PDPRIETI Policy Discussion Paper Series 14-P-023

Services Negotiation and Plurilateral Agreements:
TISA and sectoral approach

NAKATOMI Michitaka
RIETI

The Research Institute of Economy, Trade and Industry

http://www.rieti.go.jp/en/

RIETI Policy Discussion Paper Series 14-P-023
September 2014

Services Negotiation and Plurilateral Agreement: TISA and sectoral approach1
NAKATOMI Michitaka
Research Institute of Economy, Trade and Industry
Abstract
1

The World Trade Organization (WTO) General Agreement on Trade in Services (GATS) negotiation
has not resulted in any major achievements since the Telecommunication and Financial Services
Agreements concluded in 1997 due to a lack of momentum in the Doha Round, concerns aboutfree-riding, and free trade agreement (FTA) competition. In the stalemate in the Round, TISA, together
with FTAs, have been promoted as a strong tool for liberalization and rulemaking in services.

2

Trade in Services Agreement (TISA) is a plurilateral initiative among like-minded countries aiming athigh level liberalization and rulemaking in services. Japan needs to be involved fully in it since thisframework has the potential to form global rules directly, create new business opportunities for Japan,
and serve as a leverage in individual FTAs to protect Japanese interests.

3

Although the legal structure of TISA is to be discussed, defining TISA as an FTA is problematic since
it may lead to an arbitrary interpretation of Article 5 of GATS, furthermore, the scenario for
globalizing it involving developing members is not clear, economic welfare problem exists, and it does
not match the horizontal nature of services regulations. In light of global rulemaking, TISA should be
developed based on the idea of participation of members forming critical mass and the extension of
benefits of the agreement to non-participants on a most-favored nation (MFN) basis.

4

Sectoral agreement as exemplified in the Telecommunication and Financial Services Agreements is a
useful tool to develop GATS that is capable of incorporating the characteristics of various sectors.
Sectoral approach should be developed in TISA aiming at global rules. Japan is encouraged to tablesectoral proposals actively in such areas as retail and distribution, manufacturing related services,
culture related services, environment related services, and cross border data flows in TISA.

Keywords: Service, GATS, TISA, Plurilateral agreement, FTA, Sector
JEL classification: F130
RIETI Policy Discussion Papers Series is created as part of RIETI research and aims to contribute to policy
discussions in a timely fashion. The views expressed in these papers are solely those of the author(s), andneither represent those of the organization to which the author(s) belong(s) nor the Research Institute of
Economy, Trade and Industry.

1

This study is conducted as a part of the Project “Pressing Problems of International Investment Law” undertaken
at Research Institute of Economy, Trade and Industry (RIETI).

1

With a focus on the importance of plurilateral agreements, this paper will discuss theimportance and problems of the Trade in Services Agreement (TISA) currently undernegotiation, as well as the importance of sectoral negotiations in servicesandorientations towards their realization.
Section I provides an overview of the current status of service negotiations in the WTO.
Section II discusses the importance and problems of the TISA and considers the
direction that should be aimed towards, while Section III discusses the importance ofsectoral negotiations, and proposes strategies to enable their realization.

I

Current status of WTO GATS negotiations

1

Current status of GATS negotiations

In addition to disciplines in goods, the Uruguay Round that concluded in 1993
stipulated rules for services, in the form of the World Trade Organization (WTO)
General Agreement on Trade in Services (GATS).
This agreement divides services into four means of delivery, Modes 1 to 4, and stipulates
the disciplines on most-favored nation (MFN) status, national treatment (NT), andmarket access (MA), as well as appending Schedules of Commitments clarifying thespecific commitments of each signatory nation.
The services represent 70% or more of the GDP of the developed nations, and thevolume of trade in services is increasing annually. Trade in services now occupies animportant position in international trade alongside trade in goods.
However, compared to the disciplines on goods, the services agreement resulting from2the Uruguay Round had a short history, and the scope and depth of the framework andcommitments do not come close to those for goods. 1
Generally speaking, the agreement that emerged from the Uruguay Round presents a“snapshot” of the level of services liberalization disciplines of each country at the time ofits conclusion, and contains few elements resulting from a quest for further
liberalization. However, compared to GATT, with its disciplines limited to only trade ingoods, GATS is a groundbreaking framework, even by merely expanding the WTO scope
into services or domestic regulations, for example on investments.
Given the development of the GATS framework to date, it cannot be said that GATS has
evolved steadily since its conception – with the exception of the Agreement on Financial
Services and Agreement on Basic Telecommunications in 1997, two agreements which
will be further analysed in Section III.

2. Development of GATS following the conclusion of the Agreements on Financial
Services and Basic Telecommunications

From

the

conclusion

of

the

AgreementsonFinancial

Services

and

Basic

Telecommunications in 1997 to the launch of the Doha Round in 2001, there was no
major development in the services field (GATS). This situation continued following thelaunch of the Doha Round. Broadly speaking, this was due to three factors:

Firstly, the WTO negotiation rounds have promoted bargaining across sectors and1

For the relationship between disciplines on goods and services, see Reference

Materials 1 (Comparison of Goods and Services Disciplines)
3

negotiation pillars, and they have also displayed an unfortunate lack of progress in eachpillar. When negotiation rounds go into motion, WTO members tend to forgo theattempt to make deals in individual areas and instead maintain their sensitivities, as
they may become valuable bargaining chips in settling large packages. The frameworkenvisioned for the rounds was based on parallel negotiations in multiple fields, thatwould incentivise a deal between the WTO members, through which rule-making andliberalization could be advanced within an expanded equilibrium.
Unfortunately, however, this issues linkage did not eventuate smoothly in the Doha
Round.
Reflecting this fact, from 1997, the year of conclusion of the Agreements on Financial
Services and Basic Telecommunications, an extended period has gone by without any
major changes in the WTO. The mentality has been for members to conceal the aces up
their sleeves, and not to play any cards that would see them suffering even a minor loss.

Secondly, there is an (excessive) fear of free riding on the outcomes of liberalization.
What has emerged from the Agreements on Financial Services and Basic
Telecommunications has been the concept of extending the benefits to non-members
based on the most-favoured nation (MFN) principle as a precondition. The logic is thatdomestic regulation within each WTO member is often applied non-discriminatory, andtherefore MFN corresponds to the economic and legal realities on the ground where any
nation can receive the benefits. There was therefore no emphasis on a sense of caution
with regard to the fact that non-signatory nations would receive the benefits ofagreements between signatory members, in particular the developed countries.
However, there has ultimately been a significant change in this situation since the4conclusion of the Agreements on Financial Services and Basic Telecommunications.
With an increasing concern towards the free rider problem in developed countries
including the U.S., a strong sense of caution has also developed in the services fieldgiven the rapid growth of developing countries, especially the BRICS. After China’s
accession to the WTO in 2001 in particular, the contrast between China’s rapid
economic growth and the regulations of the Chinese services market led to a strong
dissatisfaction and a sense of caution amongst the developed countries – asking
themselves the question Why should they open their markets to companies incompetitive developing nations such as China, Brazil and India without commensurate
access to markets in those countries? This led to an increasingly mercantilist notion toseek the necessary leverage to open the services market in BRICS countries.
It is often pointed out that the severity of the free rider problem differs in market accessvis-à-vis rules. It is often argued that extension of benefits to non-members based on
MFN had a significant impact on firm-level competition in the area of market access(through e.g. tariffs), but only a minor and indirect effect in the area of rules. 2
In general, the same argument can also be made with regard to services negotiations,but a more analytical argument is necessary to take into consideration the specificdetails of liberalization and disciplines. 3 Despite the fact that services negotiations
differ from tariff negotiations given the former focusing on rules in addition to market
access, we must not forget that in the negotiations concerning financial and basic
telecommunications services, the agreements were based on critical mass and extension
See Van Grasstek and Sauvé (2006), pp. 857-8.
See Elsig (2010). With regard to MFN, Elsig claims that we should not adopt a
dichotomous perspective, but for each field focus on the benefits of cooperation and the
incentives for free riding, which differ for the opening of markets and the formulation ofrules. Elsig indicates the importance of creating incentives for participation by
non-participating nations.

235

of benefits on the MFN principle as foundations.
Recently, in the U.S. in particular, in the area of liberalization of services, emphasis has
been placed on the elements of market access in a similar way to tariffs, and the dangerof free riders has tended to be over-stressed.

Thirdly, and closely related to the prior points, is the deployment of free trade
agreements (FTAs).
Amid the stagnation of the WTO and the Doha Round, the members have turned to theuse of FTAs as a means of services liberalization and rulemaking. However, no FTA todate had dealt exclusively with the services sector alone. Usually, FTAs negotiate
services bilaterally concurrently with tariffs on goods (in accordance with preferential
agreements permitted under Article XXIV of GATT for goods, and Article V of GATS for
services.
Because services negotiations in FTAs are characterized by a) the fact that there is alimited number of participants in the negotiations (compared to the Doha Round where
the 160 members participate), and b) discriminatory treatment is allowed through FTAs
given it is not contrary to GATS Article V, the relative importance of non-tariff measures
have been emphasised in FTAs as they represent an easier means services liberalizationand creating rules, against the background of the stagnation of WTO negotiations.
The concept of FTAs, i.e. discrimination between participants and non-participants of
the FTA,, differs fundamentally from the basic concept of GATS. While MFN treatment
is also a principle in GATS, exceptions are recognized, and if GATS Article V(corresponding to GATT Article 24; there has been insufficient discussion of thisdiscipline since GATS was formulated. See II: 3.) is invoked in an FTA, discrimination
6

that is not registered as an exception to MFN treatment in GATS is legitimized, withparticipating nations attempting to make the “stingiest” possible response to
non-participating nations.

3

The Signaling Conference

As efforts to conclude the Doha Round continued, 2008 was the year that the Doha
Round came closest to conclusion. In the services negotiations, the Signaling Conference
was held in 2008 in order to expose the aces hidden up in the sleeves of the WTO
members, in a spirit of honesty. During this process, the WTO members expressed someof their true intentions, and the Signalling Conference had some specific outcomes.
However, with the failure to conclude the Doha Round in summer 2008, any progress
also came to a halt in the services negotiations.
In addition, the concessions signaled by the participants of the Signalling Conference
represent a snapshot of the state of play at the time. Whereas today, as if they had beenpreserved in a refrigerator and later thawed, and the outcome of the conference should
be regarded as no longer relevant.

4

TISA, FTAs, and the stagnation of the Doha RoundThe Doha Round has become bogged down. Negotiations commenced in 2001 and have
now passed their thirteenth year, with no prospect of a conclusion coming into sight. 4 In
order to break the deadlock, discussions were held at the WTO Ministerial Conferenceat the end of 2011 concerning the possibility of seeking separate resolutions for eachagenda on the table, each within separate time frames. The efforts were shifted towards
For a prescription for the early conclusion of the Doha Round and the reform of theWTO, see Nakatomi (2011).

4

7

expanding the product coverage of the Information Technology Agreement (ITA), an
agreement on trade facilitation, as well as reaching an understanding on security
measures in agriculture and delivering a package for the least developed countries(LDCs) – which led to an agreement at the Bali Ministerial Conference held at the endof 2013.
This approach has opened up a path towards the possibility of sectoral or issues-based
plurilateral agreements amongst interested WTO members only, as opposed to themultilateral approach based on an agreement between all WTO members. The Trade inServices Agreement (TISA) discussed in Section II, is understood as representing thistrend. 5 At the same time, with the stagnation of the WTO and the Doha Round,competition between various FTAs has also accelerated recently.
The TISA and mega-FTAs (such as TTIP, TPP and EU-Japan FTA) are existing andfunctioning in parallel, forming twin avenues for liberalization and rulemaking onservices.6 In the U.S. and the EU (particularly the U.S.), there is strong interest inachieving the outcomes that have not been produced by WTO services negotiations
through one or other of these means. 7
However, many countries, including Japan, have a strong interest in FTAs, and inparticular mega-FTAs, while not showing sufficient interest in TISA 8. The importanceand the problems of TISA will be discussed in the following section.

See Nakatomi (2013c)
In addition, the increase in the specific gravity of FTA in liberalization and theformulation of rules in the services field is also related to the emergence of the FTA
concept in the TISA.
7 See Reference Materials 2: (Apparent Level of Interest in Services Negotiations, byCountry).
8 See Reference Materials 2: (Apparent Level of Interest in Services Negotiations, byCountry).
5
68

II The importance of TISA

1 What is TISA?

Recognizing that progress was not being made using traditional negotiating methods,
the 2011 WTO Ministerial Conference acknowledged the possibility of advancing
negotiations in different areas at different speeds in order to overcome the stagnation of
the Doha Round.9
With this agreement, activities recommenced in a variety of fields. Within services, theidea of a Trade in Services Agreement (TISA) was introduced, with the U.S. as its
driving force.
The TISA is an initiative for services liberalization and rulemaking being discussed by
23 members, 10 amongst a coalition called “Really Good Friends of Services” (RGF)
centered around the U.S. It is an attempt to break through the deadlock of services
negotiations, aiming at high-level liberalization and rules.
Following the 2011 Ministerial Conference, preliminary discussions concerning TISA
between participating members commenced in 2012. On June 28, 2013, the RGF issued
a joint declaration to the effect that discussions concerning TISA had advanced, andthat the participating members had now moved to the stage of full-fledged negotiations.
It is necessary to bear in mind the fact that TISA is not an initiative involving all the
The agreements concerning trade facilitation, LDC, and food security realized at the2013 Bali WTO Ministerial Conference can be understood as an extension of this accord
at the 2011 Ministerial Conference.
10 Countries and regions participating in TISA negotiations (23 countries and regions(49 countries and regions if the individual countries of the EU are included)): Japan, theU.S., the EU, Canada, Australia, South Korea, Hong Kong, Taiwan, Pakistan, New
Zealand, Israel, Turkey, Mexico, Chile, Colombia, Peru, Costa Rica, Panama, Paraguay,
Norway, Switzerland, Iceland, and Lichtenstein.
99

WTO members, but strictly speaking, a plurilateral initiative outside the WTO
framework. The details of the agreement change day by day, but it is certain to have asignificant effect on trade in services if an agreement is ever reached.
At the same time, the TISA is viewed critically by other WTO members, especially bydeveloping countries, precisely because it is not an initiative involving all the members.
The future outcome of the TISA cannot be foreseen. In terms of content, numerous
vicissitudes and legal complexities can be predicted. In fact, it is probably optimistic toconsider that it will substitute the GATS negotiations, as the present exaggerated
rhetorics would like to claim. In addition, given the current situation in TISA
negotiations, its conclusion is also certain to be a long-term prospect.
A European Commission memo 11 has provided an outline of the structure of the TISA.
The main points of the memo are discussed below: 12(Purpose)
Seeking to realize an ambitious agreement that is consistent with GATS, the aim is toincrease the number of participating nations and multilateralize.
The agreement will possess a comprehensive scope, and specific service sectors andmodes will not be excluded at the outset. Like the DDA negotiations, all sectors canpotentially be covered by the negotiations.
Each participating nation will decide on the sectors in which and the extent to which
services can be provided by foreign service businesses operating in its national territory.

See European Commission (2013).
For detailed information regarding the purpose of the TISA, see Hufbauer, et al.
(2012) and the testimony of Samuel A. Di Piazza, Jr. and Peter Allgeier (both of the
Coalition of Services Industries (CSI)) to the Interagency Trade Policy Staff Committee(Di Piazza, Jr. and Allgeier (2013)).

11
12

10

The agreement will cover regulatory disciplines including autonomy of regulatory
authorities for telecommunications, finance, postal services, etc., fair approval
procedures, and non-discriminatory access to telecommunications networks.
Based on proposals from the RGF, it will be possible to incorporate the creation of new
rules

for

services

relatedtodomestic

regulations,international

shipping,

telecommunications, e-commerce, and computers, cross-border data transfer, postal andcourier services, financial services, temporary movement of natural persons,government procurement, export subsidies, and state-owned enterprises (SOE) 13.

(Structure)
The agreement will conform to GATS, and will incorporate the basic clauses of GATS.
Future integration of the agreement with GATS will be allowed for.
It has been agreed that national treatment will in principle be applied across the board.
Unless other provisions are made, participating nations might agree to a standstill
clause and a ratchet clause (future abandonment of discriminatory measures).

(Multilateralization)
Initially, the agreement will only be binding on participating nations. At the same time,the EU has ensured that the structure of the agreement allows a path towards its future
multilateralization.
Two conditions must be fulfilled for the agreement to be incorporated in the WTO
system. These are:

As examples of the new rules that should be realized through the TISA, Di Piazza, Jr.
and Allgeier (2013) list cross-border data transfer, SOE, regulatory barriers, licensing,
freedom of the legal form for business operation, transparency, and standardization.

13111) That the obligations specified by the agreement are of the same type as thosespecified by GATS; and
2) That the number of nations participating in the agreement reaches critical mass inorder for it to be multilateralized to all WTO member nations.
In order to prevent free riding, automatic multilateralization based on the MFN
principle will be temporarily suspended unless a critical mass of WTO members joins
the agreement 14.
An accession clause will be added for interested WTO members, opening a path towards
multilateralization of the agreement.

Negotiations concerning TISA continued amongst the RGF throughout 2013, and by theend of 2013, the U.S., the EU, and Japan had submitted their offers and proposals.
There are not yet any agreements on services schedules, but the RGF will continue topursue negotiations towards its realization in 2014.

2

The TISA and Japan

Given the importance of the services sector, it will be necessary for Japan to abandon
the passive stance that it has adopted up to the present, and make full-fledged efforts
towards the conclusion of TISA.
It will also be essential for Japan’s business community to correct its own passive
response in the services sector, assuming existing rules and market conditions as
unchangeable preconditions rather than and to seek changes and reforms in business

European Commission (2013) is unclear as to what form this suspension ofmultilateralization through MFN will take, and which conditions should be fulfilled for
multilateralization through MFN.

14

12

environments overseas.

The importance of TISA could be considered from different perspectives. First, with thestagnation of the Doha Round and the lack of prospects for an outcome from the GATS
negotiations, the TISA is the only framework that possesses the potential to advancedirect global liberalization and rulemaking.
It is a great pity that 13 years after the commencement of the Doha Round,liberalization and rulemaking have effectively come to a halt. However, the TISA, as aplurilateral framework being advanced by the RGF, which accounts for approximately
two-thirds of world cross-border services trade (see European Commission, 2013), has
the potential with future development and the realization of a legal framework to create
the foundation for new multilateral rules.
It is highly likely that the RGF comes close to the critical mass on creating a foundation
for global rules. Naturally, the inclusion of developing countries ( in particular China
and other major economies) is an essential condition for the TISA to become ameaningful global framework in the future, and thus, the further expansion of themembership of the agreement will be essential.15 TISA is not being negotiated within
the WTO framework with the involvement of all the WTO members, but if theparticipation of developing members can be secured in future, it is possible to expect it

Critical mass was not discussed as a numerical benchmark in the cases of theAgreements on Financial Services and Basic Telecommunications either. On this point
these agreements differ from the ITA, for which the condition for critical mass was theparticipation of nations representing approximately 90% of trade volume. If the TISA isconstituted as an FTA, then the concept of critical mass will be irrelevant, but if it is notconstituted as an FTA, sufficient coverage by participating nations will be an importantelement in the formation of the agreement. Low (2011) takes critical mass to refer to theintention among participating nations to reach an agreement, irrespective of theexistence of non-participating free riders.

15

13

to develop into a foundation for a new GATS.
As a plurilateral framework including the major developed countries, such as the U.S.,
the EU, and Japan, a successful conclusion of TISA would mean that common rules
amongst the participating members would be created on servicces. However, TISA ispresently a framework mainly for the developed countries and the RGF, with its effects
restricted to them. Nevertheless, if a broader membership of developing members could
be realized, the effects of the framework would indeed be global.
The possibility of extending the benefits of a TISA agreement to non-participating
members on the basis of the MFN principle will be discussed in Section II: 3, noting that
if the benefits of the agreement is extended to non-participants on an MFN basis, theconditions would be similar to the those of the Agreements on Financial Services andBasic Telecommunications (i.e. critical mass and extension on MFN basis), and thepotential of an agreement within the WTO will come back into the picture.
As noted, the Doha Round is bogged down and its prospects cannot be predicted, and
TISA is the only framework that offers the possibility of a global agreement on services.
However, it is essential that the consideration of the agreement is advanced in such a
way as to ensure that it becomes a truly global services trade framework. From thisperspective, its legal form (in particular whether or not it is a FTA) has an importantmeaning. The FTAs (and in particular mega-FTAs) are essential in promoting trade inservices, but the TISA has the potential to become a more global in its reach, and thebenefits of using both avenues in parallel (while clearly distinguishing the difference
between TISA and FTAs) would be significant.

Second, rule-making and liberalization in the services sector would have great potential
14to offer a foundation for the creation of business opportunities for Japan overseas, andthe TISA could be a powerful means of achieving these goals.
If the WTO GATS negotiations had proceeded smoothly, it would have represented themost desirable framework from the viewpoint of the number of participating nations,but unfortunately there has been absolutely no progress in the GATS negotiations, andat present there is little hope for future progress. 16
Against this background, the use of a plurilateral initiative such as TISA in which all
the major developed nations are participating as the next-best alternative opens up the
possibility of rulemaking and liberalization at a level that would be impossible forJapan to achieve in isolation. In this context, the considerable improvements to thebusiness environment by the ITA, Agreements on Financial Services and Basic
Telecommunications on their respective sectors should be recalled. In the view ofvarious service industries, TISA is a framework worthy of a full-fledged effort towards
realization, given its potential to improve the business environment overseas.

Third, it can be assumed that the TISA will function as “insurance policy,” providing
significant leverage to realize and protect Japan’s national interests in its mega-FTAs.
Because consensus will at least be formed between the participants in the TISA (thusdeveloped economies), it could function as a check on the occurrence of differences orBased on the results of the WTO Ministerial Conference held in Bali at the end of
2013, the future work program will be drawn up over the course of a year. It would bedesirable to be able to expect as part of this process the active submission of proposals
towards realizing progress in the GATS negotiations, but at present the formulation of
direct measures towards solutions can be considered extremely difficult. In order toadvance the GATS negotiations, what would be more desirable would be discussion of
the fundamental issues that have created difficulties in advancing the rounds, including
the rigidity of procedures for the incorporation of plurilateral agreements in the WTO
and problems in decision-making. (The rigidity of the conditions for incorporation ofplurilateral agreements like the TISA in the WTO has been the cause of severe delays indecision-making by the WTO.)

16

15

contradictions between disciplines or the level of liberalization among different
mega-FTAs. Compared to FTAs, in which discrimination between participants andnon-participants is an essential principle, TISA is a framework that is able to seek moreglobal solutions, reducing concerns over the imposition of contradicting rules
originating from superpowers like the U.S. and the EU. It is of particular importancethat the EU and the U.S. are both participating in TISA – as in the TPP and theJapan-EU FTA, these fierce rivals (especially in the area of regulations), the TISA will
reduce the risk of Japan being sandwiched between them.17,18
It must be assumed that if mega-FTAs, such as the TPP or TTIP, proceed without joint
coordination, spaghetti bowls will also be produced in services that would be impossible
to untangle. 19 This is not the outcome that the business community desires. The TISA
has the potential to act as a support that will mitigate the spaghetti-bowl effectanticipated as a result of mega-FTA, and help to create globally harmonizedframeworks. In a situation without any guarantee of joint coordination between
mega-FTAs, TISA could play a significant role in setting of global rules.
At the same time, we must also anticipate that if Japan does not correctly grasp the
movement towards the TISA and become part of that movement, the superpowers will
Readers should recall the case in which the EU complained to GATT regarding
procurement targets in the U.S.-Japan Semiconductor Trade Agreement, with the resultthat they were ruled to contravene GATT. In addition, the recent case in which South
Korea applied different definitions of standards in the electric and electronics andautomotive fields in relation to FTA with the U.S. and the EU should also be considered.
See Nakatomi (2013d).
18 The TISA can be expected to function as a lever for the creation of rules that willcontribute to the full-fledged advancement of international industrial collaboration andthe formation of truly global supply chains. It can be predicted that the advancement of
the TISA based on collaboration between the Coalition of Services Industries (CSI), theEuropean Services Federation (ESF), and the Japanese business community centeringon the Japan Services Network (JSN) will represent a significant asset in futureindustrial collaboration and the expansion of global value chains.
19 See Nakatomi (2013a).
17

16

introduce the contents of the TISA into its mega-FTAs and force Japan to accept them,stressing the fact that they are therefore international rules.
The U.S. and the EU have already initiated responses that take both mega-FTAs (inparticular the TPP and TTIP) and TISA into consideration. It will be essential for Japanto also shift its focus from exclusively working on mega-FTAs, and to utilize bothmega-FTAs and the TISAs effectively and in parallel as indispensable forums forservices negotiations.

These three points above indicate the importance for Japan to make more serious
efforts in TISA. While both the government and the private sector have recently
displayed increased interest in the agreement20, it will be necessary to follow throughthese developments more strategically.

3

FTA vs GATS

There is still no agreement within the RGF as to the form the TISA should have, a
discussion which the U.S. and the EU in particular have engaged in. Marchetti and Roy(2013ab) consider that there are four possibilities in terms of the legal structure of
TISA: 1) A GATS Protocol approach, on an MFN basis; 2) going alone, on an MFN basis;
3) a plurilateral agreement within the WTO; or 4) a plurilateral agreement outside the
WTO.
1) First option considers a protocol, like the previous Agreements on Financial Services
and Basic Telecommunications; the protocol would become effective based on theassent of the members forming a critical mass, and the details of commitments

20

See Keidanren Proposal (2013).
17

would benefit other members through the MFN principle.
2) Second option is a method in which the members participating in the negotiations
would voluntarily improve their commitments, the details of which would be
multilateralized through the MFN principle.
3) Third option would make TISA, on the basis of a consensus among WTO members, aplurilateral trade agreement within the WTO framework to which only
participating nations are subject (an Annex 4 agreement), like the Agreement on
Trade in Civil Aircraft and the Agreement on Government Procurement.
4) Final option represents a services FTA based on Article V of GATS.

In addition, Hufbauer, et al. (2012) further suggests the possibility of being granted
waivers based on Article IX(3) of the Marrakech Agreement, the consensus of at least
three-quarters of WTO members would be necessary for this. 21

Which path is chosen will depend on the future discussions between the participants in
TISA, but because there is no guarantee that all participants would improve theircommitments, option 2 have little possibility of realization. Marchetti and Roy 22 also
refer to a prisoner’s dilemma scenario, in which participants do not know whether otherparticipants will behave in the same way.
In the case of option 3, in the absence of multilateralization of the agreement based on
the MFN principle, the idea that this option would be the subject of a consensus among
WTO members is almost entirely unrealistic.
See Hufbauer et al. (2012) and Harbinson et al. (2012). The latter provides a concise
overview of the legal forms of plurilateral agreements, including waivers, offering a
useful reference.
22 Marchetti and Roy (2013a).
21

18

Marchetti and Roy do not offer any evaluation of which of the four options discussed
above should be chosen, but realistically, discussion would proceed on options 1 or 4.23
Initially, TISA was proposed by the U.S. as an FTA based on GATS Article V, and today,
the negotiations are now taking place as an FTA. The idea here, leveraged on the factthat the RGF hold an enormous share of global services trade, is to put pressure on
non-participating developing countries by pioneering a services-only FTA and notmultilateralizing it through the MFN principle. The sense of caution to free riders
discussed above is the foundation of this concept. 24

However, the FTA approach based on GATS Article V also involves considerable
danger 25.

First, there is the risk of an arbitrary interpretation of requirements such as“substantial sectoral coverage” under GATS Article V.
GATS Article V(1), concerning economic integration in the services field, stipulates therequirement for substantial sectoral coverage. In addition, “this condition is understoodin terms of number of sectors, volume of trade affected and modes of supply. In order tomeet this condition, agreements should not provide for the a priori exclusion of any
mode of supply” (Article V(1)(a)).
Further, Article (1)(b) “provides for the absence or elimination of substantially all
discrimination, in the sense of Article XVII, between or among the parties, in the sectors

See Reference Materials 3: Perspectives on the Legal Form of the TISA. Here, theauthor provides an evaluation of the options discussed above.
24 See Hufbauer et al. (2012) and European Commission (2013).
25 See Bosworth (2014). Like the author, Bosworth expresses strong concern regarding
the constitution of the TISA as an FTA.
23

19

covered under subparagraph (a)…either at the entry into force of that agreement or on
the basis of a reasonable time-frame…”
Within a framework such as the TISA, participated in by the U.S., the EU, and Japan, in
addition to all of the other advanced major economies, a responsible approach byparticipating nations to the interpretation of GATS Article V is essential. 26
GATT Article XXIV, which stipulates disciplines for FTA covering trade in goods, specifies
coverage of “substantially all trade in products” as the standard. Discussion of this standard
has continued over an extended period, and this has acted to a certain extent as a check on a
proliferation of “FTA of convenience.”
By contrast, there has been almost no discussion concerning the interpretation of GATS
Article V. GATS Article V specifies exceptions to the MFN principle. Taking into
consideration their importance for the interpretation of the article and their impact on theentire GATS/WTO legal system, a careful and sufficiently detailed discussion of therequirements for these exceptions is essential. 27
In the absence of such discussion, there is a strong possibility that the stipulations of thearticle will not act as a check on discriminatory treatment in services FTA. Compared to
GATT, the disciplines on services, such as MFN, national treatment (NT), and market

Unless the participating nations realize full-fledged liberalization in accord withGATS Article V (it is to be hoped that the realization in this context would be driven
chiefly by the participating developed nations. If substantial sectoral coverage in thestrict sense was realized and discriminatory measures were eliminated, the agreement
would follow the spirit of GATS Article V, and there would be no reason for objections.),
if gradual liberalization were to be pursued in the TISA based on arbitrary
interpretations, the agreement would violate the fundamental concept assumed by
GATS Article V. If the RGF seek to formulate the TISA as an FTA, they will have a
responsibility to face the interpretation of GATS Article V squarely and engage inappropriate discussion.
27 See Materials 4: Legal Structure of Exceptions to MFN Treatment, concerning thelegal structure of exceptions to MFN treatment in GATT and GATS. It will be clear to
the reader that the GATS disciplines are particularly vague with regard to exceptions to
MFN treatment, and that there has been insufficient discussion of their details.
26

20

access (MA), are relatively weak in GATS. If a WTO member were to introduce
discriminatory systems in a comprehensive manner, such measure would represent asignificant impediment to the future development of the GATS system.
If the process of formation of services FTA is simple, there is a strong danger thatliberalization and rulemaking in the services sector will avoid the laborious multilateralprocess and will in practice proceed on the basis of a FTA exclusively. FTAs arefundamentally structured around discrimination between participants and non-participants,
and are therefore not conducive to integrated rule-making on a global level.
Discussion concerning GATT Article XXIV has continued over a long period of time, and its
interpretation is agreed upon to a considerable degree. However, there has been insufficientaccumulation of discussion regarding GATS Article V, which was stipulated in 1995, during
the era of competition amongst FTAs.

Given that the language of GATS Article V and GATT Article XXIV differ, and that thelevel of services liberalization in FTAs compared to goods is low, a considerable danger
exists that similarly unrigorous interpretations would be allowed in the case of TISA
and mega-FTAs. 28
The uncomplicated recognition of a framework like TISA that cover the entire range ofservices, and also in which major economies participates, has the potential to shake thefoundations of GATS itself. In other words, there is a possibility that the TISA may
come to replace GATS as “WTO 2.0” (Baldwin, 2011 and 2012) 29 on services. 30,31
Services FTA negotiations incidental to goods FTA and the TISA differ in terms of thescope of member nations and their effect on GATS, and cannot be discussed in the same
category. The fact that conventional FTA in services incidental to goods FTA are notsubject to dispute settlement procedures in the WTO would not represent a deciding
factor with regard to the conformity of the TISA with GATS Article V.
29 See Baldwin (2011, 2012).
30 In the same way that the urging of the choice between GATT 1947 and GATT 1994 on
GATT member nations in the closing stage of the Uruguay Round later increased28

21

Second, the constitution of TISA as an FTA would mean that the application of theagreement would be restricted to participating members in order to prevent free riding
by non-participants, in particular developing nations. An FTA is a framework restricted
to its participants, and could not immediately become a global legal framework.
Even assuming that TISA allowed non-participating members to join the framework,
reaching critical mass would require a long period of time. 32 This is not only
inconsistent with the demands of the business community, who has a preference forrules on a global level, but it also presents serious concerns given the importance ofdeveloping countries in the world economy and the market in services. The fact that theconstitution of TISA as an FTA would render the path to global rule-making utterly
non-transparent represents a significant issue.

Third, the fact that broad introduction of a non-MFN approach may offer preferential
treatment to the inefficient services industries of TISA member nations represents asignificant issue in terms of economic welfare. It is possible that this could become an
impediment to the efficient allocation of resources through trade with countries withservices sectors possessing comparative advantage. 33
suspicion among developing nations, it is inevitable that the constitution of the TISA as
an FTA would result in a backlash from developing nations.
31 The interpretation of GATS Article V (the interpretation of “substantial sectoral
coverage”, etc.) should be defined by the WTO, but given that the trend towards
mega-FTA is in actuality being driven by the developed nations and that the TISA
negotiations are in progress, there is limited possibility of any discussion of the issue in
Geneva.
32 Until then, the TISA would be a framework for the liberalization of services among
the RGF (centering on the developed nations). A scenario in which proceeding with the
TISA as an FTA invites a backlash from developing nations, resulting in a suspension of
global rulemaking, is another concern.
33 Miroudot et al. (2010).
22

Fourth, there are doubts as to the extent to which a non-MFN approach is feasible,
given the horizontal nature of services regulations. 34 In fact, in many cases services
regulations are implemented domestically on an MFN basis.
In addition, the origin of services (of the service supplier) is defined in GATS Article
V(6); for parties to anFTA, “A service supplier of any other Member that is a juridical
person constituted under the laws of a party to an agreement referred to in paragraph 1
shall be entitled to treatment granted under such agreement, provided that it engages
in substantive business operations in the territory of the parties to such agreement.”
This requirement has a binding effect on the subjects of exceptions to MFN treatment inFTAs, but if we consider the status of its application, we find that it is applied
liberally. 35,36 Because a juridical person constituted under the laws of one of the parties
to the agreement is easily able to become subject to the terms of an FTA, even if MFN
treatment is denied to the non-participants of an FTA, it is possible to circumvent thiscondition.
However, given that many FTAs stipulate the sharing of benefits with its members on
an MFN basis, there are also many FTAs that stipulate the sharing of its benefits toother countries who have concluded FTAs with the parties in question; for example, if
there is a clause specifying sharing of benefits with participating country on a MFN
basis in the first FTA (between countries X and Y), then it is necessary to share theIn the case of market access, discriminatory application is possible (licenses, etc.),
and is sometimes necessary.
35 Miroudot et al. (2010), pp 16-21; Mattoo and Sauvé (2010), pp 39-41.
36 For example, the Australia-New Zealand FTA only features the requirement forestablishing legal entities in the region, and does not demand the “substantive business
operations” requirement. The inadequacy of the “substantive business operations”
requirement in NAFTA is treated as creating the opportunity for denial of benefits. See
Miroudot et al. (2010).
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23

benefits of a second FTA with a third country (between countries X and Z) with thesignatories of the first agreement. It is no exaggeration to say that clauses that deny
MFN treatment are becoming eroded.
In spite of the possibility of additional members and eventually reaching critical mass,and sharing the benefits on an MFN basis, there is no rationality in introducing a
discriminatory system.37,38

By contrast, if a similar approach like the Agreements on Financial Services and Basic
Telecommunications, where reaching the critical mass is considered as fundamental,
and the sharing of the benefits of the agreement with non-participating nations forms
the basis of the agreement, the possibility of securing an approval from the developing
country members and producing a global agreement would increase 39. In addition, if theagreement is pursued in this form, a global solution would be formed within GATS,
producing international standards in both substantive and legal sense, creating power
incentives to participate in the framework. By comparison, the abandonment of critical

This argument is taken by supporters of the concept of the TISA as an FTA (Hufbauer
et al. (2012)) as providing a rationale for the constitution of the TISA as an FTA. The
argument goes that because regulations are after all normally implemented on an MFN
basis, it makes no difference whether or not the TISA is an FTA.
Assuming that the benefits of the FTA for participants were multilateralized throughMFN, opposition to the constitution of the TISA as an FTA would be eased, and thedanger of GATS taking on a bipartite structure, surely a grave situation, would be
reduced.
However, assuming that multilateralization of benefits through MFN was possible,
given the flexible character of the GATS Schedules of Commitments, it would be enoughfor countries to simply modify their Schedules of Commitments, and there would be noreason to adopt an FTA structure predicated on discrimination between participants
and non-participants.
38 As indicated by Miroudot et al. (2010), the issue of multilateralization through MFN
is an issue of political will, and in the case of services FTA also, the correct course ofaction is to move ahead with extending benefits of FTA through MFN as a fundamental
principle.
39 See Warwick Commission (2007).
37

24

mass approach and thereby forming an FTA within the RGF alone, this mode ofproceeding could possess tremendous potential for a rapid global rule-making without
wasteful coordination costs. 40
In case of difficulties to achieve critical mass across all services sectors as a whole, anapproach in which TISA narrowed its focus to the important sectors and seeking anagreement in sectors where it can be reached, would also be a practical and meaningfulalternative. 41
Japan does not withhold any of the services sectors from MFN treatment, providing itwith a freedom to pursue each of these options , like the U.S. and the EU. In addition,
Japan has made a principle out of sharing with all its services liberalization in future
FTAs with its present FTA partners, meaning that it is applying MFN treatment at ahigh level.
As the discussion above suggests, whether or not TISA takes the form of an FTA will
have a powerful impact on the GATS system and its future developments. Hopefully,
the issues will be discussed seriously in the future, both in the domestic andinternational debate. 42.
It is understandable that TISA is being pursued as an FTA as a negotiation strategy inorder to encourage participation by the major developing economies – i.e. as a stick(rather than a carrot) to encourage participation. There are suggestions that the
See Sauvé (2013) for legal issues associated with the incorporation of the TISA in
GATS.
41 See Section III concerning the importance of sectoral agreements.
42 The idea of constituting the TISA as an FTA and applying the MFN principle
conditionally (the concept is to multilateralize commitments if the participation of
sufficient nations to constitute critical mass is obtained (Hufbauer et al. (2012))) puts
the cart before the horse. European Commission (2013) also indicates thatmultilateralization of the agreement will be suspended until critical mass is reached,but is unclear on the legal constitution of the agreement (FTA, waiver, etc.) or its details(e.g., conditions for introduction of multilateralization based on MFN).
40

25

strategy might be working, as China is said to consider participating in TISA. Concerns
on market access, i.e. free riding by non-participants, are understandable. However,before the use of the FTA format, the RGF members ought to make adequate efforts topromote of participation of the major developing economies and multilateralrule-making, rather than simply abandon such efforts predicting a failure.
It is essential for TISA to not to compete with mega-FTAs, and instead secure theparticipation of a larger number of countries and develop a negotiation framework thatwill lay the foundation for future GATS rules. Such potentials represent a valuable
opportunity (and presently, the only one). In order to realize this opportunity, it will benecessary to consider the time dimension of the negotiations well in advance, and to
examine certain flexibilities, for example by restricting the scope of the negotiations, as
future developments eventuate.
Japan and other participating members in TISA must understand the strategic
importance of TISA in global rule-making, and make relevant proposals following a
careful examination of its nature and goals.

III The importance of sectoral agreements and the use of TISAThe objective of TISA is to conclude a high-level plurilateral services agreement against
the background of a deadlock in the GATS negotiations. However, plurilateralagreements that have produced significant outcomes already exist in the form of theAgreements on Financial Services and Basic Telecommunications. This section will
discuss the importance of (possibility for) sectoral agreements in the wake of thoseagreements.

26

1What are the Agreements on Financial Services and Basic Telecommunications?

As we have seen above, the Agreements on Financial Services and Basic
Telecommunications could be considered as one of the major outcomes produced since
the establishment of the WTO.
At the time of the Uruguay Round agreement, it was agreed to commence reviews in thefinancial services and telecommunications sectors as a built-in agenda (a prescribed
work program). Interested countries commenced work in these two sectors following theestablishment of the WTO in 1995.
The fact that agreements were reached in these two sectors is often attributed to thefact that they were ‘built-in agendas’, but given that a variety of items were eliminatedfrom the negotiation agenda and suffered severe setbacks (for example the work toharmonize non-preferential rules of origin), there is little meaning in emphasizing thispoint. 43 Notably, the negotiating parties persisted in reaching the political resolution
implied by the built-in agenda.
The rapid changes and the globalization of the economic environment, induced by theinternet and the global financial architecture, were the factors behind the negotiations
on financial services and telecommunications sectors. The fact that the countries
involved and their business communities sought a systematic legal structure tofacilitate these developments was a strong rationale of these negotiations. This issimilar to the case of the ITA: the parties shared the recognition that free distribution ofsemiconductors, telecommunications devices, computers, etc. is the fundamental

However, the fact that the negotiations were held after the expiry of fast tracknegotiating authority and that the U.S. possessed residual negotiating authority areimportant points.

43

27

structure for the IT sector, which contributed significantly to the realization of theagreement. 44
The functioning of a shared political will to provide international public goods can beindicated as a significant element in the background of the Agreements on Financial
Services, Basic Telecommunications or the ITA. These agreements cannot be explainedby means of negotiation dynamics based on reciprocity in the strict sense of the term.
They represent trailblazing examples for future negotiations.

2 Distinguishing Ffatures of the Agreements on Financial Services and Basic
Telecommunications

1) Adhering to sectoral characteristics
As a result of discussions concerning the financial services and telecommunications
sectors between the U.S., Japan, the EU and other interested nations, financial services
and telecommunications protocols were adopted by the WTO on a consensus basis. By
appending revised commitment schedules and MFN exemption schedules to theprotocols, the nations participating in the agreements modified the sections
corresponding to their commitment schedules and MFN exemption schedules.
Turning our attention to the content, while the GATS disciplines display a simple
structure based on MFN, NT and MA, a distinctive feature of the Agreements on
Financial Services and Basic Telecommunications is that a variety of additional
disciplines were defined in response to the characteristics of the telecommunications

Negotiations towards the expansion of the products subject to the ITA commenced in2012 and are ongoing, and continuous efforts are being made to formulate anagreement.

44

28

and financial services markets, and these were accepted by participating WTO
members. 45
It is necessary to pay attention to the fact that these agreements added disciplines on
issues that were not covered by the MA and NT disciplines in GATS (or lacked clarity inthe details), and significantly advanced the basic structure of GATS through sectoral
negotiations in each sector. The evolution of a legal framework that had not beenrealized by GATS in response to the characteristics of specific sectors is an important
outcome of both agreements, and is an approach that provides a touchstone for futurenegotiations.46 A sectoral approach is able not only to expand market access andnational treatment disciplines, but can also dramatically increase the potential for the
introduction of additional disciplines in response to the characteristics of specificsectors. 472) The relationship of participating and non-participating members (critical mass andextension of benefits on the MFN principle)
The next point focus on is the relationship between participants and non-participants of
the agreement. Basically, the benefits of both agreements are in principle extended to
non-participating members on an MFN basis, in accordance with the commitments ofeach nation concerned. A significant distinguishing feature of both agreements is the
The reference paper that formed the foundation of the Agreement on Basic
Telecommunications Services established a number of disciplines in response to thecharacteristics of the sector, including competitive safeguards, mutual connection,
universal services, licensing conditions, independent regulatory authorities, andallocation of scarce resources.
46 For a comparison of goods and services disciplines, see Reference Materials 1: A
Comparison of Goods and Services Disciplines. These materials make clear thesignificant progress in disciplines in the goods sectors, compared with services.
47 In the case of the ITA, in 1996 the EU stressed that not only tariff but non-tariffmeasures should form a subject of the negotiations; it is possible that the majority of theassociated issues were issues of services negotiations, centering on thetelecommunications sector. See Nakatomi (2012a).
45

29

fact that their basis is the formation of critical mass by the major nations and extensionof their benefits based on the MFN principle.
At that point in history (in 1997), the adverse effect on competitiveness by sharing thebenefits of the agreements with non-participating members (the free ride problem) did
not attract a great deal of attention as a sensitive issue.
Critical mass and MFN extension of the benefits also represented the basic frameworkof the ITA, an initiative to eliminate tariffs in the information and communication
technology (ICT) sector, negotiated in the same year; these were the common distinctive
characteristics of these three important agreements.
The reasons behind the success of the Agreements on Financial Services, Basic
Telecommunications Agreement and ITA, while the WTO has produced no significant
outcomes in the area of liberalization in the more than 15 years since, is still relevant
today.
The cases of the Agreements on Financial Services and Basic Telecommunications (andsimilarly the ITA) represent an approach in which all major economies participated tocreate a global public good, in some specific sectors.

3) The endorsement and support of business communities
As in the case of the ITA, the support and assistance of the related business
communities in the major nations in realizing the Agreements on Financial Services
and Basic Telecommunications is worthy of special note.48
In the case of the ITA, close cooperation between the business communities of Japan,
the U.S., the EU and Canada (the Japan Electronic Industry Development Association(JEIDA), the ITI (Information Technology Industry Council), the European Associationof Manufacturers of Business Machines and Information Technology (EUROBIT), andthe Information Technology Association of Canada (ITAC)) provided a powerful impetus
for the realization of the agreement. See Nakatomi (2012a).

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3 Subsequent development of the sectoral approach and the use of TISA
Unfortunately, any similar sectoral approach has not borne fruit in the services sector
since these agreements were concluded.
As discussed in Section I, the holding back of negotiating chips, concern over free riders,and competition from FTAs are the factors behind the lack of progress in sectoral
agreements since 1997.
With regard to holding back negotiating chips, at the 2011 WTO Ministerial Conference,a shared awareness that issues linkage would be abandoned and negotiations would be
pursued on individual issues paved the way for an opportunity for genuine deals in theservices sector also. The fact that an agreement regarding trade facilitation wasreached at the 2013 Bali Ministerial Conference should also provide a significant
impetus for sectoral negotiations.
At the same time, concern over free riding remained strong.
Because consensus is a principle of the WTO decision-making process, the application of
the MFN principle will be the key to the future advancement of global rulemaking inthe services sector. (If the MFN principle is not applied, it will be difficult to obtainconsensus in the WTO. Readers should also recall the cases when sectoral protocols
have been successfully established. 49
As indicated above, in most cases services disciplines are in practice applied on an MFN
basis within each jurisdiction, and the issue of free riders is in many cases nothing more
Consensus is basically a requirement for plurilateral agreements (revision of Annex 1,
addition to Annex 4) within the WTO. The Agreements on Financial Services and Basic
Telecommunications therefore adopted an approach based on critical mass and MFN
extension of the benefits, in which protocols were formulated on the basis of consensus
between WTO members. Without MFN extension of the benefits, it can be consideredthat it would be difficult to ensure a consensus.

49

31

than a mere conceptual concern. Nevertheless, the constitution of TISA as an FTA
would be an attempt to eliminate the effort required to reach critical mass, due toconcerns over free riding. TISA as an FTA is an agreement outside the WTO.
Irrespective of the number of participants, the agreement is outside GATS allowed
under its Article V, and would not form part of GATS. It can be foreseen that there will
be a long period of numerous complications before the agreement would become part of
the GATS system.
As seen in Section II, the great value of TISA is its potential to enable global
rule-making in the future. In doing so, the sectoral approach would be an extremely
powerful tool.
If the agreement was based on reaching critical mass and extending the benefits
according to the MFN principle, following the precedents of the Agreements on
Financial Services and Basic Telecommunications, there is a potential to advance global
services liberalization and rule-making in specific important sectors using the TISA
framework.50 By means of the adoption of protocols by all of the WTO member nations,the legal system created for the agreement could become part of GATS, and thus becomea truly global framework. Such agreements based on critical mass and MFN principles
are ipso facto global agreements.
As seen above, the GATS disciplines are a product of compromises made during the
Uruguay Round, and due to strong resistance to venturing into domestic measures thedisciplines are extremely unsatisfactory, centering on MA and NT. Ideally, theBecause the inclusion of the major developing nations would form the basis forcritical mass for sectoral proposals of this type, the mounting of initiatives to explain
the benefits of the agreement to the developing nations and the presentation offrameworks that sufficiently address the concerns of the developing nations would be
important factors.

50

32

improvement of the system should have been planned during the GATS negotiations in
the Doha Round, but the outlook at present is gloomy.
Against this background, disaggregated agendas in each services sector (i.e. sector by
sector, or by issue by issue) represents an extremely important initiative and could
become powerful tools for liberalizing and establishing disciplines in the services
sector.51 TISA represents an excellent opportunity for such initiatives.
Hopefully, Japan will not limit its responses (and request lists for MA and NT) solely tothe mega-FTAs, but will give an earnest consideration to individual sectors and issues
where it has interests, and similarly prepare its responses, resulting in international
proposals. 52
Narrowing down the number of sectors also limits the constituency of interested parties
in the negotiations. It would be possible to seek solutions in sectors of mutual concern
while avoiding the wasteful concept of reciprocity.
The sectoral approach represents an effort towards the provision of a global public good,and is an approach that should be pursued more wholeheartedly.53 Hopefully, theparticipating economies, including Japan, will actively make sectoral proposals within
the TISA towards the realization of global rule-making.

4 Elements of sectoral proposals and candidate sectors
Naturally, the existence or non-existence of NT and MA disciplines are also extremely
important factors, but in a situation in which there is inadequate provision of horizontal
disciplines in the services sector (e.g., disciplines related to domestic regulations basedon Article VI (corresponding to TBT in goods) have not yet been established), it will be
more efficient to conduct focused discussion of disciplines by limiting the scope toimportant sectors of concern.
52 It is necessary to recall that since the Uruguay Round, the elimination of tariffs bysector (0-0 or harmonization approaches) has become a standard negotiating method in
the arena of goods.
53 See Nakatomi (2012a, 2013a) and Nakatomi (2013c).
51331) Examination of issues based on collaboration between industry, government andacademia and international cooperation
It will be necessary to concretely examine each service sector under the progress ofmega-FTAs and TISA in parallel, and the foundation for doing so will be provided byclose cooperation between industry, government, academics and lawyers.
The sectoral proposals should be means of liberalization and rule-making based on
industry demands, international development within the sector and a grasp of
obstacles.
As in the cases of the ITA, the Agreements on Financial Services and Basic
Telecommunications, close international cooperation with overseas service industry
organizations such as the Coalition of Services Industries (CSI) and the European
Services Forum (ESF) and other industry organizations is an essential condition forsuccess in these sectoral initiatives.

2) Creating axes for sectoral proposals
Past examples of success in sectoral agreements (in particular the plurilateralagreements) can be considered to offer a reference for making sectoral proposals.
In the services field, it is naturally the Agreements on Financial Services and Basic
Telecommunications that provide the best reference. In addition, it is also be necessary
to consider the ITA as an example of success, while it is a tariff agreement. The
Anti-Counterfeiting Trade Agreement (ACTA), an intellectual property-relatedagreement, is another plurilateral agreement that provides a reference.54

54

See Nakatomi (2012a). At present, only Japan has ratified ACTA.
34

It will be essential to formulate proposals that respond to the characteristics of services
and that accord with the realities of the industry. The details will take on different
forms depending on the specific sector, but it will basically be necessary to consider thefollowing elements.
1) Creation of clusters
First, efforts to create clusters that match policy goals in the sector in question will beessential. It is no exaggeration to say that cluster design will decide the success or
failure of sectoral proposals. 552) MA, NT and MFN disciplines
Market access and national treatment commitments are the pillars of liberalization inservices, and it can be assumed that they will become central elements in sectoral
agreements in the services field.
In addition, to achieve multilateralization of sectoral agreements other than in the formof an FTA, a MFN treatment is an unavoidable issue as seen above.
3) Horizontal disciplines that respond to the characteristics of the sector
Schedules of Commitments in GATS are organized around the simple elements of MA
and NT; because of this, it can be assumed that there will be many cases in which it will
be necessary to establish new disciplines in response to the characteristics of eachspecific sector. (See the WTO Telecommunications Reference Paper.) Because GATS
allows additional commitments, identifying the horizontal commitments other than MA
and NT that participating countries should comply with will represent a major issue, forThis situation originated in strong opposition from NGOs, particularly in the EU, and isan outcome that offers important lessons regarding the relationship between tradenegotiations and civil society. An agreement was already formulated between theparticipating governments, and it can be considered to offer numerous points thatshould be used as a reference in the future formulation of plurilateral agreements.
55 See OECD (2000).
35

example on screen quotas in cultural services, data localization requirements and data
privacy protection in cross-border data flows, etc.

4) Support measures to enable the realization of the above
Support measures to enable participation in sectoral agreements, in particular capacity
building and technical assistance to enable participation by developing economies, will
be another important element. In the future, the participation of the major developing
economies will be essential to the formation of the critical mass necessary. This makes
it essential to consider support measures to enable their participation. With regard to
dispute settlement procedures, in order to ease the burden on developing economies andavoid a sense of caution, it will be necessary in certain cases, to consider granting
exemptions to developing economies.
5) Proof of economic benefits
In making sectoral proposals, adequate verification and explanation of the economic
effects of their realization and the benefits of participation will be essential. With
regard to this point, cooperation with academia will be important in addition to theinvolvement of industry and government. 56

6) Concrete sectoral proposals – perspectives on proposals by JapanA concrete examination of each sector individually by the industry, the government,
academics and lawyers alike will be essential in future, but a number of candidate
sectors are suggested below. The suggestions below focuses on the sectors traditionallyThe further development of indicators of openness in services fields, such as theServices Trade Restrictiveness Index (STRI), by the OECD will be important inproviding proof of the economic benefits of liberalization of services.

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36

of interest to the Japanese business community. These areas should be discussed infuture on the basis of close cooperation between the government and the business
community, and where concrete proposals should be made. The examples below are alsooffered from the perspective of Japan advancing liberalization overseas. Naturally, it
will be important for Japan to strategically organize its responses to sectoral proposals
from overseas.57

1) Retail and logistics sectors
Proposals restricted to a part of the retail and logistics sectors, sectors which Japanesecompanies seek to enter in the Asian market and in which Japan is competitive, could
be considered. However, these sectors are characterized by a diverse range of internal
regulations in numerous countries, and it would be essential to respond prudently, forexample by selecting sectors in which there will be little conflict of interest with partnercountries (e.g., setting standards for scale) or proposing frameworks that bring benefits
to partner countries, e.g. rationalization of domestic industry, support for supply chains,etc.
2) Manufacturing-related services
Manufacturing-related services are a sector that Japan has focused in its FTA with
Singapore, Malaysia, Indonesia, and Vietnam. The sector offers many potentials in
itself, but in addition, it also provides the foundation for the ongoing overseas expansionof the Japanese manufacturing industry.

Even if it proves difficult for Japan to directly make proposals, it can be adequately
predicted that important sectoral proposals from the perspective of advancing reformsof domestic regulations will come from overseas. (Please refer to the sectors of interest
to the EU discussed above, and the sectors of interest to the CSI, which will be
discussed below.)57

37

In the strictest sense, these are services incidental to the manufacturing industry, or
884 and 885 under the United Nations Central Product Classification (CPC), but Japan
has also achieved a certain degree of liberalization of equipment maintenance andrepair services (CPC 633; 8801 to 8806) in its FTAs with Singapore and Vietnam.
In addition, attempts should be made to survey the current status of the business
community and include other services consequent upon establishing manufacturing
facilities overseas in clusters. These would include a portion of telecommunications (e.g.
CPC 842 to 844), data services (CPC 84) and other business services, e.g., management
consulting services (CPC 865, 866), packaging services (CPC 876), and conference
services (CPC 87909).
If it was possible to cluster services that are integral and closely associated with theoverseas expansion of manufacturing industry, this sector would contribute to thepromotion of investment and the expansion of value chains in developing economies,
making the explanation of economic benefits a relatively easy task.
3) Cultural services
Cultural services is a sector wrapped up in domestic regulations in many countries, andit can be assumed that its liberalization will present difficulties. Despite this, this is a
sector in which it will be important for Japan to advance internationally in future (the“Cool Japan” initiative being one example), and it should be considered as a candidate
sector of sectoral proposals.
4) Environmental services
An APEC agreement for the elimination of tariffs on specified environmental goods was
confirmed in 2012. Given that most nations support the development of environmental
protection and environmental industries, sectoral proposals concerning environmental
38

services (an area in which Japan is competitive), in cooperation with inter alia the
APEC countries, represents another possibility. It would be necessary to examine thepotential for clustering, with CPC environmental services (9401-3) as the core.
5) Cross-border data flows
The rapid globalization of data processing and the development of cloud computing
present a variety of business opportunities. In order to facilitate the expansion ofbusiness in these areas, there is a movement towards the elimination of regulations
such as the obligation for localization of data in order to realize free cross-border dataflows, led by the U.S. business community.58
Given that it presents the problem of harmonization with a range of domestic
regulations (e.g., concerning the protection of privacy) and horizontal problems related
to numerous services sectors in countries’ Schedules of Commitments, it would benecessary to pursue discussions in the area of cross-border data transfer prudently andcarefully.
Sectoral proposals in this sector would possess a different character to proposals in theother sectors discussed above, but this is a business sector in which Japan iscompetitive internationally, and could make relevant proposals in cooperation with thegovernments and the business communities of the U.S. and the Asia-Pacific region. At
the same time, this would offer a test case in how the frameworks of service sector
agreements should respond to technological progress.

The above are only examples, but it can be asserted that the clarification of importantsectors and the formulation of proposals for each of those sectors would represent a

58

See Meltzer (2013).
39

more efficient approach for the international expansion of Japan’s services industry
than pursuing discussion of the horizontal application of NT and MA without
identifying important sectors. It is desirable that the TISA negotiations becomes theopportunity for such proposals from the perspective of contribution of global
rule-making. 59,60

Focusing on plurilateral initiatives within the services sector, this paper has discussed
the importance and the problems of TISA, the direction that should be aimed for, andthe value of pursuing negotiations onsectoral basis. Hopefully, the discussion developed
here will be helpful in encouraging the use of the plurilateral framework in advancing
services sector negotiations in the future, as opposed to exclusively concentrate on
liberalization and rule-making through FTAs.
In addition to being an important framework in terms of the international developmentof Japan’s service industry, the TISA is also important from the perspective of theprovision of global rules within GATS. It is highly desirable that negotiations proceedon sectoral basis within this framework, and that Japan offers its contributions.

Independent plurilateral proposals and sectoral proposals within mega-FTA
negotiations could similarly be considered, but from the perspective of the realization of
global sectoral agreements, proposals within the TISA framework can be viewed as themost efficient method. Unfortunately, such proposals would be unrealistic in GATS
negotiations within a round that has lost its cohesive force.
60 Di Piazza, Jr. and Allgeier (2013) list electronic security systems, express delivery,
financial services, insurance, Internet and computer-related services, media andentertainment services, retail and logistics services, and telecommunications services
as sectoral targets for the TISA, and emphasize the importance of appropriate
clustering and bundling (express delivery, etc.). These elements can be expected to bereflected in the future in concrete proposals by the U.S. in the TISA negotiations. It isessential for Japan to prepare its own sectoral proposals as quickly as possible.
59

40

The author hopes that this paper will serve as a reference in advancing both TISA andsectoral negotiations.

41

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Baldwin, Richard (2011), “Trade and Industrialisation after Globalisation’s 2nd
Unbundling: How Building and Joining a Supply Chain are Different and Why
it Matters,” NBER, Working Paper No. 17716.
Baldwin, Richard (2012), “WTO 2.0: Global Governance of Supply-Chain Trade,” CEPR
Policy Insight 64.
Bosworth, Malcolm (2014), “The Proposed Non-MFN Trade in Services Agreement: Bad
for Unilateralism, the WTO and the Multilateral Trading System”, NCCR
Trade Working Paper No 2014/05.
Di Piazza, Jr., Samuel A. and Peter Allgeier (2013), Testimony before the U.S.
Interagency Trade Policy Staff Committee on an International Services
Agreement (March 12, 2013)https://servicescoalition.org/images/TISA_Testimony_FINAL_NEW.pdf
Elsig, Manfred (2010), “WTO Decision-Making: Can We Get a Little Help from theSecretariat and the Critical Mass?” In Redesigning the World Trade

Organization for the Twenty-First Century, Debra P. Steger (ed.), Wilfrid
Laurier University Press.
European Commission (2013), “Negotiations for a Plurilateral Agreement on Trade inServices.”
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Gootiiz, Batshur and Aaditya Mattoo (2009), “Services in Doha: What’s on the Table?”
World Bank Policy Research Working Paper No. 4903.
Harbinson, Stuart and Bart De Meester (2012), “A 21st Century Work Program for theMultilateral Trading System,” Prepared for the National Foreign Trade
Council.
Hufbauer, Gary Clyde, J. Bradford Jensen, and Sherry Stephenson (2012), “Framework
for the International Services Agreement,” Peterson Institute for International
Economics, Policy Brief PB12-10.
Keidanren (2013),“Proposals for Redefining Trade Strategy-- Towards a proactive new trade strategy that takes the initiative to establish
global rules –https://www.keidanren.or.jp/en/policy/2013/034.html
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Staff Working Paper ERSD-2011-05.
Marchetti, Juan A. and Martin Roy (2013a), “The TISA Initiative: An Overview of42Market Access Issues,” World Trade Organization Staff Working Paper
ERSD-2013-11.
Marchetti, Juan A. and Martin Roy (2013b), “The New Kid on the Block: The Trade inServices Agreement,” VoxEU column (December 21, 2013).
Marchetti, Juan A. and Martin Roy (2012), “Is there Reciprocity in Preferential Trade
Agreements on Services?” World Trade Organization Staff Working Paper
ERSD-2012-16.
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2010/13Meltzer, Joshua (2013), “The Internet, Cross-Border Data Flows and International
Trade,” Center for Technology Innovation at Brookings, Issues in Technology
Innovation No. 22.
Miroudot, Sebastian, Jehan Sauvage and Marie Sudreau (2010), “Multilateralising
Regionalism: How Preferential Are Services Commitments in Regional Trade
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Nakatomi, Michitaka (2011), "Toward the Reform of the WTO and the Early Conclusionof the Doha Round," Research Institute of Economy, Trade and Industry
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Nakatomi, Michitaka (2012a), "Exploring Future Application of Plurilateral Trade
Rules: Lessons from the ITA and the ACTA," Research Institute of Economy,
Trade and Industry, RIETI Policy Discussion Paper Series (12-P-009)
http://www.rieti.go.jp/en/publications/summary/12050012.html
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plurilateral approach," Research Institute of Economy, Trade and Industry
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44

Reference Materials 1
Goods

A Comparison of Goods and Services Disciplines
Services
Most-favored nation treatment is the principle (GATS Article II), but exceptions can be registered on theannex on exemptions.

Most-favored nation treatment

Most-favored nation treatment is the principle (GATT Article I).

Market access

Each country ordinarily binds tariff rates (GATT Article II) based on the harmonized system (HS)It is standard practice to offer commitments regarding market access only in specified sectors (GATS
classification table formulated by the WCO. Developed countries have bound almost all products.
Article XVI). Commitments will not necessarily be made for the entire 155 sectors covered by the W120
services sectors list based on the Provisional Central Product Classification. The scope of commitments islimited.

National treatment

National treatment is the principle (GATT Article III).

TBT

Negotiations are proceeding regarding domestic regulations (related to GATS Article VI), but there is
TBT Agreement exists in the WTO. It defines procedures for the introduction of regulations for goods,
not much progress. As the importance of BBM increases in the future, rules on domestic regulationstransparency, standards, and conformity assessment.
will be extremely important for the development of services disciplines.

Subsidies

Agreement on Subsidies and Countervailing Measures exists in the WTO. Detailed disciplines related
to elements including prohibited subsidies and countervailing duties exist.

Discussions concerning disciplines related to subsidies in the services sector are underway (GATS
Article XV), but progress is not being made. The fact that no frameworks exist for countermeasuresagainst the overseas expansion of services protected by subsidies, corresponding to countervailing
duties in the case of goods, may become a significant issue in the future.

Safeguards

There is an agreement concerning safeguards in the WTO. The agreement provides disciplines forelements including conditions for the application of safeguard measures and the details of safeguard
measures.

There are provisions for negotiations in GATS Article X, and discussions are underway, but progress is
not being made. On the one hand, the fact that there are no provisions for safeguards has the effectof preventing members to withdraw commitments, but on the other, because it closes off thepossibility of withdrawing or suspending commitments that have been made, it may make countries
cautious to make commitments.

Anti-dumping

No disciplines exist. There is also no provision for negotiations. In the goods sector, anti-dumping
duties are frequently used improperly in a protectionist fashion, and it is therefore to be hoped that
An anti-dumping agreement exists in the WTO. Detailed disciplines exist for elements such as thethere will be no progress in discussions concerning dumping-related disciplines in the services sector.
definition of dumping and the conditions for application of anti-dumping duties. Negotiations in the area Availability of data in services sector also significantly differs from the goods sector, and it is difficultof rules (anti-dumping, subsidies) are ongoing in the Doha Round, under the leadership of Japan.
to obtain objective cost and trade data in services. At the same time, the fact that nocountermeasures can be applied when services dumping occurs in the sectors covered bycommitments may cause countries to become cautious in making commitments in the future.

Government procurement

The Agreement on Government Procurement (an Annex 4 agreement), a plurilateral agreement, exists.
The transparency of government procurement fell off the agenda of the Doha Round negotiations. No
As at left
agreements exist that discipline all WTO members. Increasing the number of participants in theAgreement on Government Procurement is therefore an important issue.

Competition rules

No disciplines exist in the WTO. Trade and competition (Singapore issues) fell off the agenda in the
Doha Round. Competition rules will be important issues in the future for both goods and services.

Investment rules

With the exception of TRIM, there are no standard disciplines that function as investment rules in
As at left. Mode 3 has the character of investment-related rules (NT, MA) within its scope, but there
either GATT or GATS. Trade and investment (Singapore issues) fell off the agenda in the Doha Round.
is a fundamental limitation due to the scope of commitments.
Investment disciplines will be important issues in the future for both goods and services.

FTA Exemption

A discipline exists in GATS Article V. “Substantial sectoral coverage” is the basis. There is almost no
history of discussion of this discipline. The fact that exceptions to MFN treatment are allowed (there
A discipline exists in GATT Article XXIV. There is a long history of discussion of this discipline.
are numerous cases of registration of exceptions to MFN treatment in the areas of marine“Substantially all trade in goods” is the basis. It allows for significant exceptions to MFN and MA ruletransportation and AV) and that the application of NT and MA commences from the obligations withinin the WTO. On NT, because NT is the principle on goods, FTA does not produce significant difference.
the scope of commitments represent significant differences with GATT. (The discipline commencesfrom GATS and allows further preferential treatment to the participants in the FTA.)As in the case of market access, it is standard practice to offer commitments only in specified sectors(GATS Article XVII). In the sectors in which commitments have been made, national treatment isguaranteed only within the scope of the commitments.

As at left

45

Reference Materials 2
Apparent Level of Interest in Services Negotiations, by Country (Based on the author’s personal opinions as of February 2014)

Japan

U.S.

ＥＵ

Developing nations, etc.

ＷＴＯ

△

ー

△

ー

ＴＩＳＡ

△

◎

○

ー

△～○

◎

ＴＰＰ
（Trans-Pacific Partnership)

ＦＴＡ

ＥＩＡ
(Economic Integration Agreement:△～○
Japan-EU FTA）
ＲＣＥＰ
（Regional Comprehensive Economic △Partnership）◎
ーJapan-China-Korea FTA△ー（China, South Korea）

FTA with ASEAN nations

△

ー

ＴＴＩＰ
（Transatlantic Trade and Investment
Partnership ）Plurilateralagreements bysectorー（Vietnam, Malaysia,
etc. ）△（Chile, etc.）

？

◎

○

△

？

？

Degree of interest: ◎ Extremely strong; ○ Strong; △ Standard; ー Weak or opposed
While a finer mesh could be used for this study, based on the regions that are of interest to each country, it will be important for thedevelopment of Japan’s services sector to select the most efficient framework, cooperate with other countries, and establish an appropriate
sequence.

46

Reference Materials 3
Perspectives on the Legal Form of the TISA
Overview

Precedents

A GATS protocol approach, on an
MFN basis

Participation of sufficientcountries to constitute criticalmass is obtained, and theAgreements on Financial
benefits of the agreement are
Services and Basicextended to all WTO members
Telecommunications
on the MFN principle. The
agreement is formalized in the
WTO as a protocol.

Going alone, on an MFN basis

Participants in the negotiations
voluntarily revise theircommitments, which areextended to all WTO members
on an MFN principle.

Level of difficulty

WTO dispute settlement
procedures

If the participation ofcountries sufficient toconstitute critical masscannot be secured, concerns Can be usedover free riders makeextension of the benefits on
an MFN basis difficult.

Difficult. There is no
It is not a method of plurilateralguarantee that all
implementation of agreements,
participants in the
Can be used
but there are numerous
negotiations will revise theirprecedents for individualcommitments in accordance
initiatives.
with the agreement.

Extremely difficult. A
consensus among WTO
Agreement on Trade in Civil
A plurilateral agreement within the Establishment of a WTO Annex
member countries is
Aircraft, Agreement on
Can be used
WTO
4 agreement
necessary for theGovernment Procurement
establishment of an Annex 4
agreement
Services FTA can be
Many examples of GATS Article created by the agreement
between the participating
V FTA integrated with
A plurilateral agreement outside
Cannot be used
FTA based on GATS Article V GATTArticle XXIV FTA. There countries satisfying thethe WTO
requirements stipulated inare no examples of servicesGATS Article V. (In this
only FTA.
sense it is easy)

Waiver

According to Article IX(3) of the
Marrakesh Agreement, a waiver
can be obtained with theagreement of 3/4 of WTO
member countries.

Agreement of 3/4 of WTO
member countries is achallenging condition.

47

Other

Can be considered to be the mostdesirable approach from theperspective of global rulemaking.
Extension of the benefits on an
MFN basis is the key to thecreation of a protocol based on theagreement of the WTO members.

A high-level relationship of trust
between participating nations is aprecondition

Relationships of rights andobligations exist only between
participants in the agreement.

Fulfillment of the requirements of
GATS Article V is an essentialcondition.

Waivers are not suitable as ongoing
Able to be used? (Dependent
exception measures. Periodic
on content of waiver)
updating of the waiver is necessary.

Reference Materials 4
GATT

Legal Structure of Exceptions to MFN Treatment
GATS

Basic principle

Prohibited (GATT Article I)

Prohibited (GATS Article II)

Registration of exceptions

Not possible

Possible (Annex on Article II Exemptions) (Note: Japan has
not registered exceptions)

GATT Article XXIV (Substantially all trade standard)1) Sufficient discussion regarding interpretation.
2) The basic principle is elimination of tariffs onapproximately 90% of trade within 10 years. (Unclear
points exist in the details.)

Exceptions in FTA

GATS Article V (Substantial sectoral coverage standard)1) Insufficient discussion regarding interpretation.
2) No consensus regarding how far the coverage ofcommitments should extend in FTA in excess of GATS
commitments, or the depth of commitments, in relation to
155 categories and four modes of market access andnational treatment. In addition, the period for elimination of
discrimination in relation to national treatment among
participating countries is defined only as “a reasonable
time-frame” (Article V(1b)).

Market accessCommitments

Tariff rates lower than bound rates are allowed forparticipants in the FTA

No
commitments

Higher-level commitments than GATS commitments areallowed in relation to participating countries (However, MFN
treatment can also be applied)
New commitments are allowed in relation to participating
countries (However, MFN treatment can also be applied)

National treatment
Conditions for commitments (GATS) are relaxed forCommitments National treatment is a principle of GATT (Article III) participating countries (However, MFN treatment can also
be applied)No
commitments

New commitments are allowed in relation to participating
countries (However, MFN treatment can also be applied)

Rules of origin

With regard to FTA, disciplined by preferential rulesof origin (No relevant rules in WTO)

Existing juridical persons conducting substantive business
operations in the territory of a party to the FTA can share
the benefits of the FTA (GATS Article V(6))

Ease of discrimination by country

Discrimination in the areas of border measures andtariffs is easy

Discrimination against foreign investment can be applied as
regulations on market entry, but uniform application isstandard for domestic measures (It is not easy todiscriminate by country)

Extension of the benefits on MFN basis
Towards participants in
the FTA

Article XXIV FTAs can be classified into those withclauses specifying MFN extension, those with clauses As at left. (However, discrimination by country with regard
specifying efforts towards MFN extension, and those to domestic disciplines is generally difficult.)
without such clauses

Towards non-participants
As a general rule, no MFN extension
in the FTA

Can be implemented with or without MFN
extension.However, discrimination by country is generally
difficult with regard to domestic disciplines

48