PREFACE

The Industry Trade and Technology Review (ITTR) is a quarterly staff publication of the

Office of Industries, U.S. International Trade Commission. The opinions and conclusions

it contains are those of the authors and are not the views of the Commission or of any

individual Commissioner. The report is intended to provide analysis of important issues and

insights into the global position of U.S. industries, the technological competitiveness of the

United States, and implications of trade and policy developments.

The information and analysis in this series are for the purpose of this report only. Nothing

in this report should be construed to indicate how the Commission would find in an

investigation conducted under any statutory authority.

Inquiries or comments on items appearing in this report may be made directly to the author,

or to:

Director of Industries

Industry Trade and Technology Review

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Quarterly Review Staff

Larry Brookhart

assisted by

Zema Tucker

Sharon Greenfield

Contributing Authors

Joann Tortorice

Christopher Melly

Robert A. Rogowsky

Director of Operations

Vern Simpson

Director of Industries
12/99

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Industry, Trade, and Technology Review (ITTR)


  
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Industry Trade and Technology Review

12/99
DECEMBER 1999

Industry, Trade, and Technology Review Cumulative Article Listing

i

Listing of Published Articles

(January1997 - December 1999)

January 1997

Basic telecommunication service negotiations in the World Trade

Organization: Impetus, offers, and prospects

U.S. film industry: How mergers and acquisitions are reshaping distribution

patterns worldwide

Global competitiveness and organized labor: The case of Caterpillar Inc. and

the United Auto Workers Union

Evolution of the U.S.-Japanese semiconductor trade regime

April 1997

Liberalization of the Mexican telecommunication sector

Use of magnesium castings in automobiles rises, but challenges remain

U.S. trade in intangible intellectual property: Royalties and licensing fees

July 1997

Mobile satellite services

India’s steel industry emerging as a competitive global player

Textiles and apparel: India’s integration into the world economy and

opportunities for U.S. firms

October 1997

The Uruguay Round elimination of duties on pharmaceuticals: Developments 

in the 2 years since implementation

Alternative materials in the U.S. automotive industry promote development of 

joining and bonding technology

Electronic trade transforms delivery of audiovisual services

January 1998

Free trade in information technology goods 

Factors affecting the commercialization of new manufacturing processes

for materials

Thermoplastic elastomers in the auto industry: Increasing use and the potential

implications

March 1998

Textiles and apparel: New U.S. trade program likely to spur imports from

Israel and Jordan

The assembly industry in Hungary: Favorable business climate creates new

opportunities for U.S. industries

Indian market reforms attract U.S. investment and trade in capital goods

and equipment
DECEMBER 1999

Cumulative Article Listing Industry, Trade, and Technology Review

ii

Listing of Published Articles—Continued

June 1998

China's evolving automotive industry and market

Canadian involvement in Mexico's Maquiladora industry

September 1998

Internet advertising

Progress in recognizing and regulating global professional service providers

Deregulation fosters globalization of the electric power industry

December 1998

Impediments to competitiveness in Russia’s minerals and metals sector

Nonstore retailing: Alternative retailers attracting customers

Apparel sourcing strategies for competing in the U.S. market

March 1999

Korea’s foreign exchange crisis and its implications for U.S.-Korean trade

Advanced structural ceramics: Vast potential has yet to be realized

June 1999

Energy services: Recent trends and future prospects

Market trends affecting the U.S. environmental services sector

Health care services: Strong fundamentals and innovations foreshadow growth in 

U.S. exports and foreign direct investment

October 1999

Outsourcing by the pharmaceutical industry provides opportunities for fine chemical

producers worldwide 

Thailand’s financial crisis and progress towards recovery—Implications for

U.S. trade

December 1999

Air transport services: International regulation and future prospects for liberalization

Renewed services trade negotiations in the WTO
DECEMBER 1999

Industry, Trade, and Technology Review Contents

iii

CONTENTS

Page

Air transport services: International regulation and future

prospects for liberalization .................................... 1

Origins of the bilateral framework ........................................ 1

Chicago conference agreements ...................................... 2

Bermuda agreements and post-1977 bilaterals ............................. 4

Bilateral open skies agreements ....................................... 6

U.S. bilateral agreements with Japan and the United Kingdom .................... 8

The U.S.-Japan bilateral agreement .................................... 9

Major provisions ............................................... 9

Highlights of recent negotiations .................................... 11

The U.S.-U.K. bilateral agreement .................................... 12

Major provisions ............................................... 12

Highlights of recent negotiations .................................... 13

Toward a multilateral framework ......................................... 15

Common aviation area in the European Union ............................. 15

GATS: The annex on air transport services ............................... 18

Outlook ........................................................... 19

Glossary of technical terms ............................................. 20

Renewed services trade negotiations in the WTO ......... 21

GATS structure ..................................................... 22

General framework obligations ........................................ 22

MFN treatment ................................................ 22

Transparency and domestic regulation ............................... 22

Dispute settlement ............................................. 24

Schedules of specific commitments: Obligations and structure ................. 24

Modes of supply ............................................... 25

Limitations to market access and national treatment obligations ............. 25

Supplemental schedules .......................................... 26

Value of GATS commitments ........................................... 26

Renewed negotiations ................................................. 28

Long-term objectives ............................................... 28

Alternative approaches ............................................. 29

Outlook ........................................................... 31
DECEMBER 1999

Contents Industry, Trade, and Technology Review

iv

CONTENTS—Continued

Page

Appendix A: Key performance indicators of selected

industries .............................................................................. A-1

Steel:

Figure A-1 Steel industry: Profitability by strategic group ................... A-2

Table A-1 Steel mill products, all grades ............................... A-2

Table A-2 Steel service centers ..................................... A-3

Figure A-2 Steel mill products, all grades: Selected industry conditions ......... A-3

Automobiles:

Table A-3 U.S. sales of new automobiles, domestic and imported,

and share of U.S. market accounted for by sales of total imports

and Japanese imports, by specified periods, January 1998-September 1999 ...... A-4

Figure A-3 U.S. sales of new passenger automobiles, by quarter .............. A-4

Aluminum:

Figure A-4 Aluminum: U.S. imports, exports, and price .................... A-5

Table A-4 U.S. production, secondary recovery, imports, import penetration,

exports, average nominal price, and LME inventory level of aluminum, 

for third quarter 1998, second quarter1999, and third quarter 1999 ............ A-5

Flat glass:

Figure A-5 Average monthly Japanese imports of flat glass, by quantity and value,

from the United States and all countries, 1995-99 ........................ A-6

Services:

Figure A-6 Balance on U.S. service trade accounts, by quarter, 1998-99 ........ A-7

Figure A-7 Surpluses on cross-border U.S. service transactions

with selected trading partners, by selected quarters, 1997-99 ................ A-7

#
DECEMBER 1999

Industry, Trade, and Technology Review Air Transport Services

 

1

 The views expressed in this article are those of the author. They are not the views of the

International Trade Commission or any of the Commissioners.

 

2

 The subject of this article is limited to scheduled passenger services, and with few exceptions,

does not include reference to the cargo operations of passenger airlines or to all-cargo carriers. 

The article also does not address charter, or nonscheduled, passenger services.

 

3

 The Paris Convention of 1919 established that each nation has sovereignty over the airspace

above its own territory. An open, or liberalized, international air transport regime would thus result

from each nation permitting foreign air carriers to operate within its sovereign airspace.

 

4

 Purfez F. Captain and Robin C. Sickles, “Competition and Market Power in the European

(continued...)

1

Air Transport Services: International

Regulation and Future Prospects for

Liberalization

Joann Tortorice1

jtortorice@usitc.gov

(202) 205-3032

Bilateral air service agreements that govern trade in air transport

services2 allow countries to regulate the operation of foreign carriers

flying to, from, and through their home markets. The international

regulatory regime for aviation has evolved gradually, from a system

that is highly restrictive to one that allows for “open skies,” or the

ability of airlines to fly to and from foreign countries with relatively

few limitations. Although concluding open skies agreements with 40

countries, the United States has yet to forge such agreements with its

top two trade partners in air transport services, Japan and the United

Kingdom. This article examines these issues and considers the outlook

for further liberalization of air transport services. A glossary of

technical terms appears at the end of this article.

Origins of the Bilateral Framework

The first endeavor to develop a multilateral framework pertaining to trade in air transport

services occurred in 1944 at the Chicago Conference, which was evidently convened in

anticipation of the end of World War II and a need for multilateral disciplines to govern

international air transport. The 52 nations represented at the Conference differed widely as

to how far to liberalize the international air transport market.3 The United Kingdom, along

with other major European countries whose civil aviation industries had been damaged during

the war, favored a regulatory environment that would help them to redevelop their air

transport sectors. These countries proposed the creation of a multilateral body that would

rigidly limit foreign carriers’ routes and flight frequency.4 By contrast, the United States,
DECEMBER 1999

Air Transport Services Industry, Trade, and Technology Review

 

4

 (...continued)

Airline Industry: 1976-90,” Managerial and Decision Economics, vol. 18 (1997), p. 210.

 

5

 Mahlon R. Straszheim, The International Airline Industry (Washington, D.C.: The Brookings

Institution, 1969), p. 32, and Captain, “Competition and Market Power in the European Airline

Industry: 1976-90,” Managerial and Decision Economics, p. 210.

 

6

 Clyde Prestowitz, Jr., Don Hilty, Lawrence Chimerine, and Laura Sweeney, “Turbulence Over

the Pacific,” Economic Strategy Institute, Mar. 1996, p. 22.

 

7

 Traffic rights permit designated airlines to: (1) operate over routes specified within the

agreement; (2) determine seating capacity to be provided over such routes (e.g., through flight

frequency or type of aircraft deployed); and (3) establish fares. WTO, Council for Trade in

Services, “Air Transport Services: Background Note by the Secretariat,” S/C/W/59, Nov. 5, 1998, p.

24.

 

8

 Straszheim, The International Airline Industry (Washington, D.C.: The Brookings Institution,

1969), p. 32

 

9

 The Chicago Convention still serves as the organizing framework for trade in air transport and

currently includes 185 member nations. World Trade Organization (WTO), Council for Trade in

Services, “Air Transport Services: Background Note by the Secretariat,” S/C/W/59, Nov. 5, 1998, p.

19.

 

10 Ibid.

 

11 Air Transport Association (ATA), Air Service Rights in U.S. International Air Transport

Agreements, Glossary of Terms, last updated Aug. 10, 1998, p. 4.

2

along with Sweden and the Netherlands, supported “open skies”, or virtually unrestricted

access to foreign air transport markets.5 In large part, because many of the countries

represented at the conference perceived that U.S. airlines held a strong competitive

advantage compared to their domestic carriers, the United States was unsuccessful in its bid

for open skies in 1944.6 The Chicago Conference concluded without an agreement providing

for the multilateral exchange of traffic rights,7 which would have permitted signatories’

airlines to fly freely to and from one another’s country.8

Chicago Conference Agreements

Although the Chicago Conference was unsuccessful in establishing an open regime for the

exchange of traffic rights, it produced three multilateral aviation agreements: the Chicago

Convention; the International Air Services Transit Agreement; and the International Air

Transport Agreement. The Chicago Convention created the International Civil Aviation

Organization (ICAO) (table 1), and established a general set of standards and practices for

the conduct of international civil aviation.9 The Convention granted each nation control over

the operation of foreign carriers in its airspace and permitted countries to preserve cabotage,

or the provision of domestic point-to-point service, for national carriers.10

The Chicago Convention provided the organizational framework within which members

would regulate trade in air transport services whereas the International Air Services Transit

Agreement furnished signatories with the first two “freedoms of the air”: the right to fly over

another country’s territory, or airspace, without landing; and the right to land in another

country for non-traffic purposes (e.g., refueling) (table 2).11 These freedoms form the

conceptual foundation upon which signatory countries grant foreign carriers traffic rights, 
DECEMBER 1999

Industry, Trade, and Technology Review Air Transport Services

3

Table 1

Aviation agreements governing the exchange of traffic rights

Date Title Scope

1944 Chicago Convention A multilateral agreement developed during the Chicago Conference of

1944. It provides a general set of standards and practices governing

trade in air transport services, and established the International Civil

Aviation Organization (ICAO), a multilateral forum permitting countries

to consult one another on air transport issues.

1944 International Air

Services Transit

Agreement

A multilateral agreement established concurrently with the Chicago

Convention. It outlines the first two “freedoms of the air”, which

include: (1) the right to fly over another country’s territory, or airspace,

without landing; and (2) the right to land in another country for nontraffic purposes (e.g., refueling).

1944 International Air

Transport Agreement

A multilateral agreement also established jointly with the Chicago

Convention. It defined the third, fourth, and fifth freedoms of the air

referring to passenger transport between home and host country

markets, as well as to third-party countries. 

1946 Bermuda I Agreement The first U.S. bilateral aviation agreement, which was concluded with

the United Kingdom. This agreement limits airlines’ access to foreign

markets through controls on routes, seating capacity, and fares. It

also served as a model for future bilateral agreements between the

United States and foreign countries.

1977 Bermuda II Agreement A revised and more restrictive version of the Bermuda I Agreement

between the United States and the United Kingdom. The agreement

imposed additional limitations on routes, seating capacity, and fares

(requiring prior approval by both governments), and restricted the

provision of air transport services between second- and third-country

markets.

1978 Post-1977 Bilaterals A liberalized bilateral agreement providing for multiple carrier

designation and prohibiting either signatory from unilaterally limiting

fare levels, the volume of traffic served, and the frequency of

scheduled flights. 

1992 Open Skies A bilateral agreement that liberalizes the foreign provision of air

transport services. Open skies agreements remove restrictions on

the number of designated airlines; routes served; seating capacity;

and frequency of flights. In 1992, the United States negotiated its first

open skies agreement with the Netherlands, and concluded an

additional 39 open skies agreements as of December 1999.

Sources: Compiled by USITC staff from: Air Transport Association (ATA), Air Service Rights in U.S. International Air Transport

Agreements, Glossary of Terms, last updated Aug. 10, 1998, pp. 1-3; OECD, International Air Transport: The Challenges Ahead,

1993, pp. 48-49; Bruce Stockfish, “Opening Closed Skies: The Prospects for Further Liberalization of Trade in International Air

Transport Services,” Journal of Air Law and Commerce, vol. 57 (spring), p. 616; Office of the Assistant Secretary for Aviation and

International Affairs “U.S. Bilateral Aviation Agreements: New/Expanded Agreements in the Current Administration,” updated

November, 1999; and U.S. Department of Transportation, press release, “U.S. Transportation Secretary Slater Leads Transportation

and Trade Mission to Central America, Caribbean Nations,” Dec. 13, 1999, found at http://www.dot.gov/affairs/dot21199.htm,

retrieved Dec. 14, 1999.
DECEMBER 1999

Air Transport Services Industry, Trade, and Technology Review

 

12 The International Air Transport Agreement was ratified by just 19 countries. Eight of these

countries subsequently withdrew from the Agreement. WTO, Council for Trade in Services, “Air

Transport Services: Background Note by the Secretariat,” S/C/W/59, Nov. 5, 1998, pp. 19-20.

 

13 Stockfish, “Opening Closed Skies: The Prospects for Further Liberalization of Trade in

International Air Transport Services,” Journal of Air Law and Commerce, vol. 57 (spring 1992)), 

p. 605 and 608.

4

Table 2

“Freedoms of the air1”: Principles for the exercise of traffic rights

Freedoms of the air Traffic rights

1st Freedom The right to fly across the territory of foreign country without landing.

2nd Freedom The right to land in a foreign country for non-traffic purposes (e.g., for aircraft refueling or

maintenance).

3rd Freedom The right to carry passengers from the airline’s country of registration to a foreign country.

4th Freedom The right to carry passengers from a foreign country to the airline’s country of registration.

5th Freedom The right to carry passengers between two foreign countries, provided that the flight

begins or ends in the airline’s country of registration.

6th Freedom The right to carry passengers between two foreign countries, provided that the flight

passes through the airline’s country of registration.

7th Freedom The right to carry passengers between two foreign countries, without the flight originating,

terminating, or transiting the airline’s country of registration.

8th Freedom The right to carry passengers between two points within a foreign country (also known as

‘cabotage’).

 

1

 In international civil aviation, airlines are permitted to serve foreign markets based on eight so-called “freedoms of the air”. 

The first two freedoms were established under the authority of the International Air Services Agreement, and the third, fourth,

and fifth freedoms were defined in the International Air Transport Agreement. The last three freedoms were reportedly

identified through subsequent air transport negotiations. Although freedoms of the air are not defined in bilateral agreements,

they form the conceptual framework within which signatory countries grant foreign carriers traffic rights, or the authority to

operate over particular routes.

Source: WTO, Council for Trade in Services, “Air Transport Services: Background Note by the Secretariat,” S/C/W/59, Nov. 5,

1998, pp. 20-21.

or the authority to operate over particular routes. Subsequently, a second agreement, the

International Air Transport Agreement, defined the third, fourth, and fifth freedoms of the

air, referring to passenger transport between home and host country markets, as well as to

third-party countries.12

Bermuda Agreements and Post-1977 Bilaterals

In the absence of a multilateral framework for the exchange of traffic rights, nations have

predominantly relied on bilateral arrangements to govern trade in air transport services. In

1946, the United States and the United Kingdom signed the first bilateral air service

agreement, the Bermuda Agreement. The Bermuda Agreement represented a compromise

between the U.S. aspiration for a liberal air transport regime and the British desire to

maintain strict regulatory controls on international air transport.13 The Bermuda Agreement

outlined both “hard” and “soft” rights accorded to U.S. and British airlines and established
DECEMBER 1999

Industry, Trade, and Technology Review Air Transport Services

 

14 Access to routes was controlled through designation of the number of national airlines (i.e.,

airlines which are predominantly owned and controlled by citizens of the country in which the

airline is registered) that could operate as well as by the traffic points, or cities, that they could

serve. Seating capacity was determined by limiting the number of flights per carrier and, in some

instances, the share of traffic that they could transport or the type of aircraft that they could fly. 

Fares were set by a multilateral organization, the International Air Transport Association (IATA)

and, like controls on seating capacity and routes, were subject to the approval of both signatories. 

In the early 1980s, the United States began eliminating IATA tariff procedures from its bilateral air

service agreements. WTO, Council for Trade in Services, “Air Transport Services: Background

Note by the Secretariat,” S/C/W/59, Nov. 5, 1998, p. 22, and Organization for Economic Cooperation and Development (OECD), International Air Transport: The Challenges Ahead, p. 51.

 

15 A computer reservation system (CRS) is a database listing fare and flight information used to

reserve airline seats. WTO, Council for Trade in Services, “Air Transport Services: Background

Note by the Secretariat,” S/C/W/59, Nov. 5, 1998, p. 24.

 

16 ATA, Air Service Rights in U.S. International Air Transport Agreements, last updated

Aug. 10, 1998.

 

17 Prestowitz, “Turbulence Over the Pacific,” Economic Strategy Institute, Mar. 1996, p. 24.

 

18 Dual, or double, approval requires that both signatories approve proposed ticket prices. 

ATA, Air Service Rights in U.S. International Air Transport Agreements, Glossary of Terms, last

updated Aug. 10, 1998, p. 1.

 

19 The U.S. domestic airline industry was regulated by the Civil Aeronautics Board (CAB)

between 1938 and 1978. In 1978, Congress passed the Airline Deregulation Act, which terminated

the CAB’s authority to award routes, determine flight schedules, and set fares. The following

year, Congress passed the International Air Transportation Competition Act to strengthen “the

[global] competitive position of United States carriers.” G. Porter Elliot, “Antitrust at 35,000 feet:

The Extraterritorial Application of United States and European Community Competition Law in the

Air Transport Sector,” The George Washington Journal of International Law and Economics,

(1997/1998), p. 185, found at http://proquest.umi.com/, retrieved June 9, 1999.

5

controls on routes, seating capacity, and fares.14 “Hard” rights pertain directly to the

exercise of traffic rights. “Soft” rights include such elements as dispute resolution,

exemption from taxation and customs duties, the right to sell air transport services in the

currency of the other party to the agreement, the right to own and operate ground handling

services in the territory of the other party to the agreement, and conditions for the provision

of computer reservation system (CRS) services.15 The United States subsequently

concluded “Bermuda I Agreements” with a host of foreign countries including, for example,

Australia, Bolivia, Egypt, Germany, and Spain.16

In 1976, the United Kingdom sought renegotiation of the Bermuda I Agreement, reportedly

claiming that under its terms, the United States enjoyed a disproportionally high share of

U.K.-U.S. traffic.17 The new agreement, Bermuda II, was more restrictive than its

predecessor, and many of its elements continue to govern the U.S.-UK bilateral aviation

relationship, in particular a requirement for dual government approval of ticket prices.18

Following steps to deregulate the U.S. domestic airline market in 1978,19 the United States

began negotiating bilateral agreements that allowed for greater market access by U.S.

carriers. The first “post-1977" bilateral was negotiated between the United States and the
DECEMBER 1999

Air Transport Services Industry, Trade, and Technology Review

 

20 The U.S.-Netherlands agreement reportedly provided an incentive for Belgium and Germany

to renegotiate their bilateral aviation agreements with the United States out of concern that not

doing so would cause U.S.-Europe traffic to be channeled through Amsterdam. OECD,

International Air Transport: The Challenges Ahead, p. 52.

 

21 Under post-1977 bilateral agreements, ticket prices are subject to dual, or double, disapproval. 

Dual disapproval means that fare levels proposed by airlines go into effect unless rejected by both

signatories to the agreement. ATA, Air Service Rights in U.S. International Air Transport

Agreements, Glossary of Terms, last updated Aug. 10, 1998, p. 2.

 

22 OECD, International Air Transport: The Challenges Ahead, pp. 51-52.

 

23 “More Skies to Open as U.S. Signs Pacts,” Aviation Week & Space Technology, Sept. 14,

1992, p. 32, found at http://proquest.umi.com/, retrieved May 25, 1999.

 

24 As with post-1977 bilateral agreements, open skies agreements allow fares proposed by

airlines to become effective unless disapproved by both signatories. U.S. Department of

Transportation, Office of Assistant Secretary for Aviation and International Affairs, “U.S. Open

Skies Agreements,” found at http://ostpxweb.dot.gov/aviation/IntAv/OpenSky.htm, retrieved July

21,1999.

 

25 An airline cannot exercise fifth and sixth freedom rights without the approval of the thirdparty country with whom the airline’s country of registration does not have a bilateral air service

agreement. Bijit Bora and Christopher Findlay, ed., Regional Integration and the Asia-Pacific

(Melbourne: Oxford University Press, 1996), p. 129.

 

26 For further discussion of “open skies” agreements and their potential benefits, see U.S.

International Trade Commission, The Changing Structure of the Global Large Civil Aircraft

Industry and Market: Implications for the Competitiveness of the U.S. Industry, Investigation No.

332-384, USITC publication 3143, Nov. 1998.

6

Netherlands, which had been an early supporter of international air transport liberalization.20

In post-1977 bilaterals, signatories were permitted to designate multiple airlines to operate

in foreign markets. In addition, neither signatory to the agreement could unilaterally restrict

fare levels, the volume of traffic served, the frequency with which flights were scheduled,

or the type of aircraft operated by designated airlines.21 Following negotiations with Belgium,

Germany, and the Netherlands, the United States concluded agreements with other countries

such as Singapore, Thailand, and Korea.22

Bilateral Open Skies Agreements

In 1992, the United States also negotiated its first bilateral “open skies” agreement with the

Netherlands.2 3 Bilateral open skies agreements permit the designation of an unlimited

number of carriers, and place no restrictions on seating capacity, ticket prices, or the routes

that carriers may serve.24 Further, carriers are granted extensive fifth and sixth freedom

rights, allowing them to carry traffic originating in or destined for third-party countries.25

Finally, open skies agreements include provisions that permit airlines from both signatories

to engage in code-sharing alliances, enabling a carrier to list its flights under another airline’s

code in a computer reservation system.

Since 1992, the United States has concluded open skies agreements with an additional 39

countries (table 3), and continues to encourage such agreements with other trade partners.26
DECEMBER 1999

Industry, Trade, and Technology Review Air Transport Services

7

Table 3

U.S. open skies agreements concluded with trade partners as of December 1999

Region Country/year

Asia Pacific Brunei (1997)

Malaysia (1997)

New Zealand (1997)

Singapore (1997)

Taiwan (1997)

Korea (1998)

Africa Tanzania (1999)

Western Europe The Netherlands (1992)*

Austria (1995)*

Belgium (1995)*

Denmark (1995)*

Finland (1995)*

Iceland (1995)

Luxembourg (1995)*

Norway (1995)

Sweden (1995)*

Switzerland (1995)

Germany (1996)*

Italy (1998)*

Portugal (1999)*

Eastern Europe Czech Republic (1995)

Romania (1997)

Commonwealth of Independent States Uzbekistan (1998)

Latin America and the Caribbean Aruba (1997)

Chile (1997)

Costa Rica (1997)

El Salvador (1997)

Guatemala (1997)

Honduras (1997)

Nicaragua (1997)

Netherlands Antilles (1997)

Panama (1997)

Peru (1998)

Argentina (1999)

Dominican Republic (1999)

Middle East and Pakistan Jordan (1996)

Bahrain (1999)

Qatar (1999)

United Arab Emirates (1999)

Pakistan (1999)

*EU-member states

Sources: Office of the Assistant Secretary for Aviation and International Affairs “U.S. Bilateral Aviation Agreements: New/Expanded

Agreements in the Current Administration,” updated November, 1999, and U.S. Department of Transportation, press release, “United

States, Dominican Republic Reach Open Skies Agreement,” Dec. 16, 1999, found at http://www.dot.gov/affairs/dot21199.htm,

retrieved Dec. 20, 1999.
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Air Transport Services Industry, Trade, and Technology Review

 

27 The inclusion of air transport services in certain multilateral trade agreements will be

discussed in a later section. 

 

28 Industry representative, seminar hosted by the Economic Strategy Institute (ESI) and the

Congressional Economic Leadership Institute, Washington, D.C., June 18, 1999.

 

29 For example, these provisions allow airlines to market and sell their services in the territory of

the other party to the agreement; freedom to determine seating capacity and flight frequency levels

based on market conditions; and fair and equitable charges for the usage of airport facilities. U.S.

Department of Transportation, Office of the Assistant Secretary for Aviation and International

Affairs, “Air Transport Agreement Between the Government of the United States of America and

the Government of the Republic of Guatemala,” found at

http://ostpxweb.dot.gov/aviation/IntAv/opensky.htm, retrieved Dec. 20, 1999.

 

30 U.S. Department of Transportation, Office of Assistant Secretary for Aviation and

International Affairs, “U.S. Open Skies Agreements,” found at

http://ostpxweb.dot.gov/aviation/IntAv/OpenSky.htm, retrieved July 21, 1999.

 

31 In 1998, Japan accounted for 18 percent of U.S. exports of passenger fares, and the United

Kingdom accounted for 11 percent. U.S. Department of Commerce (USDOC), Bureau of Economic

Analysis (BEA), Survey of Current Business, Oct. 1999, p. 71.

8

Barring a shift to a multilateral regime governing trade in air transport,27 bilateral open skies

agreements will likely continue to serve as the mechanism through which international civil

aviation is liberalized.28

The successful negotiation of open skies agreements by the United States and its trade

partners represents significant progress in efforts to dismantle restrictions on international

air transport. Additional elements of these open skies agreements include --

(1) Liberal provisions on charter, or nonscheduled, air transport service;

(2) Right to convert earnings and remit them in hard currency promptly and without

restrictions; 

(3) Right of airlines to perform ground handling of their passengers and cargo; 

(4) Procompetitive “doing-business provisions,”pertaining to airlines’ commercial and

operational activities;29

(5) Explicit commitment for nondiscriminatory operation of, and access for, computer

reservation systems; 

(6) Model provisions on safety and security established by the Chicago Convention;

and 

(7) Seventh freedom traffic rights for scheduled and charter all-cargo service (which

has been agreed to by many but not all U.S. open skies partners).30

U.S. Bilateral Agreements With Japan and the United

Kingdom

Although Japan and the United Kingdom are the two largest U.S. export markets in the air

transport sector, accounting for nearly 30 percent of U.S. exports of air passenger transport

services,31 the United States has yet to conclude an open skies agreement with either
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32 Gateway cities differed somewhat in the original 1952 bilateral agreement. “Civil Air Transport

Agreement Between Japan and the United States of America,” Schedule (of routes), signed Aug.

11, 1952.

 

33 A route permitting Japanese carriers to fly from Japan via Anchorage to New York is

scheduled separately in the agreement. ATA, Air Service Rights in U.S. International Air

Transport Agreements, Japan, last updated Aug. 27, 1998, p. 1.

 

34 Here, the term “beyond” denotes the ability of Japanese airlines to carry passengers between

Europe and third-party countries. 

 

35 Carrier names are not specified in bilateral agreements.

 

36 Pursuant to the 1952 bilateral, Pan Am, Northwest, and Flying Tiger, a U.S. cargo carrier, were

selected as designated carriers. Pan Am sold its Pacific routes to United Airlines in 1986, while

Flying Tiger sold its rights to operate over Japan routes to FedEx.

 

37 For instance, a 1982 record of consultations adds routes permitting U.S. carriers to fly

between Seattle, Portland and Tokyo. Japanese carriers, on the other hand, are allowed to fly

between Tokyo, Seattle, and Chicago. In addition, Japanese carriers are permitted to operate two

weekly flights between Tokyo, Los Angeles, and Sao Paulo/Rio de Janeiro. In 1985, new routes

were added between Japan and Micronesia (Guam and Saipan), as well as between Japan and the

U.S. mainland /Hawaii. U.S. and Japanese carriers serving these routes were restricted in the

number of weekly flights they were permitted to operate. ATA, Air Service Rights in U.S.

International Air Transport Agreements, Japan, last updated Aug. 27, 1998, pp. 2-4.

9

country. The United States maintains its Bermuda II Agreement with the United Kingdom

and a Bermuda I Agreement with Japan, although the parties have recently made efforts to

move toward open skies.

The U.S.-Japan Bilateral Agreement

Major Provisions

The United States and Japan concluded a Bermuda I Agreement on August 11, 1952. The

agreement has since undergone multiple revisions, with the objective of providing greater

market access for the countries’ respective airlines. According to the agreement (table 4),32

U.S. carriers are granted authority to operate over routes between the United States and

three traffic points: Naha, Osaka, and Tokyo. The United States is also permitted to carry

fifth freedom traffic beyond Naha, Osaka, and Tokyo to third-party countries. In contrast,

the agreement allows Japanese carriers to fly from Japan to U.S. cities, including Honolulu,

Los Angeles, New York,33 and San Francisco, as well as to Saipan and Guam. Japanese

carriers are also granted beyond rights, permitting them to carry passengers from Honolulu,

San Francisco, and New York to Europe and beyond;34 from Honolulu and San Francisco

to Mexico and Central America; and from Honolulu and Los Angeles to South America.

While in the original agreement Japan designated only one passenger carrier, Japan

Airlines,35 the U.S. designated two, United Airlines and Northwest (as well as one cargo

carrier, FedEx).36

Between 1952 and 1989, the United States and Japan increased the number of designated

carriers, the frequency with which they operated, and the routes that they served.37 Further,

a 1989 memorandum of understanding permits increases in seating capacity on previously
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Air Transport Services Industry, Trade, and Technology Review

 

38 Ibid., p. 5.

 

39 New U.S. carriers named to the agreement included American, Delta, and Continental airlines,

as well as cargo carrier UPS. Japanese carriers included All Nippon Airways (ANA) and Nippon

Cargo Airlines (NCA). Hufbauer, ed., Flying High: Liberalizing Civil Aviation in the Asia

Pacific, Nov. 1996, p. 52.

10

Table 4

A comparison of major provisions regarding more liberalized traffic rights in four types of bilateral air

service agreements

Bermuda I

(Japan)

Bermuda II

(United Kingdom)

Post-1977

Bilaterals Open Skies

• Multiple airline

designation on routes

• Named traffic points 1 to

be served by

designated airlines

• Ex post facto review of

seating capacity, flight

frequency2

• Dual approval of

 fares

• Extensive fifth freedom

rights

• Single airline

designation3 on

routes

• Named traffic points to

be served by

designated airlines

• Prior approval of

seating capacity and

flight frequency

• Dual approval of fares

• Limited fifth freedom

rights

• Multiple airline

designation on routes

• Named traffic points to

be served by

designated airlines

• No restrictions on

capacity or flight

frequency

• Either dual

disapproval of fares,

or country of origin

rules 4 

• Extensive fifth freedom

rights

• No limits on the

number of designated

airlines

• No restrictions on

routes/no named

traffic points to be

served by designated

airlines

• No restrictions on

seating capacity or

flight frequency

• Dual disapproval of

fares

• Full fifth and sixth

freedom rights

• Approval of codesharing arrangements

 

1 In addition to delineating routes, the agreement specifies traffic points, or cities, to be served by designated foreign airlines.

 

2

 Ex post facto review permits airlines to determine independently seating capacity and flight frequency levels on specific

routes, although such levels may be later subject to government review. 

 

3

 Single designation permits signatories to designate only one national airline to fly on each of the routes specified within the

agreement. On some routes, however, the Bermuda II Agreement may also permit the designation of multiple airlines.

 

4

 Country-of-origin rules permit one signatory to unilaterally prevent the use of proposed fares with regard to traffic

originating in its own country. 

Sources: Compiled by USITC staff from ATA, Air Service Rights in U.S. International Air Transport Agreements, Glossary of Terms,

last updated Aug. 10, 1998, p. 1.; William E. O’Connor, An Introduction to Airline Economics, 5th ed., (Westport, Connecticut:

Praeger, 1995), p. 51; OECD, International Air Transport: The Challenges Ahead (Paris: Organization of Economic Co-operation

and Development, 1993), p. 50; WTO, Council for Trade in Services, “Air Transport Services: Background Note by the Secretariat,”

S/C/W/59, Nov. 5, 1998, p. 23; and Clyde Prestowitz, Jr., Don Hilty, Lawrence Chimerine, and Laura Sweeney, “Turbulence Over

the Pacific,” Economic Strategy Institute, Mar. 1996, p. 24.

scheduled routes between the United States and Japan. To this end, signatories were

allowed to designate additional new carriers to operate, or to increase the flight frequency

of already-named carriers.38 By 1989, the United States had designated four more airlines

to serve U.S.-Japan routes, while Japan had named an additional two carriers.39
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40 Discussion of a 1996 MOU has been omitted because it addresses primarily the provision of

air cargo services between the United States and Japan, which is outside the scope of this article. 

For further information, see ATA, Air Service Rights in U.S. International Air transport

Agreements, Japan, last updated Aug. 27, 1998, pp. 7-10. 

 

41 Memorandum of Understanding amending Civil Air Transport Agreement between Japan and

the United States of America, signed Mar. 14, 1998, p. 1.

 

42 Incumbent U.S. passenger carriers Northwest Airlines and United Airlines still face capacity

restrictions on their beyond rights from Japan to third-party countries. Memorandum of

Understanding amending Civil Air Transport Agreement between Japan and the United States of

America, signed in Tokyo, Japan on Mar. 14, 1998, pp. 2-6.

 

43 “JAL, American Agree Deal,” Financial Times, Feb. 26, 1998, p. 26.

 

44 Carole A. Shifrin and Eiichiro Sekigawa, “U.S. and Japan Agree On Historic Air Bilateral,”

Aviation Week & Space Technology, Feb. 9, 1998, p. 74.

11

Highlights of Recent Negotiations 40

On January 30, 1998, the United States and Japan concluded a new memorandum of

understanding (MOU) that substantially amends the 1952 bilateral agreement and enhances

significantly the operating rights of U.S. and Japanese carriers. The agreement permits both

signatories to have the same number of incumbent carriers and allows such incumbents to

have unrestricted access on scheduled routes.41 Under the MOU, Japan’s All Nippon

Airways and Nippon Cargo Airlines were newly-designated as incumbent carriers, providing

Japan with the same number of incumbents as the United States. Both U.S. and Japanese

incumbent carriers are permitted to fly between any two points in the United States and

Japan without limitation on capacity or frequency of service.42 The MOU also allows

nonincumbent U.S. carriers - American, Delta, and Continental - to increase the frequency

of their flights. Further, the United States is permitted to designate two added carriers, TWA

and US Airways, to serve U.S.-Japan routes. In addition, the MOU provides for codesharing arrangements between U.S. and Japanese carriers. For example, in October 1998,

American Airlines and Japan Airlines initiated their code-sharing alliance, which serves

nearly 290 cities in the United States and 70 cities in Japan. The code-sharing agreement

also permits the two airlines to operate joint flights to third-country destinations, including

countries in the Asia Pacific region and Latin America.43 Other proposed pairings include

United Airlines/All Nippon Airways, and Northwest Airlines/Japan Air System. Finally, the

MOU grants U.S. carriers access to a greater number of landing slots in Japan’s Narita and

Kansai airports. Such access stems from reallocation of unused slots previously held by U.S.

cargo carrier FedEx.44

Along with the liberalizing measures outlined above, the 1998 MOU provides for followup

negotiations to take place by January 1, 2001, the aim of which is to further liberalize the air

transport market between the United States and Japan. In the event that negotiations are not

successful in reaching a subsequent agreement, the 1998 MOU provides that nonincumbent

carriers will be able to increase the frequency of their flights between the years 2002 and
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Air Transport Services Industry, Trade, and Technology Review

 

45 Memorandum of Understanding amending the Civil Air Transport Agreement between Japan

and the United States of America, signed Mar. 14, 1998, pp. 21-23.

 

46 “U.S. Urged to Repudiate Flight Treaty With Britain,” The Washington Times, Oct. 23, 1998,

found at http://newsedge/NewsEDGE/PreviewSt..., retrieved Jan. 8, 1999.

 

47 ATA, Air Service Rights in U.S. International Air Transport Agreements, United Kingdom,

last updated July 1, 1997, pp. 1-2 and 15.

 

48 U.S. General Accounting Office (GAO), Testimony Before the Subcommittee on Aviation,

Committee on Commerce, Science, and Transportation, U.S. Senate, “International Aviation:

Competition Issues in the U.S.-U.K. Market,” Statement of John H. Anderson, Jr., Director,

Transportation Issues, Resources, Community, and Economic Development Division, June 4, 1997,

p. 4.

 

49 Since 1977, there have been over a dozen amendments to the agreement. ATA, Air Service

Rights in U.S. International Air Transport Agreements, last updated July 1, 1997, p. 1.

 

50 U.S. Department of Transportation, Statement of Federico Pena , Secretary of Transportation,

Before the Sub-Committee on Aviation, Committee on Commerce, Science, & Transportation

Concerning International Aviation Agreements, May 24, 1995, found at

http://www.dot.gov/affairs/1995/avtest.htm, retrieved Feb. 9, 1999.

 

51 For example, a second U.S. airline was permitted to fly between Chicago and London’s

Heathrow Airport, while British Airways was permitted to increase the frequency of its flights

(continued...)

12

2005, thus allowing for greater market access by such carriers.45 This provision of the MOU

may be viewed as a “phased-in” approach to liberalization, stopping just short of open

skies.46

The U.S.-U.K. Bilateral Agreement

Major Provisions

Trade in air transport between the United States and the United Kingdom continues to be

regulated by the relatively restrictive Bermuda II Agreement. Unlike the air service

agreement between the United States and Japan, the U.S. bilateral agreement with the

United Kingdom controls market access through strict limitations on routes, seating capacity,

and fares (see table 4). Apart from these limitations, the bilateral agreement restricts access

to London airports. Both signatories are permitted to designate only two airlines to operate

between airports in London and a host of U.S. cities named within the agreement.47 The

United States has claimed that the limited access of U.S. airlines to Heathrow Airport has

helped perpetuate the dominant position of British Airways in the U.S.-U.K. market.48

Bilateral efforts to amend the Bermuda II Agreement have liberalized the U.S.-U.K. air

transport market only to a limited degree.49 In 1991, the agreement was revised to enable

the United States to replace the two U.S. carriers permitted to serve Heathrow, Pan Am and

TWA, with American and United Airlines. In turn, the United Kingdom required the United

States to pay for succession rights, and also negotiated the right for its largest carrier, British

Airways, to enter into a code-sharing arrangement with US Airways.50 A 1995 agreement

further opened the U.S.-U.K. market by permitting U.S. and British carriers to expand

service on certain routes,51 and by increasing code-sharing opportunities.52
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51 (...continued)

between Philadelphia and London. In addition, both U.S. and British carriers were allowed to fly

between regional airports in the United Kingdom (airports located outside of London), and the

United States. U.S. Department of Transportation, press release, “U.S., U.K. Reach Agreement on

Expanded Services,” June 5, 1995, found at http://www.dot.gov/affairs/1995/ ukagree.htm,

retrieved Feb. 9, 1999.

 

52 Ibid.

 

53 The alliance was initially proposed in June 1996. “EU Ponders Stiff Terms for Approving

Alliance,” Aviation Week & Space Technology, Aug. 4, 1997, p. 38.

 

54 GAO, “International Aviation: Competition Issues in the U.S.-U.K. Market,” June 4, 1997, p. 7.

 

55 Antitrust approval was granted for alliances between Northwest Airlines and Dutch carrier,

KLM, and between United Airlines and German carrier, Lufthansa, after the Netherlands and

Germany signed open skies agreements with the United States in 1992 and 1996, respectively. 

Carole A. Shifrin, “U.S., U.K. Open Talks on Bilateral Framework,” Aviation Week & Space

Technology, June 24, 1996, p. 32, and Dan Reed, “U.S. Officials Cancels Talks on American

Airlines, British Airways Alliance,” Fort Worth Star-Telegram, Oct. 10, 1998, found at

http://newsedge/NewsEDGE/PreviewSt..., retrieved Jan. 8, 1999. 

 

56 The U.S. Department of Transportation works in conjunction with the U.S. Department of

Justice in reviewing the antitrust implications of airline alliances. GAO, Testimony Before the

Subcommittee on Aviation, Committee on Commerce, Science, and Transportation, U.S. Senate,

“International Aviation: DOT’s Efforts to Increase U.S. Airlines’ Access to International Markets,”

Statement of John H. Anderson, Jr., Director, Transportation Issues, Resources, Community, and

Economic Development Division, Mar. 14, 1996, p. 9, and U.S. Department of Transportation,

Office of the Secretary, Office of Public Affairs, “Statement of Transportation Secretary Rodney E.

Slater on American/British Airways,” press release, July 30, 1999, found at

http://www.dot.gov/briefing.htm, retrieved Aug. 2, 1999.

 

57 For added detail, see U.S. International Trade Commission, The Changing Structure of the

Global Large Civil Aircraft Industry and Market: Implications for the Competitiveness of the

U.S. Industry, Investigation No. 332-384, USITC publication 3143, Nov. 1998, p. 6-16.

13

Highlights of Recent Negotiations

Until recently, negotiations to amend the U.S. bilateral agreement with the United Kingdom

toward an open skies arrangement centered around the proposal of a strategic alliance

between American Airlines and British Airways.53 The two carriers are estimated to carry

nearly 60 percent of scheduled passenger traffic, between the United States and the United

Kingdom.54 While the United States made antitrust exemption of the alliance contingent

upon an open skies agreement,55 the United Kingdom opted for continued close regulation

of air transport between the two countries. In July 1999, the U.S. Department of

Transportation rejected an application submitted by American Airlines and British Airways

seeking antitrust approval for the alliance but, at the same time, reaffirmed its commitment

to establish an open skies agreement with the United Kingdom.56

Talks between the United States and the United Kingdom remain ongoing. For instance,

U.S. negotiators have requested more takeoff and landing slots at Heathrow Airport.57 Such

slots would be used primarily by new entrants and/or by carriers which had been denied prior

access to that airport. The United States also proposed that carriers be permitted to set

fares unless disapproved by both governments. Further, the United States aims to expand
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Air Transport Services Industry, Trade, and Technology Review

 

58 Under the current U.S.-U.K. bilateral, limited beyond rights exist for U.S. carriers. Charles

Goldsmith, “Open Skies Talks Between U.S., U.K. to Address Pricing, ‘Fly America’ Rules,” The

Wall Street Journal, Oct. 2, 1998, p. A12.

 

59 Remarks by Richard Branson, CEO, Virgin Atlantic, at “Aviation in the 21st Century”

Conference, hosted by the U.S. Department of Transportation in Chicago, Illinois, Dec. 5-7, 1999,

and Goldsmith, “Open Skies Talks between U.S., U.K. to Address Pricing, “Fly America’ Rules,”

The Wall Street Journal, Oct.. 2, 1998, p. A12. 

 

60 Goldsmith, “Open Skies Talks Between U.S., U.K. to Address Pricing, ‘Fly America’ Rules,”

The Wall Street Journal, Oct. 2, 1998, p. A12.

 

61 Michael Skapinker, “BA-American Air Alliance Faces a Further Setback: Carriers’ Planned

Link-up May Be Delayed After U.S. Walks Out of ‘Open Skies’ Talks With U.K.,” Financial

Times, Oct. 8, 1998, p. 23.

 

62 GAO, “Airline Competition: Impact of Changing Foreign Investment and Control Limits on

U.S. Airlines,” Dec. 1992, p. 22.

 

63 Goldsmith, “Open Skies Talks Between U.S., U.K. to Address Pricing, ‘Fly America’ Rules,”

The Wall Street Journal, Oct. 2, 1998, p. A12.

 

64 In June 1998, the United States and France signed a bilateral agreement which allows for the

complete elimination of restrictions on air transport service between the two countries within 5

years. “U.S. Aims to Open U.K. Skies,” CNN Financial Network, found at

http://www.japan.cnnfn.com/, posted Feb. 15, 1999, and retrieved June 9, 1999, and U.S.

Department of Transportation, Office of the Assistant Secretary for Public Affairs, “United States,

France Sign Aviation Agreement,” news release, June 18, 1998, found at

http://www.dot.gov/affairs/1998/dot11798.htm, retrieved July 8, 1999.

 

65 Michael Skapinker, “U.S. Willing to Accept Phased Progress on Open Skies by U.K.,”

Financial Times, Feb. 15, 1999

14

beyond rights for U.S. carriers, permitting them to pick up passengers in the United Kingdom,

and transport them to third-party countries.58

The United Kingdom has resisted U.S. efforts to achieve open skies. In recent negotiations,

the United Kingdom has expressed concern over pricing issues, U.S. restrictions on foreign

ownership, and “Fly America” rules.59 First, the United Kingdom desires to retain the right

for one country to unilaterally veto a proposed new fare, or, as an alternative, to establish a

formal arbitration mechanism to resolve pricing disputes between the two countries.60

Second, the United Kingdom seeks the relaxation of restrictions on foreign investment in

U.S. airlines, thus permitting U.K. firms to own and operate U.S. domestic carriers.61 Under

U.S. law, a foreign entity is permitted to own no more than 25 percent of voting stock and

49 percent of nonvoting stock of a U.S. airline.62 Finally, the United Kingdom views “Fly

America” rules, requiring that, whenever feasible, U.S. Government employees fly on U.S.-

owned carriers, as an impediment to British carriers’ serving the U.S. market.63

According to industry sources, the United States and the United Kingdom have engaged in

discussions on an agreement that gradually liberalizes competitive conditions, similar in

approach to agreements concluded between the United States and Japan, and between the

United States and France.64 Under this scenario, Bermuda II reportedly would continue to

serve, in the short term, as the bilateral framework governing air transport between the

United States and the United Kingdom.65 Industry sources indicate that gradual liberalization

of the U.S.-U.K. market would be achieved through the successful negotiation of core issues
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66 Skapinker, “U.S. Willing to Accept Phased Progress on Open Skies by U.K.,” Financial

Times, Feb. 15, 1999, and Joan M. Feldman, “To Phase or Not to Phase,” Air Transport World, Apr.

1999, p. 44.

 

67 The first and second packages liberalized measures in existing bilateral aviation agreements

between EU members. Jack Hayward, ed., Industrial Enterprise and European Integration, (New

York: Oxford University Press, 1995), p. 197.

 

68 J. Mawson, ed., “Air Transport Liberalization in the European Union: An Assessment,”

Regional Studies, vol. 31.8 (1997), p. 808.

 

69 “European Commission Takes Legal Action Against EU Member States’ Open Skies

Agreements With the United States,” European Union press releases, No. 16, Mar. 11, 1998, found

at http://www.eurunion.org/ news/press/1998-1/pr16-98.htm, retrieved June 9, 1999.

15

that have heretofore stalled progress on open skies talks. Such issues might include, for

example, U.S. carriers’ access to Heathrow Airport and the relaxation of foreign ownership

limitations on U.S. airlines.66

Toward a Multilateral Framework

While the liberalization of international aviation has been achieved primarily through the

negotiation of bilateral open skies agreements, multilateral agreements have also served to

lift restrictions on the provision of air transport services (table 5). For instance, some

regional trade agreements, such as the Andean Pact and Mercosur, contain measures which

remove restrictions on access to all intra-regional routes for member country airlines. Other

agreements, including NAFTA and the Group of Three, include provisions on ancillary

transport services, such as aircraft maintenance and repair, and computer reservation system

(CRS) services. Two multilateral efforts may have particular impact on U.S. open skies

policy: the common aviation area of the EU and the General Agreement on Trade in

Services (GATS).

Common Aviation Area in the European Union

In April 1997, the European Union concluded the last of a three-step process to deregulate

the EU aviation market. The “third package,” as it is termed, permits any airline belonging

to an EU member state to fly on any route inside the European Union.67 The deregulatory

package also allows such airlines to provide cabotage, or point-to-point service, within any

EU country.68 While the conclusion of the third package has had a significant liberalizing

impact on the operation of European airlines inside the EU, it has also held important

implications for aviation relations between EU member states and trade partners.

Following the establishment of a common aviation area, EU authorities have challenged the

right of individual EU Member States to negotiate bilateral agreements with the United

States. In particular, the European Commission (EC) has claimed that such bilaterals run

counter to the purpose of the common aviation market by discriminating between airlines

from EU countries that have concluded open skies agreements with the United States and

those from countries that have not.69 The EC has also claimed that the negotiation of
DECEMBER 1999

Air Transport Services Industry, Trade, and Technology Review

16

Table 5

Multilateral initiatives which include provisions on air transport

Agreement Air transport-related efforts/measures

Asia-Pacific Economic Cooperation 

(APEC) Forum

Established a working group in 1995 to address the creation of a more

competitive environment for the provision of air services among APEC

members.1 In February 1998, the APEC Air Service Group (ASG)

recommended liberalizing eight categories of air transport services,

including air cargo services. (For more detail, see “APEC Committee on

Trade and Investment,” available at http://www.apecsec.org.sg/cit/cti96/

11trspot.html.)

Andean Sub-regional Integration

Agreement (Andean Community)

Beginning in June 1992, airlines from member-countries (Bolivia,

Colombia, Ecuador, Peru, and Venezuela) were permitted unrestricted

access to intra-regional routes, and were also allowed to provide domestic

point-to-point service (cabotage). (For more detail, see Organization of

American States (OAS), “Provisions on Trade in Services in Trade

Integration Agreements of the Western Hemisphere,”

FTAA.ngsv/w/08/Rev.3, Washington, DC, June 22, 1999.)

General Agreement on Trade in

Services (GATS)

Addresses ancillary air transport services, including aircraft maintenance

and repair, the selling and marketing of air transport services, and

computer reservation system (CRS) services. (For more detail, see WTO:

Council for Trade in Services, “Annex on Air Transport Services,” available at

http://www.wto.org/services/9-anats.html.)

Group of Three Liberalizes the provision of aircraft maintenance and repair services,

speciality air services,2 and computerized reservation services (CRS)

among the three member countries (Colombia, Mexico, and Venezuela).

(For more detail, see OAS, “Provisions on Trade in Services in Trade

Integration Agreements of the Western Hemisphere,” Washington, DC,

June 22, 1999.)

European Common Aviation Market Concluded in April 1997, the EU’s third package on aviation deregulation

permits EU airlines to operate on any route inside the European Union, and

to provide cabotage within member-states. (For more detail, see J.

Mawson, ed., “Air Transport Liberalization in the European Union: An

Assessment,” Regional Studies, vol. 31.8, 1997.)

Southern Cone Common Market

(Mercosur)

The Annex on Air Transport Services, established during the Protocol of

Montevideo, removes market access restrictions on routes between

member countries (Argentina, Brazil, Paraguay, and Uruguay). (For more

detail, see OAS, “Provisions on Trade in Services in Trade Integration

Agreements of the Western Hemisphere,” Washington, DC, June 22, 1999.)

North America Free Trade

Agreement (NAFTA)

Liberalizes the provision of two air transport services among NAFTA

members (Canada, Mexico, and the United States). These two services

are: (1) aircraft maintenance and repair services, during which an aircraft is

withdrawn from service; and (2) speciality air services. (For more detail, see

OAS, “Provisions on Trade in Services in Trade Integration Agreements of

the Western Hemisphere,” Washington, DC, June 22, 1999.)

 

1

 APEC members include Australia, Brunei Darussalam, Canada, Chile, People’s Republic of China, Hong Kong, Indonesia,

Japan, Korea, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, Chinese Taipei,

Thailand, Vietnam, and the United States.

 

2

 Specialty air services include, for example, aerial mapping, aerial surveying, aerial photography, forest fire management, fire

fighting, aerial advertising, glider towing, parachute jumping, and aerial construction, among other activities.

Source: Compiled by USITC staff from various sources.
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70 These countries were Austria, Belgium, Denmark, Finland, Germany, Luxembourg, Sweden,

and the United Kingdom. The open skies agreement concluded between the United States and the

Netherlands in 1992 was not included in the suit because it was determined to have preceded the

adoption of the European Common Market. Reportedly, as of November 1999, no resolution had

been achieved in the EC’s case, which was presented before the European Court of Justice in

December 1998. “European Commission Takes Legal Action”; John D. Morocco, “European

Commission Challenges Bilaterals,” Aviation Week & Space Technology, Mar. 16,1998, p. 30; and

Alan George, “Europe’s Majors Call for Liberalised Transatlantic,” Airline Business, Nov. 1999, p.

19.

 

71 The EC has been given a mandate to negotiate ancillary air transport services and has

addressed such services under the European Union’s schedule of commitments in the GATS.

 

72 “European Commission Takes Legal Action,” and David Knibb, “Double Standards,” Airline

Business, Mar. 1999, p. 32.

 

73 “European Commission Takes Legal Action Against EU Member States’ Open Skies

Agreements With the United States,” The European Union press releases, No. 16, Mar. 11, 1998.

 

74 Official from the U.S. Department of Transportation, response via electronic mail to questions

posed by USITC staff, Aug. 9, 1999.

 

75 The United States has open skies agreements with 10 EU Member States (see table 3). U.S.

Department of Transportation, “U.S.- European and U.S.-EU International Transportation Issues,”

Briefing at the Foreign Press Center in Washington, D.C., presented by U.S. Secretary of

Transportation Rodney Slater and A. Bradley Mims, Deputy Assistant Secretary of Transportation

for International and Aviation Affairs, Mar. 19, 1999, and U.S. DOT, “U.S. Mission to the EU Press

Briefing,” presented by Rodney E. Slater, U.S. Secretary of Transportation, Brussels, Mar. 24, 1999,

and Office of the Assistant Secretary for Aviation and International Affairs, “U.S. Bilateral

Aviation Agreements: New/Expanded Agreements in the Current Administration,” updated Dec.,

1999.

17

bilateral agreements by individual member states contravenes EU community law. In

December 1998, the EC filed suit against eight EU members for concluding separate aviation

agreements with the United States since the adoption of the European Common Market in

1992.70 Finally, the EC has asserted that because all cross-border trade issues fall within its

jurisdiction, it alone has the authority to negotiate traffic rights with foreign countries on

behalf of EU members.71 The latter assertion has not been agreed to by most EU countries,

however, and the line between the EC’s and individual EU member’s authority, with respect

to aviation issues, is still unclear.72

The future shape of aviation relations between the United States and the EU could depend

largely on whether the EC is found to have the authority to negotiate traffic rights on behalf

of EU members. The EC has indicated its desire for a multilateral agreement between the

United States and EU member states, which it feels would provide for a more balanced

exchange of traffic rights than existing U.S. bilaterals with EU countries.73 For its part, the

United States has indicated that it is not in a position to negotiate an aviation agreement with

the EC concerning traffic rights until the EC has been given a mandate to negotiate traffic

rights on behalf of EU members.74 The United States has further indicated its intent to forge

more open skies agreements with individual EU countries.75
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Air Transport Services Industry, Trade, and Technology Review

 

76 It should be noted that there are some issues pertaining to the provision of air transport

services that are addressed both in bilateral agreements and in the GATS. These include, for

example, measures related to dispute resolution, currency conversion, ground handling operations,

and CRS services.

 

77 WTO, “Annex on Air Transport Services,” summary document found at

http://www.wto.org/wto/services/9-anats.htm, retrieved Feb. 4, 1999.

 

78 The phrase “services directly related to the exercise of traffic rights” is not defined within the

Annex on Air Transport Services, and it appears that some countries have scheduled commitments

that do in fact relate to traffic rights, such as those pertaining to “aircraft leasing with crew” and

“air transport passenger services.” WTO, Council for Trade in Services, “Air Transport Services:

Background Note by the Secretariat,” S/C/W/59, Nov. 5, 1998, pp. 1 and 16.

 

79 This would be the equivalent of third and fourth freedom traffic rights. Such rights would be

granted to the airlines of GATS signatories only.

 

80 This would be the equivalent of fifth, sixth, and seventh freedom traffic rights. Such rights

would be granted to the airlines of GATS signatories only.

 

81 An eighth freedom traffic right.

 

82 U.S. Department of Transportation (DOT), Office of International Aviation, Office of the

Secretary, “Aviation Issues in GATS 2000 and Other Fora,” June 1999.

18

GATS: The Annex on Air Transport Services

The General Agreement on Trade in Services (GATS) provides limited coverage of aviation

issues through the Annex on Air Transport Services.76 Specifically, the GATS addresses

three ancillary services with respect to air transport: (1) aircraft repair and maintenance; (2)

the selling and marketing of air transport services; and (3) computer reservation system

(CRS) services. Aircraft repair and maintenance pertain only to those activities performed

on the aircraft when it is on the ground. The selling and marketing of air transport services

includes the advertisement of air transport services and the distribution of airline tickets, but

does not address the pricing of airline seats. CRS services pertain to information regarding

airline fares and seat availability.77 The GATS does not include measures on traffic rights

or “services directly related to the exercise of traffic rights.”78

The coverage of air transport services under the GATS will be re-examined in upcoming

services negotiations (see related article in this issue), with a view toward possibly

augmenting the scope of commitments in this sector. For example, consideration has been

given to incorporating traffic rights under the framework of the GATS. If full market access

commitments were made regarding traffic rights, such rights could allow foreign carriers to

fly without limitation between their home country and host-country markets.79 National

treatment commitments would imply further liberalization of services provided by foreign

carriers. In particular, national treatment could allow a carrier to fly, without restriction,

between two foreign countries.80 Unqualified national treatment could also permit an airline

to carry traffic within a foreign country (cabotage),81 although the granting of cabotage rights

to foreign carriers is currently prohibited by most countries, including the United States.82

Expanding the coverage of air transport services under the GATS poses both advantages and

disadvantages. Potential advantages may include the opportunity for carriers to better serve
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Industry, Trade, and Technology Review Air Transport Services

 

83 As noted earlier, under the bilateral regime, airlines must obtain permission from third-party

countries with whom their country of registration does not have a bilateral agreement before flying

to such countries. 

 

84 DOT, “Aviation Issues in GATS 2000 and Other Fora,” June 1999.

 

85 Free-riders enjoy favorable terms of trade in foreign countries, although they do not grant

similar benefits to foreigners operating in their own markets.

 

86 DOT, “Aviation Issues in GATS 2000 and Other Fora,” June 1999.

 

87 Association of European Airlines (AEA), “Towards a Transatlantic Common Aviation Area,”

AEA Policy Statement, Sept. 1999.

 

88 “Aviation in the 21st Century” Conference, hosted by the U.S. Department of Transportation

in Chicago, Illinois, Dec. 5-7, 1999.

19

third-party countries83 and develop hub networks in foreign markets.84 At the same time,

however, it is not certain whether air transport commitments under the GATS would

necessarily be more equitable than a consensus the United States and a trade partner could

reach in bilateral agreements. Moreover, concerns have been raised about the

nonretractability of GATS commitments and the potential for “free-riders”85 to benefit from

such commitments in the absence of exemptions to the Most Favored Nation (MFN)

principle.86

Outlook

In order to sustain progress toward full liberalization of the international air transport market,

the United States has launched a “beyond open skies” initiative. The primary objective of this

initiative is to develop an alternative framework to the current bilateral system to facilitate

trade in air transport services. Although, at present, it is uncertain how the United States

will proceed with a beyond open skies agenda, recent discussions between the United States

and its aviation trade partners have produced several proposals. One proposal entails a

bilateral agreement between the United States and EU member states which would establish

the Transatlantic Common Aviation Area (TCAA). This proposal, advanced by the

European Commission and the Association of European Airlines (AEA),87 is intended to

facilitate further market access and to provide a common framework to harmonize aviation

regulations (with regard to airline ownership, and competition policy, for example) among

signatory countries. Another proposal entails regional aviation agreements which include

provisions on air traffic rights, such as an initiative by the Asia-Pacific Economic

Cooperation (APEC) forum (see table 5). Ultimately, U.S. aviation officials envision that

multilateral liberalization of air transport services will likely take place through a phased

approach, with agreements negotiated initially among groups of like-minded trade partners

and applicable to distinct categories of air transport services (e.g., air cargo). Although the

conclusion of a multilateral aviation agreement as originally proposed at the Chicago

Conference of 1944 may not be achieved, it is with this objective in mind that the United

States and its trade partners pursue alternative frameworks encompassed by the “beyond

open skies” initiative.88
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Air Transport Services Industry, Trade, and Technology Review

20

Glossary of technical terms

Ancillary services Services auxiliary to the transport of passengers and cargo by air as defined under the

General Agreement on Trade in Services (GATS). Such services include aircraft

maintenance and repair; the selling and marketing of air transport services; and

computer reservation system services.

Beyond rights The right of an airline to fly between two foreign countries, also known as a “fifth

freedom” right. (See definition of “Freedoms of the air”, below.)

Bilateral air service

agreement (bilateral

agreement)

An agreement between two foreign countries permitting the countries respective

airlines to fly to, from, and beyond each other’s markets, and placing certain restrictions

on the operation of foreign airlines. (See table 4 for a comparison of four types of

bilateral air service agreements.)

Cabotage The transport of passengers between two points (cities) within the same country.

Code sharing

arrangement

An alliance in which one airline is permitted to list its flights under another airline’s

code in a computer reservation system (CRS). Participating carriers also coordinate

flight schedules and payment methods.

Computer reservation

system (CRS)

An electronic database listing fare and flight information used to reserve airline seats.

Designated airline An airline from a signatory country that has been given the right to operate over routes

in a bilateral agreement. The names of designated airlines are usually not specified in

the agreements themselves.

Dual approval A provision under a bilateral agreement requiring that both signatories approve

proposed ticket prices before they take effect. Also known as “double approval”.

Dual disapproval A provision under a bilateral air service agreement which permits proposed ticket prices

to take effect unless disapproved by both signatories. Also known as “double

disapproval”.

Flight frequency The number of flights an airline operates during a given period over scheduled routes

in a bilateral agreement.

Freedoms of the air An eight-item list that delineates the type of routes over which airlines from signatories

to a bilateral agreement may operate (see table 2). The list forms the conceptual

foundation for airlines’ exercise of traffic rights (see below).

Traffic rights Traffic rights permit designated airlines of signatory countries to: (1) operate over

routes specified within a bilateral agreement; (2) determine seating capacity to be

provided over such routes; and (3) establish fares. Also known as hard rights, or

economic rights.

Seating capacity Refers to the supply of available seats for the transport of air passengers. Seating

capacity supplied by designated airlines is regulated in a bilateral agreement through

restrictions on the frequency of scheduled flights, the volume of traffic served, and/or

the types of aircraft deployed over scheduled routes. 

Soft rights Rights accorded airlines of signatories to a bilateral agreement that are separate and

distinct from traffic (or hard) rights. Soft rights pertain to dispute resolution, exemption

from taxation and customs duties, the right to own and operate ground handling

services, as well as other areas.

#
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1

 The views expressed in this article are those of the author. They are not the views of the

International Trade Commission or any of the Commissioners.

 

2

 All WTO members are signatories to the GATS.

.

21

Renewed Services Trade Negotiations in the

WTO

Christopher Melly1

melly@usitc.gov

(202) 205-3461

Negotiations to improve the effectiveness of the General Agreement on

Trade in Services are scheduled to commence in January 2000. These

negotiations will pursue improvements to the general framework of the

agreement and seek to elicit stronger commitments to liberal trade

principles by World Trade Organization (WTO) members. This article

describes the structure and elements of the agreement, discusses the

commercial value of existing commitments, and presents some of the

objectives and approaches likely to characterize the renewed

negotiations.

When the General Agreement on Trade in Services (GATS) entered into force on January 1,

1995, it broke new ground as the first multilateral, legally enforceable agreement covering

trade and investment in services. The GATS essentially establishes a framework of rules for

trade in services and provides for commitments by individual countries to liberalize market

access with respect to specific service sectors. However, the GATS framework does not

fully address trade impediments that may result from a government’s regulatory process, and

specific commitments vary widely by country and largely only prevent countries from

adopting more restrictive practices. Thus the GATS did not bring about widespread

liberalization of trade in services but instead laid a foundation from to proceed.

Recognizing that further work would needed to liberalize trade in service, GATS signatories2

agreed to resume negotiations after a period of 5 years. The mechanism effecting this

commencement is article XIX of the GATS framework, which reads as follows:

“Members shall enter into successive rounds of negotiations, beginning not later

than five years from the date of entry into force of the WTO Agreement, and

periodically thereafter, with a view to achieving a progressively higher level of

liberalization.”

The inability of WTO ministers to launch broad, multisector negotiations during the Seattle

Ministerial meeting does not necessarily mean that the negotiations agreed to in article XIX

will not move forward. Although it remains to be seen how enthusiastically new services

negotiations will be pursued in the near term, negotiations nevertheless are still scheduled to
DECEMBER 1999

WTO Services Negotiations Industry, Trade, and Technology Review

 

3

 MFN is also referred to as normal trade relations (NTR) in the United States.

 

4

 Coverage of air transport services is circumscribed, however, as traffic rights and services

directly related to the exercise of traffic rights are excluded from the scope of the GATS.

 

5

 The full text of the GATS and all related schedules, exemptions, and supplements may be

found at Internet address http://www.wto.org.

22

begin in January 2000 with the ultimate objective of achieving progressive liberalization of

international trade in services.

GATS Structure

Structurally, the GATS may be divided into two major sections: a general framework and

schedules of specific commitments (hereafter referred to as schedules), which are

augmented by supplemental schedules, lists of exemptions to most-favored-nation (MFN)

treatment,3 and other annexes. The general framework contains broad disciplines that apply

to all service sectors.4 These include obligations regarding MFN treatment, transparency,

domestic regulation, and dispute settlement. Unlike other trade agreements, the general

obligations do not include the important principles of market access and national treatment,

which are addressed separately in the schedules.

General Framework Obligations

MFN Treatment

The GATS obligation regarding MFN treatment is contained in article II, which states that

each Member shall treat the services and service suppliers of any other Member no less

favorably than the services and service suppliers of any other country.5 This means that all

foreign service providers must be treated in the same manner, regardless of their national

origin. However, this does not mean that foreign service providers need to be treated in a

way comparable to domestic service providers, or need to receive national treatment. 

Exemptions to MFN treatment are permitted, but must be clearly described in a separate list,

annexed to the agreement. The MFN exemption list must include the following information:

the sector name, the description of the measure inconsistent with MFN, the country/countries

to which the exemption applies, the duration of the exemption, and the reason for the

exemption. Often these exemptions are taken when some countries have been granted

special or preferential access to a sector, such as when two neighboring countries accord

each other preferential treatment with respect to transportation services. In principle, MFN

exemptions can only be taken for 10 years and are subject to review after 5 years.

Transparency and Domestic Regulation

Domestic regulation often creates significant barriers to services trade. Many service

industries are heavily regulated. From telecommunications to finance to medicine,

government regulation plays an integral role in defining the industry and determining which
DECEMBER 1999

Industry, Trade, and Technology Review WTO Services Negotiations

 

6

 Economic needs tests assess the impact of proposed investment on the domestic social,

political, and economic environment. The findings of these tests are often subjective, which

reduces regulatory transparency and leaves regulators with broad discretionary powers.

23

firms can participate and under what terms and conditions. The ongoing global trend of

regulatory reform is indicative of a shift in favor of market disciplines, but fundamental

regulatory functions endure. Foreign service firms can be adversely affected in local

markets by explicit discriminatory policies (e.g., foreign equity caps) or market access

limitations (e.g., economic needs tests6), as well as limitations that result from a

nontransparent policy process (e.g., regulations change without notice, publication, or any

private sector input into the process). Some impediments to services trade may include:

• Measures that limit national treatment by providing more favorable treatment to

local firms than to foreign firms.

• Certification requirements that limit national treatment or market access for

professional services like medicine, architecture, engineering, and accounting by

applying criteria based on nationality or specific university course work rather

than knowledge and ability.

• Measures that limit market access by preventing private service providers from

operating, as in cases where the government restricts private provision of

education and health care services.

• Screening procedures that may limit market access, such as economic needs

tests, licensing requirements, or investment approval policies, particularly if the

criteria used are not objective and transparent.

• Limitations to market access presented by direct market participation by

regulatory agencies, such as in instances where the telecommunications or

electric power regulator is also a service provider, and, therefore, a potential

competitor.

• Limitations to market access or national treatment presented by nontransparent

rule-making procedures.

The GATS addresses transparency and regulatory barriers to services trade in articles III

and VI. Transparency obligations (article III) require WTO members to publish promptly

relevant measures of general application that may affect services trade and to notify the

WTO Council for Trade in Services of significant changes in laws, regulations or

administrative guidelines with bearing on services trade. In addition, Members are obligated

to respond promptly to information requests from other Members and to establish an enquiry

point for use by other Members.

Domestic regulation obligations (article VI) require WTO Members to avoid using their

regulatory powers in such a way as to create services trade barriers. Members are to
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WTO Services Negotiations Industry, Trade, and Technology Review

 

7

 To simplify the presentation of sector specific commitments that apply to every service sector,

most countries provide a "horizontal commitments" section at the beginning of their schedule. 

These horizontal commitments generally apply to measures governing foreign investment and the

temporary entry and stay of foreign citizens.

 

8

 Negotiators worked from a list of service sectors developed by the Secretariat which included

cross-references to the UN CPC codes. This list is identified by the WTO document code

MTN/GNS/W/120.

24

ensure that measures of general application are administered in a reasonable, objective, and

impartial manner. In addition, for sectors in which a Member has listed a specific

commitment to grant market access or national treatment (see below for more detail on these

commitments), Members must ensure that licensing and qualification requirements or

technical standards (1) are based on objective and transparent criteria, (2) are not more

burdensome than necessary, and (3) in the case of licensing procedures, are not in

themselves a restriction on the supply of the service. 

Dispute Settlement

Article XXIII of the GATS provides for the settlement of disputes between Members

through the WTO dispute settlement mechanism. Under the dispute settlement mechanism,

a dispute may be brought before a panel by any Member if it perceives that another Member

has failed to uphold its commitments. The findings of the panel are subject to an appeal

process. Ultimately, in cases where the panel or the appellate body concludes that a

measure maintained by a Member is inconsistent with the agreement, the Member may then

choose whether to change its measure to satisfy the GATS obligations or provide

compensation to the Member that brought the case. If adequate compensation cannot be

negotiated, the Member that invoked the dispute settlement procedures may suspend some

of its trade concessions, which effectively means they may retaliate by denying services

trade privileges (such as market access) or even by raising tariffs on goods imported from

the Member that violated the agreement.

Schedules of Specific Commitments: Obligations and Structure

As mentioned previously, market access and national treatment obligations are not contained

in the general framework of the GATS, but in the separate schedules of specific

commitments. In its schedule, each country makes commitments to adhere to the GATS

market access and national treatment obligations on a sector-by-sector basis.7 This is called

a “bottom-up” or “positive list” approach because it begins from a base in which no industry

sectors are included, and builds upward as individual sectors are added one by one. Each

country chooses whether to include a sector, in which case the sector will be identified by

name and often by the applicable United Nations Central Product Classification (CPC)

code.8 Then each country specifies which modes of supplying the service (see below) will

be bound by the market access and national treatment obligation. Modes of supply are

important because they encompass the manner in which services are provided and thereby

facilitate the process of identifying and subsequently disciplining restrictions to services trade.
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9

 World Trade Organization (WTO), “General Agreement on Trade in Services - The design and

underlying principles of the GATS,” found at Internet address

http://www.wto.org/wto/services/services.htm, retrieved Dec. 30, 1999.

25

Modes of Supply

Under the GATS definition, services may be provided through one or more of the following

modes of supply: cross-border supply, consumption abroad, commercial presence, and

presence of natural persons. Three of these modes are means of providing services across

borders:

• Cross-border supply occurs when a service is provided in one country to a

customer in a second country without either party traveling, such as when a U.S.

securities broker purchases shares in New York in response to a telephone

request from a client in London.

• Consumption abroad occurs when a customer travels abroad to the service

provider’s country in order to receive a service, such as when an individual from

Venezuela travels to Miami to receive medical treatment.

• Presence of natural persons occurs when the service provider travels to the

customer’s country on a temporary basis to provide a service, such as when a

U.S. engineering consultant travels to Brazil to provide advice on the construction

of a wastewater treatment plant.

The remaining mode, commercial presence, refers to the provision of services through

foreign-based affiliates. This mode is particularly significant because, in order to establish

a foreign affiliate, there usually must be some form of foreign direct investment. Thus,

through the commercial presence mode, the GATS became the first multilateral agreement

to extend trade disciplines to foreign investment.9

Limitations to Market Access and National Treatment Obligations

After listing an industry sector and indicating which modes of supply will be subject to the

market access and national treatment obligations, countries may use their schedules of

commitments to limit the scope of these obligations. Such limitations are permitted only to

provide for existing measures that are inconsistent with these disciplines. This enables

countries that are not ready to fully liberalize a particular sector to make a partial

commitment to the market access and national treatment obligations by effectively freezing

the existing level of restrictiveness. For example, a country could make a commitment to

accord market access through a commercial presence for foreign insurance companies, but

then indicate that national treatment remains limited by an existing law that restricts foreign

ownership to no more than 49 percent of local establishments. In this case, the country has

committed to fully adhere to the market access obligation, but to only partially adhere to the

national treatment obligation. In addition, the country is now obligated to ensure a standstill;
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WTO Services Negotiations Industry, Trade, and Technology Review

 

10 Joseph Papovich, Assistant United States Trade Representative for Services, Investment, and

Intellectual Property, “Services in the New Round,” testimony before the House Commerce

Committee, Subcommittee on Telecommunications, Trade, and Consumer Protection, Washington,

D.C., Nov. 4, 1999, found at Internet address http://www.usia.gov/topical/econ/

wto99/se1104.htm, retrieved Nov. 18, 1999. 

 

11 This section is based on information drawn from the USITC series of studies that examined

the GATS commitments from 62 countries across a range of service sectors. The studies include

General Agreement on Trade in Services: Examination of Major Trading Partners’ Schedules of

Commitments (USITC publication 2940, Dec. 1995), Examination of South American Trading

Partners’ Schedules of Commitments (USITC publication 3007, Dec. 1996), Examination of the

Schedules of Commitments Submitted by Asia/Pacific Trading Partners (USITC publication 3053,

Aug. 1997), Examination of the Schedules of Commitments Submitted by Eastern Europe, the

European Free Trade Association, and Turkey (USITC publication 3127, Sept. 1998), and

Examination of the Schedules of Commitments Submitted by African Trading Partners (USITC

publication 3243, Oct. 1999). 

26

in other words, future measures cannot reduce the level of foreign ownership below 49

percent. Thus, the actual coverage of the market access and national treatment obligations

under the GATS can only be determined through a detailed examination of the schedules of

commitments. This also means that there are wide variations from one country to another,

making it difficult to assess the commercial value of commitments or to compare

commitments across sectors and from one country to another.

Supplemental Schedules

At the conclusion of the Uruguay Round in 1994, services negotiators determined that they

had not made significant progress in a number of areas. As a result, they extended

negotiations concerning movements of natural persons, maritime transport services, basic

telecommunications, and financial services. Negotiations in all sectors have concluded, and

significant progress was achieved in the basic telecommunications and financial services

sectors.10 As a result of these extended negotiations, many countries created supplementary

schedules of commitments and MFN exemption lists, which then became part of the bundle

of documents that constitute each country’s GATS obligations.

Value of GATS Commitments11

A country's complete set of GATS commitments thus consists of several documents, which

principally include the general framework, the schedules of commitments, supplemental

schedules, and lists of MFN exemptions. All of these documents must be consulted in order

to determine the commercial significance of a country's commitments under the GATS.

Consequently, it is difficult to develop objective indicators to compare the extent to which

WTO members have bound their service sectors through the GATS. However, some

general observations may be made.
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Industry, Trade, and Technology Review WTO Services Negotiations

 

12 The World Bank, World Development Indicators 1998 (Washington, D.C., 1998).

27

Industry sectors least effectively covered by the GATS schedules include:

• Private education (e.g., private programs, on-line learning),

• Private health care (e.g., health care facilities management, private hospitals,

physician and nursing care, telemedicine),

• Audiovisual (e.g., film, television, and music production and distribution through

cinemas, broadcasting, or cable television),

• Transportation (e.g., road/trucking, rail, maritime, and air (see related article in

this issue)),

• Distribution (e.g., wholesaling and retailing),

• Energy,

• Environment,

• Express delivery, and

• Foreign legal consultancy.

On a regional basis, the quality of commitments tends to be highest among the developed

countries, followed by countries in Eastern Europe and the Asia/Pacific region. Countries in

South America and Africa provided the fewest commitments. In the Asia and Pacific

regions, India appears to have provided the fewest commitments, whereas commitments

scheduled by ASEAN members were only slightly more inclusive. Asia and Pacific

countries tended to be willing to commit to developmentally oriented sectors such as

construction, architecture, and engineering, but were less forthcoming with services such as

audiovisual, private education, and private health care. India and the ASEAN members also

tend to maintain the most restrictive policies on foreign investment in services, often by

limiting foreign equity to a minority position or requiring joint ventures. Perhaps as a result,

service sectors in most of these countries account for a smaller portion of GDP than average

for low and middle-income countries.12

In Latin America, only Argentina and Mexico made commitments across a broad range of

service sectors, whereas most other countries made commitments covering less than 20

percent of the range of industries. The commitments are generally of minimal value in terms

of guaranteeing market access and national treatment for all but the travel and tourism

service sectors. Audiovisual, education, health, and transportation services received the

poorest coverage, with distribution services faring only somewhat better. In some cases, the

limited scope of these commitments may not reflect actual market conditions, but a

reluctance to make binding commitments due to other negotiating objectives (e.g., trade

sources reported that Chile may have wished to avoid entering into WTO obligations in 1994

to preserve leverage for NAFTA accession talks that were being considered at the time, and

that Brazil may have been holding out for concessions in agricultural products like oranges).
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WTO Services Negotiations Industry, Trade, and Technology Review

 

13 U.S. Dept. of State cable, “GATS 2000: Services Trade Negotiations in the WTO,” message

reference no. 221415, Nov. 23, 1999.

28

Eastern European countries tended to provide a consistent level of industry coverage that

only moderately lagged behind the position of developed countries. The EU accession

process may be partially responsible for these relatively inclusive commitments, as it provided

a model for regulatory reform that in some respects is compatible with GATS principles. In

addition, pressure from EU members may be partially responsible for the fact that none of

the Eastern European countries scheduled commitments on audiovisual services, as such an

approach is consistent with EU commitments on audiovisual services. Health care,

transportation, and courier services also generally lack adequate coverage in Eastern

European schedules.

Finally, countries acceding to the WTO after its initial establishment on January 1, 1995, have

made considerably broader commitments to accord market access and national treatment

to foreign service providers. These seven new members are Bulgaria, Ecuador, Estonia,

Kyrgyzstan, Latvia, Mongolia, Panama, and Slovenia. 

Renewed Negotiations

Long-Term Objectives

As noted, the GATS broke new ground by establishing a framework of rules applicable to

trade and investment in services and by setting a baseline of sector-specific commitments

from which future negotiations would proceed. The ultimate objective of future negotiations

could include both the further development of the general framework and improvement in

the scheduled commitments.

One major prospect for further developing the general framework obligations is strengthening

provisions on domestic regulation under article VI so that they more effectively promote

transparency in the regulatory process and better ensure that, while preserving the ability of

governments to meet legitimate regulatory objectives (e.g., public safety and welfare),

neither regulations nor their implementation procedures unnecessarily restrict trade.13

Provisions that could be particularly helpful include those that encourage foreign regulators

to (1) apply equal treatment to foreign and domestic firms, and (2) follow due process (to

include allowing a process for hearings, providing information in a timely manner, and

providing an opportunity for comment from the private sector).
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29

Objectives for improving the schedules of commitments are highlighted in the text box.

U.S. Objectives to Improve the Schedules of Commitments

• Increase the number of industry sectors listed in each country’s schedule, which

would broaden the scope of the GATS obligations on market access and national

treatment to cover more of the economy.

• Increase the number of countries that have signed the supplemental agreements

on financial and telecommunication services.

• Extend coverage of commitments to all segments of each sector (e.g., ensuring

that commitments on construction services apply to the whole sector, and not

simply to the construction of off-shore oil platforms, as is sometimes now the

case with the GATS).

• Deepen the substance of listed commitments (e.g., removing limitations such as

foreign equity caps or restrictions on the form of establishment that qualify the

terms under which foreign firms are granted market access and national

treatment in a bound sector). Deeper commitments could be pursued in most

sectors, including audiovisual, construction, distribution, energy, express delivery,

finance, private education and training, private healthcare, telecommunication,

travel and tourism, and the various professional service sectors. 

• Improve the industry classification system to better reflect actual economic

activity (e.g., redefining “courier” services, to include relevant aspects of

customs brokerage, ground transportation, and warehouse and storage services in

order to more effectively encompass the scope of integrated service providers

like Federal Express).

• Ensure that new technologies are adequately addressed under the GATS, such as

on-line learning made possible through the Internet; home entertainment

programming delivered by satellite and the Internet; and advanced health care

provided directly to homes or rural clinics via telemedicine. 

• Formalize the treatment of commitments that apply to all service sectors such

that all countries address the same elements in a consistent manner.

• Incorporate references to applicable laws and regulations within the schedules of

commitments to enhance transparency and understanding of the limitations to

market access and national treatment.

Source: Compiled by USITC staff from U.S. Dept. of State cable “ GATS 2000: Services Trade

Negotiations in the WTO,” message reference 221415, Nov. 23, 1999; and the USITC series of

GATS studies referenced in footnote 11.

Alternative Approaches

WTO negotiators have identified at least three different approaches toward achieving future

liberalization of services trade. Negotiators will likely employ, to some degree, the timehonored “request-offer” approach through which each WTO Member identifies priorities for

liberalization in the economies of selected other Members and then presents formal requests

while offering compensatory concessions. Since such a process is highly laborious and may
DECEMBER 1999

WTO Services Negotiations Industry, Trade, and Technology Review

 

14 Ibid.

 

15 Ibid.

 

16 Ambassador Richard Fisher, Deputy United States Trade Representative, “Services in the

World Trading System,” speech to the World Services Congress, Atlanta, GA, Nov. 1, 1999, found

at Internet address http://www.usia.gov/topical/econ/wto99/se1101.htm, retrieved Nov. 18, 1999. 

 

17 Article XVIII states that the Members may negotiate additional commitments that extend

beyond the scope of market access and national treatment commitments and then inscribe such

commitments in their schedules.

 

18 The full text of the basic telecommunications regulatory reference paper may be found at

Internet address http://www.wto.org/wto/services/tel23.htm.

30

result in separate negotiations for each industry sector and mode of supply, consideration is

also being given by WTO negotiators to advantages of adopting different approaches that

offer a means of bundling sectors or issues together so that they may be negotiated at a more

comprehensive level. For this reason, alternative “horizontal” and “sectoral” approaches

have also been proposed.14

A horizontal approach might involve pursuing liberalization across all industries. For example,

negotiators could choose a particular mode of supply, such as commercial presence, and

negotiate a broad commitment to accord a certain level of treatment across all service

sectors (i.e., horizontally), such as agreeing to a common permissible level of foreign

ownership.15 Alternatively, a sectoral approach could involve targeting key industry

sectors such as energy or environmental services. For the selected sectors, a model set of

commitments could be developed that presents an ideal position of full market access and

national treatment.16 Members could then base their own commitments on this ideal, listing

only limited exceptions or necessary phase-in periods.

Another device recently used by negotiators, which could facilitate negotiations of highly

regulated sectors, is the development of additional commitments under GATS Article

XVIII.17 This approach was used to support the extended negotiations on telecommunication

services. Essentially, negotiators developed a set of disciplines to which countries could bind

themselves and then incorporate in their schedules. These principles for telecommunication

services include:18

• Prevention of anti-competitive practices, 

• Nondiscriminatory and cost oriented interconnection rules, 

• Implementation of universal service obligations on a nondiscriminatory,

transparent and competitively neutral basis,

• Transparency or public availability of licensing criteria, 

• Independence of regulators from any market competitors, and

• Nondiscrimination in the allocation of scarce resources, such as spectrum.

Additional commitments in telecommunication facilitated negotiations by ensuring that market

access commitments would not be undercut by anticompetitive regulatory practices. The

development of similar additional commitments for other industries may likewise help

negotiators find common ground.
DECEMBER 1999

Industry, Trade, and Technology Review WTO Services Negotiations

31

Outlook

The foregoing discussion suggests that trade negotiators are likely to employ a combination

of approaches to pursue the goal of services trade liberalization. The specific objectives of

the current round of talks include further development of the basic framework of the

agreement, stronger commitments to liberal trade principles by WTO members, and more

effective coverage of service industries. Some of these objectives will likely be achieved

more rapidly than others, and perhaps new objectives will come to light. As with

merchandise trade, however, services liberalization is expected to be a long, gradual process.

The steps being taken now build upon a foundation developed 5 years ago, and these efforts

will in turn lay the groundwork for future liberalization. Incremental gains toward achieving

the long-term objectives of the renewed negotiations will, nonetheless, serve as necessary

building blocks that may result in some improved value of commitments for industry sectors

and regions currently least effectively covered by the GATS schedules.#

DECEMBER 1999

Industry, Trade, and Technology Review Key Performance Indicators

A-1

APPENDIX A

KEY PERFORMANCE INDICATORS OF SELECTED

INDUSTRIES

~ STEEL (Tracy Quilter, 202-205-3437/tquilter@usitc.gov)

~ AUTOMOBILES (Laura A. Polly, 202-205-3408/polly@usitc.gov)

~ ALUMINUM (Karl Tsuji, 202-205-3434/tsuji@usitc.gov)

~ FLAT GLASS (James Lukes, 202-205-3426/lukes@usitc.gov)

~ SERVICES (Tsedale Assefa, 202-205-2374/assefa@usitc.gov) 
DECEMBER 1999

Key Performance Indicators Industry, Trade, and Technology Review

A-2

Sept Dec Mar Jun Sept Dec Mar Jun Sept

-4

-2

0

2

4

6

8

10

12

Integrated Minimill Specialty

Figure A-1

Steel industry: Profitability by strategic group1

 

1 Operating profit as a percent of sales. Integrated group contains 9 firms. Minimill group contains 8 firms.

Specialty group contains 4 firms.

Source: Individual company financial statements.

 1997 1998 1999

STEEL

• Profitability for integrated and specialty producers slipped in the third quarter of 1999 compared with the

second quarter of 1999. Although most firms increased shipment tonnages compared to the third

quarter of 1998, lower average selling prices contributed to losses in the integrated sector and cut

profitability of specialty producers almost in half. Profitability of the minimill sector improved slightly, as

lower raw material (scrap) costs and increased shipments overcame price declines.

 

• Armco and AK Steel completed their merger September 30, 1999, making AK Steel the fourth largest

steelmaker in the United States. Consolidation of facilities, including the closure of Armco’s Pittsburgh,

PA headquarters and a galvanizing plant in Dover, OH has already begun.

 

Table A-1

Steel mill products, all grades

Item Q3 1999

Percentage

change, Q3

1999 from 

Q3 19981 YTD 1999

Percentage

change, YTD

1999 from 

YTD 19981

Producers’ shipments (1,000 short tons) ............. 26,811 7.7 77,644 -2.1

Imports (1,000 short tons) ........................... 9,681 -12.7 26,497 -13.2

Exports (1,000 short tons) ........................... 1,414 13.5 3,814 -11.2

Apparent supply (1,000 short tons) ................... 35,078 5.5 100,327 -5.0

Ratio of imports to apparent supply (percent) .......... 25.5 -8.7 26.3 -1.6

1

 Based on unrounded numbers.

2

 Percentage point change.

3

 No change.

Note.–Because of rounding, figures may not add to the totals shown.

Source: American Iron and Steel Institute.
DECEMBER 1999

Industry, Trade, and Technology Review Key Performance Indicators

A-3

Sept Dec Mar Jun Sept Dec Mar Jun Sept

0

20

40

60

80

100

0

2

4

6

8

10

12

14

Capacity utilization (Y1) Import penetration* (Y1)

Imports (right scale) (Y2) Exports (right scale) (Y2)

Figure A-2

Steel mill products, all grades: Selected industry conditions

* Import share of apparent open market supply.

 Source: American Iron and Steel Institute.

 1997 1998 1999

STEEL

Table A-2

Steel service centers

Item June 1999 Sept. 1999

Percentage

change, Sept.

1999 from

 June 19991 Q3 1999 Q3 1998

Shipments (1,000 net tons) ................... 2,529 2,523 -0.2 7,465 7,487

Ending inventories (1,000 net tons) ............ 7,854 8,013 2.0 8,013 8,465

Inventories on hand (months) ................. 3.3 3.2 (

2

) 3.2 3.4

 

1

 Based on unrounded numbers.

 

2

 Not applicable.

Note.–Because of rounding, figures may not add to the totals shown.

Source: Steel Service Center Institute.

 

• The Steel Service Center Institute (SSCI) reported a slight decrease in shipments for Q3 1999 compared

with Q3 1998. The service center industry, already undergoing consolidation, will face additional volume

and pricing pressure given General Motors’ announcement that it will begin purchasing more steel than it

needs and require GM suppliers to buy their steel from GM. GM, which can purchase steel at lower

prices than service centers due to its size, will sell any surplus steel across the Internet.

 

• While Q3 1999 imports fell 21 percent compared to Q3 1998 and imports for the first nine months of

1999 were 13 percent below prior year levels, Q3 1999 import levels were 14 percent above Q2 1999.

Semifinished steel products, representing more than one-third of total steel imports in Q2 1999, slipped

to 24.9 percent for Q3 1999 but was well above the 17.0 percent share posted a year earlier.

 

• Capacity utilization averaged 81.5 percent for Q3 1999, which is an improvement from the average of

81.1 percent reported for Q2 1999. However, capacity utilization is still below the 84.1 percent average

level reported for Q3 1998.
DECEMBER 1999

Key Performance Indicators Industry, Trade, and Technology Review

A-4

I II III IV I II III IV I II III IV I II III IV I II III

0

500

1000

1500

2000

2500

Total sales-consumption Domestic sales

Import sales

Figure A-3

U.S. sales of new passenger automobiles, by quarter

Note.–Domestic automobile sales include U.S.-, Canadian-, and Mexican-built automobiles sold in the United

States; these same units are not included in import sales.

Source: Automotive News; prepared by the Office of Industries.

2,298,475

1,823,358

475,117

1995 1996 1997 1998 1999

AUTOMOBILES

Table A-3

U.S. sales of new automobiles, domestic and imported, and share of U.S. market accounted for by

sales of total imports and Japanese imports, by specified periods, January 1998-September 1999

 Percentage change 

Item

Jul.- Sep.

1999

Jan.-Sep.

1999

Jul.-Sep. 1999

from 

Apr.-Jun. 1999

Jan.-Sep. 1999

from 

Jan.-Sep. 1998

U.S. sales of domestic autos

(1,000 units)

1

.................................. 1,823 5,422 -6.6 5.2

U.S. sales of imported autos

(1,000 units)

2

.................................. 475 1,305 3.5 21.9

Total U.S. sales (1,000 units)

1, 2

.................... 2,298 6,727 -4.7 8.3

Ratio of U.S. sales of imported autos to 

total U.S. sales (percent)

1, 2

...................... 20.7 19.4 8.6 12.6

U.S. sales of Japanese imports as a 

share of the total U.S. market (percent)

1, 2

......... 9.8 9.2 0.1 1.5

1

 Domestic automobile sales include U.S.-, Canadian-, and Mexican-built automobiles sold in the United

States.

2

 Imports do not include automobiles imported from Canada and Mexico.

Source: Compiled from data obtained from Automotive News.
DECEMBER 1999

Industry, Trade, and Technology Review Key Performance Indicators

A-5

Q3 Q3 Q3 Q3

0

200

400

600

800

1000

1200

0

10

20

30

40

50

60

70

80

Imports (Y1) Exports (Y1) Price (Y2)

Figure A-4

Aluminum: U.S. imports, exports, and price

 1 Crude forms (metals and alloys) and mill products (e.g., plates, sheets, and bars) for consumption.

 2 Quarterly average of the monthly U.S. market price of primary aluminum ingots.

Source: U.S. Geological Survey.

1 2

1996 1997 1998 1999

ALUMINUM

• The price for primary aluminum ingot rose sharply by 5.8 cents per pound during third quarter 1999 to the highest level since the first

quarter of 1998. In spite of increased global production, market confidence has been strengthened by continued robust or strengthening

demand worldwide, and the investment community’s favorable long-term outlook for the industry as a result of recent mergers.

 

• Overall U.S. consumption continued to remain strong, as a slight dip in shipments of certain aluminum mill products was countered by

improved can shipments. Although domestic output increased slightly, significantly lower imports of unwrought aluminum from Russia

were reflected in the noticeable percentage-point decline in the level of import penetration.

 

• Alcan (Canada), Pechiney (France), and Algroup (Switzerland) announced a management restructuring of their proposed combined

operations (currently named APA) into six business sectors. As part of the regulatory clearance process, the Department of Justice has

requested additional information from both APA and from U.S.-based Alcoa and Reynolds about their respective proposed mergers. 

Nevertheless, Alcan announced its confidence that APA’s merger transactions will be completed by early next year.

 

Table A-4

U.S. production, secondary recovery, imports, import penetration, exports, average nominal price, and

LME inventory level of aluminum, for third quarter 1998, second quarter 1999, and third quarter 1999

 Percentage change 

Item

Q3

1998

Q2

1999

Q3

1999

Q3 1999

from

 Q3 1998

Q3 1999

from

Q2 1999

Primary Production (1,000 metric tons) .............. 946 938 953 0.7 1.6

Secondary Recovery (1,000 metric tons) ............. 835r 884r 872 4.4 -1.4

Imports (1,000 metric tons) ......................... 736 1,043 825 12.1 -20.9

Import Penetration (percent)

1

....................... 32.5r 40.8r 36.1 23.5 2

-4.7

Exports (1,000 metric tons) ......................... 295 306 312 5.7 1.9

Average Nominal Price (¢/lb) ....................... 64.1 63.3 69.1 7.9 9.2

LME Inventory Level (1,000 metric tons) .............. 513 756 797 55.3 5.3

1

 Calculations based on unrounded data.

2

 Percentage point change.

Note.–revised data indicated by “r”

Sources: Compiled from data obtained from U.S. Geological Survey and World Bureau of Metal Statistics.
DECEMBER 1999

Key Performance Indicators Industry, Trade, and Technology Review

A-6

FLAT GLASS

Background

 

• The U.S.-Japanese agreement on Japanese market access for imports of flat glass seeks to increase

access and sales of foreign flat glass in Japan through such means as increased adoption of

nondiscriminatory standards and expanded promotion of safety and insulating glass. The agreement

covers the 1995-99 period.

 

• Japanese demand for imported glass has remained weak since the second half of 1997.

 

Current

 

• Japanese demand for imported glass has improved slightly, although the U.S. share of the market has

declined. The average monthly quantity of Japanese imports from all countries increased by 4 percent

for the first six months of 1999 to 1.6 million square meters, while the average monthly value of such

imports increased by 14 percent to $12.5 million as the average unit value of imports increased by 10

percent. Imports from the United States in Jan.-June 1999 decreased 4 percent to 428,000 square

meters, but increased in value by 8 percent to $6.5 million. Imports from the United States and China

recorded the most significant declines for the period, while imports from the Republic of Korea and

Indonesia posted the most significant growth.

 

 

• A proposal by the U.S. Government to negotiate a new bilateral agreement on flat glass to replace the

1995 agreement that expires at the end of 1999 was rejected by the Government of Japan during flatglass talks held in Tokyo on Nov. 10-11, 1999.1

 The U.S. Government claims that the expiring

agreement failed to open the Japanese market. The Government of Japan maintains that a new

agreement is not needed because Japan’s flat glass market already is fully open to foreign glass

products. Discussions between the Governments are continuing as the December deadline

approached.

1

 U.S. State Department telegram, “Tokyo Press Reaction to Flat Glass Talks,” message reference no. 09447,

prepared by U.S. embassy, Tokyo, Nov. 16, 1999.
DECEMBER 1999

Industry, Trade, and Technology Review Key Performance Indicators

A-7

SERVICES