RESTRICTED
WORLD TRADE WT/REG4/M/3
16April 1997
ORGANIZATION(97-1637)
Committee onRegional Trade Agreements
Fifth Session
EXAMINATION OFTHE NORTH AMERICAN FREE TRADE AGREEMENT
NOTE ONTHE MEETING OF10OCTOBER 19961
Chairman: H.E. Mr.Lode Willems (Belgium)
1. TheCommitteeonRegionalTradeAgreementscontinueditsexaminationoftheNorthAmerican
FreeTrade Agreement (NAFTA) under Agenda itemB.IofitsFifth Session.
Investment, Services andRelated Aspects oftheNAFTA
2. Therepresentative ofMexico, speaking onbehalf oftheNAFTA Parties, saidthattheNAFTA
wasaground-breakingagreementinitscoverageofinvestmentandservices.Theservicesandinvestment
provisions werefirmly based ontheprinciples ofmost-favoured-nation (MFN) andnational treatment,
supplemented bytheprohibition oflocalpresence requirements, inthecaseofcross-border services,
andbytheelimination ofperformance requirements, inthecaseofcommercial presence. Itwashis
delegation'sviewthattheNAFTAfullymettherequirementsofsubstantialsectoralcoverageasstipulated
inGATS Article V:1(a). TheNAFTA covered allfourGATS modes ofdelivery, andallservices
sectors werecovered, except forasmall number ofspecifically excluded sectors. TheNAFTA services
disciplines alsoformed partofawider framework ofeconomic integration, asdefined inGATS
Article V:2.
3. Therepresentative ofSwitzerland saidthatitwasaserious problem thatthereplies hadbeen
provided lateandthattheyexisted inEnglish only. Hisdelegation thuscould notparticipate asactively
asitwould haveliked.
4. Therepresentative oftheEuropean Communities saidthatitwasdifficult toquantify trade
inservices. Theconclusions about NAFTA 'scompatibility withtheGATS should thusbedrawn by
aqualitative, global approach. TheNAFTA hadcomplex andsubtle provisions inrelation toinvestment
andservices,and,forlegitimatereasonswhichwerenotchallenged,theNAFTAapproachwassomewhat
different from thelogic oftheGATS text. However, these differences inapproach made theglobal
review difficult.
5. Therepresentative ofMexico saidthatmany questions hadbeensubmitted afterthedeadline
forwritten questions. Thekeyquestion posed bytherepresentative oftheECwasthecompatibility
oftheNAFTA withGATS Article V.During theNAFTA negotiations, themain concern hadbeen
toascertain thattheAgreement would becompatible withGATS Article V.Regarding themodes
ofsupply, theModes 1and2hadbeenincluded inChapter Twelve oftheNAFTA (Cross-Border Trade
inServices), which included suchelements asproduction, distribution, marketing, sales, delivery,
purchase oruseofaservice, payment foraservice, andaccess toanduseofthetransportation system.
1Themeeting wasconvened inAirgram WTO/AIR/434.WT/REG4/M/3
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TheNAFTAincludednotonlymatterssuchasnationaltreatmentandMFNtreatment,butalsosomething
absent from themajority ofother international instruments: aprohibition against local presence
requirements. What inGATS wasreferred toasmarket access hadbeenincluded under national
treatment intheNAFTA. Thefundamental principles forcross-border services hadthusbeenincluded.
Mode 3,commercial presence, could befound inNAFTA Chapter Eleven, where thedefinition of
investment wentfurther thantheGATS definition. Chapter Eleven alsoreferred toMFN andnational
treatment. TheAgreement alsoeliminated alltypes ofperformance requirements, limited nationality
orpermanent residence requirements tothelevelofsenior management andboards ofdirectors, and
contained strict disciplines onthetransfer ofcapital andexpropriation. Anentire section dealtwith
dispute settlement, notonlybetween governments butalsobetween private entities andagovernment.
GATS rulesontheuseofandaccess totelecommunications transport networks weretreated inNAFTA
Chapter Thirteen. However, theNAFTA went further thantheGATS because there wasanentire
section which referred totheprovision ofvalue-added services andbecause theNAFTA hadstandards
disciplines fortelecommunications. Other elements which alsowentbeyond theGATS were intra-
enterprise communications andaccess toanduseofpublic telecommunications transport networks and
services based oneconomic costs. Chapter Fourteen oftheNAFTA (Financial Services) alsoreferred
tosuchnon-discriminatorydisciplinesastherightofestablishment,cross-bordertrade,MFNandnational
treatment. Thecommitments made wentfurther thanthose intheGATS. Finally, Chapter Sixteen
included temporary entryforbusiness persons, which related toMode 4.Inorder tofacilitate temporary
entry forbusiness persons among thethreecountries, fourcategories hadbeenestablished, which were:
business visitors, traders andinvestors, transferees within companies, andprofessionals.
Chapter Sixteen 'scoverage ofprofessionals wascomprehensive.
6. Therepresentative ofMexico continued, saying theNAFTA coverage wasalmost universal.
There were some exceptions forcertain services involving airtransport. Asinthecaseofbasic
telecommunications, thethree NAFTA Parties hadagreed tocarry outthese negotiations within the
GATS negotiations. Apart from these exceptions, thecommitments were universal. TheNAFTA
wascompletely transparent, asthenegative listsusedforallsectors made iteasytoseewhere
commitments werelimited. Those limited commitments werefewifcompared withthethreeNAFTA
Parties 'individual industrial classifications, orifcompared with theclassifications found in
document MTN/GNS/W/120. TheNAFTA alsocontained whatwascalled the"ratchet clause": if
acountry unilaterally opened up,thatopening wasimmediately bound. Thatledtoaconstant opening
withcontinuous bindings invarious sectors. Hereiterated thattherewerefewreservations within the
services sectors oftheNAFTA, butagreed withtheECrepresentative thatthequantification oftrade
inservices between thethree countries wascomplicated.
7. Therepresentative oftheEuropean Communities saidthatthereplies provided bytheParties
showed thattheNAFTA contained substantial sectoral coverage. However, regarding thereply to
question 1indocument WT/REG4/1/Add.2, itseemed thesectoral aspect should beanalyzed from
aqualitative point ofview. Hedisagreed toanextent withthecontention thatthere wasdefacto
coverage forcertain services sectors. There wasaminor difference ofinterpretation regarding whether
maritime services wascovered bytheGATS disciplines. Hisdelegation insisted thatthemaritime
sector wascovered from alegalpoint ofview, although theUnited States hadclaimed thatthelegal
coverage didnotmake sense iftherewerenospecific commitments. Itwastheviewofhisdelegation
thattheCommittee should lookatdefacto liberalization effects forthesectors covered. Thereply
given toquestion 1asserted thatMode 2wasincluded inthedefinitions ofChapter Twelve, butthis
chapter didnotapply toallsectors andtoallmeasures. Certain measures taken bylocalgovernments
wereexempted fromthese provisions, andfinancial services werenotcovered. Mode 3services were
covered inChapter Eleven (Investment). Thequestion waswhether thisentailed substantial coverage.
Thereply referred toChapter Fourteen andstated thatthesubstantive commitments oftheNAFTA
Parties metorexceeded theirGATS commitments. Hisdelegation wastrying toverify thisclaim.
Itwasalsoworth noting thatthisassertion wasnotmade inreplies relating toChapters Eleven, TwelveWT/REG4/M/3
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andThirteen. Were theNAFTA Parties prepared todeclare thattheircommitments under thesechapters
alsowere atthesame level orhigher thantheGATS commitments? From adejurepoint ofview,
there seemed tobewidesectoral andmodes ofdelivery coverage; however, hisdelegation wasless
convinced thatthere wassuchahighlevelofcommitments. Oneofthereasons forhisdelegation 's
scepticism wasthepresentation bytherepresentative ofMexico onthenegative approach, which said
thatallserviceswerecoveredexceptwhenexplicitlyexempted,whilemeasuresadoptedatthesub-federal
levelweregrandfathered. Thenegative- listapproach didnotafford thirdparties aclearunderstanding
ofexempted measures interms oftheirextension, theircharacteristics andtheextent ofgrandfathering
formeasures adopted atthesub-federal level. TheNAFTA hadtocomply withGATS Article V:1(b),
which stated thataservices agreement should provide "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." TheNAFTA prohibition ofnewormore
discriminatorymeasureswasclear.However,measurestakenbylocalgovernmentsseemedtobewidely
exempted fromtheNAFTA, sonewmeasures might betaken which would apriori bediscriminatory.
Thequestions relating toparagraph 1(b)(i) referred totheelimination ofexisting measures which had
beengrandfathered. Which measures were these? Were theyoflimited importance? The"and/or"
inthephrase "(i)elimination ofexisting discriminatory measures, and/or (ii)prohibition ofnewor
more discriminatory measures" hadtobeinterpreted inastrict way. The"or"wasapplied onlywhen
existing measures werenotofsignificant impact, orsimply when therewerenopre-existing measures.
Hisdelegation wasnotconvinced thatthesub-federal levelmeasures notlisted intheNAFTA disciplines
were insignificant.
8. Therepresentative ofMexico saidthattheNAFTA sectoral coverage wasuniversal. Ifone
oftheParties hadtaken reservations andexceptions inthefieldofmaritime transport, theother Parties
hadmade specific commitments inthatsector.
9. TherepresentativeoftheEuropeanCommunitiesclarifiedthathedidnotquestionthereservations
inthemaritime transport sector. Hehadonlymentioned themaritime sector asonecaseillustrating
thefactthattheCommittee hadtoexamine defacto coverage.
10. Therepresentative ofMexico saidthattheNAFTA hadbeenestablished withreservations,
which wereextremely fewinnumber. Hecould confirm thatforallothersectors apartfromthefinancial
services sector, andforallmodes ofdelivery, theNAFTA Parties hadgone further thantheir
commitments taken intheGATS. Regarding thegrandfathering ofsub-federal measures, the
representative oftheECwasrighttoindicate thattherehadbeenaconsolidation; ithadbeenofficially
registered, andthe"ratchet clause" hadbeenused. Atthetimeofnegotiation, ithadbeennecessary
togostate-by-state orprovince-by-province inorder toidentify thesub-federal measures. These
measures hadbeeninterchanged between thethreeNAFTA Parties. Themeasures werenotrestrictive
fortradeamong theNAFTA Parties. Thediscriminatory measures which existed atasub-federal level
werelimited innumber andinimportance inrelation tothewhole oftheservices sectors ofthethree
Parties. Defacto coverage wasuniversal.
11. Therepresentative ofNorway saidthathisdelegation, aswell, wasinterested inwhether or
nottheCommittee would beabletoconclude thattheNAFTA metthesubstantial sectoral coverage
requirement. Thefootnote toGATS Article V:1(a) stated that,inorder tomeet thecondition of
substantial sectoral coverage, theagreement should notprovide fortheapriori exclusion ofanymode
ofsupply. Ashisdelegation hadonlyreceived theinformation thatday,itwished tostudy further
whether maritime transport andbasic telecommunications forCanada andtheUnited States, aswell
astheMexican sectors mentioned inthereply toquestion 5,wereconsidered tobeapriori excluded.WT/REG4/M/3
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12. Therepresentative ofVenezuela pointed outthatherdelegation wasparticularly interested in
theresponses provided bytherepresentative ofMexico onthequestion herdelegation hadposed last
year.
13. Therepresentative ofMexico wished tobeclearinhisanswer totherepresentative ofNorway.
Hereadthefootnote ofArticle V:1(a) ofGATS, which stated: "This condition isunderstood interms
ofthenumber ofsectors, volume oftradeaffected andmodes ofsupply. Inorder tomeetthiscondition,
agreements should notprovide fortheapriori exclusion ofanymode ofsupply." TheNAFTA did
notexclude apriori oraposteriori anymode ofsupply. TheNAFTA abided notonlybyGATS
Article V:1(a), including thefootnote, butalsobythetotality ofArticle V.Thefourmodes ofsupply
werecovered inthechapters mentioned, andtherewereelements related tothemodes inother chapters
aswell.
14. Therepresentative oftheEuropean Communities saidthathisdelegation noted thecomments
made bytherepresentative ofMexico concerning the"ratchet" mechanism. Such amechanism was
applicable tomeasures which were nototherwise covered bytheNAFTA, including anumber of
measures atthesub-federal level.
15. Therepresentative ofMexico pointed outthatmeasures atthefederal, state, provincial and
locallevels wereallcovered bythedisciplines oftheNAFTA. According tothe"ratchet" or"zipper"
system, anynew,more restrictive measure applied atanylevelwould beprohibited bytheAgreement
andcould besubject todispute settlement.
16. Therepresentative oftheEuropean Communities saidthatareading oftheNAFTA didnot
necessarily leadtotheconclusion thatallmeasures affecting trade inservices between theNAFTA
Parties would besubject tothis"ratchet" mechanism. Some measures oftheGATS Article XVI
(quantitative restrictions) typewereapparently notcovered bytheNAFTA disciplines. Sub-federal
measures ormeasures under thevarious exception clauses intheNAFTA werealsosources ofconcern.
TherepresentativeofMexicohadtoldtheCommitteethattheNAFTAPartieshadexchangedinformation
onsub-federal measures andhadconcluded thattheywereinsignificant. Would itbepossible forthe
NAFTA Parties toprovide theCommittee withthedocuments which hadledthemtosuchaconclusion?
Regarding thefootnote toArticle V,theCommittee needed tounderstand thevolume oftradeactually
involved. Itwasamatter ofgood faith, asitwasverydifficult tocarry outaglobal quantitative
evaluation. Even ifsuchanevaluation were impossible, itwasstillpossible tocarry outspecific
quantitative evaluations forcertain sectors. IntheUnited States, high-quality statistics onservices
tradeexisted, butthiswasnotthecasethroughout theworld. Itwasthusimportant thattheCommittee
beabletomake aqualitative evaluation based ondefacto coverage -i.e.thetotality ofsectors, the
totality ofmodes ofdelivery andthetotality ofmeasures subject totheNAFTA disciplines. Because
ofthis,hisdelegation hadsubmitted questions 2,3,4,and5.Theanswers, however, were notas
substantial andasspecific ashisdelegation would haveliked.
17. Therepresentative ofNorway saidthattheresponse toquestion 5mentioned thatthemaritime
transport sector andrelated auxiliary services werecurrently excluded from coverage inCanada and
theUnited States. Were there areanyplans tobring theexclusions toanend?Thesame question also
applied tothereservations forother sectors mentioned inthatanswer withrespect toallthree Parties.
18. Therepresentative ofJapan saidthathisdelegation wasdisappointed bytheNAFTA Parties '
latesubmission ofreplies, ashisdelegation 'squestions hadbeensubmitted overayearago. Hehad
listened totheresponse bytheMexican representative regarding substantial sectoral coverage buthad
found theanswer unconvincing. Theanswer toquestion 5indicated thatonlyasmall number ofsectors
wereexcluded. Forexample, theUnited States hadreservations inatomic energy, telecommunications,
airtransportation, customs brokerage atthefederal level, andlicensing ofprofessionals atthesub-federalWT/REG4/M/3
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level. Mexico alsohadreservations intelecommunications. Several major services sectors werethus
excluded. Thismatter should bescrutinized onanongoing basis. Inrelation tothefootnote ofGATS
Article V:1,hewondered whatthevolume oftheexcluded services sectors wasinrelation tothetotal
ofNAFTA services trade. Regarding sub-federal measures, specifically theso-called "grandfathered"
measures, theexplanation given byMexico hadnotprovided clarification. Were the"grandfathered"
measures consistent withGATS Article V:1(b), which stated thatthose kinds ofmeasures should be
eliminated within areasonable time-frame?
19. Therepresentative ofMexico replied that,asfarasreserved services wereconcerned, there
wasamistake inthereply toquestion 5relating toMexico. Mexico infactdidnothavereservations
inmaritime transport andrelated auxiliary services, inrental/leasing oftransport equipment toprovide
busortruck transportation research, orindevelopment services. Replying tothequery ofthe
representative ofNorway concerning question 5,hesaidthatthose sectors insome cases werealready
subject toNAFTA provisions, totheeffect thattherehadbeenpartial liberalization through the"ratchet
clause". Hecalled attention toNAFTA Article 1209procedures, which read: "TheCommission shall
establish procedures for... (b)consultations onreservations, quantitative restrictions orcommitments
withaviewtofurther liberalization."
20. Therepresentative oftheEuropean Communities wished toknow whether there hadbeen
intensive consultations ontheArticle justmentioned. Ifso,hadthoseconsultations resulted inprogress?
21. Therepresentative ofMexico replied thattheFreeTrade Commission oftheNAFTA met
periodically, anditems dealing withfurther liberalization could always befound ontheagenda. Thus
far,nonegotiations hadbeenscheduled toliberalize those fewsectors which hadnotyetbeenliberalized
andwhich weresubject toreservations. Thefundamental pointtobeunderscored wasthattheobjective
wastoreach complete liberalization ofallservices forallmodes ofdelivery. Themajority ofthevolume
oftrade which existed between thethree countries hadbeenliberalized. Therepresentative ofJapan
hadasked about thepercentage oftrade which hadbeenliberalized. Itwasnotpossible toquantify
this,butfortourism, forexample, cross-border trade might be70or80percent. Itwasmore
complicated totrytoestimate thefigures forother sectors.
22. Therepresentative oftheUnited States responded tothepoints made bytherepresentative of
Japan concerning United States 'reservations andthequestion ofwhether theNAFTA hadsubstantial
sectoral coverage. Therepresentative ofJapan hadonlybeenabletolistahandful ofsectors which
werenotcovered, suchasnuclear power. AlookattheSICclassification system thattheUnited States
hadusedinscheduling itsreservations would show thatthereservations werefewandthatthere was
substantial sectoral coverage.
23. TherepresentativeofCanadarespondedtoanearlierquestionfromtherepresentativeofNorway
astowhether Canada andtheUnited States intended toholdnegotiations onmaritime transport. As
noted, theNAFTA Parties deemed itbetter tocarry outnegotiations onmaritime transport andbasic
telecommunications intheon-going services negotiations intheWTO. Ofcourse, itwasstillpossible,
pursuant totheprocedures ofNAFTA Article 1209, fortheParties tonegotiate further liberalization
within theNAFTA.
24. Therepresentative ofMexico replied tothequestion fromtherepresentative ofJapan onwhether
theNAFTA wascompatible withGATS Article V:1(b). TheNAFTA didcomply withthisrequirement
fortheabsence orelimination ofsubstantially alldiscrimination. Asignificant number ofdiscriminatory
measures hadexisted priortotheconclusion oftheNAFTA; these hadbeeneliminated, andtherewas
aprohibition onsetting upnewormore discriminatory measures. Replying tothequestion posed by
therepresentative oftheEC,hesaidthatArticle 1206 oftheNAFTA stated thatprovisions of
Article 1202 (national treatment), Article 1203 (MFN treatment) andArticle 1205 (local presence)WT/REG4/M/3
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didnotapply to"(a)anyexisting non-conforming measure thatismaintained by(i)apartyatthefederal
level, assetoutinitsSchedule toAnnex 1,(ii)aState orprovince, fortwoyears afterthedateof
entry intoforce ofthisAgreement, andthereafter assetoutbyaparty initsSchedule ...or (iii)a
localgovernment." Paragraph 1206(c)stated thatArticles 1202, 1203and1205didnotapply to"an
amendment toanynon-conforming measure referred toinsub-paragraph (a),totheextent thatthe
amendment doesnotdecrease theconformity ofthemeasure, asitexisted immediately before the
amendment, withArticles 1202, 1203and1205." Thisreferred tothefederal level, butthediscussion
hadfocused onthesub-federal level. Similar provisions were found inNAFTA Article 1108 with
respect toMode 3.There was"ratcheting" atboththefederal andthesub-federal level. Itwasthus
forbidden fortheParties tosetupmore restrictive measures.
25. Therepresentative oftheEuropean Communities noted thatthere alsowere sub-federal
discriminatory measures concerning taxes orgovernment procurement. These would notbecovered
byNAFTA Article 1206, forexample. Even ifsubsidies andgovernment procurement werenotunder
theGATS, assuch, theGATS didmention discriminatory measures without specifying thatthese
measures must fallunder theGATS atthisstage ofitsdevelopment.
26. Therepresentative ofMexico saidthatGATS Article V:1(b) referred to"alldiscrimination,
inthesense ofArticle XVII..." With respect tobothArticle XVII requirements andgovernment
procurement, theNAFTA provided widecoverage forgoods aswellasservices, withreduced thresholds
andfewexceptions. Forsome elements, suchassmall enterprises, government procurement coverage
washigh. ItwastruethattheNAFTA disciplines onfiscal measures were somewhat more relaxed
thanthoseoftheGATS;however,becausetheNAFTAcontainedveryfewexceptions,itwasnotpossible
tosaythatthere wassignificant discrimination atthesub-federal levelfromthefiscal point ofview.
Thediscrimination wasusedtomake upfordifferences between external andinternal providers, but
onthewhole there wasnational treatment forfiscal measures.
27. TherepresentativeoftheEuropeanCommunitiesnotedthattherepresentativeofMexicoseemed
torecognize thattheNAFTA disciplines were weaker thanthose intheGATS. Didthatstatement
constitute theNAFTA Parties 'reply toquestion 6,which waspending?
28. Therepresentative ofMexico replied thattheanswer wasstillpending andthatitwould be
provided laterthatsame day.
29. Therepresentative ofSwitzerland sought clarification concerning theNAFTA Parties 'response
toquestion 20.Thelastsentence stated that"aParty maydeny thebenefits tonon-Party investors
ifsuchinvestors 'enterprise hasnosubstantial business activities intheterritory oftheParty under
whose lawitisconstituted ororganized." Could theconcept of"nosubstantial business" beclarified?
Acompany wanting toenteranewmarket didnothavealargemarket share there; itshould bepossible
forasupplier toenterthatmarket evenwhen itwould notattheoutset havesubstantial business activities
there.
30. Therepresentative oftheUnited States saidthat,astheNAFTA itself contained noprecise
definition of"substantial business activity", theissue hadtobedealt withonacase-by-case basis.
Onepurpose ofthiswastoavoid having "shell companies" takeadvantage oftheNAFTA provisions.
Ashadalsobeennoted intheresponse, thetermwassomewhat comparable tothedefinition contained
intheGATS concerning substantive activity.
31. TheChairman called attention tothereply toquestion 46,which followed similar logic.WT/REG4/M/3
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32. Therepresentative oftheEuropean Communities saidthathisdelegation wished toreceive
responses tothequestions concerning thetreatment granted tooperators orcompanies which were
established inoneoftheNAFTA countries, butheadquartered outside theNAFTA territories.
33. Therepresentative ofSwitzerland saidthatquestion 26referred toArticle 1108.7. Her
delegation wasseeking anestimate ofthevolume ofpublic investment, butnodirect answer hadyet
beenprovided. Could theNAFTA Parties bemore specific?
34. Therepresentative oftheUnited States responded tothequestion fromtheEC,explaining that
Chapter Eleven defined theterm"investor ofaparty" toencompass notonlyfirms which included
branches established inaNAFTA country without distinction astonationality ofownership, butalso
NAFTA country nationals. With respect tothequestion posed bytherepresentative ofSwitzerland,
hesaidthattheUnited States hadveryfewsubsidies orgrants thatmight beinconsistent with
Article 1102or1103. Information wascontained inanOECD document fortheUnited States, entitled
"Reviews ofForeign Direct Investment," which hadbeenpublished inApril 1995. Inaddition, specific
information onstatesubsidies andgrants wasavailable inadocument entitled "Directory ofIncentives
forBusiness Investment andDevelopment intheUnited States," published byanagency inthe
United States called the"National Association ofStateDevelopment Agencies." Hisdelegation could
certainly undertake toprovide boththese documents ifthere wasinterest.
35. Therepresentative ofCanada saidthat,inhiscountry, hewasnotaware ofanydocument
containingspecificinformationonpublicinvestmentgrantsandsubsidies,otherthanthepublicaccounts.
Anydelegation wishing todosocould lookinthepublic accounts oftheGovernment ofCanada and
thevarious provinces todetermine whatthepublic investments were.
36. Therepresentative ofMexico added thatpublic investment inMexico represented lessthan
10percentoftotalinvestment. Subsidies andgrants relating toArticle 1108.7 wereextremely reduced
innumber andvolume. Unfortunately, hedidnothaveathand adocument providing thespecific
figures forsubsidies andgrants.
37. Therepresentative ofSwitzerland saidthathisdelegation would welcome thedocuments
mentioned bytherepresentative oftheUnited States.
38. Inrelation totheclarification provided bytherepresentative oftheUnited States, the
representative oftheEuropean Communities saidthattherewasatleastonecasewhen national treatment
wasnotaccorded toanundertaking whose capital didnotoriginate within theNAFTA territories.
Thishadalsobeenrecognized intheNAFTA Parties 'answer toquestion 44,which seemed tosay
thatthesubstantive business operation testwasapplied inadiscriminatory way,asitapplied onlyto
those companies whose capital didnotoriginate inaNAFTA country. Hisdelegation hadaninterest
inensuring thatforeign-owned firms received national treatment.
39. Therepresentative ofJapan saidthatinhislastintervention hehadasked forfigures ofexcluded
sub-sectors, andthattheanswer hadbeenthatnoconcrete figures wereavailable atthistime. Could
theNAFTA delegations provide statistics atalaterstage? Healsohadaspecific question ondenial
ofbenefits, which concerned Chapter Eleven andespecially NAFTA Article 1113.1(b), quoted inthe
second paragraph oftheanswer toquestion 6.TheArticle stated thataParty could denythebenefits
ofChapter Eleven "toaninvestor ofanother Party thatisanenterprise ofsuchParty andtoinvestments
ofsuchinvestor ifinvestors ofanon-Party ownorcontrol theenterprise andthedenying Party... adopts
ormaintains measures withrespect tothenon-Party thatprohibit transactions withtheenterprise or
thatwould beviolated orcircumvented ifthebenefits of[Chapter Eleven] wereaccorded totheenterprise
ortoitsinvestments." What would "prohibited transactions" entail? Would theybeusedwhen anWT/REG4/M/3
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enterprise 'sactivities wereinconsistent withtheParty'sdomestic law?Didthese prohibitions inany
waydamage theinterests ofother WTO Members?
40. Therepresentative oftheUnited States wasnotsurethatthequestions posed were relevant
tothediscussions, whose purpose wastoexamine theconsistency oftheAgreement withGATS
Article V.Thepurpose oftheNAFTA wastoprovide preferences among thethree Parties, aslong
asthepreferences wereconsistent withtheprovisions inArticle V.TheAgreement happened tobe
drafted insuchawaythatnon-Parties alsocould make useofitsbenefits, butthere wasnothing that
obliged theParties totheAgreement toextend thepreferences tothirdcountries.
41. Therepresentative oftheEuropean Communities saidthattheresponse bytheUnited States
representative wasjustified inprinciple, butthequestion entailed looking athowtherecould beamargin
ofpreference suchthattheNAFTA Agreement would beinconformity withArticle V.Thequestion
ofthemargin ofpreference hadbeenthesubject ofanumber ofquestions, buttheanswers hadbeen
disappointing. While hisdelegation wasnotconvinced oftheexistence ofarealmargin ofpreference,
itnonetheless waswarythatsome NAFTA benefits, which should beopentoenterprises ofnon-Parties
thatwere locally established according toGATS Article V:6,would defacto notbeavailable. This
wasofconcern, particularly inthefieldoffinancial services, tothird-party enterprises established in
theUnited States orinCanada. National treatment forUnited States branches ofEuropean firms
apparently wasnotguaranteed. Hereferred backtoquestion 23,which heunderstood tobeaquestion
concerning sub-federal measures. Theanswer didnotstipulate whether, atthesub-federal level, there
wasa"ratchet" discipline, andifso,whether thesame conditions applied toallenterprises present
inthemarkets oftheNAFTA countries, regardless oftheirownership.
42. Therepresentative oftheUnited States replied thattheNAFTA wasdrafted sothatinvirtually
allcircumstances, except those inwhich thecompany clearly appeared tobetrying tobenefit from
theAgreement without actually conducting business inNorth America, thebenefits ofChapter Eleven
applied without distinction astothenationality oftheinvestor. The"ratcheting" applied togovernmental
measures, anditsbenefits applied toinvestors andinvestments inNorth America, regardless ofthe
nationality ofthose investments orinvestors.
43. Therepresentative oftheEuropean Communities saidthatthere wasagapbetween the
straightforward answer given fromtherepresentative oftheUnited States andtheindications received
through other channels. Afinancial service enterprise established intheUnited States asabranch
ofaEuropean company andcomprised ofmostly European capital would notbetreated inthesame
wayintheCanadian orMexican markets asitsUnited States 'equivalent owned byaUnited States
company.
44. Therepresentative ofMexico replied thatthere wasnodiscrimination inrelation tosuppliers
offinancial services established intheUnited States whowished tosetupabranch intheMexican
market. About halfofthebanks established inMexico through theNAFTA mechanism were of
European origin. Theonlydifference wastheNAFTA quotas fortheentry offoreign banks inMexico.
Suchquotas would beterminated intheyear2000. Annex 1ofdocument WT/REG4/Add.1 showed
thequota which stillexisted intheMexican market.
45. Therepresentative ofCanada saidthatthere hadbeensome confusion, astheNAFTA Parties
hadbeendirecting responses toquestions onChapter Eleven, which concerned investment, andnot
specifically toquestions onChapter Fourteen, which dealtwithfinancial services. Theresponse given
bytherepresentative oftheUnited States wascorrect withrespect tothegeneral principles of
Chapter Eleven. Regarding banking inCanada, therewasadistinction withrespect tothesub-branching
regime:foreignbanks'subsidiariescontrolledbynon-NAFTAresidentswererequiredtoseekMinisterial
approval priortoopening newbranches, whereas those controlled byNAFTA residents wereexemptedWT/REG4/M/3
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from thisprocess. Inpractice, thishadproved tobeonlyaminor difference, since allrequests put
forward bynon-NAFTA residents hadinfactbeenapproved.
46. Therepresentative oftheUnited States suggested thattheECrepresentative lookatthefirst
paragraph ofthereply tothequestion onChapter Twenty, which stated inwriting whatessentially
hadbeennoted earlier inrelation toChapter Eleven.
47. Therepresentative oftheEuropean Communities recalled thatithadbeenunderstood from
theoutset thatitwould beimpossible tomake aquantitative evaluation, andthattheprocess therefore
hadtobeaqualitative andglobal evaluation. Hisdelegation wished toavoid procedural, tactical
manoeuvres which would cling toquantitative elements thattheNAFTA Parties would beunable to
substantiate. Hewasdisappointed bytheresponse oftherepresentative oftheUnited States tothe
effect thatananswer wasgood inthecontext ofChapters Eleven orTwenty, butnotinthesense of
Chapter Fourteen.
48. Therepresentative oftheUnited States saidthatitwashisimpression thattheCommittee had
beenconcentrating onChapter Eleven. TheNAFTA Parties hadnotintended togivemisleading
responses, andtheywere certainly willing tocome back tothequestion during theCommittee 's
examination ofChapter Fourteen (Financial Services).
49. Therepresentative ofCanada added thatChapter Eleven specifically didnotcover financial
measures. Again, Chapter Eleven didnotapply tomeasures maintained byaParty, totheextent that
those measures were covered byChapter Fourteen.
50. Therepresentative oftheEuropean Communities clarified thathisdelegation wished toexamine
theAgreement inageneral way. TheNAFTA wasatechnical andextremely complex Agreement,
andtheCommittee wastrying tohaveaglobal viewofitinorder tomake abalanced evaluation of
itsprovisions. Some flexibility intheprocedure wasnecessary. Itwasnotpossible toexamine each
provision independently oftheother provisions oftheAgreement. TheAgreement hadtobeexamined
asawhole, inallitsdetails, asevery partwasinterconnected.
51. Turning tocross-border services, therepresentative oftheEuropean Communities saidthat
hisdelegation found thatthecommitments taken bytheNAFTA Parties werenotverysubstantial in
terms oftheGATS. Anumber ofquestions hadbeenposed, buttheresponses hadnotbeenadequately
specific. Thesubstantiality ofcommitments taken wasdifficult tounderstand merely bylooking at
theschedules oftheNAFTA Parties.
52. Therepresentative ofCanada responded tothegeneral comment made bytherepresentative
oftheEC.There wassuchafundamental difference between thestructure oftheGATS andthestructure
oftheNAFTA thatitmight bedifficult tounderstand theNAFTA Parties 'commitment toliberalization
oftrade inservices. IntheGATS, acountry hadtoschedule aspecific commitment ifitintended to
liberalize, andtheschedules totheGATS therefore contained listings ofvarious specific sectors and
specificcommitments.TheNAFTAtookacompletelydifferentapproach,coveringallmodesofdelivery
relating totradeinservices, except asprovided forinthereservations. Rather thanlisteachandevery
sector, theNAFTA listed onlythose fewareas inwhich therewereexceptions tothegeneral principle
ofliberalization. Withrespect tobothChapter Eleven (Investment) andChapter Twelve (Cross-Border
TradeinServices),theNAFTAPartieshadscheduledtheirreservationsintheAnnexestotheAgreement.
Intheview oftheNAFTA Parties, these reservations were relatively minor. TheNAFTA Parties
were willing torespond toanyspecific questions about anyofthepoints listed intheAnnexes.
53. Therepresentative oftheEuropean Communities indicated thathisdelegation wasdisappointed
withthereplies toquestions 2,3,4and5.WT/REG4/M/3
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54. Therepresentative ofCanada reiterated thattheNAFTA covered allsectors andallmeasures
except forthespecific measures listed intheAnnexes.
55. Therepresentative oftheEuropean Communities wondered whether itwould bepossible for
theNAFTA Parties togiveillustrative examples thatwould address theconcerns behind questions 2,
3and4.
56. Therepresentative ofJapan hadaquestion relating tothethird paragraph oftheanswer to
question 14.DidanyNAFTA Party haveaninternational agreement withanon-Party thatincluded
aprovision stating thattheNAFTA provisions were superior tothose ofthatspecific international
agreement? Regarding thegrandfathered sub-federal measures, hewasnotconvinced oftheconsistency
ofnon-conforming measures withGATS Article V:1(b). Wasthere anyphase-out planforthenon-
conformingmeasureswhichweregrandfathered?Hewishedtonotethathisdelegation'spreviousquestion
onprohibited transactions wasdirectly related tothequestion ofwhether theprovision nullified or
impaired thebenefits ofother WTO Members.
57. Therepresentative ofMexico saidthattheagreements therepresentative ofJapan hadreferred
towere apparently bilateral agreements. Each ofthem hadtobelooked atwithgreat specificity to
seewhich sectors theycovered, soitwasdifficult togiveageneral reply. Asconcerned sub-federal
measures notinconformity withtheprinciples oftheNAFTA, therehadbeenabinding ofthese state,
provincial, municipal orcantonal measures. These measures were subject tothe"ratchet clause".
Inother words, ifoneofthethreecountries liberalized anymeasure, therewasnopossibility ofmaking
itmore restrictive later. Itwasliberalized atthelevelatwhich ithadbeenopened unilaterally. The
NAFTA provided thattheParties could carry outnewnegotiations, withthefinalaimoffulland
complete liberalization ofthefewrestrictive measures which remained among them.
58. Inreply tothequestion posed bytheJapanese representative, therepresentative ofthe
United States saidthatArticle 1113(Denial ofBenefits) hadtwopurposes. First, itattempted toensure
thatso-called "shell" companies didnottakeadvantage ofNAFTA benefits. Second, itpreserved the
foreign policy prerogative ofeachgovernment todenybenefits tofirms thatwereowned orcontrolled
bynationals ofanon-NAFTA country which didnothavediplomatic relations withtheNAFTA Party
orwhich wasthesubject ofeconomic sanctions byaNAFTA Party.
59. TherepresentativeoftheEuropeanCommunitiesrevertedtoquestion29,notingthattheNAFTA
Parties could haveprovided abetter reply. Hisdelegation hadtriedtoverify thattheNAFTA did
notimply anobligation concerning quantitative restrictions. Thereply didnotseem tocontradict that
assessment. Wasitthuscorrect tosaythattheNAFTA included nomeasure thatconcerned non-
discriminatory quantitative restrictions?
60. Therepresentative ofCanada replied that,asindicated inthereply, quantitative restrictions
were defined interms ofnon-discrimination. IntheNAFTA Parties 'view, quantitative restrictions
thatwere notdiscriminatory were innosense aviolation ofnational treatment provisions.
61. Therepresentative oftheEuropean Communities saidthatArticle VoftheGATS stated that
agreements were compatible aslongastheyfacilitated trade; itmade noreference toArticle XVI,
i.e.market access. Nevertheless, thelogicwasthataregional tradeagreement should facilitate trade.
IftheNAFTA didnotmention non-discriminatory quantitative restrictions, aParty totheNAFTA
mightdecidetoimposenon-discriminatoryquantitativerestrictions,closingalltradebetweenoneNAFTA
Party andanother; insuchacasetherewould benoviolation oftheNAFTA, buttheAgreement would
nolonger fulfil GATS Article V.Itwasimportant toknow whether ornotthere wasadiscipline
concerning non-discriminatory quantitative restrictions. Ifnot,were suchprovisions going tobe
negotiated within areasonable time-frame?WT/REG4/M/3
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62. Therepresentative ofMexico saidthat,when therewasadiscriminatory quantitative restriction,
itfellunder thenational treatment obligation. There wasthusnopossibility fortheNAFTA Parties
tobreak upthetrilateral Agreement through discriminatory quantitative restrictions. Further, Article V
oftheGATS treated theabsence orelimination ofsubstantially alldiscrimination inthesense of
Article XVII, i.e.national treatment. Regarding Article XVII, everything thatwasdiscriminatory
wassubject totheprinciple ofnational treatment. Therefore, itwasnotpossible fortrade among the
NAFTA Parties tobeaffected through theimposition ofquantitative restrictions. Furthermore, with
respect toArticle 1208oftheNAFTA, theParties wereobliged tocarry outnegotiations onquantitative
restrictions. Hereferred toAnnex 6,whose corollary intheGATS was"additional commitments".
When there wasaquantitative restriction which wasnotdiscriminatory, eliminating itamounted to
anadditionalcommitment.InthecaseofMexico,forexample,quantitativerestrictionsforentertainment
services hadbeeneliminated, which allowed theParties tobenefit fromtheMexican market forfilms
andcinema. Through anadditional commitment, Mexico hadalsoliberalized tradeinbuses andtrucks.
TheNAFTA Parties werenotdiscriminating between foreign anddomestic suppliers. Thefocus of
theGATS andtheNAFTA differed somewhat, buttherewerehistorical reasons forthat.Negotiations
hadbeencarried outinparallel, butsome hadfinished before others. GATS Articles XVIandXVII
were some ofthelastGATS provisions tobenegotiated.
63. Therepresentative oftheEuropean Communities found theexample ofroadtransport services
appropriate inrelation toquestion 31ofdocument WT/REG4/1/Add.2, which referred toatypeof
non-discriminatory quantitative restriction. Itcontained anillustration ofasituation where oneofthe
NAFTA Parties might adopt anon-discriminatory quantitative restriction which could indirectly affect
thecompatibility ofthemeasure, andbyextension thecompatibility oftheNAFTA, withGATS
Article V:6. Thefirstpartofthequestion hadbeendirected toward allNAFTA Parties, buttheanswer
wasfrom theCanadian point ofviewonly. Hisdelegation wished toreceive areply from Mexico
andtheUnited States. Thequestion illustrated theconcern behind hisprevious query.
64. Therepresentative ofMexico saidthat,inthecaseofMexico, there were noquantitative
restrictions inthefieldofroadtransport. Mexico hadfollowed theprocedure ofthenegative listin
thatcase. Concerning thequestion onquantitative restrictions, aquantitative restriction would be
established inthesamewayforbothnationals andforeigners. However, thetendency fortheNAFTA
Parties wastotrytoeliminate quantitative restrictions.
65. Therepresentative oftheUnited States tookupthequery regarding thereply toquestion 31,
concerning transport services. IntheUnited States, therewasafederal safety testforoperating licences
fortrucking ininter-state orforeign commerce. Fortrucking operations thattookplace within asingle
state, asof1January 1995 itwasthestategovernment thatawarded operating licences. Thefederal
lawprohibited stateorlocalgovernments fromregulating prices, routes orservices ofanymotor carrier.
Stategovernments could consider safety issues onlywhen awarding operating licences forinter-state
operations. Vehicles wereregistered atthestatelevel. There werenoeconomic, public convenience
ornecessity testsapplied totheawarding ofvehicle registration. Fortransport vehicles tooperate
inmore thanonestate, thevehicle hadtoberegistered ineachrelevant state. However, mechanisms
forreciprocity ofregistration between states didexist.
66. Therepresentative oftheEuropean Communities wished toreceive clarification inrelation
tothereplytoquestion 58,which stated: "InU.S. practice, thereisnodistinction between thetreatment
accorded toaNAFTA country andanon-NAFTA country withrespect tobanking." What wasmeant
by"U.S. practice", andwhat would bethesituation forfinancial institutions other thanbanking
institutions? Wasthere adifference between thedefacto practice andtheregulatory framework? If
itwasamatter ofpractice, there wasnolegalsecurity forthirdparties.WT/REG4/M/3
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67. Therepresentative oftheUnited States saidhewould seekaresponse from hiscapital. He
added, however, thatthequestion didnotseem torelate totheday'sexamination andsuggested that
thequestion might better beaddressed inabilateral setting.
68. Therepresentative oftheEuropean Communities saidtheissue wasofrelevance toGATS
Article V:6.Hethensaidthathisdelegation wasconcerned overtheinteraction ofthedispute settlement
mechanisms oftheNAFTA andtheWTO. What wastheunderlying philosophy oftheNAFTA
provisions? Hisdelegation wasalsoconcerned withtheNAFTA provision which stated thatwhen
aParty didnotfulfil aprovision, instead ofusing dispute settlement, thefrustrated Party could take
amirror-image counter measure. Itwasdifficult tounderstand howtheNAFTA mechanism ofalegally
binding standstill wasnotsubject tothedispute settlement mechanism.
69. Therepresentative ofMexico saidthatthemechanism inquestion wasnotastandstill, but
rather arollback mechanism. Forexample, theNAFTA provided fortheliberalization ofnationality
requirementsandpermanentresidencerequirements;ifaPartydidnoteliminateacitizenshiprequirement
forprofessionals, another Party could resume itsapplication ofthecitizenship requirement atwhatever
level itwasapplied bytheParty whorefused toeliminate itsrequirement. IfanyParty wished to
reimpose acitizenship requirement, theotherParties hadrecourse tothedispute settlement mechanism.
Itwasnotamatter ofsolving disputes; rather, itwasamatter ofliberalization.
70. Therepresentative oftheEuropean Communities saidthat,ifinformation onthenationality
andresidency requirements andthemechanisms foreliminating them weremade available, itwould
helptheassessment ofeffective economic integration, particularly national treatment accorded to
individuals. Implementation meant thecomplete elimination ofnationality requirements, atleastfor
nationals oftheNAFTA countries. Hisconcern wasthattheelimination oftheserequirements seemed
reversible. Ifthere were aninconsistency onthepartofoneoftheParties, theaffected Party had
recourse toacounter measure; thiscould trigger aprocess ofre-nationalization. Healsowished to
learn whether theelimination ofresidency requirements would apply across theboard, orexclusively
tothose withrespect toNAFTA nationals.
71. Therepresentative ofMexico saidthat,inaccordance withArticle 1210, theNAFTA Parties
would consult among themselves periodically, withaviewtopossibly eliminating remaining citizenship
andresidency requirements forlicences orcertificates forservice providers. Thisconcerned notjust
professional service providers, butallservice providers. Hereferred toAnnex 1,where reservations
oncitizenshiprequirementsforNAFTAPartieswerelisted,andsaidthatliberalizationwasnotreversible.
There would beaprocess towards onlygreater liberalization intheareas ofcitizenship andpermanent
residency requirements. Inthecaseofcitizenship requirements, inMexico aperson wasrequired to
havealegal domicile sothatheorshecould becontacted, buthedidnotneedtohavepermanent
residency. However, nolegalsecurity could begiven thattheopening would extend tothirdcountries.
72. Therepresentative oftheEuropean Communities saidthattheexplanation wasuseful, ashe
nowunderstood thatNAFTA Article 1210.3 wasapplicable onlyinrelation tothecitizenship and
residency requirements setoutintheschedules. Thescheduling ofaphase-out oftherequirements
waswhatthirdparties viewed asmostdamaging totrade. What wastherelative economic importance
ofthenationality andresidency requirements scheduled forelimination, ascompared totheeconomic
importance ofthose requirements notscheduled butdesignated asareasforconsultation? Itwasdifficult
fornon-NAFTA countries toassess therelative balance between Annex 1requirements andparagraph 4
requirements.
73. Therepresentative ofMexico saidthatifoneParty didnothaveareservation listed inAnnex 1,
itcould notenact thenationality requirements. Inother words, ifaParty hadnotsoenshrined the
requirements ofnationality orpermanent residence, ithadtoextend national treatment. ThematterWT/REG4/M/3
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hadbeensettled through thenegative list.Ifarequirement wasnotplaced there, national treatment
wastobegranted. Some reciprocal recognition ofqualifications, degrees andcertificates existed, and
greater reciprocity wasbeing negotiated. Thishadalargeeconomic impact ontheprofessional services
sector.
74. Therepresentative oftheEuropean Communities saidthatitwasdifficult tobelieve thatthe
sub-federal measures wereunimportant. Hisdelegation wasstillseeking clarification fromtheNAFTA
Parties ofcertain sub-federal measures inthefiscal domain.
75. Therepresentative ofMexico saidthat,since allthree NAFTA Parties hadfederal systems
ofgovernment, oneofthemain concerns during theNAFTA negotiations hadbeenthequestion of
stateorprovince-level measures. Thenumber ofprofessions subject tocitizenship andpermanent
residency requirements werefew,andthesector ofprofessional services wastheonewhere tradewas
expected togrow most quickly.
76. Therepresentative oftheEuropean Communities agreed withtheMexican representative as
totheimportance ofprofessional services. However, hecontended thatitnotonlywasadomain difficult
toliberalize within atreaty, butalsowasthetypeofactivity regarding which anyinternal liberalization
hadfewspillover effects formarket access fornon-Parties. Hisdelegation preferred liberalization
tobebalanced along thefullrange ofprofessional services, sothatservices could beopened
internationally inanacross-the-board fashion.
77. TheChairman saidthattheCommittee might needtowork some more ontheservices aspects
oftheNAFTA andthatdelegations could stillsubmit written questions.
78. TheCommittee tooknoteofthecomments made.