RESTRICTED
WORLD TRADE WT/REG4/M/4
16April 1997
ORGANIZATION(97-1647)
Committee onRegional Trade Agreement
Eighth Session
EXAMINATION OFTHE NORTH AMERICAN FREE TRADE AGREEMENT
NOTE ONTHE MEETING OF24FEBRUARY 19971
Chairman: H.E. Mr.Lode Willems (Belgium)
1. TheCommitteeonRegionalTradeAgreementscontinuedtheexaminationoftheNorthAmerican
FreeTrade Agreement (NAFTA) under Agenda itemB.IX ofitsEighth Session. Themeeting took
upthefollowing topics:
A. General Remarks
B. Investment, Services andRelated Aspects oftheNAFTA
C. Goods Aspects oftheNAFTA
D. Reports ofExaminations
A. General Remarks
2. TheChairman wished tonoteprogress todateintheNAFTA examination process. Questions
andreplies hadbeenexchanged, andtheNAFTA Parties hadmade additional information available.
Theday'smeeting marked thefourth phase oftheNAFTA examination. Much headway hadbeen
made inthereview ofthegoods aspects oftheAgreement, whereas thereview oftheservices aspects
required further consideration.
3. Therepresentative oftheEuropean Communities saidhehadsome preliminary questions of
ahorizontal nature. First, heasked whether updated information wasavailable onthedevelopment
oftrade, bothwithin theNAFTA andoutside it.Inparticular, might previously provided statistical
material beupdated? Hethenasked ifthere hadbeenanychanges intheNAFTA 'soperation, scope
orcoverage. Hesaiditwould behelpful iftheinformation could beprovided inStandard Format
form.
4. Therepresentative ofCanada, speaking onbehalf oftheNAFTA Parties, replied thatthere
hadbeennochanges ofthatnature since theNAFTA Parties hadfirstprovided theinformation. She
noted thattherewould beopportunities forregular updates ofinformation, astherewastheobligation
forreporting every twoyears. Regarding general policy issues, theNAFTA Parties allparticipated
intheTrade Policy Review process. Some ofthemhadrecently undergone reviews, andtheresulting
information would beavailable. Asfarastherequest toprovide information intheformoftheStandard
Format, theNAFTA examination process hadbegun wellbefore theCommittee agreed tousethe
Standard Format; itwould perhaps unduly delay theCommittee 'swork iftheNAFTA Parties now
hadtoprovide information inthatform.
1Themeeting wasconvened inAirgram WTO/AIR/518.WT/REG4/M/4
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B. Investment, Services andRelated Aspects oftheNAFTA
5. Therepresentative oftheEuropean Communities wished tocallattention toaspects ofNAFTA
Chapters Six,Eleven, Twelve, Fourteen andSixteen which hisdelegation thought should bereflected
intheCommittee 'sreport regarding theNAFTA examination. GATS Article Vwasthereference
point. Inrelation tosubstantial sectoral coverage oftheNAFTA, there wereanumber ofquestions -
particularly withrespect tothenumber ofsectors, thevolume oftrade, andthemodes ofsupply. For
example, Chapter Sixcontained some provisions inwhich Mexico reserved foritself adeterminate
number ofactivities inhydrocarbons; inhisdelegation 'sview, thismight constitute areservation to
Mode 1,cross-border services. Because theAgreement wasbuiltonthebasis ofanegative listing,
inprinciple every sector andactivity wascovered. However, theabsence ofcoverage foranumber
ofservices should benoted. Intransport, allairservices -scheduled andnon-scheduled, international
andcabotage -remained outside thescope, asdidmostaspects ofmaritime transport; landtransport
wascovered, though there weresubstantial provisions tightening theliberalization, inparticular with
respect toMexico. Non-conforming measures listed intheannexes didnotsufficiently outline the
possibilitiesforrollback,andtheirdurationwasindeterminateinmostcases.Inrelationtotheannexation
andlisting oftheseexceptions andreservations, theabsence ofcoverage forlocalgovernment measures
inthechapters oninvestment andcross-border tradeinservices gaverisetouncertainty. Thevolume
oftrade inwhich local governments were engaged andtheircompetence toregulate suchactivities
could affect therights ofECinvestors. Quantitative restrictions wereinlarge partexcluded fromthe
scope oftheAgreement, though "locked-in" negotiations were provided for,andthere were some
commitments toliberalize.
6. Therepresentative oftheEuropean Communities hadanother point toraisewithrespect to
thechapters oninvestment andcross-border services. Intheirtreatment ofinvestors andinvestments
where control wasbynon-NAFTA Parties whoincorporated intheNAFTA territory, thearticles dealing
withdenial ofbenefits gaverisetouncertainty andpresented problems ofprinciple. Thiscould affect
ECinvestors controlling NAFTA-incorporated companies. TheNAFTA testof"substantial business
activity beyond theirplace ofincorporation" could posetwosortsofproblems: thatofactivities being
denied thebenefits oftheNAFTA free-trade areaitself, andthatofdiscriminatory treatment toward
ECcompanies. Mostcultural industries wereexcluded fromthecoverage. TheCanada-US FreeTrade
Agreement hadbeenincorporated intotheNAFTA, andcable-TV andother broadcasting services
remained largely excluded. Itwasimportant alsotosignal thenon-coverage ofmost areas ofbasic
telecommunications. Didthatmean thattheGATS provisions taking effect inJanuary 1998 would
beincorporated intotheNAFTA, ordiditmean theywould justbeapplied among theParties solely
onthebasis oftheirWTO reciprocal relationships? Also, hisdelegation wished topoint outthatthe
subsidies disciplines hadnotbeenincorporated, which would haveabearing onthefunctioning ofany
free-trade area. Also, there wasnomechanism fortheexchange ofinformation, which, ascontained
intheGATS, could bethebasis forprogress.
7. Inrelation toprofessional services, therepresentative oftheEuropean Communities saidthat
ifthescope waslargebutcoverage wasatpresent limited, thatmeant thataheavy workprogram existed,
andthattherollback ofmostoftherestrictions currently inplace would takeplace eventually. This
pertained tosubstantial sectoral coverage. Inrelation tothemodes ofsupply, hisdelegation hadverified
theresponses oftheParties, andforChapter Eleven concerning commercial presence, Chapter Twelve
concerning Modes 1and2,andChapter Sixteen concerning Mode 4,thecoverage wascomplete.
Inrelation tonational treatment, theelimination ofsubstantially alldiscrimination, andconditions of
competition, theNAFTA codified averystrong andsolidstandstill obligation among theParties, in
accordancewiththestandstillandrollbackprovisionsofGATSArticleV:1(b).However,theAgreement
waslimited withrespect tothegrandfathering ofcertain federal orsub-federal measures, andthere
were questions astowhether themeasures would beextended oramended. Inrelation torollback,
firmcommitments existed inAnnex 5,asalarge number ofnegotiations werelocked in,andastheWT/REG4/M/4
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phased dismantling ofequity clearance systems andrestrictions wasalsoencompassed. Inrelation
toprofessionallicensingandqualifications,thecoveragewassignificant,thoughtherecognitionapplying
among Parties wasnotautomatically extended tothirdparties. Thequestion oftheoverall levelof
barriers seemed tobelessofaproblem. Hisdelegation 'sgreatest concern wasthepotential effect
ofthedenial ofbenefits provision onECcompanies, asconditional national treatment obligations would
certainly affect them. Asofnow, itseemed thatthose measures hadnotbeenapplied, soitwasnot
certain thattheeffects would beserious. Theresponses didnotshedmuch lightontheconcept of
substantial business activities. Ingeneral, theAgreement contained strong transparency provisions,
confidentiality provisions anddisciplines onmonopolies andrestrictive business practices, which often
went beyond those oftheGATS, though those concerning competition were excluded from dispute
settlement. Government procurement andtaxation wereother areas inwhich NAFTA provisions went
beyond theGATS. Perhaps theParties would liketocomment ontheimplications forGATS rules
thathiscomments implied.
8. Therepresentative ofMexico, speaking onbehalf oftheNAFTA Parties, saidthat,regarding
theAgreement 'ssubstantial coverage ofsectors, hisdelegation 'sunderstanding wasthatveryfewsectors
were leftoutside, andthatinmost cases there wasliberalization. There were some elements with
reservations, aswasthecasewithhydrocarbons, which principally concerned investment inMexico.
But,rather thanservices, thiswasamatter oftrade ingoods andwasnotpertinent totheGATS. For
airtransport, theNAFTA Parties followed exactly whatwasintheGATS, duetoaseries ofdifficulties
thattheParties hadbeenunable toresolve while theGATS wasbeing negotiated. TheNAFTA and
theGATS were negotiated atthesame time, sothere hadbeen considerable input from GATS
negotiations factoring intoNAFTA negotiations. Inmaritime transport thereweresome elements left
outside, while others wereliberalized. Themain element wasconsolidation inopening upasector,
which wasdonethrough the"ratchet clause". Previously there hadbeenmany problems withrespect
toroadtransport, asexperienced bytheEC,butsubsequently, there hadbeensubstantial opening.
Itwasthusnecessary tokeepinmind thefactthatthere wasageneral article intheNAFTA which
allowed theParties tocontinue tonegotiate andfurther liberalize. Inshort, there were reservations
withrespect toroadtransport, butthere hadbeenconsiderable liberalization. InthecaseofMexico,
thiswasparticularly true,forinthepastthesector hadbeencompletely closed, butnowitwasopen.
Quantitative restrictions were excluded from thescope oftheAgreement, or,rather, theywere the
subject ofongoing negotiations, which entailed liberalization along thelinesofwhattheGATS called
“additional commitments. ”InAnnex 6,there wasawhole series ofadditional agreements which
gradually would doaway withthose restrictions. Inmany cases therestrictions wereofnoimportance -
many wereincluded inthelawsbutwereoflittleimpact. Asfordenial ofbenefits, itwasnotnearly
ascomplicated asitappeared. Those whohadtheburden ofproof werenotthose providing transport
services orestablishing themselves intheother countries oftheNAFTA; rather itwastheimporter
whoboretheburden ofproof.
9. Therepresentative ofMexico continued, taking upthequestion ofdenial ofbenefits andeffects
onother WTO Members. Inactual fact,denial ofbenefits didnotoccur. TheNAFTA hadbeen
operational forthree years, andthere hadnever beenasingle case, norwould there likely everbe,
asitwasextremely complicated toapply thatArticle. Cultural industries hadnotbeenexcluded, and
infactagreat many wereincluded. Radio broadcasting waspartially excluded. Cable television was
anareawhere therewasapartial exclusion, butalsoliberalization. InthecaseofMexico, forexample,
thecableTVindustryhadpreviouslybeentotallyclosed,whereasnowforeigninvestmentwaspermitted.
Basic telecommunications were excluded, duetothefactthatthiswasanextremely difficult areato
negotiate, asGATS negotiations ofthepasttwoyears hadshown. There hadnowbeennegotiations,
andliberalization wastaking placeamongst thethreeNAFTA countries. TheParties hadnotyetdecided
exactly whattheywanted todowiththesector intheNAFTA, butitwasoneofthose sectors which
would besubject tofuture negotiations. Asfaraswhat hadbeenaccomplished intheWTO quite
recently, itwastooearly totellwhat would happen. Regarding thequestion ofnon-coverage ofWT/REG4/M/4
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subsidies, theParties hadconsidered thisareawhile negotiating theNAFTA. Subsidies constituted
anextremely complex issue, asshown bythefactthatfortheGATS, theMembers werecontinuing
tonegotiate obligations. TheNAFTA Parties began treating thisareaafterGATS negotiations were
underway andfinished before theGATS wasconcluded. TheParties werestillcontemplating what
todoconcerning subsidies, anditmight bethattheParties would treatthismore indepth oncefurther
progress hadbeenmade bytheWTO inthisarea. Itwasimportant torecall thatinthecaseofthe
NAFTA, theCommittee wastalking about afree-trade treaty, notacommon market. Intheareaof
professional services, coverage wasquite broad, andwithrespect tomodes ofsupply, thecoverage
wascomplete. TheNAFTA alsoallowed forthepossibility ofsending goods toother countries as
“temporary export withreimport," constituting asortofproxy totheinternational mobility ofthe
consumer andthusfurther eliminating discrimination. TheNAFTA Parties werecovering virtually
allremaining areas ofdiscrimination innegotiations. TheAgreement didnotcontain arollback for
federal andlocalmeasures. Itwasnecessary tomake adistinction between thetwo: normally local
measures werepartofthefederal measures, buttherewereofcourse other municipal measures. Here,
theParties didhave standstill, andtheyalsohada"ratchet clause" which, along withunilateral
liberalization andnegotiated liberalization, would gradually eliminate barriers totrade.
10. Therepresentative ofCanada added thatcultural industries hadbeencovered bytheCanada-
USFreeTrade Agreement.
11. Therepresentative ofJapan thanked thedelegation oftheECforhaving raised itsrange of
questions. Hisdelegation hadconcerns withrespect tosectoral coverage, denial ofbenefits, andsub-
federal rules. Regarding sectoral coverage, theNAFTA explanations seemed todifferentiate theissues
ofcoverage andreservations. While itwastruethattheNAFTA hadcomprehensive coverage (with
some exceptions, suchascivilaviation orthehealth sector), atthesame timethere were anumber
ofsubstantial reservations attached totheAgreement. Evenifcoverage wererather complete, ifsectors
withreservations occupied asubstantial portion ofthetotal, andiftheperiod inwhich suchreservations
would bewithdrawn wasnotmade clear, thereservations could haveasimilar effect asthatofexclusions
from thetreaty. Hisdelegation understood GATS Article Vtoinclude areference tothetransition
period. While noclear-cut period appeared tobespecified, thegeneral understanding wasthatitwas
more orlessfiveyears, before thenextround ofnegotiations. TheNAFTA Parties hadjustindicated
thattheyhadnotyetdecided howtheAgreement should treatbasic telecommunications, evenafter
thesuccessful negotiations intheWTO. Were theNAFTA partners prepared towithdraw reservations
currently ineffect within areasonable timeperiod? Ifnot,theCommittee needed tolookatthestatistical
dataofthesectors withreservations todetermine substantial sectoral coverage intheNAFTA.
12. Therepresentative ofSwitzerland saidthatsubstantial sectoral coverage wasnotpossible to
assess because there wasalackofstatistical data. Questions onthattopic arose inChapters Eleven,
TwelveandFourteen.RegardingChapterEleven(Investment),itwasdifficulttounderstandthecomplex
system ofexceptions. Forexample, inArticle 1108, thescope ofremaining non-conforming measures
atthelocal level andtheirimpact ontrade within theNAFTA Parties were unclear. Notifications
forsuchmeasures were notrequired under theNAFTA, andtheycould bemaintained indefinitely.
SimilardifficultiesappearedinChapterFourteen(FinancialServices).TheNAFTAPartieshadindicated
thattheywerenotinaposition toprovide data, butthatinanyevent themeasures 'impact ontrade
wasnegligible. Thisstatement didnotgiveMembers sufficient assurance; dataandmore information
were required. Provisions oncross-border trade excluded such important sectors asbasic
telecommunications, airtransport andmaritime services fromliberalization. IntheNAFTA response
toquestion 49indocument WT/REG4/1/Add.2, theParties seemed tobesaying thattherequirement
ofGATS Article Vforsubstantial sectoral coverage foranintegration zonewasindependent ofthe
question ofwhether certain sectors were covered bytheGATS. However, hisowndelegation was
oftheviewthatthelevelofintegration inanintegration zonecould beexpected tobehigher thanin
amultilateral agreement.WT/REG4/M/4
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13. Therepresentative ofSwitzerland continued, saying thatother ambiguities arose withrespect
toNAFTA Article 1206. Forexample, itwasunclear whatthescope ofgrandfathering forremaining
non-conforming measures atthelocallevelwas,andwhatimpact thishadontradeamong theNAFTA
Parties. Also, theArticle contained nonotification requirement, andmeasures could bemaintained
foranunlimited time. Inresponses toquestions 32,35,36,37and38,theNAFTA Parties hadindicated
thattheywerenotinaposition toprovide theCommittee withsufficient dataandinformation onthis
matter. ButtheParties hadprovided information onnon-conforming measures atthestatelevel in
documentWT/REG4/4/Rev.1.ChapterFourteenincludedamodestlevelofliberalizationorastandstill.
Mexico wasopening itsmarket instepsonly. Astothediscrimination ofthirdparties, theCommittee
wasnotinaposition tomake adetermination onwhether therequirements ofGATS Article V:4and6
weremet,since statistics werelacking. InChapter Eleven, Article 1113 listed three cases where the
liberalization provisions mustnotbeapplied: casesofeconomic sanctions, alackofdiplomatic relations
andalackofsubstantial economic activity. Itread: “AParty maydenythebenefits ofthisChapter
toaninvestor ofanother Party thatisanenterprise ofsuchParty andtoinvestments ofsuchinvestors
ifinvestors ofanon-Party ownorcontrol theenterprise andtheenterprise hasnosubstantial business
activities intheterritory oftheParty under whose lawitisconstituted ororganized. ”Inhisdelegation 's
view, theprovision wasnotcompatible withGATS Article V:6. Thesame problem existed in
Chapter Twelve (Cross-Border Trade inServices). Regarding Chapter Fourteen, discrimination of
foreign investors intheMexican orCanadian markets withrespect toindirect branching didnotseem
compatible withGATS Article V:6. Inlightofalltheseconcerns, compatibility withGATS Article V
could notyetbeassessed.
14. TherepresentativeofMexiconotedthattenyearsago,oneofthethingsdelegationshaddiscussed
intheGATT wasstatistics forservices. Ithadbeendecided thatstatistics must evolve overtime.
Atthetime, delegations hadbeendragging theirfeetsoastoavoid reaching anagreement onservices.
Since then, littleprogress hadbeenmade. Itwasthussurprising thatthelackofstatistics inservices
wasnowbeing citedtoassert thatneither thesectoral coverage northeelimination ofdiscrimination
wassufficiently attained bytheNAFTA Parties. TheParties could provide statistics forservices to
thesame measure thatother Members could. Regarding theexclusion ofsectors andreservations,
therewasabigdifference between thetwo.TheNAFTA Parties hadnotincluded telecommunications
intheirAgreement atthattimebecause ofthedifficulties ofopening asector which other countries
werenotwilling toopen. NowtheParties hadnoproblem withincluding it,butoneweek afterthe
conclusion ofthearduous andlongnegotiations wastoosoontohaveasense ofhowtheNAFTA would
treatthesector. Withrespect toshipping, there weremajor reservations entered, butagain, thatwas
adifficult sector fornegotiations. AllthreeParties hadtheintention anddesire toliberalize thesector
within theNAFTA. Withreference todiscrimination against thirdparties, hereminded theCommittee
thatitwasdiscussing anintegration area. Article Vsaidthatbarriers additional tothose already existing
should notbeestablished inanintegration areawhen theintegration areacameintoeffect. TheNAFTA
Parties werebynomeans doing so.Even inthefinancial services sector, where reference hadbeen
made totheneedforletting branches orsubsidiaries in,there hadbeenanopening ofapreviously
closed market. Regarding denial ofbenefits, thiswasapplied when there wasnosubstantial business
presence. Theimporting country hadtoprove therewasnosubstantial business activity, andthiswas
difficult. “Nodiplomatic relations ”waseasytoprove, andwassimply apoint which theParties had
chosen toinclude. Article Vcalled forsubstantial sectoral coverage, withthefootnote reading: "This
condition isunderstood interms ofnumber ofsectors, volume oftrade affected andmodes ofsupply.
Inorder tomeetthiscondition, agreements should notprovide fortheapriori exclusion ofanymode
ofsupply." Inaddition tohaving substantial sectoral coverage, acondition wasthattheagreement
"provides fortheabsence orelimination ofsubstantially alldiscrimination, inthesense ofArticle XVII,
between oramong theparties, inthesectors covered under subparagraph (a),through: (i)elimination
ofexisting discriminatory measures and/or (ii)prohibition ofnewormore discriminatory measures -
either attheentry intoforce ofthatagreement oronthebasis ofareasonable time-frame, except for
measures permitted under Articles XI,XII,XIVandXIVbis."Formany oftheNAFTA reservations,WT/REG4/M/4
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there wasaschedule forliberalization. While theSwiss delegation saiditcould notdetermine that
theNAFTA covered allthese elements, itcertainly didnotfollow thattheinability tomake a
determination meant thattheNAFTA didnotcover them.
15. Therepresentative ofCanada wished toaddthatwith respect toforeign branching, on
14February 1997, anewforeign bank entry regime allowing foreign banks tobranch directly into
Canadahadbeenannounced.HerGovernmentwoulddraftlegislationtogiveeffecttothatannouncement
thisyear.
16. Therepresentative oftheEuropean Communities sought clarification oftheNAFTA Parties '
response toaquestion posed bytheSwiss delegation. Theresponse hadreferred to"substantial business
activities", atermusedinNAFTA Article 1113. Theanswer didnotseem tofitthequestion that
hadbeenposed withrespect toGATS Article V:6,inwhich theterm“substantive -not“substantial ”-
wasused. Hisdelegation alsowasinterested inlearning howtheNAFTA Parties viewed reservations,
exclusions, andtime-frames. Heunderstood thepoint made withreference toGATS Article V:1(a)
anditsfootnote, but“substantially ”inArticle V:1(b) seemed different from“substantial. ”Howdid
theNAFTA Parties view thislinguistic difference? TheNAFTA Parties seemed toattach some
significancetothe“and/or”wording,soitwouldbehelpfultohaveaclarificationastotheinterpretation.
AstheCommittee wasintheprocess ofexploring theArticle forthefirsttime, hewasfocusing on
interpretation questions.
17. Inresponse tothecomment onlinguistics, therepresentative ofMexico saidthatinSpanish,
“substantial" and"substantive" weretranslated thesame, whereas inEnglish eachmight haveimportant
connotations. InArticle 1113, Denial ofBenefits, thefundamental testwaswhether there were
substantial/substantive business activities inthecountry being dealtwith. Here, theburden ofproof
wasontheimporting country. Thatdidnotmean thataform ofdiscrimination wasbeing exercised
against thirdcountries. Forexample, forprofessional services, aforeigner living inMexico whohad
adegree fromanon-NAFTA country would notbeabletobenefit fromareciprocal arrangement on
qualifications ordegrees. Thistypeofthing wasnotpeculiar totheNAFTA, butrather existed in
other regional agreements aswell, forexample intheEC. Regarding thequestion ontime-frames
ofGATS Article V:1(b), asindicated, therewereseveral sectors where therewasatime-frame calendar
fortheelimination ofreservations. Many reservations hadalready been eliminated. In
telecommunications, value-added services hadbeenaclosed market, openonlytothenational industry.
There hadbeenreservations, butnowthesector wasbeing liberalized. Regarding theelimination of
existing measures orprohibitions against newones, theParties wereeliminating thegreat majority,
overandabove what wasrequired. Asmentioned, theAgreement contained a"ratchet clause". If
there were anopening upinanygiven sector, theopening would remain liberalized. Forexample,
Mexico hadrecently liberalized theshipping sector, andthishadbeen"ratcheted".
18. Therepresentative oftheUnited States saidthat,insatisfying GATS Article V:1,liberalization
wascarried outwithaviewtoward sectoral coverage. Inmeasuring liberalization, there wasroom
foragreatdealofsubjectivity intherequirements ofsubstantial coverage andtheabsence ofsubstantial
discrimination. Asstated, therewerecurrently noservices statistics worth examining, soitwasamatter
ofsubjectively assessing whether thecriteria weremet. GATS Article V:2tookintoaccount whether
there wasoverall liberalization ofthose sectors concerned, considering situations suchaswhat had
happened inbasic telecommunications andmarine andairtransport services. Soassessment required
looking atthesumoftheparts -there wasnoobjective dataavailable fordrawing conclusions. There
werethereservations, andthebasic question waswhether thecriteria ofArticle V:1weremet. The
Committee should notwaitformore numbers, butrather should draw some subjective conclusions
according totheelements ofArticle V.WT/REG4/M/4
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19. Therepresentative ofEuropean Communities referred tothegeneral question ofGATS
Article V:1,saying hefound theinterpretation offered onthatparagraph andonparagraph 2tobe
wrong inpart. Rather thanaccepting anoptional reading of“and/or, ”itwasimportant tolookatthe
paragraph asawhole. Thereference toArticle XVII pointed totheresult intended: theelimination
orabsence ofsubstantially alldiscrimination inthesense ofnational treatment. Theinterpretation
ofthephrase inthesense ofArticle XVII wasinescapable inthiscontext; GATS Article Vcould not
beconstrued asasimple standstill arrangement without reference toArticle XVII. Itseemed thatto
achieve "theabsence orelimination" entailed boththeelimination ofdiscriminatory measures where
theyexisted andacommitment nottoputtheminplace where theydidnot.Thus, paragraphs (i)and
(ii)wereoptions which weretobejudged asappropriate against thecircumstances ofthesector being
considered, notasalternatives tobefreely chosen bytheparties toanagreement. Ifthere were no
discriminatory measures inthesense ofArticle XVII, thenparagraph (ii)wasoperable: "prohibition
ofnewormore discriminatory measures"; andifthere were indeed discriminatory measures which
needed tobeeliminated, thenparagraph (i)became theonlychoice, requiring theelimination ofthose
existing discriminatory measures onthesubstantial sectoral coverage. Thus, thequestion ofrestrictions
versus exclusions came intoplay, foritentailed thereading ofparagraph (i)incircumstances where
there wasdiscrimination. Against thatbackground, thequestion originally posed bytheJapanese
delegation remained onthetable. TheCommittee should beambitious initsinterpretation ofArticle V.
Although there might beadegree ofsubjectivity, theCommittee should attempt tobeasprecise as
possible.
20. Therepresentative ofMexico saidhedidnotintend toimply thattheNAFTA Parties were
trying toinclude thestandstill inthefreetrade agreement. Rather, hisdelegation hadbeenspeaking
about theelimination ofexisting discriminatory measures andtheprohibition ofnewormore
discriminatory measures. IntheGATS there wasthe“negative list,”referred toasthetop-down
approach; thatwasnottheapproach oftheNAFTA. TheParties hadAnnex 2,which wasactually
anexclusion, andtheyhadreservations inAnnex 1,which weresubject tolaterliberalization andsubject
tothe"ratchet clause". TheAgreement wasaliving instrument; itdidnotrepresent theendofaprocess
ofnegotiations, butrather wasaninstrument moving allelements toward greater liberalization. The
EC,too,haddeveloped inthismanner. Theimportant point wasthattheinstrument didmeetallthe
requirements setoutinArticle V.Itcomplied with“substantial ”coverage. Atissuewerethenumber
ofsectors liberalized -including bothsectors withreservations, which contained broad liberalization
andatimetable, aswellassectors without reservations. Alsoatissuewasthevolume oftradeaffected -
acondition which hadbeenmet,evenifstatistics werenotyetavailable. Looking atallthesectors
included, itwasevident thattheParties werecovering theentire volume oftradeaffected andallmeans
ofprovidingservices.Theyhadeliminatedalargenumberofdiscriminatorymeasuresandhadprohibited
newones. Atissue wasnational treatment, Article XVII. TheNAFTA Parties hadgoneabove and
beyond whatwasincluded intheGATS inthevarious areas.
21. Therepresentative oftheUnited States wished torespond tothepoint concerning the
interpretation ofArticle V:1. TheECinterpretation ofthe“and/or ”language wasinteresting, but
itdidnotseemtobesupported bythetext.Itsounded asthough theinterpretation offered would entail
arequirement thatMembers entering intoaregional arrangement withrespect toservices would have
toeliminate existing discriminatory measures andprohibit additional ones. Thatseemed totakeout
the“or”entirely. IntheECformulation, there seemed adenigration oftheconcept ofanoptional
working oftheparagraph -i.e.thatitwasalmost untoward thattheParties tothiskindofarrangement
would begiven achoice. But,indeed, thatwaswhatthetextseemed toprovide: theelimination of
existing discriminatory measures, ortheuseofastandstill. Inother words, rather thaneliminating
anexisting measure, aparty could eliminate thepossibility ofexisting measures being made worse
orofadding newmeasures. Thatseemed tobetheinterpretation bestsupported bythetext,because
itwould thengivemeaning toallthewords, including “and/or. ”Interpreting thetextwasobviously
important fortheCommittee 'sfoundational work asitmoved forward inservices.WT/REG4/M/4
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22. Therepresentative oftheEuropean Communities saidthattheposition oftheUnited States
delegation offered analternative view, inthesense of“and/or ”providing options. However, thetext
didnotsupport thatinterpretation. Subparagraph (b)dealtwithwhatitprovided for,andthechapeau
ended with“through ”,soparagraphs (i)and(ii)hadtobethemeans through which theobjective was
tobeachieved. Iftheobjective weretheabsence orelimination, thentheoption ofusing paragraph
(i)or(ii)hadtoachieve thepurpose oftheelimination. Iftheabsence were thestarting point -
discrimination inthesense ofArticle XVII being already absent -thenparagraph (ii)wastheonly
option, because paragraph (i)didnotwork, asameasure notexisting could notberemoved. Onthe
other hand, ifthere were Article XVII discrimination, thentheendresult which theparagraph tried
toachieve -i.e.theabsence orelimination ofsubstantially alldiscrimination inthesense of
Article XVII -could inthatcaseonlybeachieved incircumstances covered byparagraph (i).Asimple
prohibition onnewormore discriminatory measures would notachieve theendresult. Taken asa
whole, “and/or ”could onlymean “asappropriate ”forthesector atthetime.
23. TherepresentativeofMexicosuggestedthatthedelegationswerespeakingaboutthesamething-
thattheresult ofthenegotiations wastocomply withtherequirements ofArticle XVII insubstantially
allthesectors. Substantially, theNAFTA covered allthesectors; inallthose sectors covered, there
wasnodiscrimination inanyofthethreecountries. Thenumber ofsectors which wereexcluded were
veryfew-two,three, orfoursectors, some ofwhich were alsoexcluded from theGATS because
ofthedifficulties involved innegotiations. (Forexample, airtransport represented anareainwhich
therewerenegotiationdifficultiescommontoallactors.)Thus,thePartieswerefaithfultotheprovisions
ofArticle V.There wasnoestablishment ofnewrestrictions forWTO Members; tothecontrary,
because ofwhathadbeennegotiated intheNAFTA, Members benefited agreat deal. Nowforeign
companies could enter Mexico through Canada ortheUnited States, whereas before thepossibility
hadnotexisted.
24. Therepresentative oftheEuropean Communities referred tothelinguistic problems mentioned.
Without addressing thequestion ofdenial ofbenefits andobjections, hecontended that"substantial"
referred tosubstance andtovariability under thescope ofcoverage, whereas “substantive ”referred
moretothenature oridentity ofthecoverage. Arguably, "substantial" referred totherange ofcoverage
inahorizontal fashion -allthesubstantial areas oftheagreement -whereas "substantive" referred
vertically, tothedepth. Hesawtwoelements pertaining toobjective versus subjective assessment
ofconsistency withArticle V,especially when considering paragraph (ii)andwhether itcontained
apossibility forasubjective assessment. Objective assessment could bemade withreference tothe
wider process ofeconomic integration, andsubjective assessment could bemade withreference to
alltradeliberalization among thecountries concerned. Itwasarguable thattradeliberalization among
parties toregional tradeagreements might besubjectively considered totheextent thatother Members
might join. Hereadparagraph (i)toentail thewider process ofeconomic integration, asadynamic
reference towhattheGATS wasatagiven time-forexample, whatitincluded nowthatnegotiations
onbasictelecommunications hadbeenconcluded. Inother words, thebenchmark forsectoral coverage
inanagreement should gobeyond theGATS.
25. Therepresentative ofMexico saidthatliberalization inbasic telecommunications wasan
exceptional case. Negotiations hadtaken agreat dealoftimeanddemonstrated thedifficulty of
achieving suchliberalization. Itrepresented notonlyliberalization interms ofthesector, butalso
liberalization interms ofderegulation andother aspects ofcompetition policy, including monopoly
markets. Soitwasnotasimple caseofsectoral liberalization. Once eachParty wasabletomake
anassessment ofthesituation intelecommunications, thenthethree would beinaposition totakea
decision. Thatsubject wasnotfordiscussion here. Liberalization hadtaken place, andtheWTO
Members were benefiting from it.WT/REG4/M/4
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26. TherepresentativeoftheEuropeanCommunitiessaidhehadreferredtobasictelecommunications
asanexample. While negotiations hadconcluded onlyrecently, itwasnonetheless important tobear
inmind thatregional agreements allowed Members togofurther thantheycould inthemultilateral
ambit. Itwould bepointless tospeak onlyinterms ofspecial regimes. TheCommittee hadtofollow
objective elements initsexercise. Statistics might bedifficult toobtain, butitwasimportant tohave
ameasure. Having agood number ofobjective criteria would helpinanalyzing therestofthe
agreements.
27. Therepresentative ofMexico saidthattheNAFTA Parties hadgonesignificantly further than
theGATS, evenbythetimetheGATS came intoeffect. TheNAFTA allowed theParties tobeprecise
innegotiating services provisions, anditallowed them tocontribute evenmore tothemultilateral
negotiations.
C. Goods Aspects oftheNAFTA
28. TherepresentativeoftheEuropeanCommunitiessaidthatthetradestatisticswhichtheCommittee
wasworking withwere nowseriously outofdate. Inthemiddle of1997, theCommittee would be
asked toagree onareport based onstatistics thatwould bethree-and-a-half years old.Itseemed
reasonable toaskforupdated statistics, especially withrespect toheadline material ontradeflows and
coverage. Itwasworth recalling some keypoints ofconcern, especially relating totextiles and
automobiles, forwhich hisdelegation would appreciate updated information. Regarding transition
periods, there wasaninterpretative point ontheUnderstanding oftheInterpretation ofArticle XXIV.
IntheNAFTA responses toquestions indocument WT/REG4/1/Add.1, thematter oftransition periods
wasaddressed, withthephrase “atproduct level”usedtopreface anargument. Thatdidnotnecessarily
seem tobeacorrect reading ofparagraph 3oftheUnderstanding onArticle XXIV. Thatparagraph
saidthatthe“reasonable length oftime”referred toinArticle XXIV:5(c) should exceed 10years only
inexceptional cases, anditprovided aprocedure forfullexplanation. Itseemed the"reasonable length
oftime" concerned theplanandschedule, nottheproduct. Hewondered iftheNAFTA Parties had
aviewonthesubject.
29. Therepresentative ofAustralia saidthathisdelegation would appreciate areply toquestion
19indocument WT/REG4/1/Add.1, which dealtwiththeexclusion oftrade inmarine vessels. His
delegation alsorequested abetter response toquestion 58,concerning rules oforigin inthetextiles
sector. Hisdelegation disagreed withtheassertion thatthepreferential rulesoforigin didnotfunction
inarestrictive manner withregard tomost-favoured-nation (MFN) tariffs. Forquestions 66and67,
herequested thattheParties directly address thesubstance ofthequestion inanadditional answer.
Regarding tariff quotas, hisdelegation hadinthepastexpressed concerns overthetreatment of
preferential trade. MFN tariff quotas should bepreserved andshould notinclude preferential trade.
Ingeneral, didMexico intend tocount NAFTA imports withthose fromother countries under itsMFN
tariff quotas? Hisdelegation wasconcerned about thefactthat,where countries hadbeenrequired
toopen minimum access tariff levels ofglobal access asaresult oftheUruguay Round, there had
beenadiminution ofaccess inrealterms duetopreferential imports. Where Mexico didnotdecide
toopentariff quotas foragricultural products, howdiditensure access fornon-NAFTA suppliers?
Question 123concerned Mexico 'sapplication ofpreferences totheUnited States formilkpowder.
Given thatthein-quota tariffrateforboththeUnited States andothers waszero, hisdelegation would
beinterested inknowing howMexico based itsallocation ontrade patterns fromtheUnited States,
oronthebasis ofNAFTA preferences? HadMexico usedaparticular historical period todetermine
thelevelofallocation? Waspriority given tofilling theUnited States 'share ofthetariff quota before
theMFN share?WT/REG4/M/4
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30. Therepresentative ofCanada reiterated thattheParties would provide trade statistics prior
totheconclusion oftheexamination. Sheindicated thattheresponse toquestion 19hadbeensubmitted
asanaddendum.
31. Referring totheECdelegation 'squestion ontransition periods andspecific products, the
representative ofMexico saidthatthewritten response hadinvolved asupposition. Thesentence began
with“evenassuming that”because there hadbeennoclear indication astothesense inwhich the
question should beread. TheNAFTA Parties hadwanted toaddress different possibilities toensure
thattheresponse covered anygiven level. Theintention wastomake adistinction inthereply. The
Parties hadnotwanted togivetheimpression thattheirresponse would notapply tosome products.
They were aware thatelsewhere thishadbeeninterpreted inthesense ofaplanandprogram foran
interim agreement, withaviewofreaching afree-trade areaorcustoms union. TheMexican delegation
supported whattherepresentative ofCanada hadsaidinthename ofthethree Parties regarding the
provision ofnewstatistics. Concerning comments from theAustralian delegation, theMexican
Government hadpresented anotification totheCommittee onAgriculture. Some concerns could be
addressed byreferring tothatnotification. Mexico treated imports fromitsNAFTA partners within
itsallotment oftariff quotas, inlinewithArticle XIIIofGATT 1994. Hisdelegation therefore saw
nocontradiction regarding itsobligations under theGATT. There hadbeenahypothetical question
astowhatmight havehappened hadMexico notusedtariffication forsome ofitsagricultural products -
"hypothetical" because there hadbeennoquantitative restriction inMexico thathadnotbeentariffied
asaresult oftheUruguay Round. Inrelation tomilkpowder, hisdelegation hadbeenasked whether
ithadusedahistorical period asthebasisofitstariffication. What Mexico hadusedwastheconcession
granted when Mexico acceded totheGATT in1986. Inthatconcession, Mexico hadgranted quantified
access of120,000 tonsofmilkpowder atazerorate. Thatwasthebasis ofMexico 'stariffication,
andithadbeentheobject ofnegotiation withMexico 'smain suppliers ofmilkpowder during the
UruguayRound.Inagriculture,hisdelegationhadalreadysentanotificationclarifyingwhatthesituation
wasforeachproduct.
32. Therepresentative ofUnited States saidthatithadseemed clearthattheNAFTA Parties would
provide newdata,butthatconclusions would havetobebased onoldstatistics soasnottorevisit factual
issues.
33. Therepresentative ofMexico hadsome additional clarifications regarding thequestions ofthe
Australian delegation. First, there wasthequestion ofwhether Mexico intended tocount NAFTA
imports withthose from other countries under itsMFN tariff quotas. Theanswer wasthat,asfar
asMexican obligations under theWTO went, hiscountry hadestablished tariffquotas when ittariffied.
Insome cases where there hadbeenprevious trade withNAFTA partners, hisdelegation assigned a
corresponding share tothose partners. Butinitsscheduled concessions ofGATT 1994, ithadnot
made anydistinction between MFN andnon-MFN. Mexico would count imports from Canada and
theUnited States within itstrade quota inthesame waythatitwould count imports from anyother
WTO Member. Thequestion ofwhether theyreceived preferential treatment wasadifferent matter
altogether. Butbothwithin theWTO andtheNAFTA, Mexico counted those imports inthesame
way,asevidenced inthedocumentation provided. What hisdelegation wastrying todowastoavoid
double counting, since atonepoint aNAFTA partner could haveencountered NAFTA concessions
inaddition toWTO concessions.
34. Therepresentative ofMexico continued, taking upthequestion ofhowhiscountry ensured
access fornon-NAFTA suppliers ifitdidnotopentariff quotas foragricultural products. There was
noquestion ofaccess fornon-NAFTA suppliers, because ifthere were notariff quota, there would
benoamount tobedistributed. Perhaps thequestion wasconfusing because oftheMexican situation,
inwhich there wasonlyonecasewhere aquota wasusedfortariffied products, asthenotificationWT/REG4/M/4
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totheCommittee onAgriculture showed. Inothers cases, foranumber ofreasons, Mexico wasnot
making useofitsrighttoinvoke thetariff quota.
35. Therepresentative ofMexico turned totheconcerns expressed withrespect toquestion 123.
First, regarding whether Mexico based itsallocation ofpreferences totheUnited States onaparticular
historical period todetermine thelevelofallocation, theanswer was"yes" -thereference period was
thatimplicit inArticle XIII. Itwasimplicit because, although Article XXVIII didnotcontain anexplicit
concept ofthelastthree years forwhich information wasavailable, hisdelegation wasoftheview
thatthere could beareference point thatwould beequivalent tothatusedinArticle XIII. Imports
forthethree years prior totheNAFTA negotiations hadnotreceived preferences. Inother words,
theUnited States hadbeeninthesameposition asAustralia andanyothercountry. Mexico hadfollowed
thatcriteria foralloftheproducts tariffied, asstated inthewritten replies. Thesecond partofthe
Australian query asked ifpriority wasgiven tofulfilling theUnited States 'share ofthetariff quota
before theMFN share. Asjustmentioned, Mexico hadthetariffquota andmade nodistinction between
MFN andnon-MFN; thiswaswithreference toquantities, quiteaside fromtariffs. Ofthetariffs that
were theresults oftariffications byMexico, there wasnopriority. Asstated, priority wasinfact
impossible because, ofallproducts tariffied, onlyinthecaseofpowdered milkhadMexico usedthe
tariff quota. Inallother cases, Mexico hadnotapplied thetariff quota, butrather hadapplied only
atariff. Whoever paiditcould introduce goods. Therefore, there could notbeapreference interms
ofpriority; there might bepreference interms ofthetariff level, butthere wasnopriority. Forthat
onecaseofpowdered milk, thetariffquota was120,000 tonsatzeropercentrate.Thatapplied whether
theproduct came fromtheUnited States, Canada orAustralia; nopriority wasgiven forthe120,000
tons. Asmentioned, ofthisamount, Mexico guaranteed that80,000 would come fromWTO Members;
40,000 were assigned totheUnited States onthebasis ofthehistoric period oftheimports forthe
three years prior tothenegotiations.
36. Therepresentative ofAustralia saidtherepresentative ofMexico hadrightly corrected his
mistake, andthatthequestion hadactually been: When Mexico decided toopen tariff quotas for
agricultural products, howdiditensure access fornon-NAFTA suppliers, ifitcounted NAFTA access
against thetotalquota?
37. Therepresentative ofMexico saidhisdelegation would ensure access fornon-NAFTA suppliers
byrespecting commitments intheWTO andtheterms andconditions initsschedule.
D. Reports ofExaminations
38. TheChairman saidsummary records forthefirsttwomeetings oftheNAFTA examination
hadbeendistributed assamples forCommittee feedback. Thework hadbeenstrenuous anddetailed.
Comments submitted soonwould beincluded withthesummary records ofthatday'smeeting. In
afewweeks ’time, theCommittee would havefourdocuments making upthefactual section ofits
NAFTA report. Itwould stillhavethedifficult taskofarriving atconclusions. Heintended tohold
consultations, andconclusions should befinished before summer recess.
39. TherepresentativeofKoreahadacommentconcerningthewayconsultationsfortheconclusions
would beconducted. Itseemed theexaminations hadbeengeared toward information seeking; views
ontheconsistency would come afterthefinalfactual review. Hewondered iftherewould beapossibility
fordelegations toreassess consistency afterconsultations.
40. TheChairman replied thattheexercise would naturally concern conformity withGATT
Article XXIV andGATS Article V.Buttheprocess would beclosed tonewarguments thatwouldWT/REG4/M/4
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entail requests fornewinformation. There hadbeenalongperiod forsubmitting questions, andfour
meetings fortheexamination.
41. Therepresentative ofJapan asked ifdelegations would havetheopportunity tocommunicate
withcapitals regarding thevarious interpretations ofGATS language suggested during theday's
discussions. Ifso,more factual questions might logically arise. Hethensuggested thattwoorthree
series ofinformal consultations might beneeded, depending ondifferences ofviews.
42. TheChairman saidhewasreluctant toagree withthefirstrequest. Hehadmade clear that
alldelegationshadtheopportunitytosubmitwrittenquestionsthroughoutthecourseoftheexaminations.
AsChairman, heshould close thediscussion atsome point. TheNAFTA examination hadbeenvery
constructive, andtheeffort hadbeennoteworthy. Going backtocapitals would besetting apoor
example; theCommittee wanted tomove theprocess forward andneeded torespect certain decisions.
Ofcourse, anything touching onfinaljudgments remained tobediscussed andwasthusopen. Itwas
notpossible todetermine thenumber ofmeetings necessary inadvance, buttheprocess would befully
transparent. Alldelegations would beabletoparticipate. Hethenindicated thathewould circulate
adrafttextattheappropriate time.
43. Therepresentative ofJapan saidhehadraised thefirstquestion sincetherewasaninterpretation
question regarding Article VoftheGATS. Delegations needed toreflect onthisbefore concluding
onconformity. Forexample, the“and/or ”issuecould setaveryimportant precedent forsubsequent
examinations. Hewasmore inclined toagree withtheECinterpretation, butheneeded toreferback
tohiscapital. Hisdelegation didnotobject totheclosing oftheformal setting, butitdidprefer that
there besome occasion fornewissues tobediscussed.
44. TheChairmansaidthatbriefcommentariesonthespecificissuewouldbeincludedintheminutes
ifsubmitted within afewweeks. Asecond possibility wastohavefurther discussions atthenext
meeting, asitwasahorizontal question affecting alltheservices regional trade agreements.
45. Therepresentative oftheUnited States saidthattheinterpretation question seemed toextend
beyond theparticular situation. Thequestions oftheJapanese delegation might notbeofafactual
nature iftheyrelated tointerpretation, sothose issues would seem torelate totheconclusions phase,
when theCommittee would haveample opportunity fordiscussion.
46. Therepresentative ofNorway asked about theprocess forelaboration oftheconclusions of
thereport. TheChairman hadpointed outthattheJapanese question regarding Article V:1wasa
systemic issue. Hisdelegation wasnotsurethatamajor discussion onsystemic issues intheconclusions
partofthereport wasactually warranted. Obviously thediscussion which theCommittee hadhad
would bereflected inthefactual part. Hisdelegation welcomed NAFTA 'soffer toprovide further
statistical information ontradeflows. Heassumed thattheinformation would bemade available before
theCommittee entered intoinformal discussions.
47. TheChairman indicated thathewould conduct informal consultations.
48. TheCommittee tooknoteofallthecomments made.