurisdiction and identifies the 
person to the client. 6 
permitted to practice NY and federal law provided FLC relies on advice from a person duly qualified and 
entitled to render professional legal advice on NY or U.S.  law.  Permitted to practice law of other U.S. 
states, provided FLC is competent. 1 
not permitted. 9 
(iv) Employment of local lawyers:  
permitted. 16 
not permitted. 0 
(v) Use of firm name:  
permitted. 15 
unrestricted. 1 
Requirements for FLCs 
(i) Registration:  
required. 16 
not required. 0 
(ii) Minimum age:  
18 2 
21 1 
26 7 
not specified. 6 
(iii) Experience:  
3 of 5 years preceding registration. 2 
4 of 6 years preceding registration. 2 
5 of 7 years preceding registration. 11 
5 of 8 years preceding registration. 1 
(iv) Certification of registration a nd good standing with home-country bar:  
required. 16 
not required 0 
Table IV.6 (cont'd) WT/TPR/S/56 Trade Policy Review 
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 Number of states 
(v) Professional liability insurance:  
required. 10 
not required. 6 
(vi) Overdraft notification:  
required. 1 
not required. 5 
(vii) Subjection to rules of conduct and et hics set by a state professional body:  
required. 14 
not required. 2 
Limitations on market access and national treatment with regard to FLC activities 
(i) Market access:  
in-state office required. 5 
no limitation. 11 
(ii) National treatment:  
in-state residency required. 3 
no limitation. 13 
 
Source : U.S. GATS Schedule of Specific Commitments. 
100. In an effort to encourage the states to libe ralize regulations concerning foreign lawyers in a 
standardized manner, in 1993 the American Bar Association (ABA) adopted  a proposed Model Rule 
for the Licensing of Foreign Legal Consultants.142  The impact of the adoption of such model rule has 
so far been mixed however; out of the six states th at have adopted or modified laws regulating FLCs 
since 1993, four followed the ABA model rule and two adopted laws with some notable 
differences.143 
101. Some progress was made in liberalizing the re gulations of foreign lawyers in the NAFTA 
context.  In July 1998, representatives of th e relevant professional bodies from NAFTA countries 
signed joint recommendations for the recognition of FLCs, which are currently under consideration by 
the three governments.144  The recommendations are aimed at establishing a basis for recognition of 
FLCs who would advise on their home country laws, and also touch upon issues such as the form of 
association or partnership between local layers aut horized to practice in the home territory and FLCs. 
(iii) Accounting services 
102. U.S. accounting firms and their international ne tworks of affiliated firms dominate in world 
markets, accounting for an estimated 60% of the globa l industry’s worldwide revenue in 1996.  In the 
                                                      
142 The primary requirements to qualify as a FLC under the ABA Model Rule is that the applicant be "a 
member in good standing of a recognized legal profession in a foreign country, the member of which is subject 
to effective regulation and disciplines."  In addition, FLCs must submit to state rules of professional conduct, are 
subject to the same disciplinary provisions as local lawy ers, and cannot hold themselv es out as members of the 
bar.  The Model Rule does not restrict FLCs' ability to associate with lawyers.   The years-of-experience 
requirement is optional to the states adopting the Model Rule (Flores, 1996, pp. 159-194).  
143 Since the 1993 ABA model rule, five states have adopted laws regarding FLCs, and New York has 
modified its law.  While Indiana, Minnesota and New Mexico followed the ABA model rule and New York changed to conform closely with the model rule, Missouri and Arizona adopted rules with some differences. 
(Pardieck, 1996, p. 457-). 
144 The professional bodies include the Federation of Law Societies of Canada, the Mexican Committee 
on the International Practice of Law,  and the American Bar Association.  United States WT/TPR/S/56 
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U.S. market, the six largest multinational accounting firms145 accounted for 83% of the sector's total 
revenue of US$21. 2 billion in 1996.146  While accounting and auditing services constitute the core 
activities of accountancy firms, a wide range of a dditional services are also offered, most notably 
merger audits, insolvency services, tax advice, investment services and management consulting.147  
Indeed, for many large U.S. accounting firms, ma nagement consulting has displaced accounting and 
accounting-related activities (e.g. auditing and tax services) as the principal engine for revenue 
growth.  In 1996, management consulting and ot her management services represented the largest 
single source of total revenue (US$8.3 billion, or 39 % of the total) and the highest rate of annual 
growth (24%) for the 100 leading U.S. accounting firms.  By comparison, accounting and auditing 
generated US$7.9 billion and grew by 6%, while tax services provided US$5 billion and increased by 
12%. 
103. International trade in accounting and manage ment consulting services takes place on both a 
cross-border and an affiliate basis.  However,  affiliate transactions far exceed cross-border 
transactions as there are typically fewer legal restri ctions on serving clients through affiliates than 
providing such services across borders.148  In 1997, cross-border exports of accounting and 
management consulting services totalled US$2.4 billion (that is, US$255 million for accounting and 
accounting-related services and US$2.1 billion for management consulting and public relations 
services), imports amounted to US$1.1 billion (U S$335 million and US$782 million, respectively).149  
The outcome was a surplus of US$1.3 billion in 1997 .  U.S. affiliate transactions in accounting and 
management consulting services generated a trade surplus of US$5.6 billion in 1996, of which 
US$7.5 billion involved sales by foreign affiliates of U.S. firms and US$1.9 billion involved sales by 
U.S. affiliates of foreign firms.150 
104. The accountancy sector is regulated by state law and by professional self-regulation in the 
United States.  An accounting practitioner must be  licensed as a certified public accountant (CPA) by 
one of the 54 state, or territorial boards of accountancy.151  The National Association of State Boards 
of Accountancy (NASBA) is an umbrella organiza tion representing the subfederal licensing boards.   
Professional self-regulation applies to the setting of  standards, ethics, and codes of professional 
conduct, which are developed by professional bodies su ch as the American Institute of Certified 
                                                      
145 The six firms, the so-called "Big Six", included Arthur Anderson, Deloitte Touche Tohmatsu, Ernest 
& Young International, KPMG  International, Price Waterhouse and Coopers Lybrand.  The latter two were 
merged in September 1997, therefore, these firms are now collectively referred to as the "Big Five".  
146 USITC (1998).  
147 This is due to the fact that the skills developed by accountancy pr ofessionals in order to produce, 
process, analyse or audit financial info rmation can also be used for other purposes, such as taxation services and 
management consulting.  
148 USITC (1998f).  
149 Cross-border trade data on accounting and management consulting services are the sum of such data 
on accounting, auditing, and bookkeeping services, and ma nagement, consulting and public relations services.   
Affiliated trade includes accounting, research, manageme nt and related services. Eu ropean countries accounted 
for over 40% of both exports and imports.  
150 European countries were the largest foreign markets for accounting and management consulting 
services provided through foreign-ba sed affiliates of U.S. companies, ab sorbing over a half of total sales.  
151 The title “certified public accountant” is generally  used across the United States, however, in some 
jurisdictions, the titles “public accounta nt,” “registered public accountant, ” “licensed public accountant,” and 
“accounting practitioner” are also used . Nearly all states pr ohibit practising public  accountancy without a 
licence, except Arizona, North Carolina and Wyoming, the so-called “title” states, where unlicensed individuals 
are not prohibited from providing services, but they may not use restricted titles (WTO document S/WPPS/W/7/Add.10, 24 July 1996).  WT/TPR/S/56 Trade Policy Review 
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Public Accountants (AICPA), the national professional body for CPAs.152  The AICPA and NASBA 
have encouraged states to move toward uniformity through the use of the Uniform Accountancy Act, 
a model bill and set of regulations designed to pr ovide a uniform approach to regulation of the 
accounting profession. 
105. Accounting, bookkeeping and insolvency prac tices are not reserved for any profession, and 
thus non-CPAs may practice industry and privat e sector accounting and bookkeeping.  Auditing 
functions are reserved exclusively for the accountan cy profession.  Auditing for all companies is 
generally regulated by the State Boards of Acc ountancy, and for publicly traded companies by the 
Securities and Exchange Commission.  Tax cons ultation and representation are not reserved for 
accountancy or other professions in the United States, but are practiced primarily by the legal and 
accountancy professions.153  These services are regulated by the Internal Revenue Service and by 
State Boards.  Industry and public sector accoun ting and bookkeeping services are not regulated.154  
106. While a licence is granted and regulated by the individual states and territories, all states 
require that applicants pass the same professi onal examination, the Uniform CPA Examination.155  
Foreign education and professional experience ma y be taken into account for admission to the 
Uniform CPA examination; however, the extent vari es from state to state and depends on the country 
where education/experience were acquired.156  While U.S. citizenship is not required for licensing, 
except in Alabama and North Carolina, many states require residency and/or an in-state office for 
licensing.157  In the GATS Schedule, in-state office requ irements for 13 states are inscribed as market 
access limitations, and in-state residency for 25 states and the District of Columbia are inscribed as national treatment limitations.  Restrictions on comme rcial establishment also exist; nearly all states 
only allow accounting firms to operate as sole proprietorships, partne rships or professional 
corporations (PCs), and also limit ownership of  these accounting firms to persons licensed as 
accountants, except in Iowa where accounting firms must incorporate.
158  Temporary licensing is 
granted in 35 jurisdictions.159  The United States has concluded mutual recognition agreements to 
facilitate the supply of accountancy services with certain countries.  The U.S. and Canadian 
accounting professional representatives signed an ag reement on "Principles of Reciprocity" in  
September 1991, establishing a framework for mutual  recognition between those states or provinces 
                                                      
152 The Auditing Standards Board of the AICPA develops the standards for carrying out audits and 
other attestation services.  The Financial Accounting Standards Board (FASB) of the Financial Accounting 
Foundation is the primary body that sets accounting standards which constitute generally accepted accounting 
principles.  The Securities and Exchange Commission (SEC ) has authority to set accounting standards for public 
companies, but generally follows FASB standards.   Codes of conduct are developed by the AICPA and 
supplemented by the SEC and the Independent Standards Board (ISB) (WTO document S/WPPS/W/7/Add.10, 
24 July 1996).  
153 According to the GATS Schedule, the United States imposes no restrictions with regard to market 
access or national treatment in taxation services.  
154 WTO document S/WPPS/W/7/ Add.10, 24 July 1996.  
155 Some states may supplement this examination with an additional exam on ethics and local 
regulations.  
156 WTO document S/WPPS/W/7/ Add.10, 24 July 1996.  
157 North Carolina imposes a reciprocity requirement; citizenship is not required if the applicant’s 
country extends to North Carolina citizens similar privileges to be certified.  Puerto Rico and the Virgin Islands 
also require citizenship, however, they are not subject to commitmen ts in the GATS (WTO document 
S/WPPS/W/7/Add.10, 24 July 1996.)  
158 WTO document GATS/S/C/90, 15 April 1994.  
159 Alaska, Arkansas, California, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, 
Indiana, Iowa, Louisiana, Maryland, Michigan, Minnesota, Mississippi, Nevada, New Hampshire, New Mexico, 
New York, North Carolina, Oklahoma, Oregon, Pennsylvan ia, Puerto Rico, South Carolina, Tennessee, Texas, 
Utah, Vermont, Virgin Islands, Washington, West Virginia, Wisconsin and Wyoming.   United States WT/TPR/S/56 
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that ratify it.160  According to the agreemen t, U.S. CPAs and Canadian chartered accountants are not 
required to take the entire professional uniform  accountancy examination in the reciprocal 
jurisdiction, but may substitute it for an abbrev iated examination to demonstrate knowledge of 
national and local legislation, standards, and practices  for the jurisdiction in which a licence is sought.  
As of April 1999, 39 U.S. states and nine Canadian provinces had ratified the agreement.  Similarly, a 
Principles Agreement for Reciprocal Licensing was reached in October 1996 with the Institute of 
Chartered Accountants in Australia, a national professional association representing the chartered 
accountancy profession in Australia.161  As of April 1999, 24 U.S. states had accepted the agreement's 
recommendations concerning abbrev iated examination requirements.162  
107. The United States has actively participated in work undertaken by the  WTO Working Party 
on Professional Services, especially in developi ng the guidelines for mutual recognition agreements 
and disciplines on domestic regulation in the accountancy sector.163  According to the U.S. authorities, 
the United States strongly supports the guidelines and believes that they should be extended to other professions.  At the same time, it believes that the disciplines can be improved and should be used as a 
starting point, but not as a model, for di sciplines on regulation of other professions. 
(iv) Architectural services 
108. Available data from the USITC do not separate activities provided by architectural, 
engineering and construction service providers.
164  In 1997, U.S. cross-border exports of architectural, 
engineering, and construction (AEC) services were US$4.1 billion, and imports stood at 
US$346 million, resulting in a trade surplus of US$3.7 billion.165  Asia-Pacific countries were the 
largest export markets for U.S. cross-border AEC se rvices in 1997, although exports of such services 
to the region declined due to the economic rec ession.  Canada and the United Kingdom are the top 
suppliers to the U.S. market   More importantly , international trade in AEC services is undertaken 
primarily by affiliates in foreign markets.  Sales by foreign affiliates of U.S. firms increased from 
US$5.8 billion in 1993 to US$8.6 billion in 1996.166  Data pertaining to the total value of contracts 
secured by AEC enterprises indicate that in 1996 U.S. firms’ total foreign billings grew by nearly 
                                                      
160 Professional representatives include the AICP A, the NASBA and the Canadian Institute of 
Chartered Accountants (WTO document S/C/N/51, 10 February 1997).  
161 WTO document S/C/N/68, 13 March 1998.  
162 In Australia, the agreement is implemented on a national basis;  it entered into force on 
8 October 1996 (WTO document S/C/N/67, 13 March 1998).  
163 The guidelines, adopted by the Council for Trade in Services in May 1997, are non-binding and 
intended to be used by WTO Members on a voluntary ba sis to facilitate negotiating agreements on the mutual 
recognition of professional qualifications for accountants.  The disciplines, adopted by the Council in December 1998, are to be binding when they come in to effect, and are aimed at ensuring that domestic 
regulations for accounting services do not result in trade barriers that would undermine the market access or 
national treatment commitments that countries made under the GATS.  
164 Architectural firms provide blueprint designs for buildings and public works and may oversee the 
construction of projects. Engineering firms provide planning, design, construction, and management services for 
projects such as civil engineering works and residential, commercial, industrial, and institutional buildings. 
Construction services include pre-erection work; new cons truction and repair; and alteration, restoration, and 
maintenance work.  
165 Data pertaining to cross-border  trade in architectural, engineerin g and construction services reflect 
certain limitations.  Export data are reported on a net ba sis, whereas import data are reported on a gross basis.  
As a result, the U.S. surplus on the architectural, engin eering and construction services account is understated.  
In addition, the above data also refl ect trade in mining and surveying serv ices, which inflates estimated trade 
volumes (USITC, 1998f).  
166 Data for 1994 and 1995 is not available to avoid disclosing confidential, proprietary information 
pertaining to individual firms.  WT/TPR/S/56 Trade Policy Review 
Page 220 
 
 
20%, to US$23.8 billion.  Moreover, between 1995 and 1996, the number of U.S. contractors 
operating in overseas markets grew to 616 firms,  an increase of 10%.  Economic growth in 
developing nations, fewer restri ctions on the participation of  non-domestic firms in foreign 
construction markets, and progress in creating mutu al recognition agreements are among the factors 
contributing to U.S. strength in international trade in AEC services.167  Sales by foreign affiliates in 
the United States amounted to US$3.0 billion in 1996.168 
109. Registration is required in order to practice ar chitecture in the United States.  Responsibility 
for registering architects lies with subfederal aut horities, and all U.S. jurisdictions have established 
architectural registration boards.  Although regist ration laws vary among states, the National Council 
of Architectural Registration Boards (NCARB), the umbrella organization of 55 state and territorial 
architectural registration boards, promotes uniform national standards in governing the architectural 
profession.  Registration boards generally require a professional degree in architecture from a programme accredited by the National Architectural Accrediting Board (NAAB), three years of training, and a satisfactory pass of the NCARB Architect Registration Examination.  Those without a degree from an NAAB-accredited programme or with a degree from foreign institutions may request  
the NCARB to determine the equivalence of their education.  Mobility is facilitated by an NCARB 
Certificate, which reciprocally qualifies those register ed in one jurisdiction to be registered in another 
jurisdiction without satisfying additional edu cation, training or examination requirements.
169  
110. The U.S. GATS Schedule imposes no limitation on market access in modes 1, 2 and 3, with 
the exception of a commercial presence limitation a pplied by Michigan, where two thirds of the 
officers, partners, and/or directors of an architectural  firm must be licensed in that state as architects, 
professional engineers, and/or land surveyors.   
111. In the framework of the U.S.-Canada Free Tr ade Agreement, an Inter-Recognition Agreement 
was reached in June 1994 between  the NCARB and the Committee of Canadian Architectural 
Councils (CCAC).170  The agreement establishes a series of requirements for certification applicable 
to U.S. and Canadian architects.  As of March 1999, 41 U.S. states and nine Canadian provinces had 
adopted the agreement.171  The NCARB is currently exploring th e possibility of mutual recognition of 
architectural licensing standards with the Architects Registration of the United Kingdom.172 
(v) Engineering and integrated engineering services 
112. For all functions performed by an engineer that require licensing (e.g. signing, drawing, 
blueprints, certifications), a licence is required in  all U.S. jurisdictions for both U.S. citizens and 
foreign persons.173  Licensing laws for the title "professional engineer" often vary from state to state, 
however, they generally require graduation from an engineering programme accredited by the 
Accreditation Board for Engineering and Technology (ABET), followed by approximately four years 
of responsible engineering experience, and successful completion of exams (e.g. a Fundamentals of Engineering written exam and a Principles and Practice of Engineering exam).  The National Council of Examiners of Engineering and Surveying (NCEES ), the umbrella organization of the subfederal 
                                                     
 
167 USITC (1998f).  
168 Data on sales through affiliates include engi neering, architectural and survey services.  
169 Twenty-two member boards require the NC ARB Certificate for interstate registration 
(http://www.ncarb.org).  
170 WTO document S/C/N/52, 10 February 1997.  The CCAC is a committee comprising all of the 
Canadian Provincial Architectural Associations.  
171 WTO (1999).  
172 NCARB Press Release, 28 October 1998.  
173 WTO document, S/C/W/77, 8 December 1998.  United States WT/TPR/S/56 
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professional engineering and land surveying licensi ng authorities, has developed a model law to 
promote uniform licensing laws and licensing procedures across U.S. jurisdictions.  The profession's mobility between U.S. jurisdictions is often granted on  a reciprocal basis; that  is, engineers licensed in 
one state become licensed in another without furt her examination as long as the requirements of the 
state that originally granted licensure ar e at least, equal their minimum standards. 
113. In the GATS framework, the United States unde rtook market-access commitments in modes 
1, 2 and 3 regarding engineering and integrated engineering services.  The only reservations involve 
citizenship requirements for licensing of professional engineers in the District of Columbia and in-
state residency requirements in a dozen states.
174 
114. The United States concluded several mutual recognition agreements on the engineering 
profession.  The ABET signed a mutual recogniti on agreement, known as the "Washington Accord", 
with five foreign professional bodies in 1988.175  Signatories to the agreement recognize the 
substantial equivalence or comparability of th eir respective accreditation processes.  A mutual 
recognition agreement was also signed by the rele vant professional bodies in the context of NAFTA 
in June 1995.176  The agreement, upon implementation by states and provinces, establishes the basis 
for licensing authorities in each country to recogni ze temporary and permanent licensing of engineers 
in other partner countries.  Only Texas has so far signed a letter of intent to implement the 
agreement.177 
 
                                                      
174 Idaho, Iowa, Kansas, Maine, Mississippi, Nevada, Oklahoma, South Carolina, South Dakota, 
Tennessee, Texas, and West Virginia.  
175 WTO document S/C/N/53, 10 February, 1997.  Signatories include the Institute of Engineers 
(Australia), the Canadian Engineering Accreditation Board of the Canadian Council of Professional Engineers, 
the Institution of Engineers of Ireland, the Institution of Professional Engineer s (New Zealand) and the 
Engineering Council (United Kingdom).  The Hong Kong Institution of Engineers became a signatory in 1996, 
and the Engineering Council of South Africa in 1998.  
176 The relevant professional bodies include the Un ited States Council for International Engineering 
Practice, the Canadian Council of Professional Engin eers, and the Mexican Comm ittee for the International 
Practice of Engineering.  
177 Luther (1998), pp. 17-29.  United States WT/TPR/S/56 
 Page 223 
 
 
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