MEXICO – MEASURES AFFECTING TELECOMMUNICATIONS SERVICES
Document: Report of the Panel
Date: 2 April 2004
Document codes: WT/DS204/R
Complainant: U.S.
Respondent: Mexico
Third parties: Australia, Brazil, Canada, Cuba, EU, Guatemala, Honduras, India, Japan, Nicaragua
Dispute stage: Panel
Agreements cited: Art. VI:1, VI:5, XVI:1, XVI:2, XVII:1, XVII:2, XVII:3, XVIII  Services (GATS)

MEXICO – MEASURES AFFECTING
TELECOMMUNICATIONS SERVICES

Report of the Panel

This report of the Panel on Mexico – Measures a ffecting Telecommunications Services is being
circulated to all Members, pursuant to the DSU. The report is being circulated as an unrestricted
document from 2 April 2004 pursuant to the Procedur es for the Circulation and Derestriction of WTO
Documents (WT/L/452).

Note by the Secretariat: This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 60
days after the date of its circulation unless a party to the dispute decides to app eal or the DSB decides by
consensus not to adopt the report. If the Panel Report is appealed to the Appellate Body, it shall not be
considered for adoption by the DSB until after the completion of the appeal. Information on the current status
of the Panel Report is available from the WTO Secretariat.

I. INTRODUCTION
1.1 On 17 August 2000, the United States requested consultations with Mexico pursuant to
Article 4 of the Understanding on Rules and Proce dures Governing the Settlement of Disputes (the
"DSU") and Article XXIII of the General Ag reement on Trade in Services (the "GATS"). 1 T h i s
request concerned Mexico's GATS commitments and obligations on basic and value-added
telecommunications services.
1.2 The consultations took place on 10 October 2000, but the parties failed to reach a mutually
satisfactory resolution. On 10 November 2000, th e United States requested the Dispute Settlement
Body (the "DSB") to establish a panel, in accordance with Articles 4 and 6 of the DSU, in order to
examine Mexico's measures with respect to trad e in basic and value-added telecommunications
services.2 On the same date, the United States requ ested additional consultations with Mexico,
pursuant to Article 4 of the DSU and Article XX III of the GATS, regarding Mexico's measures
affecting trade in telecommunications services. 3 The additional consultations took place on
16 January 2001, but the parties failed again to reach a mutually satisfactory resolution. On
13 February 2002, the United States again requested the DSB to establish a panel, in accordance with
Articles 4 and 6 of the DSU in order to examin e Mexico's measures affecting telecommunications
services.4
1.3 At its meeting on 17 April 2002, the DSB establis hed a Panel in accordance with Article 6 of
the DSU.5 At that meeting, the parties agreed that th e Panel should have standa rd terms of reference
as follows:
"To examine, in the light of the relevant provisions of the covered agreements cited
by the United States in document WT/DS204/3, the matter referred to the DSB by the
United States in that document, and to ma ke such findings as will assist the DSB in
making the recommendations or in giving the rulings provided for in those
agreements."
6
1.4 On 16 August 2002, the United States requested the Director-General to determine the
composition of the Panel pursuant to Article 8.7 of the DSU, which provides:
"If there is no agreement on the panelists within 20 days after the date of the
establishment of a panel, at the request of either party, the Director-General, in
consultation with the Chairman of the DSB and the Chairman of the relevant Council
or Committee, shall determine the com position of the panel by appointing the
panelists whom the Director-General consid ers most appropriate in accordance with
any relevant special or additional rules or procedures of the covered agreement or
covered agreements which are at issue in th e dispute, after consulting with the parties
to the dispute. The Chairman of th e DSB shall inform the Members of the
composition of the panel thus formed no later than 10 days after the date the
Chairman receives such a request."

1 See WT/DS204/1.
2 See WT/DS204/2.
3 See WT/DS204/1/Add.1.
4 See WT/DS204/3.
5 See WT/DSB/M/123.
6 See WT/DS204/4.

1.5 On 26 August 2002, the Director-General composed the Panel as follows:
7
 Chairman: Mr Ernst-Ulrich Petersmann

 Members: Mr Raymond Tam
 Mr Björn Wellenius

1.6 Australia, Brazil, Canada, Cuba, the European Communities, Guatemala, Honduras, India,
Japan and Nicaragua reserved their rights to participate in the Panel proceedings as third parties.
1.7 The Panel met with the parties on 17 and 18 December 2002 and on 12 and 13 March 2003.
The Panel met with the third parties on 18 December 2002.
1.8 The Panel submitted its Interim Report to th e parties on 21 November 2003. The Panel
submitted its final report to the parties on 12 March 2004.
II. FACTUAL ASPECTS
2.1 This dispute concerns provisions in Mexi co's domestic laws and regulations on
telecommunications which govern the supply of telecommunication services.
A. M
EXICO'S TELECOMMUNICATION MARKET
2.2 Prior to 1997, long-distance and internationa l telecommunications services in Mexico were
supplied on a monopoly basis by Teléfonos de México, S.A. de C.V. ("Telmex"). Since that date,
Mexico has authorized multiple Mexican carrier s to provide international services over their
networks. Under Mexican laws, th e largest carrier of outgoing calls to a particular international
market, has the exclusive right to negotiate th e terms and conditions for the termination of
international calls in Mexico that apply to any ca rrier between Mexico and that international market. 8
Telmex is presently the largest carrier of outgoing calls for all markets. Currently, there are
27 carriers ("concesionarios" or "concessionaires") allowed to provide long distance services,
including two United States-affiliated carriers – Avantel (WorldCom) and Alestra (AT/T). 9 Of these
27 long-distance concessionaries 11 are authorized to operate international gateways, allowing them
to carry incoming and outgoing international calls. 10 Telmex remains the largest supplier of basic
telecommunications services in Mexico, including international outbound traffic.
B. MEXICO'S TELECOMMUNICATIONS LAWS AND REGULATIONS
1. Federal Telecommunications Law
2.3 The Federal Telecommunications Law (the "FTL" ) of Mexico provides the legal framework
for the regulation of telecommunications activities in Mexico. 11 Its purpose is "to govern the use,
utilization and exploitation of the radio-electrical spectrum, of the telecommunications networks, and
of satellite communication". 12 More broadly, it is intended to "promote efficient development of

7 See WT/DS204/4.
8 See ILD Rules 2 and 13.
9 See Mexico's first written submission, paragraph 87. See also Mexico's first oral statement,
paragraph 11.
10 See Mexico's first written submission, paragraph 88.
11 See Federal Telecommunications Law (FTL), (" Ley Federal de Telecomunicaciones "), published in
the Federal Gazette ("Diario oficial de la Federación") on 7 June 1995, entered into force on 8 June 1995.
12 See FTL, Article 1.

telecommunications; exercise the authority of the State on these matters to ensure national
sovereignty; to promote a healthy competiti on among the different telecommunications service
providers in order to offer better services, diversity and quality for the benefit of the users and to
promote an adequate social coverage".
13
2.4 The FTL establishes a Secretariat of Communications and Transportation (" Secretaría de
Comunicaciones y Transportes" or "Secretariat"), which is authorized, inter alia, to grant concessions
required for "installing, operating or exploiting public telecommunications networks".14 A concession
may only be granted to a Mexican individual or company, and any foreign investment therein may not
exceed 49 per cent15, except for cellular telephone services.16
2.5 Special rules apply to " comercializadoras" ("commercial agencies").17 A commercial agency
is any entity which, "without being the owner or possessor of any transmission media, provides
telecommunication services to third parties usi ng the capacity of a public telecommunications
network concessionaire." 18 A concessionaire of a public te lecommunications network may not,
without permission of the Secretariat, have "any di rect or indirect interest in the capital" of a
commercial agency.19 The establishment and operation of commercial agencies is "subject, without
exception, to the respec tive regulatory provisions". 20 The Secretariat has issued regulations for
commercial agencies to provide pay public telephone public telephony services (pay phones).21
2.6 The "interconnection" of public telecommunica tions networks with foreign networks is
carried out through agreements entere d into by the interested parties. 22 Should these require
agreement with a foreign government, the concessionair e must request the Secretariat to enter into the
appropriate agreement.23
2.7 Several fundamental technical terms are defined in the FTL. These are:
2.8 Telecommunications: "every broadcast, transmission or reception of signs, signals, written
data, images, voice, sound or data of whatever nature carried out through wires, radio-electricity, optic
or physical means or any other electromagnetic systems";
2.9 Telecommunications network: "systems integrated by means of transmission such as channels
or circuits using frequency bands of the radio-el ectrical spectrum, satellite links, wiring, electric
transmission networks or any other transmission m eans, as well as when applicable, exchanges,
switching devices or any other equipment required";

13 See FTL, Article 7.
14 See FTL, Article 11.
15 See FTL, Article 12. Foreign investment in cellula r telephone services may however be greater than
49 per cent, with the permission of the Commission on Foreign Investment.
16 See FTL, Article 12.
17 Also referred to in English language translations of the FTL as "telecommunications service
marketing companies".
18 See FTL, Article 52.
19 See FTL, Article 53.
20 See FTL, Article 54.
21 See Mexico's answer to question No. 6(d) of the Panel of 19 December 2002 (" Mexico has inscribed
in its schedule that it 'will not issue permits for the establis hment of a commercial agency until the
corresponding regulations are issued '. Why has Mexico not issued the regul ations on the es tablishment and
operation of commercial agencies?"). See also the Public Telephony Regulations, published in the Federal
Gazette on 16 December 1996 (Exhibit MEX-29).
22 See FTL, Article 47, paragraph 2.
23 See FTL, Article 47, paragraph 4.

2.10 Private telecommunications network: "the telecommunications network used to meet specific
requirements for telecommunications services of cer tain people not implying commercial exploitation
of services or capacity of said network";
2.11 Public telecommunications network : "the telecommunications network through which
telecommunications services are commercially exploited. The network does not include users'
terminal telecommunications equipment nor te lecommunications networks located beyond the
terminal connection point".
24
2. International Long-distance Rules
2.12 The International Long Distance Rules (" ILD Rules") are issued by the Federal
Telecommunications Commission ("Comisión Federal de Telecomunicaciones" or "Commission"), an
agency of the Secretariat of Communications and Transportation. 25 They serve "to regulate the
provision of international long-distance service and est ablish the terms to be included in agreements
for the interconnection of public telecommun ications networks w ith foreign networks." 26
International long-distance service is defined as the service whereby all international switched traffic
is carried through long-distance exchanges authorized as international gateways.27
2.13 Direct interconnection with foreign public te lecommunications networks in order to carry
international traffic may only be done by "international gateway operators".28 These are long-distance
service licensees authorized by the Commission "to operate a switching exchange as an international
gateway"29, that is, the exchange is "interconnected to international incoming and outgoing circuits
authorised by the Commission to carry international traffic". 30 Traffic is "switched" when it is
"carried by means of a temporary connection betw een two or more circuits between two or more
users, allowing the users the full and exclusive use of the connection until it is released."31
2.14 Each international gateway operator must appl y the same "uniform settlement rate" to every
long-distance call to or from a given country, regardless of which operator originates or terminates the
call.
32 The uniform settlement rate for each country is established, throu gh negotiations with the
operators of that country, by the long-distance ser vice licensee having the greatest percentage of
outgoing long-distance market share for that country in the previous six months.33
2.15 Each international gateway operator must also a pply the principle of "proportionate return".
Under this principle, incoming calls (or associated revenues) from a foreign country must be
distributed among international gateway operator s in proportion to each international gateway
operator's market share in outgoing calls to that country.34

24 See FTL, Article 3.
25 See Rules for the Provision of International Long-Distance Service To Be Applied by the Licensees
of Public Telecommunications Networks Author ized to Provide this Service (ILD Rules) (Reglas para Prestar el
Servicio de Larga Distancia Internacional que deberán aplicar los Concesionarios de Redes Públicas de
Telecomunicaciones Autorizados para Prestar este Servicio) . Issued by the Commission; published in the
Federal Gazette on 11 December 1996; entered into force on 12 December 1996.
26 See ILD Rule 1.
27 See ILD Rule 2:XI.
28 See ILD Rules 3 and 6.
29 See ILD Rule 2:VII.
30 See ILD Rule 2:VIII.
31 See ILD Rule 2:XV
32 See ILD Rules 2:XII(a) and (b); and 10.
33 See ILD Rule 13.
34 See ILD Rules 2:XII, 10, 13, 16, 17 and 19.

2.16 Private cross-border networks must lease capacity from a long-distance licensee
(concessionaire).35 Any cross-border traffic carried through dedicated infrastructure that forms part of
a private network must be originated and terminated within the same private network.36
C. THE COMPETITION LAWS OF MEXICO
1. Federal Law of Economic Competition37
2.17 The Federal Law of Economic Competition (" Ley Federal de Competencia Económica " or
"FLEC") is intended "to protect the process of comp etition and free market participation, through the
prevention and elimination of monopolies, monopolistic practices and other restrictions that deter the
efficient operation of the market for goods and services."38
2.18 Under the law, the "relevant market " is determined by considering, inter alia , "the
possibilities of substituting the goods or services in question, with others of domestic or foreign
origin, bearing technological possibilities, and the extent to which substitutes are available to
consumers and the time required for such substitution".39 Whether an economic agent has "substantial
power" in the relevant market is determined, inter alia , on "the share of such agent in the relevant
market and the possibility to fix prices unilaterally or to restrict supply in the relevant market, without
competitive agents being able, presently or potentially, to offset such power".40
2. Code of Regulations (to Federal Law on Economic Competition)41
2.19 The Code of Regulations to the FLEC sets out in detail the rules, inter alia, for the analysis of
the relevant market and substantial power.
2.20 For the relevant market analysis, the Code states that the Commission shall "identify the
goods or services which make up the relevant market, whether produced, marketed or supplied by the
economic agents, and those that are or may be subs tituted for them, whether domestic or foreign, as
well as the time required for such substitution to take place." The Commission is also to take into
account "economic and normative restrictions of a local , federal or international nature which prevent
access to the said substitute goods or services, or wh ich prevent the access of users or consumers to
alternative sources of supply, or the access of the suppliers to alternative customers".42
2.21 With respect to substantial power, the Code re quires the authorities to take into account the
"degree of positioning of the goods or services in the relevant market"; the "lack of access to imports
or the existence of high importation costs"; and the "existence of high cost differentials which could
face consumers on turning to other suppliers."
43

35 See ILD Rule 4.
36 See ILD Rule 4.
37 See FLEC. Approved by the Congress on 18 Decem ber 1992, promulgated by the President on
22 December 1992, published on 24 December 1992, entered into force 180 days after publication.
38 See FLEC, Article 2.
39 See FLEC, Article 12.
40 See FLEC, Article 13.
41 See Code of Regulations to the Federal Law on Economic Competition ("Reglamento de la Ley
Federal de Competencia Económica"), published in the Official Gazette on 4 March 1998, entered into force on
5 March 1998 (with the exception of Article 6 which entered into force 6 months from 5 March 1998).
42 See Code of Regulations to the Federal Law on Economic Competition, Article 9.
43 See Code of Regulations to the Federal Law on Economic Competition, Article 12.

D. M
EXICO'S COMMITMENTS UNDER THE GENERAL AGREEMENT ON TRADE IN SERVICES
(GATS)
2.22 Mexico has undertaken specific commitmen ts for telecommunications services under
Articles XVI (Market Access), XVII (National Treatment), and Article XVIII (Additional
Commitments). Its additional comm itments consist of undertakings known as the "reference paper".
These commitments are reproduced in Annex B.
III. PARTIES' REQUESTS FOR FINDINGS AND RECOMMENDATIONS
3.1 The United States requests the Panel to find that:
44
(a) Mexico's failure to ensure that Telmex provides interconnection to United States
basic telecom suppliers on a cross-border b asis on cost-oriented, reasonable rates,
terms and conditions is inconsistent with its obligations under Sections 2.1 and 2.2 of
the Reference Paper, as inscribed in Mexico's GATS Schedule of Commitments,
GATS/SC/56/Suppl.2; in particular, that:
(i) Mexico's Reference Paper obligations apply to the terms and conditions of
interconnection between Telmex and United States suppliers of basic
telecommunications services on a cross-border basis;
(ii) Telmex is a "major supplier" of basic telecommunications services in
Mexico, as that term is used in Mexico's Reference Paper obligations;
(iii) Mexico has failed to ensure that Telmex provides interconnection to
United States suppliers at rates that are " basadas en costos " and terms and
conditions that are razonables because:
- Mexico has allowed Telmex to char ge an interconnection rate that
substantially exceeds cost,
- Mexico allows Telmex to restrict the supply of scheduled basic
telecommunications services; and
- Mexico prohibits the use of any a lternative to the Telmex negotiated
interconnection rate through Mexico's ILD rules, specifically Rule 13 along
with Rules 3, 6, 10, 22 and 23.
(iv) Mexico's ILD Rules (specifically Rule 13 along with Rules 3, 6, 10, 22
and 23) fail to ensure that Telmex pr ovides cross-border interconnection in
accordance with Section 2.2 of the Reference Paper.
(b) Mexico's failure to maintain measures to prevent Telmex from engaging in anti-
competitive practices is inconsistent with its obligations under Section 1.1 of the
Reference Paper; as inscribed in Mexico's GATS Schedule of Commitments,
GATS/SC/56/Suppl.2; and in particular, that Mexico's ILD Rules (specifically Rule
13 along with Rules 3, 6, 10, 22 and 23) empower Telmex to operate a cartel
dominated by itself to fix rates for intern ational interconnection and restrict the
supply of scheduled basic telecommunications services;

44 See the United States' first written submission, para graph 297, and the United States' second written
submission, paragraph 129. See also the United States' second oral statement, paragraph 88.

(c) Mexico's failure to ensure United Stat es basic telecom suppliers reasonable and
non-discriminatory access to, and use of, public telecom networks and services is
inconsistent with its obligations under S ections 5(a) and (b) of the GATS Annex on
Telecommunications; and in particular, Mexi co failed to ensure that United States
service suppliers may access and use pub lic telecommunications networks and
services through:
(i) interconnection at reasonable terms and conditions for the supply of
scheduled services by facilities-based operators and commercial agencies;
and
(ii) private leased circuits for the supply of scheduled services by facilities-based
operators and commercial agencies.
3.2 The United States also requests that the Panel recommend that Mexico bring its measures into
conformity with its obligations under the GATS.
3.3 Mexico requests that the Panel reject all of the claims of the United States, and find that:
(a) The measures being challenged by the United States are not inconsistent with
Sections 2.1 and 2.2 of the Reference Paper, inscribed in Mexico's GATS Schedule of
Specific Commitments;
(b) Mexico has not acted inconsistently with its obligations under Section 1.1 of the
Reference Paper, inscribed in Mexico's GATS Schedule of Specific Commitments;
and
(c) The measures being challenged by the United States are not inconsistent with Section
5 of the GATS Annex on Telecommunications.
45
IV. MAIN ARGUMENTS OF THE PARTIES
A. SECTION 2 OF THE REFERENCE PAPER
4.1 The United States claims that Mexico's ILD Rules fa il to ensure that Telmex provides
interconnection to United States basic telecom supplie rs on a cross-border basis with cost-oriented,
reasonable rates, terms and conditions and that this is inconsistent with its obl igations under Sections
2.1 and 2.2 of the Reference Paper, as inscrib ed in Mexico's GATS Schedule of Commitments. 46 The
United States argues that the interconnection obligati ons in Section 2 of the Reference Paper apply:
(i) as legally binding GATS commitments; (ii) because of the specific commitments Mexico has
undertaken in its GATS Schedule; and (iii) to the circumstances at issue in this case, namely the
interconnection between United States service supp liers and Telmex for the purpose of delivering
their basic telecom services from the United States into Mexico.
47
4.2 Mexico argues that the claims of the United States must fail because Mexico's Reference
Paper obligations do not apply to the measures at issu e in this dispute, namely the accounting rates set
by bilateral agreements between the United Stat es and Mexican basic telecommunications carriers. 48

45 See Mexico's first written submission, paragraph 267. See also Mexico's first oral statement,
paragraph 58, Mexico's second written submission, paragraph 107 and Mexico's second oral statement,
paragraph 124.
46 See the United States' first written submission, para graph 297, and the United States' second written
submission, paragraph 129. See also the United States' second oral statement, paragraph 88.
47 See the United States' first written submission, paragraph 44.
48 See Mexico's first written submission, paragraph 112.

In the alternative, Mexico argues, if Section 2 of the Reference Paper is found to apply to the
accounting rate regime as implemen ted between the United States and Mexico, the United States has
nevertheless failed to establish a prima facie cas e that the accounting rates negotiated between
United States and Mexican carriers are not " basadas en costos " ("cost-oriented") and " razonables"
("reasonable") pursuant to Section 2. 2(b) of Mexico's Reference Paper.
49 Moreover, Mexico argues,
the United States has failed to establish that the ILD Rules are inconsistent with Section 2.2 of the
Reference Paper.50
1. Scope of application of the Reference Paper
4.3 The United States argues that Mexico undertook the interconnection obligations of Section 2
of the Reference Paper as additional binding commitments under Article XVIII of the GATS.
According to the United States, Mexico inscribed the entire text of the Reference Paper into its
Schedule as an additional commitment. 51 Therefore, the United States argues, pursuant to
Article XVIII of the GATS, Mexico committed to the United States (and all other WTO Members)
that it would abide by the strict terms and conditions contained in Section 2 of the Reference Paper.
In particular, the United States argues, Mexico comm itted that it would ensure that its major supplier
of basic telecom services Telmex provides interconn ection at rates that are based in cost and are
reasonable.52
4.4 Mexico submits that its Reference Paper does not apply to the accounting rates set by bilateral
agreements between United States and Mexican basic telecommunications carriers 53 since it governs
matters relating to domestic regulation.54 Mexico argues that the United States fails to recognize that
the Reference Paper is a statement of "definitions and principles" that have the objective of guiding
domestic regulators in dealing with major telecommunications suppliers.55 According to Mexico, the
Reference Paper was intended to accommodate different political and legal regimes in WTO
Members, and is sufficiently flexible to accommoda te differences in market structures and regulatory
philosophies.56 In Mexico's view, this means that the principles and definitions in the Reference
Paper must be interpreted in the light of the domestic regulatory system of the WTO Member in
question.57 Mexico considers that in this case, because its domestic regulatory regime distinguishes
between: (i) the accounting rate regime applicable to traffic exchange between foreign carriers and
Mexican concessionaires; and (ii) the regime that is applicable to carriers within Mexico's borders,
the United States' challenge under Section 2 of the Reference Paper must fail.58
4.5 Mexico notes that Section 2 of the Reference Paper contains a number of requirements as to
how a major supplier must provide interconnection, with the goal of promoting competition within
domestic markets; that is, preventing a major supp lier from using its position to prevent new entrant
competitors from participating in the domestic mark et. In contrast, Mexico argues, because carriers
from different countries that enter into accounting rate arrangements are not competing with each
other, the requirements of the Reference Paper have no meaning for those arrangements.59

49 See Mexico's first written submission, paragraph 117.
50 Ibid.
51 See the United States' first written submission, paragraph 45.
52 See the United States' first written submission, paragraph 47.
53 See Mexico's first written submission, paragraph 112.
54 See Mexico's first written submission, paragraph 152. See also Mexico's first oral statement,
paragraph 25.
55 See Mexico's first oral statement, paragraph 48.
56 See Mexico's first oral statement, paragraph 49.
57 Ibid.
58 See Mexico's first oral statement, paragraph 50.
59 See Mexico's first written submission, paragraph 154.

4.6 The United States contends that there is nothing in th e Reference Paper to suggest that its
only goal was to promote domestic competition. In its view, there is no textual basis for concluding
that the Reference Paper is limited to one mode of supply of the service, i.e. that which is solely
within its territory. Instead, the United States not es, Article I of the GATS states that the Agreement
covers all measures affecting trade in services, in cluding the cross-border supply of services. While
the United States asserts that it is undoubtedly true that the Re ference Paper "governs matters relating
to domestic regulation", it further submits that this does not mean that foreign service suppliers are
"outside the scope of application of" the Referenc e Paper, or that the Reference Paper governs only
matters relating to domestic regulation.60
4.7 Mexico argues that the mere fact that Article I of the GATS ascribes a broad application of
the general obligations of the GATS to all measure s by Members affecting trade in services does not
mean that Mexico's Reference Paper has a similarly broad application. Mexico submits that it is an
"additional commitment" that it inscribed in its Sc hedule pursuant to Article XVIII of the GATS and,
as such, its terms must be interpreted in accordan ce with the rules of treaty interpretation in
Articles 31 and 32 of the Vienna Convention on the Law of the Treaties of 1969 (" Vienna
Convention").61 According to Mexico, the Model Refere nce Paper, upon which Mexico's Reference
Paper is based, develops further the principles a nd obligations found in Article VI of the GATS on
domestic regulation and Article VIII of the GATS on monopolies and exclusive service suppliers,
both of which focus on activities within the territory of the Member in question. Thus, Mexico
concludes, these Articles deal with matters relating to domestic regulation, an d not "the supply of a
service from the territory of one Member into the territory of any other Member", which is the focus
of the United States' claims in this dispute.62
4.8 The United States contends that Section 2 applies to this case because United States suppliers
of basic switched telecom services seek to link with Telmex to connect calls by their users originating
in the United States to Telmex's users in Mexico . According to the Unit ed States, Telmex and
United States basic telecom suppliers are proveedores de redes públicas de telecomunicaciones de
transporte o de servicios ("suppliers providing public teleco mmunications transport networks or
services") ("PTTNS") because they provide basic telecommunications services, which, pursuant to the
Decision on Negotiations on Basic Telecommunications by the WTO Trade Negotiations Committee,
is synonymous with "telecommunications trans port networks and services"; also, it adds, such
services are "public" because the Central Product Cl assification (CPC) codes that Mexico used to
describe its commitments refer to "public" services. The United States further argues that supply on a
cross-border basis of basic telecom services betwee n the United States and Mexico requires "linking"
(conexión) between United States suppliers (e.g., AT&T ) and Mexican suppliers (e.g., Telmex) in
order to allow users of the United States supplier to communicate with users of the Mexican supplier
and to access services provided by the Mexican supplier. 63 According to the United States, this is
because under Mexican law, United States basic tel ecom suppliers may not own telecommunications
facilities in Mexico and thereby extend their public telecommunicati ons networks from the
United States into Mexico. Therefore, the Unite d States argues, when a United States basic telecom
supplier provides telecommunications services from the territory of the United States into the territory
of Mexico, it must link its network or a leased line to the network of a Mexican service supplier (such
as Telmex) and pay that Mexican service supplier to "terminate" (i.e., deliver) the phone call to the

60 See the United States' first oral statement, paragraph 22. See also the United States' answer to
question No. 7 of the Panel of 19 December 2002 (" Article I of the GATS states that the agreement covers all
measures affecting trade in services , including the cross border supply of services. Mexico claims that the
Reference Paper applies only to matters relating to domestic regulation within the borders of each WTO
Member. Please explain.").
61 See Mexico's answer to question No. 7 of the Pa nel of 19 December 2002. For question No. 7, see
footnote 60 of this Report.
62 See Mexico's second written submission, paragraph 25. See also Mexico's answer to question No. 7
of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
63 See the United States' first written submission, paragraphs 60-64.

end-user in Mexico.
64 This conexión, in turn, allows the consumers of the United States basic telecom
supplier ("users of one supplier") to communicate w ith Telmex's consumers in Mexico ("users of
another supplier"), as well as the United States service supplier ("user") to access services provided by
Telmex ("another supplier"), namely the services invol ved in delivering a call that originated in the
United States to its final destination in Mexico.65
4.9 Mexico argues that the apparently broad technical definition of "interconnection" in
Section 2.1 of Mexico's Reference Paper 66 is not determinative of the scope of application of
Section 2 as a whole. In Mexico's view, this defi nition must be interpreted in its context, which
substantially narrows the scope of application of S ection 2. Mexico explains that interconnection
occurs between two entities. With respect to one en tity, the wording of Section 2.2 restricts the scope
of Section 2 to interconnection with a "major supplie r". With respect to both entities, the definition in
Section 2.1 refers to "suppliers providing public te lecommunications transport networks or services".
Mexico contends that, although s uppliers in Mexico provide PTTNS in Mexico, i.e. Alestra and
Avantel, thus enabling both suppliers in an inte rconnection arrangement to meet this definition,
United States-based suppliers such as AT&T and Wo rldCom do not provide such services in Mexico.
Thus, Mexico argues, meaning must be given to the fact that Section 2.1 does not refer to "service
suppliers of any other Member", a phrase which is used elsewhere in the GATS and which would
have made it clear that Section 2 applies to cross- border (i.e., international) interconnection. Mexico
also submits that the phrase " respecto de los cuales se cont raigan compromisos específicos " in
Section 2.1 of Mexico's Reference Paper further narro ws the scope of application of Section 2 to the
bounds of the market access inscribed in Mexico's Schedule. Thus, it argues, Section 2 applies only
to services supplied in Mexico through mode 3 (commercial presence) by concessionaires with
foreign direct ownership up to 49 per cent. In ot her words, Mexico concludes, it applies only to
interconnection within Mexico.67
4.10 The United States submits that, if Mexico had meant to limit the applicability of Section 2 to
interconnection of "some" suppliers with a major s upplier, it would have adopted language to that
effect. In the absence of any such limitation, the United States contends, Section 2 applies to
interconnection of "all" suppliers with a major supplie r. For context, the United States refers to the
definition in Article XXVIII(g) of the GATS, which states that "'service supplier' means any person
that supplies a service." According to the United St ates, there is no limitation on whether the service
supplier is domestic or foreign.68
2. The scope of "interconnection" within Mexico's Reference Paper
(a) The concept of interconnection
4.11 The United States submits that interconnection consists of the linking of the networks of two
different suppliers of telecommunications services for the purpose of exchanging traffic. According
to the United States, interconnection is the necessary intermediary step that enables a phone call to
travel from the network used by the person placing th e call (the "calling party") to the network used
by the person receiving the call (the "receiving party"). 69 The United States explains that, because no
telecom supplier has a worldwide ubiquitous network, all telecommunications service suppliers rely
on another service supplier to deliver (or "terminate ") the phone call to the receiving party when the
receiving party is not on the network of the calling party's supplier. To do so, it argues, the calling

64 See the United States' first written submission, paragraph 65.
65 See the United States' first written submission, paragraph 67.
66 As regards the definition of the term "interconnection", see Section IV.A.2(a) of this Report.
67 See Mexico's second written submission, paragraphs 27-28. See also Mexico's answer to question
No. 7 of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
68 See the United States' second oral statement, paragraphs 27-28.
69 See the United States' first written submission, paragraph 39.

party's service supplier must link to the network of the receiving party's service supplier and hand-off
the call for delivery to the receiving party. In other words, the United States submits, the calling
party's service supplier interconnects its network with that of the receiving party's service supplier to
enable users of both networks to communicate with each other.70
4.12 The United States submits that, whether for the purpose of origination or termination,
interconnection is generally understood as the linking between the networks of different basic telecom
suppliers for the purpose of allowing users of one supplier to communicate with users of another.
In support of its view, the United States refers to Section 2.1 of the Reference Paper, which defines
interconnection as "linking with suppliers providing public telecommunications transport networks or
services in order to allow the users of one supplie r to communicate with users of another supplier and
to access services provided by another supplier". The United States also notes that in its domestic
regulation, Mexico defines inte rconnection similarly as "[p]hysica l and logical connection between
two public telecommunications networks, that allows the exchange of switched public traffic between
the switching central offices of both networks. Th e interconnection allows the users of one of the
networks to interconnect and exchange public switched traffic with the users of the other network and
vice versa, or to use the services provided by the other network."71
4.13 The United States also refers to the definition of "interconnection" in the European
Communities' Interconnection Directive as "the physical and logical linking of telecommunications
networks used by the same or a different organiza tion in order to allow the users of one organization
to communicate with users of the same or anot her organization, or to access services provided by
another organization."
72 The United States submits that the European Commission has explained that
"[t]he most basic interconnection service provided is that of call termination (i.e. delivering a call
which originates on one network to its destination on another network)."73
4.14 In Mexico's view, the term "interconnection" is a broad concept that can have different
meanings in different contexts. Generally, it explains, interconnection rates are charges for physically
and technically linking two domestic networks for purposes of exchanging traffic. In some contexts,
it indicates, interconnection is treated as distinct from commercial arrangements – such as settlement,
peering, and reciprocal compensation arrangements – that involve charges for use of a network for
transport and termination of traffic that originat es on another network. Mexico contends that, for
example, United States law makes a clear distinction between interconnection and transport and
termination services: interconnection is the physi cal linking of two networks, while transport and
termination is when one carrier routes traffic ove r the network of another carrier. According to
Mexico, the regulation of interconnection rates is a significant issue in domestic markets for telephone
service where carriers need access to other carriers' networks to provide service in competition with
each other. As a result, countries seeking to encourage domestic competition must have strict
requirements for incumbent providers with market po wer. Mexico claims that these rules generally
require incumbent carriers to provide all of their competitors interconnection with rates, terms and
conditions that are reasonable and non-discriminator y. Mexico argues that interconnection must be
permitted at any technically feasible point within the carrier's network and at least equal in quality to
that provided by the incumbent provider to itself or to its subsidiaries, affiliates, or any other

70 See the United States' first written submission, paragraph 40.
71 See the United States' first written submission, paragraph 41.
72 The United States refers to Directive 97/33/EC, Interconnection in Telecommunications, Art. 2(1)(a),
available at http://europa.eu.int/ispo/infosoc/telecompolicy/en/dir97-33en.htm.
73 The United States refers to Commission Recommendation on Interconnection in a Liberalised
Market, Part 1 – Interconnection Pricing , Explanatory Memorandum (January 8, 1998), Sect. 3.1 (emphasis in
original), available at http://www.europa.eu.int/ISPO/infosoc/telecompolicy/en/r3148-en.htm.

competitor. Mexico adds that competitors must also have a process to resolve disputes with
incumbent carriers that arise during and after the negotiation process.
74
4.15 The United States considers that Mexico's argument that United States law makes a "clear
distinction" between interconnecti on and call termination is irreleva nt. It submits that in the
United States, as in the European Communities, a ke y purpose of the regulation of interconnection is
to ensure that carriers may terminate calls on other carriers' networks at cost-oriented rates. The
United States submits that the FCC (Federal Communications Commission) has made clear that "[t]he
interconnection obligation of Section 251(c)(2) ... allows competing carriers to choose the most
efficient points at which to exchange traffic with incumbent LECs, thereby lowering the competing
carriers costs of, among other things, transport and termination of traffic .75 The United States
explains that United States law defines "transport and termination" separately from interconnection
because United States local exchange carriers have additional obligations with respect to the transport
and termination of calls, including the require ment to establish "reciprocal compensation
arrangements" for the termination of calls originated on other local networks.76 77
(b) The meaning of interconnection within the Reference Paper
4.16 According to Mexico, the term "interconnection" in S ection 2 of the Reference Paper is
capable of many meanings including: domestic local interconnection, domestic long-distance
interconnection and intern ational interconnection. 78 However, Mexico contends, when properly
interpreted, "interconnection" in Section 2 of the Reference Paper does not include arrangements
under the accounting rate regime.79 In Mexico's view, the term "interconnection" does not encompass
the accounting rate regime. 80 Mexico understands that, in the context of the Reference Paper,
"interconnection" must be interpreted to refer to interconnection within a WTO Member's borders, for
example, interconnection to a local exchange carri er by a domestic long-distance carrier, or by a
competitive local carrier and the incumbent local carrier.81 Mexico thus submits that the United States
incorrectly defines the rates for the transporta tion and termination of international calls as
"interconnection rates".82
4.17 Mexico further contends that this interpre tation does not render the Reference Paper
meaningless in the context of international trade in services as implied by the EC in its third party
submission. Mexico explains that, for example, where permitted under a WTO Member's Schedule, if
a foreign company establishes a commercial presence in that Member's territory, it would have to
interconnect with other carriers within the domestic network. Mexico submits that this

74 See Mexico's first written submission, paragraphs 36-38.
75 The United States refers to the Implementation of the Local Competition Provisions in the
Telecommunications Act of 1996, 11 FCC Rcd. 15499, paragraph 172 (1996) (emphasis added) (Exhibit US-
55).
76 The United States refers to the 47 USC. § 251(b)(5) (Exhibit US-56). Traffic terminated under
reciprocal compensation arrangements is subject to the same "forward -looking economic cost-based pricing
standard" that governs other interconnection services provided by incumbent local carriers. Implementation of
the Local Competition Provisions in the Telecommunications Act of 1996, 11 FCC Rcd. 15499, paragraph 1054
(1996) (Exhibit US-55).
77 See the United States' answer to question No. 8 of the Panel of 19 December 2002 ("What are the
main differences and similarities between an accounting rate regime and an interconnection regime from
commercial, contractual, technical, and regulatory viewpoints?").
78 See Mexico's first written submission, paragraph 150.
79 See Mexico's first written submission, paragraph 151. See also Mexico's first oral statement,
paragraph 26.
80 See Mexico's first written submission, paragraph 164. See also Mexico's first oral statement,
paragraph 25.
81 See Mexico's first written submission, paragraph 152.
82 See Mexico's first written submission, paragraph 21.

interconnection would be governed by the provisions of the Reference Paper. Mexico further submits
that its ILD Rules fully implement those provisions of the Reference Paper vis-à-vis foreign carriers
with a commercial presence in Mexico, among others, AT&T, WorldCom and Verizon.83
4.18 The United States contends that the plain language of the Reference Paper simply does not
support Mexico's argument. According to the Unite d States, the definition of "interconnection" in
Section 2.1 is not limited to domes tic interconnection, or in other wo rds, interconnection provided to
commercially present suppliers. Rather, it argues, it is written broadly to include all means of
"linking" for the purpose of en abling users to communicate – whether domestic (mode 3) or
international (mode 1). 84 Citing to provisions of Mexico's ILD Rules and Federal
Telecommunications Law, the United States also argues that even Mexico, in almost all references in
its internal laws and regulations, refers to the li nking of foreign service suppliers to its international
port operators as "interconnection".85
4.19 Mexico submits that the United States ignores ILD Rules 2, 10, 13, 16 and 19 which define
"settlement rate" and explicitly di stinguish between "settlement rates", which are applicable to
international traffic, and "interconnection rates, which are paid to the local operator that terminates the
call.86
4.20 The United States submits that the distinction Mexico draws between "interconnection rates"
and "charges for use of a network for transport and termination of traffic that originates on another
network" is irrelevant. 87 In its view, even though interconnection arrangements cover a wide variety
of different commercial, contr actual and technical situations, all of these arrangements are
"interconnection" under Section 2.1 of the Reference Paper. 88 According to the United States, the
requirements of Mexico's Reference Paper apply to all interconnection services, particularly call
termination. The United States explains that, because call termination means allowing calls originated
on the network of one supplier to be terminated on the network of another supplier, it falls squarely
within Mexico's definition of "interconnection" in Section 2.1, which is "linking with suppliers
providing public telecommunications transport networks or services in order to allow the users of one
supplier to communicate with users of another s upplier and to access services provided by another
supplier."89
(i) Interpretation of the term "interconnection" in its context
4.21 Mexico argues that the United States' interpretation arises from an improper application of the
general rule of interpretation in Article 31 of the Vienna Convention 90 since, in its view, the
United States simply presents the "ordinar y meaning" of the term "interconnection". 91 M e x i c o
submits that, under Article 31 of the Vienna Convention it is insufficient to rely solely on the ordinary

83 See Mexico's first oral statement, paragraph 29.
84 See the United States' first oral statement, paragraph 20. See also the United States' second written
submission, paragraph 41.
85 See the United States' first oral statement, paragraph 20. See also the United States' second written
submission, paragraphs 41-42.
86 See Mexico's second oral statement paragraph 11.
87 The United States refers to Mexico's distinction in paragraph 36 of its first written submission ( see
paragraph 4.14 of this Report). See the United States' second written submission, paragraph 54.
88 See the United States' answer to question No. 8 of the Panel of 19 December 2002. For question
No. 8, see footnote 77 of this Report.
89 See the United States' second written submission, paragraph 54.
90 See Mexico's second written submission, paragraph 33. See also Mexico's answer to question No. 7
of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
91 See Mexico's first written submission, paragraph 150. See also Mexico's first oral statement,
paragraph 27.

meaning of a term and that the United States has th erefore failed to take into account the context of
the term and object and purpose of Mexico's Reference Paper.
92
4.22 As regards the context, Mexico submits that, the history of the negotiations on basic
telecommunications confirms that "interconnection", "accounting rates" and "termination services"
were discussed but that agreement was reached only on interconnection. Accordingly, Mexico
contends, accounting rates were clearly outside the scope of what was agreed. Mexico contends that a
specific draft text on accounting rates was removed from the negotiating drafts for the Model
Reference Paper.
93 For example, Mexico states that the fo llowing bracketed text was included in a
6 March 1996 provisional negotiating text:
"[Accounting rate is the rate per traffic unit agreed upon between administrations for
a given relation, which is used for the establishment of international accounts, as per
International Telecommunication Union Recommendation D. 150 New System for
Accounting in International Telephony.]…
[7. Public availability of accounting rates
International accounting rates mainta ined by any supplier of public
telecommunications transport services with foreign correspondents will be open to
public review. Upon request of another Member, and [sic] essential facilities supplier
will be required to justify why an intern ational accounting rate differs significantly
from domestic interconnection rates.]"
But the final version of the Reference Paper did not include any of this text. Furthermore, Mexico
submits that accounting rates were consciously excluded from this text is confirmed by the fact that
they are "on the table" in the Doha Round of negotiations.
94
4.23 The United States responds that Mexico's citation of an earlier draft of the Reference Paper
does not support its argument that accounting rat es (or international interconnection rates) were
intended to be excluded from the definition of "int erconnection." According to the United States,
Mexico's argument ignores the rules of treaty interpretation included in the Vienna Convention. The
United States submits that whatever provisions we re considered during the drafting process, the Panel
is charged with interpreting the final version of the Reference Paper. Mexico's final version includes,
in Section 2.1, a definition of "interconnection" that broadly covers "linking ... to allow the users of
one supplier to communicate with users of another supplier and to access services provided by another
supplier."
95
4.24 The United States also argues that the requirement in that earlier draft of the Reference Paper
that "a dominant supplier explain the reasons why an international accounting rate differs significantly
from domestic interconnection rates" at the request of a Member indicates that the negotiators
considered accounting rates and dom estic interconnection rates to be charges for two types of
interconnection. According to the United States, the former is a charge for international
interconnection and the latter is a charge for domes tic interconnection and that the deletion of this
provision merely demonstrates that Members did not undertake those specific obligations. The
United States further argues that it does not aff ect the remaining Reference Paper obligations,

92 See Mexico's first written submission, paragraph 151. See also Mexico's first oral statement,
paragraph 27
93 See Mexico's first written submission, paragraphs 167-169. See also Mexico's first oral statement,
paragraphs 21-22, Mexico's second written submission, pa ragraph 37 and Mexico's answer to question No. 7 of
the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
94 See Mexico's first written submission, paragraphs 167-170.
95 See the United States' second written submission, paragraph 47.

including the obligation of Mexico to ensure that its major supplier Telmex charges interconnection
rates, including rates for international interconnection, that are basadas en costos.96
4.25 Mexico submits that the following factors contradict the position of the United States. First,
the fact that the negotiating drafts explicitl y distinguished between "accounting rates" and
"interconnection/interconnection rates" confirms that the negotiators treated the accounting rate
regime separately from interconnection. Second, the fact that there were transparency requirements in
draft Sections 2.2(b) and 2.3 negated the need fo r a transparency requirement in square-bracketed
Section 7 if, as the United States' argues, "interc onnection" subsumed the accounting rate regime.
[This fact, t]hat an explicit transparency requireme nt was included in Section 7 confirms that the
negotiators treated the accounting ra te regime separately and distinc tly from "interconnection". Third,
the United States is one of the few WTO Members that make their accounting rates transparent. If the
interconnection transparency provisions in the Reference Papers of WTO Members applied to
accounting rates, all WTO Members with such commi tments would make their rates transparent.
Fourth, the fact that no other provisions in the negotiating drafts, the Model Reference Paper and
Mexico's Reference Paper could be interpreted to include an obligation analogous to that contained in
draft Section 7, so it could not have been rem oved from the final version of the Reference Paper
because its substance was subsumed by other Sections of it. Rather, its subject matter and substance
was unique and the negotiators were unable to agree upon its inclusion.
97
4.26 Mexico further argues that the Understanding on Accounting Rates ("the Understanding"),
which was outlined in the February 15, 1997 Re port of the Chairman of the Group on Basic
Telecommunications98, confirms that WTO Members did not intend that accounting rates would be
subject to the obligations of the GATS, including the Reference Paper. 99 According to Mexico, the
Understanding resulted from a discussion of whethe r Members should take Article II of the GATS
(most-favoured nation) exemptions in respect of the application of differential accounting rates, after
several countries did take such exemptions. Article II of the GATS, Mexico explains, applies to "any
measure covered by [the GATS]". The main deba te was whether accounting rates negotiated between
private entities should be considered "measures" within the meaning of Article XXVII of the
GATS.100 Mexico argues that, given this uncertainty , as well as the fact that the accounting rate
regime was the subject of ongoing and active study in the ITU, the Members agreed that accounting
rates would be treated as a subject for further negot iation, as part of the "b uilt-in" negotiations under
the GATS. In the meantime, it explains, the Understanding imposes a moratorium on dispute
settlement action relating to accounting rates in the WTO.
101 In addition, Mexico argues, although the
Understanding originally arose in the context of Article II exemptions, WTO Members did not
contemplate that any other obligation of the Refe rence Paper or of the Annex on Telecommunications
would apply to accounting rates. According to Mexi co, it only agreed to inscribe the Reference Paper
as an additional commitment in its Schedule because of the Understanding that accounting rates were
not covered by it.102
4.27 As regards the Understanding, the United States submits that it is concerned with Article II
of the GATS, concerning most-favoured-nation treat ment, rather than the Reference Paper. The
United States points out that it did not address the issue of cost-orientation or reasonable terms. 103

96 See the United States' second written submission, paragraph 48.
97 See Mexico's comments on the United States' answer to question No. 18 of the Panel of 14 March
2003, paragraphs 29-33.
98 The Panel understands that the document referred to by Mexico is the Report of the Group on Basic
Telecommunications (S/GBT/4, February 15, 1997).
99 See Mexico's first written submission, paragraph 171.
100 See Mexico's first written submission, paragraph 172.
101 See Mexico's first written submission, paragraph 173.
102 See Mexico's first written submission, paragraph 176.
103 See the United States' answer to question No. 16(a) of the Panel of 19 December 2002 ("At the close
of the negotiations on basic telecommunications, an understanding on accounting rates was reached (S/GBT/4,

The United States further argues that Mexico's claim based on the Chairman's Note (the
Understanding)
104 is unsound for at least two reasons. 105 First, the Chairman's Note is at best a non-
binding statement that did not find its way into th e GATS, the Reference Paper or Mexico's Schedule
itself.106 In support of this, the United States cites to a report by the Group on Basic
Telecommunications107, which states that "[t]he Chairman stressed that this was merely an
understanding, which could not and was not intended to have binding legal force. It therefore did not
take away from Members the rights they have under the Dispute Settlement Understanding . . ." 108
Second, the United States argues that the report it self made clear that the Chairman's Note "was
merely intended to give members who had not taken MFN exemptions on accounting rates some
degree of reassurance." Even in that limited cont ext, the Note has no application outside of GATS
Article II - the MFN article.
109 The United States argues that this is clear from the Note's text: the
reference in the Chairman's Note to "such" accounti ng rates is a reference back to the introductory
paragraph of the Note, which speaks to "differe ntial" accounting rates and the MFN exemptions
actually taken by the five countries mentioned in the Note. However, it argues, because the
United States has not brought a claim under Article II of the GATS, the Note is irrelevant to this
dispute.110 The United States further indicates that th e fact that accounting rates are subject to
discussions in the ITU has no relevance to whether they are covered by Mexico's WTO commitments;
nor is it relevant that WTO Members are consider ing further commitments on accounting rates in the
current services negotiations.111
(ii) Subsequent practice
4.28 Mexico submits that the rule of interpretation in paragraph 3(b) of Article 31 of the Vienna
Convention, which provides that "[t]here should be taken into account together with the context… any
subsequent practice in the application of the treaty which establishes the agreement of the parties
regarding its interpretation", is also relevant to this disput e. According to Mexico, all fifty-five of the
WTO Members (including the Unite d States) that inscribed the interconnection commitments in
Section 2.2(b) of the Model Reference Paper ma intain the traditional joint service accounting rate
regime. Thus, Mexico argues, WTO Members, incl uding the United States, did not intend Section 2

paragraph 7). If Section 2 of the Reference Paper requiring 'cost-oriented' rates and 'reasonable' terms applies
to accounting rates, why would there have been a need for the Group on Ba sic Telecommunications to arrive at
a separate understanding on accounting rates?").
104 The Panel takes note here that, from the context of the United States' submission, the document
referred to by the United States should be the Report of the Group on Basic Telecommunications (S/GBT/4,
15 February 1997).
105 See the United States' first oral statement, paragraph 25. See also the United States' second written
submission, paragraph 49.
106 See the United States' first oral statement, paragraph 26. See also the United States' second written
submission, paragraph 50.
107 The Panel takes note here that, from the context of the United States' submission, the document
referred to by the United States should be the Report of Meeting of 15 February 1997 (S/GBT/M/9, 10 March
1997).
108 See the United States' first oral statement, paragraph 26. See also the United States' second written
submission, paragraph 50.
109 See the United States' first oral statement, paragraph 27. See also the United States' second written
submission, paragraph 51.
110 See the United States' first oral statement, paragraph 27. See also the United States' second written
submission, paragraph 51. See also the United States' answer to question No. 16(b) of the Panel of
19 December 2002 (" What is the significance of the statement in the understanding that 'the accounting rate
system ... by its nature involves differential rates'?").
111 See the United States' first oral statement, paragraph 24. See also the United States' answer to
question No. 12 of the Panel of 19 December 2002 (" Which ITU instruments, if any, are relevant for the
interpretation of Section 2 of the Reference Paper? Why?").

of their Reference Papers to apply to intern ational interconnection under the traditional accounting
rate regime.112
4.29 Mexico further submits that, its interpretation is supported by the practice of the United States
and other WTO members. According to Me xico, fifty-five WTO Members included the
interconnection commitments of Section 2.2(b) of the Model Reference Paper in their individually
inscribed Reference Papers and all of them, including the United States, maintain the traditional joint
service accounting rate regime.113
4.30 Mexico submits that the Benchmarks Order is relevant to this dispute in several respects.
United States law, including the Benchmarks Order, is consistent with Me xico's position that WTO
Members did not believe that the Fourth Protocol or the Annex on Telecommunications applied to
accounting rate arrangements. In this regard, the FCC established and applied the benchmarks for the
countries that inscribed the Reference Paper as well as those that did not, and did not purport to set
benchmarks for the former at the same level as th e domestic interconnection rates in those countries.
Also, although there are United States carriers that qualify as "major suppliers" under the definition
advocated by the United States, the Benchmarks Or der does not require any United States carriers to
base settlement rates on their own costs – to the co ntrary, the United States Benchmarks Order and
International Settlements Policy effectively prohib it United States carriers from adopting settlement
rates based on their own costs. In the event that th e Panel were to conclude that the Section 2.2 of the
Reference Paper applies to accounting rate arrangeme nts and that Telmex is a major supplier within
the meaning of the Reference Paper in the cont ext of the negotiation of rates for bilateral
United States-Mexican traffic exchanges, it woul d need to establish a methodology to determine
whether the rates were "cost-based, reasonable and economically feasible." Initially, the United States
seemed to suggest that the requirement for "cost- based" rates required an evaluation of the specific
costs of Telmex. However, Mexico introduced ev idence that it is accepted practice – both in the
international and domestic contexts – to use "benchma rks" to determine whether rates are acceptable.
The United States had also now agreed with Me xico that Members "can reasonably rely on
competitive market dynamics to yield cost-based settle ment rates." This meant that Mexico was not
obliged by the Reference Paper to make calculations of the specific costs of Mexican carriers in
providing transport and transmission services for incomi ng international calls. It also meant that the
Panel reasonably could refer to the available benc hmarks for accounting rates – those of the ITU
Working Group 3 and the FCC – to determine whethe r the rates are "cost-based" and "reasonable."
Mexico submits that, under the standards of both the ITU and the FCC, Mexico's settlement rates
clearly are cost-based and reasonable.114
4.31 The United States argues that Mexico errs in suggesting that the FCC's "Benchmarks Order",
which requires United States carriers to negotiate lo wer accounting rates, is inconsistent with the
United States claim in this proceeding that Mexi co's WTO Reference Paper obligations apply to
settlement rates. The United States submits that the FCC recognized in the Benchmarks Order that
"[t]he WTO Basic Telecom Agreement reached on 15 February 1997 will ha ve profound effects on
the accounting rate system," since 69 countries had agreed to open their markets, and 59 countries had
agreed to implement the Reference Paper. The Unit ed States points out that the FCC went on to state
that "the WTO Basic Telecom Agreement will fundam entally change the nature of relations between
international telecommunications carriers," and exp ected that its benchmarks would be "moot for
competitive countries and carriers." However, the FCC emphasized that "[n]onetheles, the
benchmarks are necessary because many countri es still will not be open to competition." Thus,
according to the United States, the FCC was partic ularly concerned by the failure to achieve

112 See Mexico's second written submission, paragraph 32. See also Mexico's answer to question No. 7
of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
113 See Mexico's second written submission, paragraphs 14 and 32.
114 See Mexico's comments on the United States' answer to question No. 19(b) of the Panel of 14 March
2003, paragraph 41.

meaningful accounting rate reform through the IT U, the 189-country membership of which includes
the large majority of countries for which benchmark rates were established by the Benchmarks Order.
The countries opening their markets and accepting the Reference Paper comprised less than 25 per
cent of the nearly 250 routes for which the FCC est ablished benchmark accounting rates. According
to the United States, the Benchmarks Order was necessary to fill this gap.
115
4.32 The United States also argues that Mexico is incorr ect in its argument that its accounting
rates are consistent with ITU recommendations on be nchmark rates. The United States submits that
neither ITU recommendations nor ITU benchmarks ar e relevant to Mexico's WTO obligations. In
addition, according to the United States Recommenda tion ITU D.140, included by Mexico as Exhibit
MEX-11, expressly states, at paragraph E.3.2, that the benchmark levels discussed therein should not
be "taken as cost-orientated levels."116
4.33 Finally, according to Mexico, the United States has argued that its own ILD rules are
consistent with Section 1 of the Reference Paper because it only applies the ru les to foreign carriers
that have market power. As shown above, however, the FCC continues to apply the rules to Mexico
notwithstanding that, according to the FCC's ow n standards, there is "meaningful economic
competition" within Mexico. Mexico has also su bmitted documents from the FCC establishing that it
has waived its International Settlements Policy only fo r 15 countries, and that it deems virtually every
major foreign carrier to have market power. According to Mexico, the conduct of the United States in
maintaining uniform settlement rate, symmetrical rate and proportionate return requirements is
evidence that the United States either does not belie ve that the Reference Paper applies to accounting
rate arrangements or that such market control practices are consistent with Section 1.117
(iii) Supplementary means of interpretation
4.34 According to Mexico, even if the United States' interpre tation could be considered a proper
application of Article 31 of the Vienna Convention , it "leads to a result which is manifestly absurd
[and] unreasonable", thus requiring recourse to the negotiating history and to the circumstances
surrounding the conclusion of the treaty.
118 Mexico explains that, under Article 32 of the Vienna
Convention, recourse may be had to supplementary means of interpretation, including the preparatory
work of the treaty and the circumstances of its c onclusion, in order to confirm the meaning resulting
from the application of Article 31 or to determin e the meaning when the in terpretation according to
Article 31 leaves the meaning ambiguous.119
aa) Negotiating history
4.35 According to Mexico, a review of the negotiating history of the Reference Paper upon which
Mexico's version is based confirms that the term "interconnection" in the Reference Paper was not
intended by the WTO Members to enco mpass the accounting rate regime. 120 See the parties
arguments on this matter in Section IV.A.2(b)(i) above.
bb) The international scope and bilatera l nature of the accounting rate regime
4.36 Mexico further argues that the United States' e xpansive interpretation of Section 2 of
Mexico's Reference Paper fails to take into account the international scope and bilateral nature of the

115 See The United States' second written submission, footnote 42 to paragraph 59.
116 See the United States' second written submission, paragraph 66.
117 See Mexico's comments on the United States' answer to question No. 19(b) of the Panel of 14 March
2003, paragraph 41.
118 See Mexico's second written submission, paragraph 33. See also Mexico's answer to question No. 7
of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
119 See Mexico's first written submission, paragraph 165.
120 See Mexico's first written submission, paragraph 166.

accounting rate regime. In terms of the internatio nal scope, it argues, only fifty-five of the one
hundred and forty-four WTO Members inscribed a vers ion of the Reference Paper in their schedules
that included the "cost-oriented" requirement in pa ragraph 2.2(b) of the Model Reference Paper while
the remaining eighty-nine WTO Members are under no such obligation. Mexico contends that, under
the United States' interpretation of Section 2.2 of Mexico's Reference Paper, those fifty-five WTO
Members would be required to implement terminat ion rates on their own national carriers using the
strict "cost-oriented" standard posed by the Un ited States, while nothing would oblige carriers from
the remaining eighty-nine WTO Members and from non-Members to do the same. In its view, the
result would be that the net outflows of payments from countries subject to Section 2.2(b) disciplines
to countries not subject to Section 2.2(b) disciplin es would rise astronomically, forcing carriers of the
former countries to choose between bankruptcy and re fusing to pay. It further indicates that the
accounting rate regime would collapse completely without a viable replacement, possibly even
leading to interruptions in international traffic.121
4.37 Also, Mexico claims, the bilateral nature of accountin g rate regimes could lead to a further
absurdity. Mexico explains that the financial pressures caused by one of the parties in a bilateral
accounting rate arrangement dropping its settlement rate to a very low level could pressure the other
party to reduce its rates in order to sustain the economic viability of the arrangement. In such a
situation, the other party would effectively be comp elled to bring itself closer into compliance with a
WTO standard or requirement that it did not inscrib e in its Schedule. Thus, it argues, even if that
WTO Member had been careful in its Schedule to ensure that its accounting rate regime was not
disciplined, it would be indirectly subject to disciplines inscribed in the schedules of other WTO
Members with whom it had accounting rate arrangements in place. In Mexico's view, this
circumstance would undermine the overall balance of concessions that formed the basis for the
agreement.122
4.38 The United States submits that neither Mexico nor any other Member violates the Reference
Paper by continuing to use "accounting rates", or violates the ITU's International Telecommunications
Regulation by subjecting "accounting rates" to the ob ligations in the Reference Paper. According to
the United States, Members that have scheduled th e Reference Paper may continue to allow their
carriers to charge "accounting rates" to terminate tr affic. Those Members must simply ensure that
those "accounting rates", when used by major supp liers, are consistent with the requirements of
Section 2.2(b).123
4.39 The United States further submits that Mexico need not worry that Telmex will be faced with
"net outflows of payments." In fact, it argues, ISR or other types of interconnection arrangements
have, in large part, already superseded the acc ounting rage regime among most of the 55 countries
Mexico lists. 124 Also, the United States argues that price reductions made by private parties in
response to competitive pressure are not "compelled". 125 In the view of the United States, Mexico's
"doomsday" scenario is an invention. The United St ates contends that Mexico's assertion that Telmex
would be forced into bankruptcy if it is forced to observe the "strict 'cost-oriented' standard posed by
the United States" is not accurate. Rather, the Un ited States submits that Telmex's current rates
substantially exceed the prices charged for the ve ry same elements of interconnection furnished
domestically. Thus, it argues, cutting Telmex's rates for the interconnection of international traffic to
the level of prices charged for interconnection furnished domestically would not lead to the
"doomsday" scenario posed in Mexico's submissi ons, since under Mexican law these rates already

121 See Mexico's second written submission, paragraph 34. See also Mexico's answer to question No. 7
of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
122 See Mexico's second written submission, paragraph 35. See also Mexico's answer to question No. 7
of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
123 See the United States' second oral statement, paragraph 33.
124 See the United States' second oral statement, paragraph 37.
125 See the United States' second oral statement, paragraph 38.

cover costs, including a reasonable rate of return.
126 Moreover, the United States notes,
approximately 80 per cent of Mexico's international traffic is exchanged with the United States. Thus,
it submits, if Telmex were to charge cost-based inte rconnection rates to terminate this traffic, given
the large imbalance in traffic fl ows between the United States and Mexico, the result will not even
approach a situation in which Telmex makes "net outflows of payments".127
cc) Circumstances of the conclusion of the treaty: Mexican legislation at the time of
negotiations
4.40 As to the circumstances of the conclusion of the treaty, Mexico turns to Mexican legislation
and regulation in effect at the time of the basic telecommunications negotiations. This includes the
ILD Rules. Those rules recognize that the term "interconnection" can be used to describe the
technical aspects of interconnection in all contexts. However, they also explicitly distinguish between
"settlement rates" for international incoming calls and "interconnection charges" for interconnection
within Mexico's borders. Accordingly, Mexico submits that, under these laws, at the time of the
conclusion of the negotiations, interconnection disci plines such as those in Section 2.2 of Mexico's
Reference Paper applied only to domestic interconn ection and points out that this is still the case
today.128 As support, Mexico cites to the Appellate Body Report in EC – Computer Equipment 129,
where the Appellate Body found that, inter alia, a Member's legislation on customs classification at
the time of conclusion of the negotiations was part of the circumstances of the conclusion of the
treaty. 130
4.41 The United States argues that, while it is true that in EC – Computer Equipment , the
Appellate Body found that a Member's legislati on at the time of negotiations can be used as a
supplementary means of interpretation, Mexico considers that its ILD rules should override the
definition of "interconnection" used in Section 2.1. 131 The United States submits that Mexico ignores
the Appellate Body's cautionary note that "[t]he purpose of treaty interpretation is to establish the
common intention of the parties to the treaty. To establish this intention, the prior practice of only one
of the parties may be relevant, but it is clearly of more limited value than the practice of all parties."
The Unites States submits that, according to the Appella te Body, if the prior practice of a party is not
consistent, it is not relevant at all as a supplemen tary means of interpretation. The Unites States
further submits that, while Mexico focuses on one particular provision of Mexican law which it
contends distinguishes between "interconnection" a nd "settlement rates", it has demonstrated that
elsewhere in Mexican law, the linking of forei gn service suppliers to Mexican international port
operators is referred to as "interconnection", and that throughout its laws and regulations, Mexico uses
the term "interconnection agreement" to describe agreements with foreign operators.132
(c) Whether the Reference Paper obligations extend to accounting rate regimes
4.42 The United States claims that the interconnection obligations in Section 2 of the Reference
Paper apply to the interconnection between Unite d States service suppliers and Telmex for the
purpose of delivering their basic telecom ser vices from the United States into Mexico. 133 Because

126 See the United States' second oral statement, paragraph 35.
127 See the United States' second oral statement, paragraph 36.
128 See Mexico's second written submission, paragraph 38. See also Mexico's answer to question No. 7
of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
129 Mexico refers to paragraphs 92-94 of the Appellate Body Report, EC – Computer Equipment.
130 See Mexico's second written submission, paragraph 38. See also Mexico's answer to question No. 7
of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
131 See the United States' second oral statement, paragraph 44.
132 See the United States' second oral statement, paragraph 45.
133 See the United States' first written submission, paragraph 44.

accounting rates are interconnection rates between ca rriers located in two different countries, the
Reference Paper obligations apply to accounting rate regimes as well.134
4.43 Mexico, on the contrary, argues that the substantiv e provisions in Section 2.2 of Mexico's
Reference Paper can be given full meaning only in the domestic context and therefore cannot be given
full meaning in the context of arrangements under the accounting rate regime.135
(i) Concept of "accounting rate"
4.44 Mexico argues that the "accounting rate regime" re fers to bilateral relationships between
carriers in two countries whereby they agree to compensate one another for transporting and
terminating traffic that originates in the other country. 136 Based on the definition by the ITU, Mexico
submits that the "accounting rate" is the price two carriers of different countries negotiate for carrying
one minute of international telephone service between their countries. Mexico explains that each
carrier's portion of the accounting rate is called the "settlement rate." Settlement payments between
carriers result when traffic flowing in one directi on exceeds traffic flowing in the opposite direction.
To calculate its settlement payment, a carrier multip lies the number of minutes its outbound traffic to
a particular foreign carrier exceeds its inbound traffic from that foreign carrier and then multiplies this
amount by the settlement rate charged by the other carrier (also known as the "accounting rate
division share"). Thus, it concludes, a carrier that originates more traffic than it terminates will make
periodic settlement payments to its foreign correspondent carrier.137
4.45 The United States notes that Mexico provides no citation for the definition of accounting rate
regime, and no definition – nor any reference to acc ounting rates – is included in Mexico's Schedule
Thus, the United States submits, Mexico's de finition confirms that accounting rates are
interconnection rates between carriers located in two different countries, and fails to show that these
terms are mutually exclusive. The United States al so points out that Mexico's ILD rules make no
reference to accounting rates, and refer throu ghout to "interconnection" and "international
interconnection" agreements.138
4.46 The United States submits that Mexico's Schedule – including its Reference Paper
commitments – must be interpreted on its own terms, according to the rules of interpretation included
in the Vienna Convention. According to the United States, ITU instruments, developed for a different
organization, of different members, for different purposes, are not relevant for the interpretation of the
requirements of Section 2 of the Reference Paper. The United States notes that Mexico cites no
binding ITU resolutions that would be violated by Mexico's compliance with its WTO obligations as
claimed by the United States and indeed there ar e none. According to the United States, Mexico
principally uses ITU documents to support its argu ment that the accounting rate regime is not
included within the scope of the Reference Paper. The United States claims that Mexico neglects to
discuss the definition of "interconnection" included in Section 2.1 of its Reference Paper, or to present
any justification for its view that the arrange ments in question do not meet that unambiguous
definition.
139 Furthermore, the United States argues th at the definition of "accounting rates"
maintained by the ITU is in fact consistent w ith the definition of interconnection included in
Section 2.1 of the Reference Paper. According to the United States, the ITU has recognized that
competition has changed the ways that intern ational carriers compensate one another for

134 See the United States' second written submission, paragraph 45.
135 See Mexico's second written submission, paragraphs 29-30. See also Mexico's answer to question
No. 7 of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.
136 See Mexico's first written submission, paragraph 24.
137 See Mexico's first written submission, paragraphs 28-29.
138 See the United States' second written submission, paragraph 45. See also the United States answer
to question No. 8 of the Panel of 19 December 2002. For question No. 8, see footnote 77 of this Report.
139 See the United States' answer to ques tion No. 12 of the Panel of 19 December 2002. For question
No. 12, see footnote 111 of this Report.

interconnection, and that accounting rates are one , and only one, of the alternative charging
mechanisms that are available fo r use between carriers in different countries to interconnect their
networks.
140
4.47 Mexico acknowledges that the ITU instruments do not assist in the determination of when
"tarifas basadas en costos " or "cost oriented rates" are reas onable and economically feasible within
the meaning of Section 2.2(b) of Mexico's Refere nce Paper. However, Mexico argues, they could
have some relevance in the interpretation of Section 2.2(b) of Mexico's Reference Paper in the context
of interconnection rates within Mexico's borders . In addition, Mexico notes, International
Telecommunications Regulation ("ITR") 6.2.1, whic h requires that accounting rates be established by
mutual agreement among administrations or recogni zed private operating agencies is an important
element of the context in which the negotiations on basic telecommunications took place. Mexico
submits that ITR 6.2.1 requires that accounting rat es be determined in negotiations between carriers.
As a result, accounting rates that a carrier negotiates for carrying traffic to different countries typically
vary widely. Mexico further submits that other recommendations of ITU working committees, such
as E.110, also help to illustrate the context in which certain terms are used within the
telecommunications sector, which in turn may assist the Panel in determining the "ordinary meaning"
of terms in the Reference Paper.141
4.48 Mexico also notes that the ITRs are supplemented by a series of D-series Recommendations
produced by ITU-T Study Group 3. Recommendation D.140 states that "accounting rates for
international telephone services should be cost-orienta ted and should take into account relevant cost
trends." At the same time, this same Recommenda tion recognizes that that "the costs incurred in
providing telecommunication services, although based on the same components, may have a different
impact depending on the country's development status."
142 Thus, Mexico contends, as a whole, the
Recommendation encouraged a transition to lower acc ounting rates, but did not mandate a particular
methodology for calculating costs nor contemplate that countries would be able to immediately
establish cost-oriented rates.
143
(ii) Domestic interconnection v. accounting rates
4.49 Comparing the two, Mexico argues that domestic interconnection is more complicated than
accounting rate regimes. 144 Mexico explains that, for exampl e: international interconnection cannot
occur at "any technically feasible point"; by their nature accounting rates are per se discriminatory and
cannot comply with the non-discrimination require ment; and domestic regulatory bodies do not have
legal authority to resolve disputes and impose solutions over carriers that are outside of their territorial
jurisdiction. Mexico also points to a Note by the Secretariat on Additional Commitments under
Article XVIII of the GATS, which states that the pr imary purpose of the interconnection provisions of
the Model Reference Paper (Section 2) is to saf eguard competitive situations where a dominant
supplier can exert control over its competitors . Thus, Mexico argues, even assuming arguendo that
Telmex is a dominant supplier, it does not "exert control over its competitors" with respect to the
supply of a service from the territory of one Member (i.e., the United States) into the territory of any
other Member (i.e., Mexico) because Telmex simply does not compete with United States suppliers
for the supply of such services.145

140 See the United States' second written submission, paragraph 58.
141 See Mexico's first written submission, paragraphs 30-31. See also Mexico's answer to question
No. 12 of the Panel of 19 December 2002. For question No. 12, see footnote 111 of this Report.
142 See Mexico's first written submission, paragraph 32.
143 Ibid.
144 See Mexico's first written submission, paragraph 39.
145 See Mexico's second written submission, paragraphs 29-30. See also Mexico's answer to question
No. 7 of the Panel of 19 December 2002. For question No. 7, see footnote 60 of this Report.

4.50 The United States argues that, under the definition included in Section 2.1 of Mexico's
Reference Paper, the "linking" accomplished via th e accounting rate regime is just one form of
"interconnection." As a result, there is no element of an "accounting rate regime" that cannot also be
an element of an "interconnection regime." Any commercial, contractual, technical or regulatory
differences between various types of interconn ection arrangements, including accounting rate
arrangements, fall under the broad definition included in Section 2.1.146
4.51 In response to a question by the Panel, the parties commented on the possible differences
between domestic interconnection and accounting ra te regimes from a commercial, contractual,
technical and regulatory point of view.147
aa) Differences from a commercial point of view
4.52 Mexico argues that domestic interconnection and accounting rate regimes are different from a
commercial viewpoint. According to Mexico, a na tional carrier entering into an accounting rate
arrangement with a national carrier of another natio n is not in competition with that carrier, because
the two carriers cannot compete for each other's customers. Moreover, it argues, under the accounting
rate regime, carriers from different countries must co me to a mutual agreement on their relationship;
there is no supra-national authority that can dictate terms or rates to both parties simultaneously. On
the other hand, Mexico indicates, the commercial context of domestic interconnection regimes is quite
different. In the sphere of domestic interconnection, the main focus is on how new entrant
("competitive") carriers gain access to the establishe d networks of incumbent carriers, so as to
compete with the incumbents for their customers. Mexico explains that, for example, a new entrant
providing a local telephone service generally will not start out with a network that reaches all of the
potential customers in the region; it therefore must interconnect with the incu mbent carrier to ensure
its customers can be connected with all of the incumbent's customers. There is little economic
incentive for the incumbent carrier to allow its competitors to inte rconnect, since the competitor will
be trying to sell the same services to those customer s as the incumbent. But if the new entrant cannot
interconnect, Mexico submits, it will be unable to provide a fully competitive service.148
4.53 Mexico submits that domestic interconnection arrangements vary depending upon the
location as well as type of interconnection, and also involve technical and operational issues. 149 In
addition, unlike with the accounting regime whereb y a relationship with only one carrier in the
destination country enables termination througho ut that country, domestic interconnection requires
relationships with potentially numerous different carriers. 150 Mexico explains that this is because to
ensure a local carrier's customers can reach all cu stomers in the market, a carrier must interconnect
with all other local carriers in the market. Simila rly, it argues, a domestic long-distance carrier (or
inter-city or interexchange carrier) must interconnect with local carriers throughout a country in order
to be able to reach all end-user customers. Because a long-distance carrier depends exclusively upon
local carriers for access to customers, whereas the lo cal carrier has no similar need for access to the
long-distance carrier, the local carrier has the incentive and ability to set interconnection rates as high

146 See the United States' answer to question No. 17 of the Panel of 14 March 2003 ("In considering the
commercial, contractual, technical, and regulatory d ifferences between an accounting rate regime and an
interconnection regime, which you described in your responses to our questions following the First Panel
Meeting, could you please identify those elements in ea ch regime that can never be elements of the other
regime?").
147 See Mexico's answer to question No. 8 of the Pane l of 19 December 2002. For question No. 8, see
footnote 77 of this Report.
148 Ibid.
149 See Mexico's first written submission, paragraph 39.
150 See Mexico's first written submission, paragraph 40. See also Mexico's answer to question No. 8 of
the Panel of 19 December 2002. For question No. 8, see footnote 77 of this Report.

as possible.
151 Thus, Mexico concludes, regulators again pl ay an important role in setting the terms,
conditions, and rates for inte rconnection between domestic long-distance and local carriers. 152 In
conclusion, Mexico submits, the accounting rate regi me by its nature must be cooperative, whereas
domestic interconnection involves fierce competition that must be regulated.153
4.54 The United States considers that, from a commercial viewpoint, interconnection is a key
wholesale input in supplying a basic telecommunica tions service because it allows suppliers to
complete phone calls where the person placing th e call uses a different network from the person
receiving the call. Because no telecommunications s upplier has a worldwide, ubiquitous network, all
telecommunications suppliers must interconnect with other telecommunications suppliers to complete
phone calls to receiving parties that use different networks. Similarly, it argues, telecommunications
suppliers without their own local networks also must interconnect with other telecommunications
suppliers to originate calls. The United States su bmits that all interconnection, including accounting
rate arrangements between carriers in different co untries, performs this key commercial function of
allowing the completion of calls between the networ ks of different suppliers. The definition of
interconnection set forth in Section 2.1 of the Refe rence Paper includes all such "linking" between the
networks of different suppliers.154
4.55 The United States further submits that Mexico wrongly seeks to imply that the regulation of
interconnection rates is necessary only where interc onnecting suppliers compete with each other.
Mexico goes on to acknowledge that interconnection is also an important concern in domestic markets
where the interconnecting carriers do not compete with each other, su ch as where "a domestic long-
distance carrier (or inter-city or interexchange carrier) must interconnect with local carriers
throughout a country in order to be able to reach a ll end-user customers. " In these circumstances, it
argues, the domestic long-distance carrier must interconnect with local carriers for both call
termination and call origination. The United States subm its that Mexico furt her acknowledges that
the regulation of interconnection rates is necess ary in such circumstances, not because the
interconnecting carriers are targeting the same cust omers, but because "the local carrier has the
incentive and ability to set interconnection rates as high as possible." For the same reasons, it
submits, the regulation of inte rconnection rates is necessary for the cross-border supply of
international basic telecommunications services, which are also dependent on interconnection
arrangements for call termination with suppliers that have "the incentive and ability to set
interconnection rates as high as possible."
 155
bb) Differences from a contractual point of view
4.56 In response to a question by the Panel, Mexico lists the major provisions of the standard
domestic interconnection agreement in comparison w ith accounting rate agreements. According to
Mexico, most of the provisions of one agreement are either not applicable or can never be a provision
in the other agreement. 156 For example, Mexico pointed to an accounting rate agreement that
provided for dispute settlement thr ough international commercial arb itration, while a US domestic
interconnection agreement provided for dispute settlem ent in the courts, before a state public utility
commission, or before the Federal Communications Commission. Mexico also highlighted that the

151 See Mexico's first written submission, paragraph 41. See also Mexico's answer to question No. 8 of
the Panel of 19 December 2002. For question No. 8, see footnote 77 of this Report.
152 See Mexico's first written submission, paragraph 41.
153 See Mexico's answer to question No. 8 of the Pane l of 19 December 2002. For question No. 8, see
footnote 77 of this Report.
154 See the United States' answer to question No. 8 of the Panel of 19 December 2002. For question
No. 8, see footnote 77 of this Report.
155 Ibid.
156 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002. For question No. 8, see
footnote 77 of this Report; see also Mexico's answer to question No. 17 of the Panel of 14 March 2003. For
question No. 17, see footnote 146 of this Report.

domestic interconnection agreement contained many provisions not included in accounting rate
agreements, such as with respect to audits, indemn ification, insurance, discontinuation of service,
intellectual property, directory and operator assi stance, access to unbundled network elements, access
to poles, ducts, conduits, and rights-of-way, access to databases needed to provide 911 emergency call
service, and a provision that each party reserves the right to institute an appropriate proceeding with
the appropriate federal or state governmental body of appropriate jurisdiction regarding the prices
charges for services by the incumbent carrier.157
4.57 The United States points out that, from a contractual viewpoint, interconnection
arrangements between suppliers in the same or different countries, including accounting rate
arrangements between suppliers in different countries, may include a wide variety of rates, terms and
conditions concerning such matters as specific servic es covered by the agreement, the rates applicable
to specific services, payment schedules, procedur es for dispute resolution, time duration of the
agreement, restrictions on assignments of rights, an d various network technical considerations. The
United States explains that interconnection arrange ments may provide for one-way or two-way traffic
flows, with the same or different rates applying in each direction, and two-way traffic flow.
Interconnection arrangements may also provide fo r "net" payment arrangements under which the two
carriers set off their interconnect payments with one carrier remitting the balance to the other carrier.
4.58 The United States indicates that, under a traditional accounting rate regime, an agreed
accounting rate is divided in half a nd applied to traffic flows in both directions. However, it argues,
Mexico's ILD rules governing "interconnection agre ements with foreign operators" (Rule 23) do not
restrict the compensation methods that may be negotiated by the "concession holder who holds the
largest outgoing long-distance market share" (Rule 13). Notably, the rates that Telmex currently
charges United States suppliers differ significan tly from the "accounting rate revenue division
procedure" described by the informal note submitted by the ITU to the Council on Trade in Services
("a net settlement payment is made on the basis of excess traffic minutes, multiplied by half the
accounting rate"). The United States explains th at United States suppliers are currently charged
different rates for each of three rate zones in Mexico. Additiona lly, under that arrangement, another
rate applies to Mexico-United States traffic. Furthermore, the United States submits, negotiated
interconnection rates, including accounting rates be tween suppliers in different countries, are
normally established by the interconnecting suppliers . Mexico's ILD Rule 13 requirement that only
the concession holder with the largest market share ma y negotiate with foreign operators rates that are
then binding on its competitors does not reflect a ny traditional accounting rate regime and, to the
knowledge of the United States, is not required by any Member other than Mexico.
158
cc) Differences from a t echnical point of view
4.59 Mexico argues that domestic interconnection and accounting rate regimes are different from a
technical viewpoint. Mexico submits that Sect ion 2.2 of the Reference Paper requires that
interconnection be ensured at "any technically feasi ble point" in the major supplier's network. In
contrast, under the accounting rate regime intern ational carriers connect at a border or some
international mid-way point that is decided privatel y between the carriers, who have a mutual interest
in cooperating with each other to complete interna tional calls. In Mexico's opinion, unless a country
permits foreign carriers to establish their own fac ilities within its territory – which Mexico has not,

157 See Mexico's answer to question No. 8 of the Panel of 19 December 2202. For question No. 8 see
footnote 77; see also Mexico's answer to question No. 17 of the Panel of 14 March 2003. For question No. 17
see footnote 146 of this Report.
158 See the United States' answer to question No. 8 of the Panel of 19 December 2002. For question
No. 8, see footnote 77 of this Report.

and for which it has a limitation in its Schedule – fo reign carriers must always connect at the border,
not at any technically feasible point.
159
4.60 According to Mexico, each specific international relationship has its individual technical
complexities. Nations that use ANSI standards a nd interconnect with those that use CEPT standards
must carry out conversions of speeds and protocols for coding of voice channels or of signalling of
channels, among other things. Th ese conversions require an agreement between the parties on the
installation of standard translator equipment, whic h can be in the country of origin, the country of
destination, or even in an intermediate country. No authority regulates the required translations, and
neither company has any obligatio n to comply with the other's requirements in any manner.
Furthermore, conditions can vary from interconnecti on to interconnection. National interconnection
arrangements, in contrast, are ge nerally homogeneous, and the techni cal aspects of all agreements
entered into with one local company are virtua lly identical. Mexico also notes that domestic
interconnections are carried out between two carriers, and if they in a particular case require a third
party for interconnection, in general terms it is tr ansparent; the company that interconnects is always
responsible for the whole network, whether it is ow ned or leased, up to the point of interconnection
with the local operator. In contrast, in internationa l relationships, the infrastructure is shared up to an
intermediate point, and the concept known as HMIU, or "half-miu," applies, a term not commonly
used in the domestic interconnection lexicon. In the case of border interconnections, the HMIU is
limited to a virtual point or to a very short fi ber optic segment; nevertheless, a point of mutual
responsibility between the parties continues to exis t. Mexico further submits that the special
complexities of international interconnection are re flected in ITU-T Recommendation E.110, and the
recommendation to concentrate international traffic in "a few international exchanges" highlights that
the concept of interconnection "at any technically f easible point" is not applicable to international
interconnection.160
4.61 The United States considers that, from a technical viewpoint, interconnection, by definition,
involves the "linking" of networks of different suppliers, and the technical characteristics of the
networks of different suppliers vary. Consequently, it argues, there may be technical differences
between interconnection arrangeme nts depending on the technologies used by the interconnecting
supplier networks, or on whether th e interconnection arrangement is between two fixed line carriers;
between a fixed line and a wireless carrier; between local and long-d istance carriers; or between two
local carriers. The United States submits that, for all interconnection arrangements, including
interconnection arrangements involving cross-border suppliers, technical issues are generally resolved
through the use of protocols and standards and thro ugh joint coordination and planning. Also, to the
extent that interconnection at a particular point in the network of the major supplier is not "technically
feasible", Section 2.2 of the Reference Paper does not apply.
 161
4.62 The United States considers that since United States carriers interconnect their networks with
the network of Telmex at the border, the border is clearly a "technically feasible point" of
interconnection under Section 2.2. In its view, that Mexico prohibits interconnection at other
technically feasible points does not change th e nature of the activity encompassed by
interconnection.162 The United States also observes th at the international interconnection
arrangements are plainly interconn ection under Section 2.1 of the Re ference Paper, and also are
similar to the "meet-point interconnection arrangements" that incumbent local exchange carriers in the

159 See Mexico's first written submission, paragraph 155.
160 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002. For question No. 8, see
footnote 77 of this Report.
161 See the United States' answer to question No. 8 of the Panel of 19 December 2002. For question
No. 8, see footnote 77 of this Report.
162 See the United States' first oral statement, paragraph 29.

United States are required to provide to new entr ants. Thus, Mexico can not exclude the accounting
rate regime from interconnection on this ground.163
4.63 The United States contends that Mexico's attempt to exclude the accounting rate regime from
interconnection on the grounds that "international ca rriers connect at a border or some international
mid-way point" is unfounded. In its view, such "li nking" of networks is plainly interconnection under
Section 2.1 of the Reference Pa per, and also is similar to the "meet-point interconnection
arrangements" that incumbent local exchange carrier s in the United States are required to provide to
new entrants. The United States considers that m eet-point arrangements are arrangements by which
each telecommunications carrier builds and maintains its network to a meet point. The FCC found in
1996 that meet-point arrangements for interconnec tion between carrier facilities, also known as "mid-
span meets", were commonly used between nei ghbouring LECs (local exchange carriers) for the
mutual exchange of traffic.164
dd) Differences from a regulatory point of view
4.64 Mexico argues that domestic interconnection and accounting rate regimes are different from a
regulatory viewpoint. According to Mexico, in the domestic interconnection context, countries
seeking to encourage domestic competition must ha ve strict requirements for incumbent providers
with market power. These rules generally require incumbent carriers to provide all of their
competitors interconnection with rates, term s and conditions that are reasonable and non-
discriminatory.
 165 In this regard, Section 2.2(a) provides that interconnection must be provided under
"non-discriminatory terms, conditions, and rates." In contrast, there is no expectation that a carrier
offer the same accounting rate agreement to fore ign carriers from different countries; indeed, there
was specifically no agreement in the GATS negotia tions to require that accounting rates be non-
discriminatory.166 Interconnection must be permitted at an y technically feasible point within the
carrier's network and at least equal in quality to th at provided by the incumbent provider to itself or to
its subsidiaries, affiliates, or any other competitor. 167 Mexico notes that Section 2.2(a) also provides
that a major supplier must provide interconnection "of a quality no less favourable than that provided
for its own like services or for like services of non-aff iliated service suppliers or for its subsidiaries or
other affiliates." In its view, issues of comparable quality arise only when there is concern that an
incumbent carrier could provide inferior quality facilities to carriers competing with it. This issue
does not arise in the context of the accounting rate regime, where the traffic is handed off at the
border to a national long-distance carrier that h as no interest in impeding calls or providing low
quality service, but rather is responsible for all of th e facilities within its country used to complete the
call.
168
4.65 Mexico submits that Section 2.2(b) of the Reference Paper provides that interconnection must
be provided in a "timely fashion". In its view, this issue does not arise in the context of the
accounting rate regime, where national carriers have no incentive to block access; to the contrary,
international calls can be completed only if the carriers from the two countries act in cooperation, and
the carriers are compensated for completing the call.
169 Mexico further submits that Section 2.2(b)
also provides that interconnection tariffs must be "sufficiently unbundled so that the supplier need not
pay for network components or facilities that it does not require for the service to be provided." In

163 See the United States' second written submission, paragraph 44.
164 See the United States' answer to question No. 8 of the Panel of 19 December 2002. For question
No. 8, see footnote 77 of this Report.
165 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002. For question No. 8, see
footnote 77 of this Report.
166 See Mexico's first written submission, paragraph 156.
167 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002. For question No. 8, see
footnote 77 of this Report.
168 See Mexico's first written submission, paragraph 157.
169 See Mexico's first written submission, paragraph 158.

contrast, it argues, unbundling does not arise in the context of the accounting rate regime because
once a carrier hands traffic off at a border, the te rminating carrier is completely responsible for
ensuring that the call reaches its final destination.
170
4.66 Mexico notes that Section 2.2(c) of the Reference Paper provides that a major supplier shall
provide interconnection upon request "at points in a ddition to the network te rmination points offered
to the majority of users, subject to charges that reflect the cost of construction of necessary additional
facilities."171 Mexico points out that, under the accounting rate regime in effect between Mexico and
the United States, however, the decision of whethe r to construct new gatewa ys for connecting with
international carriers is left solely to the discreti on of the carriers, and each carrier bears it own costs
because neither has facilities within the other country.172 Mexico argues that Section 2.3 provides that
procedures applicable for interconn ection negotiations must be made publicly available. Because
negotiation of accounting rate agreements is done privately, this requirement has no application to the
accounting rate regime.173 Mexico also contends that Section 2.4 provides that a major supplier must
make publicly available its interconn ection agreements or a reference interconnection offer. There is,
however, no expectation that accounting rates be made public.174
4.67 Mexico recalls that Section 2.5 requires that countries have an independent domestic
regulatory body to resolve disputes regarding appropriate terms, c onditions and rates for
interconnection.175 Mexico points out that competitors must have a process to resolve disputes with
incumbent carriers that arise during and after th e negotiation process. Because both parties to the
interconnection agreement are established under the laws of one country, dispute settlement
mechanisms can be established giving a governme ntal regulator the authority to impose terms,
conditions and rates on both parties. In the context of accounting rate agreements, in contrast,
governments have different regulator y goals and more limited power. 176 For example, a domestic
regulatory body can have the authority to resolve disputes and impose solutions only over two carriers
that are within its rate-setting jurisdiction. Mexi co submits that a domestic regulatory agency cannot
require a foreign carrier to accept its determination of an appropriate accounting rate; and, in any case,
the foreign carrier would always be free to ignore the determination. 177 As reflected in requirements
such as those for uniform settlement rates (a dopted by both the United States and Mexico),
proportionate return (adopted by both the United St ates and Mexico), and symmetrical rates (adopted
by the United States but not Mexico), government s generally seek to: (i) avoid allowing accounting
rate arrangements to undermine dome stic competition; and (ii) bol ster the negotiating position of
their national carriers vis-à-vis foreign carriers. At the same time, Mexico argues, because a
government of one country lacks jurisdiction over fo reign carriers, neither rates nor other terms and
conditions can be enforced by that government. A government can require th at its national carriers
seek approval of accounting rate arrangements and in that manner try to impose various conditions,
but its authority is circumscribed.178
4.68 The United States submits that, from a regulatory viewpoint, interconnection arrangements,
including accounting rate arrangements, may be subject to different regulatory requirements to
address different commercial, contractual and technical situations. The United States submits that any
such regulatory differences, however, do not alte r the status of all of these arrangements as

170 See Mexico's first written submission, paragraph 159.
171 See Mexico's first written submission, paragraph 160.
172 Ibid.
173 See Mexico's first written submission, paragraph 161.
174 See Mexico's first written submission, paragraph 162.
175 See Mexico's first written submission, paragraph 163.
176 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002. For question No. 8, see
footnote 77 of this Report.
177 See Mexico's first written submission, paragraph 163.
178 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002. For question No. 8, see
footnote 77 of this Report.

"interconnection" under Section 2.1 of the Reference Paper.179 The fact that some of the requirements
of Section 2 may not apply to interconnection provi ded to cross-border suppliers does not mean that
other requirements of Section 2 are equally inapplicable. 180 As stated by the European Communities,
"from a regulatory point of view, accounting ra tes are just one form of interconnection." 181 T h e
United States further submits that Mexico is wrong in implying that the regulation of interconnection
rates is necessary only where interconnecting supplie rs compete with each other. The United States
points out that Mexico also acknowledges that inte rconnection is an importa nt concern in domestic
markets where the interconnecting carriers do not compete with each other, such as where "a domestic
long-distance carrier (or inter-city or interexchange carrier) must interconnect with local carriers
throughout a country in order to be able to reach all end-user customers". The United States further
notes that Mexico also acknowledges that the regulati on of interconnection rates is necessary in such
circumstances, not because the interconnecting carrier s are targeting the same customers, but because
"the local carrier has the incentive and ability to set interconnection rates as high as possible." The
United States argues that, for the same reasons, the regulation of interconnection rates is necessary for
the cross-border supply of international basic tel ecommunications services, which are also dependent
on interconnection arrangements for call termination with suppliers that have "the incentive and
ability to set interconnection rates as high as possible."182
4.69 The United States further submits that Mexico is also wrong to contend that a major supplier
"has no interest in impeding calls or providing in ferior quality service" to cross-border suppliers
because these suppliers are not competitors. In fact, major suppliers are direct competitors with cross-
border suppliers that originate services in-country through home-country di rect and similar call
reversal services. Moreover, a major supplier h as an incentive to impose a competitive disadvantage
on a foreign cross-border supplier if an affiliate of the major supplier competes with the cross-border
supplier – as many such affiliates were expected to do following a successful outcome of the basic
telecommunications negotiations. 183 The United States also notes that the requirements of non-
discrimination and unbundling are equally relevant to the interconnection of international traffic as
they are to the interconnection of domestic traffic.184
3. Specific Commitments of Mexico
4.70 The United States claims that Section 2.1 of Mexico's Reference Paper defines the scope of
Mexico's interconnection obligations. Section 2.1 states that "[t]his section applies, on the basis of the
specific commitments undertaken, to linking with suppliers providing public telecommunications
transport networks or services in order to allow the users of one supplier to communicate with users of
another supplier and to access services provided by another supplier". In this regard, the
United States claims that, Mexico's obligations un der Section 2 of the Reference Paper apply to the
interconnection between Telmex and United States suppliers of basic telecom services on a cross-
border basis because such interconnection: (i) i nvolves the specific market access; and national
treatment commitments that Mexico undertook in its Schedule for basic telecommunications services;
and (ii) links suppliers of public telecom networks and services (a United States supplier of basic

179 See the United States' answer to question No. 8 of the Panel of 19 December 2002. For question
No. 8, see footnote 77 of this Report.
180 See the United States' first oral statement, paragraph 29. See also the United States' second written
submission, paragraph 57. See also the United States' answer to question No. 7 of the Panel of 19 December
2002. For question No. 7, see footnote 60 of this Report.
181 See the United States' answer to question No. 8 of the Panel of 19 December 2002. For question
No. 8, see footnote 77 of this Report.
182 See the United States' second written submission, paragraph 52.
183 See the United States' answer to question No. 8 of the Panel of 19 December 2002. For question
No. 8, see footnote 77 of this Report. See also the United States' first oral statement, paragraph 30. See also the
United States' second written submission, paragraph 53.
184 See the United States' first oral statement, paragraph 29. See also the United States' second written
submission, paragraph 57.

telecom services and Telmex) to enable users of th e United States supplier to communicate with users
of Telmex and to access Telmex's services.
185
4.71 Mexico submits that a proper interpretation of th e provisions of Mexico's Reference Paper
and Schedule demonstrates that Secti on 2 of Mexico's Reference Paper does not apply to the terms
and conditions of interconnecti on between United States suppliers of basic telecommunications
services and Telmex, that is, to "international" interconnection.186
(a) Definition of the service and mode of supply
(i) Definition of services
4.72 Mexico submits that the services at issue are basic telecommunication services and not
"telephone calls" or any other cu stomer-supplied information or da ta (e.g., voice or facsimile).
Mexico argues that, the services at issue are the servi ces related to the transportation or transmission
of such data. In Mexico 's view, it is the "public telecommunications infrastructure" that permits the
supply of such services. In support of its argument, Mexico cites to the CPC definitions of "voice
telephony" (found in CPC codes 75211 and 75212), a nd "circuit-switched data transmission services"
(CPC 7523). 187
4.73 Mexico deems it significant that "communications " are listed in Section 7 along with
"transport" and "storage" services. Mexico contends th at its view is substantiated by the fact that no
Member imposes restrictions on the number of incoming or outgoing calls, whereas many of them
impose restrictions on services relating to the calls. Mexico also notes the sp ecific wording used to
describe the modes for trade in services highlights this difference. Mode 1 covers cross-border
"supply" of a service. Thus, Mexico argues, it ca nnot reasonably be established that United States
carriers "supply" telephone calls; what they supply is the service that transports their customers'
telephone calls.
188
4.74 The United States argues that Mexico's argument should be rejected because Mexico ignores
the text of the CPC codes it inscribed. According to the United States, the CPC codes states that the
services subject to Mexico's market access commitmen ts are not simply the "transmission or transport
of customer-supplied information". Contrary to Mexico's argument, the United States submits, the
nature of the service and its cross-border character is not affected by the fact that the Mexican
concessionaire assumes responsibility for the traffic at the border. This "hand off" is expressly
contemplated in CPC 75212, which provides that th e customer has access to both "the suppliers' and

185 See the United States' first written submission, paragraph 48.
186 See Mexico's second written submission, paragraph 22.
187 See Mexico's second written submission, paragraphs 64-65. See also Mexico's answer to question
No. 3(a) of the Panel of 19 December 2002 ("The cross-border supply of telecommunications services is defined
as the supply of a service 'from the territory of one Member into the territory of any other Member.' Mexico
states that a foreign supplier of facilities-based teleco mmunications services can only supply these services
cross-border, if that supplier is also permitted to supply facilities-based services in Mexico (para 234). (a) Does
Mexico consider that cross-border supply of basic telecommunications by a foreign supplier can take place only
if that supplier terminates its cross-border services on the facilities of the concessionaire owned or controlled
by that same supplier? Does Mexico therefore cons ider that an international telecommunications service
terminated on facilities of any other concessionaire cannot be considered a service supplied through mode 1?").
188 See Mexico's answer to question No. 1 of the Panel of 14 March 2003 (" Why do you consider that
the service being scheduled is the transport of the calls instead of the calls themselves? Please relate to the
standard definitions in the Central Product Classification (CPC)").

connecting carriers' entire telephone network". Thus, it concludes, the CPC code specifically
contemplates the "joint provision" of voice services.189
4.75 According to the United States , the CPC codes make clear that the services covered by
Mexico's market access commitments include, under CPC 75212, "switching and transmission
services necessary to establish and maintain communications between local calling areas."
Establishing and maintaining communications requires active coordination between a supplier on each
side of the border, and is not two discrete services provided by different companies. For example, the
United States explains, in order to complete a call, AT&T's switch must communicate with Telmex's
switch, which is located within Mexico, not on th e border. Similarly, CPC 75212 states that the
scheduled service "provides the cust omers with access to the suppliers' and connecting carrier's entire
telephone network." According to the United Stat es, what a "customer" purchases from a United
States supplier is a "communication" – a telephone call – from its point of origin in the United States
to its point of termination in Mexico. In othe r words, the United States submits, the service includes
the entirety of a telephone call. Moreover, CP C 75212 covers "services necessary to establish and
maintain communications between local calling areas." This includes communications between a local
calling area in the United States and a local calling area in Mexico.
190
4.76 Mexico concludes that, the relevant trade in service s, or the "supply of a service", at issue in
this dispute, is the production, marketing, or sale of transmission or transport services of customer-
supplied information or data. Mexico notes that cross-border supply occurs when a service supplier is
not present within the territory of the Member wh ere the service is delivered or consumed, but it
supplies the relevant services across the border. Th erefore, Mexico argues, cross-border supply under
mode 1 in the GATS requires that the service at issue cross a border.191
4.77 Accordingly, Mexico argues, in order to determine whet her the market access commitments
inscribed in Mexico's Schedule allow the cross-bor der supply of public tel ecommunications transport
services, the Panel must determine whether Mexico's commitments permit public transmission or
transport services provided by United States suppliers to cross the border into Mexico.
192
4.78 Mexico submits that what the United States fails to mention is that the joint provision of
telephone services typically involves more than one "s witching and transmission" service supplier. In
Mexico's view, this is confirmed by the "hand-off" occurring at the border, as clearly evidenced by the
accounting rate transaction, which has major implicati ons in terms of the modes of supply under the
GATS. Indeed, where a Member's Schedule requir es services to be provided jointly by a foreign
supplier and a locally established supplier, there can be no cross-border trade within the meaning of
GATS Article I:2(a).193
4.79 According to Mexico, this legal reasoning likewise applies to cross-border transport of other
items. Mexico submits that, where a "hand-off" occu rs at the border to a se rvice supplier established
in the destination country, there can be no cross- border trade in the transport of the services involved
into the destination country. In the case of water, Mexico explains, if – at the border – a different
supplier provides the pipeline transport service into the destination country, then the transport service
supplier in the originating country cannot be said to provide cross-border service "from the territory"

189 See the United States' second oral statement, paragraph 17. See also the United States' comments on
Mexico's answer to question No. 21 of the Panel of 14 March 2003, paragraphs 1 and 5.
190 See the United States' second oral statement, paragraphs 18-20.
191 See Mexico's second written submission, paragraphs 65-67. See also the Mexico's answer to
question No. 3(a) of the Panel of 19 December 2002. For question No. 3(a), see footnote 187 of this Report.
See also Mexico's second oral statement, paragraph 27.
192 See Mexico's second written submission, paragraph 68. See also Mexico's second oral statement,
paragraph 27.
193 See Mexico's answer to question No. 1 of the Panel of 14 March 2003. For question No. 1, see
footnote 188 of this Report.

of the originating country "into the territory" of th e destination country. Mexico further submits that
the above interpretation is not only legally but also "logically" sound. According to Mexico, one of
the important elements in the ability to supply cross-border services is that the foreign service supplier
does not have to involve suppliers in the destin ation country in order to provide the services in
question. This is impossible in the case of hand-off at the border and the joint provision of services.
194
4.80 The United States argues that, second, the cross-border supply of a service does not require
that the service supplier operate on both sides of the border. The United States submits that
Article I:2(a) of GATS defines the cross-border supply of a service as the supply of a service from the
territory of one Member into the territory of any other Member. The United States argues that it is the
service that crosses the border, not the supplier. According to the United States, accepting Mexico's
argument would mean that the provision of basic telecommunications services on a cross-border basis
would only be possible if a service supplier al so operated on a commercial presence basis. The
United States submits that the result would be to render meaningless Mexico's mode 1 commitments
in the basic telecommunications sector. Since Un ited States and Mexican basic telecommunications
suppliers currently interconnect at the border, accep ting Mexico's argument would also mean that the
supply of basic telecommunications services does not fit into any of the modes of supply under
GATS. The United States submits that such an interp retation would be contrary to the nature of basic
telecommunications services. That basic telecommunications services can be, and indeed are,
supplied on a cross-border basis is confirmed by the undi sputed fact that billions of calls (i.e., signals)
are actually transmitted between the United States and Mexico annually.
195
4.81 Mexico submits that at the core of the United St ates' argument that United States suppliers
actually provide basic telecommunications services on a cross-border basis is the erroneous
proposition that the "telephone calls" are the services of United States suppliers that move across the
border. According to Mexico, the flaw in the Un ited States' reasoning becomes obvious when it is
applied to other transport services. For example, Mexico explains, in the case of mail, the service
consists of the pick-up, transport and delivery of lette rs. Mexico submits that the fact that millions of
letters cross the border between two countries does not necessarily mean that postal services providers
in country A supply their services from its territory into the territory of country B. In order for cross-
border trade in services to occur, it is the trans port and delivery services of a supplier established in
country A, not merely the letters, that must cros s the border. There will not be any cross-border
supply to the extent that the supplier established in country A provides its transport services only in its
home country's territory, and delivers the letter at a border point, where it is picked-up by another
supplier, which operates in country B, and arrange for the transport of the letter to its final destination.
This is an example of the joint provision of a ser vice by two suppliers. In no sense can this joint
provision of a service by two suppliers on either side of the border be described as the cross-border
supply of transport services by the supplier established in country A into the territory of country B.
Similarly, the fact that billions of minutes of calls (i.e., signals) are transmitted between the
United States and Mexico annually does not demons trate that United States basic telecommunications
service suppliers provide their transport and transmission services on a cross-border basis into
Mexico. The relevant question is whether United St ates suppliers can transport and transmit signals
from the United States into Mexico. The cross- border supply of basic telecommunications services
will be possible only to the extent that calls orig inating in a foreign country are transported and
transmitted by the foreign supplier across Mexico's border to the recipient. In the case of basic
telecommunications, this requires a transport and transmission network that transcends national
borders.
196

194 See Mexico's answer to question No. 1 of the Panel of 14 March 2003. For question No. 1, see
footnote 188 of this Report.
195 See the United States' second written submission, paragraph 29.
196 See Mexico's second oral statement, paragraphs 27-30.

4.82 According to Mexico, the United States has not established that such cross-border supply of
basic telecommunications services is at issue in this dispute. As a matter of law, it cannot make this
demonstration because the transport and transmissi on services supplied by United States suppliers are
not provided across the border, but merely to the bor der. At that point, traffic is handed off to a
Mexican concessionaire, which receives and carries th e calls to the recipient, that is, supplies
telecommunications transport services into and w ithin Mexico. Therefore, Mexico argues, the
United States is mistaken when it states that "the way in which United States suppliers complete calls
into Mexico is by routing through the facilities of an enterprise that has a concession". The fact is that
United States suppliers do not "complete calls" and, hence, do not supply transport and transmission
services across the border into and within Mexico.197
4.83 Mexico also notes that, under the United States' interpretation, its suppliers are providing
telecommunications services on a cross-border basis wh en the calls are routed through the facilities of
another supplier. This is not tenable. "Routing" (i.e., transmitti ng) traffic is the service being
provided by basic telecommunications suppliers. Wh en the calls are "routed" through the facilities of
a Mexican supplier, it is that supplier, not the Un ited States supplier, that provides the transport and
transmission services at issue in this dispute. 198 Mexico further claims that, accepting the United
States' argument that the fact th at signals are transmitted across th e border demonstrates that basic
telecommunications services are provided on a cross-border basis would mean that market access
under mode 1 would be granted as soon as a WTO Memb er allows calls originating in other countries
to be transmitted across its borders, regardless of w ho is supplying that service. This is also
untenable.
199 There is not a single WTO Member that prohibits incoming calls to its citizens from the
territories of other WTO Members. This does not mean that all WTO Members have granted market
access under mode 1. 200 Mexico submits that, cross-border supply does not occur under the half-
circuit regime established between Mexico and the Un ited States, as laid down in Mexico's Schedule.
According to Mexico, cross-border supply unqu estionably cannot occur where a commercial presence
limitation is scheduled under mode 1, because the incumbent provider in the United States must either
become established in Mexico or rely on another pr ovider established in Mexico in order to transport
and terminate calls into and within Mexico. In practice, the half-circuit regime requires
telecommunications traffic to be handed over at the border to another provider operating inside
Mexican territory, and it is the latter that carries the traffic over the Mexican half of the circuit. Under
Mexico's Schedule, therefore, the incumben t provider in the United States cannot supply
telecommunications transport services over the Mexican half circuit and so will never be able to
provide services "from the territory" of the United States "into the territory" of Mexico.201

197 See Mexico's second oral statement, paragraphs 31-32.
198 See Mexico's second oral statement, paragraph 33. See also Mexico's answer to question No. 4(b)
of the Panel of 14 March 2003 ("In paragraph 52 of its replies to the questions by the Panel, Mexico asserts that
a supplier must be present in the terr itory of Mexico to supply telecommunications serv ices cross-border. In
paragraph 38 of Mexico's second oral statement, Mexico states that the supplier must use or operate transport
and transmission facilities. However, Mexico maintains in the same paragr aph that a foreign supplier who has
established a commercial presence in Mexico automatically supplies services through mode 3. (b) Why does
Mexico consider that a supplier routing through facilities of a concessionaire does not 'use transport or
transmission facilities'?").
199 See Mexico's second oral statement, paragraph 34.
200 See Mexico's second oral statement, paragraph 35.
201 See Mexico's answer to question No. 3(c) of the Panel of 14 March 2003 (" If so, does the supplier
have to supply through its network(s) the entire service, or is it sufficient that it supplies through its network for
a portion of the transmission service? Please elaborate by using evidence from relevant regulations, and
consider the following scenarios: the cross-border serv ice is supplied over a facilities-based network (i) on all
segments of the transmission service, and on both sides of the border; or (ii) on any segment of the
transmission service, and on either side of the border; or (iii) on the originating side of the border only; or
(iv) on the terminating side of the border only?").

aa) Half-circuit v. full-circuit regimes

4.84 In response to a question by the Panel, Mexico describes the difference between the half-
circuit and full-circuit regimes. Mexico first su bmits that, the "half-circuit" regime does not allow
foreign suppliers to supply their services on the opposite side of the circuit. Because of the inherent
"hand off", all services in the destination country ar e supplied by incumbent suppliers in that country
and, therefore, the supply is provided under mode 3. 202 In contrast, Mexico claims, under the full-
circuit regime:
"Foreign operators can, if they wish, carry thei r international calls into the interior of
the destination country and terminate th em there via interconnect arrangements
similar to, or even identical to, those used for domestic traffic. They are no longer
compelled to hand off their traffic to a correspondent operator before it reaches the
destination country".203
4.85 According to Mexico, the clearest example of a full-circuit regime is when a foreign supplier
expands its network to the territory of the des tination country by its ow n transmission links and
network nodes (i.e. "points of presence"). As to mode 1, in order for a United States-based supplier to
supply services from United States territory to Mexican territory (in other words, cross-border supply)
it must supply telecom transport services over the whole of the full circuit without having a
commercial presence in Mexico within the mean ing of GATS Article XXVIII(d). According to
Mexico, this definition of "commercial presence" relat es to the establishment of a particular type of
legal entity, as clarified in the GATS Guidelines fo r Scheduling. A full-circuit regime does not
require the establishment of such legal entities. This is confirmed in the ITU Document included as
Exhibit MEX-59, which establishes that "internationa l operators can avoid the half-circuit regime by
establishing a switch in a foreign territory, then pr oviding end-to-end service to that switch." Indeed,
it is not even necessary to establish a commercial presence in the foreign country. Where it is
possible to establish a full-circuit regime without the need for such presence, the foreign country
supplier can provide services to the destination co untry under mode 1. For the purposes of this
dispute, it is not necessary for the Panel to define all the circumstances in which a single circuit
regime may be set up so as to allow telecom tran sport services to be supplied under mode 1. The
crucial point is that Mexico's Schedule main tains the half-circuit regime and requires all
telecommunications to be handed over at the border so that the transport and transmission services
supplied on the Mexican side of the border are suppl ied by Mexican-based concessionaires. In other
words, Mexico does not permit the supply of telecom transport services under mode 1.
204
4.86 Moreover, the United States argues that the one example Mexico gives of cross-border
supply from the United States into Mexico is wher e a United States supplier "has a full circuit" and

202 See Mexico's answer to question No. 4(d) of the Panel of 14 March 2003 (" In paragraph 52 of its
replies to the questions by the Panel, Mexico asserts that a supplier must be present in the territory of Mexico to
supply telecommunications services cr oss-border. In paragraph 38 of Mexi co's second oral statement, Mexico
states that the supplier must use or operate transport and transmission facilities. However, Mexico maintains in
the same paragraph that a foreign supplier who has established a commercial presence in Mexico automatically
supplies services through mode 3. (d) How do you relate the notions of 'full circuit' and 'half circuit' to supply
under mode 1 and mode 3?").
203 See Mexico's answer to question No. 4(d) of the Panel of 14 March 2003 (quoting M. Tyler and C.
Joy, 1.1.98. Telecommunications in the New Era: Competing in the Single Market , p.51). For question
No. 4(d), see footnote 202 of this Report.
204 See Mexico's answer to question No. 4(d) of the Panel of 14 March 2003. For question No. 4(d),
see footnote 202 of this Report.

"establish[es] a switch" or a "point of presence" in Mexico. 205 Mexico states that the United States
supplier does not have a commercial presence on the Mexican side of the border in this example.
According to the United States, however, whether or not "establishing a switch" or a "point of
presence" on the Mexican side of the border is a "commercial presence," "establishing a switch" or a
"point of presence" certainly involves operating in so me fashion on the Mexican side of the border.
This interpretation therefore adds an element that is not present in Article I:2(a) of GATS, which
defines the cross-border supply of a service as the supply of a service from the territory of one
Member into the territory of any other Member because Mexico's interpretation requires that to
provide basic telecommunications services in the cross-border mode, a service supplier must operate
on both sides of the border.
206
4.87 Mexico submits that, under the full-circuit regime, a foreign supplier carries traffic to the
"interior" of the destination country. It then in terconnects with the local network in the same way as
does a national operator. This means that, under th e full-circuit regime what is relevant for the
foreign operator is the interconnecti on "within" the destination country. 207 The United States is not
contesting the interconnection regime with Mexico as it applies to operators established within the
territory of Mexico. Mexico further claims this is based on Mexico's position that Section 2 of its
Reference Paper applies solely to "interconnection" within its borders.208
4.88 Mexico also submits that, the u se of a satellite or any othe r kind of wireless technology
instead of a landline does not in or of itself de termine whether cross-border supply exists, since
countries regulate the use of the radio frequency spect rum in their territory. Even in the case of a
satellite system with a global footprint, like the one that the Iridium system uses (the only one of its
type), the use of the Mexican spectrum to carry calls is subject to restrictions similar to those for
landlines and other wireless services that the operato r provides. Accordingly, Iridium has a Mexican
affiliate with a concession to supply public teleco m transport services inside Mexico and through
which switched calls to Mexico must be routed in order to complete transm ission to the end-user's
handset when the user is in Mexico.209
4.89 Therefore, Mexico argues, carrying calls by satellite di rect to the user's telephone could
potentially involve a cross-border service, for example, if there is only one supplier involved and there
are no joint services with a supplier who is comme rcially established in the destination country.
Whether a Member has made a commitment or not , and the way in which the commitment has been
made to authorize such cross-border supply, can be determined only by examining the specific scope
of the Member's inscription.210
4.90 The United States argues that Mexico's explanation regarding satellite services is, again,
based upon acceptance of the notion that a telephone ca ll or signal is a separate service from the
transportation of that signal. The United States re iterates that this notion ignores the CPC codes,
which specifically contemplate "hand off" of the si gnal and the joint provision of voice services, and

205 The United States refers to Mexico's answers to questions of the Panel of 14 March 2003,
paragraphs 51, 58 and 76.
206 See the United States' comments on Mexico's answer to question No. 4(a) of the Panel of
14 March 2003, paragraphs 15 and 16.
207 See Mexico's answer to question No. 4(d) of the Panel of 14 March 2003. For question No. 4(d),
see footnote 202 of this Report.
208 Ibid.
209 See Mexico's answer to question No. 5 of the Panel of 14 March 2003 (" Does the provision of a
telephone service from one Member, transmitted by satellite direct to an end-user's handset in another Member,
constitute cross-border supply in terms of Article 1:2(a) of the GATS? Why or why not?").
210 See Mexico's answer to question No. 5 of the Panel of 14 March 2003. For question No. 5, see
footnote 209 of this Report.

the purchase by a "customer" of a "communication" over the entirety of a telephone call, from its
point of origin to its point of termination.
211
(b) Mexico's commitment on cross-border supply
4.91 According to the United States , Mexico undertook market access and national treatment
commitments in its schedule for basic telecom services supplied by "facilities-based" operators on a
cross-border (mode 1) basis. The United States also notes that Mexico limited this commitment to
ensure that service suppliers route international traffic through the facilities of an entity licensed in
Mexico (known as a "concessionaire"), thus confirmi ng its specific intention to include international
services within the scope of these commitments.212
4.92 The United States further submits that Mexico scheduled cross-border commitments for non-
facilities-based telecom services ("commercial agenci es") as well. Based on Mexico's Schedule, the
United States argues that Mexico committed to acco rd market access and national treatment to United
States suppliers, which do not themselves own fac ilities, but instead provide telecommunications
services over capacity (such as a line) that they lease from a concessionaire.213
4.93 Mexico argues that it did not schedule cross-border commitments for basic
telecommunications services supplied by fac ilities-based and non-facilities-based operators. 214
Mexico submits that the phrase " respecto de los cuales se contraigan compromisos específicos " in
Section 2.1 of its Reference Paper limits the app lication of Section 2 to the precise market access
allowed in Mexico's specific commitm ents inscribed in its Schedule. The phrase translates as "on the
basis of specific commitments undertaken" or "in respect of which specific commitments are
undertaken". It qualifies the entire provision and, th ereby, links Section 2 of the Reference Paper to
the specific commitments in Mexico's Schedule. It means that Section 2 applies only within the
bounds of Mexico's inscribed market access for the supply of services.215
4.94 Mexico submits that, in order to understand its scheduled commitments in basic
telecommunications services, the first thing to consider is the circumstances in which those
commitments were negotiated. Mexico started to liberalize its basic telecommunications market with
the privatization of Telmex in 1990 and with th e implementation of the FTL in 1995. One of the
principal objectives of the FTL was to liberalize the Mexican market for basic telecommunications by
granting concessions to new entrants, which could incl ude up to 49 per cent foreign ownership. As a
result of these reforms, Mexico introduced comp etition into the international long-distance service
market. However, under Mexican law, only those ca rriers able to meet th e conditions necessary to
obtain a concession are allowed to enter the market. As to foreign enterprises, they were neither
allowed to provide international services, nor to install, operate or use facilities in Mexico.
216
4.95 Mexico argues that it was within this context th at Mexico agreed to the market access
commitments with accompanying limitations relating to basic telecommunication services in its
Schedule, which means that Mexico bound itself to the regulatory status quo as it existed in 1997 at
the end of the WTO negotiations on basic telecommunications. That status quo did not permit

211 See the United States' comments on Mexico's answer to question No. 5 of the Panel of 14 March
2003, paragraph 22.
212 See the United States' first written submission, paragraph 54. See also the United States' answer to
question No. 2(a) of the Panel of 14 March 2003 (" What is a 'facilities based public telecommunications
network'? Please elaborate by referring to relevant regulations. Are there public telecommunications networks
that are not 'facilities based'?").
213 See the United States' first written submission, paragraphs 55-57.
214 See Mexico's first written submission, paragraph 134. See also Mexico's second written submission,
paragraph 76.
215 See Mexico's second written submission, paragraph 41.
216 See Mexico's first written submission, paragraphs 120-122.

United States suppliers to supply public teleco mmunications transport networks and services
(PTTNS) from the territory of the United States into the territory of Mexico. Thus, Mexico did not,
by inscribing this commitment, permit market ac cess for the supply of basic telecommunications
services through mode 1. However, it did permit ma rket access for facilities-based suppliers through
commercial presence in Mexico in the form of up to 49 per cent direct foreign ownership of a
concessionaire.
217
4.96 Mexico also points out that, according to paragraph 1 of Article XVI of the GATS, the
obligation is to accord treatment no less favourable than that provided under the terms, limitations and
conditions on market access speci fied in a Member's Schedule. 218 Thus, Mexico argues, the mere
inscription of a service sector in the "sector or subsector" column of a Schedule of Specific
Commitments does not imply that a Member has bound itself to grant unconditional market access for
any of the modes of supply; rather, any commitment made must be read in light of the "terms,
limitations and conditions" specifically inscribed under the relevant column of the Schedule. 219
According to Mexico, the relevant terms, limitatio ns and conditions on market access inscribed in
Mexico's Schedule clarify that Mexico did not undertake any commitments to permit basic
telecommunications service suppliers of other Members to provide "facilities-based" or "non-
facilities" based basic telecommunications services on a "cross-border" basis.220
4.97 In response to a question by the Panel, the United States contends that, once any level of
commitment is undertaken, Section 2 applies fully within the modes of supply in which commitments
have been taken, unless the limitation scheduled sp ecifically limits the applic ability of the Reference
Paper.221
4.98 Mexico submits that Section 2 of Mexico 's Reference Paper does not apply fully to a service
sector or subsector once any level of commitment is made in any mode of supply because of the
following reasons:
(i) First, the specific language of Mexico's Reference Paper — i.e., the phrase " respecto
de los cuales se contraigan compromisos específicos " – plainly restricts the
application of the Reference Paper to the precise scope of Mexico's commitments for
market access for the supply of basic tel ecommunication services. In order to give
meaning to this restriction, it is necessary to interpret Mexico's specific commitments
in totality, including the inscribed limitations.
(ii) Second, those commitments must be interprete d in the light of the relevant mode of
supply and any associated limitations, because it is the positive inscriptions and the
limitations read together that define Mexi co's specific commitments with respect to
the supply of particular services.

217 See Mexico's first written submission, paragraph 123. See also Mexico's answer to question
No. 1(a) of the Panel of 19 December 2002 (" Section 2.1 of the Reference Pape r as scheduled by Mexico states
that interconnection applies 'respecto de los cuales se contraigan compromisos específicos' [on the basis of
specific commitments undertaken]. (a) Are there specific commitments undertaken by Mexico in modes 1 and 3
of its schedule with respect to the supply of basic telecommunications?").
218 See Mexico's first written submission, paragraphs 124-125.
219 See Mexico's first written submission, paragraph 125. See also Mexico's first oral statement,
paragraph 37.
220 See Mexico's first written submission, paragraph 127.
221 See the United States' answer to question No. 1( c) of the Panel of 19 December 2002 (" Section 2.1
of the Reference Paper as scheduled by Mexico states that interconnection applies 'respecto de los cuales se
contraigan compromisos específicos' [on the basis of spec ific commitments undertaken]. (c) Does Section 2 of
the Reference Paper apply fully to a service sector or subsector once any level of commitment in market access
or national treatment is made in any of the modes of supply?").

(iii) Third, the United States is wrong to interpret the phrase "where specific commitments
are undertaken" to simply mean that wh ere any commitments are undertaken by a
WTO Member the Reference Paper applies fu lly. The inscription of the Reference
Paper in the fourth column of a Member's Schedule is, itself, a commitment that
would invoke the application of Section 2 of the Reference Paper under the United
States' interpretation. Such an interpreta tion means that the phrase "respecto de los
cuales se contraigan compromisos específicos " in Section 2.1 of the Reference Paper
is unnecessary. This renders the phrase meaningless and, therefore, is an
impermissible interpretation under Article 31 of the Vienna Convention.
222
4.99 Mexico further argues that its interpretation that its Reference Paper applies only within the
bounds of its specific commitments and limitations on market access is consistent with the object and
purpose of Section 2. According to Mexico, the primary objective of the interconnection provisions
of the Reference Paper is to safeguard competitive conditions in situations where a dominant carrier
can exert control over its competitors within its mark et. Thus, in order to benefit from the terms and
conditions of interconnection provided for in Section 2, foreign suppliers must first be granted market
access under the commitments inscribed in a Member's Schedule. Accordingly, suppliers that are not
allowed to compete in a given market because they have not been granted access cannot benefit from
the terms and conditions provided for in Section 2.
223
4.100 Mexico also argues that, independently of the meaning of the phrase " respecto de los cuales
se contraigan compromisos específicos ", Article 31 of the Vienna Convention requires that Mexico's
Reference Paper be interpreted in a manner that gives meaning to its content and to the specific
commitments and limitations inscribed in Mexico's Schedule. 224 Mexico also urges the Panel to bear
in mind the principle of effectiveness in the interpretation of treaties ( ut res magis valeat quam
pereat) which, according to the Appellate Body, requires that a treaty interpreter:
"… must give meaning and effect to all the terms of the treaty. An interpreter is not
free to adopt a reading that would result in reducing whole clauses or paragraphs of a
treaty to redundancy or inutility."225
4.101 According to Mexico, the United States' interpretation entails reading the sector/subsector
column of Mexico's Schedule in isolation from th e rest of its Schedule. Among other things, the
United States' interpretation ignores the fact th at a Member may inscribe "unbound" in either
columns 2 (market access) or 3 (national treatment). In such circumstances, there is no specific
market access commitment fo r the service sector or subsector and mode involved. Similarly, where
the term "unbound" is not used, but limitations are inscribed under specific modes, it is only through a
detailed examination of the text of those limitations that it can be determined whether or not suppliers
of other WTO Members have, in fact, been granted market access under each of the modes.226
4.102 Mexico argues that the United States interpreta tion of Mexico's Reference Paper would
effectively grant market access to United States supplie rs of basic telecommunications services that is
not inscribed in Mexico's Schedule. Furthermor e, it would render meaningless the limitations on

222 See Mexico's second written submission, paragraph 43. See also Mexico's answer to question
No. 1(c) of the Panel of 19 December 2002. For question No. 1(c), see footnote 221 of this Report.
223 See Mexico's second written submission, paragraph 44.
224 See Mexico's second written submission, paragraph 46.
225 See Mexico's second written submission, paragraph 46. See also Mexico's answer to question
No. 2(a) of the Panel of 19 December 2002 (" The explanatory note containing Guidelines for the Scheduling of
Commitments (MTN.GNS/W/164) requires in paragraph 25 that in scheduling limitations 'the entry should
describe each measure concisely, indicating the elements which make it inconsistent with Articles XVI or XVII'.
(a) What are the elements of inconsistency with Article XVI contained in the Mexican law referred to in relation
to the establishment of enterprises eligible for a concession?").
226 See Mexico's second written submission, paragraphs 47-48.

market access that are specified in Mexico's Schedule. Such an interpretation is inconsistent with the
principle of effective interpretation in Article 31 of the Vienna Convention and, therefore, is
impermissible.227
(c) Meaning of the limitations inscribed
4.103 Mexico also submits that the inscription in its Schedule cannot be equated with providing
market access for cross-border trade. Mexico explains that, under Article XVI of the GATS, the mere
fact that a Member has inscribed a commitment for a particular mode of supply in a particular sector
or subsector cannot be ipso facto equated with an undertaking to grant market access to suppliers of
other Members for the supply of services through that mode of supply. Rather, whether and to what
extent market access has been gran ted to foreign suppliers depends on careful interpretation of the
precise meaning of the limitations inscribed in the Member's Schedule for the relevant mode. This
requires detailed analyses of all entries in a Member's Schedule in accordance with the general
principles of treaty interpretation set forth in the Vienna Convention.
228
4.104 According to Mexico, the phrase "none, except the following" is an accepted drafting
convention to introduce a limitation. Using its right to inscribe limitations, a WTO Member can
effectively disallow market access to foreign suppliers for trade in one mode of supply, even though
there is a "standstill" binding for that mode of supply. When specific commitments are undertaken
under GATS Article XVI, a Member binds certain me asures and commits not to accord to foreign
suppliers treatment less favourable than that stip ulated in these measures. It is those "terms,
limitations and conditions" specified in a Schedule that determine the level of market access, if any,
for each mode of supply that is bound by a Member. Thus, Mexico argues, the fact that a Member has
inscribed a commitment for a particular mode of supply in a particular service sector does not
necessarily mean that market acce ss has been granted to foreign suppliers for the supply of the
relevant services in that particular mode. 229
4.105 Mexico notes that, in inscribing their limitations, WTO Members can bind themselves to the
status quo for the supply of a service through one of the modes of supply. It may very well be that,
under the status quo as inscribed in the limitations in their Schedule, no market access is actually
provided to foreign suppliers for the supply of the relevant service through that mode of supply. In
such cases, the limitation has the effect of prohib iting market access for th ese suppliers even though
the Member did not inscribe "unbound" in the releva nt column. For example, certain limitations on
the number of service suppliers can effectively cr eate a "zero quota", which prohibits market access
for foreign suppliers.
230 In support of its argument, Mexico cites two WTO Secretariat Notes. 231232
According to Mexico, the inscription of a commercia l presence requirement in such a manner has the
effect of prohibiting market access for the cro ss-border supply of such services even though the

227 See Mexico's second written submission, paragraph 49.
228 See Mexico's second written submission, paragraph 55.
229 See Mexico's second written submission, paragraphs 56-57. See also Mexico's answer to question
No. 2(a) of the Panel of 19 December 2002. For question No. 2(a), see footnote 225 of this Report. See also
Mexico's second oral statement, paragraph 44.
230 See Mexico's second written submission, paragraph 59.
231 Explanatory Note in Scheduling of Initial Commitments in Trade in Services: Explanatory Note ,
MTN.GNS/W/164/Add.1, 30 Nov. 1993 and Draft Revision of the Guidelines for the Scheduling of Specific
Commitments, Committee on Specific Commitments, Note by the Secretariat, S/CSC/W/30, 23 March 2001.
232 See Mexico's first written submission, footnote 89 to paragraph 129. See also Mexico's first oral
statement, paragraph 42. See also Mexico's second written submission, paragraph 59. See also Mexico's answer
to question No. 1(b) of the Panel of 19 December 2002 (" Section 2.1 of the Reference Paper as scheduled by
Mexico states that interconnection applies 'respecto de los cuales se contraigan compromisos especificos' [on
the basis of specific commitments undertaken]. (b) If Mexico is arguing that it does not have such commitments
(paragraphs 134 and 146 of its submission), why did it not schedule these sectors and modes as 'unbound'?").

Member did not inscribe "unbound" in the relevant column and this is exactly what Mexico has
done.
233
4.106 The United States argues that Mexico's reliance on the Scheduling Note is misplaced. The
United States points out that the part of the Note that Mexico relies on only applies to "a residence
requirement, nationality condition or commercial presence requirement." Thus, it is not applicable to
the limitation in Mexico's Schedule, which is a routing requirement.
234
4.107 The United States argues that Mexico's commitment is clear and straightforward: there are
no limitations on the mode 1 commitment, with the exception of a routing requirement. The
United States submits that Mexi co's argument that "None" shoul d be interpreted as "Unbound" is
thoroughly untenable. The requirement to route international traffic through the facilities of a
Mexican concessionaire does not completely evi scerate Mexico's market access commitment for
mode 1 – indeed, there would be no need for this or any other limitation if Mexico had left mode 1
unbound. The way in which United States suppliers complete calls into Mexico is by "rout[ing]
through the facilities of an enterprise that has a concession" – an option specifically provided in
Mexico's Schedule.235
4.108 The United States argues that Mexico ignores this aspect of its commitment in asserting that
it has made no commitment for the supply of teleco mmunications services on a cross-border basis.
The United States submits that, even if this limita tion had any effects, it would still be a limitation on
a commitment that Mexico undertook and would theref ore still trigger the obligations in Section 2 of
the Reference Paper and Section 5 of the Annex.236
4.109 The United States also considers that, as a legal matter, Mexico's routing requirement is not a
market access limitation at all. The United Stat es agrees with the European Communities that the
limitation scheduled by Mexico is superfluous and without legal eff ect because a routing requirement
is not one of the limitations listed in Article XVI:2 of GATS. According to the United States, a note
by the Secretariat supports this position, confirming that "a Member grants full market access in a
given sector and mode of supply when it does not maintain in that sector and mode any of the types of
measures listed in Article XVI." 237 In the United States' view, Mexico did not need to schedule the
requirement that cross-border suppliers route tr affic through the facilities of a concessionaire to
maintain that limitation for Article XVI purposes.238
4.110 Mexico submits that the United States' characterization of Mexico's mode 1 limitation is
erroneous. As a legal matter, the concession require ment stipulated in Mexico's mode 1 limitation
must be given meaning. Mexico argues that the correct interpretation is that the limitation that
"international traffic must be routed to the fac ilities of an enterprise that has a concession" imposes
commercial presence and nationality requirements for the supply of scheduled services. Thus, this
limitation ensures that suppliers established in th e United States cannot transport and transmit signals
across Mexico's borders. Instead, they have to rely on Mexican concessionaires, which have the
exclusive right to supply telecommunications transport and transmission services in Mexico.239
4.111 For international "facilities-based" services, Mexico argues that its schedule sets forth a
limitation by requiring that international traffic must be routed through the facilities of an enterprise

233 See Mexico's second written submission, paragraph 61.
234 See the United States' second written submission, paragraph 22. See also the United States' answer
to question No. 1(b) of the Panel of 19 December 2002. For question No. 1(b), see footnote 232 of this Report.
235 See the United States' second written submission, paragraph 15.
236 Ibid.
237 See document MTN.GNS/W/163, of 3 September 1993, paragraph 4.
238 See the United States' second written submission, paragraph 16.
239 See Mexico's second oral statement, paragraph 48.

that has a concession granted by the Ministry of Communication and Transport (SCT). 240 Under
Mexican law, only Mexican individuals or companies may obtain such a concession. 241 Thus, the
limitation in the market access column of Mexico's Schedule creates a nationality and commercial
presence requirement for suppliers of scheduled services.
242 Therefore, Mexico effectively froze the
level of market access to that prevailing at the tim e of the negotiations and reserved its right to limit
those enterprises authorized to supply basic tele communications services within Mexico to service
suppliers that have commercial pres ence in Mexico (i.e., concessionaires). 243 Since United States
suppliers (e.g. AT&T and WorldCom) of basic telecommunications services cannot obtain
concessions, they are not allowed to supply basic telecommunications services from the territory of
the United States into the territory of Me xico, that is, on a cross-border basis.
244 Mexico also claims
that it reserved its right to prevent foreign service suppliers from owning facilities in Mexico through
the inscription of broad limitations on market acc ess through commercial presence (mode 3) in its
Schedule.245 In order to install, operate or use a facilities-based public telecommunications network in
Mexico, Mexico's Schedule stipulates that a concession from the SCT is required and that direct
foreign investment is limited to 49 per cent in an enterprise set up in accordance with Mexican law.
246
4.112 The United States replies that whether or not Mexico was "freezing" the level of market
access prevailing at the time of the negotiations is irrelevant; the ordinary meaning of Mexico's
Schedule speaks for itself and should control. In support of its argument, the United States points to
the same Secretariat's Explanatory Note on Sc heduling relied upon by Mexico, which emphasizes
that, if a Member wished to bind the status quo, as Mexico now asserts was its intention, these so-
called "standstill" commitments were to be schedul ed no differently than any other market access
commitments. Thus, the Panel still has to interp ret the meaning of the routing requirement in
Mexico's Schedule as it is written, regardless of Mexico's intention.247
4.113 The United States counters that the requirement to route international traffic through the
facilities of a Mexican concessionaire does not co mpletely eviscerate Mexico's market access
commitment for mode 1. According to the United States, Mexico's argument is untenable for two
reasons. First, even if this limitation had any effect, it would still be a limitation on a commitment
that Mexico undertook and would therefore still trigge r the obligations in Section 2 of the Reference
Paper.248 Second, the United States argues that Mexico's routing requirement is not a market access
limitation at all since a routing restriction is not the type of limitation found in Article XVI:2 of the
GATS.249 The United States points to a note by the S ecretariat, which states that "a Member grants
full market access in a given sector and mode of s upply when it does not maintain in that sector and

240 See Mexico's first written submission, paragraph 128. See also Mexico's first oral statement,
paragraph 40. See also Mexico's answer to question No. 1(b) of the Panel of 19 December 2002. For question
No. 1(b), see footnote 232 of this Report.
241 See Mexico's first written submission, paragraph 129. See also Mexico's second written submission,
paragraph 70.
242 See Mexico's first written submission, paragraph 129. See also Mexico's first oral statement,
paragraph 41. See also Mexico's second written submission, paragraph 71. See also Mexico's answer to
question No. 1(b) of the Panel of 19 December 2002. For question No. 1(b), see footnote 232 of this Report.
243 See Mexico's first written submission, paragraphs 129-130.
244 See Mexico's first written submission, paragraph 130. See also Mexico's second written submission,
paragraph 72.
245 See Mexico's first written submission, paragraph 131.
246 See Mexico's first written submission, paragraph 131. See also Mexico's second written submission,
paragraph 72.
247 See the United States' second written submission, paragraph 20.
248 See the United States' first oral statement, paragraph 13. See also the United States' second written
submission, paragraph 15-16.
249 See the United States' first oral statement, paragraph 13. See also the United States' second written
submission, paragraph 16. See also the United States' answer to question No. 1(b) of the Panel of 19 December
2002. For question No. 1(b), see footnote 232 of this Report.

mode any of the types of measures listed in Article XVI."
250 Thus, the United States argues that the
routing requirement is superfluous and without legal effect because it is not one of the limitations
listed in Article XVI:2 of GATS.251
4.114 Mexico submits that the United States' interpreta tion is wrong. Instead, Mexico argues, the
correct interpretation is that, in fact, the transport and transmission services provided by United States
suppliers do not enter the territory of Mexico when United States suppliers hand over traffic to
Mexican suppliers at a border point.252
4.115 Mexico argues that the United States' interpretation is based on its mistaken belief that United
States suppliers are providing basic telecommunicati ons transport services into Mexico when they
rely on other service suppliers (i.e., Mexican conc essionaires) to transport and transmit signals in
Mexico. To the contrary, the transport and tr ansmission services supplied by United States carriers
end at the border. There is no cross-border supply simply because United States suppliers do not
supply end-to-end services. Accepting the Unite d States argument would mean that suppliers
established in United States territory have to be deemed to supply services into another Member's
territory when they hand off traffic to other suppliers which then transport and transmit the signals.
253
4.116 Mexico submits that the United States' interpreta tion fails to give meaning to the word
"concession", which is at the heart of Mexico's limi tation. The terms of Mexico's Schedule make it
clear that a "concession" is a title to "insta ll, operate or use a facilities-based public
telecommunications network". A concession is available only to enterprises established in accordance
with Mexican law, which includes a limitation on direct foreign investment of up to 49 per cent. The
concession requirement, therefore, imposes a commercial presence limitation on Mexico's mode 1
commitment to supply public telecommunications tr ansport and transmission services in Mexico. In
other words, only enterprises esta blished in Mexico are entitled by law to transport and transmit
international traffic, which is the service at issue in this dispute. This requirement prohibits the cross-
border supply of telecommunications transport servi ces by United States suppliers into Mexico and
denies cross-border market access for United States suppliers, such as AT&T.254
4.117 In response to a question from the Panel, Mexico also asserts that the "concession
requirement", the "routing requirement," and the co mmercial agency "permit requirement" fall within
the limitations listed in GATS Article XVI:2(a) and (e).255
(i) Concession requirement
4.118 Mexico argues that the concession requirement creates commercial presence and nationality
requirements to supply basic telecommunications ser vices in Mexico. According to Mexico, these
requirements fall within GATS Article XVI:2(a) whic h refers to "limitations on the number of service
suppliers whether in the form of numerical quot as, monopolies, exclusive service suppliers or the
requirements of an economic needs test". More sp ecifically, with respect to mode 1 (cross-border)
supply, by requiring a commercial presence, the "number of service suppliers" that can supply

250 MTN.GNS/W/164 (September 3, 1993), paragraph 4, cited in the United States' first oral statement,
paragraph 13. See also the United States' second written submission, paragraph 16. See also the United States'
answer to question No. 1(b) of the Panel of 19 December 2 002. For question No. 1(b), see footnote 232 of this
Report.
251 See the United States' first oral statement, paragraph 13. See also the United States' second written
submission, paragraph 16. See also the United States' answer to question No. 1(b) of the Panel of 19 December
2002. For question No. 1(b), see footnote 232 of this Report.
252 See Mexico's second oral statement, paragraph 50.
253 See Mexico's second oral statement, paragraph 51.
254 See Mexico's second oral statement, paragraph 52.
255 See Mexico's answer to question No. 2(a) of the Panel of 19 December 2002. For question No. 2(a),
see footnote 225 of this Report.

services through mode 1 is zero. The concessi on requirement creates co mmercial presence and
nationality requirements because concessions can be granted only to Mexican individuals or
companies. With respect to mode 3 (commercial presence), the 49 per cent maximum foreign
ownership and nationality requirements similarly crea te a zero quota. This is confirmed by a WTO
Secretariat Note, which states that "nationality requi rements for suppliers of services" are "limitations
on the number of service suppliers" because they are "equivalent to zero quota".
256 Accordingly, the
concession requirement prevents nationals and juri dical persons of other Members from installing,
operating or using a facilities-based public telecomm unications network in Mexico. Mexico also
submits that the "concession" requirement means that suppliers must assume a specific legal form.
Thus, it also falls within Article XVI:2(e) which refe rs to "measures which restrict or require specific
types of legal entity or joint venture through which a service supplier may supply a service".
A "concessionaire" is a specific type of legal entity under Mexican law.257
4.119 The United States argues that, because Mexico's mode 1 limitation does not use the term
"commercial presence", the limitation does not impose a commercial presence requirement.258
4.120 In addition, the United States responds that, first, Mexico's argument that a limitation
scheduled under one mode of supply can be "read together" or "in combination with" another
limitation listed under a different mode is without an y legal support. According to the United States,
to interpret Mexico's Schedule in this manner would amount to the Panel inserting a limitation on
Mexico's mode 1 commitment that Mexico itself di d not schedule. The United States argues that this
would impermissibly diminish the rights of the United States in violation of Article 19.2 of the
DSU.
259
4.121 The United States argues that Mexico's argument is also contrary to a Secretariat Scheduling
Note, MTN.GNS/W/164 (3 September 1993), paragraph 19( a). That Note explains that "international
transport, the supply of a service through teleco mmunications or mail, and services embodied in
exported goods (e.g. a computer diskette, or drawin gs) are all examples of cross-border supply, since
the service supplier is not present within the te rritory of the Member where the service is
delivered."260
4.122 Finally, the United States argues that Mexico's own Schedule does not support its argument.
Mexico's Schedule specifically permits market acce ss in mode 1 as long as traffic is routed through
the facilities of "an enterprise that has a concessi on ... ". Mexico's Schedule does not limit market
access in mode 1 to only those foreign service supplie r itself owns or controls. Thus, Mexico's own
Schedule anticipates that a "service," within the m eaning of the GATS, can be supplied on a cross-
border basis as long as traffic is routed through the facilities of any Mexican concessionaire.261
4.123 Mexico replies that this interpretation is incorrect. 262 According to Mexico, a commercial
presence requirement can be inscribed without th e need expressly to use the words "commercial
presence requirement". 263 What matters is the effect of th e measure inscribed in the Schedule.
Mexico did not refer to "commercial presence" in th e generic sense but instead used the more specific
phrase "enterprise that has a concession". This entails a specific legal form of commercial presence –

256 See the Scheduling of Initial Commitments in Trade in Services: Explanatory Note ,
MTN.GNS/W/164, 3 September 1993.
257 See Mexico's answer to question No. 2(a) of the Panel of 19 December 2002. For question No. 2(a),
see footnote 225 of this Report.
258 See the United States second oral statement, paragraph 11.
259 See the United States' second written submission, paragraph 28.
260 See the United States' second written submission, paragraph 30.
261 See the United States' second written submission, paragraph 31.
262 See Mexico's answer to question No. 3(c) of the Panel of 14 March 2003. For question No. 3(c), see
footnote 201 of this Report.
263 Ibid.

i.e. a "concessionaire" – as well as nationality and other requirements. The use of a more specific
phrase is consistent with the GATS Guidelines for the Scheduling of Commitments, which establish
that "[i]f in the context of such a commitment, a measure is maintained which is contrary to
Article XVI or XVII, it must be entered as a limi tation in the appropriate column (either market
access or national treatment) for the relevant sector and modes of supply; the entry should describe
the measure concisely, indicating the elements wh ich make it inconsistent with Article XVI or
XVII".
264
4.124 According to Mexico, the requirement that "international traffic must be routed through the
facilities of an enterprise that has a concession" cr eates an inconsistency w ith Article XVI of the
GATS, because it reserves the supply of services to entities commercially present in Mexico – thereby
establishing a zero quota on cross-border trade which im plies that no such trade can occur. More
specifically, because the limitations require a commerc ial presence for the supply of routing services,
the number of suppliers that may supply such ser vices through mode 1 is zero. Consequently, the
measure inscribed in Mexico's Schedule is a limitatio n on the number of service suppliers within the
meaning of GATS Article XVI:2. It also compels suppliers of routing services to acquire a specific
legal status under the terms of this provision.265
4.125 Mexico submits that, under the scenarios outlined ab ove, a United States supplier would have
to "supply" telecommunications transport and transmission services "on both sides of the border" (that
is, both sides of the half circuit), without any "co mmercial presence" in Mexico within the meaning of
GATS Article XXVIII(d), in order for cross-border supply to be able to occur. This is not the case
where traffic is handed over at the border to another carrier. As explained below, this can occur only
under a "full-circuit" regime.266
4.126 The United States responds that Mexico's assertion that a "half circuit regime" is
"incorporated in Mexico's Schedule," requires co mmercial presence and therefore prevents cross-
border supply is based on a misstatement of what Mexico's Schedule actually says. Mexico
apparently derives this argument, and the distinctio n between "half circuit" an d "full circuit" service,
from the requirement in its Schedule that internati onal traffic "be routed through the facilities of an
enterprise that has a concession." The United States argues that this phrase, however, does not require
that a foreign supplier own a concession to send in ternational traffic into Mexico. Rather, it only
requires that foreign suppliers operating in the cross-border mode route that traffic through the
facilities of an entity that has a concession. According to the United States, Mexico clearly knew how
to schedule a concession requirement when it meant to do so – to enjoy market access in mode 3,
Mexico's Schedule states that "[a] concession from the SCT is required." The United States submits
that the contrast between Mexico's mode 1 and mo de 3 "limitations" demonstrates that there is no
concession requirement with respect to the cr oss-border supply of basic telecommunications
services.267
(ii) Routing requirement
4.127 Mexico further argues that the routing requirement establishes a "zero quota" on mode 1
access for international simple resale (ISR). 268 According to Mexico, the requirement that
international traffic be routed "through the fac ilities" of a concessionaire excludes ISR traffic.
Specifically, the "facilities of a concessionaire" mean s more than its ordinary meaning – i.e. the

264 See Mexico's answer to question No. 3(c) of the Panel of 14 March 2003. For question No. 3(c), see
footnote 201 of this Report.
265 Ibid.
266 Ibid.
267 See the United States' comments on Mexico's answer to question No. 3(c) of the Panel of 14 March
2003, paragraph 13.
268 See Mexico's answer to question No. 2(a) of the Panel of 19 December 2002. For question No. 2(a),
see footnote 225 of this Report.

equipment of a concessionaire. Either by vi rtue of Article 31(4) or Article 32 of the Vienna
Convention, this term must be interpreted in the light of its special meaning under Mexican law.
Mexico notes that FTL Article 47 limits installati on of telecommunications equipment for cross-
border traffic to concessionaires and those otherwise specifically authorized by the SCT. ILD Rule 3
specifies that international long-distance traffic can be carried only by international gateway
operators. ILD Rule 6 specifies that long-dist ance concessionaries may carry international long-
distance traffic only through intern ational gateways. This means th at the term "through the facilities
of" means through an international gateway. This excludes ISR traffic because such traffic, by its
character, passes through private lines and not thr ough an international gateway. It effectively
imposes a "zero quota" on ISR traffic and, as su ch, is a limitation that falls within GATS
Article XVI:2(a).269
4.128 The United States further submits that Mexico's position fails to recognize that "facilities" is
in fact a much broader term than "ports," and embraces a variety of means that might be used to
terminate cross-border traffic, including private leased circuits. The United States argues that
Mexico's own laws and regulations recognize that the term "facilities" is broader than just
"international ports." Article 47 of Mexico's Federal Law on Telecommunications requires a
concession to install "telecommunications equipment and transmission means," a category of facilities
obviously broader than merely international ports.
270 Likewise, Mexico's ILD Rule 4 clarifies that the
facilities of an international concessionaire include the international port and "telecommunications
equipment and means of transmission that cross the country's borders."271272
4.129 The United States submits that these definitions are also consistent with the WTO's
Telecommunications Services Glossary of Terms, wh ich defines "networks or facilities" to include
"the ensemble of equipment, sites, switches, lines, circuits, software, and other transmission apparatus
used to provide telecommunications services." Inte rnational switched ports ar e only one of the many
types of telecommunications facilities embraces by this definition. Accordin g to the United States,
Mexico's scheduled facilities routing requirement mu st therefore be interpreted to permit routing
through any facilities. Nothing in Mexico's Schedule, with respect to services provided under mode 1,
allows Mexico to preclude the termination of cr oss-border traffic using private leased circuits
obtained from a Mexican concessionaire. This is the essence of International Simple Resale
("ISR").
273
4.130 The United States notes that, even if the term "facilities" is construed to mean just
"international ports," this conclusion would only affe ct Mexico's right to prohibit the interconnection
of private leased circuits at network points other th an the international port, which is relevant to the
United States' claim under the Annex on Telecommuni cations. Mexico would still be required to
allow private lines to be interconnected at the intern ational port. According to the United States, even
if Mexico's Schedule were interpreted to allow Mexico to require international traffic to route through
a switched port operated by a Mexican concessionaire, United States carriers would still be providing
telecommunications services on a cross-border (mode 1) basis. Thus, the obligations of Section 2 of
the Reference Paper would still apply.274

269 See Mexico's answer to question No. 6(b) of the Panel of 19 December 2002 ("Mexico has inscribed
in its schedule that it 'will not issue permits for the establishment of a commercial agency until the
corresponding regulations are issued'. (b) Mexico asserts that international simple resale is prohibited. Please
explain how this follows from its scheduled commitments.").
270 See Mexico's Federal Telecommunications Law att ached as Exhibit US-16 to the first written
submission of the United States.
271 See Mexico's ILD rules attached as Exhibit US-1 to the first written submission of the United States.
272 See the United States' second written submission, paragraph 24.
273 See the United States' second written submission, paragraph 25.
274 See the United States' second written submission, paragraph 26.

4.131 Mexico argues that the term "bypass" in the Unite d States' submission refers to means that
carriers can use to avoid paying settlement rates fo r having their traffic terminated in a foreign
country. According to Mexico, the most commonly u sed method is international simple resale (ISR).
Mexico argues that the Reference Paper does not ove rride Mexico's limitation on international simple
resale (ISR). Unlike a traditional accounting rate arrangement whereby carriers hand off traffic at the
border or another mid-point between countries, ISR entails the use of private leased lines that cross
the border. The private lines are connected directly to the domestic public switched telephone
network in the destination country, thus enabling dir ect access to end-users in that country. Private
lines are normally used for closed, intracorporate networking capabilities and are usually charged on a
flat-rate basis. By leasing capacity on a private line, a carrier seeking to terminate traffic in a foreign
country can bypass the accounting rate regime and a void paying per-minute settlement rates. Many
nations, including the United States on certain routes, prohibit the use of ISR for carrying
international traffic for the specific reason that they wish to preserve use of the accounting rate
regime. According to Mexico, ISR is also prohibited in Mexico.
275
4.132 According to Mexico, the "private" character of a circuit does not stem from its technical
features but from the manner in which the circuit is u sed. To the extent that the circuit is used for an
end-to-end private service, it constitutes a private-line circ uit; if it is used to carry public traffic, the
circuit is public. The issue whether a supplier can do so in conformity with Mexico's Schedule,
however, depends on the market access inscriptions and limitations regarding the services in question
and the supply of those services. In Mexico, once a private line (end-to-end) is used to carry public
traffic, it is considered to be part of the public network and consequently loses its "private" character.
It is then regulated as part of the public network and may not be used, or l eased, for an end-to-end
service. In other words, a "private circuit" may not carry public traffic. Mexico has undertaken
commitments with respect to the transport of public traffic using the public network and the transport
of end-to-end private traffic using public network facilities ( infraestructura de la red pública ).
However, nowhere in Mexico's Schedule has a market access commitment b een undertaken for the
transport of public traffic through private lines.276
4.133 Mexico points out that, it is important to have a clear understanding of the nature of private-
line service. The main characteristic of private-line service is that it constitutes "end-to-end" service –
i.e. the consumer determines beforehand the spec ific location where the service will be used.
Conversely, public traffic is not limited to specific points; it has access to the entire public network.
ISR involves sending the traffic by means of a privat e-line service and then connecting such traffic to
the switched public network in the foreign country. The originating carrier thus gains access to an
end-to-end private-line service in the foreign country and has to rely on an entity (which has leased a
domestic private line, presumably for its own use) w ithin that foreign country in order to arrange for
the traffic to be connected to the public network. In other words, the originating carrier itself is not
involved in the connection to the public network in the foreign country. However, in Section 2.C(g)
of its Schedule, Mexico has made clear that on ce the operator of a private network "resells" that
network in order to connect public traffic to th e public network, the private network no longer
constitutes a "private" end-to-end connection. Th e operator becomes subject to all the rules and
limitations governing public networ ks and no longer qualifies as a private-line carrier – which by
definition precludes it from being used for ISR.277
4.134 Therefore, Mexico argues, the United States in fact claims that Mexico should allow Mexican
users of end-to-end private-line services to intercon nect with the switched public network, so that

275 See Mexico's first written submission, paragraphs 33-34.
276 See Mexico's answer to question No. 3(d) of the Panel of 14 March 2003 (" Does a supplier who
owns facilities but leases private circuits for part of the transmission still supply services through a 'facilities
based public telecommunications network'? Please elaborate by using evidence from relevant regulations.").
277 See Mexico's answer to question No. 3(d) of the Panel of 14 March 2003. For question No. 3(d),
see footnote 276 of this Report.

United States carriers can arrange for their traffi c to evade (i.e. bypass) authorized Mexican
carriers.278
4.135 Mexico submits that it has therefore made clear that once the operator of a private network
"resells" that network in order to connect public tra ffic to the public network, the private network no
longer constitutes a "private" end-to-end connection. The operator becomes subject to all the rules
and limitations governing public netw orks and no longer qualifies as a private-line carrier – which by
definition precludes it from being used for ISR.279
4.136 The United States notes that, while Mexico continues to argue that a private circuit cannot
carry public traffic, it has failed to respond to the Un ited States observation that Telmex in fact offers
such private lines to other public network operators , not just private businesses. The United States
argues that this demonstrates that the inscription on "private leased circuit services" in Mexico's
Schedule does not mean what Mexico now contends. The inclusion in Mexico's Schedule of "private
leased circuit services" relates only to the obligatio n of private "network operators" in Mexico who
want to exploit their networks commercially to obtain a concession, not to the ability of firms
operating on a resale rather than a facilities basis in Mexico to send traffic through leased private lines
obtained from a network operator that has a concession. The separate provision for "commercial
agencies" under mode 3 operating on a permit, not a concession, reinforces this interpretation.
Though an owner of network facilities in Mexico would need a concession in order to lease its lines to
others to carry public traffic on a resale basis (i.e., become the "lessor"), th e firms leasing such lines
(the "lessee") would not themselves need the conce ssion. The United States contends that ISR does
not "evade" the authorized Mexican carriers' ne tworks. Rather, commercial agencies under mode 1
would use the networks of the Mexican carriers as re quired by the routing restriction, but are simply
not bound to send their traffic through the internat ional switched ports subject to the cartel pricing
provision of ILD Rule 13.
280
(iii) Commercial agency permit requirement
4.137 Mexico submits that the permit requirement establishes a "zero quota" on mode 3 access for
commercial agencies which is a limitation under GATS Article XVI:2(a). 281 According to Mexico,
the permit requirement is qualified by the paragraph "[t]he establishment and operation of commercial
agencies is invariably subject to the relevant re gulations. The SCT will not issue permits for the
establishment of a commercial agency until the corresponding regulations are issued". This paragraph
means that, at the time the limitation was inscribed, permits were not being issued by the SCT. Like
the limitations on market access for facilities-based s uppliers, this is equivalent to a zero quota.
Accordingly, the requirement falls within the category of "limitations on the number of service
suppliers" in paragraph (a) of GATS Article XVI:2.282
4.138 The United States disagrees with this classification. 283 However, the United States argues
that the Panel does not need to deal with this issue, for one very simple reason – the mode 1 market
access column of Mexico's Schedule does not incl ude such a "concession requirement." Mexico's

278 See Mexico's answer to question No. 3(d) of the Panel of 14 March 2003. For question No. 3(d),
see footnote 276 of this Report.
279 Ibid.
280 See the United States' comments on Mexico's answer to question No. 3(d) of the Panel of 14 March
2003, paragraph 14.
281 See Mexico's answer to question No. 2(a) of the Panel of 19 December 2002. For question No. 2(a),
see footnote 225 of this Report.
282 See Mexico's answer to question No. 6(a) of the Panel of 19 December 2002 ("Mexico has inscribed
in its schedule that it "will not issue permits for the establishment of a commercial agency until the
corresponding regulations are issued ". What is the scope of Mexico's commitment under Mode 1 and Mode 3
for commercial agencies?").
283 See the United States' second written submission, paragraph 17.

Schedule simply does not require foreign suppliers sending international traffic into Mexico to
themselves have a concession. Rather, it only requires that they route that traffic through the facilities
of an entity that has a concession. The United St ates further submits that this interpretation of
Mexico's routing requirement is reinforced by th e contrast between Mexico's mode 1 and mode 3
market access limitations. To en joy market access as a facilities-based operator in mode 3, Mexico's
Schedule states that "[a] concession from the SCT is required." This wording shows that Mexico
knew how to describe a concession requirement, where it so intended.
284
4.139 Mexico replies that it is not arguing that its limitation requires the United States-established
supplier "itself" to maintain a co mmercial presence but that, given the nature of the half-circuit
regime, routing services over the Mexican half ci rcuit must be supplied by a concessionaire
established in Mexico.285
4.140 The United States does not agree that the routing requi rement falls within the limitations
listed in GATS Article XVI:2(a) and (e). Accord ing to the United Stat es, however, even accepting
Mexico's point solely for the sake of argum ent, classifying the routing requirement under
subparagraphs (a) or (e) would not reduce Mexico's cross-border commitment to "unbound", and thus
Section 2 of the Reference Paper and Section 5 of the Annex would still apply.286
4.141 In response to a question by the Panel, the United States further claims that Mexico's
argument that the cross-border supply of basic tele communications services by a foreign supplier can
take place only if that supplier terminates its cross border services on the facilities of a concessionaire
owned or controlled by that same supplier is untenable for the following reasons:
287
(i) Mexico's own Schedule does not limit ma rket access in mode 1 to only those
foreign service suppliers that route traffic through the facilities of a Mexican
concessionaire that the foreign service supplier itself owns or controls.288
(ii) Second, accepting Mexico's argument would mean that the provision of basic
telecommunications services on a cross-border basis would only be possible
if a service supplier also operated on a commercial presence basis. The result
would be to make mode 1 redundant, and to render meaningless Members'
mode 1 commitments in the basic telecommunications sector – a result that is
contrary to the rules of interpre tation to be applied by the Panel.
289 Such an
interpretation would be contrary to the meaning of mode 1, which is defined
in GATS as the supply of a service "from the territory of one Member into
the territory of any other Member." The ordinary meaning of these terms is
that the service moves from the territory of one Member into the territory of
the other Member, not the service supplier. This reading is also supported by
an explanatory scheduling note, which st ates that "international transport, the

284 See the United States' second oral statement, paragraphs 8-9.
285 See Mexico's answer to question No. 3(c) of the Panel of 14 March 2003 (" If so, does the supplier
have to supply through its network(s) the entire service, or is it sufficient that it supplies through its network for
a portion of the transmission service? Please elaborate by using evidence from relevant regulations, and
consider the following scenarios: the cross-border service is supplied over a facilities-based network: (i) on all
segments of the transmission service, and on both sides of the border; or (ii) on any segment of the
transmission service, and on either side of the border; or (iii) on the originating side of the border only; or (iv)
on the terminating side of the border only? "). See also the United States' comments on Mexico's answer to
question No. 3(c) of the Panel of 14 March 2003, paragraph 13.
286 See the United States' second written submission, paragraph 17.
287 See the United States' answer to question No. 3(a) of the Panel of 19 December 2002. For question
No. 3(a), see footnote 187 of this Report.
288 Ibid.
289 Ibid.

supply of a service through telecommunications or mail, and services
embodied in exported goods (e.g. a computer diskette, or drawings) are all
examples of cross-border supply, since the service supplier is not present
within the territory of the Member where the service is delivered".
290
4.142 Mexico acknowledges that a concessionaire which is controlled by a foreign minority partner
is a service supplier of another Member under th e definitions in Article XXVIII of the GATS.
Mexico notes, however, that the United States has not established that any of the concessionaires
authorized to supply public telecommunications services in the territory of Mexico are "controlled" by
persons of another Member. Thus, the evidence on the record does not demonstrate that these
concessionaires are service suppliers of another Member.
291
4.143 Mexico further argues that, even if the Unite d States were to demonstrate that a
concessionaire is a service supplier of the United St ates under the definitions in Article XXVIII of the
GATS, this would merely establish that United States suppliers are supplying public
telecommunications transport services through commercial presence in the territory of Mexico. Thus,
those market entrants would not be supplying services through mode 1 (cross-border supply).
292
4.144 Moreover, Mexico submits, other United States suppliers that "interconnect" with those
concessionaires would not be supplying public telecommunications transport services on a cross-
border basis from the United States into Mexico because, in that event, the transport and delivery of a
telephone call to the receiving party in Mexico woul d still require the joint provision of services by
two service suppliers and the United States supplier th at originates the call would still have to hand
off its traffic at the border to a supplier commercia lly established in Mexico. The latter supplier is a
different and separate "juridical person" that supplies services under the GATS. Cross-border supply
only occurs when a telecommunications service supplier established and operating in the territory of a
given WTO Member transports and delivers the data supplied by its customers across a border into
the territory of another WTO Member.
 293
4.145 Mexico also submits that, even if the United States suppliers that "interconnect" with these
concessionaires were supplying PTTNS on a "cross-border" basis from the United States into Mexico,
the disciplines in Section 2 of Mexico's Reference Paper would not apply. By virtue of the chapeau to
Section 2.2, the disciplines in that section apply only to interconnection with a "major supplier".
These concessionaires are not "major suppliers".
294
4.146 As to non-facilities-based international services, Mexico argues that, because an identical
limitation relating to mode 1 cross-border supply is inscribed under subparagraph (o) (i.e., Other –
Commercial agencies) in Mexico's Schedule, Un ited States non-facilities-based suppliers of basic
telecommunications services are prevented from suppl ying their services on a cross-border basis as
well. Also, Mexico claims that, by requiring intern ational calls to be routed through a facilities-based
licensed carrier, Mexico has not undertaken any commit ment to authorize International Simple Resale
(ISR).295 The effect of this limitation requires all supp liers established in the United States, including

290 See the United States' answer to question No. 3(a) of the Panel of 19 December 2002. For question
No. 3(a), see footnote 187 of this Report.
291 See Mexico's answer to question No. 5(c) of the Panel of 19 December 2002 (" Mexico argues that
the limitation set out under Mode 1 read together with th e limitation set out under Mode 3 of Mexico's Schedule
must be interpreted to mean that Mexico has not committed to the cross-border supply of basic
telecommunications. (c) If so, can a concessionaire wh ich is controlled by a foreign minority partner be a
service supplier of another Member under the definitions in Article XXVIII of the GATS?").
292 See Mexico's answer to question No. 5(c) of the Panel of 19 December 2002. For question No. 5(c),
see footnote 291 of this Report.
293 Ibid.
294 Ibid.
295 See Mexico's first written submission, paragraphs 132-133.

United States "resellers" or "commercial agencies", to hand of their traffic at the border for transport
services on the Mexican side of the half circuit to be supplied by Mexican concessionaires established
in Mexico.
296
4.147 The United States argues that this asserted prohib ition does not follow from Mexico's
scheduled commitments. According to the Unite d States, Mexico's commitments for commercial
agencies specifically include both the supply by a foreign supplier of scheduled basic
telecommunications services from the United States into Mexico over capacity leased from a Mexican
concessionaire (mode 1), and the acquisition by a foreign service supplier of a locally-established
commercial agency for the purpose of supplying sch eduled international basic telecommunications
services from Mexico to the United States over capacity leased from a Mexican concessionaire
(mode 3). Both of these situations are examples of what is typically known as international simple
resale. The United States also notes that Mexico's routing requirement does not equate to a
prohibition on the use of private leased circuits be cause a foreign service supplier that leases capacity
from a concessionaire is still in co mpliance with the Mexican requireme nt to route traffic through the
facilities of a concessionaire.
297
4.148 Mexico argues that Article XVIII of the GATS establishes a distinction between measures
that affect market access and national treatment, which are subject to scheduling under GATS
Article XVI and XVII, and other measures that aff ect the supply of a service within a Member's
territory. Only the latter category of measures can be covered by add itional commitments under
Article XVIII of the GATS. This means that th e terms and conditions governing market access for
foreign service suppliers are determined by the commitments made under Article XVI of the GATS,
and not by the commitments made pursuant to Article XVIII. Since the Reference Paper was included
in Mexico's Schedule pursuant to Article XVIII, it does not relate to Mexico's Scheduled market
access commitments.
298
4. Whether Telmex is a major supplier within the meaning of the Reference Paper
4.149 The United States submits that the Reference Paper defines "major supplier" as a "supplier
which has the ability to materially affect the terms of participation (having regard to price and supply)
in the relevant market for basic telecommunicati ons services as a result of (a) control over essential
facilities or (b) use of its position in the market". According to the United States, this definition
requires the determination of the "relevant ma rket for basic telecommunications services" and
whether, in that market, the supplier in question can use either control over essential facilities or its
position in the market to materially affect terms of participation. The United States further notes that,
because "control over essential facilities" and "use of its position in the market" are in the disjunctive,
either is sufficient to meet the definition.299
4.150 Mexico notes first that the burden is on the Un ited States to demonstrate that the
interconnection at issue concerns a "major supplier". According to Mexico, the analysis of the United

296 See Mexico's answer to question No. 6 of the Panel of 14 March 2003 ( What in your view, would be
the legal significance of the routing re striction, in the absence of any mode 3 limitations in Mexico's Schedule?
Under this hypothesis, which subparagraph of ArticleXVI:2 of the GATS would the routing restriction fit
under?). See also Mexico's answer to question No. 8 of the Panel of 14 March 2003 ( Mexico's commitments
relating to commercial agencies – under "(o) other" – appear to be subordinate to the chapeau of its entry on
telecommunications services. Please explain this relationship.).
297 See the United States' answer to question No. 6(b) of the Panel of 19 December 2002. For question
No. 6(b), see footnote 269 of this Report.
298 See Mexico's first written submission, paragraphs 137-138.
299 See the United States' first written submission, paragraphs 68-69.

States is flawed. Mexico also claims that the United States has not presented a prima facie case that
Telmex is a "major supplier" within the meaning of the Reference Paper.300
(a) The relevant market
4.151 The United States submits that, according to well-accepted principles of market analysis
deriving from competition law, which are simila r in both United States antitrust and Mexican
competition law, markets are defined in terms of s ubstitution, looking at the alternatives available and
acceptable to consumers. According to the United States, international telecommunications services,
whether involving termination of cross-border supply or origination through a commercial presence in
the country, are distinct from domestic telecommunications services and not substitutes. In support of
its argument, the United States cited to decisi ons by the Mexican competition authority, the Comisión
Federal de Competencia ("CFC"), which stated that international long-distance service is a relevant
market for which there are "no close substitutes," and that such service is distinct from domestic local,
access, long-distance or carrier toll services.301
4.152 The United States further submits that, within the broa d category of international services, it
is necessary to distinguish the markets for originating traffic and for terminating traffic. According to
the United States' substitution analysis, because a United States carrier cannot own its own facilities in
Mexico and is required to hand o ff its cross-border telecommunications traffic into Mexico to a
Mexican concessionaire at the international bord er, termination by Telmex (and other Mexican
carriers authorized to operate international ports) is needed by United States and other foreign carriers
to complete their international telecommunications traffic into Mexico. Therefore, argues the United
States, the origination of international voice telephony, facsimile or circuit-switched data transmission
in Mexico cannot be considered a substitute for th e termination of such services supplied on a cross-
border basis from the United States into Mexico.302
4.153 The United States also argues that, because Mexican la w does not permit the use of private
leased circuits by either a foreign facilities-based operator or a commercial agency (either foreign or
Mexican) for the purpose of carrying cross-border sw itched traffic, United States suppliers have no
choice but to rely on Telmex (and other Mexican c oncessionaires authorized to operate international
ports) to terminate their cross-border switched tele communications traffic in Mexico. According to
the United States, this limitation is clearly relevant for market definition analysis under the established
Mexican competition law, which takes into account restrictions on using alternate sources of
supply.303
4.154 Thus, the United States argues, the "relevant market for basic telecommunications services"
in this dispute is the termination of voice telephon y, circuit-switched data transmission and facsimile
services supplied on a cross-border basis from the United States into Mexico.304
4.155 Mexico replies that, the United States fails to clearly define the services at issue and how they
are supplied in its analysis.305
4.156 Mexico further argues, assuming that the servi ces at issue are the transportation and
transmission of telecommunications signals and that the mode of supply at issue is mode 1 (cross-
border), the United States fails to explain how the "r elevant market" it defines is relevant to the cross-
border supply of such services. The United States defines the "relevant market" as "the termination of

300 See Mexico's second oral statement, paragraphs 68, 69, and 74.
301 See the United States' first written submission, paragraphs 73 and 75.
302 See the United States' first written submission, paragraph 76.
303 See the United States' first written submission, paragraph 77.
304 See the United States' first written submission, paragraph 78.
305 See Mexico's second oral statement, paragraph 70.

voice telephony, facsimile and circuit-switched data transmission services". According to Mexico,
"termination services", to the extent that they are provided by a carrier in a WTO Member, are
provided on a mode 3 (commercial presence) basis and not on a cross-border basis. Mexico claims
that the United States' analysis confuses two distin ct modes of supply – cross-border and commercial
presence. Moreover, Mexico submits, the United St ates relies on a relevant market resolution by the
Mexican competition authority that is under review by Mexican courts
306 precisely because it was
based on data from 1996, that is, when the telecommunications market was not yet fully open.307
4.157 In addition, Mexico submits, even assuming that defining the relevant market as "termination
services" is relevant, it is unclear whether a carrier in Mexico, such as Telmex, is providing
"termination services". According to Mexico, a t echnical distinction can be made between the
traditional accounting rate procedure, which invol ves jointly provided services and a division of
revenues for the provision of these jointly provided services, and a termination regime under which
telecommunications services are treated as a tradab le commodity rather than as jointly provided
services. Mexico submits that this distinction has been recognized by the ITU. Mexico maintains a
traditional accounting rate regime under which services are provided jointly and revenue is divided. It
does not maintain a termination regime. In this sense, it cannot be said that any carrier operating in
Mexico provides "termination services". In fact, th e rates are determined by bilateral negotiations
between private parties – carriers of Mexico and the United States – for traffic going in both
directions. Accordingly, the "relevant market" for those negotiations must encompass that two-way
traffic. Mexico also notes that, at the time of the negotiation of the current accounting rates,
WorldCom had the same market share of southbound traffic that Telmex did of northbound traffic.
308
4.158 Mexico also submits that, even if a carrier in Mexico does provide "termination services" for
foreign carriers wishing to terminate calls with in Mexico, these services and how to schedule them
were a specific topic of discussion during the nego tiations on basic telecommunications. There was
no agreement on these services and, even if there w as, Mexico has not inscribed in its Schedule any
specific commitments with respect to these services.309
(b) Whether Telmex has market power
4.159 The United States argues that, Telmex has "market pow er" or "substantial power" in the
relevant market for termination of voice telephony, facsimile and circuit-switched data transmission
services supplied on a cross-border basis from the Un ited States into Mexico, based on the special
rights given to it by Mexico's ILD Rules as well as the findings of Mexico's own Federal Competition
Commission, and the evidence of Telmex's continuing dominance in this area and persistent ability to
maintain international settlement rates well above cost.310
4.160 The United States submits that, Telmex's market power stems most directly from the special
and exclusive legal right conferred on it under Mexico 's ILD Rules. In particular, Rule 13 provides
that "[t]he long-distance concessionaire with the grea test percentage of the outgoing long-distance
market in the last six months prior to negotiati on with a determined country, shall be the one to
negotiate the liquidation tariffs with the operators of such country." Rule 10 also provides that this
rate shall be the uniform rate ch arged by all Mexican carriers. Thus , the United States contends, as
the largest carrier, Telmex is granted the exclusiv e right to determine the settlement rates for cross-
border termination for all Me xican carriers. Even thoug h there are other Mexican

306 See Mexico's second oral statement, paragraph 71.
307 See Mexico's first written submission, paragraphs 102-108.
308 See Mexico's second oral statement, paragraph 72.
309 See Mexico's second oral statement, paragraph 73.
310 See the United States' first written submission, paragraph 81.

telecommunications carriers that have their own ne tworks, they are prohibited from competing on the
price of terminating cross-border traffic into Mexico by operation of Mexican law.311
4.161 Mexico argues that the requirements in Rules 10 a nd 13 help protect and promote investment
in domestic infrastructure in several ways: (i) they en sure that an incumbent carrier will not be able to
use its market position to negotiate better deals than the new entrants; (ii) they prevent large carriers
in the two countries from conspiring to exclude smalle r carriers; and (iii) they prevent new entrants
that focus on high volume, low cost end-users from tr iggering a "price war" that could drive the rates
of all carriers too low to support infrastructure build-out. Mexico points out that, since the
United States already has very substantial inv estments in telecommunications infrastructure,
promotion of investments in facilities has not been a high priority. However, for countries such as
Mexico, with low teledensity and unserved rural ar eas, it is vital. Mexico further notes that it
implemented the ILD Rules for accounting rate agre ements to mirror the pre-existing rules of the
United States, which for United States-Mexico traffic require that United States carriers reflect in their
accounting rate agreements the requirements of propor tional return and uniform settlement rates. The
United States further requires that international settlement rates be symmetrical – that is, that
United States carriers charge foreign carriers the exac t same rate that they pay the foreign carriers.
The stated purpose of the United States policy is to prevent its carriers from being "whipsawed" by
foreign carriers; that is, to prevent foreign carrier s from being able to obtain unduly favourable terms
and conditions from United States carriers by setting th em against one another. Thus, Mexico argues,
in the absence of the ILD Rules, Mexican carriers would be vulnerable to "whipsawing" by
United States carriers.312
4.162 The United States also claims that the extent of Te lmex's market power has also been
substantiated by Mexico's own competition authority, the Comisión Federal de Competencia
("CFC").313 According to the United States, in 2001, th e CFC reaffirmed its earlier conclusion that
Telmex had "poder sustancial" (substantial power) in international ser vices in light of its "large share
of the international long-distance market," "its ability to set payment charges applicable to
international traffic," and its "advantages arising from its vertical integration that enable it to set prices
for cross-border dedicated circuits and enjoy signi ficant advantages from the resale of international
port services."314 The United States further submits that, the CFC's conclusion regarding international
services is also applicable to the market for termin ation of switched cross-border traffic as a subset of
the broader international services market analyzed in the CFC decision. The United States explains
that, Mexico's ILD Rules require the proportional allocation of terminating traffic among Mexican
network operators according to each operator's share of originating traffic, rather than allowing each
operator to compete freely to terminate any amount of incoming international traffic. Therefore, if an
operator has "substantial power" in providing international services or iginating within Mexico, it will
have at least a comparable position in the market for termination of cross-border switched traffic into
Mexico.315
4.163 The United States also submits that, like the CFC, the United States Federal Communications
Commission has also found that both Telmex and its United States affiliate are dominant in the
provision of international services between the United States and Mexico. The FCC determined that
Telmex continues to control "bottleneck" facilities, including the only ubiquitous local network an
ubiquitous inter-city facilities that are needed for ca rriers to terminate international switched services
into Mexico.
316

311 See the United States' first written submission, paragraph 82.
312 See Mexico's first written submission, paragraphs 79-81.
313 See the United States' first written submission, paragraph 84.
314 See the United States' first written submission, paragraphs 84-90.
315 See the United States' first written submission, paragraph 91.
316 See the United States' first written submission, paragraph 92.

4.164 Mexico argues that it has taken a number of step s to establish a comprehensive regulatory
framework for the incumbent (former monopoly) ca rrier, Telmex, which are designed to introduce
competition while protecting and promoting the nation's telecommunications infrastructure.
317
According to Mexico, Telmex's concession title was substantially modified when it was privatized. 318
As a result, Telmex's concession title itself contai ns provisions intended to prevent anti-competitive
activities.319 Mexico also points out that, under Artic le 63 of the Federal Economic Competition Law
(FTL), a finding by the Federal Competition Commission ("COFECO") that a concessionaire
possesses substantial market power does not imply that the concessionaire has abused its market
power (that is, behaved in an anticompetitive manner).
320 Rather, it merely allows COFETEL to
impose prophylactic measures to prevent abuses of market power.321
4.165 The United States submits that, current market eviden ce indicates that Telmex has exercised
and continues to exercise, market power with resp ect to the markets for termination of cross-border
voice telephony and circuit-switched data transmissi on services from the United States into Mexico.
The United States begins by noting that Telmex's sh are in the international long-distance market has
long been well over 50%. The United States notes that , a large market share on the order of 50% or
more, particularly when sustained over time , is well recognized by competition authorities and
telecommunications regulators as relevant evidence of a firm's market power, though not the sole
determining factor, and the higher the market share, the more readily it will support a presumption of
market power.322 Furthermore, the United States submits that Telmex's significant market power is
indicated by the absence of signifi cant new suppliers of international telecommunications services in
Mexico during the past few years. 323 Also, the United States argues, Telmex's market power is
demonstrated by its ability to maintain prices for a sustained period of time well above the levels that
could be expected to prevail in a competitive environment.324
4.166 Mexico submits that currently there are 27 concessionaires allowed to provide long-distance
services, including three United States-affiliated carr iers, Avantel (WorldCom), Alestra (AT/T) and
Iusatel (Verizon).325 Also, as of September 2002, 11 out of the 27 long-distance concessionaires in
Mexico were authorized to operate international ports and, thus, to carry outgoing and incoming
international calls.326 According to Mexico, new entrants in the Mexican domestic and international
long-distance market have gained significant market share when compared with other countries that
opened the sector to compe tition under similar conditions. 327 Mexico points out that, with respect to
the domestic long-distance market, using data from the year 2000, it took the new entrants only four
years to capture a 29% share of the Mexican mark et (measured in terms of access lines served per
carrier).
328 In the European Union, new entrants in the domestic long-distance market had on average
20 per cent market share in 2000 after three years of competition. 329 By comparison, it took new
entrants in the United States more than 11 years af ter competition was allowed to reach a comparable

317 See Mexico's first written submission, paragraph 96.
318 See Mexico's first written submission, paragraph 97.
319 See Mexico's first written submission, paragraph 98.
320 See Mexico's first written submission, paragraph 103.
321 Ibid.
322 See the United States' first written submission, paragraph 93.
323 See the United States' first written submission, paragraph 95.
324 See the United States' first written submission, paragraph 97.
325 See Mexico's first written submission, paragraph 87. See also Mexico's first oral statement,
paragraph 11.
326 See Mexico's first written submission, paragraph 88.
327 See Mexico's first written submission, paragraph 89.
328 See Mexico's first written submission, paragraph 90. See also Mexico's first oral statement,
paragraph 13.
329 Ibid.

market share. 330 Mexico also notes that, in the case of the market for international long-distance
traffic, new entrants in Mexico have perfo rmed even better in capturing market share. 331 This is
reflected in the market share of Telmex, which at the end of 2000 was at a 61%, whereas in European
Union member countries the incumbents had an aver age market share of 80% in terms of minutes. 332
Again, in the United States, after eleven years of competition, the incumbent (AT&T) had a market
share of 59% – similar to that of Telmex today. 333 Mexico further submits that that new entrant
carriers have been gaining significant market share on many important routes. 334 For example, from
January to June of 2002, Alestra (the affiliate of AT&T) had 39% of the outgoing traffic to the
United Kingdom while Telmex had 49%.335
5. Whether Telmex' interconnection rates are "basadas en costos"
4.167 The United States argues that Section 2.2 of Mexico's Reference Paper requires Mexico to
ensure that Telmex provides interconnecti on at rates that are "based in cost" (" basadas en costos ")
and "reasonable". However, according to the United St ates, Mexico has failed to meet this obligation
because the rates that Telmex charg es United States suppliers to interc onnect are not based in cost or
reasonable.336
4.168 Mexico argues that, because Mexico did not make any specific commitments relating to the
accounting rate regime, Section 2 of the Reference Paper does not apply to the facts of this dispute.
Mexico further submits that, even if Mexico's Refe rence Paper could be considered to apply to the
accounting rate regime, the United States has failed to present a prima facie case that the accounting
rates negotiated by Mexican and United States carri ers do not comply with the obligations of the
Reference Paper.337
(a) Whether Telmex interconnection rates are "based in cost"
(i) The meaning of "based in cost"
4.169 The United States submits that the term "based in cost" is not defined in the reference paper.
The United States notes first that the ordinary meani ng of "based in cost" suggests that the "cost" at
issue must be related to the cost in curred in providing the good or service. 338 Next the United States
argues that, because the terms "cost-oriented" and " basadas en costos " are used in the
telecommunications laws and regulations of WTO Me mbers, this usage could be termed a "special
meaning," which Article 31(4) of the Vienna Convention provides "shall be given to a term if it is
established that the parties so intended." 339 After surveying the laws of many WTO Members,
including Mexico, the United States argues that, there appears to be consensus among many WTO
Members – including Mexico – to give the term "cost-oriented" and " basadas en costos" the "special
meaning" that interconnection rates should be based on the cost of providing interconnection. 340 The
United States also submits that this "special m eaning" is in line with the meaning derived from

330 See Mexico's first written submission, paragraph 90. See also Mexico's first oral statement,
paragraph 13.
331 See Mexico's first written submission, paragraph 91. See also Mexico's first oral statement,
paragraph 14.
332 Ibid.
333 Ibid.
334 See Mexico's first written submission, paragraph 73. See also Mexico's first oral statement,
paragraph 14.
335 Ibid.
336 See the United States' first written submission, paragraphs 100-101.
337 See Mexico's first written submission, paragraphs 147, 148, and 177.
338 See the United States' first written submission, paragraph 107.
339 See the United States' first written submission, paragraph 108.
340 See the United States' first written submission, paragraphs 109-113.

Article 31(1) of the Vienna Convention, which states that a "treaty shall be interpreted in good faith in
accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the
light of its object and purpose."
341 According to the United States, the interconnection obligations in
Section 2 are one part of the set of pro-comp etitive regulatory commitments embodied in the
Reference Paper, which mandates major suppliers to charge interconnection rates based on the cost
that the major supplier incurs in providing interconnection.342
4.170 Mexico claims that the United States interprets the term " basadas en costos " narrowly to
mean that the rate in question must equal the ba re cost of providing the service and this narrow
interpretation must be rejected. 343 According to Mexico, basadas en costos allows for more distance
between the rate and the cost than is argued by the United States. 344 In support of its argument,
Mexico first notes that if the negotiators of the Model Reference Paper and Mexico's Reference Paper
had intended this narrow interpretati on, they would have referred to "rates that equal cost" or "rates
that at most recover cost". 345 Instead, they used a much more flexible term. 346 Further, interpreting
"cost oriented" to mean "equal to cost" would lead to an absurdity, in that the carrier supplying the
service would be prohibited from making any profit at all in transactions with other carriers.347
4.171 According to Mexico, cost-oriented rates should allow an adequate rate of return, even
without the modifiers "reasonable" and "economically feasible" being taken into consideration.
Determining an adequate rate of return is an extremely complex matter and one which is not
necessarily restricted to the charg es for carrying international calls; rather, it could quite legitimately
involve overall carrier costs. Specifically, a mu lti-product firm (one offering a range of services)
incurs different kinds of costs in providing its services, some of whic h can be directly allocated to
specific services, given that it is provision of these particular services which gives rise to the cost
incurred. However, in addition to direct costs, a multi-product firm incurs costs that are shared
between groups of services and costs which are co mmon to all services. Both common and shared
costs can only be avoided if the group of services is terminated (in the case of shared costs) or if the
whole firm closes down (in the case of common costs). In spite of the fact that common and shared
costs cannot be directly allocated to the various services offered by a multi-product firm, they are
nevertheless real economic costs which must be recovered if the firm hopes to earn a competitive
return on the capital used and to co ntinue to attract investment funds for the business. Most firms in
competitive industries are multi-product and the ma rgins referred to are necessary, as are cost
increases. Such increases provide the expected revenue and recoup bot h common costs and any
historic costs permitted by the market. The extent of the margins depends on market conditions. In
short, Mexico argues, fixing a carrier's interconnecti on rate at direct cost level would be incorrect
from an economic point of view. At the same time, an "economically correct" increase in common
and shared costs is mainly a question of market conditions.348
4.172 Mexico also submits that it does not, in any case, consider that the Reference Paper provides
a basis for determining the level of rate of return appropriate for any particular circumstance. Rather,
it would be more advisable to focus on whether the ra te is in itself reasonable in the light of all the

341 See the United States' first written submission, paragraph 114.
342 See the United States' first written submission, paragraphs 115-117.
343 See Mexico's second written submission, paragraph 81. See also Mexico's answer to question
No. 10(a) of the Panel of 19 December 2002 (" Does Mexico consider that the rates that Mexican companies
currently charge for terminating incoming traffic from the United States are cost-oriented?").
344 See Mexico's second written submission, paragraph 82. See also Mexico's answer to question
No. 10(a) of the Panel of 19 December 2002. For question No. 10(a), see footnote 343 of this Report.
345 See Mexico's answer to question No. 10(a) of the Panel of 19 December 2002. For question
No. 10(a), see footnote 343 of this Report.
346 Ibid.
347 Ibid.
348 See Mexico's answer to question No. 12 of the Panel of 14 March 2003. For question No. 12, see
footnote 111 of this Report.

circumstances, for example, by way of a compar ison with target rates and the rates of other
countries.349
4.173 The United States submits that Mexico's assertion is not correct. According to the
United States, under Mexican law, interconnecti on rates for commercially-present suppliers must
recover at least the total cost of all network elemen ts. The term used for "total cost" in Mexican law
is "long run average incremental cost." The United States argues that the term "long run" refers to a
period long enough so that all costs become variab le. As a result, when Mexican law requires that
carriers recover "at least the long run average incremental cost," it already builds in the cost of capital,
which includes a reasonable rate of return, or in other words a profit.350
4.174 Mexico also submits that Mexico's Schedule is part of the GATS which, itself, is part of the
WTO Agreement. As a consequence, other agreemen ts within the WTO Agreement form part of the
context of the GATS and, thereby, part of the cont ext of Mexico's Schedule. Mexico points out that,
according to Article 2.2 of the Agreement on Implem entation of Article VI of the General Agreement
on Tariffs and Trade (Anti-Dumping Agreement), where a precise relationship between a price and a
cost was intended, this relationship was specified explicitly. However, no such relationship is
specified in the Model Reference Paper or in Mexico 's Reference Paper. Mexico also submits that,
even assuming that the reference papers inscribed in the Members' schedules could apply to the
accounting rate regime, the practice of the WTO Members subsequent to the conclusion of the
negotiations on basic telecommunicati ons confirms that the Members do not share the United States'
narrow interpretation of "cost-oriented". Of th e 55 WTO Members that inscribed a version of the
reference paper in their schedules that included the "cost-oriented" requirement in paragraph 2.2(b),
Mexico is not aware of any that have adopted an explicit requirement that settlement rates negotiated
under accounting rates arrangements be based on the costs of their own carriers, let alone equal to cost
or no greater than their carriers' rates for domestic interconnection. There is good reason for this state
of affairs. If the narrow interpretation posed by the United States is applied to accounting rates, it
would create the absurdity identified in Mexico's response to question 7 of the Panel.
351
4.175 The United States replies that it is aware of no Member, other than Mexico, that has accepted
commitments under Section 2.2(b) of the Reference Paper and that has simultaneously imposed an
explicit prohibition on competition between supplie rs providing interconnection to cross-border
suppliers, the effect of which is to prevent comp etition from reducing rates. Even if other WTO
Members do not have explicit requirements for settlement rates to be cost-based, they also do not have
restrictions, such as those maintained by Mexi co, on competition between suppliers. Those other
Members therefore can reasonably rely on competitive market dynamics to yield cost-based
settlement rates. The United States notes that, for numerous countries where competitive conditions
are allowed to govern international interconnecti on rate negotiations, United States carriers have
negotiated rates for traffic termination in the range of 1.5 to 4 cents per minute.352

349 See Mexico's answer to question No. 12 of the Panel of 14 March 2003 (" Is there a margin for an
adequate rate of return that can be interpreted into the terms 'cost-oriented rates that are … reasonable. ' If so,
what would be an adequate margin of return. Please provide examples.").
350 See the United States' second oral statement, paragraph 50. See also the United States' comments on
Mexico's answer to question No. 12 of the Panel of 14 March 2003, paragraph 36.
351 See Mexico's answer to question No. 10(a) of the Panel of 19 December 2002. For question
No. 10(a), see footnote 343 of this Report.
352 See the United States' answer to question No. 19(a) of the Panel of 14 March 2003 (" Mexico states
in paragraph 146 of its Responses to questions that it 'is not aware that the United States or any other country
among the 55 has explicitly attempted to subject accounting rate arrangements to the obligations of Section
2.2(b).' (a) Does the United States share Mexico's belief that most or a ll of the Members that have accepted
Section 2.2(b) Reference Paper commitments also tolerate, or require, non-cost-based 'accounting rate
arrangements' with carriers in other countries?").

4.176 The United States also points to evidence showing one major operator's wholesale rates to
terminate calls to various countries, including six EC member States and eighteen other WTO
Members that included the interconnection commitments under Section 2.2(b) of the Reference Paper.
All of those rates are lower than the current average rate Telmex charges United States suppliers, and
many are below 2 cents per minute. Mexico h as challenged none of this evidence. Thus, the
United States argues, to the extent that any WTO Me mber does not fulfil its obligations under Section
2.2(b) of the Reference Paper, other WTO Members ha ve the right to challenge that failure in dispute
settlement.
353
4.177 Mexico argues that, under a "cost-based" or "cost-or iented" standard, a rate is not limited to
simply recovering cost but can also recover amounts that reflect social policy and other concerns.
Therefore, the narrow benchmark established in the United States' first written and oral submissions is
without legal basis. By implication, the evidence us ed to argue that Mexico does not comply with the
narrow benchmark is irrelevant a nd does not establish a prima facie case of a violation of
Section 2.2(b) of Mexico's Reference Paper.354
4.178 Mexico notes that the United States' accounting rate arrangements with a number of other
countries provide for much higher settlement rate s than the current United States –– Mexico
arrangement. Noting that accounting rate arrangements exist side-by-side with ISR even in countries
where ISR is legal, Mexico argues that the Unite d States continues to ignore those accounting rate
arrangements and insists on comparing the United States-Mexico accounting rate arrangement to ISR
charges purportedly available to United States' carrie rs to send traffic to other countries. Mexico
submits that the United States refuses to acknowledge a comparison of the United States — Mexico
accounting rate arrangement to United States accoun ting rate arrangements w ith other countries.
Mexico further argues that the United States implic itly admits that other WTO Members "do not have
explicit requirements for settlement rates to be cost-based."355
4.179 Mexico argues that, because accounting rate arra ngements provide for access to an entire
country's public network, the phrase in Section 2.2(b) does not mean that the charges associated with
the interconnection cannot include an amount to off set the cost of rolling out telecommunications
infrastructure.356 Clearly, such charges can be allocated to any and all network components. Under
the United States' argument, a WTO Member inscrib ing commitments analogous to Section 2.2(b) of
Mexico's Reference Paper could not include any am ount to offset infrastructure roll-out. Such an
interpretation is absurd and is contrary to Article IV and paragraph five of the Preamble to the
GATS.357
4.180 Mexico argues further that the United States neglec ts to acknowledge that paragraph 2.2(b)
states that interconnection is provided "on terms, conditions … and cost-oriented rates …that are …
reasonable, having regard to economic feasibility ."358 According to Mexico, the ordinary meaning of
"economically" is "as regards the efficient use of income and wealth: economically feasible
proposals"; the ordinary meaning of "feasible" includes "capable of being done, effected or

353 See the United States' answer to question No. 19(a) of the Panel of 14 March 2003. For question
No. 19(a), see footnote 352 of this Report.
354 See Mexico's second written submission, paragraphs 83-84.
355 See Mexico's comments on the United States answer to question No. 19(a) of the Panel of 14 March
2003, paragraphs 36-37.
356 See the United States' comments on Mexico's answer to question No. 4(a) of the Panel of 14 March
2003, paragraph 16.
357 See Mexico's second oral statement, paragraph 83.
358 See Mexico's first written submission, paragraph 181. See also Mexico's second written submission,
paragraph 87.

accomplished" and "suitable". 359 In the context of interconnection rates, the term means that the
obligation to ensure that rates are cost-oriented is not absolute, but rather tempered by factors arising
from economic feasibility, which can include consider ations of a nation's overall policy goals for
expanding its telecommunications infrastructure. 360 Thus countries – especially developing countries
such as Mexico – have wide latitude to allow rat es that would permit the continued development of
needed infrastructure and the achievement of universal service.361
4.181 Mexico submits that the United States' claim must fail because the United States did not
interpret "based in cost" in light of the entire qualifying phrase.362 Mexico argues that, in applying the
"economically feasible standard," account must be taken of Mexico's clear policy goal of promoting
universal access to basic telecommunications service for its population. Ac counting rate revenues
remain an important potential source of funds for in frastructure development. However, Mexico's net
revenue from settlement rates (from all countries) has al ready been declining. Thus, in light of the
important need of Mexico for investment in the telecommunications sector, further and immediate
drastic cuts in settlement revenue are not economically feasible.
363
4.182 Mexico cites to a statement of a United States repres entative in the context of discussions that
led to the Annex on Telecommunications. 364 According to Mexico, this statement highlights that the
term "cost-based" was not intended to require that the "price of a specific service on a specific route to
be identified and charged on a cost-based basis"; ra ther, the term as used in the telecommunications
sector implies considerable flexibility for regulators to take into account social policy goals, the need
to balance out varying cost structures across differe nt regions and as between local and long-distance
service. Mexico also cites to two reports by th e Mexican Government, which shows that Mexico has
had an established policy to promote the construc tion of telecommunications infrastructure with a
view toward broadening the availability of telepho ne and related services. Neither the Reference
Paper, nor the GATS more generally , should be interpreted in such a way as to prevent Mexico from
carrying out this policy.
365
4.183 The United States argues that the terms " basadas en costos " and "cost-oriented" require a
relationship between interconnection rates and the co st incurred in providing interconnection, rather
than costs incurred in connection with infrastructur e development or other social policy goals. The
WTO website defines "cost-based pricing" as "the general principle of charging for services in
relation to the cost of providing these services." Furt hermore, Section 2.2(b) of Mexico's Reference
Paper requires that a supplier purchasing interconn ection "need not pay for network components or
facilities that it does not require for the [interconn ection] service to be provided." This language
provides relevant context for the interpretation of " basadas en costos", and makes clear that the scope
of all interconnection charges is limited to the specific network components and facilities required for
the interconnection service provided, and not other unre lated costs. By claiming that "accounting rate
revenues remain an important source of potenti al revenue for infrastructure development," the

359 See Mexico's second written submission, paragraph 93. See also Mexico's answer to question
No. 14(a) of the Panel of 19 December 2002 (" What is the meaning of '… having regard to economic feasibility
… ' in paragraph 2.2 of the Reference Paper?")
360 See Mexico's first written submission, paragraph 181. See also Mexico's second written submission,
paragraph 93. See also Mexico's answer to question No. 14(a) of the Panel of 19 December 2002. For question
No. 14(a), see footnote 359 of this Report.
361 See Mexico's answer to question No. 14(a) of the Panel of 19 December 2002. For question No.
14(a), see footnote 359 of this Report.
362 See Mexico's first written submission, paragraph 181. See also Mexico's second written submission,
paragraph 88.
363 See Mexico's second written submission, paragraph 95. See also Mexico's answer to question
No. 14(a) of the Panel of 19 December 2002. For question No. 14(a), see footnote 359 of this Report.
364 See Mexico's second written submission, paragraph 82.
365 See Mexico's answer to question No. 10(a) of the Panel of 19 December 2002. For question
No. 10(a), see footnote 343 of this Report.

United States argues, Mexico effectively concedes th at its international inte rconnection rates recover
more than the cost of the "network components or facilities . . . require[d] for service to be provided"
to United States suppliers.
366
4.184 The United States submits that nothing in this definiti on supports consideration of the public
policy factors cited by Mexico. According to the United States, Mexico's definition of "economically
feasible" as requiring consideration of the "efficient" use of income and wealth in fact prohibits
consideration of the non-cost-oriented factors Mexi co seeks to include through this language. The
efficient use of resources requires cost -oriented pricing and not subsidization . Citing an ITU
statement, the United States argues that the effici ent use of income and wealth must preclude the
open-ended subsidization of "policy goals" such as infrastructure development and universal service.
The terms " basadas en costos " and "cost-oriented" require a re lationship between interconnection
rates and the costs incurred in providing interconnection.367
4.185 The United States also submits that cost-oriented pricing, as that term is used in Section 2 of
the Reference Paper, does not permit Mexico so-ca lled "flexibility" to implement the national goals
that Mexico identified in its submission. A ccording to the United States, the provisions on
interconnection serve to achieve the requirement to which all Members that subscribed to the
Reference Paper committed, namely to ensure that the scope of all interconnection charges is limited
to the specific network components and facilities required for the interconnection service provided,
and not other unrelated costs. 368 Furthermore, the United States disagrees with Mexico's
interpretation of its statement during the 1990 negotiati ons. According to the United States, it is clear
from this statement, that the United States was draw ing a distinction between a cost-based rate and a
price that includes a universal service component. As Mexico notes, this statement was made in the
context of the Annex negotiations, which did not le ad to the adoption of any "cost-based" or "cost-
orientation" rate requirement. In contrast, the Reference Paper separates the disciplines on
interconnection rates in Section 2 from the disciplines on universal service in Section 3.
369
4.186 The United States argues that the phrase "having regard to economic feasibility" does not
"temper" a Member's obligation to provide interconn ection at cost-oriented rates, in light of its
"overall policy goals for expanding its telecomm unications infrastructure." According to the
United States, Section 2.2(b) of the Reference Pa per requires a relationship between interconnection
rates and the cost incurred in providing interconnecti on, rather than costs incurred in connection with
telecommunications infrastructure roll-out. Addition ally, Section 3 of the Reference Paper imposes
separate and particular requirements for Members wishing to impose universal service obligations to
fund the requirements of Members seeking to rollou t their national telecommunications infrastructure.
Thus, the United States argues that Mexico seeks to avoid the requiremen ts of Section 3 (and to read
Section 3 out of the Reference Paper) by justifying its rollout costs pursuant to the phrase "having
regard to economic feasibility." 370
4.187 The United States argues that taking the phrase "economically feasible" into account does
not change the fact that Telmex's rates are substan tially above cost and that, as a result, Mexico is not
in compliance with Section 2 of the Reference Paper. The United States explains that, first this phrase
must be read in the context of subparagraph 2.2(b) of the Reference Paper in its entirety. According

366 See the United States' answer to question No. 13 of the Panel of 14 March 2003 (" Does cost-
oriented pricing allow for flexibility in implementing national goals, as Mexico appears to argue in paragraphs
188-192 of Mexico's Responses to questions?"). See also the United States' second oral statement, paragraph 60.
367 See the United States' second oral statement, paragraphs 59 and 60.
368 See the United States' answer to question No. 13 of the Panel of 14 March 2003. For question
No. 13, see footnote 366 of this Report.
369 See the United States' second oral statement, paragraph 62.
370 See the United States' second written submission, paragraph 71. See also the United States' answer
to question No. 14(a) of the Panel of 19 December 2002. For question No. 14(a), see footnote 359 of this
Report.

to such reading, this phrase immediately foll ows the requirement for "reasonable" terms and
conditions for interconnection, which prohibits the u se of such terms and conditions to restrict the
supply of a scheduled basic telecommunications service. Second, under the ordinary meaning of the
phrase "having regard to economic feasibility," a te rm or condition for interconnection will not be
"razonables" if it restricts the supply of a scheduled telecommunications service where such
interconnection is economically practical or possi ble – that is, where the resulting revenues are
sufficient to cover the expenses of its operation or use.
371
4.188 The United States further explains that this means that the obligation to provide
interconnection is limited only where there is in sufficient demand from interconnecting suppliers to
generate sufficient revenue to cover the expenses of operation or use, or where a major supplier
requires an additional period of time to install necessary switching capabilities or other required
network components or facilities where more rapid installation would entail very high costs that could
not be recovered from interconnec ting suppliers. However, because the United States-Mexico route
carries the world's largest one-way volume of intern ational calls, there is no question of insufficient
demand for interconnection; also, because United St ates suppliers are already interconnected with
Telmex, such interconnection does not require additional switching capabilities or other network
components or facilities. Thus, neither is the case in Mexico. Third, to the extent that the phrase
"having regard to economic feasibility" limits the ob ligation to provide interconnection at rates that
are " basadas en costos ", interconnection rates should be sufficient to cover the expenses of the
operation and use of interconnection, which requires no more than that interconnection rates should
cover both direct costs and common costs, and shou ld permit a reasonable return on an operator's
investment. According to the United States, all of these costs are already includ ed in the rates set out
by the United States as benchmarks for the determin ation whether Mexico's interconnection rates are
"basadas en costos".372
4.189 The United States also notes that, Mexico may meet its other national goals, unrelated to
interconnection, in a variety of ways. For example, Mexico could put in place a universal service
obligation, under Section 3 of the Reference Pape r. However, the recovery of universal service
subsidies through inflated interconnection charges paid to the major supplier would be contrary to the
Section 3 requirement that universal service obliga tions be "administered in a transparent, non-
discriminatory and competitively-neutral manner . . ." . Such recovery would not be transparent,
because universal service obligations would be hi dden in interconnection rates paid to the major
supplier. Nor would it adhere to the requireme nts for non-discrimination and competitive neutrality,
because it would burden only those suppliers purchasing interconnection with the funding of universal
service obligations.373 Moreover, the United States claims that Mexico's argument is also refuted by
Section 3 of the Reference Paper, which provides fo r separate universal service obligations to finance
universal service and infrastructure development. The recovery of universal service subsidies hidden
in interconnection charges would be contrary to the Section 3 requirement for transparent
administration of universal service obligations.374
4.190 Mexico argues that Section 3 of Mexico's Reference Paper merely imposes obligations for
universal service, that is, requirements imposed on dom estic carriers to supply universal service. It

371 See the United States' second written submission, paragraphs 67-70. See also the United States'
answers to question No. 14(a) (for question No. 14(a), see footnote 359 of this Report) and question No. 14(b)
("How might this phrase modify in practice the determination of cost-oriented interconnection prices? ") of the
Panel of 19 December 2002.
372 See the United States' second written submission, paragraphs 67-70. See also the United States'
answers to question 14(a) (for question 14(a), see footnote 359 of this Report) and question 14(b) (for question
No. 14(b), see footnote 371) of the Panel of 19 December 2002.
373 See the United States' answer to question No. 13 of the Panel of 14 March 2003. For question
No. 13, see footnote 366 of this Report.
374 See the United States' second oral statement, paragraph 60. See also the United States' comments
on Mexico's answer to question No. 14 of the Panel of 14 March 2003, paragraphs 37-38.

does not in any way discipline the rates charged for interconnection.
375 Furthermore, Mexico has not
imposed, nor can it impose, any universal service oblig ations on United States carriers. According to
Mexico, universal service obligations involve costs fo r domestic carriers, which must then be able to
recover them, together with a reasonable return. This is only possible by means of the rates, including
the interconnection rates, which they charge. S ection 2.2(b) of Mexico's Reference Paper must
therefore permit rates which, inter alia , allow for the cost of rolling out infrastructure, plus a
reasonable return. Mexico submits that this is particularly significant for developing country
Members, such as Mexico, which require substan tial investment in their telecommunications
infrastructure. The objective of achieving unive rsal access is expressly provided for in Mexican
legislation. The legitimacy of such investment by developing country Members is explicitly
recognized in GATS Article IV. Hence, Mexico concludes, there is no connection between Sections 2
and 3 in the context of accounting rate arrangements.376
4.191 Citing to provisions concerning rural telephone companies in the Communications Act of the
United States, Mexico also argues that an analogous concep t can be found in the United States'
domestic telecommunications law. Based on these provisions, Mexico claims that under
United States law the concept of "economic feasibility " is a complete exception to the requirement to
offer cost-based interconnection rates.377
4.192 The United States argues that, this requirement of Unite d States law is fully consistent with
the United States' Reference Paper obligations. Th e United States expressly limited Section 2.2 of its
Reference Paper to permit this exemption for rura l carriers. Mexico made no such limitation on its
Reference Paper, with respect to rural or any other carriers.378
4.193 Mexico also argues that the term "cost-based" does not imply that governmental authorities
need to set all rates. To the contrary, durin g the telecommunications negotiations the view was
expressed that, where domestic competition in tel ecommunications services has been established, the
market itself will ensure that rat es are sufficiently "cost-based". A ccording to Mexico, this view is
also endorsed by the United States. Nonetheless, Me xico also notes that, empirical evidence indicates
that there is also a high correlation between the introduction of domestic competition and decreases in
international accounting rates. Mexico claims that , in a market where there is competition, market
dynamics will ensure that the rates are cost-o riented. Recalling its rapid success in introducing
competition in its domestic market, Mexico argues th at, if the requirements of Section 2.2(b) were
applied to accounting rates, Mexico's success in introducing and maintaining competition in the
domestic market for long-distance services has satisfied its obligations to ensure that settlement rates
are cost-based within the meaning of the Reference Paper. According to Mexico, this is supported by
the fact that Mexico's settlement rates for calls from the United States have dropped since 1997 – by
85%, 78% and 69%, depending on the destination of the call.
379
4.194 The United States replies that Mexico's argument that competition in a different market, for
the supply of long-distance service in Mexico, ensur es cost-oriented rates in the separate market for
the provision of interconnection to United States su ppliers operating in the cross-border mode, is not
logical. According to the United States, while competitive market dynamics could reasonably be
expected to ensure cost-oriented rates in most countries, the market dynamics that would normally

375 See Mexico's answer to question No. 14 of the Panel of 14 March 2003 (" How do Mexico's
considerations on elements to be included in the establishment of cost-oriented rates relate to its obligations
under Section 3 of its Reference Paper?").
376 See Mexico's answer to question No. 14 of the Panel of 14 March 2003. For question No. 14, see
footnote 375 of this Report.
377 See Mexico's answer to question No. 14(a) of the Panel of 19 December 2002. For question
No. 14(a), see footnote 359 of this Report.
378 See the United States' second oral statement, paragraph 62.
379 See Mexico's answer to question No. 10(a) of the Panel of 19 December 2002. For question
No. 10(a), see footnote 343 of this Report.

lead to cost-oriented rates are not allowed in Mexico. The United States points out that, Mexico
imposes a naked prohibition on competition on all in ternational routes between firms that would
otherwise be competitors, Mexico's ILD rules re quire a horizontal price-fixing cartel among Mexican
suppliers. Those rules prevent all price co mpetition between Mexica n suppliers providing
interconnection to United States cross-border supplie rs. Even if other WTO Members do not have
explicit requirements for settlement rates to be co st-based, they also do not have restrictions on
competition like Mexico, and therefore can reasonably rely on competitive market dynamics to yield
cost-based rates.
380
4.195 Mexico further argues that, with respect to the unilateral reduction of settlement rates for
incoming calls to domestic interconnection rate leve ls, Mexico would have to require that Mexican
carriers unilaterally reduce their charges to fore ign carriers from all GATS Members for transporting
and terminating incoming international telephone tr affic, but Mexico would have no assurance that
the other Members would implement the same radical change in their regulatory systems, because
only Mexico is the subject of the current complain t. This would expose Mexican carriers to huge
financial liabilities to foreign carriers, including tho se of the United States. Thus, Mexico argues, the
accounting rate regime cannot be changed or abandoned without a multilateral agreement on a system
to replace it.381
(ii) Whether Telmex interconnection rates are "based in cost"
4.196 The United States submits that, in August 2002, Cofetel approved a Telmex proposal to
charge United States suppliers' settlement rates base d on three zones within Mexico. The "settlement
rate" is the interconnection rate that Telmex (and other Mexican suppliers) charge United States cross
border suppliers to connect their calls to their fina l destination in Mexico. Telmex charges 5.5 cents
per minute for traffic terminating in the three largest cities in Mexico (Mexico City, Guadalajara, and
Monterrey) (Zone 1); 8.5 cents per minute for th e other roughly 200 medium-sized cities in Mexico
(Zone 2); and 11.75 cents for traffic terminating in all other locations in the rest of Mexico
(Zone 3).382 The United States argues that these rates are not based in cost.
4.197 The United States submits that, because Mexico declined to make Telmex's interconnection
cost data available to the United States, it uses othe r relevant public data as proxies for measuring the
cost of interconnection provided to United Stat es cross-border suppliers. According to the
United States, these include: (1) published Mexi can price data on maximum rates that Telmex
charges for the network components used to provide interconnection; (2) grey market rates for calls
between the United States and Mexico; (3) international proxies; and (4) rates Mexican carriers
charge each other for settling accounts relating to international calls.383
4.198 Mexico notes that the European Commission allows the regulatory authorities of member
states to use target rates for domestic interconnection rates to determine whether rates charged by their
carriers could be deemed cost-oriented. Mexico argues that, if the use of target rates is satisfactory to
comply with the obligations of Section 2.2 for domestic interconnection rates, the use of target rates is
also acceptable for settlement rates. In this regard, Mexico's inte rnational settlement rates with the
United States are consistent with the target ra te recommended by ITU Study Group 3 for Mexico.
Mexico also submits that the current accounting rate arrangement between Mexican and United States
carriers even complies with the benchmark rate for Mexico unilaterally set by the FCC of the

380 See the United States' second oral statement, paragraphs 55-58.
381 See Mexico's second written submission, paragraph 96. See also Mexico's answer to question
No. 14(a) of the Panel of 19 December 2002. For question No. 14(a), see footnote 359 of this Report.
382 See the United States' first written submission, paragraph 118.
383 See the United States' first written submission, paragraph 120.

United States. Thus, Mexico argues, its rates are cons istent with the cost-based obligation even if the
term "cost-based" is viewed in isolation.
384
4.199 The United States questions Mexico's attempts to justify the use of this ITU target rate by
citing the European Commission's use of "current b est practices" domestic interconnection rates. For
2000, the EC established best practice rates of 1.5 to 1.8 Euro-cents (about 1.4 to 1.65 United States
cents) for double transit (or nationwide termination) at peak (time of day) rates. Adding the Cofetel
approved rate of 1.5 cents (used in the pricing methodology by the United States as an estimated
charge for the additional network components (i nternational transmission and gateway switching)
required to terminate an international call) to the EC best practices rates for nationwide termination
yields an international "best practices" target of only about 3 cents per minute. The current 5.5, 8.5
and 11.75 cents per minute international rates char ged by Telmex exceed this target by 83%, 183%
and 292%.385
4.200 The United States replies that neither the ITU or F CC benchmark is a ppropriate, because
both the ITU and the FCC state that their benchmarks are not cost-oriented.386
4.201 The United States points out first that Mexico's obliga tion under Section 2 of its Reference
Paper is to ensure that Telmex's interconnection rat es are cost-oriented, not to observe that Telmex's
interconnection rates are consistent with a transitiona l target rate that makes no claim to be "basadas
en costos". The United States notes that ITU Re commendation D.140 states that its target rates are
"to be used . . . during the transition to cost-ori entation," and should not be "taken as cost-oriented
levels." After ITU members have attained these targ et rates they "should continue to take positive
steps to reduce their accounting rates to cost-oriented levels." 387
4.202 The United States also submits that Mexico incorrectly claims that it is subject to these ITU
target rates. ITU Recommendation D.140 states that the target rates "are not applicable between
competitive markets." Therefore, the ITU targets do not apply to the termination of United States
traffic in Mexico, which has made binding comm itments to open its basic telecommunications
markets to competition.388
4.203 The United States also notes that the benchmark rat es established by the FCC in 1997 were
not cost-oriented when issued, and are even less so in 2003. In adopting those rates, the FCC stated
that its benchmarks ". . . still exceed foreign carrier s' costs to terminate inte rnational traffic because
they are based primarily on foreign carriers tariffed rates" in effect in 1996, and "include costs
associated with providing retail communications services to consumers which would not be included
in cost-based settlement rates." The FCC therefor e emphasized that its benchmarks "continue to
exceed, usually substantially, any reasonable estimate of the level of foreign carriers' relevant costs of
providing international termination services."389

384 See Mexico's answer to question No. 10(a) of the Panel of 19 December 2002. For question
No. 10(a), see footnote 343 of this Report.
385 See the United States' answer to question No. 21 of the Panel of 14 March 2003 ("Mexico states that
its international settlement rates are consistent with the target rate recommended by ITU Study Group 3 for
Mexico, in its Responses to questions, paragraph 195. Please comment.").
386 See the United States' second oral statement, paragraph 51.
387 See the United States' second oral statement, paragraph 52. See also the United States' answer to
question No. 21 of the Panel of 14 March 2003. For question No. 21, see footnote 385 of this Report.
388 See the United States' answer to question No. 21 of the Panel of 14 March 2003. For question
No. 21, see footnote 385 of this Report.
389 See the United States' second or al statement, paragraph 53. See also the United States' answer to
question No. 19(b) of the Panel of 14 March 2003 (" Mexico states in paragraph 146 of its Responses to
questions that it 'is not aware that the United States or any other country among the 55 has explicitly attempted
to subject accounting rate arrangements to the obligations of Section 2.2(b).' (b) What, for example, is the

4.204 Mexico submits that the United States' assertion th at the FCC's "benchmarks" are not cost-
oriented, ignores Mexico's point that the current United States-Mexican accounting rate is not at the
level of the United States benchmark for Mexico , but well below it. The FCC's benchmark for
Mexico's settlement rate is $.19, while the current rates are $.055, $.085 and $.115. Thus, the rate for
calls to the three largest Mexican cities is about 71 per cent lower than the United States benchmark,
and the rate for calls to rural areas is about 40 per cent lower than the benchmark. Mexico also
identifies portions of the FCC's 1999 ISP Reform Order in which it established its policy that the
United States international settlements policy (that is, the requirements for uniform and symmetrical
settlement rates and proportionate return) could be waived for a country where the settlement rate was
at least 25 per cent below the benchmark for that count ry, on the basis that rates at this level "are
sufficiently below the benchmark level to indicat e that a dominant carrier is facing competitive
pressures to lower rates" and "an indication that competitive market forces exist to constrain the
ability of a foreign carrier to exercise market power." Mexico argues that according to this standard
of United States law, the current settlement rates for United States-Mexico traffic indicate that there is
"meaningful economic competition" within Mexico.
390
aa) Costs based on maximum rates charged for network components
4.205 The United States submits that, in the absence of i ndependent competitive negotiations on
interconnection rates and in the absence of Telmex cost data, the maximum cost that Telmex could
incur to provide interconnection to United Stat es suppliers can be estimated by identifying the
network components Telmex uses to terminate a ca ll from the United States and then adding together
the corresponding prices that either Cofetel or Te lmex established for these components. According
to the United States, because it is reasonable to assume that the component prices established by
Cofetel or Telmex are sufficient to cover the co mponent costs, the sum total of those component
prices can be regarded as a "cost ceiling" for the aggregate network components. Under the
United States' analysis, the maximum average cost th at Telmex incurs to provide interconnection to
United States suppliers is 5.2 (United States) ce nts per minute. The blended average rate of
approximately 9.2 cents per minute that Telmex charges exceed this maximum average cost by more
than 75 per cent. 391 The United States further argues that, b ecause it bases these estimates of cost on
prices charged by Telmex, costs incurred by Telmex , especially for the very large volumes of traffic
generated by United States carriers, would be substantially lower.392
4.206 The United States identifies four network compone nts Telmex uses to provide
interconnection and terminate in Mexico calls that originate in the United States:
"(i) International transmission and switc hing: this network component includes
transport from the United States-Mexico border to and through the
Telmex/Telnor international gateway switch.
(ii) Local links: this network component consists of those facilities utilized to
transport a call from the international ga teway switch to an entry point in the
Telmex/Telnor domestic network.
(iii) Subscriber line: this network component includes switching in the
terminating city and transmission over facilities (such as a local loop) to the
receiving telephone.

situation in the United States in this respect? In particular, what is the relevance of the Benchmarks Order
referred to in paragraph 196 of Mexico's Responses to questions?").
390 See Mexico's comments on the United States' answer to question No. 19(b) of the Panel of 14 March
2003, paragraphs 38-40.
391 See the United States' first written submission, paragraph 121.
392 Ibid.

(iv) Long-distance links: this network component consists of those facilities
 utilized to transport traffic from th e entry point in the Telmex/Telnor
 domestic network to the last switch in the network chain."
393
4.207 According to the United States , these network components reflect the guidelines
promulgated by the ITU for identifying the cost s incurred in terminating international calls.
According to the ITU, the network components us ed to provide international telephone services are
international transmission and switching facilities (component 1 above) and national extension (which
incorporates components 2 through 4 above). 394 As a basis for its calculation, the United States uses
the published Telmex prices, which are approved by Cofetel, for these network components. The
United States further argues that, because Mexica n law requires these Cofetel-approved rates to
recover at least the total cost of these network co mponents, they therefore include at least the true
costs of these network components, including direct and indirect costs. 395 For certain network
components, the United States relies on either Telmex 's retail prices or on certain non-cost-oriented
wholesale rates that Telmex charges. The United St ates argues that Telmex prices, as such, set an
upward limit (cost ceiling) of cost; rates above this cost ceiling cannot be "basadas en costos".396
4.208 The United States then discusses the specific prices of these network components, depending
on the destination of a call into Mexico. Accordin g to the United States, cross-border suppliers of
basic telecom services interconnect with Telmex in order to terminate calls to three "zones" in
Mexico. These three zones are: (1) calls termina ting in Mexico City, Guadalajara, and Monterrey;
(2) calls terminating in approximately 200 medium c ities in Mexico; and (3) calls terminating in all
other locations in Mexico. The United Stat es notes that each successive calling zone reflects
progressively more extensive use of Telmex's ne twork (and hence progressively higher prices, based
on Telmex's current pricing practices).397
4.209 For calls to Zone 1 cities, the United States submits that Telmex's costs can be no more than
2.5 cents per minute (1.5 cents for international transmission and switching plus 0.022 cents for local
link plus 1.003 cents for subscriber line) for the network components to interconnect a call from the
United States border. 398 However, Telmex currently charges a Cofetel-approved rate of 5.5 cents to
connect these calls. Thus, the United States asserts that Telmex charges United States suppliers an
interconnection rate that is approximately 220 per ce nt of the maximum cost it incurs to terminate a
call in Zone 1.399
4.210 According to the United States , calls to Zone 2 cities re quire one additional network
component, i.e., a "long-distance link" used for tr ansport within Mexico between the international
gateway switch and the switch in the destination c ity. For these calls, Telmex allows its competitors
to purchase "on-net" interconnection. The United St ates submits that Telmex's costs can be no more
than 3 cents per minute (1.5 cents for internati onal transmission and switching plus 0.022 cents for
local link plus 0.536 cents for long-distance link plus 1.003 cents for subscriber line) for the network
components used to interconnect a call from the Un ited States border to a Zone 2 city. However,
Telmex currently charges a Cofetel-approved rate of 8.5 cents to connect these calls. Thus, the

393 See the United States' first written submission, paragraph 122.
394 See the United States' first written submission, paragraph 123; see also International
Telecommunication Union, Recommendation D.140 (Accounting Rate Principles for the International
Telephone Service) ("D.140"), October 2000.
395 See the United States' first written submission, paragraph 124.
396 See the United States' first written submission, paragraph 126.
397 See the United States' first written submission, paragraph 127.
398 See the United States' first written submission, paragraph 130.
399 Ibid.

United States argues that Telmex charges Un ited States suppliers an interconnection rate
approximately 275 per cent of the maximum cost it incurs to terminate a call in Zone 2.400
4.211 The United States further notes that, calls to Zone 3 cities are classified as "off-net", which
means that Telmex has not opened to originati ng competition and does not allow competitors to
purchase "on-net" termination. According to th e United States, Telmex uses the same network
components as it does for Zone 2 to terminate calls in Zone 3 cities. However, unlike the preceding
two calling patterns, Telmex's rate for terminating interconnection is substantially higher than that
charged by Telmex for "on-net" interconnection. In Zones 1 and 2, Telmex terminates calls in cities
where competitors are allowed to purchase "on-net" termination at rates established by Cofetel and
incorporated into commercial agreements between Mexican operators. However, Telmex charges
highly inflated rates (known as " reventa" or "off-net" rates) to terminate calls in cities where
competitors are not allowed to buy "on-net" te rminating interconnection. Because unbundled pricing
information for the network components used to provide reventa service is not readily available, the
United States utilizes the 7.76 cent reventa rate that Telmex charges its competitors to terminate calls
to off-net cities. Based on this, the United States submits that Telmex's costs can be no more than
9.28 cents per minute (1.5 cents for international transmission and switching plus 0.022 cents for local
link plus 7.76 cents for termina ting interconnection) for the networ k components used to interconnect
a call from the United States border to a Zone 3 city . However, Telmex currently charges a Cofetel-
approved rate of 11.75 cents to connect these calls. Thus, the United States argues that Telmex
charges United States suppliers an interconnection rate approximately 127 per cent of the maximum
cost it incurs to terminate a call in Zone 3.
401
4.212 In conclusion, the United States argues that the 9.2 cents per minute blended average of the
three zone rates that Telmex charges United St ates suppliers for interconnection exceeds Telmex's
published price for the network components used to provide such interconnection, and hence,
Telmex's maximum blended average costs, by 77 pe r cent. As to each of the three zones, the
United States argues that the rates that Telmex charges United States suppliers for interconnection
exceeds Telmex's published price for the network co mponents used to provide such interconnection,
and hence, Telmex's maximum costs by 27 to 183 pe r cent. The United States also emphasizes that
the data it is using – including Telmex's retail ra tes for private lines and Telmex's rates for off-net
interconnection – yields the maximum cost th at Telmex could possibly incur to provide
interconnection to United States suppliers. According to the United States, the real cost that Telmex
incurs is likely far lower than the maximum cost ceili ngs identified in this section, and is likely in line
with the 1 to 2 cent per minute rate in effect with carriers in countries with WTO-compliant
competitive conditions. Even so, the United St ates argues, the rates that Telmex charges
United States suppliers for interconnection far exceed even this inflated cost ceiling.402
4.213 Mexico submits that the proposed United States methodology for determining whether rates
are cost-oriented is not found in the agreement. According to Mexico, even though the United States
agrees that the Reference Paper does not define th e terms "cost based" or "cost oriented", it still
attempts to imply that there is universal agreement on the meaning of those terms, as well as universal
agreement that the costs of providing national acce ss through accounting rate agreements must be
determined in the same manner as the costs of domestic interconnection.
403 Mexico argues that under
the United States' methodology, accounting rates negotiated between Mexican and United States
carriers must be set no greater than domestic interconnection rates. 404 Citing to publications by the
ITU, Mexico claims that there is no common unders tanding of what the terms "cost-based" and "cost-
oriented" mean, either in the domestic or internat ional contexts, and there is no consensus that it

400 See the United States' first written submission, paragraphs 131-132.
401 See the United States' first written submission, paragraphs 133-136.
402 See the United States' first written submission, paragraphs 137-139.
403 See Mexico's first written submission, paragraph 186.
404 See Mexico's first written submission, paragraph 179.

means that the costs of transporting and terminating international calls should be deemed the same as
the costs of domestic interconnection.
405
4.214 The United States replies that it is not arguing that the costs of mode 1 interconnection must
be equal to the costs for domestic interconnecti on for commercially-present suppliers. Instead the
United States submits that the point of its estimate d cost model is to show that the rates currently
charged by Telmex substantially exceed the prices charged for the same elements domestically. Since
Mexican law requires that interconnection rates fo r commercially-present suppliers must recover at
least the total cost of all network elements, in terconnection rates for cross-border suppliers that
exceed rates for commercially-present suppliers are by definition not based in cost. The United States
further clarifies that it is not asking that the Panel determine a rate that would be considered basadas
en costos ; instead it is only asking that the Panel de termine that the rates currently charged by
Telmex for interconnection provided to cross-border s uppliers are not based in cost. According to the
United States, Mexico has not contested that rate s for international interconnection exceed rates for
domestic interconnection by 127 to 283 per cent (usi ng the exact same network elements) and that
rates for domestic interconnection are required by Me xican law to be based in cost. Thus, whatever
the definition of " basadas en costos ," under these circumstances Mexico's international
interconnection rates cannot be considered cost-based. 406
4.215 Mexico further argues that the United States is wrong in arguing that the type of cost analysis
used for domestic interconnection can be applied to settlement rates fo r international calls. Mexico's
GATS commitments preserved the current system under which termination of international long-
distance traffic in Mexico is conducted under a join t provision regime (half circuit regime), not under
a whole provision regime (full circuit regime). The accounting rate system is widely, if not
universally, used for settlements under the half circ uit regime. The cost analysis demanded by the
United States is used only for interconnection under a whole circuit regime, in particular domestic
interconnection. According to Mexico, proposals ha ve been made (such as by Australia) to replace
the accounting rate systems with a cost-oriente d "termination rate" regime, which could be
implemented using half circuit or full circuit cr iteria. However, there is not yet an agreed
methodology on how to determine costs under a termina tion rate regime, either at the bilateral or
multilateral levels. Thus, the issue remains unresolved.407
4.216 The United States replies that the various methodologies proposed by the United States
should not be regarded as estimates of the cost of te rminating incoming international calls in Mexico.
Rather, the United States argues that, the methodolog ies presented show a maximum cost or a ceiling
on the costs incurred and, as such, exceed the actual cost.408
bb) "Grey market" rates for calls between the United States and Mexico
4.217 Another proxy the United States uses for identifying costs of interconnection are grey market
rates for transport and termination of internationa l minutes into Mexico, sold in London, Los Angeles
and New York. The United States recognizes that such arrangements bypass the uniform settlement
rates required by regulations in Mexico and therefore are technically illegal in Mexico. However, the
United States argues that these rates provide anothe r estimate of what some operators are currently

405 See Mexico's first written submission, paragraphs 187-190.
406 See the United States' first oral statement, paragraph 33. See also the United States' second written
submission, paragraphs 61-62.
407 See Mexico's answer to question No. 11(b) of the Panel of 19 December 2002 (" If [Mexico does not
consider that the estimates of the cost of terminating in coming international calls in Mexico given in the United
States submission are roughly correct], please give reasons and outline how more satisfactory figures might be
obtained.").
408 See the United States' answer to question No. 11(a) of the Pa nel of 19 December 2002 (" Does
Mexico consider that the estimates of the cost of terminating incoming international calls in Mexico given in the
United States submission are roughly correct?").

paying for the network components used to termin ate such calls, even given the constraints of
Mexico's regulations. According to the United St ates, these rates also provide insight as to the
relevant costs incurred to complete calls into Mexico, given that a grey market for such calls would
not exist unless operators were making a profit over the cost of the network components required to
complete the calls. Based on its comparison of the rates, the United States submits that the grey
market rates are far lower than the rates charged by Telmex and even the maximum costs shown in
the above United States pricing surrogate, and thus confirm the conservative nature of the
assumptions underlying that methodology.409
4.218 The United States also notes several factors which suggest that the grey market rates include
costs in addition to the costs of the network com ponents used by Telmex to terminate United States
calls into Mexico. First, the United States argues th at the grey market rates include – in addition to
termination – the cost of transporting calls from di fferent points abroad (Los Angeles, New York, or
London) to the Mexican border. Second, the Unite d States asserts, because such calls are technically
illegal in Mexico, they necessarily involve a regulat ory risk premium to cover the possibility that
these grey market operations can be shut down at an y time. Furthermore, to avoid detection, such
operators typically do not use efficient, high-capacity links for their networks (but instead rely on
commercially available low capacity links), thereby incurring network inefficiencies and higher costs.
Third, according to the United States, given the pr ice ceiling set by Telmex (i.e., the cross-border
interconnection rate) which still gove rns the overwhelming majority of calls, and the limited capacity
of the grey market to meet demand for alternative termination, market pressure to drive grey market
rates to cost is limited – such operators can meet demand by offering a limited discount to the
Telmex-set price umbrella, which likely results in such grey market rates being well above cost.410
4.219 In conclusion, the United States argues that, even though these grey market rates themselves
are above Telmex's maximum costs, the Telmex interconnection rates still exceed these grey market
rates.411 Thus, Telmex's interconnection rates are substantially above Telmex's costs.
4.220 Mexico argues that, by asserting that rates for illeg al bypass traffic into Mexico should be
used as the benchmark for determining whether the accounting rates negotiated between United States
and Mexican carriers comply with the Reference Pape r, the United States is tantamount to stating that
international access must be priced as though Mexico had authorized the United States' carriers to
provide service into Mexico throug h ISR, so that the United States ' carriers could interconnect with
the domestic network within Mexico without routi ng their traffic through an authorized facilities
based carrier. But Mexico does not allow ISR, and scheduled a reservation to the GATS allowing it
to maintain that prohibition. Accordingly, Mexi co argues, the United States reliance on the rates
charged for illegal ISR traffic into Mexico as a be nchmark is completely inappropriate, just as
illegally downloaded music can not be used as a measure of the true cost of producing the music.412
4.221 The United States counters that Mexico's analogy is flawed. According to the United States,
in the case of illegally downloaded music, no one pa ys for the use of the downloaded music; on the
other hand, in the case of illegal bypass, the users of bypass are paying for the use of those network
elements. Mexico does not assert that bypass rates do not cover the costs of the various components
involved in providing bypass service. Nor does it id entify any cost that is not recovered by bypass
rates.
413

409 See the United States' first written submission, paragraph 141.
410 See the United States' first written submission, paragraphs 143-144.
411 See the United States' first written submission, paragraph 145. See also the United States' second
written submission, paragraph 63.
412 See Mexico's first written submission, paragraph 180.
413 See the United States' second written submission, paragraph 65.

4.222 Mexico also submits that the United States makes "apples to oranges" comparisons.
According to Mexico, the United States compares ISR rates from the United States to various
countries with the United States-Mexico accounting ra tes, rather than comparing the United States
accounting rates with those countries to the United States-Mexico accounting rates. Mexico also
points out that, in the same submis sions in which it complains about the unavailability of ISR into
Mexico, the United States presents detailed inform ation about the rates United States carriers are
currently paying for ISR into Mexico. This contradiction serves to highlight that the United States has
not presented the complete factual picture.
414
cc) International proxies
4.223 The United States also shows that Telmex termination rates exceed wholesale rates
established by a major operator to terminate calls to various countries that, like Mexico, have more
than one long-distance provider. The United St ates notes that these rates include transport from
points of interconnection in Los Angeles, New York or London and thus include network components
and costs in addition to those used and incurred by Telmex in terminating a call from the Mexican
border to the final destination in Mexico. The United States also points out that none of these
countries match the volume of international traffi c and corresponding economies of scale for traffic
between the United States and Mexico. Neverthe less, the United States argues, these international
rates provide a useful, but highly conservative, benchmark further supporting the United States claim
that Mexico has failed to ensure that Telmex pr ovides interconnection to cross border suppliers at
rates that are basadas en costos. 415
dd) Financial compensation among Mexican ope rators relating to international calls
4.224 The United States also argues that financial compensation procedures among Mexican
operators demonstrate that the interconnection rat es charged to United States suppliers are not cost-
oriented.416 According to the United States, the ILD Rul es require Mexican international operators to
allocate incoming international calls among themse lves under a "proportionate return" system that
reflects each operators' share of outgoing calls. Because the Mexican intern ational operators do not
necessarily receive traffic (and the associated paym ents by United States carriers) in accordance with
this proportionate return requirement, the ILD Ru les also establish redistribution and compensation
procedures to ensure that each operator either re ceives the correct amount of traffic or receives
appropriate financial compensation.417
4.225 The United States explains that the "proportionate return" system works in two ways: first,
under the traffic redistribution procedures establis hed by ILD Rule 16, the operator receiving the
excess traffic at its international port is required to transfer the excess traffic to another operator
entitled to receive the traffic under the allocation fo rmula. The initial operator is allowed to deduct
from the settlement rate for its own international por t services (authorized by Cofetel at 1.5 cents per
minute), with the remainder of the settlement rate going to the operator to which the traffic is
transferred.418 Alternatively, the United States argues, IL D Rule 17 allows the Mexican international
operators to "mutually negotiate financial compen sation agreements in consideration of the rights
generated for each of them in accordance with th e proportionate return system." This allows
operators that are unable to identify and transf er excess traffic in accordance with Rule 16 to

414 See Mexico's second oral statement, paragraph 78.
415 See the United States' first written submission, paragraphs 146-147. See also the United States'
second written submission, paragraph 63.
416 See the United States' second written submission, paragraph 64.
417 See the United States' first written submission, paragraph 148.
418 See the United States' first written submission, paragraph 149.

terminate that traffic and then negotiate financia l compensation agreements (or "true-up" payments)
with the operator entitled to receive the traffic under the allocation formula.419
4.226 The United States argues that, the mere existence of Rule 17 should be regarded as an
admission by Mexico that the interconnection rate charged to cross-border suppliers is not basadas en
costos.420 The United States claims th at, if the settlement rate was basadas en costos , no Rule 17
"financial compensation" would be available for any "entitled" operator to receive, because the
settlement rate received by the operator actually r eceiving and terminating the "excess" traffic would
merely be sufficient to cover those termination costs.421 The United States further explains that, under
Rule 17 financial compensation procedures, operators terminate excess traffic with their own network
arrangements, deduct the "cost" incurred in such termination from the settlement payments received
for that traffic, and distribute the residual amount to the operator entitled to additional traffic under the
ILD Rules. According to the United States, impl ementing this financial transfer, however, requires
operators to agree on the cost of terminating a call, since what they transfer between themselves is
only the "premium" on such calls, or the amount in excess of the costs incurre d for terminating such
calls.422 Thus, the United States argues that Rule 17 payments are required solely because cross-
border interconnection rates are not basadas en costos.423
4.227 Mexico argues that the requirement for proportion ate return allows new entrants in the
domestic market to preserve and gain market share by allowing them to terminate incoming traffic in
the same proportion as their share of outgoing traffic. According to Mexico, a carrier that has gained
more customers in the domestic market, and ther eby carries these customers' outgoing traffic to a
particular country, is ensured that it will be able to terminate a proportionate share of the country's
incoming traffic, which otherwise might be carried by larger carriers.
424
(b) Whether Telmex interconnection rates are "reasonable"
(i) The meaning of "reasonable"
4.228 The United States submits that the Referenc e Paper does not define " razonable" or
"reasonable." Thus, the United States argues, th e term should be interpreted according to the
customary rules of treaty interpretation reflected in Article 31(1) of the Vienna Convention .
According to the United States, such an analysis considers the ordinary meaning of "reasonable" (a
word that has a very broad meaning) in its context and in light of the object and purpose of the
agreement.
425
4.229 The United States argues that, the commitments that resulted from the negotiations on basic
telecommunications should be interpreted in light of both that particular object and purpose of the
agreement as a whole and of those negotiations in particular: the liberalization of trade in basic
telecom services. The United States asserts that the Reference Paper is an integral part of these basic
telecom commitments. These additional commitmen ts recognize that major suppliers of basic
telecommunications services have the potential to use their dominant position to undermine market
access and national treatment commitments. Thus, the United States claims, Section 2 of the

419 See the United States' first written submission, paragraph 150.
420 See the United States' first written submission, paragraph 151. See also the United States' second
written submission, paragraph 64.
421 See the United States' first written submission, paragraph 151.
422 See the United States' first written submission, paragraph 153.
423 See the United States' first written submission, paragraph 155.
424 See Mexico's first written submission, paragraph 78.
425 See the United States' first written submission, paragraphs 158-159.

Reference Paper establishes discip lines to prevent major suppliers from using interconnection to
restrict other suppliers from offering a scheduled service.
426
4.230 In terms of the context, the United States argues that the interconnection obligations of
Section 2 are especially important for the cross-borde r supply of basic telecom services – particularly
in markets like Mexico, which legally bar fo reign service suppliers from owning facilities and
therefore force foreign suppliers to rely on the majo r supplier to deliver their services to the end-user.
In such cases, foreign suppliers have no choice bu t to pay a domestic service supplier (such as
Telmex) an interconnection rate to terminate their cal ls. As a result, the ma jor supplier has the power
and incentive to price this input at levels which extract as much revenue as possible from cross-border
suppliers. Thus, by raising the wholesale price of cross-border interconnection, the major supplier has
the power to raise the retail price, reduce demand fo r the retail service, and thereby restrict the cross-
border supply of services into Mexico. The United States further claims that, under Section 2, it is not
enough for a WTO Member like Mexico to ensu re that its major supplier's cross border
interconnection rate is cost-based. Mexico must also ensure that the terms and conditions are
reasonable – providing additional security that a majo r supplier may not use its bottleneck control of
interconnection to restrict a foreign supplier ava iling itself of scheduled cross-border market access
and national treatment commitments.427
4.231 The United States concludes that, Section 2.2 of the Re ference Paper is designed to ensure
that a major supplier cannot restrict the supply of a scheduled basic telecom service through the terms
and condition for interconnection. Therefore, interconnection terms and conditions are not
"reasonable" if they would permit a major supplier to restrict the supply of a scheduled basic telecom
service.428
4.232 Mexico submits that the United States' interpretation of "reasonable" is based on its
assumption that Mexico has allowed United States suppliers to provide their services on a cross-
border basis. However, Mexico argues, its co mmitments do not permit United States suppliers of
basic telecommunications services to provide their transmission or transport services across the border
into Mexico. It is not the rates negotiated by Telm ex that restrict the supply of telecommunications
transmission and transport services, but rather, th e limitations inscribed in Mexico's Schedule.
Pursuant to Article XVI of the GATS, Mexico is en titled to restrict the rights of service suppliers of
other Members to supply basic telecommunications services into and within its territory.429
4.233 According to Mexico, the United States' argument on this issue also results from its apparent
misunderstanding of the meaning of cross-border supply in the context of telecommunications
transport services. Specifically, the United States co nsistently confuses the "telephone call" or other
data that is transported by the service suppliers with the actual transport and transmission services that
are at issue in this dispute. 430
4.234 Mexico argues that the United States' interpretati on of the word "reasonable" is overly and
blatantly simplistic.431 According to Mexico, the ordinary meaning of "reasonable" is "in accordance
with reason; not absurd; within the limits of reason; not greatly more or less than might be expected".
Mexico argues that the reasonableness of " tarifas basadas en costos " or cost-oriented rates can be
judged only within the context of all relevant f acts and circumstances because it is those facts and
circumstances that provide a basis for reason and expectation. 432 In this light, Mexico argues, it

426 See the United States' first written submission, paragraphs 160-162.
427 See the United States' first written submission, paragraphs 163-164.
428 See the United States' first written submission, paragraph 165.
429 See Mexico's second written submission, paragraph 108.
430 See Mexico's second written submission, paragraph 110.
431 See Mexico's first written submission, paragraph 182.
432 See Mexico's second written submission, paragraphs 89 and 115. See also Mexico's answer to
question No. 15 of the Pane l of 19 December 2002 ("The United States suggests that interconnection terms and

cannot be said, categorically, that an action or a measure that restricts the supply of a scheduled
service is "unreasonable". In the broad sense, all fo rms of government regulation related to the terms
and conditions of supply of a servi ce have some impact on the level of supply of that service.
However, merely because they have that effect, it cannot be said that they are "unreasonable" under
any interpretation of the term "reasonable".433
4.235 Mexico further argues that the fact that other major telecommunications markets, especially
the United States, maintain virtually identical rules to preserve the negotiating position of their
carriers vis-à-vis Mexican carriers must be taken into acc ount in determining whether Mexico's ILD
rules are "reasonable," and whether it would be "eco nomically feasible" for Mexico to eliminate them
unilaterally.434
4.236 Mexico argues that the United States' interpretati on of "reasonable" does not allow for rates
that simply recover bare costs, let alone rates that are "economically feasible" to Mexico. The fact
that the same settlement rate appli es to other Mexican carriers is irrelevant to the application of the
"reasonableness" requirement in Section 2.2(b) because that requirement applies only to
interconnection with major suppliers . Accordingly, the interpretation presented by the United States
is manifestly absurd and should be rejected by this Panel.
435
4.237 According to Mexico, a multitude of facts and circumstances are relevant to the determination
of whether " tarifas basadas en costos " are reasonable. These include the state of a WTO Member's
telecommunications industry, the c overage and quality of its telecomm unications network, the return
on investment, and the nature of the rates at issue.436
4.238 Mexico argues that, in determining the reasonabl eness of Mexico's accounting rates, the
bilateral nature of accounting rates must be ta ken into account. Bilateral accounting rate
arrangements continue to be prevalent and many of the countries with which Mexico has such
arrangements are under no obligation to reduce the ra tes they negotiate. T hus, Mexico submits, it
would not be reasonable to expect Mexico to unilaterally reduce its accounting rates to domestic
interconnection levels and yet face high accounting rates for outgoing calls.437
4.239 Mexico also deems it pertinent to compare Mexico 's settlement rates with the United States
with those of other countries with the United St ates. According to Mexico, because the current
accounting rate arrangement between United St ates and Mexican carriers provides for lower
settlement rates than the accounting rate arrange ments of United States carriers with a number of
other countries, Mexico's rates must be deemed reasonable.438
4.240 Mexico also submits that reasonableness must be judged in the light of all relevant
circumstances which could include the technology u sed. Mexico notes that technology reduces costs,

conditions are not 'reasonable ' under Section 2.2 if they permit a major supplier to 'restrict the supply of a
scheduled basic telecom service.' (United States' submission, paragraph 165). Please comment.").
433 See Mexico's second written submission, paragraph 115. See also Mexico's answer to question
No. 15 of the Panel of 19 December 2002. For question No. 15, see footnote 432 of this Report.
434 See Mexico's second written submission, paragraph 117.
435 See Mexico's second written submission, paragraph 118. See also Mexico's answer to question
No. 15 of the Panel of 19 December 2002. For question No. 15, see footnote 432 of this Report.
436 See Mexico's second written submission, paragraph 90. See also Mexico's answer to question
No. 13(a) of the Panel of 19 December 2002 (" Elements to be included in determining whether rates are
reasonable (a) What elements should be included in determining whether cost-oriented interconnection prices
are 'reasonable'?").
437 See Mexico's second written submission, paragraph 91. See also Mexico's answer to question
No. 13(a) of the Panel of 19 December 2002. For question No. 13(a), see footnote 436 of this Report.
438 See Mexico's second written submission, paragraph 92. See also Mexico's answer to question
No. 13(a) of the Panel of 19 December 2002. For question No. 13(a), see footnote 436 of this Report.

especially in the long run. However, in the tel ecommunications sector technological change has been
very rapid, so much so that fixed asset obsolescence has led to high depreciation rates and,
consequently, higher costs. Currently there is an excess of transmission capacity that must be
depreciated very quickly, but with a very low cap acity utilization and profitability. Mexico submits
that it is not an exception to this global problem.
439
4.241 According to Mexico, another consideration to be take n into account is that technological
change does not take place instantly and obsolete eq uipment cannot be immediately discarded. This
factor results in cost reductions that are less dramatic than desired.440
4.242 Mexico also points out that developing countries are usually technology consumers, not
producers, and thus have to pay a higher price for technology than developed countries. Relative to
developed countries, this drives costs for devel oping countries up, not down. In addition, a
technology consumer country must spend extra m onies to adapt and make compatible different
vendors' technologies.441
4.243 Mexico further submits that, contrary to recen t inflated expectations, the bulk of
telecommunications revenues (around 80%) still come from voice (or voice-related) services, where
new technology does not yet represent a perfect substitute for the traditional (circuit-based) one.442
4.244 Thus, Mexico concludes, technology, in the present circumstances, for a developing country
such as Mexico, does not reduce but rather in creases costs, especially with respect to its
counterparts.443
4.245 Mexico claims that the United States has ignored th e following statements in the preamble of
the GATS:
"Desiring the early achievement of progressive ly higher levels of liberalization in
trade in services … while giving due r espect to national policy objectives;
Recognizing the right of Members to regulate, and to introduce new regulations, on
the supply of services within their territories in order to meet national policy
objectives and, given asymmetries existing with respect to the degree of development
of services regulations in different countri es, the particular need of developing
countries to exercise this right; Desiring to facilitate the increasing participation of
developing countries in trade in services and the expansion of their service exports
including, inter alia, through the strengthening of their domestic services capacity and
its efficiency and competitiveness …"
444I
4.246 In Mexico's view, from the statements above, al ong with the Schedules themselves, it is
obvious that the overall goal of liberalization does not provide a justification for the United States
interpretation. Neither the GATS in general nor the Fourth Protocol in particular were intended to
eliminate immediately all restrictions and charges on trade in services.445

439 See Mexico's answer to question No. 13(b) of the Panel of 19 December 2002 (" Elements to be
included in determining whether rates are reasonable. (b) Does the answer depend on the technology used?").
440 See Mexico's answer to question No. 13(b) of the Panel of 19 December 2002. For question
No. 13(b), see footnote 439 of this Report.
441 Ibid.
442 Ibid.
443 Ibid.
444 See Mexico's first written submission, paragraph 183.
445 Ibid.

4.247 Mexico further asserts that the United States interp retation leads to an absurd result. If
carried to its logical conclusion, the United Stat es argument implies that any charge for access is
unreasonable, because any fee higher than zero conceivably "restricts" supply.446
4.248 The United States replies that it is not arguing that an y charge for interconnection or that any
term or condition imposed upon interconnection is unreasonable. Rather, the determination of
reasonableness must be made on a case-by-case basis. In this case, the facts clearly show that Mexico
has failed to ensure that the terms and conditions for interconnection with Telmex are reasonable -
that is, Mexico has failed to ensure that those te rms and conditions reign in Telmex's ability to abuse
its market power and restrict the supply of basic telecommunications services. The result of Mexico's
failure to ensure interconnection on reasonable te rms and conditions is th at Telmex has indeed
restricted the supply of scheduled services.447
4.249 Mexico replies that the United States' qualification highlights a fundamental flaw in the
United States' claim. According to Mexico, what the United States is now arguing is that whether or
not the rate is reasonable depends on how much it restricts the supply rather than the fact that it
restricts supply in the first place. Under this new legal test posited by the United States, a multitude
of facts could have a bearing on "how much is t oo much". Accordingly, the fact that a measure
"restricts the supply of a scheduled service" is no longer determinative of "reasonableness" and the
entire basis for this claim is eviscerated.448
(ii) Whether Telmex interconnection rates are "reasonable"
4.250 The United States argues that, because Mexico has given Telmex de jure monopoly power to
set and maintain interconnection ra tes with foreign operators enabling it to restrict the supply of
scheduled services, it has failed to ensure that Telm ex provides interconnection at reasonable rates.
According to the United States, Mexico has enable d, through its ILD Rules, its major supplier to
affect the supply of scheduled basic telecom serv ices through its exclusive negotiating authority and
power to set interconnection rates for all Mexican ca rriers. The United States alleges that, on their
face, the ILD Rules prevent Telmex from providing interconnection as required by Section 2.2 of the
Reference Paper. Instead, the rules establish a struct ure and process that allow Telmex to set inflated
interconnection rates and insulate Telmex from an y competitive pressures that would otherwise lead
to rates that are reasonable. The United States explains that Rule 13 grants Telmex alone the
exclusive authority to negotiate the interconnection ra te with cross-border suppliers, while Rules 3, 6,
10, 22, and 23 prohibit any alternatives to this Telm ex-negotiated rate. As a result, the United States
argues, these particular ILD Rules prevent Mexico from fulfilling its obligations under Section 2.2
and, for that reason, are inconsistent with that provision. 449
4.251 The United States further contends that Mexico h as failed to honour its commitments under
Section 2.2(b) by rejecting proposals from United St ates and Mexican suppliers to approve alternative
interconnection agreements that would exert comp etitive pressure on the Telmex-negotiated rate.
According to the United States, since 1998, Unite d States and Mexican suppliers have tried to
convince Mexican authorities to permit competitive alternatives to the Telmex-negotiated cross-
border interconnection rates. However, Mexican aut horities either rejected or ignored each request.
The United States alleges that, these examples rein force the conclusion that Mexico has taken
affirmative steps to prevent any competition to the Telmex-negotiated interconnection rate.450

446 See Mexico's first written submission, paragraph 184.
447 See the United States' second written submission, paragraphs 74-75.
448 See Mexico's second oral statement, paragraph 87.
449 See the United States' first written submission, paragraphs 167-175.
450 See the United States' first written submission, paragraphs 178-179.

4.252 The United States argues that Mexico has failed to ensure that Telmex provides
interconnection on reasonable terms and conditions and therefore has not honoured its commitments
under Section 2.2(b) of the Reference Paper.
451
B. SECTION 1.1 OF THE REFERENCE PAPER: PREVENTION OF ANTI -COMPETITIVE PRACTICES IN
TELECOMMUNICATIONS
4.253 The United States claims that Mexico's ILD Rules ope rate to prevent competition in the
termination of cross-border switche d traffic, hold international interconnection rates artificially high,
and allow foreign suppliers no choi ce but to pay Telmex-negotiated rate if they want to supply
services on a cross-border basis . According to the United States, Mexico's ILD rules empower
Telmex to engage in monopolistic practices with re spect to interconnection rates for basic telecom
services supplied on a cross-border basis and to create an effective cartel dominated by Telmex to set
rates for such interconnection.452 The United States therefore claims that Mexico has failed to honour
its commitments under Section 1.1 of the Reference Paper 453, which provides that "[a]ppropriate
measures shall be maintained for the purpose of pr eventing suppliers who, alone or together, are a
major supplier from engaging in or continuing anti-competitive practices."454
4.254 Mexico replies that its ILD Rules are not subject to the obligations of the Reference Paper,
and therefore, cannot be inconsistent with its Section 1.1.455 456 Mexico further points out that, even if
its ILD Rules were subject to the obligations of th e Reference Paper, the United States, in order to
succeed in its claim, must present a prima facie case that Mexico has not maintained "appropriate
measures... for the purpose of preventing suppliers who... are major supplier from engaging in or
continuing anti-competitive practices". According to Mexico, the United States has not done so. 457
Mexico also submits that the United States has misinterpreted the obligations of Section 1.1. 458
Mexico also points out that, although its ILD Rules are not subject to the obligations of the Reference
Paper, it has maintained appropriate measures for the purpose of preventing Telmex from engaging in
anti-competitive practices.
459 According to Mexico its measures meet the standards of Section 1.1 of
the Reference Paper and the Mexican regulatory fr amework contains the requisite of "Competitive
Safeguards".460
1. Panel's standard of review
4.255 Mexico submits that the fact that the United States may have different goals centered on
promoting the interest of its own carriers shoul d not influence the manner in which the Panel
interprets Section 1 in the light of the objectives of the GATS, which include:

451 See the United States' first written submission, paragraph 188.
452 See the United States' first written submission, paragraph 206.
453 See the United States' first written submission, paragraph 31.
454 See Mexico's Reference Paper, page 8, GATS/SC/56/Suppl.2.
455 See Mexico's first written submission, paragraph 197.
456 The United States maintains that Mexico's Reference Paper obligations apply to the terms and
conditions of cross-border interconnection between Te lmex and suppliers from the United States. Mexico
disagrees and contends that the settlement rates that ca rriers from the United States have agreed to pay to
Telmex under the accounting rate regime are not subject to Mexico's comm itment under Section 2.1 and 2.2 of
the Reference Paper. Moreover, Mexico argues that it di d not agree to grant cross-border access in its Schedule
of specific commitments and that the Reference Paper has no application in this context. For more information
regarding the discussion on the scope of application of the Reference Paper, see Section IV.A.1 of this Report.
457 See Mexico's second written submission, paragraph 122.
458 See Mexico's first written submission, paragraph 199.
459 See Mexico's first written submission, paragraph 204.
460 See Mexico's first written submission, paragraph 205.

"Desiring the early achievement of progressively higher levels of liberalization in
trade in services … while giving due respect to national policy objectives;
Recognizing the right of Members to regulate … the supply of services within their
territories in order to meet national polic y objectives and, given wide asymmetries
existing with respect to the degree of deve lopment of services regulations in different
countries, the particular need of developing countries to exercise this right;
Desiring to facilitate the increasing participation of developing countries in trade in
services and the expansion of their service exports including, inter alia, through the
strengthening of their domestic services capacity and its efficiency and
competitiveness …"
461
4.256 Mexico also submits that Section 1.1 does not requi re a Panel to act as a domestic anti-trust
authority, as, Mexico indicates , the United States implicitly argues. In Mexico's view, Section 1.1
sets out "principles and definitions" for regulator y authorities and does not mean that a single and
common regulatory system should be imposed in the territory of all WTO Members.462
2. Section 1.1 of Mexico's Reference Paper
(a) Purpose of Section 1.1
4.257 According to the United States , Section 1.1 of Mexico's Reference Paper provides for the
maintenance of appropriate measures to prevent majo r suppliers from engaging in or continuing anti-
competitive practices. 463 The United States recalls that those appropriate measures are intended to
prevent anti-competitive conduct by suppliers who "a lone or together" are a major supplier. The
United Sates submits that the "or together" language in Section 1.1 indicates that the negotiators
attached relevance to horizontal coordination be tween suppliers. The United States also points out
that, although this phrase has dire ct relevance to the definition of "major supplier," it also lends
context to the interpretation of the term "anti-competitive practices," which the United States contends
includes, at the very least, horizontal price-fixing agreements.464
4.258 According to Mexico, the obligation in Section 1.1 is to maintain "suitable or proper"
measures with the object or the intention of pr eventing Telmex from engaging in anti-competitive
practices.465 Mexico claims that Section 1.1 is drafted in such manner that it allows Mexico a large
measure of discretion in deciding what measures would be suitable or proper to accomplish the
intended objectives and cannot be interpreted to mean that Mexico is required to prevent all suppliers
from even engaging in or continuing anti-competitiv e practices, as suggested by the United States. 466
Mexico further submits that, Section 1.1 creates an obligation of means, not an obligation of result.467
(b) Extent of the requirement under Section 1.1
4.259 Mexico maintains that Section 1 of the Referen ce Paper does not require markets to be
opened to competition. According to Mexico, the ope ning of markets is a market access issue that is

461 Mexico refers to the preamble of the GATS. See Mexico's answer to question 17(a) of the Panel of
19 December 2002, paragraph 273 (" Are Mexican rules that impede price competition among Mexican
companies terminating incoming international calls consistent with the GATS and the Reference Paper?").
462 See Mexico's first written submission, paragraph 204.
463 The United States refers to Section 1.1 of Mexico's Schedule, Reference Paper, Sec 1,
GATS/SC/56/Supp.2, p.7, Spanish Version. See the United States' first written submission, paragraph 191.
464 See the United States' second written submission, paragraph 80.
465 See Mexico's first written submission, paragraph 201.
466 See Mexico's first written submission, paragraph 202.
467 See Mexico's first written submission, paragraph 203.

dealt with in Mexico's Schedule of Specific Commitments. Mexico submits that Section 1 requires
only that appropriate measures be maintained fo r the purpose of preventing major suppliers from
engaging in or continuing anti-competitive practices.
468
4.260 The United States submits that it is not arguing that Section 1 requires a guaranteed result
and agrees that it is the maintenance of appropriate measures that is required. 469 According to the
United States, what matters is that a Party maintain measures of some sort to prevent, not stimulate or
condone, anti-competitive marketplace conduct. 470 The United States further submits that it does not
claim that Section 1 of the Refe rence Paper contains language requiring a market to be opened to
competition or that the requirement of the Refere nce Paper can only be met by opening a market to
competition. According to the United States, Mexi co's obligation to open various markets derives
from the broad range of market access commitmen ts on basic telecommunications contained in its
Schedule.471
(i) "Appropriate measures"
aa) Whether the ILD Rules are "appropriate measures" under Section 1.1
4.261 The United States asserts that the FCC has identified Rule 13 as restricting competition,
limiting the ability to achieve cost-based cross-border interconnection rates. 472 According to the
United States, Rules 13 and 23 prevent Mexican and foreign suppliers from agreeing to alternative
rates that could exert competitive pressures on the rate exclusively negotiated by Telmex. 473 T h e
United States submits that Mexico's ILD Rules ar e the opposite of "appropriate" measures to prevent
anti-competitive practices, as required by Section 1.1 of the Reference Paper.474
4.262 Mexico contends that Section 1.1 does not require Me xico to ensure that Telmex does not act
in an anti-competitive manner. Mexico submits that it is obliged to put in place "appropriate
measures" aimed at preventing anti-competitive practices 475 and that it has maintained appropriate
measures for the purpose of preventing Telmex from engaging in anti-competitive practices. 476
According to Mexico, it must be recognized that the ILD Rules pursue legitimate policy development
objectives, and, in fact, constitute appropriate me asures to encourage and ensure competition among
domestic long-distance carriers. 477 In Mexico's view, the United States' claim under Section 1 fails,
even under its incorrect interpretation of the oblig ation in Section 1.1, since the ILD rules do not
require anti-competitive practices.478
4.263 Mexico submits that Rule 13 grants to the largest car rier of outgoing international traffic to a
particular country the right to negotiate the rate for terminating incoming international calls from that
country. Mexico indicates that the uniform se ttlement rate policy ensures that all Mexican
international service providers that terminate intern ational calls are paid the same negotiated rate.
Mexico further points out that the proportional re turn policy, ensures that each Mexican provider

468 See Mexico's answer to question 17(b) of the Panel of 19 December 2002 (" Does Section 1 of the
Reference Paper require that markets be opened to competition?").
469 See the United States' first oral statement, paragraph 36.
470 See the United States' second written submission, paragraph 83.
471 See the United States' answer to qu estion 17(b) of the Panel meeting of 19 December 2002. For
question No. 17(b), see footnote 468 of this Report.
472 See the United States' first written submission, paragraph 201.
473 See the United States' first written submission, paragraph 202.
474 See the United States' first written submission, paragraph 206.
475 See Mexico's first oral statement, paragraph 54.
476 See Mexico's first written submission, paragraph 213.
477 See Mexico's first oral statement, paragraph 54. See Mexico's first oral statement, paragraph 8.
478 See Mexico's first written submission, paragraph 213.

receives fees proportionate to the number of calls it actually handles. 479 According to Mexico, the
combination of these policies prevents a large carrier taking advantage of that authority by retaining
an unfair share of the revenue from incoming inte rnational traffic, or otherwise undercutting new
entrants.480
4.264 According to the United States , preventing price competition by new entrants to protect a
major supplier's high price cannot possibl y be understood as promoting competition. 481 The United
States submits that Mexico has offe red no evidence that the new entran t carriers at issue need to be
protected from a competitive market or from Telmex. In its view, their best prospects of building
market share and challenging Telmex’s dominance in fact lie in the freedom to compete with Telmex.
The United States argues that Mexico’s general co mpetition law and its competition authority, the
CFC, can address any attempts by Telmex, alone or in collusion with others, to engage in
exclusionary or predatory conduct, once the constraints of the ILD rules are lifted. 482 T h e United
States argues that although Mexico maintains a general competition statute, it also maintains measures
that require its telecommunications carriers to adhe re to a Telmex-led horizontal price-fixing cartel,
restrict competition for the termination of inte rnational switched telecommunications traffic and
otherwise restrict the supply of scheduled telecommunications services.
483 The United States claims
that these measures stifle market challengers and allow Telmex to maintain artificially high prices.484
4.265 The United States recalls Mexico's report to the OECD's Committee on Competition Law
and Policy in which Mexico stated that its own ILD Rules may not be the most favourable for
competition.485 The United States claims Telmex is exactly the sort of former official monopoly that
the Reference Paper meant to be restrained in order to allow a competitive basic telecom services
trade to develop. 486 The United States also claims that the OECD's Report on Regulatory Reform in
Mexico has recognized that Mexico's ILD Rul es prevent competition in the termination of
international traffic and prevents prices from decre asing for consumers, to the benefit of the Mexican
telecommunications operators. The United States further points out that the OECD Secretariat
concluded that an immediate price reduction on international calls would follow the elimination of the
Mexican system.
487
4.266 Mexico submits that its ILD Rules are not per se anti-competitive, they just form part of
Mexico's regulatory framework, which is aime d at increasing competition in its domestic
telecommunications market. 488 Mexico claims that Rule 13 of the ILD in combination with its
uniform settlement policy and the requirements of proportional return, serves to preserve competition

479 See Mexico's first written submission, paragraph 208.
480 See Mexico's first written submission, paragraph 209.
481 See the United States' first oral statement, paragraph 38.
482 See the United States' answer to question No. 25 of the Panel of 14 March 2003, paragraph 62
("Please explain whether the effect of Rule 13 of th e ILD Rules is pro-competitive or anti-competitive, and
support your argument with the appropriate illustrative figures and examples").
483 The United States refers to Mexico's ILD Rules. See the United States' first written submission,
paragraph 196. See the United States' answer to question 17(a) of the Panel of 19 December 2002, paragraph 86.
For question No. 17(a), see footnote 461 of this Report.
484 See the United States' first written submission, paragraph 200.
485 The United States refers to OECD, CLP, Working Party No.2 on Competition and Regulation,
"Competition and Regulation Issues in Telecommunications," submitted by Mexico (18 May 2001),
DAFFE/CLP/WP2/WD(2001)25, at 3-4. See the United States' first written submission, paragraph 199.
486 See the United States' first written submission, paragraph 199.
487 The United States refers to the OECD, Regulatory Reform in Mexico (1999). See the United States'
first written submission, paragraph 205.
488 See Mexico's first written submission, paragraph 206.

among domestic carriers and to promote invest ment in the domestic telecommunications
infrastructure, and cannot be evaluated in isolation.
489
4.267 The United States considers that Mexican ILD Rules, which contain an explicit restriction on
price competition together with the division of s upply among market participants, have the classic
features of a cartel. The United States says that Mexi co admits that the effect of its ILD Rules is to
prevent smaller carriers from undercutting Telmex on price. 490 The United States submits that ILD
Rule 13, in combination with other provisions of the ILD rules, affirmatively requires and promotes
per se anti-competitive conduct. According to the Unite d States, the effect of Mexico's rules is to
maintain rates for international interconnection th at are well in excess of cost, eliminating any
competitive incentive to lower inte rnational interconnection rates. The United States further points
out that the reduction of international interconnection rates, as have occurred, cannot be attributed to
this anti-competitive scheme.491
4.268 According to the United States , the impact of ILD Rule 13 is to prevent new entrant
international carriers in Mexico, some of which are affiliated with United States or other foreign
providers, from undercutting the above-cost prices char ged by Telmex, thereby attracting more traffic
for themselves. The United St ates claims that Mexico has acknowledged its concern about new
entrant carriers engaging in a "price war" with Telmex. 492 The United States submits that Mexico's
maintenance of ILD Rule 13, in other words, is not directed at preventing harm to competition but
rather is directed at preventing the natural results of competition. The United States further points out
that Mexico prohibits price competition in the ma rket for interconnection provided to United States
suppliers operating on a cross-border basis, and jus tifies this prohibition as necessary to prevent such
competition from reducing rates. In the United States' view, this can only be regarded as
anti-competitive.493
4.269 Mexico alleges that its ILD rules governing settleme nt rates and proportionate return are not
only appropriate, but necessary to prevent a major supplier from engaging in anti-competitive
practices in the Mexican domestic market for long- distance services, and to promote the development
of the nation's telecommunications infrastructure to meet fundamental goals such as broader consumer
access to service. 494 According to Mexico, the requirem ents for uniform settlement rates and
proportionate return in ILD Rule 13 are crucial: (i) to preserve competition in Mexico's domestic
market for long-distance services; and (ii) to prom ote infrastructure development by ensuring that
carriers' shares of the settlement rate revenue fro m incoming calls are proportionate to their success in

489 See Mexico's first written submission, paragraph 207. See Mexico's first oral statement, paragraph
53. See Mexico's answer to question No. 18 of the Panel of 19 December 2002, paragraph 284 (" Do you agree
with Mexico's claim that ILD Rule 13 promotes competition? If so, plea se explain how, giving illustrative
examples of desired and undesired outcomes "); and Mexico's answer to question No. 25 of the Panel of
14 March 2003, paragraph 132. For question No. 25, see footnote 482 of this Report.
490 The United States refers Mexico's first written submission, paragraph 79. See the United States' first
oral statement, paragraph 38.
491 See the United States' answer to question No. 18 of the Panel of 19 December 2002, paragraph 89.
For question No. 18, see footnote 489 of this Report.
492 The United States refers to Mexico first written submission, paragraph 79. See the United States'
answer to question No. 24 of the Panel of 14 March 2003 (" Are there examples of WTO Members other than
Mexico who maintain measures similar to ILD Rule 13 – granting one supplier the right to negotiate with
foreign suppliers a settlement rate that is applicable to all other domestic suppliers?").
493 See the United States' answer to question No. 24 of the Panel of 14 March 2003, paragraph 48. For
question No. 24, see footnote 492 of this Report.
494 Mexico refers to the preamble of the GATS. See Mexico's answer to question No. 17(a) of the
Panel of 19 December 2002, paragraph 273. For question No. 17(a), see footnote 461 of this Report.

penetrating the domestic market for outgoing internati onal calls. This is why, in Mexico's view, the
ILD rules must be evaluated in their totality.495
4.270 The United States submits that its concern that Telmex is engaging in anti-competitive
behaviour in its accounting rate ne gotiations with United States carriers is exacerbated by the fact
that, under Rule 13 of the regulations issued by Mexico's Secretariat of Communications and
Transport, Telmex negotiates accounting rates for all Mexican carriers. 496 As a result, the United
States contends, Telmex has de jure monopoly power in its negotiations with United States carriers.
The United States submits that its suppliers have no choice but to interconnect with the Mexican
public network at the border, since under Mexico's ILD Rule 3, only "international port operators"
may interconnect with the public networks of fo reign operators. The United States recalls that
Mexican law permits only Mexican facilities-based ope rators to hold a concession to supply long-
distance services.497 The United States further points out that Mexico leaves no choice but to pay the
Telmex-negotiated interconnection rates, to s uppliers from the United States willing to provide
scheduled services on a cross-border basis. The Un ited States claims that Mexico does not allow
"resale" which requires the use of private lease circ uits for the purpose of providing circuit switched
telecommunication traffic.498
4.271 Mexico argues that the United States' arguments are an attempt to force Mexico to permit
ISR.499 According to Mexico, its commitments were limited to allow international traffic only
"through the facilities of an enterprise that h as a concession granted by the Secretaría de
Comunicaciones y Transportes". Mexico argues that Section 1.1 cannot be construed to indirectly
grant carriers, from the United States, access to IS R when Mexico has an express limitation that
allows it to prohibit ISR.
500 According to Mexico, the end resu lt of the United States approach would
be to affect competitive long-distance carriers in Mexico and thereby cut down domestic market
competition with the argument of reducing costs for AT&T and Worldcom. It further argues that the
United States, incidentally, has not offered any in formation whatsoever on how elimination of the
ILD Rules would promote competition in the Unite d States, where WorldCom and AT&T together
control more than 90 per cent of United States traffic to Mexico. In its view, even with Rule 13, the
negotiating power of the duopsony (exclusive market power of two buyers on a market ) on the
United States side has been so dominant, and th e volume of traffic southwards so great, that
historically the settlement rate has been drastically reduced.501
4.272 In response to a question by the Panel, Mexico indicated that it is not aware of any other
WTO Member that has a de jure Rule 13. However, it argues, most Members, including the United
States, have a de facto Rule 13, since the carrier with the highest market share is the one that
negotiates the corresponding accounting rates (and theref ore the settlement rates) with its counterpart,
which also has the highest corresponding market share, and the remaining carriers on both sides
follow their leaders. Mexico explains that, in the United States, for example, the ISP establishes
uniform settlement rates and proportional return rule s that result in a de facto Rule 13 for all United
States carriers. However, if one of the economic effects of Rule 13 could be said to prove "anti-
competitive", most, if not all, WTO Members have regulatory measures producing that effect. As is
the case with ILD Rule 13, there are legitimate gr ounds for such measures and the measures should

495 See Mexico's answer to question No. 18 of the Pa nel of 19 December 2002. For question No. 18,
see footnote 489 of this Report.
496 See the United States' first written submission, paragraph 201.
497 The United States refers to Mexican law. See the United States' first written submission,
paragraph 204.
498 See the United States' first written submission, paragraph 203.
499 Mexico refers to the United States first written submission, paragraphs 203-204. See Mexico's first
written submission, paragraph 211.
500 See Mexico's first written submission, paragraph 212.
501 See Mexico's answer to question No. 25 of the Panel of 14 March 2003. For question No. 25, see
footnote 482 of this Report.

not be prohibited simply because one of the e ffects might be "anti-competitive" according to a
particular criterion or measure.
 502
4.273 The United States submits that Mexico finally admits that no other WTO Member maintains
a measure similar to Rule 13, and fails to iden tify any WTO Members, other than purportedly the
United States, which it claims "have a de facto Rule 13." The United States submits that Mexico then
repeats its false charges that United States rules and policies are similar to those of Mexico, and again
makes no attempt to rebut the evidence put fo rward by the United States showing that the
United States International Settlements Policy requires nondiscr iminatory rather than uniform rates,
that ISP non-discrimination and proportionate requirements apply only to arrangements with
dominant carriers that maintain high rates, a nd that all United States carriers negotiate rates
independently. 503
bb) Whether a proportionate return system could be an anti-competitive measure
4.274 Mexico claims that Rule 13 prevents internationa l anti-competitive activities. According to
Mexico, the United States fails to mention that the two other major Mexican long distance carriers are
affiliates of carriers from the United States and also fails to explain how allowing those carriers to
dictate rates to their Mexican affiliates would ser ve any anti-competitive purpose. Mexico submits
that its ILD Rules were adopted to mirror those of the United States, which otherwise would give
carriers from the United States an unbalanced negotiating advantage over Mexican carriers. 504
Mexico contends that its rules have prevente d large foreign carriers from pressuring their own
affiliated Mexican companies to agree to predat ory, uneconomic prices that would serve only the
interest of companies from the United States to th e detriment of the Mexican market, undermining the
opportunity to expand access to basic telecommuni cations services to those who now lack such
services, and who comprise two-thirds of Mexican households.505
4.275 The United States replies that its international regul atory scheme upon which Mexico's ILD
Rules were allegedly based is qualitatively different from Mexico's rules. According to the United
States, its rules are designed to prevent monopolistic abuses where th e potential for them still exists,
not to authorize and mandate such abuses like Mexico's ILD Rules. According to the United States its
uniform or nondiscriminatory settlement rate and proportionate return requi rements only apply to
foreign carriers with market power, whereas Mexico's rules apply to all foreign carriers regardless of
their market power. The United States claims that it s rules encourage all its carriers to negotiate cost-
oriented rates. The United States further points out that Me xico's rules prohibit all carriers, except
Telmex, from negotiating rates and thus encourage ar tificially high rates, the exact opposite of cost-
based.
506 The United States submits that it has not at any time given one carrier the exclusive
authority to negotiate international interconnection rates for itself and other competitive carriers.507
4.276 Mexico contends that, despite the United Stat es claim that it applies its International
Settlements Policy in a narrowly targeted fashion, it has waived the policy only for 15 countries, and

502 See Mexico's answer to question No. 24 of the Panel of 14 March 2003, paragraphs 128-129. For
question No. 24, see footnote 492 of this Report.
503 See the United States' comments on Mexico's answer to question No. 24 of the Panel of 14 March
2003, paragraph 67.
504 See Mexico's first written submission, paragraph 210. See Mexico's answer to question No. 17(a)
of the Panel of 19 December 2002, paragraph 256. For question No. 17(a), see footnote 461 of this Report.
505 See Mexico's answer to question No. 17(a) of the Panel of 19 Decem ber 2002, paragraph 256. For
question No. 17(a), see footnote 461 of this Report.
506 See the United States' first oral statement, paragraph 40.
507 See the United States' first oral statement, paragraph 41.

it deems virtually every major foreign carrier to have market power, including all local exchange
carriers in the countries to which the Policy applies.508
4.277 In the United States' view, the use of a proportionate return system is not an anti-competitive
practice where it is used solely to prevent the abuse of market power . The United States claims that it
applies proportionate return requirements only to cr oss border suppliers that both (1) possess market
power at the foreign end of the international route, and (2) maintain high settlement rates. 509
According to the United States, proportionate return is applied to dominant s uppliers with high rates
in order to prevent those dominant suppliers from using their control of return traffic to obtain
additional concessions from competi ng suppliers in the United States . The United States claims that,
except for dominant suppliers with high rates, cr oss-border suppliers into the United States are not
subject to proportionate return . The United States refers that all suppliers, from all countries, that do
not possess market power at the foreign end of the re levant international route, including all Mexican
suppliers except Telmex, are not subject to pr oportionate return, and may terminate unlimited
amounts of bound traffic in the Unite States with any supplier.510
4.278 The United States claims that it is pro-competitive rath er than anti-competitive to apply a
proportionate return system narrowly in order to prevent dominant suppliers with high settlement rates
from using their market power to receive increased above-cost subsidies. The United States points
out that Mexico has established a "proportional return" system under which Mexican carriers receive a
share of the above cost payments associated with inbound international traffic in relation to their
outbound international traffic. 511 In the Unites States' view, Me xico does not apply proportionate
return to prevent the abuse of market power, bu t just requires all suppliers to comply with
proportionate return, irrespective of whether they possess market power. The United States submits
that Mexico's proportionate return requirement ope rates "in combination with" the Telmex monopoly
on rate negotiations and the requirement for un iform rates to prevent one Mexican supplier
"undercutting" any other Mexican supplier, or otherwise competing to increase its share of traffic
received from cross-border suppliers from the United States.
512 The United States contends that
Mexico applies proportionate return broadly to all suppliers with the purpose of maintaining payment
of above-cost subsidies resulting from the abuse of market power by Telmex.513
4.279 The United States submits that Mexico has failed to explain why a Mexican carrier, even if
minority owned (but not controlled) by a United St ates. carrier, would ignore its responsibility to its
majority shareholders and agree to predatory, uneco nomic prices for international interconnection. In
its view, the impact of ILD Rule 13 is to prevent new entrant international carriers in Mexico, some of
which are affiliated with United States or other foreign providers, from undercutting the above-cost
prices charged by Telmex, thereby attracting more traffic for themselves. Mexico has acknowledged
its concern about new entrant carriers engaging in a "price war" with Telmex. Mexico’s maintenance

508 See Mexico's comments on the United States' answer to question No. 19(b) of the Panel of 14 March
2003, paragraph 41.
509 The United States refers to the International Settlement Policy Reform, IB Docket No. 02-234,
Notice of Proposed Rulemaking . See the United States' answer to question No. 19(d) of the Panel of
19 December 2002, paragraph 96 ("Does a proportional return system necessarily constitute an anti-competitive
practice?").
510 See the United States' answer to question No. 19(d ) of the Panel of 19 December 2002, paragraph
96. For question No. 19(d), see footnote 509 of this Report. See the United States' second written submission,
paragraph 95.
511 The United States refers to Mexico's ILD Rules 16 and 17. See the United States' first written
submission, paragraph 198.
512 The United States refers to paragraph 207- 209 of Mexico's first written submission. See the United
States' answer to question No. 19(d) of the Panel of 19 December 2002, paragraph 97. For question No. 19(d),
see footnote 509 of this Report.
513 See the United States' answer to question No. 19(d ) of the Panel of 19 December 2002, paragraph
97. For question No. 19(d), see footnote 509 of this Report.

of ILD Rule 13, in other words, is not directed at preventing harm to competition but rather is directed
at preventing the natural results of competition. Me xico prohibits price competition in the market for
interconnection provided to United States suppliers operating on a cros s-border basis, and justifies
this prohibition as necessary to prevent such co mpetition from reducing rates. This can only be
regarded as anti-competitive.
 514
4.280 In Mexico's view, the proportional return system is a pro-competitive practice, directed at
Mexico's legitimate policy objectives.515 According to Mexico, its ILD Rules promote competition in
the Mexican domestic market, while protecting Mexican carriers from being played off each other by
foreign carriers. Mexico submits that among ot her pro-competitive features, ILD Rules prevent
negotiation by one supplier of a settlement rate th at could undercut other suppliers because it would
be unprofitable for them (i.e., a predatory settlement rate) . Mexico points out that the United States
tries to dismiss the pro-competitive goals of the IL D rules as irrelevant, persisting in its claim that
Mexico's Reference Paper requires competition in the negotiation of accounting rates regardless of the
negative impact on competition that this would bring to the domestic market, including the impact on
international calling services to consumers.
516
(ii) "Major supplier"
4.281 The United States explains that Mexico's ILD Rule 13 provides that the carrier with the
greatest share of outgoing international calls in the last six months is given the exclusive authority to
negotiate the interconnection rates with foreign carriers. The United States points out that Telmex has
always been the carrier with the largest outgoing in ternational calls, holding the exclusive negotiating
authority. The United States further points out that ILD Rules require all Mexican long-distance basic
telecom suppliers to charge foreign suppliers only the Telmex-negotiated cross-border interconnection
rate, even if Telmex is not a party to that agreement.
517 The United States therefore contends that
Mexico's rules empower and require Telmex to ope rate a cartel dominated by itself to fix rates for
international interconnection and mandate that all Mexican carriers must adhere to those rates.518
4.282 The United States submits that Section 1.2 of the Reference Paper defines "major supplier"
as a "supplier which has the ability to materially aff ect the terms of participation (having regard to
price and supply) in the relevant market 519 for basic telecommunications services as a result of:
(a) control over essential facilities; or (b) use of its position in the market." 520 According to the
United States, Telmex satisfies this definition of "major supplier" because it has the ability, in the
Mexican market, to use its position to materially affect the prices charged and the supply of
services.
521 The United States further submits that Mexi can competition law, in determining whether
an economic agent has "substantial power in the rele vant market", considers "the possibility to fix
prices unilaterally or to restrict supply in the rele vant market, without competitive agents being able,
presently or potentially to offset such power", a nd other factors including "existence of entry
barriers", existence and power of … competitors", and possibility of access … for sources of inputs. 522

514 See the United States' answer to question No. 25 of the Panel of 14 March 2003, paragraphs 63-64.
For question No. 25, see footnote 482 of this Report.
515 See Mexico's answer to question No. 19(d) of th e Panel meeting of 19 December 2002. For
question No. 19(d), see footnote 509 of this Report.
516 See Mexico's second oral statement, paragraph 92.
517 The United States refers to Mexico's ILD Rules 13 and 23. See the United States' first written
submission, paragraph 197.
518 See the United States' first written submission, paragraph 190.
519 As regards the parties' argumentation on the "relevant market", see also Section IV.A.4(a).
520 See the United States' first written submission, paragraph 68.
521 See the United States' first written submission, paragraph 71.
522 The United States refers to the unofficial tran slation of the Mexican Federal Law of Economic
Competition, Chapter II, Article 13 (issue d December 24, 1992). Exhibit US-18. See the United States' first
written submission, paragraph 80.

The United States defines the relevant market as the termination of voice telephony, facsimile and
circuit-switched data transmission services supplied on a cross-border ( i.e., international) basis from
the United States into Mexico, which, in its view , is demonstrated by well-accepted principles of
market analysis which derive from competition law. 523 The United States recalls that Mexican
competition law provides that in order to determin e a relevant market, it is necessary to evaluate
"[t]he possibilities of substituting the goods or services in question, with others of domestic or foreign
origin, considering technological possibilities, and th e extent to which substitutes are available to
consumers and the time required for such substitution".524
4.283 Mexico argues that the United States has not demons trated that the interconnection at issue
concerns a "major supplier" 525 and has not presented a prima facie case that Telmex is a "major
supplier" within the meaning of the Reference Paper. 526 In Mexico's view, the United States'
analysis527 in which it sets out its argument that Telmex is a "major supplier" is flawed. 528 I n t h i s
regard, Mexico submits that the United States has failed to clearly define the services at issue and how
they are supplied. 529 It further contends that, even if assuming that the services at issue are the
transportation and transmission of telecommunications signals and that the mode of supply at issue is
mode 1 (cross-border), the United States has failed to explain how the "relevant market" it defines is
relevant to the cross-border supply of such services.
4.284 As regards the United States' definition of "r elevant market" as "the termination of voice
telephony, facsimile and circuit-sw itched data transmission services", Mexico submits that
"termination services", to the extent that they are provided by a carrier in a WTO Member, are
provided on a mode 3 (commercial presence) basis and not on a cross-border basis. Mexico claims
that the United States' analysis confuses two dis tinct modes of supply, cross-border and commercial
presence. Mexico further claims that the United St ates relies on a relevant market resolution by the
Mexican competition authority that is under review by Mexican courts precisely because the data it
was based upon. 530 Mexico also argues that, assuming that defining the relevant market as
"termination services" is relevant, it is unclear wh ether a carrier in Mexico, such as Telmex, is
providing "termination services" in the light of th e technical distinction between the traditional
accounting rate procedure and a termination regime. It further argues that, even if a carrier in Mexico
does provide termination services for foreign carriers wishing to terminate calls within Mexico,
"termination services" and how to schedule those services was a specific topic of discussion during
the negotiations on basic telecommunications. There was no agreement on these services and, even if
there was, Mexico has not inscribed in its Schedul e any specific commitments with respect to these
services, for example, by using the approach proposed by Australia during the negotiations.
531
4.285 The United States responds that Mexico's assertion that termination services are not
interconnection is refuted by the plain language in Section 2.1 of Mexico's Reference Paper definition
of "interconnection". Additionally, the United States submits that the European Commission has
described call termination as "the most basic interconnection service provided" and that in its

523 See the United States' first written submission, paragraph 73.
524 The United States refers to the unofficial tran slation of the Mexican Federal Law of Economic
Competition, Chapter II, Article 13 (issue d December 24, 1992). Exhibit US-18. See the United States' first
written submission, paragraph 74.
525 See Mexico's second oral statement, paragraph 68.
526 See Mexico's second oral statement, paragraph 74.
527 Mexico refers to paragraphs 68-99 of the United States' first written submission.
528 See Mexico's second oral statement, paragraph 69.
529 See Mexico's second oral statement, paragraph 70.
530 See Mexico's second oral statement, paragraph 71.
531 See Mexico's second oral statement, paragraphs 72-73.

submissions during the negotiations, Australia stated that termination of international traffic is
interconnection, and there is no indication that any other Member objected to this characterization.
532
4.286 Mexico submits that, basically, Mexico and the United States differ on what constitutes the
relevant market in which competition must be prom oted and protected. Mexican policy, as shown by
the ILD Rules, is that domestic carriers should sh are in and split agreements for incoming calls in
terms of their success in securing a share on the dom estic market and generating outbound calls. The
United States sees it differently (apparently, solely fo r the purposes of its argument in this case), i.e.
the only "market" worth protecting is the one for term inating United States traffic to Mexico. Mexico
contends that the United States is acting as if new operators should compete to carry incoming
international traffic calls instead of competing for end-customers in Mexi co. According to the
criterion set by the United States, it argues, an operator who has made a minimal investment in
Mexican infrastructure should be allowed to do so on an unlimited basis, taking all the revenue for
international calls from the operators who have ma de such investments and have obtained successful
results in acquiring a share of the market. 533
4.287 The United States claims that Mexico is attempting to justify its anti-competitive ILD rules
by alleging that the United States "is acting as if new operators should compete in order to carry
incoming international traffic calls instead of comp eting for end-customers in Mexico." The United
States submits that Mexico misstates the United St ates position. In the view of the United States,
Mexico’s WTO obligations require it to allow new carriers to compete both to carry inbound
international calls and for customers in Mexico. Likewise, it argues, Mexico implies that it is wrong
for the United States to assert th at carriers that have made "minimal" investments in Mexican
infrastructure should be allowed to engage in "un limited" competition. The United States maintains
that a carrier’s ability to compete, either for inb ound international calls, Mexican customers or in any
other area, is limited only by the limitations, if any, in Mexico’s Schedule. Mexico cites no
requirement in its Schedule that links a supplier’s ability to compete for inbound international calls to
that supplier’s level of investment in Mexican fa cilities. Additionally, Mexico does not restrict
competition for inbound international traffic merely for those suppliers with an undefined level of
"minimal investment." Instead, Mexico's ILD ru les restrict competition for inbound international
traffic for all commercially present suppliers, irresp ective of their level of investment in Mexican
facilities. 534
(iii) "Anti-competitive practices"
aa) Definition of anti-competitive practices
4.288 The United States explains that apart from three illust rative practices included in Section 1,
the Reference Paper does not define the term "anti-competitive practices". The United States
considers that this term encompasses, at a mini mum, what are usually characterized as "abuses of
dominant position" and/or "monopolization" offences as well as "cartelization", which, according to
the United States, are common antitrust concepts gene rally included within the universe of business
practices usually found to be anti-competitive under national regulatory schemes and competition
laws and policies. The United States claims that Mexico's antitrust law generally prohibits behaviour
of this sort.535 The United States further indicates that the 1999 Report of the WTO Working Group

532 See the United States' comments on Mexico's answer to question No. 17 of the Panel of 14 March
2003, paragraph 59.
533 See Mexico's answer to question No. 25 of the Panel of 14 March 2003, paragraph 132. For
question No. 25, see footnote 482 of this Report.
534 See the United States' comments on Mexico's answer to question No. 25 of the Panel of 14 March
2003, paragraphs 68 and 69.
535 The United States refers to the WTO, Working Group on the Interaction between Trade and
Competition "The Fundamental Principles of Competition Policy " (7 June 1999), Exhibit US-42; "Overview of
Members' National Competition Legislation" (Rev. 2,4 July 2001); ABA Sec tion of Antitrust Law, Competition

on the Interaction Between Trade and Competition Policy describes the nature and consequences of
"horizontal" agreements which are likely to have a direct, negative impact on competition and to give
rise to the exercise of market power.536
4.289 Mexico indicates that a definition of "anti-competiti ve practices" is provided in Section 1.2,
which states that:
 "The anti-competitive practices referr ed to in the above paragraph shall
include in particular:
(a) Engaging in anti-competitive cross-subsidization;
(b) using information obtained from competitors with anti-competitive results;
and
(c) not making available to other service s suppliers on a timely basis technical
information about essential facilities and commercially relevant information
which are necessary for them to provide service." (emphasis added)
537
4.290 Mexico argues that the term "shall include" indi cates that the list is non-exhaustive and that
the addition of the words "in particular" demonstr ate a focus on certain types of activities – namely,
actions taken by private companies to gain an adva ntage over their competitors. Mexico claims that
carriers from the United States are not competing with Mexican carriers when they enter into bilateral
accounting rate arrangements since they do not offer service to Mexican customers. Mexico submits
that, even if the legal requirement that all Mexican carriers charge the same settlement rate somehow
could be construed as a "horizontal price fixing agreement" by private companies, such an agreement
would not be encompassed by Section 1 because all Mexican carriers would be participating in the
conspiracy and none would be harmed by it.
538
bb) Government intervention
4.291 According to the United States , the fact that anti-competitive conduct is compelled by the
government does not change the underlying nature of the conduct as anti-competitive. 539 In its view,
even if an activity engaged in by Mexico's ma jor supplier, Telmex, is immunised from domestic
enforcement action under Mexican law, or is in some sense the act of the Me xican State itself, that
does not alter the anti-competitive char acter of the activity at issue. The United States notes that it is
Mexico's failure to observe the obligations of Section 1 that is at issue in this dispute, not Telmex 's
failure to observe those obligations. According to the United States, if a WTO Member were able to
immunize itself from the obligation incumbent upon it under Section 1 to take measures to prevent
anti-competitive conduct by major suppliers by simp ly requiring anti-competitive conduct by major
suppliers, the entire purpose of Section 1 would be undermined. The United States says that such an

Laws Outside the United States I (2001) Chapter 1, Exhibit US-49; OECD "Recommendation of the Council
Concerning Effective Action against Hard Core Cartels (1998) "; Mexican Federal Law of Economic
Competition, Arts. 8 and 9, Exhibit US-18. See the United States' first written submission, paragraph 193. See
the United States' first oral statement, paragraph 34. See the United States' answer to question No. 17(a) of the
Panel of 19 December 2002, paragraph 86. " Are Mexican rules that impede price competition among Mexican
companies terminating incoming international calls consistent with the GATS and the Reference Paper? ". See
the United States' second written submission, paragraph 79.
536 See the United States' first written submission, paragraph 194.
537 See Mexico's answer to question No. 19(a) of the Panel of 19 December 2002, paragraph 287
("How do you define "anti-competitive practices" in the sense of Section 1.1 of the Reference Paper?").
538 See Mexico's answer to question No. 19(a) of the Panel of 19 Decem ber 2002, paragraph 288. For
question No. 19(a), see footnote 537 of this Report.
539 See the United States' first oral statement, paragraph 42.

interpretation of Section 1 would encourage Memb ers affirmatively to maintain measures requiring
anti-competitive conduct, rather than put in place measures to prevent anti-competitive conduct.
540
4.292 Mexico submits that the United States has failed to establish that Section 1 disciplines
regulatory "measures" of a WTO Member that have an anti-competitive effect. 541 In Mexico's view,
"anti-competitive practices" refer to the practic es of a major supplier and not to governmental
measures that may have an anti-competitive effect. 542 Mexico recognizes that all regulation of
economic activity, by definition, interferes with the operation of a freely competitive marketplace,
including rate-setting by governmental authorities, but claims that such government regulation itself is
not typically understood to be capable of violating competition rules. 543 According to Mexico, if the
United States' interpretation is to be accepted, all government regulatory measures in the
telecommunications sector that restrain the actions of a major supplier in a manner that interferes with
the operation of a freely competitive marketplace would be prohibited . Mexico claims that this is not
what was intended by Section 1 of its Reference Pape r. Mexico submits that there is no basis in the
text of Section 1 to judge the legitimacy of a WTO Member's internal regulatory policies in
circumstances where no multilaterally agreed-upon benc hmarks exist. Mexico further contends that
in order to justify its own anti-competitive meas ures, the United States e ssentially distinguishes
between anti-competitive measures that, in its view , have legitimate policy objectives and those that,
in its view, do not. In Mexico's view, if the dr afters of Section 1 meant to include government
regulatory measures, surely they would have incl uded text to take into account such important
distinctions and to provide objective benchmarks for assessing the legitimacy of such measures.544

540 See the United States' answer to question No . 17(c) of the Panel of 19 December 2002 ("Can the
fixing of a uniform price be anti-competitive practice in violation of the obligation under the Reference Paper if
uniform prices are required by law? "). See the United States' answer to questi on No. 23(a) of the Panel of 14
March 2003, paragraph 31. For question No. 23(a), see footnote 545 of this Report.
541 See Mexico's second oral statement, paragraph 10.
542 See Mexico's answer to question No . 19(a) of the Panel of 19 Decem ber 2002, paragraph 287. For
question No. 19(a), see footnote 537 of this Report.
543 See Mexico's second written submission, paragraph 128.
544 See Mexico's second oral statement, paragraph 10.

cc) Price fixing as an anti-competitive practice
4.293 Answering a Panel's question 545, the United States submits that, if price-fixing is anti-
competitive, then it is anti-competitive even if require d by law. According to the United States, even
if an activity engaged in by Mexico's majo r supplier, Telmex, is immunized from domestic
enforcement action under Mexican law, or is in some sense the act of the Me xican state itself, that
does not alter the anti-competitive character of the activity at issue. 546 The United States further
submits that Telmex's ability to negotiate uniform settlement rates is per se anti-competitive. In its
view, this is, by definition, a horizontal price-fixing cartel that fits within virtually any definition of
anti-competitive practice. The United States notes that horizontal price fixing is condemned both as a
per se violation of its own law under Section 1 of the Sherman Act and as an absolute monopolistic
practice under Article 9 of Mexico's FLEC. 547 The United States affirms that it is the setting of the
rate by a monopolist (since Telmex is given the exclus ive authority, it is acting as a monopolist in this
context) and the use of this rate by all other supp liers (horizontal price-fixing) that comprise the anti-
competitive practices that form the basis for the Un ited States' claim under Section 1 of the Reference
Paper. It submits that the fact that the govern ment requires the anti-competitive practice does not
change the nature of the practice as anti-competitive.548
4.294 Also in answer to a Panel's question, Mexico submits that the fixing of a uniform price cannot
be an anti-competitive practice in violation of the obligations under the Reference Paper if uniform
prices are required by law. 549 Mexico further submits that Telmex's ability to negotiate uniform
settlement rates is not per se anti-competitive since Mexican law does not give Telmex the authority
to negotiate the rate. According to Mexico, Rule 13 provides the carrier having the greatest share of
outgoing traffic to a particular country is authorized to negotiate the rate. Mexico claims that new
entrant carriers have been gaining important shares of outgoing traffic on certain routes, and therefore
may soon have the right to negotiate the rates for those routes.550
4.295 Mexico further submits that, in the economic sense, monopolies may be "anti-competitive".
However, it cannot be said that a domestic regulator y regime that establishes and permits a monopoly
or small number of exclusive service suppliers to ex ist is equivalent to requiring an "anti-competitive
practice" within the meaning of Section 1 of Mexi co's Reference Paper. GATS Article VIII explicitly
contemplates that WTO Members can maintain monopolies and exclusive service suppliers.
Moreover, many WTO Members who have inscrib ed a Reference Paper maintain monopolies or
exclusive service suppliers under thei r domestic law. Section 1 of Me xico's Reference Paper and the

545 Namely, question No. 17(c) of the Panel of 19 December 2002. For question No. 17(c), see
footnote 540 of this Report, and question No. 23(a) of the Panel of 14 March 2003 (" Explain why the Mexican
legal requirement that all Mexican su ppliers must apply the settlement rate negotiated by the major supplier,
amounts to requiring an 'anti-competitive practice' in violation of Section 1.1 even if Mexican suppliers do not
collude and do not distort competition voluntarily.").
546 See the United States' answer to question No. 17(c ) of the Panel of 19 December 2002, paragraph
88. For question No. 17(c), see footnote 540 of this Report. See the United States' answer to question No. 23(a)
of the Panel of 14 March 2003, paragraph 31. For question No. 23(a), see footnote 545 of this Report.
547 See the United States' answer to question No. 19(c) of the Panel of 19 December 2002, paragraph 95
("Do you consider that Telmex's ability to negotiate uniform settlement rates is per se anti-competitive?").
548 See the United States' answer to question No. 23(a) of the Panel of 14 March 2003, paragraph 31.
For question No. 23(a), see footnote 545 of this Report.
549 See Mexico's answer to question No 17(c) of the Panel of 19 December 2002, paragraph 283. For
question No. 17(c), see footnote 540 of this Report. See also Mexico's comments on the United States' answer to
question No. 23(a) of the Panel of 14 March 2003, paragraphs 48-51.
550 See Mexico's answer to question No. 19(c) of the Panel of 19 Decem ber 2002, paragraph 292. For
question No. 19(c), see footnote 547 of this Report. See also Mexico's comments on the United States' answer
to question No. 23(a) of the Panel of 14 March 2003, paragraph 52.

equivalent provisions in the Reference Papers of other WTO Members cannot be interpreted to nullify
a right that exists under GATS Article VIII. Mexico submits that the obligations in the Reference
Paper were negotiated specifically to prevent majo r carriers in regulated markets from abusing their
market positions by engaging in anti-competitive "priva te" actions. With respect to "the use of the
[Telmex] rate by all other suppliers", such acti on is not the result of anti-competitive practices of a
major supplier – the focus of Section 1 of Mexico's Reference Paper – rather, it is the result of a
legitimate government regulatory scheme.
551
4.296 The United States responds that there is no basis for Mexico's assertion that GATS
Article VIII contemplates Mexico's restrictions on competition through the ILD rules, and therefore
somehow precludes any challenge to such measu res under Article 1 of the Reference Paper. 552
Article VIII only applies to monopolists and "exclu sive service suppliers, where a Member, formally
or in effect, (a) authorizes or establishes a small number of suppliers and (b ) substantially prevents
competition among those suppliers in its territory." Mexico has placed no limitation on the number of
concessionaires, either formally or in effect, and Article VIII therefore does not apply. Mexico's
Schedule contains no Article XVI:2(a) limitation on the number of service suppliers, and as of
September 2002 Mexico had gran ted no fewer than 27 concessions for domestic long-distance
service, 11 of which are authorized to operate international ports.
553
(c) Relationship between Section 1.1 and Section 2.2(b) of the Reference Paper
4.297 The United States submits that a Member that scheduled the Reference Paper as an
additional commitment is required by Section 1 of the Reference Paper to maintain appropriate
measures to prevent its major supp lier from engaging in or contin uing anti-competitive practices, and
is also obliged under Section 2.2(b) to ensure in terconnection with that major suppliers on reasonable
terms, conditions and rates. The United States c onsiders that depending on the facts at issue, a
conduct could be both anti-competitive and restrict the supply of basic telecommunication services,
leading to a violation of both Sections 1 and 2.2(b). 554 T h e United States also submits that the
purpose of Section 1 of the Reference Paper is to support the parallel goals of de-monopolization and
market access by protecting and fostering competition among basic telecom competitors, and that it
complements the more specific interconnection rules for major suppliers found in Section 2.555
4.298 Mexico submits that Sections 1 and 2 of Mexi co's Reference paper do not cover the same
subject matter. In Mexico's view, independent meaning must be given to each provision and
overlapping interpretations must be avoided.556 According to Mexico, what is "not reasonable" under
Section 2.2 and what is "anti-competitive" under Sec tion 1.1 are measured against different standards,
there being no relationship between the two.557

551 See Mexico's comments on the United States' answer to question No. 23(a) of the Panel of 14 March
2003, paragraphs 50-51.
552 See Mexico's second oral statement, paragraphs 100-01.
553 See the United States' comments on Mexico's answer to question No. 25 of the Panel of 14 March
2003, footnote 82 to paragraph 70.
554 See the United States' answer to question No. 19(b ) of the Panel of 19 December 2002, paragraph
94, "How do you view the relationship between an 'anti-competitive practice' in the sense of Section 1.1 and a
practice that is not "reasonable" in the sense of Section 2.2(b)?".
555 See the United States' first written submission, paragraph 192.
556 See Mexico's answer to question No . 19(b) of the Panel of 19 Decem ber 2002, paragraph 290. For
question No. 19(b), see footnote 554 of this Report.
557 See Mexico's answer to question No . 19(b) of the Panel of 19 Decem ber 2002, paragraph 291. For
question No. 19(b), see footnote 554 of this Report.

(d) Relationship between Sections 1.1 and 3 of Mexico's Reference Paper
4.299 In response to question No. 23(b) of the Panel meeting of 13 March 2003 558, Mexico explains
that there is no legal relationship between Sections 1.1 and 3 of its Referenc e Paper. According to
Mexico, those Sections relate to different subj ects and lay down different obligations. Mexico
submits that Section 3 has not been the subject of th is dispute. In Mexico's view, Section 1.1 does not
regulate measures by a Member with a side-effect that may prove anti-competitive from a particular
standpoint. Mexico contends that Section 3 rela tes to the maintenance of a type of specific
governmental measure for the universal service obligation, which includes laying down obligations on
domestic carriers to provide unive rsal service coverage over a Member's territory and that such
measure be, inter alia, administered in a "transparent, non- discriminatory and competitively neutral"
manner.
4.300 Mexico submits that, for the purposes of this disput e, it is notable that when a governmental
measure must be regulated in accordance with Mexi co's Reference Paper, it is done explicitly as in
Section 3, so that it identifies the exact government al measure in question (i.e. a "universal service"
measure and not a general governmental regulator y measure, which would be the outcome of the
United States interpretation of Section 1.1 of Mexi co's Reference Paper) and the specific disciplines
that apply (i.e., "competitively ne utral", contrary to "anti-competitive practices", which are more
subjective and general). According to Mexico, th is confirms its position that Section 1.1 of its
Reference Paper does not regulate a Member's measures, but the "practices" of a "major supplier".559
4.301 The United States replies noting that Mexico's ILD Rules are not "legislative
requirement[s]," but regulatory requirements imposed by Cofetel. According to the United States,
Mexico's ILD Rules 13 and 23 implement per se an ti-competitive practices under Section 1.1 of the
Reference Paper, which are not mitigated by any application of Section 3.560
4.302 The United States submits that Section 3 allows a Member to "define the kind of universal
service obligation it wishes to maintain". The Unite d States claims it is aware of no universal service
obligation implemented or defined by the Mexican authorities, and no such obligation is defined by
the ILD rules. The United States further submits th at Mexico has not even identified or defined a
universal service obligation that would, were it identified or defined, "not be regarded as
anti-competitive per se," pursuant to Section 3. In the United States view, since Mexico has not
identified or defined a universal service obligation, it is not entitled to the presumption against per-se
anti-competitiveness included in Section 3.561
4.303 The United States further submits that even if Mexi co had defined a universal service
obligation and Section 3 were to apply, Mexico would not be entitled to this presumption, since its
ILD rules also breach the additional requirements th at the defined obligation be "administered in a
transparent, non-discriminatory and competitively neutral manner and … not [be] more burdensome

558 See Mexico's answer to question No. 23(b) of the Panel of 14 March 2003, paragraphs 124-126.
"Please also elaborate on the relationship between Section 1.1 and Section 3 of the Reference Paper, i.e. under
what conditions can a legislative requirement that all domestic suppliers must apply the settlement rate
negotiated by the major domestic supplier be considered as a 'non-discriminatory and competitively neutral '
universal service obligation that is not 'regarded as anti-competitive per se ' in the sense of Section 3 of the
Reference Paper."
559 See Mexico's answer to question No. 23(b) of the Panel of 14 March 2003, paragraph 127. For
question No. 23(b), see footnote 558 of this Report.
560 See the United States' answer to question No. 23(b) of the Panel of 14 March 2003, paragraphs 49
and 50. For question No. 23(b), see footnote 558 of this Report.
561 See the United States' answer to question No. 23(b) of the Panel of 14 March 2003, paragraph 51.
For question No. 23(b), see footnote 558 of this Report.

than necessary for the kind of universal service defined by the Member."
562 Specifically, the United
States argues that, at present, any alleged universal service obligations levied against foreign suppliers
are apparently hidden in interconn ection rates paid to Telmex. There is no transparency when
universal service obligations are hidden in interconn ection rates paid to the major supplier. The
United States submits that a transparent process mu st, at a minimum, identify the level of charges
associated with the universal service obligati on. The ILD rules also fail to provide the
"non-discriminatory and competitively neutral" ad ministration of the defined universal service
obligation that is required by S ection 3. Because the ILD rules only address interconnection rates
paid by cross-border suppliers, they ensure that the entire burden of any universal service obligation
implemented in this way falls upon cross-border supp liers. Finally, the United States notes that the
ILD rules fail to identify the monetary level of the obligation and ensure that the charges are
commensurate with that obligation. Because Mexico has not defined a universal service obligation, it
cannot determine what level of charges would be "n ecessary" to meet that obligation. Similarly,
levying charges allegedly associated with that obl igation are by definition more burdensome than
necessary.563
C. SECTION 5 OF THE GATS ANNEX ON TELECOMMUNICATIONS
4.304 The United States claims that Mexico has failed to honour its commitments under the GATS
Annex on Telecommunications. According to the United States, the Annex requires Mexico to ensure
that service suppliers of other Members can ac cess and use public tel ecommunications transport
networks and services on reasonable and non-discri minatory terms and conditions to provide a
scheduled service.564 In the United States' view, Mexico has not fulfilled its obligations under either
Section 5(a) or 5(b) of the Annex for the provision of the scheduled services.565
4.305 Mexico submits that the scheduled services - i.e. the market-access commitments - that the
United States alleges that Mexico has made and which are the basis for the claim under the Annex do
not exist. In Mexico's view, the United States is incorrectly arguing that the Annex confers rights to
supply basic telecommunications services when the Annex applies only to access to and use of those
services. Therefore, Mexico submits that the provisions of the Annex cited by the United States
566 do
not apply to the facts of this dispute. Mexico fu rther submits that even if Sections 5(a) and 5(b)
applied, the United States has failed to present a prima facie case that these provisions have been
violated. According to Mexico, the measures the United States is challenging are consistent with
paragraphs 5(e), 5(f) and 5(g) of the Annex.567
1. Application of the Annex
4.306 The United States submits that the GATS Annex on Telecommunications addresses
telecommunications as a means of transporting sche duled services. In its view, the Annex requires
Members to ensure that users of telecommunications (e.g., service suppliers) have access to, or use of,
telecommunications – free from obstacles – to deliver their services. 568 It further submits that the
Annex grew out of a recognition that telecommuni cations represent the primary delivery mechanism
for many services, particularly those offered on a cross-border basis. Without telecommunications, it

562 See the United States' answer to question No. 23(b) of the Panel of 14 March 2003, paragraph 52.
For question No. 23(b), see footnote 558 of this Report. See also the United States' comments on Mexico's
answer to question No. 23(b) of the Panel of 14 March 2003, paragraphs 62-66.
563 See the United States' answer to question No. 23(b) of the Panel of 14 March 2003, paragraphs 53-
55. For question No. 23(b), see footnote 558 of this Report.
564 See the United States' first written submission, paragraph 32.
565 See the United States' first written submission, paragraph 33.
566 Mexico refers to Sections 5(a) and (b) of the Annex on Telecommunications. See Mexico's first
written submission, paragraph 220.
567 See Mexico's first written submission, paragraph 220.
568 See the United States' first written submission, paragraph 207.

would be impossible for many service suppliers to deliver their services. 569 The United States claims
that access to telecommunications as a transpor t mechanism depends on those entities which control
telecommunications networks and offer telecomm unications services. Such entities – principally
monopolies or former monopoly providers – have re presented the principal obstacle to access and use
of telecommunications as a transport mechanism. 570 Like the Reference Paper, the Annex represents
an effort to prevent dominant telecom provide rs from using their control over public telecom
networks and services to undermine the supply of a scheduled service and to ensure that dominant
telecom suppliers cannot nullify the services commitments that their home country undertakes.571
4.307 Mexico contends that enhanced services and supp liers of services in sectors other than the
telecommunications sector rely on "access to a nd use of" the existing public telecommunication
network. According to Mexico, the Annex establishes general obligations to ensure that such services
have access to and use of the public networ k on non-discriminatory and reasonable terms and
conditions. Mexico claims that the Annex does not confer any right to supply telecommunications
transport networks and services (i.e. basic telecommunications services) other than as provided in a
Member's Schedule. It further submits that market access rights for the supply of basic
telecommunication services were the subject of th e later negotiations that led to the Fourth
Protocol.
572
4.308 The United States maintains that the Annex requires each WTO Member to ensure that
foreign service suppliers have reasonable and non-discriminatory access to and use of public
telecommunications networks and services to supply a scheduled service. According to Section 5 of
the Annex:
"(a) Each Member shall ensure that any service supplier of any other Member is
accorded access to and use of public te lecommunications transport networks
and service on reasonable and non-discr iminatory terms and conditions for
the supply of a service included in its Schedule. This obligation shall be
applied, inter alia, through paragraphs (b) through (f) [footnote omitted].
(b) Each Member shall ensure that service suppliers of any other Member have
access to and use of any public teleco mmunications transport network or
service offered within or across the border of that Member, including private
leased circuits."
573
4.309 The United States submits that for each service inscrib ed in its Schedule, including basic
telecom services, each WTO Member must ensure th at foreign service suppliers may access or use
public telecommunications networks and services – whether through interconnection or any other
form of access and use – to transport their service. 574 According to the United States the scope of this
obligation is wide and extends to any public telecom network and service offered within or across the
border of that Member. The definition of such networks and services is br oad enough to encompass
all types of public networks and services that a telecom provider may offer. 575
4.310 Mexico submits that the focus of the Annex on Telecommunications services is as a transport
means for other economic activities, and not the supply of basic telecommunications services. 576 The
term "access to and use of" is not defined in the A nnex, but paragraphs (b) and (c) of Section 3 of the

569 See the United States' first written submission, paragraph 208.
570 See the United States' first written submission, paragraph 209.
571 See the United States' first written submission, paragraph 210.
572 See Mexico's first written submission, paragraph 216.
573 See the United States' first written submission, paragraph 211.
574 Ibid.
575 See the United States' first written submission, paragraph 212.
576 See Mexico's first written submission, paragraph 221.

Annex define the terms "public telecommunications transport service"
577 and public
telecommunications transport networks"578. In Mexico's view, the Annex applies to access to and use
of a Member's available basic telecommunications services. The services for which "access to and
use of" is provided are something othe r than basic telecommunication services. 579 Mexico contends
that the United States' claims under the Annex must be assessed within the context of these
definitions. Mexico points out that the United States is arguing that the Annex grants to its suppliers
of basic telecommunications services the right to "supply" basic telecommunications services cross-
border into Mexico by interconnecting with the pub lic network or by interconnecting with private
leased or owned circuits in Mexico. It further point s out that the United States is also arguing that the
Annex grants foreign companies the right to own 100 per cent of operators established in Mexico who
will be entitled to supply such services cross-border into the United States.580
4.311 The United States claims that Mexican law prevents foreign suppliers from owning public
telecom networks and services in Mexico, leaving them no choice but to rely on Mexican operators to
provide the access to and use of the public networks and services they need to deliver scheduled basic
telecom services from abroad into Mexico. Because of Telmex's monopoly over the negotiation of
settlement rates and the requirement that all other Me xican carriers must charge the rate negotiated by
Telmex, all Mexican operators are require d to charge rates that exceed cost. 581 According to the
United States, the entire purpose of Section 5 of th e Annex is to require WTO Members to prevent
this very form of behavior. The United States clai ms that Members drafted the Annex to ensure that
their suppliers of public networks and services – whether they are monopolies, major suppliers, or
competitive suppliers – do not hold access to, and use of, their networks and services hostage to
monopoly rates, or any other form of unfair or anti-competitive conduct that would undermine the
supply of scheduled services.582
4.312 In Mexico's view, the purpose of the Annex is not to allow facilities-based and non-facilities-
based basic telecommunications suppliers to supply their services cross-border, but to provide
supplementary or additional obligations to allo w "access to" and "use of" Mexico's existing public
telecommunications transport network and services
583. It submits that the terms "access to" and "use
of" have different meanings from the term "supply", which is frequently used in the text of the GATS.
The term "supply" is defined as meaning "provide or furnish a thing needed". Mexico claims that the
Annex applies only to measures which affect "access to or use of public telecommunications transport
networks or services, and it does not apply to measures that affect "supply" of telecommunications
transport services cross-border.
584 According to Mexico, the United States is confusing "market
access" with "access to and use of" existing public telecommunications transport networks operated
by domestic concessionaires. Mexico contends that "market access" is dealt with in the market-access
commitments made under Article XVI of the GATS in scribed in Mexico's Schedule, whereas "access
to and use of" public telecommunications networks is dealt with in the Annex.
585

577 "Public telecommunications transport service" means any telecommunica tions transport service
required, explicitly or in effect, by a Member to be offe red to the public generally. Such services may include,
inter alia , telegraph, telephone, telex, and data transmission typically involving the real-time transmission of
customer-supplied information between two or more points without any end to end change in the form or
content of the customer's information. See Mexico's first written submission, paragraph 223.
578 "Public telecommunication transport network" m eans the public telecommunications infrastructure
which permits telecommunications between and among defined network termination points. See Mexico's first
written submission, paragraph 220.
579 See Mexico's first written submission, paragraph 224.
580 See Mexico's first written submission, paragraph 225.
581 See the United States' first written submission, paragraph 243.
582 See the United States' first written submission, paragraph 244.
583 See Mexico's first written submission, paragraph 226.
584 See Mexico's first written submission, paragraph 227.
585 See Mexico's first written submission, paragraph 228.

4.313 In Mexico's view, the Annex was not drafted to pr ovide "market access" to foreign suppliers
of basic telecommunications services 586. According to Mexico, paragraph (c) of Section 2 of the
Annex provides important exemptions from the application of the Annex:
"Nothing in this Annex shall be construed:
(i) to require a Member to authorize a service supplier of any other Member to
establish, construct, acquire, lease, operate, or supply telecommunications
transport networks or services, other than as provided in its Schedule; or
(ii) to require a Member (or to require a Member to oblige service suppliers under
its jurisdiction) to establish, constr uct, acquire, lease, operate or supply
telecommunications transport networks or services not offered to the public
generally."587
4.314 According to Mexico, the services at issue in this dispute are "telecommunications transport
… services", governed by Mexico's Schedule. In Mexi co's view, pursuant to Section 2(c)(i), nothing
in the Annex can be construed to require Mexico to authorize service suppliers from the United States
to supply these services beyond the terms and conditions inscribed in its schedule. 588 T h e
United States submits that Section 1 of the Annex states that telecommunications has a "dual role as
a distinct sector of economic activity and as th e underlying transport means for other economic
activities." It further submits that Section 2(a) states that the Annex applies to "all measures"
affecting access to and use of public telecommuni cations transport networks and services, which
would include measures regulating telecommunications "as a distinct sector of economic activity . . ."
The United States also recalls Section 5(a), which imposes obligations "for the supply of a service
included in [a Member's] Schedule," without imposing any limits on the type of service that would be
relevant, including basic telecommunications services scheduled by Mexico.
589
4.315 Mexico maintains that the fact that Section 1 (entitled "Objectives") of the Annex on
Telecommunications refers to a "dual" role of the telecommunications services sector does not mean
that the Annex covers both aspects of this "dual" ro le. In Mexico's view, Section 1 simply confirms
that the Annex is based on the recognition that , beyond constituting a service sector of their own,
telecommunications services and networks are essen tial tools for other economic activities, such as
banking, insurance, etc. According to Mexico th e fact that these other activities rely heavily on
telecommunications services as an underl ying transport means that is the raison d'être of the Annex,
supporting Mexico's view that the Annex is aimed at addressing the second aspect of the dual role.
The first aspect – the supply of basic telecommuni cations services – was dealt with under the basic
telecommunications negotiations that led to the Fourth Protocol to the GATS in 1997.
590 Although
Section 1 refers to a "dual" role of the telecomm unications services sector, it also stipulates that the
Annex was agreed to "with the objective of elabor ating upon the provisions of the Agreement with
respect to measures affec ting access to and use of public telecommunications transport networks and
services".591 The reference in Section 1 of the Annex to "measures affecting access to and use of"
PTTNS must be contrasted with the scope of the provisions of the GATS Annex on Financial

586 See Mexico's first written submission, paragraph 229.
587 See Mexico's first written submission, paragraph 230.
588 See Mexico's first written submission, paragraph 231.
589 See the United States' answer to question No. 21 of the Pa nel meeting of 19 December 2002,
paragraph 99, ("Can Mexico reconcile its argument that the 'Annex only address telecommunications transport
services as the underlying transport means for other economic activities' with the reference, in the GATS Annex,
to a 'dual' role of the telecommunications service sector?").
590 See Mexico's answer to question No. 21 of the Panel meeting of 19 December 2002, paragraph 299.
For question No. 21, see footnote 589 of this Report; see also Mexico's first written submission, paragraph 214.
591 See Mexico's answer to question No. 21 of the Panel meeting of 19 December 2002, paragraph 300.
For question No. 21, see footnote 589 of this Report.

Services. Section 1(a) of that Annex states "[t]hi s Annex applies to measures affecting the supply of
financial services. Reference to the supply of a fina ncial service shall mean the supply of a service as
defined in paragraph 2 of Article I of the Agre ement". Thus, where the negotiators of the GATS
intended that an annex apply to the "supply" of a service within the broader meaning of the GATS,
they did so explicitly.
592
4.316 According to Mexico the Annex distinguishes between access to and use of public
telecommunications transport networks and services, which is relevant to telecommunications
services as an underlying transport mean s for other economic activities, and the supply of such
services, which is relevant to trade in telecommuni cations services as a distinct sector of economic
activity.593 In Mexico's view, Section 2 of the Annex ma kes clear that the Annex is devoted solely to
the guarantees of access and use. It explains that Pa ragraph (a) of Section 2 stipulates that the Annex
"shall apply to all measures of a Member that affe ct access to and use of public telecommunications
transport networks and services". In Mexico's view, the Annex is limited in scope and deals only with
the right to access and use public telecommunicati ons transport networks and services and not the
right to provide and supply them. 594 Mexico contends that the services at issue in this dispute are the
transport of customer-supplied information or data between two or more points, being themselves
"public telecommunications transport networks and services", which cannot be supplied through
access to and use of another Member's PTTNS. 595 It further submits that, by definition, Mexico's
suppliers of "public telecommuni cations transport networks and services" cannot transport public
telecommunications transport services supplied by other suppliers. It explains that, in the
circumstances of this dispute, when suppliers from the United States hand off traffic to a Mexican
supplier at the border, they rely on the PTTNS pr ovided by that supplier and do not supply their
services into Mexico. Mexico contends that b asic telecommunications services are the underlying
transport means for other economic activities and Mexi co fails to see how they could be viewed as a
transport means for the same economic activity, which is the implication of the United States' position
in this dispute.596
4.317 Answering a question by the Panel 597, Mexico submits that Section 5 of the Annex refers to
access to and use of a Member's PTTNS "for the su pply of a service included in its schedule", that
applies only until the services scheduled by a Member can be supplied by access to and use of another
Member's PTTNS. 598 According to Mexico, the services that are the subject of this dispute are
telecommunications transport and transmission services, which cannot ipso facto be supplied through
access to and use of another Member's PTTNS since the latter are, in themselves, "public
telecommunications transport networks and services". 599 Mexico contends that the United States
interpretation would lead to the conclusion that the Mexican postal authority would be transporting

592 See Mexico's answer to question No. 21 of the Panel meeting of 19 December 2002, paragraph 301.
For question No. 21, see footnote 589 of this Report.
593 See Mexico's answer to question No. 21 of the Panel meeting on 19 December 2002, paragraph 302.
For question No. 21, see footnote 589 of this Report.
594 See Mexico's answer to question No. 21 of the Panel meeting on 19 December 2002, paragraph 303.
For question No. 21, see footnote 589 of this Report.
595 See Mexico's answer to question No. 21 of the Panel meeting on 19 December 2002, paragraph 306.
For question No. 21, see footnote 589 of this Report.
596 See Mexico's answer to question No. 21 of the Panel meeting on 19 December 2002, paragraph 307.
For question No. 21, see footnote 589 of this Report.
597 See question No. 26 of the Panel of 13 March 2003, ("Please explain why Mexico says at paragraph
307 of its Responses to questions that 'by definition, Mexico's suppliers of ' public telecommunications transport
networks and services' cannot transport public telecommunications transport services supplied by other
suppliers.'").
598 See Mexico's answer to question No. 26 of the Panel meeting on 13 March 2003, paragraph 135.
For question No. 27, see footnote 597 of this Report.
599 See Mexico's answer to question No. 26 of the Panel meeting on 13 March 2003, paragraph 136.
For question No. 27, see footnote 597 of this Report.

United States postal services by delivering mail se nt from the United States and handed over at the
border, that a pipeline within Mexican territory would be transporting United States pipeline services
when it transports oil received from a United Stat es pipeline that stops at the border, and that a
Mexican transport company would be performing United States transport services when it delivers the
freight that was transferred to it at the border. In Mexico's view, Mexican service suppliers –
including public telecommunications transport suppliers – only supply their own transport service.600
4.318 The United States contends that Mexico's assertion that the services at issue are "transport
and transmission" services, is erroneous, as it ignores the text of the CPC codes Mexico has inscribed
in its Schedule. In the view of the United Stat es, Mexico's Schedule does not limit its cross-border
commitment to only a portion of the service defined in the CPC codes, but the entirety of a telephone
call's path, from its point of origin to its point of termination. 601 The United States further disagrees
with the analogy that Mexico draws with regard to the transport of oil or of goods sent via mail. In
case of the transport of goods, the goods are sep arate products, while a basic telecommunications
service – a telephone call or a "communication" is an inseparable part of the service itself. Section 1
of the Annex draws an explicit distinction between telecommunications services as a distinct sector of
economic activity and as the underlying transport means for other economic activities.
602
2. Application of Sections 5(a) and 5(b) of the Annex
4.319 The United States submits that, its claims are related to five distinct situations for which, in
the United States' view, Mexico has made specific commitments, and for which Mexico must comply
with its Annex obligations. According to the Un ited States, under the first two situations, in
accordance with Section 5(a) of the Annex, Mexico must ensure that foreign facilities-based and non-
facilities based suppliers of cross border telecommuni cations services are acco rded access to and use
of public telecommunications transport netw orks and services (PTTNS) on reasonable and non-
discriminatory terms and conditions.603 Under the third and fourth situations, the United States claims
that, according to Section 5(b) of the Annex, Mexico must ensure that these suppliers have access to
and use of private leased circuits. 604 The United States further points out that locally established non-
facilities based operators (commercial agencies) mu st likewise be afforded access to and use of
private leased circuits to supply international telephone services.605
(a) Claims under Section 5(a) of the Annex
4.320 According to the United States , pursuant to the Annex, services suppliers from the
United States are entitled to access and use of public telecommunications networks and services. The
United States claims that interconnection is the means by which service suppliers from the
United States access and use Mexico's public te lecommunications networks and services. The
United States asserts that its service suppliers must interconnect with the Mexican network in order to
ensure they can transport their scheduled service to its final destination in Mexico. The United States
further points out that without such access, a servi ce supplier from the United States could never
supply a scheduled facilities-based or non-facilities-based basic telecom service.606

600 See Mexico's answer to question No. 26 of the Panel meeting on 13 March 2003, paragraph 137.
For question No. 26, see footnote 597 of this Report.
601 See the United States' comments on Mexico's answer to question No. 26 of the Panel of 14 March
2003, paragraph 71.
602 See the United States' comments on Mexico's answer to question No. 1 of the Panel of 14 March
2003, paragraph 5.
603 See the United States' first written submission, paragraph 211.
604 See the United States' first written submission, paragraph 213.
605 See the United States' first written submission, paragraph 214.
606 See the United States' first written submission, paragraph 216.

4.321 United States submits that Section 5 of the Annex requires Mexico to ensure that for the
supply of a service included in its Schedule, any se rvice supplier of any other Member is accorded
access to and use of public telecom transport networks and services on reasonable terms and
conditions.
607
4.322 The United States claims that Mexico undertook market access and national treatment
commitments for public basic telecom service s supplied by facilities-based operators and
non-facilities-based operators ("commercial agencies"). In the United States' view, Mexico undertook
these obligations on a cross-border basis, with few limitations, applying to th e supply of cross-border
public basic telecom services supplied by facilities-based operators and commercial agencies.608
4.323 The United States also claims that Mexico's Annex ob ligations apply to any service supplier
from the United States (whether facilities-based or non-facilities-based) wishing to supply the
scheduled basic telecom services.609
4.324 The United States submits that the Annex imposes a broad obligation upon Members to
ensure - by whatever measures necessary 610 – that service suppliers have broad access to and use of
public telecom networks and services to transport their services. 611 In the United States' view,
interconnection, as defined by Section 2.1 of the Reference Paper 612, is the principal method for
suppliers from the United States to obtain access and use of Mexican public telecommunications
networks and services for the cross-border supply of scheduled basic telecom services.613
4.325 The United States claims that Mexican law prohibits foreign suppliers from owning public
telecom networks and services in Mexico 614, preventing such suppliers of scheduled basic telecom
services to originate and terminate services over th eir own networks. The United States submits that
its suppliers have no choice but to rely on Mexican suppliers of public telecom networks and services
– such as Telmex and others – to transp ort their service to its final destination. 615 According to the
United States, this interconnection of its suppliers can take two principal forms: (1) a facilities-based
supplier of the scheduled basic telecom services who links its network with that of a Mexican
supplier616; or (2) a supplier who does not own faciliti es and interconnects by leasing circuits from
other operators with Mexican public networks and services.617
4.326 Mexico contends that in its Schedule, for th e subsector of "Telecommunications services
supplied by a facilities based public telecommunicat ions network through an y existing technological
medium …", it specifically inscrib ed in the column "Limitations on Market Access" the following
limitations on the modes of supply of (1) cross border-supply and (3) commercial presence:
"(1) None, except the following:

607 See the United States' first written submission, paragraph 218.
608 See the United States' first written submission, paragraph 219.
609 See the United States' first written submission, paragraph 220.
610 The United States refers to Section 2(a), note 14 of the GATS Annex on Telecommunications. See
the United States' first written submission, paragraph 222.
611 See the United States' first written submission, paragraph 222.
612 As regards the definition of the term "interconnection", see Section IV.A.2 of the United States' first
written submission. See also the United States' first written submission, paragraph 224.
613 See the United States' first written submission, paragraph 223.
614 The United States refers to Mexico's Federal Telecommunications Law, art. 12, Exhibit US-16. See
the United States' first written submission, paragraph 225.
615 See the United States' first written submission, paragraph 225.
616 See the United States' first written submission, paragraph 227.
617 See the United States' first written submission, paragraph 228.

 International traffic must be routed through the facilities of an enterprise that
has a concession granted by the Ministry of Communications and Transport
(SCT).
 …
(3) A concession from the SCT is require d. Only enterprises established in
conformity with Mexican law may obtain such a concession.
 Footnote 1 – Concession: The granting of title to install, operate or use a
facilities-based public telecommunications network."
618
4.327 The United States submits that unlike the term "non-discriminatory", the Annex does not
define "reasonable". In the United States view, to determine the scope of "reasonable" terms and
conditions, a treaty interpreter should look to the ordi nary meaning of "reasonable" in its context and
in light of the object and purpose of the Annex and the GATS. 619 According to the United States, the
terms and conditions that Mexico has imposed ar e unreasonable under the object and purpose of the
Annex and the GATS.620
4.328 Mexico contends that the term "reasonable" set out in Section 5(a) of the Annex does not
have the same meaning as the term "reasonable" set out in Section 2.2 of the Reference Paper. 621 In
Mexico's view, although the ordinary meaning is applicable to the term "reasonable" in both
provisions, Section 5(a) of the Annex and Sectio n 2.2(b) of Mexico's Reference Paper provide
different contexts for interpreting its meaning.622
4.329 Mexico submits that in US – Definitive Safeguard Measures on Imports of Wheat Gluten from
the European Communitie s, the Appellate Body stated that "[i]n view of the identity of the language
in the two provisions, and in the absence of any contra ry indication in the context, we believe that it is
appropriate to ascribe the same meaning to this phrase in both Articles 2.1 and 2.2". 623 In Mexico's
view, where identical language is used in two pr ovisions, it is only appropriate to ascribe the same
meaning to the language where ther e is an "absence of any contrary indication in the context".
Mexico contends that the different context of th e term "reasonable" in the two provisions necessitates
that a different meaning be ascribed to the term. According to Mexico, Section 5(a) of the Annex
applies to "access to and use of public teleco mmunications transport networks" on terms and
conditions that are inter alia , "reasonable", while Section 2.2(b) applies to interconnection with a
major supplier on, inter alia, cost-oriented rates that are "reasonable". In its view, the two provisions
address different subject matters. Mexico claims that these different contexts are important,
particularly when interpreting the meaning of a wo rd like "reasonable". Mexico further submits that
reasonableness can be judged only within the context of all relevant facts and circumstances because
it is those facts and circumstances that provide a basis for reason and expectation.
624 Mexico further
points out that, in determining whether a service supplier of another Member is accorded "access to

618 See Mexico's first written submission, paragraph 233.
619 The United States refers to the customary rules of treaty interpretation reflected in Article 31(1) of
the Vienna Convention. See the United States' first written submission, paragraph 232.
620 See the United States' first written submission, paragraph 232.
621 See Mexico's answer to question No. 23 of the Panel meeting of 19 December 2002, paragraph 315
("Does the term 'reasonable', as set out in Section 5(a) of the Annex on Telecommunications, have the same
meaning as in Section 2.2 of the Reference Paper?").
622 See Mexico's answer to question No. 23 of the Panel meeting of 19 December 2002, paragraph 316.
For question No. 23, see footnote 621 of this Report.
623 Mexico refers to paragraph 96 of the Appellate Body Report, US – Wheat Gluten . See Mexico's
second written submission, paragraph 163.
624 See Mexico's answer to question No. 23 of the Panel meeting of 19 December 2002, paragraph 318.
For question No. 23, see footnote 621 of this Report.

and use of public telecommunications transpor t networks" on terms and conditions that are inter alia,
"reasonable", the Panel must examine all relevant facts and circumstances related to access to and use
of PTTN.
625
(b) Claims under Section 5(b) of the Annex
4.330 The United States submits that Section 5(a) of the Annex requires Mexico to ensure that
service suppliers of other Members can access a nd use public telecom networks and services on
reasonable terms and conditions to provide a scheduled service. 626 The United States further submits
that, to this end, Section 5(b) of the Annex requires Mexico to ensure that foreign suppliers can access
and use private leased circuits offered within and across Mexico's borde r and interconnect those
circuits with public networks and services. 627 Consequently, both facilities and non-facilities based
suppliers of cross-border telecom services must have access to and use of private leased circuits.
Further, established non-facilities b ased operators (commercial agenci es) must likewise be afforded
access to and use of private leased circuits under reasonable terms and conditions, to supply scheduled
basic telecom services. In the United States' view, Mexico's measures preclude foreign suppliers from
offering scheduled basic telecom services over privat e leased circuits; and are therefore violating the
basic obligation to provide access to and use of priv ate leased circuits for the provision of a scheduled
service by Mexico.628
4.331 Mexico contends that under Mexican law, only companies established in Mexico and
qualifying for a "concession" may "install, operate or use a facilities-based public telecommunications
network". It contends that under Mexican law, suppliers of facilities-based telecommunications
services from the United States are not permitted to provide facilities-based telecommunications
services in Mexico. Mexico further submits that it made clear, by specifically inscribing limitations in
its Schedule, that suppliers of facilities-based te lecommunications services from the United States
would not be permitted to supply basic telecommunications services cross-border.629
4.332 The United States submits that Section 5(b) cont emplates both principal forms of
interconnection, as follows:
"Each Member shall ensure that service suppliers of any other Member have access to
and use of any public telecommunications transport network and service offered
within or across the border of that Member, including private leased circuits, and to
this end shall ensure, subject to paragra phs (e) and (f), that such suppliers are
permitted . . . (ii) to interconnect privat e leased or owned circuits with public
telecommunications transport networks or w ith circuits leased or owned by another
service supplier."
630
4.333 Mexico claims that there is no basis for the a llegation from the United States that Mexico
committed itself to cross-border access for faciliti es-based suppliers of basic telecommunications. 631
According to Mexico, the language of Section 5( b) explicitly demonstrates that WTO Members
intended and expected that "access to and use of any public telecommunications transport network or
service" was something that could be "offered" or not "offered", within or across the border of a
particular Member. Mexico claims that it did not "offer" or commit itself to "access to or use of" a

625 See Mexico's answer to question No. 23 of the Panel meeting of 19 December 2002, paragraph 319.
For question No. 23, see footnote 621 of this Report.
626 See the United States' first written submission, paragraph 247.
627 Ibid.
628 See the United States' first written submission, paragraph 248.
629 See Mexico's first written submission, paragraph 234.
630 The United States refers to Section 5(b) of the GATS Annex on Telecommunications. See the
United States' first written submission, paragraph 229.
631 See Mexico's first written submission, paragraph 240.

public telecommunications transport network or service either within Mexico or across its border. In
Mexico's view, two provisions of a treaty - Sections 2(c)(i) and 5(b) - should not be interpreted in a
manner which renders one of them ineffective or inutile.632
4.334 According to the United States , Section 5(b) specifically guarantees that foreign service
suppliers may obtain access to and use of Mexican public telecom networks and services through
interconnection of private leased or owned circuits. 633 The United States mainta in that, in both cases,
its service suppliers must rely on interconnection with a Mexican supplier of public telecom networks
and services – such as Telmex – in order to access and use Mexican public telecom networks and
services for the supply of a scheduled basic teleco m service between the United States and Mexico.
In the United States' view, Mexico must therefor e ensure – under Section 5 of the Annex – that
suppliers of scheduled basic telecom services from the United States may interconnect with Mexican
suppliers on reasonable terms and conditions.634
4.335 In Mexico's view, Section 2(c)(i) of the Annex exempts Mexico from allowing non-facilities-
based suppliers of basic telecommunications services to supply their services cross-border over
capacity that they lease from operators in Mexico . Mexico claims that to interpret the Annex
otherwise would not only be inconsistent with the provisions of Section 2(c)(i) of the Annex, but
would also undermine and render ineffective th e express language of the limitations on Market
Access inscribed in Mexico's GATS Schedule.
635
4.336 According to the United States, private leased circuits are es sentially lines that a user leases
from a public telecom operator over which it transports (or supplies) its service. As an example, the
United States explains that a bank might lease a line from a public telecom operator over which it
sends financial information from its branch in Mexico City to its home office in New York, or a
telecommunications company may lease a line from a public telecom operator over which its sends a
phone call from its customer in Los Angeles to the e nd-user in Montreal. In the United States' view,
in both cases the service supplier (the bank or the phone company) needs access to a line (a public
telecom network or service) to provide a scheduled service (a financial service or a basic telecom
service).636 It claims that Mexico has not ensured that suppliers from the United States have access to
and use of any public telecommunications network and service for the supply of the basic telecom
services inscribed in Mexico's Schedule637, failing to honour its commitments under the Annex.638
4.337 Mexico submits that, even if the Annex were to apply to this dispute, the terms and conditions
that Mexico applies on access to and use of PTTNS would have to be considered reasonable.
According to Mexico, the Annex allows WTO Member s great latitude to regulate access to and use of
PTTNS. In Mexico's view the word "reasonable" in Section 5(b) would have to be interpreted broadly
to include all relevant facts and circumstances related to interconnecti on, including the economic
feasibility of the terms of access to the Mexican carrier and Mexico.639
4.338 According to the United States , Section 5(b) of the Annex requires Mexico to ensure that
service suppliers of any other Member. "(ii) interconnect private leased or owned circuits with public
telecommunications transport networks and services or with circuits leased or owned by another

632 See Mexico's first written submission, paragraph 239.
633 See the United States' first written submission, paragraph 230.
634 See the United States' first written submission, paragraph 231.
635 See Mexico's first written submission, paragraph 242.
636 See the United States' first written submission, paragraph 213.
637 See the United States' first written submission, paragraph 214.
638 See the United States' first written submission, paragraph 215.
639 See Mexico's answer to question No. 25 of the Panel meeting on 19 December 2002, paragraph 322
("If the Annex were to apply to the services in question, would Mexico consider that the 'terms and conditions' it
applies on access to and use of Public Telecommunications Transport Networks and Services (PTTNS) are
'reasonable'?").

supplier". In the United States view, because the obligatio n in Section 5(a) of the Annex apply to
paragraph (b), Mexico must ensure that foreign suppliers have access to and use of such private leased
circuits on reasonable terms and conditions for the supply of scheduled services. The United States
further points out that in this case, the analysis need not to extend to whether the "terms and
conditions" are reasonable and non-discriminatory, because Mexico has failed to ensure any access to
and use of private leased circuits for the supply of scheduled services
640, acting inconsistently with its
obligations under Section 5(a) and (b) of the Annex.641
4.339 The United States claims that Mexico has failed to comp ly with Section 5 of the Annex with
respect to the market access and national tr eatment commitments it undertook for the: (1)
cross-border (mode 1) supply of facilities-based ba sic telecom services; and (2) the cross-border
(mode 1) and domestic (mode 3) supply of non-facilities-based basic telecom services. The United
States submits that, to avoid any confusion, the clai ms it makes related to private leased circuits
address the delivery of scheduled public basic telecom service using private leased circuits.642
4.340 The United States contends that Mexico scheduled market access and national commitments
to allow non-facilities-based suppliers ("commercial agencies") to provide basic circuit-switched
telecom services to third parties over a private (i.e., dedicated) circuit that it leases from a
concessionaire.643 The United States recalls that according to Mexico's Schedule, commercial
agencies do not supply basic telecom services over their owned facilities but over capacity they lease
from a licensed facilities-based telecom operator. 644 The United States points out that the supply of
telecommunications over leased capacity is typically known as "resale", but Mexico's Schedule uses
the phrase "commercial agencies". 645 The United States recalls that "leased capacity" is essential to
the supply of this scheduled service, because w ithout access to such capac ity, a commercial agency
cannot, according to Mexico's definition, supply its service. The United States submits that private
leased circuits – not defined in the Annex – are generally understood to mean telephone lines leased
from a phone company that are specifically dedicated to a customer's use.
646
4.341 The United States submits that Mexico undertook these commitments for the cross-border
supply of services (mode 1) over leased capacity from the territory of one Member (e.g., the United
States) into the territory of any other Member (i.e ., Mexico). According to the United States, Mexico
limited this mode 1 commitment to ensure that fore ign commercial agencies route international traffic
through the facilities of a "concessionaire". The Unite d States claims that Mexico committed to allow
a foreign, non-facilities-based supplier to offer telecom services from the territory of the United States
into the territory of Mexico over capacity leased from a public network conce ssionaire (i.e., private
leased circuits). The United States points out that the cross-border supply of a basic telecom service
over leased capacity is typically known as International Simple Resale (ISR).647
4.342 The United States recalls that Mexico also underto ok commitments for locally-established
(mode 3) commercial agencies, with certain limitations. The United States points out that a foreign
service supplier should be able to own 100 per cent of a locally established commercial agency,
because Mexico did not schedule a foreign ownershi p limitation for such services. The United States

640 See the United States' first written submission, paragraph 249.
641 See the United States' first written submission, paragraph 250.
642 See the United States' first written submission, paragraph 251.
643 See the United States' first written submission, paragraph 254.
644 The United States refers to Mexico's Sc hedule, GATS/SC/56/Suppl.2., note 2. See the
United States' first written submission, paragraph 252.
645 See the United States' first written submission, paragraph 252.
646 See the United States' first written submission, paragraph 253.
647 See the United States' first written submission, paragraph 255.

argues that, because Mexico did not indicate otherw ise, this mode 3 commitment allows a locally
established commercial agency to provide international basic telecom services over leased capacity.648
4.343 The United States contends that Mexico undertook m ode 1 and mode 3 commitments for
services, which require access to and use of private leased circuits for their supply. The United States
claims that its suppliers cannot supply basic tel ecom services over leased capacity on a cross-border
basis if they cannot lease private leased circuits from a Mexican supplier. The United States further
points out that its suppliers can not establish a commercial presence to supply international basic
telecom services over leased capacity if they ca nnot lease private leased circuits from a Mexican
supplier. The United States recalls that Mexico do es not permit its basic telecom service suppliers to
lease such circuits for these servi ces and therefore precludes the supply of mode 1 and mode 3
commercial agency services.649
4.344 Mexico submits that with respect to access through commercial presence for non-facilities
based suppliers, the United States argues that Mexi co committed to the establishment of commercial
agencies and to the provisions of services by such agencies through private leased circuits, i.e. ISR.650
Mexico claims that its mode 3 (commercial presence) commitment for commercial agencies is subject
to the following limitations:
"A permit issued by the SCT is required . Only enterprises set up in accordance with
Mexican law may obtain such permit.
Foreign governments may not participate in an enterprise set up in accordance with
Mexican law nor obtain any authorization to provide telecommunication services.
Except where specifically approved by the SCT, public telecommunications network
concessionaires may not participate, directly or indirectly, in the capital of a
commercial agency.
The establishment and operation of commercial agencies is invariably subject to the
relevant regulations . The SCT will not issue permits for the establishment of a
commercial agency until the corresponding regulations are issued."651
4.345 Mexico submits that the permit requirement is central to the limitation. According to Mexico,
because at the time the limitation was inscribed, pe rmits were not issued by the SCT, then it is
equivalent to a zero quota, falling the requirement within the category of "limitations on the number
of service suppliers" in paragraph (a) of GATS Article XVI:2.652
4.346 Answering a Panel's question 653, the United States contends that Mexico's refusal to adopt
regulations necessary to issue commercial agen cy permits violates Mexico's obligation under
Section 5(b) of the Annex on Telecommunications to ensure that service suppliers have access to and

648 See the United States' first written submission, paragraph 256.
649 See the United States' first written submission, paragraph 257.
650 Mexico refers to paragraphs 252-257 and 265-294 of the United States' first written submission. See
Mexico's first written submission, paragraph 243.
651 See Mexico's first written submission, paragraph 244.
652 See Mexico's answer to question No. 6(a) of the Panel of 19 Dec 2002, paragraph 90. For question
No. 6(a), see footnote 282 of this Report. For more information regarding the discussion on the scope of
Mexico's commitments, see Section IV.A.3 of this Report.
653 Namely, question No. 6(c) of the Panel of 19 December 2002 ("Mexico has inscribed in its Schedule
that it will not issue permits for the establishment of a commercial agency until the corresponding regulations
are issued'. Does Mexico Mode 3 commitment regarding commercial agencies include an obligation, at present,
to issue permits for the establishment and operation of such agencies?").

use of private leased circuits.
654 The United States further submits that Telmex, through its subsidiary
in the United States, assured the FCC that Mexico 's WTO commitments requires Mexico "promptly"
to adopt the relevant regulations and issue reseller permits.655
4.347 The United States submits that Mexico also undert ook cross-border market access and
national treatment commitments for specific public basic telecom services supplied by a
facilities-based operator. According to the United St ates, Mexico limited this commitment to ensure
that foreign service suppliers route internati onal traffic through the facilities of a Mexican
concessionaire. The United States contends that , for the supply of these public facilities-based
services from the territory of the United States into the territory of Mexico, Mexico promised to
accord market access and national treatment to supp liers of these services provided that the service
supplier, from the United States, routes interna tional traffic through the facilities of a Mexican
concessionaire.656
4.348 According to the United States, access to and use of private leased circuits is essential to the
supply of the following services inscribed in Mexi co's Schedule: (a) facilities-based services
(i.e., voice telephone, circuit-switche d data, facsimile services by a facilities-based operator from the
United States into Mexico) supplied on a cross-bor der basis; (b) commercial agencies (i.e., basic
telecom services by a non-facilities-based operator ove r leased capacity from the United States into
Mexico) supplied on a cross-border basis; and (c) locally established commercial agencies (i.e., basic
telecom services by a non-facilities-based opera tor over leased capacity from Mexico into the
United States). The United States claims that Mexico has failed to ensure that private leased circuits
are available for the supply of these scheduled services.657
4.349 The United States submits that Mexico committed under S ection 5(a) and (b) to ensure that
foreign facilities-based suppliers, foreign commerc ial agencies and locally established commercial
agencies have access to and use of private leased circuits to s upply scheduled international basic
telecom services over such circuits and can interconn ect such circuits with public telecom networks
and services. The United States contends that becau se Mexican suppliers offer private leased circuits
to their customers, then Mexico must ensure that these circuits ar e available to all suppliers of
scheduled basic telecom services. 658 The United States claims that foreign suppliers do not have
access to and use of private leased circuits to supply scheduled basic telecom services. The
United States further submits that Mexican suppliers have refused to provide these circuits, Mexican
law prevents foreign basic telecom service suppliers from using such circuits, and Mexican authorities
continue to refuse to permit the supply of schedul ed services over leased capacity. According to the
United States, these restrictions prevent foreign service suppliers from accessing and using private
leased circuits to supply scheduled basic telecom services.659
4.350 The United States submits that its suppliers based in the United States have no access to
private leased circuits for the supply of scheduled basic telecom services a nd even if they did,
Mexican ILD Rules prevent foreign suppliers from in terconnecting private leased circuits with public
telecom network services, violating the obligation to provide access to an d use of private leased
circuits.660 It claims that Telmex has refused to make private leased circuits available for the cross-

654 See the United States' answer to question No. 6(c) of the Panel of 19 Dec 2002, paragraph 32. For
question No. 6(c), see footnote 653 of this Report.
655 The United States refers to the Consolidated Opposition of Telmex/Sprint Communications, L.L.C.
to Applications for Review, page. 7, Exhibit US-54. See the United States' answer to question No. 6(c) of the
Panel of 19 Dec 2002, paragraph 34. For question No. 6(c), see footnote 653 of this Report.
656 See the United States' first written submission, paragraph 258.
657 See the United States' first written submission, paragraph 261.
658 See the United States' first written submission, paragraph 266.
659 See the United States' first written submission, paragraph 267.
660 See the United States' first written submission, paragraph 268.

border supply of scheduled voice telephone services 661, and that Mexican authorities have done
nothing to ensure that Telmex or any other supp lier provides these leased circuits to suppliers from
the United States for the cross-border supply of scheduled basic telecom services.662
4.351 The United States contends that Mexico not only has failed to ensure that its suppliers
provide private leased circuits to foreign supplie rs for the cross-border supply of scheduled basic
telecom services but has also maintained measures that preclude foreign suppliers from ever using
these circuits to supply such services. 663 The United States recalls that under Mexico's ILD Rule 3 664,
a foreign supplier cannot interconnect a private circu it leased in Mexico with foreign public networks
and services for the provision of scheduled basic telecom services. 665 The United States submits that
according to this Rule, only "international port operators" may interconnect with the public
telecommunications networks of foreign operators in order to supply basic telecom services, but
Mexican ILD Rules require an international port oper ator to be a supplier with a concession to supply
long-distance services and Mexican law prohib its non-Mexican entities from holding such a
concession, since Mexico inscribed this nationality restriction for concessionaires in its Schedule.666
4.352 The United States contends that the interconnection of a private circuit leased in Mexico with
the public telecom network in the United States is essential to the cross-border provision of public
basic telecom services over private leased circuits , which is a commitment included in Mexico's
Schedule. Because a non facilities-based service supplier cannot be a long-distance concessionaire, it
cannot interconnect a private circuit leased in Me xico with the public telecom network in the
United States, as it is unable to supply the scheduled public telecom service.
667
4.353 The United States submits that Mexico undertook cross-border commitments for
"commercial agencies", which Mexico defined as the supply by non-facilities-based providers of
telecommunications services to third parties over capacity leased from a Mexican concessionaire.
According to the United States, by Mexico's defin ition, the supply of this international "resale"
service requires a Mexican concessionaire to provide a foreign service supplier access to and use of
private leased circuits. The Unite d States claims that without such circuits, foreign suppliers cannot
provide cross-border telecom services as commercial agencies.
668 The United States recalls that
Sections 5(a) and (b) of the Annex ensure that foreign commercial agencies have access to and use of
these circuits and can interconnect these circuits with public telecom networks and services on
reasonable terms and conditions to provide "resale" services on a cross-border basis – services that
cannot be supplied without such circuits. In the United States' view, Mexico has failed to comply
with these commitments, prohibiting foreign service s uppliers from offering this "resale" service that
it scheduled. The United States further points out that even if Mexico permitted foreign suppliers to
offer this "resale" service, ILD Rule 3 preclud es the supply of this service by preventing all
commercial agencies (domestic and foreign) from inte rconnecting private leased circuits with foreign
telecom networks.
669
4.354 The United States submits that the policy of the Mexican Government – since undertaking
commitments for commercial agencies – has been to refuse to permit any foreign carrier from
supplying international "resale" services (i.e., in ternational telecom services supplied over private
leased circuits). Eight months after finalizing its "commercial agencies" commitments, the
then-Secretary of Mexico's Secretariat of Communications and Transportation (SCT) wrote a letter to

661 See the United States' first written submission, paragraph 269.
662 See the United States' first written submission, paragraph 272.
663 See the United States' first written submission, paragraph 274.
664 See the United States' first written submission, paragraph 275.
665 See the United States' first written submission, paragraph 274.
666 See the United States' first written submission, paragraph 275.
667 See the United States' first written submission, paragraph 276.
668 See the United States' first written submission, paragraph 278.
669 See the United States' first written submission, paragraph 279.

the then-Chairman of the FCC stating that the polic y of his Government was to forbid the resale of
"long-distance public network capacity in Mexico".
670 The United States claims that, in other words,
although Mexico had committed to its WTO partners that it would permit commercial agencies to
provide all forms of telecommunications services to th ird parties over resold capacity, Secretary Ruiz
Sacristán affirmed that Government of Mexico ha d no intention of allowing telecom operators to do
so.671 The United States further submits that Secretar y Ruiz Sacristán reaffirmed this position in a
8 May 1998 letter to then-USTR Charlene Barshefs ky. According to the United States, Ambassador
Barshefsky wrote to both Secretary Ruiz Sacr istán and Secretary Herminio Blanco Mendoza
(then-Secretary of Commerce and Industrial Deve lopment) on 4 April 1998 to express her deep
concern over Mexico's implementation of its GATS basic telecom commitments, including "Mexico's
failure to permit unrestricted domestic and inte rnational resale of telecommunications services
(including international simple resale)". 672 The United States recalls th at Secretary Ruiz Sacristán
responded that Mexico's WTO commitments did not include these services.673
4.355 The United States contends that, by expressing his Government's refusal to permit the
domestic and international resale of telecommunication services, Secretary Ruiz Sacristán
acknowledged Mexico's failure to honour its scheduled commitment to allow "commercial agencies"
to supply cross-border telecommunications services to third parties over leased capacity (i.e., private
leased circuits).
674
4.356 According to the United States , Mexico undertook a mode 3 commitment for commercial
agencies promising to permit foreign suppliers to acquire a 100 per cent interest in a local non-
facilities-based supplier and offer international te lecommunications services to third parties over
capacity leased from a Mexican concessionaire. The Un ited States points out that the supply of this
international "resale" service requires a Mexican concessionaire to provide a foreign service supplier
access to and use of private leased circuits. 675 The United States further submits that Sections 5(b) of
the Annex obliges Mexico to ensure that foreign ser vice suppliers: (1) have access to and use of the
private leased circuits they need to supply this scheduled resale service; and (2) can interconnect such
circuits with public telecom networks and services. The United States claims that Mexico has failed
to comply with these obligations by not permitti ng non-facilities-based service suppliers (commercial
agencies) to establish locally and supply intern ational telecom services from Mexico over private
leased circuits. The United States further points out that ILD Rule 3 prevents all commercial agencies
from interconnecting private leased circuits with foreign telecom networks, preventing Mexico from
complying with its commitments under the Annex.676
4.357 The United States submits that to its knowledge, Mexico does not permit foreign
non-facilities-based suppliers to establish locally and supply third parties international
telecommunications services over private leased circuits.677 The United States recognizes that Mexico
conditioned the mode 3 supply of "commercial agenci es" on the issuance of the relevance regulations,
but claims that over five years have elapsed since Mexico finalized this commitment in February 1997
(and four years have elapsed since this commitment entered into force in February 1998), and Mexico
still has not issued – and has indicated no intention to issue – the relevant regulations. According to

670 The United States refers to the letter from Secr etary Carlos Ruiz Sacris tán to Chairman Hundt,
22 October 1997, Exhibit US-46. See the United States' first written submission, paragraph 281.
671 See the United States' first written submission, paragraph 281.
672 The United States refers to the Letter from Amba ssador Charlene Barshefsky to Secretary Carlos
Ruiz Sacristán, 4 April 1998, Exhibit US-47. See the United States' first written submission, paragraph 282.
673 The United States refers to the Letter from Secretary Carlos Ruiz Sacristán to Ambassador Charlene
Barshefsky, 8 May 1998, Exhibit US-48. See the United States' first written submission, paragraph 282.
674 See the United States' first written submission, paragraph 283.
675 See the United States' first written submission, paragraph 291.
676 See the United States' first written submission, paragraph 292.
677 See the United States' first written submission, paragraph 293.

the United States, the refusal to issue such regula tions raises questions about whether Mexico ever
intends to implement this scheduled mode 3 commitment for commercial agencies.678
4.358 Mexico replies that there is nothing in the word ing of the limitations that indicates that
Mexico has made a commitment to issue the corr esponding regulation within a certain time-frame.
According to Mexico, the issuance of the regulati on is at the discretion of the Mexican authorities
taking into account the transition occurring in th e Mexican telecommunications market. Mexico
claims that the fact that the regulation has not yet been issued does not nullify the limitation. 679
Furthermore, Mexico has issued regulations fo r the establishment and operation of commercial
agencies for pay-telephone public services. Base d on those regulations, Mexico has granted 59
permits for public pay phone commercial agencies. 35 of those agencies have begun operations and
five of them have foreign capital.680
4.359 The United States submits that it is not inconsistent w ith the obligation under Section 5(b) of
the Annex to require that cross-border service suppliers route traffic through the facilities of a
Mexican concessionaire. According to the United States, the routing requirement is one way in which
a member may satisfy the obligation in Section 5(b). In its view, the routing requirement included in
Mexico's Schedule, interpreted according to the rules of interpretation in the Vienna Convention ,
permit service suppliers from the United States to provide basic telecommunications services into
Mexico over capacity leased from a Mexican concessionaire.
681
4.360 In response to question No. 27 of the Panel on 19 December 2002, Mexico submits that
Section 5(b) relates to "access to and use of" priv ate leased circuits and the interconnection of those
circuits with the PTTNS or with other leased circuits . Mexico notes that, in the context of the claims
being raised by the United States, this provision does not entitle service suppliers of any other
Member to supply public telecommunications services over private leased circuits. In Mexico's view,
Section 5(b) does not entitle service suppliers of the United States to offer ISR into Mexico.
According to Mexico, this interpretation is confirmed by Section 2(c)(i) which: (i) refers to Schedule
limitations; and (ii) which refers to availabl e services and networks. Mexico submits that its
Schedule, which includes the routing restriction, denies any market access for service suppliers from
the United States to provide ISR into Mexico.
682 In the same line, Mexico submits that ISR services
are prohibited under Mexican law as manifested in its Schedule. Therefore, ISR was "not offered to
the public generally" within the meaning of Section 2(c)(i) of the Annex.683
3. Application of Sections 5(e), 5(f) and 5(g) of the Annex
4.361 Mexico contends that, even if the Annex were to apply to this dispute, the United States has
failed to present a prima facie case under Section 5 of the Annex, because it has not attempted to
establish the requisite elements for a challenge under that provision. 684 Mexico submits that although
the United States acknowledges that the obligation in Section 5(a) must be applied through paragraphs

678 See the United States' first written submission, paragraph 294.
679 See Mexico's first written submission, paragraph 245.
680 See Mexico's answer to question No. 6(d) of the Panel of 19 December 1992 , paragraphs 111-113.
For question No. 6(d), see footnote 21 of this Report.
681 See the United States' answer to question No. 27 of the Panel of 19 December 2002, paragraph 111
("How does the routing requirement under mode 1 relate to the obligation in Section 5(b) to ensure access to
and use of leased circuits?").
682 See Mexico's answer to question No. 27 of the Panel of 19 December 2002, paragraph 329. For
question No. 27, see footnote 681 of this Report.
683 See Mexico's answer to question No. 27 of the Panel of 19 December 2002, paragraph 326-331. For
question No. 27, see footnote 681 of this Report.
684 See Mexico's first written submission, paragraph 247.

5(b) through 5(f)
685, it interprets Sections 5(a) and 5(b) in isolation. Mexico claims that one cannot
demonstrate a violation of Section 5 without adduc ing evidence sufficient to raise a presumption that
the measures at issue are inconsistent with paragraphs (e) and (f) of Section 5, as follows:
"(e) Each Member shall ensure that no condition is imposed on access to and use
of public telecommunications transport networks and services other than as
necessary:
(i) to safeguard the public service responsibilities of the
suppliers of public telecommuni cations transport networks
and services, in particular their ability to make their networks
or services available to the public generally;
(ii) to protect the technical integrity of public
telecommunications transport networks or services: or
(iii) to ensure that services suppliers of any other Member do not
supply services unless permitted pursuant to commitments in
the Member's Schedule.
 …
(f) Provided that they satisfy the criteria set out in paragraph (e), conditions for
access to and use of public telecommunications transport networks and
services may include:
(i) restrictions on resale or shared use of such services;
(ii) a requirement to use specified technical interfaces, including
interface protocols, for inter-connection with such networks
and services;
(iii) requirements, where necessar y, for the inter-operability of
such services and to encourage the achievement of the goals
set out in paragraph 7(a);
(iv) type approval of terminal or other equipment with interfaces
with the network and technical requirements relating to the
attachment of such equipment to such networks;
(v) restrictions on inter-connecti on of private leased or owned
circuits with such networks or services or with circuits leased
or owned by another service supplier; or
(vi) notification, registration and licensing."
686
4.362 Mexico submits that since the general obligation in Section 5(a) is required to be applied
through paragraphs (e) and (f), the United States cannot establish a violation of paragraphs (a) and (b)
of Section 5 without also demonstrating that Mexi co's measures are not permitted by paragraphs (e)
and (f). According to Mexico, these paragraphs ar e part of the same provision and must be read

685 Mexico refers to paragraph 249 of th e United States' first written submission. See Mexico's first
written submission, paragraph 250.
686 See Mexico's first written submission, paragraph 251.

together to determine the meaning of a Member's obligation under Section 5.687 Mexico contends that
in EC – Hormones 688, the Appellate Body found that a gene ral rule-exception relationship between
Articles 3.1 and 3.3 of the Agreement on the Application of Sanitary and Phytosanitary Measures did
not exist, bringing to the complainant the burden of proof to establish a case of inconsistency with
both Articles 3.1 and 3.3. In Mexico's view, si nce there is no general ru le-exception relationship
between Section 5(a) and 5(b) of the Annex, the Un ited States, as complaining party, has the burden
of establishing a case of inconsistency with all four provisions. 689 Mexico claims that even if the
obligations in Section 5(a) and (b) of the Annex we re found to apply to the measures at issue, those
measures are consistent with Mexico's rights a nd obligations under paragr aph (e), (f) and (g) of
Section 5 of the Annex. 690 Mexico further submits that its restrictions on access to and use of public
telecommunication transport networks and services ar e no more than necessary to ensure that foreign
suppliers of facilities-based and non-facilities-base d telecommunications transport services do not
illegally bypass the accounting rate regime contrary to the clear intention of the limitations on market
access set forth in Mexico's Schedule. Mexico r ecalls the definition of "necessary" as interpreted by
the Appellate Body in the context of paragraph (d) of Article XX of the GATT 1994.691
4.363 The United States contends that it does not consider Sections 5(e) and 5(f) necessary to
establish a claim under Section 5(a) and 5(b) of th e Annex and considers that Mexico's conditions on
access and use are not justified by Section 5(e) and 5 (f). As an example, the United States refers to
Mexico's argument that its restriction on resale are consistent with Section 5(e) as necessary to
enforce the limitations on market access inscribed in its Schedule 692, which, according to the
United States is not accurate, since Mexico's Sche dule authorizes cross-border suppliers to provide
basic telecommunications services, subject only to th e limitation that they route traffic through the
facilities of a concessionaire.693
4.364 According to the United States, Sections 5(e) and 5(f) are not elements of a prima facie claim
under Sections 5(a) or (b) of the Annex. It disag rees with the analogy to Articles 3.1 and 3.3 of the
Agreement on the Application of Sanitary and Phytosanitary Measures. In the United States' view,
the Mexican assertion that "there is no general rule -exception relationship" between Sections 5(a)-(b)
and 5(e)-(f) of the Annex 694, has no support. The United States points out that, like Section 5(f),
Article XX of the GATT includes a list of measures that may fall within the scope of the provision
(Articles XX(a)-(j)). It further points out that like Section 5(e), Article XX(d) requires that to fall
within the scope of the provision, a measure must be deemed "necessary" to achieve a particular goal.
The United States claims that, in the context of Article XX(d), the Appellate Body has expressly
found that the burden of satisfying the "necessity" test falls on the Member invoking the provision.695

687 See Mexico's first written submission, paragraph 253.
688 Mexico refers to paragraph 104 of the Appellate Body Report, EC – Hormones. See Mexico's first
written submission, paragraph 256.
689 See Mexico's first written submission, paragraph 256.
690 See Mexico's first written submission, paragraph 258.
691 Mexico refers to paragraph 161 of the Appellate Body Report, Korea – Various Measures on Beef .
See Mexico's first written submission, paragraphs 261-262. For a detailed discussion of the routing requirement
in Mexico's specific commitments, see Section IV.A.3(c)(ii) of this Report.
692 The United States refers to Mexico's first written submission, paragraph 264. See the United States'
first oral statement, paragraph 49.
693 See the United States' first oral statement, paragraph 49.
694 The United States refers to paragraph 256 of Mexico's first written submission. See the
United States' answer to question No. 26 of the Panel of 19 Dec 2002, paragraph 109 (" Is it necessary to
consider Section 5 (e) and (f) to establish a claim under Section 5 (a) and (b)? Please explain").
695 The United States refers to paragraph 157 of the Appellate Body Report, Korea – Various Measures
on Beef. See the United States' answer to qu estion No. 26 of the Panel of 19 December 2002, paragraph 109.
For question No. 26, see footnote 694 of this Report.

4.365 Mexico submits that the obligations in Section 5( a) and 5(b) are qualified in an important
manner by Section 5(e) and 5(f), constraining th e rights of users under Section 5(a) and (b).
According to Mexico, it is incorrect to argue that it has to provide unconditional access to and use of
Mexico's PTTNS and to allow the use, and interconnection with the public networks, of private leased
lines facilities-based and non-facilities-based suppliers fro m the United States. It further submits that
paragraphs 5(e) and 5(f) are not of the nature of exceptions or affirmative defences, but key
substantive provisions that define the rights of regu lators to restrict the access to and use of public
telecommunications transport networks and services. In Mexico's view, the United States has the
burden of establishing that the terms and conditi ons on access and use maintained by Mexico exceed
or go beyond Mexico's rights as a regulator.
696
4.366 The United States submits that in any event, while Me xico may have imposed conditions on
access to and use of public telecommunications tran sport networks and services that fall within the
meaning of Section 5(f), those conditions are "oth er than as necessary" to satisfy the criteria in
Sections 5(e)(i)-(iii). According to the United States, since the conditions do not "satisfy the criteria
set out in Section 5(e)", Mexico is not permitted to maintain those conditions, pursuant to Section
5(f).697
4.367 According to the United States, three conditions are inconsistent with Sections 5(a) or 5(b) of
the Annex and not necessary to achieve the goals liste d in Section 5(e)(i)-(iii); first, under ILD Rule
13, Mexico conditions United States suppliers' ac cess to and use of public telecommunications
networks and services on negotiating exclusively with Telmex 698; second, the refusal to make private
leased circuits available to United States facilitie s-based suppliers, United States non-facilities-based
suppliers ("commercial agencies") and locally-est ablished commercial agencies for the supply of
scheduled voice telephone services 699; and third, to limit the author ity to interconnect private leased
circuits to international port operators . The United States claims that even if United States facilities-
based suppliers, United States non-facilities-based suppliers ("commercial agencies") and locally-
established commercial agencies were granted access to and use of private leased circuits from
Mexican suppliers, ILD Rule 3 prohibits them from interconnecting those leased circuits with foreign
public networks and services. The United States r ecalls that Rule 3 limits the authority to
interconnect private leased circuits to an inte rnational port operator, which must be a Mexican
entity.700 In the United States' view, each of these three conditions is "other than as necessary" to
satisfy the criteria of Section 5(e)(i)-(iii). The Un ited States considers that the Panel does not need to
define precisely what degree of "necessity" is required here.701
4.368 Mexico contends that even if the obligations in Sections 5(a) and (b) of the Annex were found
to apply to the measures at issue, those measures ar e consistent with Mexico's rights and obligations
under paragraph (g) of Section 5.702
4.369 The conditions or restrictions applied by Mexico on access to or use of public
telecommunications networks and services by fore ign suppliers of faciliti es-based and non-facilities-
based basic telecommunications are "necessary" to enforcing the limitations on market access
specifically inscribed in Mexico's Schedule. Mexico's ban of ISR is c onsistent with Mexico's level of
development and "place[s] reasonable conditions on access to and use of public telecommunications
transport networks and services necessary to strengthen its domestic telecommunications

696 See Mexico's answer to question No. 26 of the Panel of 19 December 2002, paragraph 322. For
question No. 26, see footnote 694 of this Report.
697 See the United States' second written submission, paragraph 109.
698 See the United States' second written submission, paragraph 110.
699 See the United States' second written submission, paragraph 111.
700 See the United States' second written submission, paragraph 112.
701 See the United States' second written submission, paragraph 113.
702 See Mexico's first written submission, paragraph 258.

infrastructure and service capability and to increas e its participation in international trade
telecommunications services" within the meaning of paragraph (g) of Section 5 of the Annex. These
measures are integral conditions to the limitations specified in Mexico's Schedule.703
4.370 The United States contends that Section 5(g) exp licitly requires that any conditions
restricting access to and use of private leased ci rcuits, as in Mexico, "shall be specified in the
Member' s Schedule." However, Mexico specified no such condition prohibiting the use of private
lines in its Schedule. Mexico's inclusion of a routing restriction under mode 1 does not provide a
basis for Mexico to prohibit the use of private leased circuits. As long as the circuit is leased from a
concessionaire, it is consistent with the requirement to route international traffic through the facilities
of a concessionaire. For this reason alone, Mexico ca nnot rely on Section 5(g). Even if Mexico had
included such a condition in its Schedule, there is no basis to conclude that the prohibition on the use
of private leased circuits in Mexico otherwise sa tisfies the criteria of Section 5(g). Mexico's assertion
that this restriction is "necessary to strengthen its domestic telecommunications infrastructure and
service capacity and to increase its participation in international trade in telecommunications services"
is unsupported, and cannot substitute for evidence an d cannot form the basis for the factual findings
that would be necessary to justify Mexico's invocation of this subparagraph.704
V. ARGUMENTS OF THE THIRD PARTIES
5.1 From the third parties in these proceedings, i.e . Australia, Brazil, Canada, Cuba, the
European Communities, Guatemala, Honduras, India, Japan and Nicaragua, only Australia, Brazil, the
European Communities and Japan filed their co mments within the deadline and presented Oral
Statements during the third party session.
A. AUSTRALIA
1. Informal Understanding on Accounting Rates
5.2 Australia recalls that this dispute raises the issue of the informal Understanding on
Accounting Rates (informal Unders tanding) which has been in place since the 1996 Negotiations on
Basic Telecommunications, and is reflected in th e Report of the Group on Basic Telecommunications
of 15 February 1997.705
5.3 In Australia's view, as the informal Unders tanding was never affirmed by the Council for
Trade in Services or the General Council, and so di d not become a formal Understanding, it therefore
does not present a legal barrier to disputes being taken by WTO Members in respect of the application
of accounting rates.
706
5.4 Furthermore, Australia contends that even if the moratorium did at any time present a legal
barrier to such disputes, then that legal barrier no longer exists as it expired on 1 January 2000, in
accordance with the clear intention of the WTO Members as reflected in the informal
Understanding.707
2. Scope of "interconnection" in Section 2 of the Reference Paper
5.5 Australia submits that this dispute raises the i ssue of the scope of the term "interconnection"
as used in section 2 of the Reference Paper. 708 Australia recalls that the scope of "interconnection"

703 See Mexico's first written submission, paragraphs 264-265.
704 See United States' second submission, paragraphs 124-125.
705 See Australia's third party submission, paragraph 3.
706 See Australia's third party submission, paragraph 4.
707 See Australia's third party submission, paragraph 5.
708 See Australia's third party submission, paragraph 6.

has important implications for the application of the obligations in the mentioned section of the
Reference Paper.
709
5.6 In view of the above, Australia contends th at the issue at stake is whether the term
"interconnection" should be understood as applying only to interconnection within the borders of a
Member that has inscrib ed the Reference Paper in its Sc hedule of Commitments (in-country
interconnection), or whether it also applies to the interconnection of public telecommunications
networks within such a Member's borders with telecommunications networks external to that
Member's borders (international interconnection)710; and whether "interconnection" as used in section
2 of the Reference Paper covers accounting rates.711
5.7 Australia states that, as the Reference Paper does not explicitly restrict interconnection to in-
country interconnection then, in principle, the Refe rence Paper obligations re lating to interconnection
apply to international interconnection.712
3. Interconnection and accounting rates
5.8 Australia notes that in its view, "accounting rat es" are specific sets of arrangements for the
pricing of a subset of interconnection arrangements . Australia considers that, as the Reference Paper
applies to international interconnection, these pric ing arrangements must be consistent with the
Reference Paper obligations with respect to interconnection.713
5.9 Australia notes that underpinning the inform al Understanding on Acc ounting Rates is the
assumption of Members that interconnection obligati ons under the Reference Paper would apply to
international interconnection and, in the absence of the Understanding, give rise to disputes.714
4. Meaning of "cost-oriented" rates in section 2.2(b) of the Reference Paper
5.10 Australia considers that the Reference Paper provides a framework for the competitive supply
of telecommunications services in markets where there is a major supplier that can affect the terms of
participation through control over essential facilities or by use of its market position.715
5.11 In Australia's view, a main concern is to de velop greater clarity concerning, and acceptance
of, interconnection obligations, and particularly in re lation to the requirement stated in paragraph 2.2
of the Reference Paper.716
5.12 Australia further points out that the Reference Paper does not elaborate on what is meant by
"cost-oriented rates". Australia submits that any interpretation of "cost-oriented rates" should be
consistent with these criteria of transparency , reasonableness, economic feasibility and unbundled
elements. Australia submits that the Panel must form a view of the meaning of "cost-oriented rates"
that is consistent with these criteria so that the Reference Paper promotes telecommunications
competition (and through that, trade in telecommunica tions services). Australia's view is that an
interpretation of "cost-oriented rates" that is t oo broad would undermine the effect of the Reference
Paper as a whole, and is clearly contrary to its intent.
717

709 See Australia's third party submission, paragraph 7.
710 See Australia's third party submission, paragraph 6.a.
711 See Australia's third party submission, paragraph 6.b.
712 See Australia's third party submission, paragraph 8.
713 See Australia's third party submission, paragraph 9.
714 See Australia's third party submission, paragraph 10.
715 See Australia's third party submission, paragraph 11.
716 See Australia's third party submission, paragraph 12.
717 See Australia's third party submission, paragraph 13.

5.13 According to Australia, recommendations of the ITU provide some guidance on relevant cost
components in the development of cost-based rates . In addition, Australia submits that the Panel
should, in its interpretation of "cost-oriented ra tes", consider the application of dynamic costing
models for interconnection in GATS Member count ries that are encouraging the competitive supply
of telecommunications networks and services. 718
B. BRAZIL
1. Introduction
5.14 According to Brazil, to analyse this dispute the Panel should take into account the scope and
reach of the specific commitments of market access and national treatment undertaken by Mexico .
Brazil considers that, for that purpo se, the Panel should analyse Mexico 's commitments in light of the
national treatment discipline of the GATS as set out in its Article XVII and as qualified by footnote
15 of the GATS. Brazil submits that in conducting this analysis the Panel should take into account the
applicability of the national treatment discipline in relation to the four modes of supply of services, as
defined in GATS Article I:2(a) to (d), particularly as regards "mode 1".
719 720
5.15 Brazil states that the Panel should consider wh ether the national treatment discipline applies
individually to each mode of supply or whether it applies across all modes noting that, for the
purposes of the application of the GATS Annex on Basic Telecommunications, the disciplines of
"non-discrimination" contained in Article II (M ost-Favoured Nation) and Article XVII (National
Treatment) of the Agreement are qualified by the c oncept of "like circumstances", as set out in
footnote 15 of the GATS.721
5.16 Brazil submits that it can be inferred from Arti cle XVII.1 and footnote 15 that the meaning
and the scope of the national treatment obligation lies in the definition of likeness . Brazil considers
that this determination can only be made in rela tion to each mode of supply and not "across modes" .
Under Brazil's view, the scope of the national treatme nt obligation is given much more legal certainty
by the interpretation that it applies for and within each mode of supply individually, with likeness
being defined on the basis of the concept of "like circumstances".722
5.17 According to Brazil it seems inconsistent to compare with the same common reference
different categories of service suppliers and the servi ces they supply, because in that thinking a full
National Treatment in mode 3 would be necessary to grant full national treatment in modes 1, 2 and 4,
since they would be "like" services suppliers.723
2. Scope and reach of specific commitments
5.18 Brazil submits that, in the first column of its Schedule of Specific Commitments, Mexico,
confined the definition of "Telecommunication Se rvices" to those services "supplied by a facilities-
based public telecommunications network (wire- based and radioelectric) through any existing
technological medium" . Accordingly, Brazil states that one could conclude that Mexico has not

718 See Australia's third party submission, paragraph 14 where it refers to the recognition of the role of
the ITU by the GATS Annex on Telecommunications.
719 See Brazil's third party submission, paragraph 3.
720 See Brazil's oral statement, paragraphs 5-6.
721 See Brazil's third party submission, paragraph 3.
722 See Brazil's oral statement, paragraph 11.
723 See Brazil's oral statement, paragraph 18.

committed to ensure the rights and obligations est ablished in the GATS to suppliers that are not
"facilities-based".
724
5.19 However, Brazil argues that under subsector "o – Other" of its Schedule of Specific
Commitments, Mexico undertook commitments regarding "commercial agencies", which according to
Mexico's are those "which, without owning tran smission means, provide third parties with
telecommunication services by using capacity leased from a public network concessionaire" .
According to Brazil this definition seems equal to the one provided by the United States in paragraph
24 of its submission . Brazil submits that the supply of basic telecom services over leased capacity is
referred to in the industry as "resale".725
5.20 According to Brazil, although Mexico's definition of "Telecommunications services" would
suggest that its commitments were applicable ex clusively to "facilities-based suppliers", Mexico
undertook specific commitments for "commercial agencies/resale" . In this regard, Brazil notes that
commitments under mode 1 for "facilities based su ppliers" are the same as those undertaken for
"private-leased circuits".726
5.21 Brazil contends that Mexico's specific commit ments regarding "commercial agencies" read,
for mode 1, in the market access column "none, except as indicated in 2.C.1". Brazil recalls that in
2.C.1, for mode 1, the Schedule reads: "none, except the following: international traffic must be
routed through the facilities of an enterprise that has a concession granted by the "Ministry of
Communications and Transport (SCT)" . Therefore, under Brazil's point of view, the limitation
inscribed in 2.C.1 is equally valid for the market access column in mode 1 for "commercial agencies".
Brazil recalls that in the National Treatment column , for mode 1, is written "none" for "commercial
agencies".
727
3. Non-discrimination and the concept of "like circumstances"
5.22 Brazil submits that one of the main objec tives of the GATS is the achievement of
progressively higher levels of liberalization and one of the main ways of accomplishing that goal is
the elimination of all discrimination between services and services suppliers of the Parties to the
Agreement. According to Brazil, that seems to be the basic rationale behind Articles II ("Most-
Favoured Nation") and XVII ("National Treatment").728
5.23 According to Brazil, footnote 15 of the GATS go es one step further and establishes that: the
term "non-discriminatory" is unde rstood to refer to most-favoured-n ation and national treatment as
defined in the Agreement, as well as to reflect s ector-specific usage of the term to mean "terms and
conditions no less favourable than those accorded to any other user of like public telecommunications
transport networks or services under like circumstances".729
5.24 In Brazil's view, it can be inferred from Article XVII.1 and footnote 15 that the meaning and
the scope of the national treatment obligation li es in the definition of "like services and service
suppliers" and "under like circumstances". According to Brazil, there is nothing in the language of
Article XVII and of footnote 15 suggesting that the m ode of supply is a consid eration in defining the
"likeness" of a service or of a service supplier . However, Brazil recalls that GATS' commitments are

724 See Brazil's third party submission, paragraph 5 where it refers to Mexico's Schedule of Specific
Commitments.
725 See Brazil's third party submission, paragraph 6 where it refers to the definition provided in the
WTO web page.
726 See Brazil's third party submission, paragraph 7.
727 See Brazil's third party submission, paragraph 8 where it refers to footnote 2 in Mexico's Schedule
of Specific Commitments.
728 See Brazil's third party submission, paragraph 15.
729 See Brazil's third party submission, paragraph 16.

inscribed in national schedules by mode of supply, which allows for the perception that the whole
architecture of the Agreement stems from the clear separation between the four modes, as defined in
Article I of the GATS. Brazil submits that even when full comm itments are entered in all four modes
in a given sector or subsector, the extent to which services and services suppliers operating in
different modes can be considered "like" remains unclear . Therefore it is not evident, for Brazil, how
national treatment should apply to them . According to Brazil, the same situation arises in regard to
the interpretation of Mexico's commitments.730
5.25 In view of the above, Brazil contend that tw o possible interpretations should be considered .
The first interpretation borrows from one of the a pproaches identified in the "jurisprudence" on trade
in goods, which is to define likeness in terms of the essential characteristics of the products . In a
services context this would perhaps mean that servi ces and/or service suppliers would be considered
"like" on the basis of the nature of the economic act ivity being performed regardless of the territorial
presence of the supplier and the consumer. Under this point of view all service suppliers operating in
the same sector would be considered "like service suppliers" and all the services supplied in the same
sector would be considered "like services" . In this case, if all services suppliers are "like" services
suppliers, the only possible way of defining the na tional treatment obligation is to compare the
treatment granted to all foreign services suppliers altogether regarding the treatment granted to
national services suppliers based in their home country . Brazil states that, if the determination of
likeness is independent of the mode of supply, it fo llows that national treatment applies across modes
in relation to a same common reference: national services suppliers in their home country.731
5.26 Brazil further points out that in the second possi ble interpretation, the definition of "like
services and service suppliers" would be based on a co mparison of the service suppliers that operate
under like circumstances, as mentioned in footnote 15 of GATS . Brazil considers that this logic
follows the other approach to likeness identified in jurisprudence on trade in goods, which is to define
it on the basis of the "aims and effects" or of the regulatory objective being pursued by a certain
measure affecting the product or its producers. Br azil notes that in this connection, services and/or
service suppliers would be considered "like" only if they are subject to the same regulatory
framework. According to Brazil, in this interpre tation, likeness becomes a function of the mode of
supply, being defined only within each mode indi vidually. Brazil states that in this possible
interpretation, if one assumes that there are four categories of services suppliers, it seems inconsistent
to compare those services suppliers and the services they supply with the same common reference.732
5.27 Brazil submits that the question to be answered seems to be: is Mexico under the obligation
of granting foreign services and service suppliers the same treatment it accords Mexican services and
services suppliers in mode 1 - for instance, the same treatment Mexico would grant to Mexican
service suppliers based outside the territory of Mexi co - or is Mexico under the obligation of granting
foreign services and service suppliers the same trea tment it accords to Mexican services and service
suppliers based in the Mexican territo ry? According to Brazil, if this question is not given an answer,
it seems to be impossible to judge any claimed violation of Mexican commitments, including as
regards, for instance, Mexico's obligations under paragraphs 5(a) and 5(b) of the Annex on
Telecommunications in relation to the supply of scheduled telecommunication services in mode 1.733
5.28 Brazil contends that the legal uncertainty re garding the scope of the national treatment
obligation seems to be greatly redu ced by the interpretation that this basic obligation applies for and
within each mode of supply individually, with "lik eness" being defined on the basis of the concept of
"like" circumstances. Brazil submits that this inte rpretation would be much more in conformity with
the four-mode logic that constitutes the very foundati on of the GATS. Brazil considers that this logic

730 See Brazil's third party submission, paragraph 17.
731 See Brazil's third party submission, paragraph 19.
732 See Brazil's third party submission, paragraph 20.
733 See Brazil's third party submission, paragraph 21.

implies that services and services suppliers opera ting through different modes cannot always be
treated as "perfect substitutes" because, in realit y, they will be subject to different regulatory
frameworks. Brazil recalls that this approach is in keeping with the "pri nciple of equality" (from
which flows the concept of like circumstances ), according to which the same treatment must be
accorded to persons under the same condition and similarly situated.
734
C. EUROPEAN COMMUNITIES
5.29 The European Communities recalls that the United States' claims, in its first written
submission to this Panel, are based exclusivel y on alleged violations of Mexico's additional
commitments on Telecommunications under Article XVIII of the GATS as incorporated via the
Fourth Protocol to the GATS and based on the Re ference Paper (Sections 1.1, 2.1 and 2.2); and
alleged violations of the Sections 5(a) and 5(b) of the GATS Annex on Telecommunications.
735
5.30 The European Communities notes that the requ est for the establishment of the Panel and
therefore the Panel's terms of reference also in clude Article XVII of the GATS. The European
Communities recall that the original request for the es tablishment of a panel in this case also alleged
violation of Article VI:1, VI:5, XVI:1, XVI:2, XVII:1, XVII:2 and XVII:3 of the GATS as well as
many other provisions of the Reference Paper a nd the Annex on Telecommunications. Under the
European Communities point of view these additional claims now seem to have been abandoned.736
5.31 Under the European Communities' view, a correct analysis of Mexico's obligations has to start
by considering the relevant specific commitments of Mexico.737
1. Interpretation of Mexico's specific commitment under mode 1
5.32 The European Communities recalls that the re levant commitment in telecommunications
services under mode 1 and the limitations column contains the following:
"(1) None, except the following:
International traffic must be routed through the facilities of an enterprise that has a
concession granted by the Ministry of Communications and Transport."
738
5.33 According to the European Communities, this commitment is rendered obligatory and must
therefore be read in the light of Article XVI of the GATS.739
5.34 The European Communities further points out that the basic obligation expressed in
Article XVI:1 is to "accord services and service suppliers of any other Member treatment no less
favourable than that provided for under the terms, li mitations and conditions agreed and specified in
its Schedule", and that Article XVI:2 provides an exhaustive list of measures that Members shall not
maintain or adopt unless otherwise specified in its schedule. The European Communities submits that
these are various kinds of quantitative limitations and restrictions on the types of legal en tity or joint
venture (and foreign participation th erein) that may be used to supply the service. According to the
European Communities a Member is not restricted under Article XVI:1 from regulating the supply of
services on its territory in any way other than thr ough the measures specified in Article XVI:2. The

734 See Brazil's third party submission, paragraph 22 where it refers to Black's Law Dictionary
definition of equality.
735 See European Communities' third party submission, paragraph 5.
736 See European Communities' third party submission, paragraph 6.
737 See European Communities' third party submission, paragraph 7.
738 See European Communities' third party submission, paragraph 8.
739 See European Communities' third party submission, paragraph 9.

European Communities clearly states that there are other obligations under the GATS that the Member
has to respect.740
5.35 The European Communities submits that the "exception" to the commitment on
telecommunication services under mode 1 inscribed by Mexico in its Schedule is pointless since the
measure that is specified (an obligation to route international traffic through the facilities of an
enterprise that has a concession gran ted by the Ministry of Communications and Transport) is not a
measure of the kind listed in Article XVI:2.741
5.36 The European Communities recalls that the measure mentioned in the "exception" is
regulatory in nature and is expressed to apply to all international traffic (whether foreign service
supply or a foreign service supplier is involved or not).742
5.37 The European Communities notes that it is in fact precisely because the supply of
telecommunication services is so susceptible to being affected, and even rendered impossible, by
regulatory measures that the adoption of additiona l commitments concerning telecommunications
services was so important and that the Reference Pa per was a central element in the negotiations on
basic telecommunications.
743
5.38 According to the European Comm unities, Mexico relies to a great extent in its first written
submission on the contention that additional commi tments under Article XVIII of the GATS can only
cover measures that are not subject to scheduli ng under Articles XVI and XVII of the GATS. The
European Communities agree with this approach.744
5.39 However, under the European Communities' point of view the correct conclusion for this case
is the opposite of that which Mexico submits. According to the European Communities the
"exception" on which Mexico seeks to rely should be included as a limitation to any additional
commitments made on regulatory measures.745
5.40 In the European Communities' vi ew the "exception" to the comm itment in Mexico's Schedule
has no legal effect since it was not necessary for the purpose of allowing Mexico to maintain the
measure described. According to the Europ ean Communities the "exception" to the specific
commitment can only be read as an additional inform ation to the reader about the legal situation in
Mexico. The European Communities contends that the United States is correct in basing its claim
only on the additional commitments of Mexico, wh ich do not include the exception on which Mexico
relies.746
5.41 The European Communities note th at the "exception" inserted by Mexico in its Schedule of
Commitments refers to the obligation to route tra ffic through the facilities of an enterprise that has a
concession granted by the Ministry of Communi cations and Transport. According to the
European Communities this obligation does not ex clude foreign telecommunications suppliers from
supplying services in a cross-border manner provided th at those suppliers reach an agreement with a
Mexican enterprise, which has been granted a concession, to terminate its traffic within Mexico.747

740 See European Communities' third party submission, paragraph 10.
741 See European Communities' third party submission, paragraph 12.
742 See European Communities' third party submission, paragraph 13.
743 See European Communities' third party submission, paragraph 14.
744 See European Communities' third party submission, paragraph 15.
745 See European Communities' third party submission, paragraph 16.
746 See European Communities' third party submission, paragraph 17.
747 See European Communities' third party submission, paragraph 18.

5.42 With regard to Brazil's concern based on the in terpretation of Mexico's Schedule of Specific
Commitments,
748 the European Communities contends that the condition in the Spanish language is
that the service has to be provided "por", which in context means through or over a public
telecommunication network, not limiting the concession to facilities based suppliers.
749
2. Mexico's commitments under mode 3
5.43 In the European Communities' view, the two sente nces of the statement in Mexico's Schedule
referring to permits for the establishment of comme rcial agencies under mode 3 cannot be read in
combination as making the coming into effect of the entire commitment subject to the discretion of
Mexico.
750 According to the European Communities a cons istent reading is that the regulations will
be issued before permits are granted so as to en sure that no commercial agencies will be allowed to
have "acquired rights" to operate without respecting the regulations.751
5.44 The European Communities considers that this position is supported by the explanatory note
containing Guidelines for the Scheduling of Commitments (MTN.GNS/W/164/Add.1) which specifies
under Point 8 that "according to the agreed sche duling procedures, schedules should not contain
general references to laws and regulations as it is understood that such references would not have
legal implications under the GATS". Thus, limitati ons to scheduled commitments must be set out
explicitly in the schedule and not incorporated by reference to national regulations.752
5.45 The European Communities considers that Me xico's commitments for market access for
commercial agencies are in force subject to the limitations legitimately included in the Schedule.753
5.46 The European Communities recalls that, on th e relationship between specific commitments
and additional commitments, there is no basis for holding that additional commitments cannot prevail
over specific commitments, as argued by Mexico in paragraphs 211 and 212 of its first written
submission. According to the European Communities there is no limitation of this kind in Article
XVIII of the GATS.
754
5.47 The European Communities contends that the Annex on Telecommunications is an integral
part of the GATS (Article XXIX) and as such, restrictions listed as "limitations" to specific
commitments cannot derogate from GATS obligations except as specifically provided. In the
European Communities' view this is why the Annex on Telecommunications contains language
expressly stating that it does not require the author ization of services other than as provided for in its
Schedule.755

748 See Brazil's third party submission paragraph 5.
749 See European Communities' oral statement, paragraphs 5 and 7.
750 See European Communities' third party submission, pa ragraph 19 where it refers to paragraphs 265
and 294 of the United States' first written submission.
751 See European Communities' third party submission, paragraphs 20-23.
752 See European Communities' replies to questions from the Panel, paragraph 14.
753 See European Communities' third party submission, paragraph 24.
754 See European Communities' third party submission, paragraph 25.
755 See European Communities' third party submission, paragraph 28 where it refers to Section 2(c)(I)
of the Annex on Telecommunications of the GATS.

3. Application of the interconnection rules contained in the Reference Paper
5.48 The European Communities disagrees with Me xico's view that the obligations on
interconnection contained in the Re ference Paper do not apply to term ination of international calls
under the accounting rate system.756
5.49 According to the European Comm unities the term "interconnection", as used in Section 2 of
the Reference Paper, interpreted in accordance to Article 31 of the Vienna Convention appears to
relate to all modes of linking two operators. In the European Communities view the wording of
Section 2.1 of the Reference Paper which defines "interconnection" supports this idea.757
5.50 The European Communities contends that the very object and purpose of the GATS is the
liberalisation of international trade in services. In the European Communities view it is difficult to
maintain that an interpretation of the Reference Pa per should be limited to e nhancement of "national"
competition to the detriment of "international" one.758
5.51 The European Communities contends that the ne gotiations which led to the final Reference
Paper were conducted on the assumption that termina tion of international calls under the accounting
rate system is not fundamentally different from domes tic interconnection, and it tends to suggest that
accounting rates may indeed be considered as a form of "international interconnection".759
5.52 In this regard, the European Communities belie ves that the ordinary meaning of the term
"interconnection" covers both national and international linking.760
5.53 The European Communities adds in reply to a question from the Panel that the opening words
of Section 2.1 of the Referen ce Paper ("This section applies , on the basis of the specific commitments
undertaken ... ") means that Section 2 of the Reference Paper only applies to the extent that there are
specific commitments and cannot be used to require market access where this does not result from the
specific commitments. According to the Europ ean Communities, the additional commitment is
intended to facilitate the effective exploitation of market access to whic h a Member has committed
itself in its Schedule. The European Communities is of the view that Mexico has committed to
provide market access under mode 1 and must therefore ensure that the major supplier provides
interconnection in accordance with Section 2.761
4. Rates relating to termination of international calls
5.54 In the European Communities' view, Telmex should be obliged to provide cost-oriented
interconnection, taking into consideration Mexico 's commitments. Due to the ample divergence
between "costs" and "rates", the European Commun ities considers that it is upon Mexico to provide
the Panel with proof of those costs that would justify Mexico's rates.762
5.55 As regard Japan's argument that the Spanis h term "basadas en costos", which has been
included in Mexico's additional commitments, requir es a stricter adherence to costs than the term
"cost oriented", the European Communities subm its that the additional commitments introduced
through the Fourth Protocol to GATS, were ba sed on a common Reference Paper to ensure that

756 See European Communities' third party submission, paragraph 29 where it refers to paragraph 37
and heading IV.A.3 of the United States first written submission.
757 See European Communities' third party submission, paragraphs 30-31.
758 See European Communities' third party submission, paragraph 32.
759 See European Communities' third party submission, paragraph 34.
760 See European Communities' third party submission, paragraph 35.
761 See European Communities' replies to questions from the Panel, paragraphs 3-4.
762 See European Communities' third party submission, paragraphs 38-39.

identical obligations were undertaken by all except where expressly intended otherwise.
763 T h e
European Communities submits that the term "cost-or iented" in English and "basadas en el costo" in
Spanish were intended to be equi valent. It points out that the European Communities' additional
commitments which are authentic in all three WTO languages uses the term "cost-oriented" in English
and "basadas en el costo" in Spanish. 764 Since the additional commitments of the European
Communities are an integral part of the GATS and were accepted by all parties to the Fourth Protocol,
it is clear that the two terms were intended to be equivalent. According to the European Communities
a different interpretation would vary the scope of WTO Members' obligations depending on the
choice of authentic language for additional commitments.765
5.56 The European Communities further points out the fact that cost-orientation has been
discussed extensively in the ITU, and some gui dance can be found in ITU-T Recommendation D.140,
entitled "Accounting Rate Principles for the International Telephone Service", and ITU-T
Recommendation D.150 entitled "New System fo r Accounting in International telephony".766 It notes
that commercially, contractually and technically, both accounting rates and interconnection can cover
many different situations: where two operators' networks connect physically at a given point that they
own together, where two operators' network connect physically at a given point that is owned by
either of them of by a third party, where two operators own jointly a link between their respective
networks.767
5.57 The European Communities notes that the Refere nce Paper does not contain the detail of the
ITU Recommendations and does not specify which cost standard should be applied. In the European
Communities view, national authorities have discretion as to the choice of cost standard, provided that
it properly reflects the cost of interconnection and is applied in a transparent, consistent and non-
discriminatory way.768
5. The meaning of "reasonable"
5.58 The European Communities contends that the interpretation of the term "reasonable" as linked
to conditions of competition is not appropriate . According to the European Communities the
interpretation should be in line with the negotiatin g history of the Reference Paper, according to
which this term it is normally used to refer to "a reasonable rate of return of the capital employed".769
5.59 In answer to a question from the Panel, the European Communities added that the
requirement of reasonableness is to be understood as a discipline on the model used by national
authorities to calculate the 'real' cost of interconn ection. It recalls that there are several models
(bottom-up or top-down models, looking at historical or current costs, in a fully-distributed or stand
alone manner, among other). The European Communities considers that the Reference Paper does not
mandate the use of one particular model, but the mode l chosen must reflect economic reality so that if
the model fails to reflect reality, the resulting interconnection prices cannot be regarded as
reasonable.770
5.60 In the European Communities' view, the expr ession 'having regard to economic feasibility'
must be understood as a general qualification of (or limitation on) the obligation for major suppliers to
provide interconnection on: (1) terms; (2) condi tions; and (3) cost-oriented rates which are (a)

763 See European Communities' oral statement, paragraph 5 where it refers to paragraph 5 of Brazil's
third party written submission.
764 See document GATS/SC/31/Suppl.3.
765 See European Communities' oral statement, paragraph 10.
766 See European Communities' oral statement, paragraph 16.
767 See European Communities' replies to questions from the Panel, paragraphs 22-28.
768 See European Communities' oral statement, paragraph 23.
769 See European Communities' third party submission, paragraphs 40-42.
770 See European Communities' replies to questions from the Panel, paragraphs 31-33.

transparent and (b) reasonable. It confirms that rates must be oriented towards, not 'equal to' or
'identical to', actual cost and that operators are a llowed a reasonable rate of return on investment and
provides a safeguard to ensure that major supplie rs do not have to meet demands that could be
excessively expensive, bearing in mind the reve nues to be generated by the interconnection
agreement. The European Commun ities submits that the ambiguity in the drafting of the different
language versions of the text should be resolved in a manner that makes them consistent with one
another, and which acknowledges that economic feasibility is a general qualification of (or limitation
on) the obligation for major suppliers to provide interconnection on reasonable and transparent terms,
conditions and rates.771
6. Requirements of Section 1
5.61 According to the European Communities, Mexico is clearly right that Section 1 imposes an
obligation of means, not of result. 772 Section 1 requires Mexico to maintain appropriate measures for
the purpose of preventing major suppliers from enga ging in or continuing anti-competitive practices
and does not require Mexico to open all its teleco mmunication markets. In view of the above, the
European Communities contends that if Mexi co chooses not to allow competition between
telecommunication operators on a certain matter, there is no scope for anti-competitive practices
relating to that matter. In that regard, the Eur opean Communities points out that it is not possible to
restrict competition where competition is not allowed.773
5.62 In view of the above, the European Commun ities contends that one matter that could
constitute an anti-competitive practice would be the negotiation by the major supplier of an
accounting rate that restricts competition by other suppliers, because it would be unprofitable for them
and this must be the subject of competitive safeguards.774
5.63 The European Communities submits that one an ti-competitive practice that the United States
seems to be complaining of is the fixing of prici ng and the high level thereof. However, it argues the
fixing of a uniform price cannot be an anti-competitive practice since uniform prices are required by
law. In its view, the same goes for the revenue sh aring system ("proportional return") since this is
also mandated by law.
775
5.64 The European Communities submits that Sec tion 1 of the reference paper does create
obligations in sectors that are not covered by specific commitments. 776
7. Applicability of the Annex on Telecommunications
5.65 The European Communities recalls it shares the United States view that the GATS Annex on
Telecommunications was meant to benefit not onl y non-telecom providers, and providers of value-
added telecommunications, but also providers of basic telecommunications. The European
Communities considers that to restrict the scope of the Annex to non-telecom providers would fail to
give effect to one of the two distinct roles of the telecommunications sector.777

771 See European Communities' replies to questions from the Panel, paragraphs 34-39.
772 See European Communities' third party submission, paragraph 48.
773 See European Communities' third party submission, paragraph 49.
774 See European Communities' third party submission, paragraph 52.
775 See European Communities' third party submission, paragraph 53.
776 See European Communities' third party submission, paragraph 56.
777 See European Communities' third party submission, paragraph 58.

5.66 The European Communities furthers point out that the GATS Annex on Telecommunications
was never meant to provide wider market access obligations for WTO Members than those
established in their Schedules as regards basic telecommunications.
778
5.67 According to the European Communities ev en though the Annex on Telecommunications
does not create market access commitments that are not contained in the Schedules, it is intended to
facilitate the exploitation of market access comm itments that are contained in the Schedules. 779 The
European Communities also recalled that the obligations contained in the Annex only relate to " public
telecommunications transport networks and ser vices", which means "any telecommunications
transport service required, explicitly or in effect, by a Member to be offered to the public
generally".780
8. The notion of likeness
5.68 With respect of the notion of likeness, the Eu ropean Communities asserts that footnote 15
relates only to the meaning of the term non-discr iminatory in the Annex on Telecommunications and
is not relevant to the interpretation of "like services and service suppliers" as they appear in Articles II
and XVII of the GATS. In the European Communiti es' view, footnote 15 cannot in the absence of a
clear textual indication to the contrary, be relevant to the interpretation of "like services and service
suppliers," especially since this must have the sa me meaning for all service sectors. The European
Communities further points out that the existing case-law ( Canada – Autos 781) clearly suggests that
the notion of "like services and service suppliers" re quires a comparison of the activity involved and
that the mode of supply is irrelevant.782
D. JAPAN
1. Validity for an action by the United States
5.69 Japan contends that the Panel should first dete rmine whether it is proper for the United States
to use the dispute settlement pro cedure under the DSU to object to "interconnection" rates charged by
Telmex based on the accounting rate system.783
5.70 Japan submits that the "Group" addressed the subject of matters that may not give rise to an
action before a panel in its repor t dated 15 February 1997, which includes the application of the
accounting rate system.784
5.71 Japan further points out that the position of th e "Group" as to whether accounting rates could
give rise to an action by Members under the DSU is further addressed in the report dated 10 March
1997, where the Chairman stressed that the report was merely an understanding, which could not and
was not intended to have binding legal force and did not take away from Members the rights they have
under the DSU.
785
5.72 Japan considers that the "understanding" of the "Group" concerning the proper scope and
treatment of "accounting rates" is not entirely clear. In Japan's view it is not clear whether the "rates"

778 See European Communities' third party submission, paragraph 59.
779 See European Communities' third party submission, paragraph 60.
780 See European Communities' third party submission, paragraphs 62-63.
781 See Panel Report, Canada – Autos.
782 See European Communities' oral statement, paragraphs 28- 29.
783 See Japan's third party submission, paragraph 5.
784 See Japan's third party submission, paragraph 6 where it refers to the Report of the Group on Basic
Telecommunications of 15 February 1997, S/GBT/4.
785 See Japan's third party submission, paragraph 7 where it refers to the Report of the Group on Basic
Telecommunications of 10 March 1997, S/GBT/M/9.

described in Section 2.2(b) of the Reference Paper in fact cover accounting rates, and are thus capable
of being disputed under the DSU mechanism.786
5.73 According to Japan, given the lack of clarity concerning the proper scope and treatment of
accounting rates, the panel needs to determine whet her it is proper for the United States to bring
before the panel its objections concerning the accounting rates negotiated by Telmex.787
2. The term "cost oriented"
5.74 According to Japan, the meaning of the term " basadas en costos ", as used in Mexico's
Reference Paper, does not automatically apply to the term " cost-oriented" that appears in the
Reference Paper of other Members. Japan asserts that in its submission the United States provides its
interpretation of the term " basadas en costos ", as used in the context of Mexico's Reference Paper.
Japan further points out that in the course of its s ubmission, the United States at times appears to use
the terms " basadas en costos ", "cost based" and "cost-oriented" interchangeably, and implies that
these terms have equivalent meanings.
788
5.75 Japan submits that if the meaning of " basadas en costos " is based upon the term's alleged
English language equivalent, " based in cost ", such meaning in Japan's view cannot automatically be
applied to the term " cost oriented " that appears in the Reference Papers which are attached to the
Schedules of specific commitments of other Members, which chose English to be authentic.789
3. The term "cost-based"
5.76 Japan submits that in the English language Re ference Paper of many Members, the English
language equivalent of the term " basadas en costos" appears as "cost-oriented". Japan points out that
the term "cost-oriented" is not defined in any Me mber's Reference Paper, and its meaning is not
addressed in any other part of the WTO Agreement or in the report of any panel or Appellate Body.
Japan considers that "cost-oriented" rates has an or dinary meaning that is less specific, and therefore
less constraining, than "cost-based" rates, "cost-equiva lent" rates, or rates calculated by application of
the total element long run incremental costs adopted in the United States.790
5.77 In Japan's view the term "cost-oriented" must basically be interpreted in accordance with its
ordinary meaning as stipulated under Article 31(1) of the Vienna Convention. Japan further points
out that the determination of whether interconnection rates are "cost-oriented" cannot be limited to an
examination of only the specific manner in which interconnection rates are established.791
5.78 According to Japan the implementation of an interconnection rate system that meets the
general principles of the Reference Paper is left to the discretion of each Member's government.792
5.79 Japan notes that, according to the negotiating hist ory of the Reference Paper, Members were
not only unable to agree on an exact definition of "cost", but also avoided closely binding themselves
to the term by using the expression "cost-oriented" rather than "cost-based".793

786 See Japan's third party submission, paragraph 9.
787 See Japan's third party submission, paragraph 10.
788 See Japan's third party submission, paragraphs 12-13.
789 See Japan's third party submission, paragraph 14.
790 See Japan's third party submission, paragraph 15.
791 See Japan's third party submission, paragraph 16 where it refers to the Vienna Convention on the
Law of Treaties.
792 See Japan's third party submission, paragraph 18.
793 See Japan's third party submission, paragraph 21.

5.80 Japan considers that Members adopted the term "cost-orient ed" during the Negotiations on
Basic Telecommunications ("NBT") on account of its ambiguity.
794
4. Election of a uniform accounting rate and proportionate return system
5.81 Japan submits that the Spanish term "razonabl es, económicamente factibles" grants Mexico
additional flexibility in determining interconnection ra tes. According to Japan , in the absence of any
argument concerning the inapplicability of the quali fication created by the term "económicamente
factibles", the panel has insufficient information before it to find that the interconnection rates
imposed by Mexico are not "razonables".795
5.82 Japan recalls that following the conclusion of the negotiations on basic telecommunications, a
number of Members liberalized aspects of their acc ounting rate systems. However, many Members
(including Japan and the United States), continue to maintain pre-existing accounting rate systems for
settling interconnection rates with carriers from certain countries. Japan points out that it applies such
pre-existing system only to non-WTO Member carri ers while the United States applies it to carriers
with market power, either WTO-Member or non-Me mber. According to Japan, these systems are
similar to Mexico's accounting rate system presently under discussion.796
5.83 In Japan's view it is hard to determ ine that Mexico is acting unreasonably per se insofar as it
elects to maintain a uniform accounting rate and pr oportionate return system similar to that which
continues to be used by many Members (including the United States) to settle rates with certain
countries. According to Japan, the United States ha s to provide a compelling argument that the mere
maintenance of a uniform accounti ng rate and proportionate return sy stem triggers a violation of
Section 2.2(b) of the Reference Paper. Neverthel ess, Japan notes its strong concern with Mexico's
indiscriminate practice of applying uniform accoun ting rate and proportionate return system in
determining accounting rates with carriers from every country, regardless of whether the country in
question possesses multiple carriers or has a competitive environment.
797

794 See Japan's third party submission, paragraph 22.
795 See Japan's third party submission, paragraph 24.
796 See Japan's third party submission, paragraph 26.
797 See Japan's third party submission, paragraph 27.

VI. INTERIM REVIEW
6.1 On 10 July 2003, pursuant to Article 15.1 of the DSU, the Panel issued the draft descriptive
part of its Report. As agreed, on 25 July 2003 both parties commented on the draft descriptive part.
The Panel issued its Interim Report on 21 Novemb er 2003. On 15 December 2003, pursuant to
Article 15.2 of the DSU, the United States and Mexi co provided comments and requested the revision
and clarification of certain aspects of the Interim Report. None of the parties requested that the Panel
hold a further meeting with the parties. In the absen ce of a meeting and further to paragraph 16 of the
Panel's Working Procedures
798, the parties were given until 15 Ja nuary 2004 to submit further written
comments on the other party's Interim Review comments. Only the United States filed further
comments on that date.
6.2 Following the comments of the parties, the Panel has reviewed the claims, arguments and
evidence submitted by the parties during the panel pr ocess. Where it considered it appropriate to
ensure clarity and avoid misunderstandings, the Pane l has revised the findings section of its Report,
including the correction of typographical and editorial mistakes. It is important to note that in the
findings section of a Report, a panel cannot be expected to refer to all the statements and arguments of
the parties. Failure to do so does not therefor e imply that the Panel has ignored statements or
arguments of the parties. Taking into considerati on this last statement, the Panel has addressed the
following comments raised by the parties.
6.3 Generally, the United States' comments concern some additions or deletions to the text of the
findings as a matter of clarity. The United States notes that it disagrees with the Panel's conclusion
that Mexico's Schedule allows Mexico to prohib it market access for the cross-border supply of the
services at issue into Mexico over capacity leased by the supplier (i.e., on a non-facilities basis) in
Mexico. However, the United States states that it woul d not repeat its arguments in this respect in the
comments provided to the Panel on the Interim Report.
6.4 On the other side, Mexico's comments refer to precise aspects of the Interim Report, including
the identification of some evidence, the clarification of some definitions and the identification of the
services at issue. Mexico submits that the review of all these aspects will help to clarify its position
on certain issues.
6.5 Mexico notes in its submission dated 15 December 2003 that in paragraph 7.6 of the Interim
Report (which has been deleted in this Report) and corresponding footnote the Panel identifies the
services at issue in this dispute as "certain basi c public telecommunications services" referring to a
definition contained in paragraph 7.32 of the Interi m Report to describe them. According to Mexico,
the text quoted in paragraph 7.32 is from the definition of "Public telecommunications transport
services" in Article 3(b) of the Annex on Telecomm unications. Mexico further states that it
understands that the Ministerial Decision on Negot iations on Basic Telecommunications refers to
"basic telecommunications" as "telecommunications transport networks and services" , but states that
the latter term is not defined in the GATS Anne x on Telecommunications. According to Mexico,
Article 3 of the Annex on Telecommunications sets ou t two distinct definitions for the terms "Public
telecommunications transport service" and "Public telecommunications transport network". Mexico
states that it has argued that the services at issue in this dispute are transmission or transport services
of customer-supplied information or data. In partic ular, Mexico requests that the Panel clarifies its

798 Paragraph 16 of the Panel's Working Procedures reads as follows: "Fo llowing issuance of the
Interim Report, the parties shall have no less than 7 days to submit written requests to review precise aspects of
the Interim Report and to request a further meeting with th e Panel. The right to request such a meeting must be
exercised no later than at that time. Following recei pt of any written requests for review, in cases where no
further meeting with the Panel is requested, the parties shall have the opportunity within a time-period to be
specified by the Panel to submit written comments on the other parties' written requests for review. Such
comments shall be strictly limited to referencing the other parties' written requests for review."

definition of "basic public telecommunications services" and its description of the nature of the
services at issue. The United St ates alleges in its submission dated 15 January 2004 that it is not
necessary for the Panel to provide a precise definition of the broad term "basic public
telecommunications services." According to the Unite d States, in order to resolve the dispute, the
Panel needs only define the specific services to wh ich the claims relate and the services subject to
Mexico's commitments. In consideration of th ese comments, the Panel modified footnotes 745 and
753 (footnotes 829 and 840 of this Report) to clarify the link between "basic public
telecommunications services" and the definition of the term "public telecommunications transport
services".
6.6 With regard to paragraph 7.11 (paragraph 7.10 of this Report) Mexico disagrees with the
translation of ILD Rule 2:XI and requests it to be m odified. It also requests to add a sentence at the
end of paragraph 7.11 (paragraph 7.10 of this Report) in order to include a reference to ILD Rule
2:VIII according to its own translation. The Unite d States asserts that Mexico has not previously
disputed the English-language copy of the ILD Ru les provided to the Panel by the United States in
Exhibit US-1 and that the same translation of IL D Rule 2:XI was provided in paragraph 2.8 of the
draft descriptive part and was not contested by Me xico. The United States submits that it considers
accurate its own translation of the ILD Rules and that it does not consider accurate the translation
offered by Mexico. The Panel declines to amend th e translation of ILD Rule 2:XI as requested by
Mexico because the text conforms with the transl ation provided by the WTO Secretariat of the ILD
Rules (annexed to the Report) and does not appear , in substance, to differ from the modification
proposed by Mexico. As regards Mexico's request to add a sentence at the end of paragraph 7.11
(paragraph 7.10 of this Report), the Panel consider s the additional language suggested by Mexico to
refer to a matter already addressed in paragraph 7.12 (paragraph 7.11 of this Report).
6.7 Mexico considers that in paragraphs 7.23-7.25 (paragraphs 7.22-7.23 and 7.26 of this Report),
the Panel has summarised the arguments of the Un ited States on what constitutes the service at issue
and the manner in which they are provided, but has not summarised the arguments of Mexico.
Mexico requests the Panel to summarise in paragra phs 7.23 to 7.25 (paragraphs 7.22-7.23 and 7.26 of
this Report), its description of the precise nature of the services at issue and the manner in which those
services are supplied. Mexico also requests the Pane l to clarify its description of the nature of the
services at issue and to make a finding on whethe r the services at issue constitute transport and
transmission services. The United States submits that beyond identifying the service sectors at issue
as including voice telephony, circuit-switched data transmission and facsimile services, the Panel also
engaged in a detailed review of the definition of those services sectors according to, among other
things, the Central Product Classification codes included in the sector column of Mexico's Schedule.
According to the United States it is incorrect to suggest that the Panel has not directly addressed
Mexico's argument that the services at issue were only transmission and transport as it is rejected in
paragraph 7.36 of the Interim Report. In the Un ited States' view, the Panel's discussion extends
beyond paragraphs 7.23-7.25 (paragra ph 7.22-7.23 and 7.26 of this Report) to include the discussion
culminating in paragraph 7.46 (paragraph 7.45 of th is Report). The United States also submits that
although paragraph 7.46 (paragraph 7.45 of this Report) alr eady provides a concise description of the
services at issue, the Panel may consider providing a precise definition of the "services at issue", at
the end of that section. In view of Mexico's concerns, the Panel has modified the discussion of
"services at issue" to clarify that this term on its own focuses on the service sectors, and not on the
modes of supply raised in the United States' claim.
6.8 Mexico submits that it did not make the argumen t referred by the Panel in paragraph 7.27 of
the Interim Report. According to Mexico, it argued that in order for a United States-based supplier to
supply services from the United States territory into the Mexican territory, it must supply telecom
transport services over the whole of the "full circuit" without having a commercial presence within the
meaning of GATS Article XXVIII(d). Mexico further submits that it also explained how a full circuit
regime does not require commercial presence within the meaning of the GATS. Mexico requests the
Panel to replace the fourth sentence of paragraph 7.27 of the Interim Report and to add a new sentence

after the third sentence of the same paragraph. As regards Mexico's alle gation, the United States
considers that it is entirely reasonable for the Panel to have understood that under Mexico's
interpretation, a foreign service supplier must "operate " in some sense in a foreign territory to provide
scheduled services via the cross-border mode of supply. According to the United States, the Panel
may clarify this by moving the fourth sentence of paragraph 7.27 of the Interim Report and making it
the first sentence of paragraph 7.28 of the Interi m Report, including some new editing. The United
States suggests that it may be helpful for the Panel to adopt a uniform formulation such as "operates in
some fashion, or is located" when it uses the word "present", "pr esence", "operate" or "located" in
diverse paragraphs of the Interim Report. The United States submits that Mexico's assertion that the
Panel did not address the argument made by Mexico is not accurate, since the Panel did in fact
address and reject the relevance of Mexico's argument at paragraph 7.39 of the Interim Report. For all
these reasons the United States asks the Panel to rej ect Mexico's request to add an additional sentence
to paragraph 7.27 of the Interim Report. The Panel has amended the text of paragraphs 7.27 and 7.28
of the Interim Report to clarify Mexico's argument and adopted a uniform formulation regarding the
word "present", "presence" etc., ac companied by an explanatory footnote, to clarify that the terms
were not intended to refer to "commercial presence".
6.9 In relation to paragraph 7.28 of the Interim Repor t, Mexico submits that the issue before the
Panel was whether the services provided by United Stat es-based suppliers in the circumstances of this
dispute cross the border into Mexico, and not whet her cross-border "occurs only if the supplier itself
operates, or is present, in the territory of both Members". Mexico requests that paragraph 7.28 of the
Interim Report be accordingly replaced. In refere nce to the Mexico's comments, the United States
submits that the reason the Panel addressed the ques tion of whether "cross-border 'occurs only if the
supplier itself operates, or is present, in the territo ry of both Members'" is because Mexico made that
argument. The United States requests that the Panel rejects the replacement text proposed by Mexico
for paragraph 7.28 of the Interim Report. In consideration of Mexico's comments, the Panel modified
the wording of paragraph 7.28 of the Interim Re port to define in more precise wording the "issue
before the Panel" referred to in the paragraph.
6.10 Mexico, for the same reasons explained in its comments on paragraph 7.27 of the Interim
Report, requests that the Panel clarifies whether by using the word "present" in paragraphs 7.28, 7.32,
and 7.35 of the Interim Report, and the word "pr esence" in paragraphs 7.39, 7.40 and 7.88 of the
Interim Report (paragraphs 7.39, 7. 40 and 7.90 of this Report), it meant "commercially present" and
"commercial presence" within the meaning of the GATS. Regarding the use of these terms, the
United States refers the Panel to its discussion re garding Mexico's comments on paragraph 7.27 of the
Interim Report. The approach taken by the Panel to address the question posed by Mexico is described
above in the paragraph dealing with Mexico's in itial comment regarding the use of these terms in
paragraph 7.27 of the Interim Report.
6.11 As regards paragraph 7.36 of the Interim Re port, the United States requests the Panel to
rectify a typographical error when referring to "t elephony services". The Panel notes that the term
"telephony" does not appear in W/120 or the CPC. Ho wever, it is used in the translation of Mexico's
scheduled service commitments, in the ITU contexts, a nd by the parties to this dispute. The Panel
considers appropriate the suggested modification. For clarification, the Panel also added a footnote to
paragraph 7.45 (paragraph 7.43 of this Report) st ating that it considers the terms "telephony" and
"voice telephony" (as used in the English translati ons of Mexico's Schedule and the claims by the
United States) to be equivalent to the terms "t elephone services" and "voice telephone services" (as
used in the GATS sectoral classification the CPC).
6.12 Mexico submits that the Panel refers to "communications services supplied between
Members" in paragraph 7.38 of the Interim Report. Since, according to Mexico, the United States has
limited its challenge to "certain basic public te lecommunications services", Mexico requests that the
Panel clarifies what is meant by the terms "communications services" and make additional findings on
whether and how such services are supplied by Unit ed States-based suppliers on a cross-border basis

from the United States into Mexico . According to the United St ates, the Panel's reference to
"communications services" is equivalent to "telecommunications services," but suggests that the Panel
may clarify it. With respect to Mexico's comments on the interpretation of the services at issue in this
dispute, the United States recalls its discussion regarding Mexico's comments on paragraphs 7.23-7.25
(paragraphs 7.22-7.23 and 7.26 of th is Report). To address Mexico's concern, the Panel modified the
first sentence of paragraph 7.38 of the Interim Re port, replacing the word "communications" with
"basic telecommunications".
6.13 Mexico also notes that in paragraph 7.39 of th e Interim Report the Panel states that "the CPC
definition of the basic telecommunications services at issue provides for an especially high degree of
interaction between operators on each side of the bor der". Mexico requests that the Panel identifies
the specific definition to which it refers. Mexico re quests that the Panel clarifies its statement in the
fourth sentence of the paragraph and explain the le gal basis for that statement. With respect to
Mexico's comment that it "fails to see which CPC definition provides for interaction between
operators 'on each side of the border'," the United St ates finds entirely clear that the CPC definition to
which the Panel refers is CPC 75212 and that the Panel is applying the definition to the specific facts
of the dispute. The Panel addressed Mexico's con cern by amending paragraph 7.39 of the Interim
Report to specify more precisely the reasoning that leads us to consider that the CPC definition
foresees an especially high degree of interaction also between operators located in different Members.
6.14 As regards paragraph 7.41 of the Interim Re port (paragraph 7.41 of this Report), Mexico
recalls that the Panel states that "…all telecommunications traffic currently crossing borders would
then fall outside the scope of the GATS". Mexico un derstands from this statement that the Panel is of
the view that "telecommunications traffic currently crossing borders" is within the scope of the
GATS. Mexico requests that the Panel clarifies wh at is meant by "traffic" and the legal basis for
referring to that term. The United States consider s that Mexico's comments speak to its arguments
about the interpretation of the services at issue in this dispute. Therefore, the United States refers the
Panel to its discussion regarding Mexico's comment s on paragraphs 7.23-7.25 (paragraphs 7.22-7.23
and 7.26 of this Report). Regarding Mexico's co mment on the term "traffic", the United States
maintains that the Panel's reference to "telecommuni cations traffic currently crossing borders" is clear
but suggests that the Panel could amend it to refer to "telecommunications services currently crossing
borders." To address Mexico's concern the Panel had modified the third sentence of paragraph 7.41 of
the Interim Report (paragraph 7.41 of this Report) to refer telecommunications "services".
6.15 Mexico contends that paragraph 7.44 of th e Interim Report implies that under Mexico's
arguments, the cross-border supply of basic teleco mmunications services would not be technically
feasible. According to Mexico this is not the argument it made. Mexico states that it did not argue
that the cross-border supply of basic telecomm unications services required commercial presence, but
rather explained how cross-border supply could occu r in a "full-circuit" regime. Under Mexico's
arguments, cross-border trade in telecommunications transport service is technically feasible and does
not require "commercial presence" within the m eaning of the GATS. For these reasons, Mexico
requests that the Panel modifies paragraph 7.44. In the United States' view, the first sentence of this
paragraph expresses the Panel's conclusion that the examples and definition of "cross-border" supply
asserted by Mexico would virtually exclude from th e cross-border supply of facilities-based services
all situations in which the supplier does not have a commercial presence. According to the
United States, it was quite reasonable for the Panel to conclude that the examples of a "full-circuit"
regime cited by Mexico usually would only occu r through commercial presence and suggests that the
Panel rejects Mexico's proposed modifications. In view of Mexico's comments, the Panel deleted
paragraph 7.44, since the reasoning in that paragr aph relied to a large extent on a supposition that
Mexico's argument did imply that commercial presence was virtually necessary to conduct cross-
border supply on a facilities basis.
6.16 As regards paragraph 7.45 (paragraph 7.43 of this Report) Mexico requests the Panel to add a
sentence at the beginning, in order to better reflect its position. The United States notes that Mexico

provides no citation to an earlier submission in which it raised the argument "that there is a relevant
distinction between services supplied 'through' th e use of telecommunications transport service and
telecommunications transport service itself," and belie ves that Mexico has not previously made this
argument. Moreover, despite Mexico's attempt to introduce the argument, the purported distinction is
not relevant to the purpose of the quotation, which is to explain that the Explanatory Note supports the
view that cross-border supply does not imply the pr esence of the service supplier in the market where
the service is delivered. For these two reasons, the United States asks the Panel to reject Mexico's
comment and proposed text. The Panel declined Mexico's request because it considers that the
proposed addition is not directly related to the rest of paragraph 7.45 (paragraph 7.43 of this Report).
6.17 Mexico claims that the Panel refers to the "ser vices at issue" in paragraph 7.46 of this Report
without further explanation and concludes that they are supplied cross-border within the meaning of
the GATS. Mexico requests that the Panel clarify wh at is the precise nature of the services at issue
and explain how they are supplied cross-border. According to the United St ates, Mexico's comments
reiterate its arguments about the interpretation of th e services at issue in this dispute and therefore
refers the Panel to its discussion regarding Mexi co's comments on paragraphs 7.23-7.25 (paragraphs
7.22-7.23 and 7.26 of this Report). Regarding Mexi co's comments, the Panel notes that it has already
clarified what is meant by the "services at issue". And that paragraph 7.46 of this Report is a
conclusion intended to summarise the preceding analysis rather than to repeat it.
6.18 Mexico submits that the Panel statement in pa ragraph 7.48 (paragraph 7.47 of this Report)
does not accurately reflect Mexico's arguments. Me xico refers to its arguments summarized at
paragraphs 63 to 76 of its second written submission, where it explained its view that in order to
ascertain the nature of Mexico's mode 1 commitment s, it is first necessary to define the services at
issue. According to Mexico, in order to determ ine whether its market access commitments allow the
cross-border supply of such services into Mexico , the Panel had to determine whether Mexico's
Schedule permits public transmission or transport services provided by United States suppliers to
cross the border into Mexico. Mexico argues that it has not inscribed specific commitments that allow
such trade, because of the limitati ons inscribed in its Schedule. Mexico recalls that it argued that by
inscribing commercial presence and nationality re quirements in its mode 1 column, Mexico has
prevented the suppliers of other WTO Members (both facilities-based and non-facilities-based) from
supplying telecommunications transport services cross- border into Mexico. Referring the Panel to its
discussion regarding Mexico's comments on paragra phs 7.23-7.25 (paragraphs 7.22-7.23 and 7.26 of
this Report), the United States states that, in para graphs 7.48-7.49 (paragraphs 7.47-7.48 of this
Report), the Panel has accurately summarised Mexico's arguments on the definition of the services at
issue and whether those services can be provided on a cross-border basis. The Panel declined to
amend the paragraph on the basis of Mexico's co mment because it considered that paragraphs 7.48-
7.49 (paragraphs 7.47-7.48 of this Report) together do reflect, in summary, the points that Mexico
explains above.
6.19 Mexico submits that the Panel's statement in pa ragraph 7.49 (paragraph 7.48 of this Report)
does not accurately reflect Mexico's arguments. According to Mexico, its argument that the
limitations inscribed in its Schedule make it impossi ble for cross-border supply to take place must be
read in conjunction with its submissions on the nature of the services at issue. Mexico also notes that,
as drafted, the first sentence of paragraph 7.49 (par agraph 7.48 of this Report) suggests that Mexico
has argued that it did not undertake any commitment in respect of basic telecommunications. Mexico
submits that, on the contrary, it has argued that it has scheduled a "standstill" under mode 1. In
Mexico's view, this constituted a commitment, but did not accord market access to suppliers for cross-
border supply. Mexico further submits that it inscribed commitments under mode 3. Mexico requests
that the first and second sentence of paragraph 7.49 (paragraph 7.48 of this Re port) be appropriately
modified. According to the United States, Mexi co asserts that the Panel has mischaracterized
Mexico's argument by stating that it "did not undertake any commitment in respect of basic
telecommunications." The United States notes that Mexico did in fact make this argument and
considers that the Panel has accurately summarise d Mexico's arguments. In view of Mexico's

concern, the Panel modified the first sentence of paragraph 7.49 (paragraph 7.48 of this Report) to
more clearly state the Panel's understanding of Mexico's arguments.
6.20 As regards paragraphs 7.51-7.61 (paragraphs 7.58-7.68 of this Report), the United States
submits that in several places in this section the read er could be left with the mistaken impression that
the Panel has used the Model Schedule and Chairman 's Note in a manner other than to confirm the
ordinary meaning of a term, as provided for in the customary rules of interpretation of public
international law reflected in the Vienna Conventio n on the Law of Treaties. The United States
particularly recalls that the use of the words "inter pret" and "interpretative" in paragraphs 7.51, 7.57,
and 7.61 of the Interim Report may lead to this mistaken impression. The United States further
submits that the Panel has correctly stated its appr oach in paragraphs 7.15-7.17 (paragraphs 7.14-7.16
of this Report). In order to avoid any potential mistaken impressions, the United States suggests that
the Panel more precisely indicates that these documents are simply being used to confirm the ordinary
meaning of the terms employed. In view of the United States' comments, the Panel considered it
appropriate to modify the section concerned to iden tify more clearly its application of the rules of
interpretation of the Vienna Convention on the Law of Treaties to the Model Schedule and the
Chairman's Note with regard to Mexico's commitments on the services at issue.
6.21 The United States, in connection with the preceding comment, suggests modifications to the
first sentence of paragraph 7.61 (paragraph 7.67 of th is Report). According to the United States, the
second sentence of paragraph 7.61 (paragraph 7.68 of this Report) appears to address exclusively the
interpretation of schedules which are not at issue in this dispute. Accordingl y, it suggests that the
sentence be omitted from the final report. As regard s the first sentence of paragraph 7.61, the Panel
changed the wording but did not use the formulati on specified by the United States. On the second
suggestion, the Panel disagrees with the United Sates. The Panel declined the modification requested
by the United States because it considers it to be su fficiently clear that, in citing an example of a
schedule without categories, the Panel is simply illustrating the importance of the implications of the
Model Schedule and the Chairman's Note, and not indicating how the Panel would rule with respect to
such a schedule.
6.22 With regard to paragraph 7.77 (paragraph 7.79 of this Report) Mexico requests that the Panel
clarifies whether it is the "international traffic" or the transportation or transmission of such traffic
that is supplied cross-border. According to the United States, Mexico's comment essentially repeats
its arguments about the interpretation of the services at issue in this dispute, and its insistence that
those services are not provided on a cross-border b asis. The United States refers the Panel to its
responses to Mexico's comments on paragraphs 7.23- 7.25 (paragraphs 7.22-7.23 and 7.26 of this
Report) and 7.27 of the Interim Report. According to the United States, further clarification of those
issues is neither required nor appropriate in this paragraph. The Panel declines Mexico's request
because it considers the relevance of Mexico's requested clarification to be unclear but believes that it
appears to make a link with Mexico's previously rejected definition of cross-border supply.
6.23 Mexico also requests that the Panel clarifies what is meant by the term "cross-border service
suppliers" in the last sentence of paragraph 7.77 (p aragraph 7.79 of this Repor t). The United States
believes the meaning of the quoted phrase in the fi nal sentence is sufficiently clear, but suggests the
Panel to consider changing the te rm to "suppliers of scheduled services on a cross-border basis".
Although the Panel considers the meaning of the phrase to be clear, the Panel accepts the suggestion
made by the United States to modify this term in paragraph 7.77 (paragraph 7.79 of this Report).
6.24 Mexico requests that in paragraph 7.88 (parag raph 7.90 of this Report) the Panel clarifies
what is meant by the terms "potential cross-border supplier" and the "supply of services by [the cross-
border] mode". The Panel considers the meaning of the phrases concerned to be sufficiently clear in
their context and, thus, declines Mexico's request fo r clarification. However, the Panel notes that the
word "potential", was meant simply to indicate th at no cross-border supply into Mexico is actually
permitted. To avoid any misunderstanding, the Panel has deleted the word "potential".

6.25 Mexico requests the Panel to add a new sentence to paragraph 7.108 (paragraph 7.110 of this
Report) in order to fully reflect Mexico's position on the use of ILD Rules to define "interconnection".
The United States considers Mexico's suggested te xt misplaced in a paragraph that describes the
conclusions of the Panel rather than the arguments of the Parties. The United States therefore requests
that the Panel rejects Mexico's proposed text. The Panel considers the paragraph concerned to contain
the reasoning of the Panel, not the arguments of th e parties and, therefore, declines the modification
requested by Mexico.
6.26 With regard to paragraph 7.111 (paragraph 7.113 of this Report) Mexico requests the Panel to
clarify how competition occurs in the context of an international setting and to explain what
constitutes the "services offered in each others' mark et". The United States believes that the meaning
of the quoted sentences is sufficiently clear. The Panel does not consider the point referred to by
Mexico to be unclear and, thus, declines to amend the paragraph concerned.
6.27 Mexico notes that its comment on paragraph 4. 54 of the descriptive part of the Report
released on 6 June 2003 (paragraph 4.56 of this Re port) pointed out that, in response to a specific
request from the Panel for a list of the differences between accounting rate agreements and domestic
interconnection agreements, Mexico had submitted copies of standard agreements and asked the Panel
to reproduce the list of the important differences identified by Mexico. Mexico claims that this
comment is not reflected in the Interim Report. Mexico further notes that at paragraph 7.112
(paragraph 7.114 of this Report), the Panel states that, "[a]fter reviewing the evidence," it agrees with
the United States that there are no significant differences between accounting rate and domestic
interconnection agreements. However, Mexico subm its that it is not aware that the United States
submitted any evidence in response to the pertinent question of the Panel. For these reasons, Mexico
requests that the Panel identifies the evidence on which it relied in making the finding in paragraph
7.112 (paragraph 7.114 of this Report), and that it modifies paragraph 7.112 (paragraph 7.114 of this
Report) to accurately reflect Mexico's position by listing the differences between the two types of
contracts identified by Mexico. With respect to Mexico's request regarding the phrase "[a]fter
reviewing the evidence," the United States observes th at it is within the Panel's discretion to have
found that arguments raised by the United States de monstrated that Mexico's arguments and evidence
lacked relevance and probative value. As rega rds the descriptive part, the Panel had not accepted
Mexico's suggestion made earlier because it consider ed that the paragraph concerned adequately
summarised Mexico's submission. However, in view of the importance Mexico has attached to this
point, the Panel has included a new sentence to para graph 4.56 of this Repor t listing the differences
between accounting rate agreements and domestic in terconnection agreements described by Mexico.
With regard to the contested phrase the Panel agrees to clarify it, in its own language, to avoid any
misinterpretation. The Panel also accepted a Un ited States' suggestion to insert a citation of the
specific source of the United States' statements in paragraph 7.112 (paragraph 7.114 of this Report).
6.28 With regard to paragraph 7.114 (paragraph 7.116 of this Report) Mexico submits that the
Panel considers only the evidence provided by the Un ited States. Mexico suggests this paragraph to
be amended to fully reflect Mexico's position by adding a new sentence after the first one. The
United States considers Mexico's suggested text to be misplaced since the paragraph provides the
findings of the Panel rather than a recitation of argum ents of the parties. The Panel declines Mexico's
request because paragraph 7.114 (paragraph 7.116 of this Report) contains the Panel's reasoning, and
sets out what the Panel considers are the relevant arguments for arriving at its conclusion.
6.29
According to Mexico, in paragraph 7.117 (parag raph 7.119 of this Report) the Panel does not
deal with the evidence submitted by Mexico that the current contractual arrangements lowering the
accounting rate have been implemented by Mexican and United States' carriers notwithstanding that
the United States' FCC has refused to approve them and still officially lists the United States-Mexico
accounting rate as US$0.38 (equating to a US$0.19 settleme nt rate). In Mexico's view, this evidence
verifies that, to enforce an accounting rate arrangement, a domestic body would need jurisdiction over
parties beyond its border. Mexico requests that th e Panel adds a new sentence at the end of paragraph

4.67 of the Interim Report. According to the Unite d States, Mexico raises an argument, with respect
to the position of the United States' FCC on United States-Mexico accounting rates, that Mexico did
not make during the Panel proceedings. The Un ited States considers Mexico's suggested text
misplaced in a paragraph that describes the conclusions of the Panel rather than the arguments of the
parties. The United States therefore urges the Pa nel to reject Mexico's proposed text. The Panel
declines Mexico's request to insert Mexico's pr oposed sentence, because paragraph 7.117 (paragraph
7.119 of this Report) contains the Panel's reasoning, and sets out what the Panel considers are relevant
arguments for arriving at its conclusion.
6.30 As regards paragraph 7.118 (paragraph 7.120 of this Report), the United States requests the
Panel to add a footnote referencing the paragraphs to which the final sentence of the paragraph refers.
In view of the United States' request, the Panel decide d to delete "as discussed later in this section",
since the subsequent discussions do not address the issu e alluded to in exactly the same context as in
this paragraph and because it considers that the conclusion in this paragraph stands on its own.
6.31 Mexico requests that the Panel clarifies, in pa ragraph 7.119 (paragraph 7.121 of this Report),
how telecommunications transport services are actuall y supplied cross border and explain what is the
nature of the services that cross the border. According to the United States, Mexico's comments again
speak to its arguments about the interpretation of the services at issue, and its insistence that those
services are not provided on a cross-border basis. The United States sees no justification for further
discussion of those issues in this paragraph. The Pa nel declines the clarification requested by Mexico
with respect to this paragraph and notes that it has already dealt with the matter regarding the
"services at issue", above.
6.32 With regard to paragraph 7.138 (paragraph 7.14 0 of this Report), Mexico submits that in
paragraph 170 of its first written submission, it di d argue that accounting rates and termination
services were consciously excluded from the Reference Paper which is confirmed by the fact that they
are "on the table" in the Doha Round of negotiations . Mexico requests that the Panel clarify how this
argument was taken into account or respond to this argument. The United States notes that the
argument cited by Mexico is only one of many pu t before the Panel on this issue, and as such, it
would not be appropriate to single it out in this paragraph. The Panel reviewed the arguments and
decided to insert additional text at the end of pa ragraph 7.138 (paragraph 7.140 of this Report) to
reflect Mexico's argument and how it was taken into account.
6.33 Mexico requests that the Panel identifies th e evidence on which it relied in reaching the
conclusion in paragraph 7.140 (paragraph 7.142 of this Report) that "many of the 55 WTO Members
which have committed to cost-oriented interconn ection are unlikely to apply traditional accounting
rate arrangements to a significant portion of their in ternational traffic….". According to Mexico, it
submitted reports from the United States' FCC that establish that United States' carriers have
accounting rate arrangements with virtually every country, and that in 2001 a majority of international
calls to and from the United States were made thro ugh "traditional settlement". The United States
notes that support for the Panel's conclusion may be found in paragraph 38 and footnote 25 of the
United States' oral statement of 13 March 2003 and paragraph 48 and footnote 51 of the United States'
submission of 30 April 2003. The Panel's findings already demonstrate that it does not agree with
Mexico regarding the significance of the submissions it cites. However, to accommodate Mexico's
concerns, the second sentence of paragraph 7.140 (par agraph 7.142 of this Report) is modified and a
footnote is added to identify the evidence on which we relied to reach our conclusion.
6.34 Mexico submits that paragraph 7.149 (paragraph 7.151 of this Report), is ambiguous in that it
does not clearly define what is the service supp lied by the United States suppliers and under what
mode. Mexico requests that the Panel clarifies: the definition of the "services at issue" and the
relevant mode of supply; whether the "Mexican operators" referred to in the paragraph are also
"suppliers" of such "service" or "services"; what is meant by the term "termination of the service";
whether the United States suppliers "terminate" the "service" or "services" in question; and what is

meant by the term "outgoing services". According to the United States, Mexico's comments repeat its
arguments about the interpretation of the services at issue in this dispute and its insistence that those
services are not provided on a cross-border basis. Re garding Mexico's references to the Panel's use of
the terms "termination of the service" and "outgo ing services", the United States submits that the
Panel is not employing those terms to further define the services at issue in this dispute. The United
States further submits that the Panel is properly usin g those terms to define the relevant market, for
the purpose of determining whether Telmex is a "maj or supplier". With respect to the definition of
the "services at issue" the Panel notes that it has already addressed the matter, above. As to whether
the "Mexican operators" referred to in the paragr aph are also "suppliers" of such "service" or
"services", the Panel does not consider this distinction to be relevant. With regard to what is meant by
the term "termination of the service", the Panel considers it appropriate to add a footnote to
paragraph 7.23 (paragraph 7.22 of this Report) to clar ify that the term is used in our findings to refer
to forms of "linking" that falls within the scope of "interconnection". As to whether the United States
suppliers "terminate" the "service" or "services", the Panel considers its reasoning makes clear that
suppliers do not need to "terminate" services to be "supplying" them. As regards what is meant by the
term "outgoing services" the Panel has changed the term to "outgoing traffic".
6.35 Mexico argues that, in paragraph 7.150 (paragra ph 7.152 of this Report), the Panel refers to
the market for "termination services" and to domestic and international "communication". In the light
of Mexico's arguments on the meaning of "ter mination services" Mexico requests that the Panel
clarifies and makes additional findings on what it means when it refers to "termination services",
whether "termination services" are "basic telecommun ications services" or a service sector at issue in
this dispute, the mode of supply of such services, and whether United States or Mexican suppliers
provide such services. Mexico also requests that the Panel clarifies whether a "communication" is a
service at issue in this dispute. The United Stat es submits that with respect to Mexico's comments
regarding the Panel's use of the term "termination se rvices," the Panel is not employing this term to
further define the services at issue in this disput e – that is, the services to which the United States'
claims relate and the services subject to Mexico's commitments. Rather, the United States reads the
paragraph as using that term to pr operly define the relevant market for the purposes of determining
whether Telmex is a "major supplier." The Pane l does not accept the inferences made by Mexico
with respect to the Panel's use of the term "termination services". However for clarification, the Panel
is replacing "termination services" with "termination", to emphasise that the Panel is not using that
term to refer in any way to services at issue in this dispute, but rather to define the relevant market for
the purposes of determining whether Telmex is a "major supplier". To address the second concern,
the Panel is replacing the term "communication" with "telecommunications service".
6.36 With regard to paragraph 7.154 (paragraph 7. 156 of this Report), Mexico requests a new
sentence to be added to the paragraph in order to reflect Mexico's position. The United States submits
that Mexico's request is not necessary or accurate. According to the United States, the decisions by
the CFC were provided by the United States at Exhibits US-20 and US-21. The United States notes
that the CFC's decisions relied in part on the rest rictive provisions in the ILD Rules discussed at
length by the Panel. The Panel accepts Mexico's point and has added the suggested sentence to the
paragraph in order to reflect Mexico's argument on these points.
6.37 Mexico submits that the Panel concludes in paragraph 7.157 (paragraph 7.159 of this Report)
that Telmex is a "major supplier", with respect to the "services at issue" in that it has the ability to
materially affect the price of termination of calls from the United States into Mexico. Mexico
requests that the Panel clarify what is meant by th e "services at issue" and whether the "termination of
calls" is a service at issue in this dispute. The United States submits that the Panel has already
adequately described the services at issue in this dispute, as well as the "relevant market" in which
Telmex is a major supplier. The Panel's conclusi on in paragraph 7.157 (paragraph 7.159 of this
Report) speaks to the definition of the relevant mark et and whether Telmex is a major supplier in that
market. To clarify this point, the United Stat es suggests that the Panel amends paragraph 7.157

(paragraph 7.159 of this Report) by adding in th e first sentence the phrase "termination of". The
Panel accepts the suggestion made by the United States.
6.38 With regard to paragraph 7.200 (paragraph 7. 202 of this Report) the United States asks the
Panel to note that it has presented evidence of th e difference between the aggregated component
prices and the rates charged to United States supplie rs for each of the three individual "zones" in
Mexico. The Panel amended the text to make clear that it is aware that the United States presented
evidence of the difference between the aggregated component prices and the rates charged to United
States suppliers for each of the three individual zones.
6.39 Mexico refers to paragraphs 7.206-7.208 (par agraphs 7.208-7.210 of this Report) and 7.324-
7.326 (paragraphs 7.326-7.328 of this Report) and cl aims that the Panel has adopted the United States
characterisation of settlement rates as "access charg es" or "termination rates." Therefore, Mexico
considers that it is especially important that the Pane l set forth the factual nature of settlement charges
as described by Mexico in paragraph 29 of its fi rst written submission. Mexico also requests an
addition at the end of paragraph 7.206 (paragraph 7.208 of this Report) to ensure that Mexico's
arguments are fully and accurately presented. The Un ited States submits that Mexico's suggested text
is misplaced and inappropriate in paragraphs 7. 206-7.208 (paragraphs 7.208- 7.210 of this Report).
Therefore the United States urges the Panel to reject Mexico's proposed text. The Panel considers that
the arguments of the parties on differences between settlement rates and termination rates do not
belong to this section and makes no change to the text of the paragraph.
6.40 With regard to paragraph 7.210 (paragraph 7. 212 of this Report), the United States submits
that the paragraph contains a lengthy statement from the United States, but does not provide the
specific source of the statement. The Panel accepts the United States request and inserts the indicated
reference in a footnote.
6.41 According to Mexico, in paragraph 7.214 (parag raph 7.216 of this Report), in arriving at its
finding that "interconnection rates charged by Telm ex to United States suppliers of the services at
issue are not cost-oriented", the Panel did no t address facts and arguments presented by Mexico.
According to Mexico there is a widespread practic e, both in domestic and international contexts, of
using target rates to determine whether rates are acceptable, and the United States stated that "WTO
Members do not have explicit requirements for settle ment rates to be cost-based." Mexico also
contends that the United States agreed with it that Members "can reasonably rely on competitive
market dynamics to yield cost-based settlement rat es". The United States submits that Mexico is
inaccurately quoting the United States. According to the United States, it did not state that "WTO
Members do not have explicit require ments for settlement rates to be cost-based." Nor did it agree
that currently in Mexico, Members "can reasonabl y rely on competitive market dynamics to yield
cost-based settlement rates," which is what Mexico is presumably implying. The Panel declines to
make any amendments on the basis of Mexico's co mments because the quotes appear to be inaccurate
or out of context; even if true, they are not relevant to argument presented in this paragraph.
6.42 According to Mexico its settlement rates with th e United States are consistent with the target
rate recommended by ITU Study Group 3 for Mexico. According to the United States, Mexico
incorrectly states that the Panel did not address Mexi co's argument that its settlement rates with the
United States are consistent with the target ra te recommended by ITU Study Group 3 for Mexico.
The Panel believes that is has adequately addressed Mexico's arguments and notes that, in any case,
ITU "target rates" are just that, and are not, themselves, cost oriented rates.
6.43 Mexico submits that its settlement rates are al so sufficiently below the benchmark rate for
Mexico set by the United States' FCC to establis h, under the FCC's own guidelines, that there is
"meaningful economic competition" in Mexico. More over, the application by the United States of its
benchmarks policy to WTO Members is inconsistent with a belief that the Fourth Protocol applies to
accounting rates. The United States submits that relevant United States' arguments are included at

paragraph 36 of the United States' answers of 27 Ma rch 2003, and at footnote 42 of its second written
submission of 5 February 2003. The Panel notes that it does not accept the implications of Mexico's
arguments and notes, further, that the FCC benchmark rates are not, and are not claimed to be, "cost
oriented" rates.
6.44 Mexico claims that the United States compar es ISR rates from the United States to various
countries with the United States-Mexico accounting ra tes, rather than comparing the United States
accounting rates with those countries to the United States-Mexico accounting rates. The United States
submits that relevant United States' arguments in this regard are included at paragraph 34 of the
United States' answers of 27 March 2003, and at pa ragraph 121 of its first written submission and at
Exhibit US-5. The Panel considers that Mexico's argument is not relevant since the United States'
accounting rates are not subject to any claims in this dispute. Furthermore, the Panel is of the view
that the United States uses ISR rates not as a substitute for accounting rates, but as a proxy for
illustrating what costs may be.
6.45 With regard to paragraph 7.225 (paragraph 7.2 27 of this Report), Mexico requests that the
Panel clarifies what is meant by the "services at issue" and whether the "termination … of the services
at issue" means the "termination of calls". The United States submits that, as noted above in the
United States' responses to Mexico's comments concerning paragraphs 7.149, 7.150 and 7.157
(paragraphs 7.151, 7.152 and 7.159 of this Report ), the Panel's statements at paragraph 7.225
(paragraph 7.227 of this Report) speak to the definiti on of the relevant market, and whether Telmex is
a "major supplier" in that market. To clarify this point, the United States suggests that the Panel
amend the first sentence of paragraph 7.225 (parag raph 7.227 of this Report). The Panel declines
Mexico's request because it notes that the issue of "services at issue" and "termination" have already
been adequately addressed in response Mexico's comments above.
6.46 Mexico requests the Panel to clarify in paragr aph 7.226 (paragraph 7.228 of this Report) of
the Interim Report that under the Panel's finding, i ndividual gateway operators other than Telmex are
not, themselves, "major supplier[s]" within the mean ing of Section 1 of Mexi co's Reference Paper.
The United States submits that the additional language requested is inappropriate and requests that the
Panel reject the modification requested by Mexico. According to the United States, the parties have
made no arguments and presented no evidence regard ing whether Mexican gateway operators other
than Telmex are, "viewed individually or together," "major suppliers". The Panel declines Mexico's
request because the Panel does not consider it nec essary or relevant to make such a finding as to
whether the other suppliers are not "major suppliers".
6.47 According to Mexico, in paragraphs 7.237-7.24 3 (paragraphs 7.239-7.245 of this Report), the
Panel sets out its reasoning that leads to its conc lusion that practices required under Mexico's law can
be "anti-competitive practices" within the meaning of Section 1 of Mexico's Reference Paper. Mexico
submits that the Panel reasoning is incomplete. In Mexico's view, Section 1.1 of Mexico's Reference
Paper is aimed at anti-competitive "practices" by major suppliers, not "measures" implemented by a
WTO Member, otherwise the language of Section 1 would have gone further to prohibit Members
from introducing or maintaining "anti-competitive measures
". According to the United States, the
Panel has included Mexico's argument in paragraph 4.257 of the Interim Report. The United States'
rebuttal to Mexico's argument is included in para graph 66 of the United States' comments on 30 April
2003 on Mexico's answers. The United States al so notes that the Panel addressed at length the
relationship between "measures" and "practices" at paragraphs 7.237-7.243 (paragraphs 7.239-7.245
of this Report). In view of Mexico's concerns, th e Panel has added a sentence after the first sentence
of paragraph 7.239 (paragraph 7.241 of this Report) to better reflect that Mexico's argument was taken
into account.
6.48 According to Mexico, important legal context is provided by Article VIII:5 of the GATS.
This provision imposes disciplines in situations where a WTO Member authorises or establishes a
small number of service suppliers and substantially prevents competition among those suppliers in its

territory. Mexico submits that the Panel's interp retation of Section 1 of Mexico's Reference Paper
must take into account this GATS provision so as not to undermine its meaning. In the United States'
view, the Panel addressed Mexico's argument, and th e United States rebuttal thereto, in paragraphs
4.260-4.261 of the Interim Report. Having re-e xamined the submission containing the argument
referred to by Mexico, the Panel declines to accep t Mexico's request because the Panel considers the
argument to be recorded as adequately as possible in the paragraphs cited by the United States.
6.49 In Mexico's view, there is no basis in the text of Section 1 of Mexico's Reference Paper to
make important and complicated distinctions betw een permissible and impermissible anti-competitive
"measures" or to judge the leg itimacy of a WTO Member's internal policies in circumstances where
no agreed-upon benchmarks exist. According to the United States, the Panel addressed Mexico's
argument at paragraphs 4.257 of the Interim Repor t, 7.228-7.236, and 7.263-7.267 (paragraphs 7.230-
7.238 and 7.265-7.269 of this Report). As addre ssed in paragraphs 7.233- 7.234 (paragraphs 7.235-
7.236 of this Report), there are international agre ements on certain types of anti-competitive practices
that should be prohibited, including in particular price-fixing cartels. The Panel declines Mexico's
request, noting that it has already addressed Mexico 's argument at paragraph 7.263-7.267 (paragraphs
7.265-7.269 of this Report).
6.50 According to Mexico, at paragraphs 7.237-7.24 3 (paragraphs 7.239-7.245 of this Report), the
Panel sets out its reasoning that leads to its c onclusion that practices required under Mexico's law
could be "anti-competitive practices" within the mean ing of Section 1 of Mexi co's Reference Paper.
At paragraphs 7.255-7.262 (paragra phs 7.257-7.264 of this Report), the Panel sets out its reasoning
that leads to its conclusions that the uniform settle ment rate and proportionate return system under the
ILD Rules require practices by a major supplier, Telmex, that are "anti-competitive" within the
meaning of Section 1 of Mexico's Reference Pape r. In Mexico's view, it has presented detailed
arguments that the measures at issue had "pro-c ompetitive" effects and were aimed at legitimate
policy objectives. Mexico submits that although the Panel Report identifies some of these arguments,
the Panel does not explain how Section 1 of Mexico 's Reference Paper prohibits measures that have
pro-competitive effects and legitimate policy objectives where, at the same time , they also have some
anti-competitive effects. Mexico further submits th at the Panel refers only to "horizontal practices
such as price-fixing among competitors" and "market sharing arrangements", private actions that do
not have the pro-competitive effects and legitimate policy objectives of Mexico's measures. Mexico's
argument that its measures are distinguishable from such private actions and are not "anti-competitive
practices" within the meaning of Section 1 and its argument that all government regulatory measures
have some anti-competitive effects have not been addressed by the Panel. The United States contends
that although Mexico asserts that the Panel i gnored its arguments that the ILD Rules have
"pro-competitive effects," the Panel in fact dem onstrates that it considered this argument at
paragraphs 7.221, 7.239, 7.256, 7.259 and 7.261 (par agraphs 7.223, 7.241, 7.258, 7.261 and 7.263 of
this Report). In paragraph 7.259 (paragraph 7.26 1 of this Report), the Panel expressly evaluated
Mexico's assertions, concluding that Mexico faile d to provide evidence or well-founded reasons to
support its assertions. Moreover, as noted above, the Panel addressed, in paragraphs 7.237-7.243
(paragraphs 7.239-7.245 of this Report) of the Interim Report, whether practices required under a
Member's laws can be "anti-competitive practices" within the meaning of Section 1.1 of Mexico's
Reference Paper. The Panel does not accept Mexico's request, noting that it has dealt with Mexico's
arguments, as pointed out in the United States' comm ents, in paragraphs 7.221, 7.239, 7.256, 7.259
and especially 7.261 (paragraphs 7.223, 7.241, 7.25 8, 7.261 and 7.263 of this Report). The Panel
confirms that its deliberations took fully into acc ount the points and arguments identified by Mexico
in its comments on the reasoning of this particular conclusion. However, the Panel declines Mexico's
request because, as noted at the outset of this section, a panel cannot be expected to restate all of the
statements and arguments of the parties in the findings section of a Report.
6.51 According to the United States, in paragraph 7.240 (paragraph 7.242 of this Report), the Panel
discusses cross-subsidisation as an illustrative exam ple of an anti-competitive practice listed in
Section 1.2 of the Reference Paper. The United St ates notes that the language of Section 1.2 of the

Reference Paper does not explicitly refer to cross- subsidisation per se, but rather anti-competitive
cross-subsidisation. To conform to the phrasing used in the Reference Paper, the United States
suggests the text to be amended. The Panel not es the United States' comment and has modified the
text to reflect the concern raised.
6.52 With regard to paragraphs 7.272-7.286 (parag raphs 7.274-7.288 of this Report) , Mexico
submits that the Panel sets out its reasoning that leads to its conclusion that the Annex applies to
measures of a Member that affect access to and use of public telecommunications transport networks
and services by basic telecommunications suppliers of any other Member. According to Mexico, the
Panel's summary of Mexico's argument is incomple te. In Mexico's view, the Panel does not identify
nor respond to Mexico's argument that the service at issue is not a "telephone call" or any other
customer-supplied information or data, but, rather , is telecommunications transport networks or
services that involve the transport or transmission
 of information or data be tween two or more points.
As such, Mexican suppliers of telecommunications transport networks and services cannot transmit
other telecommunications transport networks or ser vices and cannot, therefore, constitute a mode of
delivery for those services. Mexico requests that the Panel incorporate this argument in paragraph
7.274 (paragraph 7.276 of this Re port) and make additional findings on the nature of the services at
issue. In particular, Mexico requests that the Panel clarifies what constitutes the "supply of basic
telecommunications services" and "international s upply of basic telecommunications services". The
United States submits that Mexico's comments repe at comments on the interpretation of the services
at issue in this dispute and recalls its respon ses to Mexico's comments on paragraphs 7.23-7.25
(paragraphs 7.22-7.23 and 7.26 of this Report). The United States maintains the issues raised here
require no further development at this point in the report. The Panel declines Mexico's request, noting
that Mexico's comments essentially relate to ar guments and conclusions concerning the services at
issue in this dispute that are already addressed earlier in this is section.
6.53 With regard to paragraph 7.317 (paragraph 7. 319 of this Report), Mexico fails to see how
paragraph 7.178 of the Interim Report cited in foot note 924 (footnote 1023 of this Report) is relevant
to the Panel's statement and requests that the Panel clarifies this. The United States submits that with
respect to Mexico's comments regarding footnote 924 (footnote 1023 of this Report), the Panel may
have intended to refer to paragr aph 7.40 in this Report or one of the surrounding paragraphs. The
Panel has reviewed the reference and corrected foot note 924 (footnote 1023 of this Report) to refer to
paragraphs 7.40-7.45 of this Report.
6.54 Mexico also submits that the quoted statement in paragraph 7.317 (paragraph 7.319 of this
Report) does not clearly describe the nature of th e "basic telecommunications services" at issue and
how foreign suppliers actually supply such service s into Mexico. Thus, Mexico requests that the
Panel clarifies and makes additional finding on: wh at "services" require suppliers to link their
networks to those of other suppliers; whether the "services at issue" are the transport or transmission
of information or data between two or more points; how Mexican suppliers can tran smit "transport
and transmission" services of other suppliers; and whether United States suppliers supply "transport
and transmission services" into and within Mexico . According to the United States, Mexico's
comments repeats those on the interpretation of the services at issue in this dispute and recalls its
responses to Mexico's comments on paragraphs 7.23- 7.25 (paragraphs 7.22-7.23 and 7.26 of this
Report). The United States maintains the issues rais ed here have been amply addressed and require
no further development at this point in the Report. The Panel notes that Mexico's comments relate to
arguments and findings that have already been addressed earlier in this section.
6.55 As regards paragraph 7.322 (paragraph 7.324 of this Report), the United States considers that
it would be helpful for the Panel to include a cross-re ference to the paragraphs it has in mind when it
refers, at the beginning of the third sentence of this paragraph, to "our earlier analysis." The United
States also suggests that the third sentence of paragraph 7.322 (paragraph 7.324 of this Report) should
be re-arranged in harmony to paragraph 7.304 (paragraph 7.306 of this Report). The Panel accepts the

United States suggestions and adds a footnote cro ss-referencing paragraph 7.304 (paragraph 7.306 of
this Report). It also modifies the paragraph as suggested by the United States.
6.56 As regards paragraph 7.369 (paragraph 7.371 of this Report), Mexico requests that the Panel
clarifies and notes the fact that Mexico has issued regulations for the establishment and operation of
commercial agencies for pay-telephone public ser vices. The United States notes that Mexico's
argument is reflected in paragraph 4.323 of the Inte rim Report. If Mexico's request is accepted by the
Panel then the United States requests that the Pane l also note the United States' observation that the
service suppliers at issue in the United Stat es' claim under Section 5(b) of the Annex on
Telecommunications are locally-established commercial agencies offering international
telecommunications services over private circuits leased from a Mexican concessionaire. Noting that
pay phone services are not subject to the claims made by the United States in this dispute, the Panel
does not consider it necessary to include in the Pane l's findings the argument identified by Mexico on
this point.
VII. FINDINGS
A. I
NTRODUCTION
7.1 The United States presents three main claims. Firs t, that Mexico has failed to ensure that its
major telecommunications supplier provides inte rconnection "on terms, conditions … and cost-
oriented rates that are … reasonable", in acco rdance with Section 2 of its Reference Paper
commitments. Second, that Mexico has not main tained appropriate measures to prevent Telmex, a
major supplier, from engaging in "anti-competitive pr actices", in accordance with Section 1 of its
Reference Paper commitments. Third, that Mexico has failed to ensure "access to and use of" its
public telecommunications transpor t networks and services, including private leased circuits, on
"reasonable and non-discriminatory terms and cond itions", in accordance with its obligations under
Section 5 of the GATS Annex on Telecommunications.
7.2 This case is the first panel proceeding in the WT O to deal solely with trade in services under
the GATS. It is also the first WTO panel proceedi ng to deal with telecommunications services. The
Panel is fully aware that the interpretation of the complex layers of GATS Articles, Annexes,
Protocols and Schedules with GATS market access commitments, national treatment commitments
and additional commitments poses many challeng es to WTO Members and WTO dispute settlement
bodies. This is especially so in the early years of GATS jurisprudence when the sometimes different
approaches used by governments in the drafting of their respective GATS schedules may give rise to
divergent understandings and exp ectations. Just as the interpretation and application of GATT
provisions have dynamically evolved in respon se to the several hundred GATT dispute settlement
proceedings since 1948, so the interpretation and clar ification of GATS provisions is likely to evolve
over time. The diverse backgrounds of the panelis ts, and the assistance granted by the Secretariat
pursuant to Article 27.1 of the DSU, have ensured that this Panel was fully aware of the legal and
technical complexity of the regulation of te lecommunications services, including their rapid
technological evolution
799 and the drafting history of GATS provisions to which both parties to this
dispute referred extensively.
7.3 The Panel's legal task is "to examine, in the light of the relevant provisions of the covered
agreements cited by the United States in documen t WT/DS204/3, the matter referred to the DSB by
the United States in that document, and to make su ch findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements". This task requires us, as
provided in Article 3.2 of the DSU, "to clarify the existing provisions of those agreements in
accordance with customary rules of interpretation of public international law" in order "to preserve the

799 For instance, some of the telecommunication provisions seem to be technology-specific and may no
longer reflect prevailing industry practices.

rights and obligations of Members under the cove red agreements" and to provide "security and
predictability to the multilateral trading system". We have approached our daunting task with the
utmost prudence and, in several parts of our findi ngs, have decided to exercise "judicial economy".
WTO negotiators sometimes praise the political wis dom of resorting to "constructive ambiguity" as a
diplomatic means of enabling consensus on WTO rules. 800 The limited legal task of dispute
settlement findings is very different. It is to deci de on the legal claims, in a particular dispute, based
on the "ordinary meaning" of the WTO provisions c oncerned "in their context" and in light of the
"object and purpose" of the agreement. Our legal findings are thus limited to the disputed meaning
and scope of certain GATS obligations and commitments of Mexico in the very particular context of
this bilateral dispute, and do not go beyond what we consider indispensable for deciding on the legal
claims submitted to this Panel. Our focus on telecommunications services may mean that certain
elements of our findings in this particular services sector may not be relevant for other services
sectors with different legal, economic and technical contexts. Our findings also do not adversely
affect the large degree of regulatory autonomy which WTO Members, individually and collectively,
retain under the GATS, including the right to m odify specific GATS commitments pursuant to the
procedures and conditions set out in Article XXI of the GATS.
1. Telecommunications in the WTO
7.4 This case concerns obligations undertaken by Mexico as part of the GATS. The GATS,
which is an integral part of the WTO Agreement, co nsists of a number of articles in its main body and
several annexes, including an Annex on Telecommuni cations (the "Annex"). Both the main body of
the GATS and the Annex are applicable to every WTO Member. In addition, each WTO Member has
attached its own schedule to the GATS, in which the Member makes individual specific commitments
on market access, national treatment, and any additional commitments the Member may wish to
make. These specific commitments are inscribed by service sector and mode of supply of the service,
and may be subject to limitations on market access and national treatment.
7.5 Special GATS negotiations intended to d eepen and widen commitments in basic
telecommunications were concluded in 1997. Memb ers participating in these negotiations made
commitments, or further commitments, in their schedules on market access or national treatment.
Many, including Mexico, also made additional commi tments in the form of a "Reference Paper",
which contained a set of pro-competitive regulator y principles applicable to the telecommunications
sector.
2. Measures at issue in this dispute
7.6 The government measures at issue in these proceedings are:
(a) The "Federal Telecommunications Law" ("FTL") ( Ley Federal de
Telecomunicaciones) of 18 May 1995.
(b) The "Rules for Long Distance Service" ( Reglas del Servicio de Larga Distancia )
published by the Secretariat of Comm unications and Transportation ("SCT")
(Secretaría de Comunicaciones y Transporte) on 21 June 1996.
(c) The International Long Distance Rules ("ILD Rules") (Reglas para prestar el servicio
de larga distancia internacional) published by the SCT on 11 December 1996.
801

800 Cf. former WTO Director-General Mike Moore, " A World Without Walls – Freedom, Development,
Free Trade and Global Governance", Cambridge, Cambridge University Press, 2003, p. 111.
801 See footnote 25 of this Report.

(d) The "Agreement of the SCT establishing the procedure to obtain concessions for the
installation, operation or exploitation of interstate public telecommunications
networks, pursuant to the Federal Telecommunications Law" (Acuerdo de la SCT por
operación o explotación de redes públicas de telecomunicaciones interestatales, al
amparo de la Ley Federal de Telecomunicaciones) published on 4 September 1995.
3. Mexico's legal framework for the regulation of telecommunications services
7.7 The Federal Telecommunications Law (the "FTL" ) of Mexico provides the legal framework
for the regulation of telecommunications activities in Mexico.
802 The FTL authorizes the SCT,
inter alia, to grant concessions required for "ins talling, operating or exploiting public
telecommunications networks". 803 A concession may only be grante d to a Mexican individual or
company, and any foreign investment therein may not exceed 49% 804, except for cellular telephone
services.805
7.8 Special rules apply to " comercializadoras" ("commercial agencies"). 806 A commercial
agency is any entity which, "without being the owner or possessor of any transmission media,
provides telecommunications services to third parties using the capacity of a public
telecommunications network concessionaire." 807 A concessionaire of a public telecommunications
network may not, without permission of the SCT, have "any direct or indirect interest in the capital"
of a commercial agency. 808 The establishment and operation of commercial agencies is "subject,
without exception, to the respective regulatory provisions".809
7.9 The "interconnection" of public telecommunica tions networks with foreign networks is
carried out through agreements entere d into by the interested parties. 810 Should these require
agreement with a foreign government, the concessiona ire must request the SCT to enter into the
appropriate agreement.811
7.10 International Long-Distance Rules ("ILD Rules") are issued by the Federal
Telecommunications Commission (" Comisión Federal de Telecomunicaciones "), a semi-autonomous
agency of the Secretariat of Communications and Transportation.812 The ILD Rules serve "to regulate
the provision of international long-distance serv ice and establish the terms to be included in
agreements for the interconnection of public telecommunications ne tworks with foreign networks." 813

802 See FTL ("Ley Federal de Telecomunicaciones "), published in the Federal Gazette (" Diario oficial
de la Federación") on 7 June 1995, entered into force on 8 June 1995.
803 See FTL, Article 11.
804 See FTL, Article 12. Foreign investment in cellular telephone services may however be greater than
49%, with the permission of the Commission on Foreign Investment.
805 See FTL, Article 12.
806 Also referred to in English la nguage translations of the F TL as "telecommunications service
marketing companies".
807 See FTL, Article 52.
808 See FTL, Article 53.
809 See FTL, Article 54.
810 See FTL, Article 47, paragraph 2.
811 See FTL, Article 47, paragraph 4.
812 See Rules for the Provision of International Long-Distance Service To Be Applied by the Licensees
of Public Telecommunications Networks Authorized to Provide this Service (Reglas para Prestar el Servicio de
Larga Distancia Internacional que deberán aplicar los Concesionarios de Redes Públicas de Telecomunicaciones
Autorizados para Prestar este Servicio) . Issued by the Commission; published in the Federal Gazette on
11 December 1996; entered into force on 12 December 1996.
813 See ILD Rule 1.

International long-distance service is defined as the service whereby all international switched traffic
is carried through long-distance exchanges authorized as international gateways".814
7.11 Direct interconnection with foreign public te lecommunications networks in order to carry
international traffic may only be carried out by "international gateway operators". 815 These are long-
distance service licensees authorized by the Co mmission "to operate a switching exchange as an
international gateway"816, that is, the exchange is "interconnected to incoming and outgoing circuits
authorised by the Commission to carry international traffic". 817 Traffic is "switched" when it is
"carried by means of a temporary connection betw een two or more circuits between two or more
users, allowing the users the full and exclusive use of the connection until it is released."818
7.12 Each international gateway operator must appl y the same "uniform settlement rate" to every
long-distance call to or from a given country, regardless of which operator originates or terminates the
call.819 The uniform settlement rate for each country is established, throug h negotiations with the
operators of that country, by the long-distance ser vice licensee having the greatest percentage of
outgoing long-distance market share for that country in the previous six months.820
7.13 Each international gateway operator must also a pply the principle of "proportionate return".
Under this principle, incoming calls from a foreign country must be distributed among international
gateway operators in proportion to each intern ational gateway operator's market share in outgoing
calls to that country.821
4. Rules of interpretation
7.14 The GATS constitutes an integral part of the WTO Agreement. As such, the GATS
(including its annexes and schedules of specific commi tments that are made an integral part of it
under GATS Article XX:3) is one of the "covered agre ements" and is therefore subject to the Dispute
Settlement Understanding (the "DSU").
7.15 Article 3.2 of the DSU provides that panels are to clarify the provisions of "covered
agreements" in accordance with customary rules of interpretation of public international law. In US –
Gasoline, the Appellate Body stated that the fundamental rule of treaty interpretation as set out in
Articles 31 and 32 of the Vienna Convention on the Law of Treaties (the "Vienna Convention")822 had
"attained the status of a rule of customary or ge neral international law" and "forms part of the
'customary rules of interpretation of public international law'".823 Since the commitments provided for
in Mexico's Schedule are part of the terms of th e treaty, the only rules which may be applied in
interpreting the meaning of a commitment are the general rules of interpretation as set out in the
Vienna Convention.824

814 See ILD Rule 2:XI.
815 See ILD Rules 3, and 6.
816 See ILD Rule 2:VII.
817 See ILD Rule 2:VIII.
818 See ILD Rule 2:XV
819 See ILD Rules 2:XII(a) and (b); and 10.
820 See ILD Rule 13.
821 See ILD Rules 2:XII, 10, 13, 16, 17, and 19.
822 Vienna Convention on the Law of Treaties, done at Vienna, 23 May 1969, 1155 U.N.T.S. 331;
(1969) 8 International Legal Materials 679.
823 See Appellate Body Report, US – Gasoline, DSR 1996:I, 3, at 16.
824 See Appellate Body Report, EC – Computer Equipment , paragraph 84. The conclusions of the
Appellate Body in that case applied to concessions made by Members in their GATT Schedules. We consider
that such conclusions can equally well be applied to commitments made by Members in their GATS schedules.

7.16 Article 31(1) of the Vienna Convention requires a treaty interpreter to determine the meaning
of a term in accordance with the "ordinary meaning" to be given to the term "in its context", and in
light of the "object and purpose" of the treaty. If, after applying the rule of interpretation set out in
Article 31(1), it is desirable to confirm the meani ng of the term, or the meaning of the treaty term
remains ambiguous or obscure or leads to a result that is manifestly absurd or unreasonable, Article 32
allows the treaty interpreter to have recourse to "supplementary means of interpretation, including the
preparatory work on the treaty and the circumstances of its conclusion".
825
5. Order of analysis of the claims
7.17 The United States has presented its two claims concerning Mexico's Reference Paper
commitments first, followed by its claim concer ning Section 5 of the Annex on Telecommunications.
We have decided to examine these claims in th e order presented by the United States since we
consider that this order will allow us to analyse the issues in the most efficient manner.
B. WHETHER MEXICO HAS FULFILLED ITS COMMITMENTS UNDER SECTIONS 2.1 AND 2.2 OF THE
REFERENCE PAPER
7.18 The United States claims that Mexico has not met its commitment under Sections 2.1 and 2.2
of its Reference Paper with respect to certain basic telecommunications services supplied cross-border
into Mexico by facilities-based and non-facilities-ba sed United States suppliers. In particular, the
United States claims that Mexico has failed to ensure that Telmex provide interconnection to
United States basic telecommunications suppliers on a cross-border basis w ith cost-based rates and
reasonable terms and conditions. Mexico contests this claim, stating that its GATS schedule contains
no specific commitments that would trigger the Sect ion 2 commitments in the Reference Paper, and
that in any case the Reference Paper provisions on interconnection do not extend to services which
originate abroad, or are subject to international acco unting rates. Even if interconnection in the sense
of the Reference Paper were to apply, Mexico cl aims that Telmex is not a "major supplier", as
specified under Section 2.2, and that, in any case, the terms and conditions of interconnection offered
to United States telecommunications suppliers are in fact "reasonable", and the rates are "cost-
oriented".
7.19 The basis of this first claim by the United St ates are Sections 2.1 and 2.2 of the Reference
Paper, as incorporated in Mexico's GATS schedule under additional commitments. 826 These
provisions state, in relevant part:
"2. Interconnection
2.1 This section applies, on the basis of the specific commitments
undertaken, to linking with suppliers providing public
telecommunications transport networks or services in order to allow
the users of one supplier to communicate with users of another
supplier and to access services provided by another supplier.
2.2 Interconnection to be ensured
 Interconnection with a major s upplier will be ensured at any
technically feasible point in the network. Such interconnection is
provided
 …

825 See Appellate Body Report, EC – Computer Equipment, paragraph 86.
826 Mexico has undertaken specifi c commitments for telecommunicat ions services (Schedule of
Specific Commitments) under Articles XVI (Market Acce ss), XVII (National Treatment), and Article XVIII
(Additional Commitments). Its additional commitments consist of undertakings known as the "Reference
Paper". These commitments are reproduced in Annex B.

(b) in a timely fashion, on terms, conditions (including technical
standards and specifications) and cost-oriented rates that are
transparent, reasonable, having regard to economic feasibility,
and sufficiently unbundled so that the supplier need not pay for
network components or facilities that it does not require for the
service to be provided; … "
827
7.20 In determining whether commitments in Sections 2.1 and 2.2 have been met by Mexico, we
shall first examine whether Mexico has undertaken an interconnection commitment with respect to
the telecommunications services at issu e in this case. In the event that we conclude that Mexico has
indeed undertaken an interconnection commitment in respect of the telecommunications services at
issue, we will then determine whether, with respect to the services at issue, Mexico has fulfilled any
Section 2 interconnection commitment.
1. Whether Mexico has undertaken an interconnection commitment, in Section 2 of its
Reference Paper, with respect to the telecommunications services at issue
7.21 Section 2.1 of Mexico's Reference Paper co mmitment on interconnection specifies that it
applies only "on the basis of the specific commitments undertaken" (" respecto de los cuales se
contraigan compromisos específicos "). We must first therefore determine what the services at issue
are, and through which of the four modes specified in Article I:2 of the GATS they are supplied. 828
Only then can we determine whether Mexico h as undertaken, with respect to these services, a
commitment "on the basis" of which the interconnec tion commitment in Section 2.2 applies. Finally,
in determining whether Mexico has undertaken in terconnection commitments with respect to the
services and modes of supply at issue, we must ex amine whether the "linking" of suppliers referred to
in Section 2.1 of the Reference Paper covers not only domestic interconnection, but also international
interconnection, understood as the linking of suppliers cross-border, including linking which involves
traditional "accounting rate" regimes.
(a) What are the services at issue?
7.22 The United States focuses its first claim on the supply of certain basic public
telecommunications services 829 for which United States suppliers s eek to interconnect at the border

827 English translation. The authentic version of M e x i c o ' s S c h e d u l e i s S p a n i s h . I t r e a d s :
 "2 Interconexión
telecomunicaciones de transporte o de servicios a fin de permitir a los usuarios de un pr oveedor comunicarse
respecto de los cuales se contraigan compromisos específicos.
2.2 Interconexión a ser garantizada
factible de la red. Tal interconexión se llevará a cabo:

(b) de manera oportuna, en términos, condiciones (incluyendo normas técnicas y
especificaciones) y tarifas basadas en costos que sean transparentes, razonables, económicamente factibles y
828 The modes of supply are commonly known as: (a) cross-border supply; (b) consumption abroad;
(c) commercial presence; a nd (d) presence of natural persons. They are also referred to numerically as modes
1, 2, 3 and 4. For the text of Article I:2 of the GATS, see paragraph 7.29.
829 For the definition of basic public telecommunication services, see Section 3(b) of the GATS Annex
on Telecommunications, which defines "public telecommunications transport services" as "any
telecommunications transport service required, explicitly or in effect, by a Member to be offered to the public
generally. Such services may include, inter alia , telegraph, telephone, telex, and data transmission typically
involving the real-time transmission of customer-supplie d information between two or more points without any

with Telmex, or other Mexican operators, for termination
830 in Mexico, and for which, according to
the United States, Mexico has undertaken specific co mmitments in its schedule. The specific public
telecommunications services subject to the claims are voice te lephony, circuit-switched data
transmission and facsimile services. These services ar e, according to the United States, of two types
depending on how the service is provided. First, there are "facilities-based" services, whereby the
service supplier provides the services over its own f acilities. Second, there are "non-facilities-based"
services (services supplied by "comercializadoras" or "commercial agencies"), whereby the service
supplier provides telecommunications services using facilities leased from other operators.831
7.23 We will refer to the public voice telephony, ci rcuit-switched data transmission and facsimile
services, both "facilities-based" and by a "commercial ag ency", that are raised by the United States in
its first claim as "the services at issue".832
7.24 The United States' claims regard ing the services at issue relate to the GATS mode of supply
known as cross-border supply of these services. However, the parties to do not agree that the
services at issue are actually being supplied by this mode of supply. Consequently, the Panel must
now turn to the issue of whether or not the services at issue are supplied cross-border.
(b) Are the services at issue supplied cross-border?
7.25 The United States contends that their claims rega rding the services at issue relate to the cross
border supply of these services. According to the United States, these services are supplied from the
United States into Mexico, within the meaning of GATS Article I:2(a), which defines what is
commonly referred to as "cross-border" trade in services.
833 Specifically, facilities-based operators in
the territory of the United States deliver traffic c onsisting of the services at issue from United States
customers to the Mexican border where, under Mexican law, the traffic is transferred to Mexican
operators, who then terminate the United States operators' traffic, consisting of the services at issue, in
Mexico. According to the United States, non-facilities-based operators (commercial agencies) would,
if permitted by Mexican regulations, also supply services on a cross-border basis into Mexico. 834
Whether a service is facilities-based or non-facilities based, for the supply of cross-border services, is
determined, according to the United States, by the use or not of a supplier's own facilities in the
market from which the service is supplied.835
7.26 To illustrate the cross-border supply of the servi ces at issue, the United States points to the
supply of services by AT&T, WorldCom and Sprint which, as facilities-based operators, "use their
own networks in the United States to offer voice telephony, circuit-switched data and facsimile

end-to-end change in the form or content of the customer 's information." This definition is applicable because
the Ministerial Decision on Negotiations on Basic Telecommunications (part of the Final Act of the Uruguay
Round) specified that "telecommunications transport networks and services" were "basic telecommunications",
a term which would encompass both "public telecommunications transport services" and non-public
"telecommunications transport services".
830 The word "termination" is used in our findings to refer to one of the forms of "linking" that falls
within the scope of the "interconnection". This is suppo rted by the language of Sec tion 2 which states that the
section applies to linking "in order to allow the users of one supplier to communicate with users of another
supplier".
831 See the United States' first written submission, paragr aph 59. These services are listed in Mexico's
Schedule under headings 2.C.(a), (c) and (d).
832 The Panel considers the terms "telephony" and "voice telephony" (as used in the English translations
of Mexico's Schedule and the claims by the United States) to be equivalent to the terms "telephone services" and
"voice telephone services" (as used in the GATS sectoral classification and the CPC).
833 See the United States' first written submission, paragraph 54.
834 See the United States' first written submission, paragraph 57.
835 See the United States' answer to question No. 2(a) of the Panel of 14 March 2003. For question
No. 2(a), see footnote 212 of this Report.

services between the United States and Mexico". 836 These operators must link their network at the
border to that of a Mexican operator. The Unite d States does not illustrate the current supply of
"commercial agency" services from the United States into Mexico, claiming that Mexico maintains
measures that prohibit the cross-border supply of this type of service.
7.27 Mexico claims that the services at issue are not supplied cross-border in accordance with the
terms of Article I:2(a). According to Mexico, the essential nature of the services at issue is the
transmission of customer data. In order to transmit customer data cross-border "from" one Member
"into" another Member, the supplier must itself transmit the customer data within the territory of that
other Member. Mexico's view is that no country imposes restrictions on the quantity of incoming or
outgoing calls, but rather only on services relating to the transmission of the calls, and therefore that
the GATS commitments would be meaningless if th ey related to the calls rather than their
transmission. Thus, an operator who simply "han ds off" traffic at the border to another operator
would not, argues Mexico, be supplying cross-border w ithin the meaning of Article I:2(a). According
to Mexico, a hand-off of traffic at the border amounts to a "half-circuit" provision of
telecommunications services; only "full-circuit" or "end-to-end" provision by the same operator
constitutes cross-border supply within the meaning of Article I:2(a).
837
7.28 Mexico's argument that the supplier must itself transmit the customer data within the territory
of that other Member implies, in effect, that cr oss-border supply within the meaning of Article I:2(a)
can only occur if the supplier operates, or is present 838 in some way, on the other side of the border.
Absent this, the supplier would presu mably not have the capability to itself transmit there. The issue
before us is therefore whether, with respect to the telecommunications services at issue, cross-border
supply between two Members under Article I:2(a) occurs only if the supplier itself operates, or is
present, on the other side of the border, or if cross-border supply can occur also if a supplier simply
"hands off" traffic at the border. We now examine this fundamental issue.
7.29 The scope of the GATS is defined in Article I:1 as covering "measures by Members affecting
trade in services". Trade in services is then define d in Article I:2 as "the supply of a service" through
any of four modes of supply:
"(a) from the territory of one Member in to the territory of any other Member;
(b) in the territory of one Member to the service consumer of any other Member;
(c) by a service supplier of one Memb er, through commercial presence in the
 territory of any other Member;
(d) by a service supplier of one Member, through presence of natural persons of
 a Member in the territory of any other Member."
7.30 Subparagraph (a) describes what is referred to as "cross-border", or "mode 1", supply of trade
in services.
839 The ordinary meaning of the words of this provision indicate that the service is
supplied from the territory of one Member into the territory of another Member. Subparagraph (a) is
silent as regards the supplier of the service. The words of this provision do not address the service

836 See the United States' answer to question No. 2(a) of the Panel of 14 March 2003, paragraph 2. For
question No. 2(a), see footnote 212 of this Report.
837 See Mexico's answer to question No. 3(a) of the Panel of 19 December 2002, paragraph 56. For
question No. 3(a), see footnote 187 of this Report.
838 Mention in this section of the Report of the "prese nce" of a service supplier, or of a service supplier
that is "present", should be understood in the general sense of these terms. The use of the terms "present" and
"presence" in this section are not intended to refer specifically to the supply of a service through "commercial
presence", in the sense of Article I:2(c).
839 See footnote 828.

supplier or specify where the service supplier must operate, or be present in some way, much less
imply any degree of presence of the supplier in the territory into which the service is supplied. The
silence of subparagraph (a) with respect to the supplier suggests that the place where the supplier
itself operates, or is present, is not directly relevant to the definition of cross-border supply.
7.31 We now examine the context of subparagraph (a ) to determine whether our interpretation,
based on the ordinary meaning of the words of the provision, is correct. S ubparagraph (a) is one of
four modes of supply which, as indicated above, are list ed in Article I:2. If we look at the wording of
the other modes of supply, we note that the silen ce in subparagraph (a) as regards the presence of the
supplier of the service is in marked contrast to the modes of supply described in subparagraphs (c)
("commercial presence") and (d) ("presence of natu ral persons"). In both cases, the presence of the
service supplier within the territory where the ser vice is supplied is specifically mentioned. The
context provided by subparagraphs (c) and (d) therefore suggests that, where the presence of the
service supplier was required to define a particul ar mode of supply, the drafters of the GATS
expressed this clearly.
7.32 Further contextual evidence that cross-border s upply of the services at issue does not require
the supplier to operate, or be present in some way, on both sides of the border is suggested by the
definition of the basic telecommunications services at issue, which are defined in the GATS Annex on
Telecommunications. The services at issue are "basic" telecommunications services and involve:
"the real-time transmission of customer-supplied information between two or more
points without end-to-end change in the form or content of the customer's
information."
840 (emphasis added)
7.33 We note that this definition contains two clo sely linked elements that are relevant to our
analysis: the transmission itself, and that which is transmitted – customer-supplied information. In
our view, reading the word "transmission" alone as constituting the service, as Mexico does, fails to
recognize the close link explicit in this definition. Moreover, the ownership or control of the means of
transmission are nowhere addressed in this definition.
7.34 According to the definition, basic telecommunications services are services supplied
"between two or more points". The definition nowhere indicates that a single supplier must undertake
the transmission between the "points". The words "b etween two or more points" suggest, in fact, the
contrary. Transmission to the various "points" re quested by a customer requires ownership of or
access to an expansive transmission infrastructure. It would be unreasonable to assume that the
definition of telecommunications services applies only where a telecommunications supplier itself
owns or controls a complete global infrastruct ure allowing it to reach every potential "point"
requested by its customers. Had WTO Members inte nded this to be the case, they surely would have
made it explicit in the definition.
7.35 We note that most WTO Members, in cluding Mexico, scheduled their basic
telecommunications services using the 1991 UN Provisional Central Product Classification
("CPC").
841 The CPC references provide more detailed descriptions of the services included in the
GATS sectoral listing. 842 With respect to the facilities-based telecommunications services at issue,
further support for our conclusion that cross-borde r supply under Article I:2(a) does not require a
supplier to operate, or to be present in some way, on both sides of the border, is provided by an

840 GATS Annex on Telecommunications, section 3(b). See also footnote 829.
841 United Nations, Statistical Papers , Series M No. 77, Provisional Central Product Classification,
1991.
842 The Scheduling of Initial Commitments in Trade in Services: Explanatory Note, MTN.GNS/W/164
(3 September 1993), paragraph 16, states that "[w]here it is necessary to refine further a sectoral classification,
this should be done on the basis of the CPC or other internationally recognized classification".

examination of the CPC description of "public long distance voice telephone services" (CPC 75212),
that is referred to under the item "voice telephone services" in the GATS sectoral list (W/120).
843 The
CPC description of this service states, in relevant part:
"Switching and transmission services necessary to establish and maintain
communications between local calling areas. This service is primarily designed
(used) to establish voice communications, but may serve other applications such as
text communication (facsimile or teletex) and may be provided on a toll or flat fee
basis. This service provides the customer with access to the supplier's and
connecting carrier's entire telephone network or, in some instances, to a limited
number or exchange areas (WATS service)." (emphasis added)
7.36 This definition makes clear that the service of long-distance telephony consists of giving a
customer access to both "the supplier's and connecting operator's entire telephone network"
(emphasis added). The definition of voice telephony services thus anticipates interworking of both
operating networks in order for the service to be pe rformed. No element of the definition implies or
requires "end-to-end" service by one and the same op erator. Moreover, when more than one operator
is involved, the service supplied to customers in cludes access to the "entire networks" of both
operators. The service supplied is not therefore the simple transmission of a voice message "up to" a
connecting operator's network; rather, the service is defined as spanning both operators' networks. It
therefore follows that supply of the service involves call completion spanning both operators'
networks.
7.37 The CPC definition also specifies that the switching and transmission services supplied are
those "necessary to establish and maintain communica tions" between local calling areas. We note the
statement made by the United States on this point that:
"[m]aintaining 'communications' requires active coordination between operators on
each side of the border, and is not tw o discrete services provided by different
companies. For example, in order to complete a call, AT&T's switch must
communicate with Telmex's switch, which is located within Mexico, not on the
border."
844
7.38 We observe that basic telecommunications services supplied between Members do require,
during the delivery of the service, a high degree of interaction between each other's networks, since
the service typically involves a continuous, rapid and often two-way flow of intangible customer and
operator data. The interaction results in a seamles s service between the originating and terminating
segments, which suggests that the service be considered as a single, cross-border service.
7.39 Mexico seeks to draw an analogy with services involving the distribution of tangible
products, such as mail, trucking or pipeline services. Mexico argues that the se services are similar to
the telecommunications services at issue, in that they are not supplied cross-border unless the supplier
operates, or is present in some way, on both sides of the border. It is not in the Panel's mandate to
make findings on whether, or to what extent, s ituations regarding the supply of these services fall
within the scope of Article I:2(a), and we expressly do not make such findings. We observe, however,
that the CPC definition of the "public long distance voice telephone services", one of the basic
telecommunications services at issue, provides for an especially high degree of interaction between
operators. The CPC definition does not explicitly r estrict the scope of these services to those supplied
between operators within the same jurisdiction. We infer that the CPC definition foresees an
especially high degree of interaction also between operators located in different Members. Because of

843 Services Sectoral Classification List, Note by the Secretariat. MTN.GNS/W/120, 10 July 1991. See
also footnote 858.
844 See the United States' second oral statement, paragraph 18.

this high degree of interaction implicit in the definition of the service, we do not agree that these other
services mentioned by Mexico provide persuasive evidence of the argument presented by Mexico.
7.40 A basic telecommunications operator, in other wo rds, must typically link with other operators
in order to supply a complete service to its custom ers. Likewise, those other operators will link with
it, in order to give their customers a complete ser vice. Public telecommunications networks are in
fact often legally obligated to interconnect. In sum, telecommunications services normally involve or
require linking with another operator to complete the service, and the operation, or presence in some
way, of the supplier on both ends of the service cannot therefore be a necessary element of the
definition of cross-border supply.
7.41 If linking with another operator implied that the originating operator were no longer
"supplying" the service, an absurd consequence would result. Not only would telecommunications
services delivered in this manner not be "supplied" cross-border in the sense of Article I:2(a), they
would also not be "supplied" under any of the other modes of supply under the GATS. Nearly all
telecommunications services currently supplied across borders would then fall outside the scope of the
GATS. Present and future liberalization of this fo rm of international telecommunications trade would
not be possible within the WTO, without a new or amended treaty. Such an interpretation would be
inconsistent with the fact that the GATS "applies to ... trade in services" (Article I:1), and that "trade
in services" is defined comprehensively as the supply of services through four modes of supply.
 845
The GATS creates a wide-ranging agreement covering all services and modes of supply, in order to
allow progressive liberalization of trade in services between Members. This suggests that the supply
of basic telecommunications services – the "trans mission of customer supplied information" – must
include supply by means which involve or require linking to another operator to complete the service.
7.42 More generally, a supplier of services under th e GATS is no less a supplier solely because
elements of the service are subcontracted to another firm, or are carried out with assets owned by
another firm. What counts is the service that th e supplier offers and has agreed to supply to a
customer. In the case of a basic telecommunications service, whether domestic or international, or
supplied cross-border or through commercial presence, the supplier offers its customer the service of
completing the customer's communications. Having done so, the supplier is responsible for making
any necessary subsidiary arrangements to ensure that the communications are in fact completed. The
customer typically pays its supplier the price of the end-to-end service, regardless of whether the
supplier contracts with, or uses the assets of, another firm to supply the service.
7.43 Additional evidence, for the view that cross-border supply does not imply the presence of the
service supplier in the market into which the servi ce is delivered, is contained in a document entitled
"Scheduling of Initial Commitments in Trade in Services: Explanatory Note" (the "Explanatory
Note"), issued by the GATT Secretariat as a wo rking document for the Group of Negotiations on
Services.
846 The Explanatory Note states that the supply of a service through telecommunications is
an example of cross-border supply "since the service supplier is not present within the territory of the
Member where the service is delivered". 847 (emphasis added) We accord substantial interpretative
weight to this statement. The Explanatory Note was requested by the Group of Negotiations on
Services, and issued in September 1993, during a pe riod of intense drafting of initial commitments to
meet the deadline for the completion of schedules in December of that year. During and after that

845 The comprehensive coverage of the GATS is also reflected in Article I:3(b) of the GATS which
provides that "services" – for the pu rposes of the Agreement – "includes any services in an y sector except
services supplied in the exercise of governmental auth ority". The Preamble to the GATS also refers in
expansive terms to the "growing importance" of trade in services for the "world economy", and the desire to
establish a multilateral framework of principles and rules for the "expansion" of such trade in order to promote
"economic growth" and "development".
846 Scheduling of Initial Commitments in Trade in Services: Explanatory Note . MTN.GNS/W/164
(3 September 1993). We refer to this document as the "Explanatory Note".
847 Ibid., paragraph 19(a).

period, the Explanatory Note was heavily relied upon by negotiators to interpret their own and other
negotiators' commitments. The Explanatory Note was revised somewhat in 2001 – without however
modifying the statement with respect to the presence of cross border suppliers – and was adopted by
the Council on Trade in Services as "Guidelines for th e scheduling of specific commitments under the
General Agreement on Trade in Services (GATS)" (the "Scheduling Guidelines").848 Even though the
Explanatory Note and the Scheduling Guidelines each state that they cannot be considered as
"authoritative" or "legal" interpretations of the GAT S, we find that the source, content, and use by
negotiators of the Explanatory Note, together w ith its later adoption by Members as the Scheduling
Guidelines, provides an important element with which to interpret the provisions of the GATS.
7.44 In interpreting the scope of cross border supply in Article I:2(a) of the GATS, we need not
decide whether the Explanatory Note provides "con text" (as an agreement or instrument made in
connection with the conclusion of the GATS) unde r paragraph 2 of Article 31 of the Vienna
Convention, or whether it can be "taken into acco unt", together with the context, as a subsequent
agreement or practice under paragra ph 3 of the same provision. In any case, we consider that the
source, content and use of the Explanatory Note make it part of the "circumstances" of the conclusion
of the GATS, within the meaning of Article 32 of the Vienna Convention. We may therefore properly
have recourse to the Explanatory Note to conf irm our understanding of the ordinary meaning of
Article I:2(a) of the GATS.849
7.45 For these reasons, we find that the services at issue, in which United States suppliers link
their networks at the border with those of Mexican suppliers for termination within Mexico, without
United States' suppliers operating, or being present in some way, in Mexico, are services which are
supplied cross-border within the meaning of Article I:2(a) of the GATS.
(c) Has Mexico undertaken commitments on the cross-border supply of the services at issue?
7.46 The United States argues that Mexico, with resp ect to the cross-border supply of the services
at issue, has inscribed in its schedule commitmen ts granting full national treatment and full market
access. The one apparent limitation (the "routing r estriction"), which Mexico has inscribed in the
market access column does not, accord ing to the United States, fall within the defined categories of
market access restrictions in Article XVI:2, and therefore does not limit the full market access which
Mexico has committed with respect to the cross-border services at issue.
7.47 Mexico initially argues that it cannot have unde rtaken any cross-border commitments with
respect to the supply of the services at issue through the linking of networks of different operators at
the border, since the supply of these services in this manner is not within the definition of cross-
border trade in services in the sense of Article I:2(a). We have rejected this argument in the previous
section.
7.48 Mexico then argues that, even if cross-border supply were understood to include the linking
of networks of different operators at the border, Mexico has still undertaken no commitment to allow
the cross-border supply of the services at issue, beca use the limitations Mexico has inscribed in its
schedule make it impossible for cross-border supply to take place. In particular, Mexico argues that
the routing requirement in its commitments requir es a cross-border supplier to link its network with
that of a Mexican operator at the border and that this requirement, read together with other restrictions
in its schedule, requires a potential cross-borde r supplier to obtain a "concession". To obtain a

848 Guidelines for the scheduling of specific commitments under the General Agreement on Trade in
Services (GATS) , adopted 23 March 2001, S/L/92 (28 March 2001), chart following paragraph 26, and
paragraph 28. We refer to this document as the "Scheduling Guidelines". See discussion of the Guidelines in
paragraph 7.67.
849 See paragraphs 7.53-7.57.

concession, Mexico argues, foreign suppliers woul d have to have both a commercial presence in
Mexico and Mexican nationality.
7.49 It remains for us therefore to examine whether, in the light of the limitations inscribed in its
schedule, Mexico has made any specific commitments with respect to the cross-border supply of the
services at issue and, if so, whether these repr esent full market access and national treatment
commitments, in the sense of Articles XVI and XVII.
(i) Cross-border services in Mexico's Schedule
7.50 We first examine Mexico's Schedule to determine which service sectors Mexico has made
subject to cross-border commitments. We will start our analysis by looking at the inscriptions that
Mexico has made in the sector column of its schedule, with respect to the services at issue.
aa) Service sectors inscribed in Mexico's Schedule

7.51 Mexico has set out the telecommunications services sectors that are subject to commitments
by it by making the following inscription in the service sector column of its schedule:850
"2.C. Telecommunications Services
Telecommunications services supplied by a facilities based public
telecommunications network (wire-based and radioelectric) through any existing
technological medium, included in subparagraphs (a), … (c), (f), … and (o).
 …
(a) Voice telephony (CPC 75211, 75212)
 …
(c) Circuit-switched data transmission services (CPC 7523*)
(f) Facsimile services (CPC 7521** + 7529**)
(o) Other
 – …
 – Commercial agencies
3
 – …
3Agencies which, without owning transmi ssion means, provide third parties with
telecommunications services by using capacity leased from a public network
concessionaire."

850 The Spanish language version, which Mexico has designated as the only authentic version, reads:
"2.C. Servicios de Telecomunicaciones
basada en infraestructura (alámbrica y radio-eléctrica) a través de cualquier medio tecnológico
actual, incluidos en las literales a), … c), f), … y o).
 …
(a) Servicios de telefonía (CCP 75211, 75212)
 …
(c) Servicios de transmisión de datos con conmutación de circuitos (CCP 7523**)
(f) Servicios de facsímil (CCP 7521**+7529**)
(o) Otros
 - …
 - Comercializadoras
3
 - …
3 Empresas que, sin ser propietarias o poseedoras de medios de transmisión, proporcionan a
terceros servicios de telecomunicaciones mediante el uso de capacidad arrendada de un
concesionario de redes públicas de telecomunicaciones."

7.52 The services listed in Mexico's Schedule – "voice telephony", "circuit-switched data
transmission services", "facsimile services", and "commercial agencies" – appear to cover the services
at issue raised by the United States in this case. However, these services are listed under, and are
subordinate to, a introductory heading, that describes the listed services as "[t]elecommunications
services supplied by a facilities based public telecommunications network (wire-based and
radioelectric) through any existing technological medi um". We must therefore carry our examination
further and determine whether, or to what extent, the introductory heading affects the scope of the
individual listed services.
bb) Introductory heading

7.53 The parties interpret differently the introductory heading, and disagree on its implications for
the scope of the commitments undertaken. Mexico argues that the introductory heading refers only to
"the physical and technical aspects of signal transmis sion" and "does not define the specific nature of
either the services or the supply thereof". 851 Mexico implies, therefore, that the introductory heading
has little or no effect. The United States takes a di fferent view, maintaining that the introductory
heading limits the scope of the sector generally to services of suppliers who, in the market from which
the service is supplied, own facilities. Services of suppliers who lease facilities in the market from
which the service is supplied are, according to the United States, nonetheless covered by the particular
subsector on "commercial agencies".
852
7.54 We recall that the introductory heading of Me xico's Schedule covers "[t]elecommunications
services supplied by a facilities based public telecommunications network (wire-based and
radioelectric) through any existing technological me dium". A simple parsing of the terms of the
heading indicates that telecommunications services within its scope must have four main attributes:
these services must be supplied by: (i) a " telecommunications network", that is; (ii) "public"; (iii)
"facilities based"; and (iv) utilises "any existing technological medium". In examining the first two
requirements – that the service be supplied by a "t elecommunications network" that is "public" – we
recall the definition in the GATS Annex on Teleco mmunications of a "public telecommunications
transport network". This is defined in the Anne x as the public telecommunications "infrastructure"
which permits telecommunications between a nd among defined networ k termination points.
853
Moreover, the meaning of "public" is revealed in the accompanying definition in the Annex of "public
telecommunications transport service", which refers to a service "explicitly or in effect ... required to
be offered to the public generally." 854 The first two requirements of the introductory heading thus
appear to be straightforward, indicating simply that the service supplied is for public use, and is based
on some sort of network infrastructure. Likewise, the fourth requirement – that supply be through
"any existing technological medium" is straightforward, excluding "new" technologies from the scope
of the commitments. The parties do not dispute the claims made by the United States that the
services at issue relate to "public" services, tran sported over a "network", and using "existing"
technologies.
7.55 However, the meaning of the third requirement of the introductory heading – that the service
be supplied by a "facilities-based" network – is much less clear. The ordinary meaning of the term
"facilities", with respect to a telecommunications ser vice, suggests "infrastructure", or the physical
elements by means of which the service is su pplied. The term "facilities-based", under this

851 See Mexico's answer to question No. 2(c) of the Panel of 14 March 2003, paragraphs 2 and 3 ( What
does the phrase "by a facilities based public telecommunications network " add to the sector inscription in
Mexico's Schedule? Without these words in the sector column, what other forms of supplying services would be
allowed?).
852 See the United States' answer to question No. 2(c) of the Panel of 14 March 2003, paragraph 19.
For question No. 2(c), see footnote 851 of this Report.
853 See GATS Annex on Telecommunications, Section 3(c).
854 See GATS Annex on Telecommunications, Section 3(b).

interpretation, would on its face suggest that th e telecommunications services committed in Mexico's
Schedule must be supplied by or through telecomm unications "infrastructure". Yet if the term
"facilities-based" simply means "infrastructure", th en the term would add little or no meaning to
Mexico's commitment, since a service supplied by or through a public telecommunications network
must, as the Annex on Telecommunications suggests, be ultimately supplied by or through some form
of telecommunications infrastructure. The introduct ory heading in Spanish, which is the authentic
language of Mexico's Schedule, uses the term " basada en infraestructura", which gives rise to the
same interpretative difficulties.
855
7.56 We recognize that, in examining the meaning of the expression "facilities-based" in Mexico's
introductory heading, we need to give meaning and effect to all its terms, and not adopt an
interpretation that would result in re ducing any of its terms to redundancy. 856 In seeking to give
meaning to the term "facilities-based", we observe that the requirement that the supply of the service
be "based" on facilities logically implies that there could in principle exist supply that is not "based"
on facilities. This suggests that a "facilities-b ased" network refers not to the existence of
infrastructure (upon which any telecommunication ser vice ultimately has to rely), but to the
relationship between the infrastructure and the service. Under this interpretation, the term "facilities-
based" in the introductory heading of Mexico's Sche dule could plausibly refer to services transported
by an operator over its own infrastructure, and not over infrastructure leased from another operator.
7.57 Under this interpretation, a further issue ari ses as to whether the meaning of "facilities-based"
qualifies only those services transported by an ope rator over its own infrastructure in the market from
which the service is supplied, as the United States sugg ests. Examining the ordinary meaning of the
terms in Mexico's Schedule, in their context, the words "facilities-based public telecommunications
networks" do not, on their own, suggest any geographical distinction. Mexico has placed this phrase
in the column of its schedule entitled "sector", whic h suggests that the phrase refers to the overall
nature of the service, and not to the nature of the ser vice with respect to any particular location of the
supplier. Aspects of the supply of the service that relate to the location of the supplier are addressed
in GATS by the four modes of supply. In a sche dule, the inscriptions that inform the reader
concerning the nature of the commitments in relation to the four modes of supply are found in the
market access and national treatment columns, not in the sector column. Thus, the inscriptions in the
market access and national treatment columns must be used to determine what limitations, if any,
may affect the supply of a service based on the location of the supplier or its status (facilities-based or
not) in a particular location. We therefore see no reason to read this geographical qualification into
the meaning of "facilities-based". Accordingly, we are not convinced by the United States' argument
that the phrase "facilities-based public telecommunica tion networks" found in the sector column of
Mexico's Schedule means, in itself, that Mexico's commitments extend to any of the services at issue
supplied by a cross-border supplier that uses its own infrastructure (and not leased capacity) in the
market from which it is supplying, regardless of how these services are terminated in Mexico.
cc) Supplementary documents used to schedule commitments

7.58 We have arrived at this interpretation of the introductory heading in Mexico's Schedule based
on the wording of the heading within the context of the schedule. We now seek confirmation of the
meaning of the introductory heading in the light of three important documents used by Members to
provide guidance in drawing up their schedules: th e Draft Model Schedule, the related Note by the
Chairman, and the Scheduling Guidelines. We refer to these documents as the "supplementary
documents".
i) Description of the supplementary documents

855 See Spanish text of the main sector heading reproduced in footnote 850.
856 See Appellate Body Report , US – Gasoline, DSR 1996:I, 3, at 21.

– Draft Model Schedule
7.59 The Draft Model Schedule arose from discussions by negotiators at the close of the Uruguay
Round. Once the Negotiating Group on Basic Teleco mmunications was established in May 1994, the
Secretariat was asked to provide a Note on the background on the previous Uruguay Round
discussions on basic telecommunications. The resulting Note included the Draft Model Schedule that,
after discussion in the Group, was reissued with minor revisions.
857 The Draft Model Schedule was
specifically intended "to assist participants in the drafting of their offers and final schedules." It
contains a list of basic telecommunications sectors based on the standard GATS sectoral classification
list (W/120)
858, including cross-references to the United Nations CPC, and explanatory notes.859
7.60 The Draft Model Schedule lists the services subsectors, considered as the basic
telecommunications services subject to the negotiations, as follows:
"2.C. Telecommunications Services UNCPC
a. Voice telephone services 7521
b. Packet-switched data transmission services 7523**
c. Circuit-switched data transmission services 7523**
d. Telex services 7523**
e. Telegraph services 7522**
f. Facsimile services 7521**+7529**
g. Private leased circuit services 7522**+7523**
o. Other"
7.61 The "sector or subsector" column of the Draft Model Schedule also lists a number of
"categories" into which the services can be further subdivided. The Draft Model Schedule explains:
860
"Depending on the services being offered or on the limitations existing in the
regulatory regime concerned, the specific commitments on these services [a. through
g. and o.] may be subdivided into the categories as noted."
7.62 The listed "categories" are reproduced as follows:
861 (emphasis added)
 "Local/long distance/international service
 – wire-based
 – radio-based
 – on a resale basis
 – facilities-based

857 Formulated by negotiators during 1993, prior to the conclusion of the Uruguay Round, it was
included in a formal document at the outset of the telecom negotiations, as an attachment to Negotiations on
Basic Telecommunications, Note by the Secretariat, TS/NGBT/W/1, 2 May 1994. It was slightly revised by the
Group and reissued in Draft Model Schedule of Commitments on Basic Telecommunications, Informal Note by the
Secretariat, Job. No. 1311, 12 April 1995.
858 Services Sectoral Classification List , Note by the Secretariat. MTN.GNS/W/120, 10 July 1991.
Subsectors (h) to (n) of the standard WTO sectoral listing for telecommunications services contained in
document W/120 were considered to be "value-added", not "basic", telecommunications services, and therefore
omitted. The asterisks appearing against CPC number s indicate that the listed subsector comprises only part of
that CPC code.
859 United Nations, Statistical Papers, Series M, No. 77, Provisional Central Product Classification,
1991.
860 Draft Model Schedule, Footnote b. See footnote 857.
861 Note by the Chairman, 16 January 1997. S/G/W/2/Re v.1. The Note states that a category has to be
explicitly mentioned in a Member's sector column in order to have effect.

 – for public use
 – for non-public use"
7.63 We note particularly the use of the terms "on a resale basis" and "facilities-based" as
categories by which specific commitments may be subdivided.
– The Note by the Chairman

7.64 A Note by the Chairman of the Negotiating Group on Basic Telecom, entitled "Notes for
Scheduling Basic Telecom Services Commitments" was issued on 16 January 1997. 862 The purpose
was "to produce a brief and simple note on assumptions applicable to the scheduling of commitments
in basic telecoms." 863 Although the Note states that it is " not intended to have any binding legal
status", it specifies that its purpose is "to assist de legations in ensuring the transparency of their
commitments and to promote a better unders tanding of the meaning of commitments." 864 The Note
draws on the Draft Model Schedule, restating its categories and confirming that they are to be used in
scheduling commitments. The Note states an importa nt assumption: that, "unless otherwise noted in
the sector column" any telecommunications service listed in the sector column "encompasses" or
"may be provided" by or through all of the different "categories" of the service.
7.65 The Note by the Chairman wa s attached to the final Report of the Group on Basic
Telecommunications, which was adopted on 15 February 1997.
865 The Report states that the
Chairman issued a Note "reflecting his understandi ng of the position reached in discussion of the
scheduling of commitments" and that this Note " set out a number of assumptions applicable to the
scheduling of commitments and was intended to assist in ensuring the transparency of
commitments".866
– Scheduling Guidelines
7.66 The Note by the Chairman, together with the Draft Model Schedule, were attached to the
"Guidelines for the Scheduling of Specific Comm itments under the General Agreement on Trade in
Services (GATS)", (the "Scheduling Guidelines") which were adopted by Members in the Council on
Trade in Services on 23 March 2001. 867 The Scheduling Guidelines were an update of the
Explanatory Note issued in 1993 for the Group of Negotiations on Services. 868 The objective of the
Scheduling Guidelines is "to explain, in a concis e manner, how specific commitments should be set
out in schedules in order to achieve precision and clarity."
ii) Interpretative value of the supplementary documents
7.67 The Draft Model Schedule and the Note by the Chairman were documents given considerable
prominence by Members, since they were attached to the final Report adopted by the Negotiating
Group on Basic Telecommunications in 1997. 869 Members gave further prominence to these two
documents by attaching them to the Scheduling Guidelines adopted by the Council for Trade in
Services in 2001. Annex 2 of the Scheduling Guid elines is entitled "List of attached documents

862 Notes for Scheduling Basic Telecommunications Services Commitments, Note by the Chairman.
S/GBT/W/2/Rev.1.
863 Note by the Chairman, 16 January 1997. S/G/W/2/Rev.1, preamble.
864 Note by the Chairman, 16 January 1997. S/G/W/2/Rev.1, preamble.
865 Report of the Group on Basic Telecommunications, S/GBT/4 of 15 February 1997.
866 Report of the Group on Basic Telecommunications, S/GBT/4 of 15 February 1997, paragraph 5.
867 Guidelines for the scheduling of specific commitments under the General Agreement on Trade in
Services (GATS), adopted 23 March 2001, S/L/92 (28 March 2001).
868Scheduling of Initial Commitments in Trade in Services: Explanatory Note . MTN.GNS/W/164
(3 September 1993).
869 Report of the Group on Basic Telecommunications, S/GBT/4 of 15 February 1997.

relevant for scheduling purposes". (emphasis added) Nonetheless, a footnote to the title of Annex 2
states that "[t]he fact that these documents are annexed to these guidelines should not be interpreted as
changing their status." We accept that the footnot e means that the attachment of the Draft Model
Schedule and the Note by the Chairman to the Sc heduling Guidelines should not in itself affect the
existing interpretative status of the two documen ts. However, the footnote does not affect the
interpretative status that the Draft Model Schedul e and the Note by the Chairman might otherwise
have, including the interpretative value derived from being attached to the Report by the Negotiating
Group on Basic Telecommunications. Consequently, ev en if the Draft Model Schedule and the Note
by the Chairman cannot be seen as part of the "context" under paragraph 2 of Article 31, nor be "taken
into account" under Article 31 – a lega l question that we leave open – we find that these documents
are, with respect to the GATS Protocol on Tel ecommunications (to which Mexico's Schedule was
attached) an important part of the "circumstances of its conclusion" within the meaning of Article 32
of the Vienna Convention. Under the terms of Article 32, we may therefore use the Draft Model
Schedule and the Note by the Chairman to confir m the ordinary meaning, arrived at through the
application of Article 31 of the Vienna Conve ntion, of Mexico's GATS commitments on
telecommunications services.
7.68 Confirmation of the interpretative value of the supplementary documents is provided by the
extensive use in Members' schedules of the categor ies indicated in the Chairman's Note and Draft
Model Schedule. Schedules on occasion indicate even finer distinctions in categories, where needed,
to reflect accurately the nature of the services on which Members were undertaking commitments. In
some cases, the categories are used to limit the sco pe of a subsector by distinguishing the categories
of services that are being committed. In other cases, the categories are used to specify different levels
of commitments for some categories of a subsect or, as compared with other categories of the
subsector. Typical examples in schedules include co mmitments that offer greater levels of access for
a given service supplied on a facilities basis, or that specify that public telephony remains under
monopoly while non-public telephony does not. The categories are often cited in the sector column of
schedules, as provided in the Chairman's Note. In some schedules, however, categories are listed in
the market access column instead of the sector column. In these c ases, the entries nonetheless appear
to clarify the category or categories of service to which the market access limitation itself applies.
Indeed, for those schedules that use not categori es at all, it is only by reference to these
understandings that there can be certainty that th e commitments "encompass" all of the forms in
which the services may be supplied. Because of this extensive use in Members' schedules of
principles set out in the Draft Model Schedule and the Note by the Chairm an, we consider that
substantial interpretative weight can be given to the supplementary documents.
dd) Mexico's cross-border te lecommunications commitments
7.69 We now examine the sector column of Mexico's Schedule in the light of the Model Schedule
and the Chairman's Note. We recall that the intr oductory heading in Mexico's Schedule is contained
in the column which describes services, and our earlier reasoning that this heading must therefore
qualify a type of service. We next observe that the words "facilities based", "public", "wire-based"
and "any … technological medium" used in Mexico's Schedule all reflect categories included in the
Chairman's Note.870 Mexico appears therefore to have adopt ed the sectoral appr oach set out in the
Chairman's Note, and can be assumed to have scheduled its commitments according to the
assumptions contained in that Note.
7.70 The category "facilities-based" which appears in the Chairman's Note and the Draft Model
Schedule is used solely to describe the "facilities- based" supply of a service, and not generally to
describe the simple existence of a network infrastruct ure. As indicated in the Chairman's Note "unless
otherwise noted in the sector column", the commitment is presumed to encompass all of the categories
cited in the Note. We recall that these categories include "facilities-based" and "on a resale basis". If,

870 See our previous discussion of the Chairman's Note in paragraphs 7.62-7.68 of this Report.

as discussed earlier, Mexico's reference to supply by or through "facilities" were understood simply to
refer to supply by means of an infrastructure, th en the term would be redundant, since any supply of
the service is ultimately possible only through a network of physical assets of some operator. In
consideration of the categories of the Chairman's Note, however, it becomes apparent that such an
interpretation would also make redundant the cont rasting categories of supply – "facilities-based" and
"by resale". Were this the case, it would not be possible, as provided by the Chairman's Note, for
Members to use these categories as a basis for distinguishing between types of supply of basic
telecommunications services being committed and those that are not.
7.71 We find therefore that the use of the word "facilities-based" in the phrase "facilities-based
public telecommunication network" contained in the introductory heading to Mexico's
telecommunications commitments means that Mexico has undertaken commitments for the services at
issue supplied only on a facilities basis over such ne tworks – and not by resale or leased capacity.
The examination of the supplementary documents t hus confirm our interpretation of the ordinary
meaning of the terms "facilities-based" in Mexico's Schedule.
7.72 Nonetheless, Mexico's services sector listing do es contain a subsector listing for "commercial
agencies" ("comercializadoras"), defined as "[a]gencies which, without owning transmission means,
provide third parties with telecommunications services by using capacity leased from a public
network concessionaire." This subsector listing can be read only as an exception, for the services at
issue that are supplied through leased capacity, to th e general exclusion of such services expressed in
the introductory heading. The separate commit ment on supply of telecommunications services
through leased capacity has meaning in the context of Mexico's Schedule, since supply in this manner
is subject to market access limitations that are somewhat different from those inscribed with respect to
facilities-based supply.
(ii) Market access and national treatment commitments for cross-border supply
7.73 We now consider what cross-border commitments Mexico has undertaken with respect to the
services listed in the sector column of its schedule. For the services at issue, Mexico has inscribed
certain cross-border commitments for market access and national treatment. In the national treatment
column of its schedule, Mexico has inscribed "N one". This term is a GATS scheduling convention
which means "no limitations" – in other words, a full commitment.
871 Mexico has therefore
undertaken a full national treatment commitment for the cross-border supply of the services at issue.
7.74 With respect to market access for the cross-border supply of the services at issue, Mexico has
inscribed the following:
"None, except the following: International traffic must be routed through the
facilities of an enterprise that has a concession granted by the Ministry of
Communications and Transport (SCT)."872
7.75 The words "None, except" appear at the beginni ng of Mexico's inscription. The words that
follow indicate that Mexico intends to grant fu ll market access, subject only to the limitation
described. Since Article XVI and scheduling convent ions require that the inscription of a limitation

871 Scheduling of Initial Commitments in Trade in Services: Explanatory Note . MTN.GNS/W/164
(3 September 1993) paragraph 24. See also Guidelines for the scheduling of specific commitments under the
General Agreement on Trade in Services (GATS) . Adopted 23 March 2001. S/L/92 (28 March 2001),
paragraph 42.
872 In Spanish: " 1) Ninguna, excepto la siguiente: el tráfico internacional debe ser enrutado a través de
(SCT)."

must be read to mean that full market access is granted, subject only to any measures specifically
inscribed, the inscription of the words "None, except" was not necessary.873
7.76 We now examine what sort of limitation, if an y, on market access is achieved by Mexico's
inscription that "[i]nternational traffic must be rout ed through the facilities of an enterprise that has a
concession …". Article XX:1(a) sets out the general requirement for Members to "specify" the terms,
limitations and conditions on market access for comm itted sectors in their schedule. "Specifying"
requires that an entry describe each measure conc isely, indicating the elements that make it
inconsistent with Article XVI:2.874
(iii) Mexico's "routing restriction"
7.77 We now examine whether the terms of the "routi ng restriction" in the market access column
of Mexico's Schedule indicate that it comes within the scope of Article XVI:2. This provision
contains six categories of measures that restrict market access. These categories differ depending on
whether they place limitations on:
 (a) the number of service suppliers;
 (b) the value of services transactions or assets;
 (c) the number of service operations or quantity of service output;
 (d) the number of natural persons that may be employed;
 (e) the forms of legal entity; or
 (f) the participation of foreign capital.
875

873 Scheduling of Initial Commitments in Trade in Services: Explanatory Note , MTN.GNS/W/164
(3 September 1993), paragraph 4.
874 Scheduling of Initial Commitments in Trade in Services: Explanatory Note , MTN.GNS/W/164
(3 September 1993), paragraphs 21 and 25.
875 A summary of the six categories. GATS Article XVI:2 reads in full:
 "In sectors where market-access commitments ar e undertaken, the measures which a Member
shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire
territory, unless otherwise specified in its Schedule, are defined as:
(a) limitations on the number of service suppliers whether in the form of numerical
quotas, monopolies, exclusive service suppli ers or the requirements of an economic
needs test;
(b) limitations on the total value of service transactions or assets in the form of numerical
 quotas or the requirement of an economic needs test;
(c) limitations on the total number of service operations or on the total quantity of
 service output expressed in terms of designated numerical units in the form of quotas
 or the requirement of an economic needs test;
(d) limitations on the total number of natural persons that may be employed in a
particular service sector or that a service supplier may employ and who are necessary
for, and directly related to, the supply of a specific service in the form of numerical
quotas or the requirement of an economic needs test;
(e) measures which restrict or require specific types of legal entity or joint venture
 through which a service supplier may supply a service; and
(f) limitations on the participation of foreign capital in terms of maximum percentage
 limit on foreign shareholding or the total value of individual or aggregate foreign
 investment."

7.78 Mexico's routing restriction contains three main elements. The first element relates to
"international traffic". The second element concerns traffic that "must be routed through the facilities
of" an enterprise. The third and final element c oncerns "an enterprise that has a concession". We
assess each of these elements in turn, with respect to their relevance to the six categories of market
access measure set out in Article XVI:2.
aa) "International traffic
"
7.79 The first element of the routing restriction narro ws its scope to "international traffic". This
element reflects one of the "categories" contained in the Chairman's Note, and can be contrasted with
other categories of local and domestic long-distance service. Since the services at issue are services
supplied cross-border, they would necessarily involve tra ffic that is international in character. Even if
"domestic" services were to transit borders, they w ould do so as international "traffic". Therefore,
Mexico has not, through use of this element, placed a substantive limitation on the number of
suppliers of scheduled services on a cross-border basis, the quantity of the cross-border services
supplied, or on any of the other categories of measure described in Article XVI:2.
bb) "Routed through the facilities "
7.80 The second element requires that international tr affic "must be routed through the facilities"
of a Mexican concessionaire. The United States ar gues that the requirement that services supplied
cross-border "through the facilities" of a Mexican concessionaire means simply that United States
calls must be terminated using the assets or equipment of a Mexican concessionaire, and that these
include the use of leased lines and other leased capacity. 876 Mexico disagrees, specifying that
"through the facilities" means "through an internatio nal gateway" of a Mexican concessionaire, which
it claims is its meaning in Mexican legislation.
7.81 In examining the meaning of this element of the routing restriction, we note that the ordinary
meaning of the term "facilities" (in the Spanish authentic text " instalaciones"), on its own, is very
broad. A specialized telecommunications dictionary defines "telecommunications facilities" as
follows:
"The aggregate of equipment, such as telephones, teletypewriters, facsimile
equipment, cables, and switches, used for various modes of transmission, such as
digital data, audio signals, image and video signals."
7.82 The same dictionary defines "transmission facility" as:
"A piece of a telecommunication system through which information is transmitted for
example, a multi pair cable, a fiber optic cable, a coaxial cable, or a microwave
radio."
877
7.83 Neither of these broad definitions makes clear whether supply of the services at issue routed
through the "facilities" would include supply using capacity leased to another operator. It is therefore
necessary to examine further the meaning of the term "facilities", viewed in its context within
Mexico's Schedule.
7.84 We recall that the Chairman's Note provided guidance for Members making commitments in
basic telecommunications.878 The use of the word "facilities" in the Note corresponds to a possible
category by which a service sector could be narrowed down or refined. The category is referred to as

876 See the United States' first written submission, paragraph 57.
877 Newton's Telecom Dictionary, 19th Edition, March 2000.
878 See paragraphs 7.58-7.68 of this Report.

the "facilities-based" supply of a service. We therefore find that the phrase "through the facilities of",
placed in the context of the categories of the Chairm an's Note, refers not to a requirement simply to
use the equipment or physical assets of a Mexican concessionaire, but to supply the service on a
facilities-basis, and not through capacity leased to the cross-border supplier.
7.85 We now assess whether this element of the ro uting restriction introduces a market access
restriction in the sense of Article XVI:2, with r espect to the cross-border supply of the service. To
this end, it is necessary to assess the effect of this element on the relevant services listed by Mexico in
its schedule. With respect to services falling under the main sectoral heading, this element would
appear to reinforce the inscription in the main sectoral heading that the services committed must be
supplied on a facilities-basis. However, this element of the routing restriction also further specifies
that the terminating segment of cross-border supply not only may, but must, be supplied on a
facilities-basis. This element of th e routing restriction means, therefore, that supply of the service by
means of one of the categories (over leased capacity) within Mexico is prohibited, and is subject to a
zero quota in the sense of Article XVI:2(a), (b) and (c ). We note that, while this limitation prohibits
services that originate on a facilities basis from be ing terminated over leased circuits, it does not
prevent these services from being supplied when they fall within the facilities-based category with
respect to termination.
7.86 With respect to Mexico's commitments falling under the subsector heading of "commercial
agencies", this element of the routing restriction would mean that even if the originating segment of
the cross-border service is supplied over leased capacity , it is nevertheless restricted only to facilities
based supply on the terminating segment within Mexi co. Therefore, with respect to the commercial
agencies (comercializadoras) services described as a subsector, this routing restriction prohibits the
cross-border supply upon termination within Mexico by means of the very "leased capacity" which
defines this type of service. While this element of the routing restriction does not expressly prohibit
cross-border supply over leased capacity on the originating segment, it means that supply over leased
capacity on the terminating segment is prohibited. Therefore, this element of the routing restriction
prohibits end-to-end International Simple Resale (I SR), and effectively eliminates the possibility of
any cross-border supply of services over leased capac ity. In this sense, with respect to cross border
services supplied by commercial agencies, the rou ting restriction falls within the scope of
Article XVI:2(a), (b) and (c).
cc) "Enterprise that has a concession
"
7.87 The third element requires that the traffic be routed through the facilities of an "enterprise that
has a concession". In particular, Mexico argues th at the requirement that international traffic be
"routed through the facilities" of an enterprise that has a "concession" must be read in conjunction
with the use of the term "concession" contained in its market access column for the supply of the
services at issue through commercial presence.
7.88 Mexico's Schedule, with respect to the supply of the services at issue through commercial
presence reads, in relevant part:
"A concession1 from the SCT is required. Only enterprises established in conformity
with Mexican law may obtain such concession.
1 Concession: The granting of title to install, operate or use a facilities-based public
telecommunications network.
Direct foreign investment up to 49 percent is permitted in an enterprise set up in
accordance with Mexican law." (emphasis added)

7.89 Thus, the "concession" needed to supply the services at issue through commercial presence
requires: (a) the establishment of an enterprise; w ith (b) no more than 49% foreign ownership. For
Mexico, the use of the word "con cession" has the same meaning in the context of cross-border supply
as it does in the context of commercial presence. Therefore, in Mexico's view, a concessionaire
entitled to route international traffic into Mexico mu st be a juridical person of Mexican nationality.
Mexico then reasons that the mention of the word "concession" in the routin g restriction for cross-
border supply "creates commercial presence and nationality requirements to supply basic
telecommunications services in Mexico".
879 Since a foreign service supplier wishing to supply cross-
border can neither have Mexican nationality nor supply through commercial presence, Mexico
concludes that its cross-border commitments for th e services at issue effectively allow zero access for
foreign service suppliers wishing to supply cross-bo rder, and that this constitutes "limitations on the
number of service suppliers", as provided for in paragraph (a) of Article XVI:2.880
7.90 Even if we were to accept Mexico's argument that the term "concession" in its cross-border
commitments has the same meaning as in its commercial presence commitments, we do not see how
the nationality and commercial presence requirements for the concessionaire – the entity which routes
the calls transferred to it by United States supplie rs at the border – amounts to a commercial presence
and a Mexican nationality requirement for a cross-border supplier, effectively preventing any supply
by that mode. Accepting Mexico's argument in th is regard would require acceptance of Mexico's
argument that the same supplier must undertake the transmission of a call on both sides of the border,
implying that the supplier operate, or be present in some way, in the market being supplied. The
Panel has earlier examined and rejected this interpretation.
881 Based on a correct understanding of
cross-border supply under Article I:2(a) of the GATS, Mexico's conclusion simply does not follow.
The third element of the routing restriction – the concession requirement – does not therefore fall into
any of the six categories of market access restrictions contained in Article XVI:2.
7.91 We find overall therefore that the inscription in Mexico's Schedule of the routing requirement
prohibits market access for the supply of the serv ices at issue on a non-facilities basis (over capacity
leased by an operator) in Mexico, but allows full access for the services at issue supplied on a
facilities-basis ( not over capacity leased by an operator) in Mexico – subject to routing the traffic
through Mexican enterprises that have a "concession".
(d) Do Mexico's specific commitments provide "t he basis" for its additional commitment on
interconnection?
7.92 Section 2.1 of the Reference Paper stipulates th at Mexico's interconnection obligation applies
"on the basis of the specific commitments undertaken" (" respecto de los cuales se contraigan
compromisos específicos"). The specific commitments referred to in Section 2.1 must refer only to
the market access and national treatment commit ments undertaken by Mexico, and not Mexico's
additional commitments, since otherwise the interconnection provision (itself a specific commitment)
would provide the basis for its own application. The United States argues that once any level of
commitment is made, Section 2 of the Reference Pa per applies fully within the modes of supply in
which the commitments have been taken, unless ther e is an inscription in the schedule explicitly
limiting the applicability of the Reference Paper.
882 Mexico disagrees and, basing itself on the

879 See Mexico's answer to question No. 2(a) of the Panel of 19 December 2002, paragraph 35. For
question No. 2(a), see footnote 225 of this Report.
880 See Mexico's first written submission, paragraph 145.
881 See paragraphs 7.28-7.45.
882 See the United States answer to question No. 1(c) of the Panel of 19 December 2002, paragraph 7.
For question No. 1(c), see footnote 221 of this Report.

language of its Reference Paper, states that Sec tion 2 applies only within the bounds of inscribed
market access.883
7.93 We recall that Section 2.1 reads:
"2. Interconnection

 2.1 This section applies, on the basis of the specific commitments
undertaken, to linking with suppliers providing public
telecommunications transport networks or services in order to allow
the users of one supplier to communicate with users of another
supplier and to access services provided by another supplier."
884
(emphasis added)
7.94 Section 2.1 requires that the interconnection obl igation be "on the basis" of these specific
commitments undertaken (" respecto de los cuales se contra igan compromisos específicos "). The
wording of this phrase suggests that the specific commitments should in some way "justify" or
"provide the scope for" the interconnection obli gation. This conclusion is supported by an
examination of the phrase in its context. The wordin g of Section 2 of the Reference Paper as a whole
suggests that the purpose of the interconnection oblig ation is to enable suppliers supplying a basic
telecommunications service committed by a Member in its schedule not to be restricted by unduly
onerous interconnection terms, conditions and rates imposed by a major supplier. It would not appear
to be the purpose of Section 2 to provide the be nefits of the interconnection to a supplier in any
telecommunications subsector or mode of supply, simply because other subsectors and modes of
supply have been committed. It would seem reasona ble to conclude, therefore, that the right to
interconnect accorded by Section 2.2 should apply where, with respect to a particular subsector and
mode of supply , a Member's market access and national treatment commitments specifically accords
the right to supply that service. We therefore do not agree with the United States argument that a
limitation inscribed in either th e market access or the national treatment column cannot limit the
applicability of an additional commitment under Article XVIII.
7.95 We have found in previous sections that Me xico has undertaken specific commitments –
national treatment and market access – with respect to the supply of services on a facilities basis (not
over capacity leased by an operator) in Mexico. We therefore find that these specific commitments
form the "basis" on which Section 2.1 of Mexico's Reference Paper applies to the services at issue
supplied on a facilities basis in Mexico.
(e) Do Mexico's additional commitments on interco nnection apply to suppliers of cross-border
services?
7.96 The United States argues that, based on ordinary meaning, the Reference Paper applies to
interconnection with a cross-border supplier since, in the wording of Section 2.1, there is a "linking"
of basic telecommunications suppliers in order to "allow the users of one supplier to communicate
with users of another supplier". That certain pr ovisions in Section 2 may be more relevant to

883 See Mexico's answer to question No. 1(b) of the Panel of 19 December 2002, paragraphs 14-24. For
question No. 1(b), see footnote 232 of this Report.
884 In the authentic Spanish version of Mexico's Schedule:
"2. Interconexión
redes públicas de telecomunicaciones de transporte o de servicios a fin de
otro proveedor y tener acceso a los se rvicios suministrados por algún otro
proveedor, respecto de los cuales se contraigan compromisos específicos."

domestic interconnection than to international interconnection is not determinative. In the
United States view, there are no important techni cal differences between international and domestic
interconnection, and the underlying reasons for co mpetition disciplines in both cases are the same.
Call termination is simply a form of interconnection. According to the Unite d States, even Mexico's
own laws and regulations governing such cross-borde r termination refer to "interconnection" with
foreign suppliers.
7.97 The United States further argues that the existe nce of international "accounting rate" regimes
which may apply to certain cases of cross-border interconnection does not mean that cross-border
interconnection is excluded from the scope of the Re ference Paper. There are no explicit words to
this effect. The United States argues that, while early drafts of the Reference Paper specifically
provided for transparency in accounting rates, it does not follow that deletion of this discipline from
the final version indicates that interconnection unde r such regimes is excluded from the scope of the
Reference Paper. The United States also contends that it is not relevant that accounting rate regimes
are temporarily exempt from WTO dispute settle ment procedures through an understanding on
accounting rates ("Understanding") contained in a 1997 Chairman's Note.
885 That exclusion, the
United States points out, is non-binding, and was intended solely to provide cover from the MFN
obligations in Article II of the GATS, and not commitments containe d in the Reference Paper. The
United States finally argues that International Te lecommunication Union ("ITU") instruments are not
relevant to this dispute, since they are separat e from the WTO Agreement and, in any case, they do
not conflict with Mexico's WTO obligations, and th e definition of "accounting rate" in the ITU is
consistent with Section 2.1 of the Reference Paper.
7.98 Mexico disagrees and claims that the Refere nce Paper provisions on interconnection do not
apply to the cross-border supply of a service. It argues that Reference Paper commitments are
additional commitments undertaken under Article XVIII, and they cannot therefore apply to cross-
border interconnection, a market access issue covere d by Article XVI. Mexico further argues that
Reference Paper commitments are a matter exclus ively of domestic regulation, and cannot cover
cross-border supply in which the operator is located outside a Member's territory.
7.99 Mexico also argues that the existence of acc ounting rate regimes governing the cross-border
supply of telecommunications services between many countries, and which are inconsistent with
Reference Paper obligations, shows that these cr oss-border services were never intended to be
covered by the Reference Paper disciplines on interc onnection. In addition, Mexico argues that the
negotiating history of the Reference Paper must be used as a supplementary means of interpretation.
Although a section containing obligations relating e xplicitly to accounting rates was contained in
early drafts of the Reference Paper, Mexico argues, they were later removed. Mexico also argues that
the non-binding Understanding, contained in the 1997 Chair Note, which excludes the application of
accounting rates from WTO dispute set tlement, is evidence of an intention to exclude cross-border
interconnection from the Reference Paper.
7.100 In order to determine whether Mexico's add itional commitment on interconnection applies on
the basis of its commitment on cross-border supply of the services at issue, we re-examine the terms
of Section 2.1 of Mexico's Reference Paper. As already indicated before, Se ction 2.1 states that the
interconnection provisions in Section 2.2 apply to:
"linking with suppliers providing public telecommunications transport networks or
services in order to allow the users of one supplier to communicate with users of
another supplier and to access services provi ded by another supplier, on the basis of
the specific commitments are undertaken."

885 See the United States' first oral statement, paragraph 25. See also the United States' second written
submission, paragraph 49.

7.101 We note that this delimitation of the type of interconnection which falls within the scope of
Section 2.2 contains four main elements: (a ) a "linking"; (b) with "suppliers of public
telecommunications networks and services"; (c) "to allow the users of one supplier to communicate
with users of another supplier and to access services provided by another supplier"; and (d) "on the
basis of the specific commitments undertaken". We examine the scope of the interconnection
provided for in Section 2 in the light of these elements.
(i) Ordinary meaning
7.102 The ordinary meaning of the word "linking" is very broad. The general dictionary meaning of
"link" is "a connecting part, whether in material or immaterial sense; a thing ( occas. a person) serving
to establish or maintain a connexion; a member of a series or succession; a means of connexion or
communication." Similarly, the meaning of the verb form of "link" is "to couple or join with", and the
phrase "to link up with" includes "by means of transport or system of communication". 886 T h e
dictionary meaning of the term link thus suggests that linking can involve any kind of connection
between networks. The ordinary meaning of linki ng is broad and does not, in particular, imply any
particular location of the object being linked. This ordinary meaning of link is consistent with the
definition provided by a telecom glossary of a link as "a general term used to indicate the existence of
communications facilities between two points".887
7.103 Section 2 of Mexico's Reference Paper describ es the form of linking to which it applies as
that occurring "with suppliers providing public te lecommunications transport networks or services".
A "public telecommunications transport service"888 is defined in the Annex as:
"a telecommunications transport service required, explicitly or in effect, by a Member
to be offered to the public generally. Such services may include, inter alia, telegraph,
telephone, telex, and data tran smission typically involving the real-time transmission
of customer-supplied information between two or more points without any end-to-end
change in the form or content of the customer's information."889
7.104 A "public telecommunications transport network"890 is defined in the Annex as "the public
telecommunications infrastructure which permits telecommunications be tween and among defined
network termination points".891
7.105 Accordingly, the phrase "suppliers providing p ublic telecommunications transport networks
or services " means that, under Section 2, the "linking " is with suppliers of basic telecommunications
services that are required to be offered to the public generally.892 Thus there is no obligation to ensure
such linking with suppliers that do not provide basi c telecommunications services or with suppliers of
basic telecommunications services that are not requi red to offer their services to the public generally.
However, neither that provision, nor any other prov ision of Section 2, makes any reference to the

886 The Shorter Oxford English Dictionary, 3rd edition, (Clarendon Press, 1990), Vol. I, page 1219.
887 ANS T1.523-2001, Telecom Glossary 2000; http://www.atis.org/tg2k/.
888 (emphasis added).
889 Annex on Telecommunications, Section 3(b).
890 (emphasis added).
891 Annex on Telecommunications, Section 3(c).
892 Section 3(b) of the Annex on Telecommunications defines "public telecommunications transport
service" as "any telecommunications transport service required, explicitly or in effect, by a Member to be
offered to the public generally. Such services may incl ude, inter alia, telegraph, telephone, telex, and data
transmission typically involving the real-time transmission of customer-supplied information between two or
more points without any end-to-end change in the form or content of the customer's information.". Section 3(c)
of the Annex on Telecommunications defines "Public telecommunications transport network" as "the public
telecommunications infrastructure which permits telecommunications between and among defined network
termination points."

entity that is entitled to be linked to the public te lecommunications transport networks or services; no
language thus exists that would circumscribe th e scope, geographic or otherwise, of the basic
telecommunications suppliers to be linked. This provision therefore could not be read to exclude
suppliers outside of Mexico from "linking" to public telecommunications transport networks and
services in Mexico.
7.106 Section 2 also states that the purpose of the linking is "to allow the users of one supplier to
communicate with users of another supplier and to access services provided by another supplier".
Allowing the users of one supplier to communicate w ith users of another supplier should consist, at
the very least, of allowing a basic telecommunications supplier who originates a voice telephone call
for its customer to interconnect with a supplier of public telecommunications transport networks and
services for the purpose of terminating that call with whichever user its customer wishes to
communicate with. Again, there is nothing in th is wording that suggests that the geographical
location of the users that communicate, the services to be accessed, or service suppliers to be linked is
relevant, much less circumscribed. Finally, th e definition limits the scope of interconnection to
situations "on the basis of the specific commitments undertaken". This condition likewise is silent as
to the location of the suppliers or the network.
7.107 That the drafters did not explicitly limit the sc ope of Section 2 by, for example, inserting the
word "domestic", must have some meaning. This silence could be seen as an indication that the scope
of interconnection under Section 2 is comprehensive and includes international interconnection.
However, the fact that there is no hint of any language limiting the geographic location of the network
of the supplier seeking to be linked in this Sec tion does not conclude our task of determining the
meaning of interconnection under Section 2. Othe r interpretative elements could, as argued by
Mexico, indicate a different result.
893
(ii) Context provided by the term "interconnection"
7.108 We note that the "linking" referred to in S ection 2.1 falls under the Section 2 heading of
"interconnection", and is therefore informed by this term. The verb form "interconnect", in its general
dictionary sense, means simply "to be or become mutually connected". 894 This suggests that the term
"interconnection" is simply a form of linking of suppliers, which does not indicate any distinction
with respect to the location of th e suppliers being linked. Intercon nection is, however, a term which
may be given a "special meaning", according to Article 31.4 of the Vienna Convention, "if it is
established that the parties so intended." Since th e provision is a technical one that appears in a
specialized service sector, we are entitled to exam ine what "special meaning" it may have in the
telecommunications context, and whether the "linking " referred to in Section 2.1 is circumscribed by
that special meaning. A specialized dictionary meaning of "interconnection" is:
"The linking together of interoperable system s. The linkage used to join two or more
communications units, such as systems, netw orks, links, nodes, equipment, circuits,
and devices."
895
7.109 We note that this definition makes no distinc tion with respect to the national or geographic
origin of the supplier or the location of the supplier to be linked.
7.110 The term "interconnection" also appears as a technical term with a possible "special meaning"
in national laws and regulations . Mexico's Federal Communications Law, for example, although it
does not directly define "interconnection", unamb iguously uses the term to include cross-border

893 See Appellate Body Report, US – Carbon Steel, paragraph 104.
894 MerriamWebster Dictionary, Merriam Webster Online, 2003; http://www.webster.com./
895 ANS T1.523-2001, Telecom Glossary 2000; http://www.atis.org/tg2k/.

interconnection.896 Article 47 of the law states that "[i]nterconnection of public telecommunications
networks with foreign networks shall be carried out through agreemen ts entered into by the interested
parties".897 The ILD Rules likewise do not define "interc onnection" directly, but again, usage of the
term in the Rules makes it clear that it includ es interconnection with foreign networks. The
introductory clauses of the ILD Rules state that the Federal Telecommunications Commission has the
authority to "oversee the efficient interconnec tion of public telecommuni cations networks and
equipment, including interconnection with foreign networks ".898 Likewise, the stated purpose of the
ILD Rules is to "regulate the provision of international long-distance service and establish the terms
to be included in agreements for the interconnection of public telecommunications networks with
foreign networks ."
899 This confirms that the term "int erconnection" is used in Mexico for
interconnection between domestic networks, and between domestic and foreign networks.
7.111 We have not been provided evidence of laws or regulations of other Members which offer
definitions or usage that indicate that the definitio n of "interconnection" is inconsistent with the
ordinary meaning of the term "linking" in Section 2 of Mexico's Reference paper. 900 We note that
under EC law, the term "interconnec tion" is defined comprehensively in a manner that is consistent
with the ordinary meaning of the term "linking":
"the physical and logical linking of pub lic communications networks used by the
same or a different undertaking in order to allow the users of one undertaking to
communicate with users of the same or another undertaking, or to access services
provided by another undertaking. Services may be provided by the parties involved
or other parties who have access to the networ k. Interconnection is a specific type of
access implemented between public network operators."
901
7.112 A "special meaning" of the term "interconnection" in Section 2, inconsistent with the ordinary
meaning of this term, is also not evident from an examination of the differences between domestic and
international interconnection from commercial, contractual, or technical points of view.
7.113 From a commercial perspective, we disagree with Mexi co that international interconnection
under a traditional, "joint service" regime is dis tinctive because the two ope rators cooperate, and do
not compete for the same customers, unlike in domestic interconnection. In a domestic setting, it is
true that two operators in the same geographic area and providing the same type of service will
usually compete directly for the same customers. In an international se tting, two operators may
however also compete for the same customers through subsidiaries or services offered in each others'

896 A glossary published by Cofetel, does, however, offer a formal definition of interconnection, in
similar terms to Section 2.2(b) of Mexico's Reference Paper: "Physical and logical connection between two
public telecommunications networks, that allows the ex change of switched public traffic between the switching
central offices of both networks. The interconnection a llows the users of one of th e networks to interconnect
and exchange public switched traffic with the users of the other network and vice versa, or to use the services
provided by the other network." English translation. Source: www.cft.gob.mx/html/la_era/glo_pub2de4.html#I.
897 Federal Communications Law, Article 47. (emphasis added)
898 Rules for the Provision of International Long-Dist ance Service to be Applie d by the Licensees of
Public Telecommunications Networks Authorized to Prov ide this Service, Decision No. RES PC 961207 of
4 December 1996 ("ILD Rules"). Preambular clause. (emphasis added)
899 ILD Rules, Rule 1. (emphasis added)
900 See notably, for the United States: "Interconnection is the linking of two networks for the mutual
exchange of traffic. This term does not include the transport and termination of traffic. " 47 CFR Ch. 1 §51.5
(10-1-02 Edition) (FCC) [Interconnection regulations implementing ss. 251-252 of the Communications Act of
1934];
901 Article 2 of EC Directive 2002/19/EC (Access Directive) (OJ 2002 L108, p. 33). In this respect, see
also the "Commission guidelines on mark et analysis and the assessment of significant market power under the
Community regulatory framework for electronic communications networks and services" (2002/C 165/03),
Official Journal of the European Communities 165/6, 11.7.20 02. The Panel is awar e that the EC Access
Directive regulates a common market for telecommunications among EC member States.

markets. Even if they do not, there is still an incentive for a major supplier to set interconnection rates
at anti-competitive rates, and not to provide optimal service to the other supplier in terms of quality
and timeliness. Domestic and international interconnection do not therefore differ significantly in this
respect.
7.114 From a contractual perspective, we also find that there are no significant differences between
the domestic and international inte rconnection, including through accounting rate arrangements. We
cannot accept Mexico's assertion that "most of the provisions of one agreement are either not
applicable or can never be a provision in the other agreement."
902 From a contractual point of view,
domestic and international interc onnection, including the accounting rate regime, do not form two
distinct regimes that cannot overlap. After revi ewing the evidence before it, including copies of
standard agreements furnished by Mexico, and th e arguments of the parties, the Panel agrees
substantially with the statement by the United States that interconnection agreements between
suppliers in the same or different countries, including through accounting rate regimes:
"may include a wide variety of rates, terms and conditions concerning such matters as
specific services covered by the agreement, the rates applicable to specific services,
payment schedules, procedures for dispute resolution, time duration of the agreement,
restrictions on assignments of rights, and va rious network technical considerations.
Interconnection arrangements may provide fo r one-way or two-way traffic flows,
with the same or different rates applying in each direction, and two-way traffic flow.
Interconnection arrangements may also provi de for 'net' payment arrangements under
which the two carriers set off their interc onnect payments with one carrier remitting
the balance to the other carrier."
903
7.115 Even Telmex's contractual arrangements with United States suppliers do not adhere fully to
the traditional accounting rate regime described by the ITU in which "a net settlement payment is
made on the basis of excess traffic minutes, multiplied by half the accounting rate". 904 I n f a c t ,
United States suppliers are charged three different rates depending on the destination zone in Mexico,
while a still different rate applies to traffic from Mexico to the United States.
7.116 From a technical perspective, we find that the United States provides convincing evidence
that the "mid-point" cross-border link-up, which Mexico argues is particular to international
interconnection, arises also in certain situations of domestic interconnection. 905 More generally, we
consider that technical issues arise under both domes tic and international interconnection, including
through accounting rate arrangements, and that these are solved in both cases through the use of
technical standards and agreements, joint planning and coordination.
7.117 In sum the ordinary meaning, in the heading of Section 2 of Mexico's Reference Paper, of the
term "interconnection" – that it does not dis tinguish between domestic and international
interconnection, including through accounting rate re gimes – is confirmed by an examination of any
"special meaning" that the term "interconnection" may have in telecommunications legislation, or by
taking into account potential commercial, contractual or technical differences inherent in international
interconnection. We find that any "special meaning" of the term "interconnection" in Section 2 of

902 See Mexico's answer to question No. 8 of the Pa nel of 19 December 2002. For question No. 8, see
footnote 77 of this Report. See also Mexico's answer to question No. 17 of the Panel of 14 March 2003. For
question No.17, see footnote 146 of this Report.
903 See United States' answer to question No. 8 of the Panel of 19 December 2002, paragraph 44. For
question No. 8, see footnote 77 of this Report.
904 Accounting Rate Reform Undertaken by ITU-T Study Group 3 , Communication from the
International Telecommunication Union, Informal Note , Council for Trade in Services, Job. no. 2947,
11 May 2000, paragraph 2.
905 See the United States' answer to qu estion No. 8 of the Panel of 19 December 2002, paragraph 47.
For question No. 8, see footnote 77 of this Report.

Mexico's Reference Paper does not justify a restricted interpretation of interconnection, or of the term
"linking", which would exclude international interconnection, including accounting rate regimes, from
the scope of Section 2 of the Reference Paper.
(iii) Other contextual elements
7.118 We now consider whether any other contextual elements within Mexico's Reference Paper
may assist us in our interpretation of the scope of interconnection within Section 2. Mexico argues
that certain obligations which arise from the in terconnection commitment in Mexico's Reference
Paper indicate that international interconnection, including through accounting rate regimes, should be
excluded. Section 2.2 requires that interconnection be ensured "at any technically feasible point in the
network". However, as already noted, this would not , contrary to Mexico's views, exclude linking to
a point in a Mexican concessionaire's network that is located at the border. There is no reason why
such a point would not be a "technically feasible poi nt" in a network. Likewise, the requirement in
Section 2.2(a) that the interconnection takes place "under non-discriminatory terms … and rates" does
not in itself indicate that interconnection is restricted to domestic calls. Further, for the purposes of
Section 2, it is just as necessary to ensure the in terconnection of a cross-border service supplied "on
the basis of the specific commitments", as it is for a supplier who is commercially present in the
market.
7.119 The existence of dispute settlement provisions in Section 2.5 does not, in our view, provide
contextual evidence that the scope of interconnecti on is restricted to domestic networks only.
Section 2.5 provides for an "independent domestic body", which will "resolve disputes regarding
appropriate terms, conditions and rates for interconnection within a reasonable period of time, to the
extent that these have not been established previous ly." The fact that the adjudicating body is
"domestic" does not suggest that it would have no jurisdiction over the conditions of linking of a
foreign network with a domestic network at the bo rder. Domestic regulations applicable within a
Member, and subject to adjudication by the domestic bodies of that Member, can clearly also be
applied by that Member at the border.
7.120 A further element that may be taken into account, together with the context, in interpreting the
notion of interconnection is "subse quent practice" by WTO Members. Article 31.3(b) of the Vienna
Convention requires that the treaty interpreter take into account "any subsequent practice in the
application of the treaty which establishes the agreem ent of the parties regarding its interpretation".
The Appellate Body has defined this concept as a "concordant, common and consistent" sequence of
acts or pronouncements which is sufficient to estab lish a discernible pattern implying the agreement
of the parties [to a treaty] regarding its interpretation
".906 Mexico claims that "all fifty-five WTO
Members that inscribed the interconnection commitme nts in Section 2.2(b) of the Model Reference
Paper maintain the traditional joint service accoun ting rate regime", including the United States.
However, maintenance of a "joint service regime" that may be inconsistent with Reference Paper
obligations does not necessarily establish that interconnection commitments under Section 2 were
meant to exclude coverage of all international interconnection.
(iv) Object and purpose
7.121 A consideration of the object and purpose of the treaty – the GATS – would support the
interpretation of "interconnection" derived through an examination of the ordinary meaning of the
term in its context. Article I:1 of the GATS provides that the agreement extends to "measures
affecting trade in services". Trade in services is defined in Article I:2 to include the cross-border
supply of a service "from the territory of one Member into the territory of any other Member". This
mode of supply, together with supply through commercial presence, is particularly significant for trade
in international telecommunications services. There is no reason to suppose that provisions that ensure

906 See Appellate Body Report, Japan – Alcoholic Beverages II, DSR 1996:I, 97, at 106.

interconnection on reasonable terms and conditions for telecommuni cations services supplied through
the commercial presence should not benefit the cross-border supply of the same service, in the absence
of clear and specific language to that effect. Si nce the GATS deals specifically with international
trade in services by four modes of supply that are considered comprehensive, it would indeed be
unusual for interconnection disciplines not to ex tend to an obvious and important mode of
international supply of telecommunications services – cross border.
(v) Supplementary means – the "Understanding"
7.122 The rules of the Vienna Convention provide th at "supplementary means" of interpretation
may be applied in two cases.
907 First, to confirm the meaning resulting from the application of the
primary rules of interpretation – tho se we have applied up to this point. 908 Second, to determine the
meaning when the application of the primary ru les leaves the meaning "ambiguous or obscure" or
leads to a result that is "manifestly absurd or unreasonable". The supplementary means of
interpretation include the preparatory work of the treaty and the circumstances of its conclusion.909
7.123 Mexico has presented extensive arguments, b ased on the preparatory work of the GATS and
the circumstances of its conclusion, to show that a reading of the term "interconnection" to include
interconnection with foreign supplie rs and networks would lead to a result which is "manifestly
absurd or unreasonable". Mexico refers specifically to early drafts of the Reference Paper, and to an
understanding on accounting rates reached by nego tiators. In order to "confirm the meaning"
resulting from the application of the primary rules of interpretation, it would therefore be appropriate
to examine these supplementary means of interpretation.
7.124 The text cited by Mexico (t he "Understanding") is containe d in a Report by the Group on
Basic Telecommunications made on 15 February 1997, at the close of the negotiations on the Fourth
Protocol – the instrument which contained Members' new commitments on basic telecommunications,
including Mexico's Reference Paper commitments. The Report, which appended the draft schedules
of Members, states:
"7. The Group noted that five countries had taken Article II exemptions in respect
of the application of differential accounting rates to services and service suppliers of
other Members. In the light of the fact that the accounting rate system established
under the International Telecommunications Regulations is the usual method of
terminating international traffi c and by its nature involves differential rates , and in
order to avoid the submission of further such exemptions , it is the understanding of
the Group that:
- the application of such accounting rates would not give rise to
action by Members under dispute settlement under the WTO; and
- that this understanding will be reviewed not later than the
commencement of the further R ound of negotiations on Services
Commitments due to begin not later than 1 January 2000."
(emphasis added)
7.125 The Report was introduced by the Chair of th e Group on Basic Telecommunications at the
15 February meeting in the following terms (as reported in a Secretariat note):

907 Vienna Convention, Article 32, supra, footnote 822.
908 The "primary" rules of interpretation are set out in Article 31, the "supplementary" rules are set out
in Article 32.
909 Vienna Convention, Article 32, supra, footnote 822.

"Introducing the revised draft of this repor t, the Chairman drew attention to a new
paragraph dealing with accounting rates systems. It had been noted that some
delegations had submitted Article II exemp tions with respect to accounting rates
systems; though their right to do so was not in question, it would have been
undesirable that a large number of other delegations felt it necessary to take similar
exemptions on the basis of uncertainty ab out the interpretation of the issue of
accounting rates in these negotiations. In order to avoid such an outcome he
suggested that a paragraph be inserted in the Report recording the understanding of
the Group that the application of ac counting rates under the International
Telecommunications Regulations would not give rise to dispute settlement action
under the WTO. The Chairman stressed that this was merely an understanding, which
could not and was not intended to have binding legal force . It therefore did not take
away from Members the rights they have under the Dispute Settlement
Understanding; it was merely intended to give Members who had not taken MFN
exemptions on accounting rates some degree of reassurance . He also drew attention
to the statement in the paragraph that th is understanding will be reviewed before the
commencement of the next Round of negotia tions. Some delegations suggested some
other changes, which were incorporated in the Report." (emphasis added)
7.126 In interpreting the Understanding, it is important to note at the outset that it cannot affect
directly the scope of Mexico's obligations under Section 2 of the Reference Paper. The
Understanding is not, under the WTO Agreement, an agr eed interpretation (Article IX:2), or a waiver
(Article IX:3), or an amendment (Article X) of a provision, all of which require special rules and
procedures. Even according to its own terms, the Understanding is e xplicitly non-binding, and
concerns only procedural rights to dispute settlement , not substantive obligatio ns. Any interpretative
value of the Understanding must lie in the guidan ce it may lend in determining the scope of the
interconnection provision in Section 2 of Mexico's Reference Paper.
7.127 The operative clause of the Understand ing is that "the application of such accounting rates
would not give rise to action by Members unde r dispute settlement under the WTO" (emphasis
added). The term "such accounting rates" refers to an earlier statem ent in the Understanding that the
"accounting rate system established under the Inte rnational Telecommunicati ons Regulations is the
usual method of terminating international traffic a nd by its nature involves differential rates". The
accounting rates referred to in the Understanding can therefore be taken to be those imposed under an
accounting rate system: (a) "established under th e International Telecommunications Regulations",
and; (b) that "involves differential rates". The underlying purpose of the Understanding is "to avoid
the submission of [MFN] exemptions", by providing temporarily "some degree of reassurance" for
Members to maintain "differential" rates.
7.128 The main interpretative issue arising from the Understanding is whether the non-binding
decision to exclude from the scope of WTO dis pute settlement "differential" accounting rates
"established under the International Telecommuni cation Regulations" for the purposes of the MFN
obligation, implies also an intent to exclude from the substantive scope of the Reference Paper
international interconnection – in particular, the in ternational linking of the networks of Mexican and
United States suppliers.
7.129 In addressing this issue, we need first to examine what is meant in the Understanding by
"differential" accounting rates "established under th e International Telecommunication Regulations".
The International Telecommunication Regulations are a binding set of rules with treaty status, last
revised in 1988, and agreed by ITU members, which include both Mexico and the United States. 910
The Regulations are intended to "establish genera l principles which relate to the provision and

910 Forming part of the Final Acts of the World Administrative Telegraph and Telephone Conference,
Melbourne, 1988 (WATTC-88).

operation of international telecommunications ser vices offered to the public as well as to the
underlying international telecommunications transport means used to provide such services".
911
7.130 The Regulations deal in part with "accounting rates", which are defined as "the rate agreed
between administrations in a given relation that is used for the establishment of international
accounts." An "administration" includes a "recognized private operating agency". 912 A "relation" is
defined as the "exchange of traffic between two te rminal countries". The principal obligation with
respect to accounting rates is set out in Article 6.2:
"6.2 Accounting rates
6.2.1 For each applicable service in a given relation, administrations shall by
mutual agreement establish and revise acc ounting rates to be a pplied between them,
in accordance with the provisions of Appe ndix I and taking into account relevant
CCITT Recommendations and relevant cost trends." [footnote omitted]
7.131 Article 6.2 refers to Appendix I, which sets out in more detail the establishment and settling
of accounts. Article 1.1 of the Appendix prov ides two methods of establishing accounting rates.
First, by mutual agreement of administrations, ta king into account ITU recommendations and "trends
in cost".913 Second, by each administration establishing terminal and transit shares, and adding these
together.914
7.132 According to the ITU, the most common system of remuneration historically has been the
"accounting rate revenue division procedure". 915 This envisages an international call as a single
"joint-service", for which the two operators negotia te an agreed "accounting rate". The accounting
rate is then divided in half (the "settlement rate ") and applied to traffic flows in both directions. 916
Since both traffic flows are priced the same, the scheme results overall in a net payment from the
operator originating more traffic to the operator orig inating less traffic, based solely on the difference
in volume of traffic in each direction.
7.133 The traditional "accounting rate revenue divisi on procedure" based on a negotiated rate
resulted in pricing which, in practice, depended on many factors other than cost, including the
dynamics of different bilateral negotiations. When the supplier, public or private, had monopoly
rights within a Member's territory, any di fferent pricing of services that occurred on the basis of a
Member's territory might also, under GATS Article VIII:1, lead to MFN inconsistencies under GATS
Article II. Under Article VIII:1, a Member "shall ensure that any monopoly supplier of service in its
territory does not, in the supply of the monopoly service in the relevant market, act in a manner
inconsistent with that Member's obligations under Article II [MFN] and specific commitments." This
possible inconsistency with the MFN principle was the particular concern that was addressed in the
Understanding, which speaks of "differential rates" being inherent in accounting rates.

911 ITR Article 1.1(a).
912 The use of the word "administrations" is systematically footnoted in the ITRs to include "recognized
private operating agency(ies)".
913 ITR, Appendix 1, Article 1.1.
914 ITR, Appendix 1, Article 1.2.
915 Accounting Rate Reform Undertaken by ITU-T Study Group 3 , Communication from the
International Telecommunication Union, Informal Note, Council for Trade in Services, Job. no. 2947, 11 May
2000, paragraph 2. See also Exhibit MEX-59 (which presents Section 8 on "International Interconnection" of
ITU Trends in Telecommunications Reform: Interconnection Regulation, 3rd edition, pp. 93-107).
916 This assumes that the traffic does not transit through third countries.

7.134 Relevant, non-binding recommendations referred to in Article 6.2 of the Regulations are the
ITU-T Recommendations D.140 and D.150. 917 They deal with methods of compensating
administrations for the cost of international telecommunications. At the time of the WTO negotiations
on basic telecommunications, Recommendation D.140 already contained the principle of cost-
orientation, transparency and non-discriminati on. Subsequent to the WTO negotiations, ITU
Members modified these Recommendations, adding pr inciples for determining costs, transitional
periods for achieving cost oriented rates, and exp licit alternatives to the traditional accounting rate
procedures between administrations.
7.135 Read together, the Regulations, its Appendix, and the related Recommendations result today
in a number of different ways in which operators in different countries can be compensated for
international traffic exchanged between them, ranging from traditional methods to more modern
alternatives.
918 Regardless of whether the traditional or new alternative arrangements are being used,
the ITU instruments require that the arrangements be cost-oriented and non-discriminatory.
7.136 We therefore conclude that the accounting rat es described in the Understanding should be
understood to be limited to: (a) a traditional accounting ra te that is not cost-oriented; (b) that can be
interpreted as a measure of a Member, or that tr iggers a Member's obligations under Article VIII on
monopolies; and (c) that applies discriminatory rates on the basis of the national origin of the cross-
border traffic, and thus may be inconsistent with the MFN principle in Article II.
7.137 Based on this delineation of the "accounting rates" that are within the scope of the
Understanding, we can make several observations. First, not all international interconnection pricing
was excluded from dispute settlement by the Understa nding, only traditional accounting rate regimes
with "differential rates". Second, the exclusion was from dispute settlement, not from the substantive
obligations of the GATS, including its schedules of commitments. Third, the explicit aim of the
exclusion was the MFN obligation under GATS Article II. Other obligations or specific commitments
in the GATS, such as Section 2 of Mexico's Refe rence Paper were not specified. Fourth, not all
traditional accounting rate regimes would be MFN inconsistent, even if they were not cost-oriented.
In order to demonstrate the MFN inconsistency of a traditional accounting system regime, one would
have to show that the rate is either a "measure " of a Member, or that it falls within a Member's
obligations under Article VIII:1 on m onopolies, and that different ra tes for different international
routes amount to treatment less favourable with resp ect to one "like service" compared to another
"like service". Finally, the existence of the Unders tanding demonstrates that, even though negotiators
considered at length the issue of rates for intern ational interconnection, they chose not to adopt
wording that would have expressly excluded certain types of interconnection from the scope of the
Reference Paper.
7.138 In sum, the Understanding seeks to exempt a very limited category of measures, temporarily,
and on a non-binding basis, from the scope of WTO dispute settlement. Simply because Members
wished to shield a certain type of cross-border interconnection from dispute settlement, because of
possible MFN inconsistencies (with respect to differential rates), it does not follow that they wished to
shield all forms of cross-border interconnection from dis pute settlement. The clear intention to do so
is not expressed in the Understanding. This suggests that the content and purpose of the

917 The CCITT no longer exists. Its functions have been subsumed by the ITU-T, whose Study Group
3 is responsible for development and revision of ITU-T D Series Recommendations such as D.140 and D.150.
918 ITU Recommendation ITU-T D.150, (06/1999) paragraph 2. Recommendation D.150, which has
existed in some form since 1968 was revised in 1999 to reflect the new telecommunication environment. In its
present form, Section 2 describes different procedures fo r remuneration that include modern alternatives to the
"accounting rate revenue division procedure". See also, Accounting Rate Reform Undertaken by ITU-T Study
Group 3, Communication from the International Telecommunication Union, Informal Note, Council for Trade
in Services, Job. no. 2947, 11 May 2000, paragraph 2. See also Exhibit MEX-59 (which presents Section 8 on
"International Interconnection" of ITU Trends in Telecommunications Reform: Interconnection Regulation, 3rd
edition, pp. 93-107).

Understanding is of limited assistance in interpre ting the scope of application of the term
"interconnection" in Section 2.1 of Mexico's Reference Paper.
7.139 Before leaving the Understanding, we note that the Understanding could arguably be
considered as part of the interpretative "contex t" under the primary rules of interpretation in
Article 31.2 of the Vienna Convention. In th at case, the Understanding has to be seen as an
instrument made "in connection w ith the conclusion of the treaty", and "accepted by the other parties
as an instrument related to the treaty". Since the Report attaches draft schedules of commitments,
including Mexico's Reference Paper commitments, to be appended to the Fourth Protocol, the
Understanding might well be viewed as being made "i n connection with the conclusion of the treaty".
As the Understanding reflects the common view of negotiators on a matter affecting access to WTO
dispute settlement on telecommunications matters, it w ould be difficult for parties to deny that it was
an instrument "related to" the Fourth Protocol. However, even if viewed as "context", and not as a
"supplementary means" of interpretation under Article 32 of the Vienna Conven tion, we would arrive
at the same interpretative conclusion.
(vi) Supplementary means – other
7.140 In addition to the Understanding, Mexico refers to the drafting history of the Reference Paper.
Mexico provides evidence that a tr ansparency requirement with respect to accounting rates existed in
earlier drafts of the Reference Paper, but asserts th at these references were subsequently deleted,
indicating the intention to exclude accounting rat es from its scope. However, the opposite argument
can equally well be made that negotiators cons idered, based on the plain meaning of the word
"interconnection", that the matter was covered, a nd that the special provision was no longer needed.
The available records of the negotiations simply do not contain sufficient material to permit the Panel
to determine the reason for the deletion of the separate provision.
919 In the absence of a clear record
of the negotiations on this point, which might give firm evidence of the reasons for the deletion, we
find it difficult to arrive at the interpretation which Mexico is seeking.
920 The introduction and
deletion of the specific provision on accounting rate transparency is therefore not helpful in arriving at
an interpretation of the scope of the provisions of Mexico's Reference Paper on "interconnection".
Mexico argues further that the conscious exclusi on from the Reference Paper of accounting rates and
termination services is confirmed by the fact that they are "on the table" in the Doha Round of
negotiations. The Panel does not however see this as providing the confirmation that Mexico claims.
In the Doha Round, the main issue for Members wi th respect to the Understanding has been whether
it should be maintained, and not what its scope mi ght be. With respect to termination services, a
proposal by a Member to make specific commitmen ts on these services demonstrates no more than an
interest, on the part of one Member, in market access or national treatment commitments for these
services. These discussions do not lead to any particular conclusion with respect to the scope of
Section 2 of the Reference Paper.
7.141 Finally, consideration must be given to Me xico's argument that the interpretation of
"interconnection" in Section 2 of the Reference Paper as including international interconnection leads,
under Article 32 of the Vienna Convention, to a resu lt that is "manifestly absurd or unreasonable".
Mexico claims that such an interpretation would require all 55 WTO Members who have accepted
cost-oriented interconnection to apply th ese low rates to terminate traffic from all other WTO
Members, even from the 89 WTO Member with no co st-oriented pricing commitments because they
have not committed to the Reference Paper. Mexico states that this situation would result in a net
outflow of payments from countries subject to cost-oriented pricing disciplines, which would lead to
operators in those countries to "choose between bankruptcy and refusing to pay".
921 This would result

919 Available records of the negotiations consist of all documents in the series S/NGBT/1 - 18 and
S/NGBT/W1 – W19 and in the series S/GBT/1 – 4, S/GBT/M1 – M9, and S/GBT/W1 – W13.
920 See Appellate Body Report, India – Quantitative Restrictions, paragraph 94.
921 See Mexico's second written submission, paragraph 34.

in "the complete collapse of the accounting rate re gime without a viable replacement, possibly even
leading to interruptions in international traffic."922
7.142 We are not convinced by Mexico's argument th at a broad interpretation of interconnection
would lead in this sense to a result that is "manif estly absurd or unreasonable". First, a large and
increasing proportion of all international traffic is routed outside the traditional accounting rate
system.923 Second, the "outflows" predicted by Mexi co would only occur if those other countries
without cost-oriented international interconnecti on were able to maintain high interconnection
charges, and at the same time were high net recipients of incoming calls. Third, traditional accounting
rate regime charges are falling quickly, unde r influences such as the ITU-T D.140 Annex E
Benchmarks, the 1997 United States FCC Benchmarks , use of leased lines, and new technology such
as voice-over-IP. In sum, Mexico has not demons trated that a requirement for Members having
undertaken Reference Paper commitments to grant international interconnection at cost-oriented
pricing to all other WTO Members would lead to results which were "manifestly absurd or
unreasonable".
7.143 We find, therefore, that Section 2 of Mexico's Reference Paper applies to the interconnection
of cross-border suppliers.
7.144 Since we have already found that Mexico has undertaken market access and national
treatment commitments in its schedule with respect to the cross-border supply of the services at issue;
and that these commitments can provide the basis fo r interconnection commitments in Section 2.2(b)
of Mexico's Reference Paper; we are able to find overall that Section 2.2(b) of Mexico's Reference
Paper applies to United States service suppliers supplying or seeking to supply the services at issue.
2. Whether Mexico has fulfilled its interconnectio n commitment, in Section 2.2(b) of its
Reference Paper, with respect to the services at issue
7.145 We now consider whether Mexico has fulfilled the commitment contained in Section 2.2 of its
Reference Paper, notably to ensure, with a major supplier, cost-oriented interconnection. We consider
first the preliminary issue of whether Telmex is a "major supplier".
(a) Is Telmex a "major supplier"?
7.146 The United States claims that Mexico has not met its commitment under Sections 2.1 and 2.2
of its Reference Paper because it has failed to ensure that Telmex, a major supplier, provides
interconnection to United States basic telecommunications suppliers on a cross-border basis with cost-
based rates and reasonable terms and conditions. Me xico refutes this claim and also contests the
United States assertion that Telmex is a major supplier.
7.147 We examine first the definition of the term "m ajor supplier", as it appears in the Reference
Paper:
"A major supplier is a supplier which has the ability to materially affect the terms of
participation (having regard to price and supply) in the relevant market for basic
telecommunications services as a result of:
(a) control over essential facilities; or

922 See Mexico's second written submission, paragraph 34.
923 Estimates are that as much as half of all international traffic is outside the traditional accounting rate
system. ITU Trends in Telecommunications Reform 2000-2001, Section 8.2 (Exhibit MEX-59).

(b) use of its position in the market."
924
7.148 It is not in dispute that Telmex is a supplier of basic telecommunications services. In order to
determine whether Telmex is a "major supplier", Mexico's Reference Paper indicates that we must
examine three factors. First, what the "relevant ma rket" is. Second, whether, in that market, Telmex
has "the ability to materially affect the terms of participation (having regard to price and supply) in
that market". Third, whether that ability results either from "control over essential facilities", or "use
of its position in the market". We consider each of these factors in turn.
(i) What is the "relevant market for basic telecommunications services"?
7.149 The United States argues that the relevant market is the termination of the services at issue –
voice telephony, facsimile and circuit-switched da ta transmission services – supplied cross-border
from the United States to Mexico. A ccording to the United States, this results from an application of
basic principles of United States antitrust law and Mexican competition law, which define the relevant
market in terms of demand substitution. Under th is principle, it contends that international
telecommunications services (whether supplied cr oss-border or through commercial presence) cannot
substitute for domestic telecommunications ser vices. Likewise, within international
telecommunications services, originating traffic cannot substitute for terminating traffic, which is a
separate market.
925
7.150 Mexico contests this analysis. It argues that the United States fails to explain how the supply
of cross-border services is relevant to the market for termination, which are supplied through
commercial presence, a different mode of supply. Even if the market for termination were in
principle relevant, Telmex does not provide such ser vices, and Mexico does not permit trade in them.
Instead, it argues, Telmex completes international calls on a shared-revenue basis, under a traditional
accounting rate regime, and the relevant market would thus have to include two-way traffic.
926
7.151 The services at issue are basic telecommunications services – voice, switched data and fax –
originating in the United States, and for which Un ited States suppliers are seeking interconnection
with Mexican concessionaires for termination of the service in Mexico. United States suppliers have
a choice of Mexican operators with whom they ma y interconnect and terminate, even though these
operators, by Mexican law, must charge a single pri ce set by the operator with the largest volume of
outgoing traffic, and Telmex contro ls the majority of international gateways necessary to terminate
the services. Contrary to Mexico's arguments, therefore, there does exist supply and demand – a
"market" – in Mexico for termination. The fact that arrangements for interconnection and termination
may take the form of "joint service" agreements, and may not be price-oriented, does not change the
fact that the market exists. Nor is it pertinent to the determination of the "relevant market", as Mexico
suggests, that most WTO Members have not undertak en market access commitm ents specifically in
"termination services"; facilities for the termination and interconnection are essential to the supply of
the services at issue in this case.
7.152 Is this market for termination the "relevant" market? For the purposes of this case, we accept
the evidence put forward by the United States, and uncontested by Mexico, that the notion of demand

924 In the authentic Spanish version:
"Proveedor principal, es aquel proveedor que tiene la capacidad de afectar
servicios básicos de telecomunicaciones (teniendo en cuenta el precio y la
oferta), como resultado del:
(b) uso de su posición en el mercado. "
925 See the United States' first written submission, paragraphs 72-78.
926 See Mexico's second oral statement, paragraphs 67-74.

substitution – simply put, whether a consumer woul d consider two products as "substitutable" – is
central to the process of market definition as it is used by competition authorities. Applying that
principle, we find no evidence that a domestic telecommunications service is substitutable for an
international one, and that an outgoing call is c onsidered substitutable for an incoming one. One is
not a practical alternative to the other. Even if the price difference between domestic and
international interconnection would change, such a price change would not make these different
services substitutable in the eyes of a consumer. We accept, therefore, that the "relevant market for
telecommunications services" for the services at issue – voice, switched data and fax – is the
termination of these services in Mexico.
(ii) Does Telmex have "the ability to materially affect the terms of participation (having regard to
price and supply)" in that market?
7.153 The United States maintains that, within the mark et for termination, Telmex "can materially
affect the terms of participation (having regard to price and supply)". It argues that this notion
corresponds to the concepts of "market power", used by United States competition authorities, and
"substantial power", used by Mexican competition aut horities. A firm has market power if it has the
ability profitably to maintain prices above competitive levels for a significant period of time, which
implies both the ability to maintain prices well ab ove costs, and protection (either governmental
limitations or market circumstances) against a rival's entry or expansion. The United States argues
that, in determining whether a firm has market power, United States antitrust authorities examine
factors such as market share, ba rriers to entry, capacities of firm s in the market, availability of
substitutes, and opportunities for coordinated behaviour among firms.
927
7.154 Within the market for termination in Mexico, the ILD Rules accord Telmex special powers.
ILD Rule 13 provides:
"The long-distance service licensee having the greatest percentage of outgoing long-
distance market share for the six months pr ior to negotiations with a given country
shall be the licensee that is au thorized to negotiate settlement rates with the operators
of said country. These rates shall be submitted to the Commission for its approval."
7.155 Rule 13 effectively grants to the long-distan ce licensee with the highest volume of outgoing
traffic on a particular international market the so le right to negotiate settlement rates which, under
Rule 10, all other operators must apply. Since Te lmex has always had the largest share of outgoing
traffic in every international market, including to the United States, it is, and has consistently been
under the Rules, the "licensee authorized to negotiate settlement rates". In th ese circumstances, since
Telmex is legally required to negotiate settlement rates for the entire market for termination of the
services at issue from the United States, we find that it has patently met the definitional requirement
in Mexico's Reference Paper that it have "the ability to materially affect the terms of participation",
particularly "having regard to price".
(iii) If Telmex has the ability to materially affect the terms of participation in that market, does it
result from "control over essential facilities", or "use of its position in the market"?
7.156 The United States argues that Telmex has market power with respect to the termination of the
services at issue mainly because of its right under the International Long Distance Rules ("ILD
Rules") to determine the single price applicable to all suppliers in the market. It contends that
Mexico's own competition authority, the CFC, fou nd in 2001 that Telmex ha d substantial power in
international services markets based on: a market share of 74% in international traffic, control of
nearly 75% of international gateway capacity, a right to set prices because of its large market share, as
well as advantages arising from vertical integration. Mexico for its part argues that the United States

927 See the United States' first written submission, paragraphs 79-81.

relies on a market determination by the Mexican competition authority that is under review by
Mexican courts precisely because it was ba sed on data from 1996, that is, when the
telecommunications market was not yet fully open.
928 The United States argues that the substantial
power of Telmex in the international market would apply automatically to the market for termination,
since the ILD Rules guarantee that Telmex, as an or iginator of international services, is entitled to
terminate services in the same proportion. The United States notes that the FCC has also made a
finding that Telmex is dominant in the provisi on of international telecommunications services
between the United States and Mexico.929
7.157 The United States also argues that Telmex continues to have market power with respect to the
cross-border termination of the services at issue. It contends that Telmex has over 60% of the
Mexican international switched market, and has never been below that level; that the United States
market is over 80% of that market; that it is not necessary to analy se separately incoming and
outgoing minutes, since the proportionate return system links the two; that there have been no
significant new entrants since competition was opened in the Mexican international
telecommunications market; and that Telmex has de monstrated the ability over a sustained period to
maintain prices well above costs.
930
7.158 In examining this issue, we have alread y shown that Telmex possesses the "ability to
materially affect the terms of participation" in the relevant market, primarily through its ability to
impose its negotiated settlement rate for an intern ational route on its competitors. The ability to
impose uniform settlement rates on its competitors is the "use" by Telmex of its special "position in
the market", which is granted to it under the ILD Rules.
7.159 Overall, we find therefore that Telmex is a "major supplier", with respect to termination of the
services at issue, in that it has the ability to materially affect the price of termination of calls from the
United States into Mexico, as a result of its special position in the market, which allows it to set a
uniform price applying to all its competitors on terminating calls from the United States.
(b) Are the Telmex interconnection rates "cost-oriented"?
7.160 The United States claims that the interconnection rates negotiated by Telmex are not cost-
oriented. The United States argues that the ordinary meaning of "cost-oriented" suggests that the cost
at issue must be "related to the cost incurred in providing the good or service". 931 This meaning is
amplified, according to the United States, by the use of this term in many WTO Members'
telecommunications laws and regulations, a usage wh ich amounts to a "special meaning" in the sense
of Article 31 of the Vienna Convention. The te rm "cost-oriented" in the context of Mexico's
Reference Paper should therefore be interpreted as "the cost incurred in providing interconnection".932
The United States contends that this meaning is confirmed through the practice of WTO Members,
including the United States, the European Communities and Mexico. 933 Mexican law, in particular,
requires the use of "long run average incremental co st" ("LRAIC") principles, which are consistent
with interconnection rates that relate to the cost of providing that service. 934 Furthermore, according
to the United States, this meaning is consistent with the pro-competitive object and purpose of the
Reference Paper commitments, since requiring a majo r supplier to set interconnection rates based on

928 Mexico's argument on this issue is summarized at paragraph 4.156 of this Report.
929 See the United States' first written submission, paragraphs 82-92.
930 See the United States' first written submission, paragraphs 93-98.
931 See the United States' first written submission, paragraph 107.
932 See the United States' first written submission, paragraph 108.
933 See the United States' first written submission, paragraphs 109 and 112.
934 See the United States' first written submission, paragraph 110.

the cost of providing the interconnection is an im portant way of ensuring that competitors are on an
equal footing.935
7.161 The United States argues that, to the extent that the term "having regard to economic
feasibility" qualifies the term "cost-oriented" rates, it simply confirms that interconnection rates
should cover "both direct costs and common costs, and should permit a reasonable return on the
investor's investment".
936 According to the United States, the LRAIC method used by Mexico to
develop its domestic interconnecti on rates includes the cost of capital to finance interconnection
facilities, which already includes a r easonable rate of return. The United States agrees with the EC
that the language in the EC Interconnection Direc tive served as a model for the phrase "having regard
to economic feasibility", and it is intended there simply to ensure the return on an operator's
investment is "reasonable".937
7.162 The United States also argues that the phrase "hav ing regard to economic feasibility" does not
temper the obligation to provide interconnection at co st-oriented rates, in light of an overall policy
goal such as expanding a country's telecommunicati ons infrastructure. Section 2.2(b) requires a
relationship between interconnec tion rates and the cost of interconnection, not the cost of national
infrastructure roll-out.938 According to the United States, its in terpretation is contextually supported
by Section 2.2(b), which provides that a purchaser of unbundled interconnection "need not pay for
network components or facilities that it does not re quire for the [interconnection] service to be
provided", and by Section 3, which provides sep arate and particular requirements for Members
wishing to impose universal service obligations.939
7.163 The United States presents detailed eviden ce aimed at showing that the current
interconnection rates for terminating United States calls charged by Telmex and approved by Mexican
authorities (5.5 cents, 8.5 cents, or 11.75 cents per minute, depending on the geographical area in
Mexico where the call is terminated) are much hi gher on average than the prices Telmex charged for
purely domestic use of the same network component s. The United States also uses three other proxy
methods, showing that the interconnection rates th at Telmex charges Unit ed States cross-border
suppliers greatly exceeds grey market retail rat es for calls into Mexico, wholesale rates for the
termination of calls into other countries, and rat es Mexican operators charge each other for settling
accounts relating to international calls.
7.164 Mexico argues that the United States incorrectly defines "cost-oriented" rates as requiring that
the rate equal the "bare cost" of providing the service. Instead, according to Mexico, the term " tarifas
basadas en costos " ("cost-oriented rates") must be inte rpreted taking into account the qualifying
phrase " que sean transparentes, razonabl es, económicamente factibles " ("that are transparent,
reasonable, economically feasible") which also appears in Section 2.2(b) of its Reference Paper. In
assessing whether cost-oriented rates were "reasonable", Mexico states that relevant factors include
the state of a WTO Member's telecommunications industry; the coverage and quality of its
telecommunications network; the return on invest ment; and whether the rates derive from an
accounting rate regime. In assessing whether the co st-oriented rates were "economically feasible",
Mexico states that rates meet this standard if they are "consistent with the efficient use of income and
wealth that is suitable, reflecting the needs of the operator and the policy goals of the country".
940 In
this respect, account had to be taken of Mexico 's policy goal of promoting universal access to
telecommunications services, which depended to a large extent on accounting rate revenues.

935 See the United States' first written submission, paragraphs 115-116.
936 See the United States' second written submission, paragraph 68.
937 See the United States' answer to question No. 14(a ) of the Panel of 19 December 2002, paragraph
76. For question No. 14(a), see footnote 359 of this Report.
938 See the United States' second written submission, paragraph 71.
939 See the United States' first written submission, paragraph 107.
940 See Mexico's second written submission, paragraphs 87-97.

7.165 In resolving the issue of whether Mexico h as ensured that Telmex charges "cost-oriented
rates" to United States suppliers of the services at issu e, we first examine the meaning of this term. In
the light of this, we then determine whether the United States has provided evidence that Mexico has
failed to ensure that Telmex has met this standard.
(i) Meaning of "cost-oriented" rates
7.166 Section 2.2(b) of Mexico's Reference Paper re quires that Mexico ensure interconnection "at
cost-oriented rates that are ... reasonable, having regard to economic feasibility".
941 We will first look
at the ordinary meaning of the wording.
7.167 With respect to the term "cost-oriented", we note that Japan, a third party to these
proceedings, drew the Panel's attention to a di screpancy between the or iginal Spanish term " basadas
en costos" and its translation into English "cost-oriented". It was said that the correct translation of
"basadas en costos" should have been "based on costs" and th at there was a difference in the meaning
between those two terms. Although the Panel agreed with this sec ond translation as being the closer
to the original Spanish, both parties indicated to the Panel that they did not see any substantive
difference in meaning between " basadas en costos" and "cost-oriented". Therefore, in the absence of
disagreement between the parties on this point, the Panel considers that " basadas en costos " and
"cost-oriented" are interchangeable.
7.168 In examining the ordinary meaning of "cost-oriented", we note that the dictionary meaning of
"to orient" is "to adjust, correct, or bring into defined relations, to known facts or principles".942 Rates
that are "cost-oriented" thus suggest rates that are brought into a defined relation to known costs or
cost principles. Rates that are "cost-oriented" would not n eed to equate exactly to cost, but should be
founded on cost. The degree of flexibility inherent in the term "cost-oriented" suggests, moreover,
that more than one costing methodology could be used to calculate "cost-oriented" rates.
7.169 As we did in the case of the term "interconnection", we will now examine whether the term
"cost-oriented" has a "special meaning", in the sense of Article 31:4 of the Vienna Convention since it
is a technical term that may have such a meaning in the telecommunications sector. As already noted,
this provision requires that "a special meaning shal l be given to a term if it is established that the
parties so intended". We consider that Article 31. 4 includes cases in which the term at issue is a
technical one that is in common use in its field, and which the parties can be presumed to have been
aware of. We find this to be the case with "cost-oriented rates".
7.170 The term "cost-oriented rates" is of centr al importance in national and international
telecommunications regulation. Within the ITU, the notion of "cost-oriented rates" is a key concept
which has been in common use since 1991. It fi gures in a key ITU-T series Recommendation D.140,
which lays down guidelines for establishing accoun ting rates for international telephone services. 943
Recommendation D.140 states that accounting rates "s hould be 'cost-orientated' and should take into
account relevant cost trends", and that cost-o rientation should apply "to all relations on a non-
discriminatory basis".944
7.171 Recommendation D.140 also enumerates the cost elements to be taken into account when
determining accounting rates. Annexed guidelin es enumerate these "cost elements": network
elements (international transmission facilities, in ternational switching facilities, and the national
extension), related costs (direct, and indirect or common costs – including a "reasonable return on

941 In the authentic Spanish version: " en ... tarifas basadas en costos que sean …, razonables,
económicamente factibles".
942 The Shorter Oxford English Dictionary, 3rd edition, (Clarendon Press, 1990), page 1463.
943 ITU Recommendation ITU-T Rec. D.140 (06/2002) paragraph 1.
944 ITU Recommendation ITU-T Rec. D.140 (06/2002) paragraph 2.

equity"), and "other related costs" to be agreed between the parties. 945 The guidelines specify that
several of the related direct costs are relevant only "if applicable", or "directly attributable" to the
particular international telephone service. Likewi se, related indirect or common costs "cannot be
solely attributed to the international telephone ser vice and thus must be allocated". The guidelines
suggest therefore that the relevant cost elements are only those that relate to the actual cost of
providing the service.
7.172 The principle of "cost-orientation" is conf irmed in a related ITU Recommendation, D.150,
which was amended in 1999 to describe possibl e procedures for the "remuneration of the
Administration of the country of destination" for international telecommunications traffic. These
procedures are: flat rate price, traffic-unit price, accounting revenue division, settlement rate,
termination charge, and "other" procedures. For each of these procedures, the Recommendation states
that administrations "should apply the principles of … cost-orientation". 946
7.173 Recommendation D.140 also specifies that cost el ements need be valued according to a cost
model in order to arrive at specific cost figures. A set of principles adopted in 1999 and annexed to
the Recommendation D.140 requires that administra tions, in developing and using a cost model,
adhere to a "principle of causality" between the service and the resources used to provide it:
"Principle of causality
The demonstration of a clear cause and e ffect relationship between service delivery
on the one hand and the network elements a nd other resources used to provide it on
the other hand, taking into account the relevant underlying cost determinants."947
7.174 In sum, Recommendation D.140 requires in its present form that the cost elements and the
cost model both be clearly related to the cost of deliver ing the service. This special meaning of "cost-
orientated", in the context of the ITU, is thus cons istent with the ordinary meaning of the term as it
appears in Section 2.2(b) of Mexico's Reference Pape r. As both parties to this dispute as well as most
WTO Members are also members of the ITU, the special definition adds precision to the ordinary
meaning by classifying allowable cost elements , and establishing the causality between the cost
elements and the services provided. While leaving a margin of discretion to national authorities to
choose the precise cost method by which to arrive at "cost-oriented" rates, the ITU recommendations
indicate that the term "cost-oriented rates" can be understood as rates related to the cost incurred in
providing the service.
7.175 In examining further the "special meaning" of the term "cost-oriented", we note that the ITU
states in a report that "incremental cost methodologies are becoming the de facto standard for
interconnection pricing around the world".
948 These methods focus on the additional future fixed and
variable costs that are attributable to the service. Setting rates in line with long run incremental costs
reflects the view that the regulator should require prices from dominant or major suppliers that most
closely imitate a fully competitive market, wher e prices are driven down towards marginal or

945 ITU Recommendation ITU-T Rec. D.140 (06/2002) Annex A.
946 ITU Recommendation ITU-T D.150, (06/1999) paragraph 2. Although the Recommendation uses
the form "cost-orientation", we do not attach any interpretative significance to this.
947 ITU Recommendation ITU-T Rec. D.140 (06/2002) Annex F.
948 ITU, Trends in Telecommunications Reform: Interconnection Regulation , 3rd edition, sec. 4.2.1.2,
p. 40. This paragraph also states that countries that apply long run incremental cost methodologies include
United States, Australia, EC, Colombia, and South Africa, and that "numerous developing countries have
adopted or proposed" some form of this model.

incremental costs.
949 The increasing use of incremental cost methodologies indicates the special
meaning that the term "cost-oriented" is acquiring among WTO Members.
7.176 Mexico is among the WTO Members that implem ents a type of long run incremental cost
methodology, known as LRAIC. Article 63 of Mexi co's Federal Law on Telecommunications gives
the authority to impose on any public telecommuni cations licensee with substantial market power
rates that aim at "recovery, at least, of the long run average incremental cost". 950 T h i s m e a s u r e i s
aimed at avoiding predatory pricing.
7.177 We find therefore that the increasing and wide-spread usage of incremental cost
methodologies among WTO Members supports the inte rpretation of the term "cost-oriented" as
meaning the costs incurred in suppl ying the service, and that the use of long term incremental cost
methodologies, such as those required in Mexican law, is consistent with this meaning.
7.178 So far, we have examined the meaning of "cost-oriented rates" without taking into account the
subsequent phrase in Section 2.2(b) of Mexico's Re ference Paper: "that are transparent, reasonable,
having regard to economic feasibility". We now ex amine what interpretative effect should be given
this phrase. We recall that Section 2.2(b) requi res a Member to ensure that interconnection is
provided by a major supplier:
"in a timely fashion, on terms, conditions (including technical standards and
specifications) and cost-oriented rates that are transparent, reasonable, having regard
to economic feasibility, and sufficiently unbundled so that the supplier need not pay
for network components or facilities that it does not require for the service to be
provided … " 951 (emphasis added)
7.179 We first examine the relationship of the phrases "reasonable" and "having regard to economic
feasibility" with the other elements of the Section 2. 2(b). We note that the provision isolates certain
key elements in the relationship of interconnection between a supplier and a major supplier – "terms",
"conditions" and "rates". It then lists some gene ral qualifiers – including "reasonable", and "having
regard to economic feasibility".
7.180 The phrase "terms and conditions" is commonly used to designate the elements of a contract
or an agreement. The word "terms", in its speci alized legal sense, can m ean "conditions, obligations,
rights, price, etc., as specified in contract or instrument" 952; while "condition" may be defined as "a
provision in a will, contract, etc., on which the force or effect of the document depends."953 Therefore
"rates" can be seen as special types of "terms" or "conditions", and that whatever qualifies "terms" or
"conditions" also qualifies "rates". Further, it is clear that "reasonable" must qualify "terms" and
"conditions", since these two e xpressions are not otherwise qua lified. Based on these two
observations, we conclude that the term "reasonable" must also, at a minimum, impart some meaning
to "cost-oriented rates".

949 ITU, Trends in Telecommunications Reform: Interconnection Regulation , 3rd edition, sec. 4.2.1.2,
p. 40.
950 Federal Law on Telecommunications, Article 63.
951 In the authentic Spanish version:
"(b) de manera oportuna, en términos, condiciones (incluyendo normas
técnicas y especificaciones) y tarifas basadas en costos que sean
transparentes, razonables, económicamente factibles y que sean lo
sea suministrado;... ".
952 Black's Law Dictionary, 6th edition, 1990.
953 See Panel Report, US – Stainless Steel, paragraph 6.75.

7.181 The phrase "having regard to economic feasibility" could act as a general qualifier in the same
way as "reasonable" or, because it begins with the c onnecting participle "hav ing ...", it could be
interpreted as being attached to and qualifying only the word "reasonable" which precedes it. Either
way – directly or through qualifying the term "reasonable" – the phrase imparts meaning to "cost-
oriented rates". We note, however, that because the word "rates" is qualified directly and specifically
by the expression "cost-oriented", that this expression should have a preponderant weighting.
7.182 We now consider what additional meaning the terms "reasonable" a nd "having regard to
economic feasibility" impart to "cost-oriented rat es". We start with the term "reasonable". The
ordinary meaning of the word "reasonable" suggests something that is "not irrational, absurd or
ridiculous".954 Defined positively, reasonable can be defi ned as something "of such an amount, size,
number, etc., as is judged to be appropriate or suitable to the circumstances or purpose ".955 The term
"reasonable" thus suggests that the interconnection rates should be "suitable to the circumstances or
purpose" – in other words, that they reflect the overall objectives of the provision that the rates
represent the costs incurred in providing the service. The word "reasonable" thus emphasizes that the
application of the cost model chosen by the Member reflects the costs incurred for the interconnection
service. Flexibility and balance are also part of the notion of "reasonable".
956
7.183 The qualification of "cost-oriented rates" by the word "reasonable" would not therefore permit
costs to be included in the rate that were not in curred in the supply of the interconnection service.
Thus, contrary to Mexico's position, the general state of the telecommunications industry, the
coverage and quality of the network, and whethe r rates are established under an accounting rate
regime, are not relevant to determining a proper cost-oriented rate.
7.184 We now examine the qualifier "having regard to economic feasibility". We have established
that the phrase imparts meaning to "cost-oriented" e ither directly, or indirectly through the term
"reasonable". Normally, however, a "cost-orient ed" rate must meet an "economic feasibility"
standard, since the cost-oriented rate by definitio n covers all incurred costs, including a reasonable
rate of return. The application of the "economic fe asibility" standard would thus appear to have more
meaning when applied to "terms" and "conditions". Its use here to qualify "cost-oriented rates" serves
merely to underline that the major supplier is entitled to rates that allow it to undertake
interconnection on an "economic" basis, that is, to make a reasonable rate of return.
7.185 This interpretation is supported to some exte nt by negotiating history. The phrase "having
regard to economic feasibility" was, according to the United States, adap ted from language being
developed for the EC Interconnection Directive. The European Communities claims that this phrase
is understood to mean that the operators must be allowed a "reasonable rate of return on
investment."957

954 The Shorter Oxford English Dictionary, 3rd edition, (Clarendon Press, 1990), Vol. II, page 1758.
955 Ibid.
956 The Appellate Body in US – Hot-Rolled Steel stated: "…The word 'reasonable' implies a degree of
flexibility that involves consideration of all of the circumstances of a particular case. What is 'reasonable' in one
set of circumstances may prove to be less than 'reasonable' in different circumstances. This suggests that what
constitutes a reasonable period or a reasonable time, under Article 6.8 and Annex II of the Anti-Dumping
Agreement, should be defined on a case-by-case basi s, in the light of the sp ecific circumstances of each
investigation. In sum, a "reasonable period" must be inte rpreted consistently with the notions of flexibility and
balance that are inherent in the concept of "reasonableness", and in a manner that allows for account to be taken
of the particular circumstances of each case. This was in the context of the Anti-Dumping Agreement, but we
believe it is equally pertinent in the context of GATS." See Appellate Body Report, US – Hot-Rolled Steel ,
paragraphs 84-85.
957 Article 7(2) of the EC Interconnection Dir ective (Directive 97/33/EC) of 30 June 1997 on
interconnection in Telecommunications with regard to en suring universal service and interoperability through
application of the principles of Open Network Provision (ONP), (OJ 1997 L 199, p. 32) which provides

(ii) Does Telmex interconnect United States suppliers at cost-oriented rates?
7.186 We now examine whether the United States has presented evidence demonstrating that
Mexico has not ensured that Telmex has interconnected United States suppliers of the services at issue
at cost-oriented rates, as required by Section 2.2 of Mexico's Reference Paper.
7.187 The United States uses four methods to show that Telmex does not charge cost-oriented rates
to United States suppliers of the services at issue. First, it presents evidence that the same network
elements used to interconnect United States supplie rs, when used for domestic interconnection, cost
on average 75% less. Second, it presents evidence that grey market rates for a variety of international
routes to Mexico are far lower than the rates char ged by Telmex. Third, it presents evidence that
wholesale rates to terminate calls between various countries with competitive long-distance operators
is much lower than the rates charged by Telmex. F ourth, the United States presents evidence that the
financial arrangements related to "proportionate return" proc edures among Mexican operators
pursuant to the ILD Rules show that Telmex's rates are above cost. We examine in turn each of these
methods.
7.188 We note that Mexico did not offer comments on the specific methods of evaluating costs and
settlement charges presented by the United States, nor did it take up the Panel's invitation to submit its
own calculations.
958
aa) Comparison with domestic prices in Mexico for the same network components
7.189 We start with an examination of the first me thod offered by the United States to demonstrate
that the rate charged by Telmex to United Stat es suppliers of the services at issue are not cost-
oriented. The United States argues that, in the absen ce of Telmex data on costs, the maximum cost to
Telmex of interconnecting a United States supplier can be estimated by identifying the network
components used by Telmex to terminate calls fro m the United States, and then adding together the
published prices of these components established by Cofetel or Telmex. Since the published
component prices are set to cover Telmex's costs, the sum total of the component prices is a "cost-
ceiling" for the aggregate network components.
7.190 Mexico argues that the type of cost analysis proposed by the United States is not in the
GATS. There is not, for Mexico, a common understanding of the meaning of the term "cost-
oriented".
959 Furthermore, the United States analysis could not apply to settlement rates for
international calls; it could only be used for in terconnection under a "full-circuit", and usually a
domestic regime.960
7.191 We find that the United States' basic methodology provides a useful indication of the costs
incurred by Telmex in interconnecting United States suppliers and terminating their calls in Mexico.

"[c]harges for interconnection shall follow the principles of transparency and cost orientation. The burden of
proof that charges are derived from actual costs including a reasonable rate of return on investment shall lie with
the organization providing interconnection to its facilities".
958 See e.g., question No. 11 (a. Does Mexico consider that the estimates of the cost of terminating
incoming international calls in Mexico given in the United States submission are roughly correct? b. If not,
please give reasons and outline how more satisfactory figures might be obtained) at the first meeting of the
Panel; questions No. 12 (Is there a margin for an adequate rate of return that can be interpreted into the terms
"cost-oriented rates that are … reasona ble." If so, what would be an adequate margin of return. Please provide
examples.) and No. 14 (How do Mexico's considerations on elements to be included in the establishment of
cost-oriented rates relate to its obligations under Section 3 of its Reference Paper?) at the second meeting of the
Panel.
959 See Mexico's first written submission, paragraph 186.
960 See Mexico's answer to question No. 11(b) of the Panel of 19 December 2002. For question
No. 11(b), see footnote 407 of this Report.

We think it is justified to presume that the aggreg ate price charged by Telmex for the use of network
components, when used for purely domestic traffic, is an indication of the cost-oriented rate, in the
sense of Section 2.2(b) of Mexico's Reference Paper, for the use of these same network components in
terminating an international call. We cannot accept Mexico's arguments to the contrary, which it bases
on an overly flexible meaning of "cost-oriented", a nd the fact that an "accounting rate regime" applies
to the services at issue. We have already made findings that reject these arguments.
7.192 In examining the application of the United States methodology, we are not convinced that the
implicit traffic distribution used to weigh costs a nd settlement charges of the three groups of Mexican
localities, which would indicate that the bulk of inco ming international calls go to small localities, is
representative of what could be expected, and we believe might understate the difference between
average settlement and costs. Nonetheless, the co st figures put forward by the United States, and
uncontested by Mexico, are such that the conclusions of our analysis remain substantively unchanged,
even assuming that a greater proportion of traffic goes to the larger cities.
7.193 We now examine the main elements of the Un ited States analysis, the individual factual
elements of which are not contested by Mexi co despite specific requests from the Panel. 961 T h e
United States presents evid ence successively on: the identificati on of relevant network components;
Telmex prices for these components; the calculati on of the aggregate component prices for each of
three types of destination in Mexico; and the cal culation of the differences between the aggregate
prices and Telmex rates. We examine each of these elements in turn.
i) Relevant network components
7.194 The United States identifies four Telmex networ k components that are used to interconnect
United States cross-border suppliers:
 (a) international tran smission and switching
 (b) local links
 (c) subscriber line, and
 (d) long-distance links.

7.195 These components are consistent with the cate gories recommended by the ITU, which is
considered good international practice. The netw ork components used for international telephone
services are categorized as follows: international transmission and switching facilities (component (a)
above), and the national extensi on (components (b) to (d) above).
962 The ITU also specifically
includes "direct" and "indirect" costs.
7.196 The evidence presented by the United States identifying the relevant Telmex network
components is uncontested by Mexico. We find, on the basis of the evidence before us, that the
relevant network elements are international transm ission and switching, local links, subscriber line,
and long-distance links.

961 See paragraph 7.188 and footnote 958.
962 See ITU-T Rec. D.140, footnote 945.

ii) Prices for the relevant network components

7.197 The United States presents evidence that either Telmex or Cofetel has established rates for
each of the relevant network elements. The rates es tablished by Cofetel are published, and relate to
international transmission and switc hing, and terminating interconn ection to cities where there is
long-distance competition. The rates established by Telmex are also published, and relate to local and
long-distance links. Both Cofetel and Telmex are le gally required to set prices that recover at least
the total cost of these network components.963
7.198 The United States classifies all calls to Mexico into three price categories, according to the
use they make of Telmex's network. These three z ones are: (1) calls terminating in Mexico City,
Guadalajara, and Monterrey; (2) calls terminating in approximately 200 medium size cities; and (3)
calls terminating in other locati ons in Mexico. We now examine the pricing evidence which the
United States presents for each of these three zones.
– Termination in Zone 1 (large cities)
7.199 The United States presents evidence that in these cities (Mexico City , Guadalajara, and
Monterrey) United States suppliers need only use three network components. These components are
charged at the following rates: international transmission and switching (1.5 cents/minute); local link
(0.022 cents/minute) and subscriber line (1.003 cents/minute). Together these charges amount to
2.525 cents/minute. However, Telmex currently ch arges 5.5 cents per minute, or 120% more than the
maximum cost it incurs to terminate these calls into zone 1.
– Termination in Zone 2 (medium cities)
7.200 The United States presents evidence that in th ese medium-sized cities, which do not have an
international gateway switch, an additional network component – a "long-distance link" – is needed.
The components are charged at the following ra tes: international transmission and switching
(1.5 cents/minute); local link (0.022 cents/minute); long-distance link (0.536 cents/minute); and
subscriber line (1.003 cents/minute). Together these charges amount to 3.061 cents/minute. However,
Telmex currently charges 8.5 cents per minute, or 175% more than the maximum cost it incurs to
terminate these calls into zone 2.
– Termination in Zone 3 (other cities)
7.201 Finally, the United States presen ts evidence for certain cities that Telmex has not opened to
originating competition. Telmex uses the same netw ork components for termination of calls to these
cities as it does to zone 2 cities. However, fo r these cities, no unbundled pricing information is
available for the long-distance link and subscriber lin e. The United States therefore uses a proxy cost
(7.76 cents/minute) based on the "reventa" rate that Telmex charges its competitors to terminate calls
to these cities. The components are charged at the following rates: international transmission and
switching (1.5 cents/minute); local link (0.022 cents/minute); terminating interconnection
(7.76 cents/minute). Together these charges amount to 9.28 cents/minute. However, Telmex currently
charges 11.75 cents per minute, or 27% more than th e maximum cost it incurs to terminate these calls
into zone 3.
iii) Difference between component prices and Telmex rates

7.202 Based on the aggregate component prices for the termination of calls into each to the three
zones, the United States presents evidence of a di fference between the aggregated component prices
and the rates charged to United States suppliers for each of the three individual zones. Overall, and

963 See the United States' first written submission, paragraph 124.

based on figures for traffic during the months of Ma rch to May 2002, the Telmex blended cost ceiling
is 5.2 cents/minute, and the Telmex blended rate is 9.2 cents/minute, which is 77% more than the cost
ceiling.
7.203 We earlier accepted in principle the United States method for determining the difference
between interconnection rates charged by Telmex to the United States suppliers of the services at
issue, and the aggregate costs for relevant network components. We found earlier that it is a justified
presumption that any substantial difference betwee n the two figures was evidence that the Telmex
interconnection rates were not "cost-oriented" in th e sense of Article 2.2(b) of Mexico's Reference
Paper. The evidence reveals that the blended aver age difference in costs is in the order of 77%.
Mindful of the fact that the cost-ceiling figures used are conservative (since they are based in part on
retail rates for private lines, and Telmex's interconnec tion rates to cities without competition in call
origination), we find that a difference of over 75 % above Telmex's demonstrated cost-ceiling is
unlikely to be within the scope of regulatory flexib ility allowed by the notion of "cost-oriented" rates,
in the sense of Section 2.2(b) of Mexico's Reference Paper.
bb) Comparison with "grey market" prices on the Mexico-United States route
7.204 We now examine the second method used by the Un ited States to demonstrate that the rates
charged by Telmex to United States suppliers of the services at issue are not "cost-oriented". The
method is based on the use of data on exchange trad ed capacity (which the United States labels grey
market). These grey market a rrangements, which are based on the lease of cross-border links, bypass
the uniform settlement rates required under Mexica n regulations, and are technically illegal in
Mexico. The United States presents evidence, derive d from a major traffic exchange company, that
grey market rates for transport and termination of international traffic into Mexico, sold in London,
Los Angeles and New York also show that Telmex interconnection rates are not cost-oriented.
7.205 Mexico objects that this method is not legitimat e, since it is based on methods of supply of
the service (such as international simple resale) that are not permitted under Mexican law. We do not
accept Mexico's argument, since what is relevant he re is solely the determination of actual costs
incurred in terminating an international service within Mexico, and not the legitimacy of such
practices. Even though Mexico does possess all the re levant information concerning cost elements, it
does not show that grey-market or bypass services do not cover the costs of the various components at
issue, nor that any costs are not recovered in such rates. We find therefore that recourse to this
subsidiary method by the United States is in prin ciple justifiable for the purpose of estimating the
costs of Telmex in interconnecting United States suppliers and terminating their calls.
7.206 The United States presents evidence that rate s offered by grey market operators from
Los Angeles, New York and London to cities in Mexico range from 1.3 cents/minute to
9.6 cents/minute, depending on the city of des tination, compared to 5.5 cents/minute to
11.75 cents/minute for Telmex. Telmex rates theref ore ranged from 22% to 323% above grey market
rates, depending on the city of destination in Mexico. According to the United States, the grey market
rates likely overstated the real costs of the rele vant network components within Mexico, since the
grey market rates also included the cost of tran smission of the signal to the Mexican border, the
regulatory risk due to the illegal nature of the activity in Mexico, and the higher cost of low-efficiency
links frequently used by such operators.
7.207 As Mexico has not submitted evidence to the contrary, we find that this methodology points
to Telmex interconnection rates in the range of 22% to 323% above grey market rates for international
calls into Mexico. We are not convinced however th at the use of data on exchange traded capacity is
fully warranted, as such capacity may be priced at short-term incremental cost (well below long-term
incremental cost as required under Mexican law for calculating interconnection charges) and may also
result in lower service reliability and quality. For this reason, and since these figures are based on the

prices of only one major traffic exchange company
964 on 13 September 2002, we would not make an
independent finding, based solely on these figures, that Telmex rates are not cost-based in the
meaning of Section 2.2(b) of Mexico's Reference Paper. We find nonetheless that the substantial
difference in costs goes some way to support the finding under the first method described above.
cc) Comparison with termination rates on other international routes
7.208 We now examine the third method used by the United States to demonstrate that the rates
charged by Telmex to United States suppliers of th e services at issue are not "cost-oriented". The
method is based on a comparison of the market for wholesale transportation and termination of
international calls. We accept that this method is a valid method for estimating costs of network
components used for interconnection
7.209 The United States presents evidence, based on wholesale rates on a major exchange 965 to
terminate calls to countries, like Mexico, that have more than one long-distance provider. The rates
range from 1.2 cents/minute to 6.23 cents/minute, compared to Telmex blended average
interconnection rate of 9.2 cents/minute. Telmex interconnection rates are therefore 48% to 667%
above these wholesale rates.
7.210 We find that this method results in Telmex interconnection rates of between 48% to 667%
above wholesale rates into other international markets with more than one long distance provider. We
find that the results of this method lend credibility to the result under the first method. However,
since this evidence is based only on the data of one major operator on one particular day, and does not
concern traffic into Mexico, we would not base a finding solely on this evidence.
966
dd) "Proportionate return" proc edures among Mexican operators
7.211 We now examine the fourth and final method offe red by the United States to demonstrate that
the rates charged by Telmex to United States suppliers of the services at issue are not cost-oriented.
The method is based on the "proportionate return system" required under the ILD Rules.967 Under this
system, operators of international gateways in Mexico allocate incoming calls among themselves in
proportion to each operator's share of outgoing calls. Since the operators do not always receive traffic
at their gateways in the proportion of their outgoing calls, Rule 16 provides for a transfer of these calls
to another gateway operator, who may deduct a fee for its gateway services. The remainder of the
settlement rate from the foreign operator goes to the oper ator to whom the call is transferred. Rule 17
allows "financial compensation agreements" to be negotiated between gateway operators, instead of
the physical transfer of calls.
7.212 The United States points out that, under Rule 17 financial compensation agreements:
"operators terminate excess traffic with their own network arrangements, deduct the
'cost' incurred in such termination from the settlement payments received for that
traffic, and distribute the residual amount to the operator entitled to additional traffic
under the ILD Rules. Implementing this financial transfer, however, requires
operators to agree on the cost of terminating a call – since what they transfer between
themselves is only the 'premium' on such calls, or the amount in excess of the costs
incurred for terminating such calls."968

964 The company is Arbinet. See the United States' first written submission, footnote 134.
965 Arbinet.
966 Arbinet prices on 13 September 2002.
967 ILD Rules 2:XIII, 16, 17.
968 See United States' first written submission, paragraph 153.

7.213 We observe that the Rule 17 arrangements, which on the uncontested evidence of the
United States, involve "most" of the market allo cation adjustments, can only exist if there is a
"surplus" to distribute after the full costs of in terconnection have been deducted by the operator
receiving the call. This surplus can only exist if the Telmex settlement rate does not reflect the
operator's costs, and there is consequently somethi ng left to distribute. We find therefore that the
existence and use of the "financial compensation agreements", which implement the "proportionate
allocation" rules, are further evidence of the fact that Telmex interconnection rates are not cost-
oriented in the sense of Section 2.2(b) of Mexico's Reference Paper.
7.214 More generally, Mexico argues that commitm ents made by developing country Members
have to be interpreted in the li ght of paragraph 5 of the preamble to the GATS, and GATS Article IV
which recognize that these Members need to "s trengthen their domestic services capacity and
efficiency and competitiveness". 969 However, we note that these provisions describe the types of
commitments that Members should ma ke with respect to developing country Members; they do not
provide an interpretation of commitments already made by those developing country Members.
7.215 The following table summarizes the various cost estimates presented by the United States:

969 See Mexico's second oral statement, paragraph 81.

Table 1
Mexico - summary of comparisons between interconnection costs and settlement rates
Method
Cost
(US cents/min)
Settlement rate
(in Mexico
 US cents/min)
Multiple
(Settlement
as multiple of cost)
1. Cost of components in Mexico
 3 largest cities 2.5 5.5 2.2
 200 medium-size cities 3.0 8.5 2.8
 Other localities 9.3 11.8 1.3
 Weighted average 970 5.2 9.2 1.8
2. Exchange traded capacity 971
 3 largest cities 1.5
 200 medium-size cities 6.1
 Other localities 9.3
3. International comparators 972 2.5
7.216 The Panel decided, after having received no evidence from Mexico in response to our
questions relating to the United States cost estimates (see paragraph 7.188 and footnote 958 above), to
base itself on the methodologies presented to the Panel by the United States and not refuted by
Mexico. On this basis, we conclude overall that the interconnection rates charged by Telmex to
United States suppliers of the services at issue are not "cost-oriented" within the meaning of
Section 2.2(b) of Mexico's Reference Paper, sin ce by any of the methodologies presented to the Panel
by the United States, they are substantially highe r than the costs which are actually incurred in
providing the interconnection. Therefore, we find that Mexico has failed to fulfil its commitments
under Section 2.2(b) of the Refere nce Paper by failing to ensure th at a major supplier in terms of
Section 2.2 of the Reference Paper provides interc onnection to United States basic telecom suppliers
of the services at issue on a facilities basis under cost-oriented rates.
(iii) Are the Telmex interconnection terms and conditions "reasonable"?
7.217 The United States argues that Section 2.2 of Mexi co's Reference Paper also requires that the
"terms and conditions" of interconnec tion must be "reasonable". An inte rpretation of that word in its
context, and in the light of the object and purpose of the GATS suggests, according to the
United States, that terms and conditions on interconn ection are not "reasonable" if they "restrict the

970 Weighted by distribution of traffic from ATT to Telmex in March-May 2002.
971 Price per minute of circuits between Los Angeles, New York, and London and selected destinations
in Mexico as posted by Arbinet, a major traffic exchange company, on 13 September 2002. Figure shown in
table is simple average of figures for individual destinations. Includes international transmission in addition to
termination in Mexico.
972 The simple average of wholesale termination rates of a major operator in 29 countries having
several long-distance providers. The United States lists these countries in a table in paragraph 146 of its first
written submission, and claims that the rates are those posted by Arbinet on 13 September 2002.

supply of the service". The United States points to the de jure monopoly power granted by Mexican
law to Telmex under the ILD Rule 13 to set the in terconnection rate, and impose that rate on all other
Mexican long-distance operators; it also points to th e rejection by Mexican authorities of requests by
both Mexican and United States suppliers to negotia te lower interconnection rates. For the United
States, these measures result in "unreasonable" term s and conditions for interconnection with Telmex,
since they restrict the supply of scheduled ser vices through raising pr ices, reducing demand and
lessening competition.
7.218 The United States argues that the term "havin g regard to economic feasibility" qualifies the
requirement for "reasonable" terms and conditions.973 In this sense, it limits the obligation to provide
interconnection on reasonable terms and cond itions in cases including where revenues from
interconnecting operators would not cover costs due to insufficient demand or because of increased
costs of rapid installation of facilities.
7.219 Mexico replies that the United States has not shown that either the ILD Rules regarding
settlement rates, or the Mexican refusal to permit alternative rates, are "terms and conditions" of
interconnection with a "major supplier" that are not "reasonable". The United States had not shown,
according to Mexico, that factors concerning rates of interconnection are "terms and conditions" of
interconnection and, even it they were, that these rates were terms and conditions of interconnection
with a "major supplier", as required by Section 2.2(b) of Mexico's Reference Paper. Even if Telmex
were considered a "major supplie r", the requirements in the ILD Ru les that the United States objects
to could hardly be said to be "unreasonable": the need to interconnect through an international port;
the need to interconnect through an interconnection agreement; and the right of Telmex to negotiate
its own settlement rates. The fact that other Mexi can operators have to a pply the rate negotiated by
Telmex is not, according to Mexico, a term and c ondition of interconnection with a "major supplier",
since no one suggests that the other Mexican suppliers have that status. 974 Nor does the refusal of
Mexican authorities to permit alternative rates c onstitute "terms and conditions" of interconnection
with a "major supplier".
7.220 Mexico argues that the United States' interpretation of "reasonable" has no merit. All forms
of government regulation relate to the terms a nd conditions of supply of a service and have some
impact on the level of supply of that service. It c ould hardly be said, however, that merely because a
government regulation has that effect, that it is not "reasonable". In any case, according to Mexico, it
is not the "terms and conditions" of interc onnection that restrict the supply of basic
telecommunications, but the valid limitations on cro ss-border supply that Mexi co has inscribed in its
schedule. Even if the United States definition of "reasonable" were accepted, argues Mexico,
Mexico's ILD Rules do not violate that standard, in th at they do not restrict in any way the supply of a
scheduled service.
7.221 We do not consider it necessary for our findings on Mexico's commitments under
Section 2.2(b) of the Reference Paper to also decide on the additional claims by the United States that
Mexico has failed to ensure that the terms a nd conditions of interconnection with Telmex are
reasonable as required by Section 2.2(b) of the Re ference Paper. Having found that the phrase "terms
and conditions" may cover also interconnection rates, we are inclined to find that the approval by the
Mexican authorities of the above cost rate (includi ng reasonable profits) – and the imposition of that
above cost rate as a uniform interconnection rate in a manner excluding price competition in the
relevant Mexican market – may also constitute, as cl aimed by the United States, "failure" by Mexico
to "ensure" that interconnection with a majo r supplier is provided on reasonable terms and
conditions.975 We note, however, that the interpreta tion of "reasonable terms and conditions" of
interconnection with a major supplier in Section 2.2( b) of the Reference Paper may also be informed

973 See the United States' second written submission, paragraph 68.
974 See Mexico's second written submission, paragraph 103.
975 See paragraph 7.180

by the interpretation of Mexico's obligations und er Section 1 of the Reference Paper regarding
"competitive safeguards", which we examine in the fo llowing Section C of our report. Moreover, in
Section D of our report, we have to examine the claim by the United States that Mexico does not
permit interconnection of United States suppliers on "reasonable terms and co nditions" contrary to
Section 5(a) of the GATS Annex on Telecommunica tions. Having already found an inconsistency
with Mexico's obligations under Section 2.2(b) of the Reference Paper, we consider it wiser and
justified to exercise "judicial economy" with rega rd to the United States claim of an additional
inconsistency with the requirement in Section 2.2(b) of "reasonable" terms and conditions.
C. W
HETHER MEXICO HAS MET ITS COMMITMENT UNDER SECTION 1 OF ITS REFERENCE PAPER
7.222 The United States argues that Mexico has not met the requirements of Section 1.1 of its
Reference Paper, which provides that "[a]ppropriate measures shall be maintained for the purpose of
preventing suppliers who, alone or together, are a major supplier from engaging in or continuing anti-
competitive practices." In the absence of a preci se definition of "anti-competitive practices", the
United States argues that the term encompasses, at a minimum, practices usually proscribed under
national law: abuse of dominant position, monopo lization, and cartelization. The United States
argues that, far from proscribing such be haviour, Mexico maintains measures that require Mexican
telecommunications operators to adhere to a horiz ontal price-fixing cartel led by Telmex. This
requirement is contained in ILD Rule 13, which obliges the Mexican operator with the most outgoing
traffic on a particular international route to nego tiate with the suppliers of that country a single
settlement rate, which then applies, by virtue of ILD Rule 23, to all other Mexican operators. Anti-
competitive practices are also evidenced, accord ing to the United States, by the required
"proportionate return" system defined in ILD Rule 2:XIII, by which a Mexican operator is entitled to
receive as much incoming traffic as it sends outgoing traffic.
7.223 In response, Mexico argues that its Reference Paper commitments apply only to matters
within its border, and not to services supplied unde r an accounting rate regime. In any case, Mexico
contends, it has put in place "appropriate measures" to prevent anti-competitive practices under its
general competition laws. As for the ILD Rules th ey are, according to Mexico, aimed at increasing
competition – by stopping new entrants from being undercut on pricing, and by preventing foreign
operators from dictating prices to their Mexican a ffiliates. The United States had not shown that
Telmex is a "major supplier" in the relevant ma rket, and behaviour legally required under Mexican
law could not be an "anti-competitive practice".
7.224 We examine first the terms of Section 1.1 of Mexico's Reference Paper. It reads:
"Prevention of anti-competitive practices in telecommunications
Appropriate measures shall be maintained for the purpose of preventing suppliers
who, alone or together, are a major supplier from engaging in or continuing anti-
competitive practices.
 "976
7.225 We note that Section 1.1 contains three key el ements: (i) a "major supplier"; (ii) "anti-
competitive practices"; and (iii) "appropriate meas ures" which must be maintained. We examine
each of these elements in turn.

976 In the authentic Spanish version:
"1.1 Prevención de prácticas anticompetitivas en telecomunicaciones:
se constituyan, de manera individual o conjunta, como proveedor principal, se involucren en,

1. Is Telmex a "major supplier"?
7.226 Section 1 provides that the anti-competitive practices to be prevented are those of "suppliers
who, alone or together, are a major supplier". The United States claims that Telmex has always had
the largest share of the United States – Mexico market for the termination of voice telephony,
facsimile and circuit-switched data transmission services, and it is t hus a "major supplier" in that
market. Mexico counters that the market for "ter mination" services is not relevant to the case, since
termination services can only be supplied throug h commercial presence, and not on a cross-border
basis. Even if termination services were potentiall y relevant, Mexico argues that Telmex does not in
fact provide these services.
7.227 In our earlier analysis of the United States cl aim under Section 2.2 of Mexico's Reference
Paper, we found that Telmex is a "major supplier" within the meaning of Mexico's Reference Paper,
with respect to the services at issue.
977 We based this finding on the ability of Telmex to affect the
terms of participation through use of its position in the relevant ma rket, which we found to be the
termination in Mexico of the services at issue. We see no reason to alter our analysis of the same
term, with respect to same services, in examin ing Mexico's commitments under Section 1 of its
Reference Paper. We find therefore that Telmex, for the purposes of Section 1 of its Reference Paper,
is a "major supplier."
7.228 We note that Section 1 establishes an obligatio n with respect to "suppliers who, alone or
together, are a major supplier". The practices at issue involve not only Telmex, but all the other
Mexican suppliers who are gateway operators. Sin ce we have already found that Telmex alone is a
"major supplier" within the meaning of Section 1, and that the practices at issue involve acts of all the
Mexican suppliers who are gateway operators, we ca n conclude also that Telmex and all the other
Mexican gateway operators are together a "major supplier".
2. What are "anti-competitive practices"?
7.229 We next examine the meaning of "anti-competitive practices", and whether such practices can
result from the requirements of a Member's laws.
(a) Meaning of "anti-competitive practices"
7.230 The term "anti-competitive practices" is not defined in Section 1 of Mexico's Reference
Paper. The dictionary meaning of the word "practi ces" is very general. Its meanings include "the
habitual doing or carrying on of something; usua l, customary, or constant action; action as
distinguished from profession, theory, knowledge, etc.; conduct."
978 The word "practices" thus
indicates "actions" in general, or can mean actions that are "usual" or "customary". The dictionary
meaning of the word "competitive" includes "charact erized by competition; organized on the basis of
competition".979 The word "competition", in its relevant ec onomic sense, is in turn defined as "rivalry
in the market, striving for custom between tho se who have the same commodities to dispose of". 980
Consistent with these meanings, the word "anti-competitive" has been defined as "tending to reduce or
discourage competition. 981 On its own, therefore, the term "anti-competitive practices" is broad in
scope, suggesting actions that lessen rivalry or competition in the market.

977 See paragraph 7.159 of this Report.
978 The Shorter Oxford English Dictionary, 3rd edition, (Clarendon Press, 1990), Vol. II, page 1645.
979 Ibid, page 382.
980 Ibid.
981 Merriam Webster Dictionary, Merriam Webster Online, 2003; http://www.webster.com/.

7.231 We now examine the term "anti-competitive practic es" in the context of the Reference Paper.
Examples of "anti-competitive practices" are set out in paragraph 2 of Section 1, which states that
such practices "shall include in particular":
 "(a) engaging in anti-competitive cross-subsidization;
 (b) using information obtained from comp etitors with anti-competitive results; and
 (c) not making available to other services suppliers on a timely basis technical
information about essential facilities and comm ercially relevant information which
are necessary for them to provide services."
7.232 The list is introduced by the phrase "shall include in particular", indicating that this list is not
exhaustive and that therefore the above exampl es do not represent all "anti-competitive practices"
within the scope of the provision. The examples do however illustrate certain practices that were
considered to be particularly relevant in the te lecommunications sector. The first example – on cross-
subsidization – indicates that "anti-competitive practices" can include pricing actions by a major
supplier. All three examples show that "anti-co mpetitive practices" may also include action by a
major supplier without collusion or agreement with other suppliers. Cross-subsidization, misuse of
competitor information, and withholding of releva nt technical and commercial information are all
practices which a major supplier can, and might normally, undertake on its own.
7.233 Further context is provided by the narrowing of the scope of Section 1 of Mexico's Reference
Paper to practices of a "major s upplier". We recall that the term "major supplier" is defined in
Mexico's Reference Paper as:
"a supplier which has the ability to materially affect the terms of participation (having
regard to price and supply) in the rele vant market for basic telecommunications
services as a result of:
(a) control over essential facilities; or
(b) use of its position in the market."
7.234 The use of the term "major supplier" in Section 1, examined in the light of the definition of
this term, suggests that the focus of "anti-competitive practices" is on a supplier's "ability to materially
affect the terms of participation (having regard to price and supply)" – in other words, on
monopolization or the abuse of a dominant position in ways that affect prices or supply. The
definition of a major supplier in terms of supplie rs "alone or together" and the requirement in
Section 1.1 of "preventing suppliers from engaging in or continuing anti-competitive practices" also
suggests that horizontal coordination of suppliers may be relevant . This is supported by the
requirement in Section 1.1 of "preventing supplie rs from engaging in or continuing anti-competitive
practices."
7.235 The meaning of "anti-competitive practices" is al so informed by the use of this term in
Members' own competition legislation.
982 Many WTO Members maintain laws to ensure that firms
do not undermine competition in their markets. The term "anti-competitive practices" is often used in
these laws to designate categories of behaviour th at are unlawful. The range of anti-competitive
practices that are prohibited varies between Memb ers, but practices that are unlawful under the
competition laws of Members having such laws incl ude cartels or collusive horizontal agreements

982 "Overview of Members' National Competiti on Legislation", Note by the Secretariat,
WT/WGTCP/W/128/Rev.2, 4 July 2001.

between firms, such as agreements to fix prices or share markets, in addition to other practices such as
abuse of a dominant position and vertical market restraints. 983
7.236 In addition, the meaning of "anti-competitive prac tices" is informed by related provisions of
some international instruments that address comp etition policy. Article 46 of the 1948 Havana
Charter for an International Trade Organization alre ady recognized that rest rictive business practices,
such as price-fixing and allocation of markets and of customers, coul d adversely affect international
trade by restraining competition and limiting market access. The importance of ensuring that firms
refrain from engaging in horizontal price fixing agreements, market or customer allocation
arrangements and other forms of collusion is lik ewise emphasized in the United Nations Set of
Multilaterally Agreed Equitable Principles and Ru les for the Control of Restrictive Business
Practices.984 It is also worth pointing out, since both Mexico and the United States are members of the
OECD, that the OECD has adopted a Recommenda tion calling for strict prohibition of cartels. 985 In
the work of the WTO Working Group on the In teraction between Trade and Competition Policy,
reference has been made to the pernicious effects of cartels, and to the consensus that exists among
competition officials that price-fixing "hard core cartels" ought to be banned. 986 Cartels were also
described as the most unambiguously harmful kind of competition law violation.987
7.237 An examination of the object and purpose of the Reference Paper commitments made by
Members supports our conclusion that the term "a nti-competitive practices", in addition to the
examples mentioned in Section 1.2, includes horiz ontal price-fixing and market-sharing agreements
by suppliers which, on a national or international le vel, are generally discouraged or disallowed. An
analysis of the Reference Paper commitment s shows that Members recognized that the
telecommunications sector, in many cases, was characterized by monopolies or market dominance.
Removing market access and national treatment barr iers was not deemed suff icient to ensure the
effective realization of market access commitm ents in basic telecommunications services.
Accordingly many Members agreed to additional commitments to implement a pro-competitive
regulatory framework designed to prevent c ontinued monopoly behaviour, particularly by former
monopoly operators, and abuse of dominance by these or any other major suppliers. Members wished
to ensure that market access and national treatme nt commitments would not be undermined by anti-
competitive behaviour by monopolies or dominant supp liers, which are particularly prevalent in the
telecommunications sector. Mexico's Reference Paper commitment to the prevention of "anti-
competitive practices" by major suppliers has to be read in this light.
7.238 Based on this analysis, we find that the term "anti-competitive practices" in Section 1 of
Mexico's Reference Paper includes practices in additi on to those listed in Section 1.2, in particular
horizontal practices related to price-fixing and market-sharing agreements.
(b) Whether practices required under a Member's law can be "anti-competitive practices"
7.239 We now take up the issue of whether acts by a major supplier can be "anti-competitive
practices" if they are required by a Member's law, and not freely undertaken by a major supplier.
7.240 The United States argues that anti-competitive practices do not change their nature simply
because they are required by national laws and regula tions. In the view of the United States, "[j]ust
because Mexican regulation requires the suppliers to collude does not mean they are not indeed

983 Ibid.
984 United Nations Set (1980), Part D, paragraph 3.
985 OECD Council Recommendation Concerning Effective Action Against Hardcore Cartels (adopted
by the OECD Council at its 921st Session on 25 March 1998 [C/M(98)7/PROV]).
986 Report (2002) of the Working Group on the In teraction between Trade and Competition Policy to
the General Council (WT/WGTCP/6), paragraph 61.
987 Report (2003) of the Working Group on the In teraction between Trade and Competition Policy to
the General Council (WT/WGTCP/7), paragraph 41.

colluding or, in other words, engaging in horizontal price fixing." It argues further that any other
interpretation would render the provision self-defeating and meaningless, since a Member "could
easily avoid the obligation to maintain appropriate measures to prevent 'anti-competitive practices' by
formally requiring such practices."
988
7.241 Mexico argues that the ILD Rules are part of the regulatory framework of laws intended to
increase competition. Mexico also contends that in any case the focus of Section 1.1 of its Reference
Paper is on anti-competitive "practices " by a major supplier that are not required under a Member's
law. Otherwise, the language of Section 1.1 woul d have gone further and specifically prohibited anti-
competitive "measures" implemented or main tained by a WTO Member. The European
Communities, as third party to these proceedings, belie ves that under the ILD Rules "the fixing of a
uniform price cannot be an anti-competitive practice since uniform prices are required by law. The
same goes for the revenue sharing system ("propor tional return") since this is also mandated by
law."989 The European Communities concludes that "[ if] Mexico chooses not to allow competition
between telecommunications operators on a certain matter, there is no scope for anti-competitive
practices relating to that matter. It is not possibl e to restrict competition where competition is not
allowed."990
7.242 We have examined the meaning of the term anti-competitive practices in the previous section.
We now look at whether anti-competiti ve practices, as this term is used in Section 1 of the Reference
Paper, also covers practices by a major supplier that are required by a Member's law. The first
illustrative example in Section 1.2 of anti-co mpetitive practices is anti-competitive cross-
subsidization. Cross-subsidization was and is a common practice in monopoly regimes, whereby the
monopoly operator is required by a government to cr oss subsidize, either explicitly or in effect,
usually through government determ ination or approval of rates or rate structures. Once monopoly
rights are terminated in particular services sectors, however, such cross-subsidization assumes an anti-
competitive character. This provision, therefore, provides an example of a practice, sanctioned by
measures of a government, that a WTO Member should no longer allow an operator to "continue".
Accordingly, to fulfil its commitments with respect to "competitive safeguards" in Section 1 of the
Reference Paper, a Member would be obliged to revise or terminate the measures leading to the cross-
subsidization. This example clearly suggests th at not all acts required by a Member's law are
excluded from the scope of anti-competitive practices.
7.243 Sections 1 and 2 of Mexico's Reference Paper impose obligations on Members with respect to
the behaviour of major suppliers. Section 2.1 illu strates that Members did not hesitate to undertake
obligations, with respect to a major supplier, th at defined an objective outcome – "cost-oriented"
interconnection. There is no reason to suppose, a nd no language to suggest, that the desired outcome
in Section 1 – preventing major suppliers from engaging in anti-competitive practices – should
depend entirely on whether a Member's own laws made such practices legal.
7.244 The Panel is aware that, pursuant to doctrines applicable under the competition laws of some
Members, a firm complying with a specific legislative requirement of such a Member (e.g. a trade law
authorizing private market-sharing agreements) ma y be immunized from being found in violation of
the general domestic competition law. The reason fo r these doctrines is that, in most jurisdictions,
domestic legislatures have the legislative power to limit the scope of competition legislation.
International commitments made under the GATS "f or the purpose of preventing suppliers ... from
engaging in or continuing anti-competitive practices"
991 are, however, designed to limit the regulatory
powers of WTO Members. Reference Paper commitm ents undertaken by a Member are international

988 See the United States' answer to question No. 23(a) of the Panel of 14 March 2003, paragraph 47.
For question No. 23(a), see footnote 545 of this Report.
989 See the European Communities' third party submission, paragraph 53.
990 See the European Communities' third party submission, paragraph 49.
991 Section 1.1 of the Reference Paper.

obligations owed to all other Members of the WT O in all areas of the relevant GATS commitments.
In accordance with the principle established in Article 27 of the Vienna Convention 992, a requirement
imposed by a Member under its internal law on a major supplier cannot unilaterally erode its
international commitments made in its schedule to other WTO Members to prevent major suppliers
from "continuing anti-competitive practices". 993 The pro-competitive obligations in Section 1 of the
Reference Paper do not reserve any such unilate ral right of WTO Members to maintain anti-
competitive measures.
7.245 For these reasons, we conclude that practices required under Mexico's law can be "anti-
competitive practices" within the meaning of Section 1 of Mexico's Reference Paper.
3. Do the ILD Rules require a major supplier to engage in "anti-competitive practices"?
7.246 We now examine whether, as the United Stat es claims, the ILD Rules do require "anti-
competitive" practices by "suppliers who, alone or together, are a major supplier", and would therefore
not be "appropriate measures" within the meaning of Section 1 of Mexico's Reference Paper. We first
identify the relevant requirements placed by the ILD Rules on Telmex and other Mexican operators,
and then assess whether these requirements would constitute "anti-competitive practices."
(a) What acts do the ILD Rules require of Telmex and other Mexican operators?
7.247 The relevant measures invoked by the United Stat es are the ILD Rules that require Mexican
operators to apply a "uniform settlement rate", a nd to ensure a "proportionate return" of incoming
calls, compared to outgoing calls.
(i) Uniform settlement rate
7.248 The ILD Rules require all "international gate way operators", including Telmex, to apply a
uniform settlement rate in the following terms:
"[t]he same settlement rates are applied by international gateway operators to all
long-distance calls from a given country, regardless of which operator originates the
call abroad and which licensee terminates the call within Mexican territory."
994
7.249 The uniform settlement rate is implemented th rough ILD Rule 13, which gives the Mexican
operator with the greatest share of outgoing calls to a particular country in the previous six months –
in this case Telmex – the sole right to negotiate se ttlement rates with the operators of that country.
ILD Rule 13 states:
"The long-distance service licensee having th e greatest percentage of outgoing long-
distance market share for the six months pr ior to negotiations with a given country
shall be the licensee that is au thorized to negotiate settlement rates with the operators

992 See the Vienna Convention on the Law of Treaties, 1969, Art. 27. See also Ian Brownlie, Principles
of Public International Law (Clarendon Press, 1998, 5th ed.), page 34.
993 Section 1.1 of the Reference Paper.
994 Rule 2:XII(a), also confirmed by Rule 10.
continuación se indica:
XII. Sistema de tarifas de liquidación uniformes: aquél por el cual:

of said country. These rates shall be submitted to the Commission for its
approval."
995
7.250 Telmex is an "international gateway opera tor", and the "long-distance service licensee"
authorized to negotiate settlement rates with Un ited States operators on the United States – Mexico
route.
(ii) Proportionate return
7.251 The ILD Rules also require international gateway operators to apply the system of
"proportionate return", and distribute among themselves incoming calls from a country in proportion
to the outgoing calls the operator sends to that country. 996 The system is implemented through ILD
Rule 16 and 2:XIII.
7.252 Rule 2:XIII sets out, in relevant part, the principle of the scheme:
"international gateway operators shall have th e right to receive, regardless of the type
of call, incoming call attempts from a gi ven country during any one-month period,
based on the percentages established for the previous monthly period."997
7.253 Rule 16 provides for the redistribution of calls:
"In the event that an international gate way operator receives a greater share of
incoming traffic than that to which it is entitled under the terms of subparagraph XIII
of Rule 2, the operator shall distribute th e surplus to another international gateway
operator as to remain within the bound of its own percentage."998
7.254 In redistributing the incoming traffic, ILD Rule 17 provides that operators may also
"negotiate financial compensation agreements am ong themselves, according to the rights that are
generated for each of them". These agreemen ts are notified to and approved by Mexican
authorities.999
7.255 The principle of a uniform settlement rate must be applied by operators to all international
incoming and outgoing traffic, and the principle of proportionate return must be applied by operators
to all international incoming traffic, and both must appear in all interconnection agreements made by
Mexican operators with foreign operators.1000

995 ILD Rule 13.
aprobación de la Comisión."
996 ILD Rule 2:XIII.
997 "los operadores de puerto internacional tendrán derecho a recibir, en forma aleatoria respecto del
tipo de llamada, los intentos de llamadas de entrada provenientes de un país determinado en cualquier periodo
998 "En caso de que un operador de puerto internacional reciba tráfico de entrada en una proporción
enrutamiento y contabilidad en el puerto internacional, y pagar el monto restante de la tarifa de liquidación a
los operadores de puerto internacional a los que transfiera dicho tráfico. A su vez, estos últimos deberán pagar
999 ILD Rule 17.
1000 ILD Rule 23.

7.256 In sum, these measures impose two main requirements on Telmex, which is the "major
supplier", on the United States – Mexico route. Firs t, Telmex must negotiate a settlement rate for
incoming calls with suppliers in the other markets wishing to supply the Mexican market and apply,
subject to approval by the Mexican authorities and in common with the other Mexican suppliers, that
single rate to interconnection for incoming traffic fro m the United States. Second, Telmex must give
up traffic to, or accept traffic from, other supplie rs depending on whether the proportion of incoming
traffic surpasses, or falls short of, its proportion of ou tgoing traffic. To this end, Telmex may enter
into "financial compensation agreements" 1001 with other operators, which are to be approved by
Mexican authorities.
(b) Are the acts required of Telmex and other Mexican operators "anti-competitive practices"?
7.257 The United States argues that the uniform settlement rate (that restricts price) together with
the proportionate return system (that allocates mark et shares) has the "classic features of a cartel". 1002
According to the United States:
"It is the setting of the rate by the monopo list (since Telmex is given the exclusive
authority, it is acting as a monopolist in this context) and the use of this rate by all
other suppliers (horizontal price fixing) th at comprise the anti-competitive practices
that form the basis for the United States ' claim under Section 1 of the Reference
Paper."1003
7.258 Mexico argues that the principles of uniform ra tes and proportionate return contained in the
ILD Rules in fact favour competition. According to Mexico, th e uniform rate requirement protects
new entrants from predatory pricing by incumbent suppliers, and from being played off against each
other by major foreign operators, while the proporti onate return system prevents foreign operators
from imposing predatory pricing on their Mexican affiliates.
7.259 In addition, Mexico states that it differs with the United States with respect to the relevant
market in which competition must be promoted and protected.1004 Mexico states:
"Mexican policy, as shown by the ILD Rules, is that domestic carriers should share in
and split agreements for incoming calls in terms of their success in securing a share
on the domestic market and generating out bound calls. The United States sees it
differently … the only market worth protecting is the one for terminating
United States traffic to Mexico. The Unite d States is acting as if new operators
should compete to carry incoming internationa l traffic calls instead of competing for
new customers in Mexico. According to the criterion set by the United States, an
operator who has made a minimal investme nt in Mexican infrastructure should be
allowed to do so on an unlimited basis, taki ng all the revenue for international calls
from the operators who have made such investments and have obtained successful
results in acquiring a share of the market."
1005
7.260 We now examine the two specific elements of the ILD Rules that the United States has
invoked.

1001 ILD Rule 17.
1002 See the United States' first oral statement, paragraph 38.
1003 See the United States' answer to question No. 23(a) of the Panel of 14 March 2003, paragraph 47.
For question No. 23(a), see footnote 545 of this Report.
1004 See Mexico's answer to question No. 25 of the Panel of 14 March 2003, paragraph 132, (" Please
explain whether the effect of Rule 13 of the ILD Rules is pro-competitive or anti-competitive, and support your
argument with the appropriate illustrative figures and examples".).
1005 See Mexico's answer to question No. 25 of the Panel of 14 March 2003, para 132. For question
No. 25, see footnote 1004 of this Report.

(i) Uniform settlement rate
7.261 With respect to the uniform settlement rate, we have found that the ILD Rules require Telmex
to negotiate a price, that is then approved by Mexican authorities and applied by Telmex and the other
Mexican suppliers to the termination of the services at issue. Mexico justifies this uniform pricing
scheme as pro-competitive since, according to Mexi co, it removes the possibility that Telmex, or
Mexican operators which are foreign affiliates, engage in predatory pricing, or are played against each
other by major foreign operators. This Mexican argument admits that one purpose of the uniform
pricing requirement is to limit price competition su ch as "predatory pricing". Yet Mexico gives no
evidence that its existing competition laws are inadequate to deal with predatory pricing, or that it has
well-founded reasons for believing that predatory pr icing or unfair treatment by foreign affiliates
would occur in Mexico absent the uniform settlement rate in the ILD Rules. Nor does Mexico show
that predatory pricing could not be dealt with by telecommunications regulations in ways other than
through uniform pricing.
7.262 We find the United States argument convincing that the removal of price competition by the
Mexican authorities, combined with the setting of th e uniform price by the major supplier, has effects
tantamount to those of a price-fixing cartel. We ha ve previously found that horizontal practices such
as price-fixing among competitors are "anti-comp etitive practices" under Section 1 of Mexico's
Reference Paper. We have also found that a GATS obligation "of preventing suppliers … from
engaging in or continuing anti-competitive practices " cannot be unilaterally abrogated by a national
regulation requiring such an anti-competitive practice within the meaning of Section 1 of Mexico's
Reference Paper (see paragraphs 7.243 to 7.245 above). For the same reasons, anti-competitive price
fixing by telecommunications suppliers cannot be unilaterally exempted from the scope of Section 1
by a government requirement imposing such pric e fixing. To find otherwise would enable WTO
Members unilaterally to detract from the effectiven ess of their Section 1 obligations to maintain
competitive safeguards by requiring such anti-compe titive practices. We find, therefore, that the
uniform settlement rate under the ILD Rules requires practices by a major supplier, Telmex, that are
"anti-competitive" within the meaning of Section 1 of Mexico's Reference Paper.
(ii) Proportionate return
7.263 With respect to the "proportionate return" sy stem, we have found that Telmex and other
Mexican operators terminating the services at issue are required under the ILD Rules to give up traffic
to, or accept traffic from, one another depending on whether the proportion of incoming traffic
surpasses, or falls short of, their proportion of outg oing traffic. We have also found that Mexico
permits Mexican suppliers to ne gotiate financial compensation agreements between themselves
instead of actually transferring surplus traffic amon g themselves. Mexico justifies this system on
substantially the same grounds as the uniform settlement system which the proportionate return
system supports. For the reasons explained alread y in paragraph 7.261 above , we are not convinced
by Mexico's justification of this restrictive allo cation among competing suppliers of incoming traffic
calls and market shares.
7.264 We find that the allocation of market shar e between Mexican suppliers imposed by the
Mexican authorities, combined with the authorization of Mexican ope rators to negotiate financial
compensation between them instead of physically tr ansferring surplus traffic, has effects tantamount
to those of a market sharing arrangement between su ppliers. We have previously found that certain
horizontal practices, such as market sharing a rrangements, are "anti-competitive practices" in
Section 1 of Mexico's Reference Paper. We recall our previous finding that practices of a major
supplier, even if they result from a legal require ment, can be anti-competitive practices within the
meaning of Section 1 of Mexico's Reference Paper. We find theref ore that the proportionate return
system under the ILD Rules requires practices by a major supplier, Telmex, that limit rivalry and
competition among competing suppliers and are "anti-competitive" within the meaning of Section 1 of
Mexico's Reference Paper.

4. Has Mexico maintained "appropriate measures" to prevent anti-competitive practices
by a major supplier?
7.265 Section 1.1 requires Mexico to maintain "appropriate measures" to prevent anti-competitive
practices by a major supplier. The word "appropria te", in its general dictionary sense, means
"specially suitable, proper". 1006 This suggests that "appropriate measures" are those that are suitable
for achieving their purpose – in this case that of "preventing a major supplier from engaging in or
continuing anti-competitive practices".
7.266 We recognize that measures that are "appropriate " in the sense of Section 1 of Mexico's
Reference Paper would not need to forestall in every case the occurrence of anti-competitive practices
of major suppliers. However, at a minimum, if a measure legally requires certain behaviour, then it
cannot logically be "appropriate" in preventing that same behaviour. Since we have found already
that Mexico maintains measures (the ILD Rule s concerning uniform interconnection rate and
proportionate return) which legally require anti-competitive conduct by a major supplier, we find that
Mexico has failed to maintain "appropriate measures" to prevent such acts, contrary to Section 1 of its
Reference Paper. As Mexico has not claimed that its general competition law is applicable to the anti-
competitive practices mandated by the ILD rules, we do not consider it necessary to examine the
broader issue of whether Mexico's competition laws are, in general, "appropriate measures" in terms
of Section 1.1.
7.267 We underline that our interpretation of Section 1 of the Reference Paper does not unduly limit
the broad regulatory autonomy of WTO Members in the field of trade in services, including
telecommunications. Although we find that measure s required by a Member under its internal laws
may fall within the scope of Section 1, the measur es addressed in the case before us are exceptional,
and require a major supplier to engage in acts which are tantamount to anti-competitive practices
which are condemned in domestic competition laws of most WTO Members, and under instruments
of international organizations to which both parti es are members. Section 1 is a voluntary, additional
commitment to maintain certain "appropriate" me asures, which reserves a degree of flexibility for
Members in accepting and implementing such an add itional commitment. Finally, the measures to be
maintained under Section 1 refer only to practices of "major suppliers" and not to those of other
suppliers in the market.
7.268 We also recognize that – beyond our findings regarding horizontal price-fixing and market
allocations among competing suppliers of basic telecommunications services – the term "anti-
competitive practices" in Section 1 of the Reference Paper may be interpreted differently by different
WTO Members. Our finding is limited to the in terpretation of Mexico's GATS obligations under
Section 1 of its Reference Paper, with respect to the United States, and with respect to the very
specific anti-competitive measures in the relevant market for telecommunications discussed above.
7.269 We therefore find that Mexico has failed, in viol ation of Section 1.1 of its Reference Paper, to
maintain "appropriate measures" to prevent anti- competitive practices by maintaining measures that
require anti-competitive practices among competing s uppliers which, alone or together, are a major
supplier of the services at issue.
D. W
HETHER MEXICO HAS MET ITS OBLIGATION UNDER SECTION 5 OF THE GATS ANNEX ON
TELECOMMUNICATIONS
7.270 The United States claims that Mexico has not met its obligations under Section 5 of the
GATS Annex on Telecommunications ("the Annex"), that is, to ensure that United States suppliers of
basic telecommunications services have access to and use of Mexico's public telecommunications
transport networks and services. In particular, the United States argues that Mexico does not permit

1006 The Shorter Oxford English Dictionary, 3rd edition, (Clarendon Press, 1990), page 94.

interconnection of United States suppliers on reasonable terms and conditions, contrary to Section
5(a), and prohibits altogether access to private leased circuits, contrary to Section 5(b).
7.271 The United States claim relates to five distinct situations for which, the United States argues,
Mexico has made specific commitments, and for which Mexico must comply with Annex obligations:
− Under Section 5(a) of the Annex, the United States argues that Mexico must ensure
that:
 (i) suppliers of facilities-based basic telecommunications services from
the United States into Mexico (c ross-border) are accorded access to
and use of "public telecommunications transport networks and
services" on "reasonable terms and conditions";
 (ii) suppliers of basic telecommunications services on a non-facilities
basis from the United States into Me xico (cross-border) are accorded
access to and use of public telecommunications transport networks
and services on reasonable terms and conditions;
− Under Section 5(b) of the Annex, the United States argues Mexico must ensure that:
 (iii) suppliers of facilities-based basic telecommunications services from
the United States into Mexico (cross-border) have access to and use
of private leased circuits, and must be permitted to interconnect these
private leased circuits to public telecommunications transport
networks and services in Mexico;
 (iv) suppliers of basic telecommunications services on a non-facilities
basis from the United States into Mexico (cross-border) have access
to and use of private leased circuits, and must be permitted to
interconnect these private l eased circuits to public
telecommunications transport networks and services in Mexico;
 (v) suppliers of basic telecommunications services on a non-facilities
basis through a commercial presence in Mexico must likewise be
afforded access to and use of priv ate leased circuits to supply
international telephone services.
7.272 Mexico argues that the Annex does not a pply to the access to and use of public
telecommunications transport networks and serv ices for the supply of basic telecommunications
services. Further, it reiterates that it has not made any commitments on cross-border supply, either for
facilities-based suppliers or commercial agencies, and that it therefore has no Annex obligations
related to such services. With r espect to locally established commerc ial agencies, Mexico states that
it has not committed to issue permits for their establishment prior to issuing the corresponding
regulations.
7.273 Before we consider whether Mexico has violat ed obligations arising from Section 5 of the
Annex, we will examine whether the Annex applies to the telecommunications services at issue,
which we have described in detail in Part B of these findings as basic telecommunications services.

1. Whether the Annex imposes obligations on Mexi co to ensure access to and use of public
telecommunications transport networks a nd services for the supply of the basic
telecommunications services scheduled by Mexico
(a) Does the Annex apply to access to and use of pu blic telecommunications transport networks
and services for the supply of basic telecommunications services?
7.274 Mexico submits that the Annex appli es only to access to and use of public
telecommunications transport networks and services as a transport means for other economic
activities, and not to the supply of basic telecommunications services per se.1007
7.275 The United States argues that the Annex states in Section 1 that telecommunications has a
"dual role as a distinct sector of economic activ ity and as the underlying transport means for other
economic activities". As further context, it points out that Section 2(a) states that the Annex applies
to "all measures ... that affect access to and use of public telecommunications transport networks and
services", which would include measures regulating telecommunications "as a distinct sector of
economic activity". Finally, Sec tion 5(a) imposes obligations "for the supply of a service included in
[a Member's] Schedule".
1008
7.276 Mexico maintains that the Annex does not c over access for the purpose of supplying basic
telecommunication services, but only access for services that require basic telecommunications
services as an underlying means of transport, incl uding enhanced telecommunications services. In
Mexico's view, the fact that Section 1 (entitled "Obj ectives") of the Annex refers to a "dual" role of
the telecommunications services sector does not impl y that the Annex covers both aspects of that
"dual" role. Rather, Section 1 simply confirms that the Annex is based on the recognition that,
beyond constituting a service sector of their own, telecommunications services and networks are
essential tools for other economic activities, such as banking or insurance services. According to
Mexico, the fact that these other activities rely heavily on telecommunications services as an
underlying means of transport points to the fundame ntal purpose of the Annex. Section 1 therefore
shows that the Annex is aimed at addressing the second aspect of the dual role. Mexico argues that
the first aspect – the supply of basic telecommuni cations services – was dealt with under the basic
telecommunications negotiations that led to the Fourth Protocol to the GATS in 1997.
7.277 Our first task is to establish whether the A nnex applies to measures affecting access to and
use of public telecommunications transport ne tworks and services by suppliers of basic
telecommunications services. We start with Section 2 of the Annex, entitled "Scope". It reads:
"2. Scope
 (a) This Annex shall apply to all measures of a Member that affect
access to and use of public telecommunications transport networks
and services.
14
 (footnote original) 14 This paragraph is understood to mean that each
Member shall ensure that the obligations of this Annex are applied with
respect to suppliers of public telecommunications transport networks and
services by whatever measures are necessary.
 (b) This Annex shall not apply to measures affecting the cable or
broadcast distribution of radio or television programming.

1007 See Mexico's answer to question No. 21 of the Panel of 19 December 2002, paragraph 303. For
question No. 21, see footnote 589 of this Report.
1008 See the United States' first oral statement, paragraph 45. See also the United States' second written
submission, paragraphs 99-100. See also the United States' answer to qu estion No. 21 of the Panel of
19 December 2002. For question No. 21, see footnote 589 of this Report.

 (c) Nothing in this A nnex shall be construed:
 (i) to require a Member to authorize a service supplier of any
other Member to establish, cons truct, acquire, lease, operate,
or supply telecommunications transport networks or services,
other than as provided for in its schedule; or
 (ii) to require a Member (or to require a Member to oblige
service suppliers under its jurisdiction) to establish, construct,
acquire, lease, operate or supply telecommunications
transport networks or services not offered to the public
generally."
7.278 Section 2(a) provides that the Annex shall appl y to "all measures" of a Member that affect
access to and use of public telecommunications trans port networks and services. We observe that the
wording of Section 2(a) does not specify that th e provision is limited to measures affecting access to
and use of public telecommunications transport networks and services by only certain services or
service sectors. The ordinary meaning of the words in Section 2(a) suggests therefore that the scope
of the Annex includes all measures that affect access to or use of public telecommunications transport
networks and services with regard to all services, including basic telecommunications services.
7.279 In further assessing whether the Annex a pplies to access to and use of public
telecommunications transport networks and servic es, we next examine the context provided by
Section 1 of the Annex, entitled "Objectives":
"Recognizing the specificities of the tel ecommunications services sector and, in
particular, its dual role as a distinct sector of economic activity and as the underlying
transport means for other economic activiti es, the Members have agreed to the
following Annex with the objective of el aborating upon the provisions of the
Agreement with respect to measures affecting access to and use of public
telecommunications transport networks a nd services. Accordingly, this Annex
provides notes and supplementary provisions to the Agreement." (emphasis added)
7.280 We note that Section 1 recognizes the dual role of the telecommunications services sector as
"a distinct sector of economic activity and as th e underlying transport means for other economic
activities". Such recognition is not however conclu sive as to whether the Annex contains provisions
addressing telecommunications services as a "distinct sector of economic activity", and not only as an
"underlying transport means for other economic activiti es". Section 1 goes on to state, however, that
the purpose of the Annex is "elaborating on the provisi ons of the Agreement with respect to measures
affecting access to and use of public telecommunicati ons transport networks and services". As in the
case of Section 2(a) on scope, Section 1 on objectives contains no language suggesting that access to
and use of public telecommunications transport networks and services for the supply of basic
telecommunications services is meant to be exclude d from the scope of the Annex. The "notes and
supplementary provisions to the Agreement" that the Annex "provides" do not appear in any way to
exclude any measures covered by the Agreement, including measures affecting the access to and use
of public telecommunications transport ne tworks and services for the supply of basic
telecommunications services.
7.281 Similarly, we note that Section 5 (a) of the Annex states that the obligation to ensure access to
and use of public telecommunications transport ne tworks and services shall apply for the benefit of
"any service supplier of any other Member" for the supply of "a service included in its schedule".
This language does not explicitly exclude suppliers of basic telecommunications services. On the
contrary, Section 5(a) speaks of "any" service supplie r. It also speaks of a "service included" in a
Member's schedule which, in the case of any Me mber, can, and for many Members does, include

basic telecommunications services. We consider this to be a further indication that the Annex is not
limited in its application to exclude measu res ensuring the access to and use of public
telecommunications transport networks and service s for the supply of any service, including basic
telecommunications services.
7.282 Mexico contrasts the scope provision of th e Annex with the provisions on "Scope and
Definition" contained in Section 1 of the Annex on Financial Services, and argues that the former
only applies to access to and use of public tel ecommunications transport networks and services,
whereas the latter applies to "supply". Mexico is of the view that, where the negotiators of the GATS
intended that an Annex was to apply to the "suppl y" of a service, they stated this explicitly.
According to Mexico, the Annex distinguishes between access to and use of public
telecommunications transport networks and services, which is relevant to telecommunications
services as an underlying transport mean s for other economic activities, and the supply of such
services, which is relevant to trade in telecommuni cations services as a distinct sector of economic
activity.
1009
7.283 We agree that the Annex addresses measures affecting "access to and use of" public
telecommunications transport networks and services, and not the supply of services. However,
"access to and use of" public telecommunications trans port networks and services are to be granted in
order to enable the supply of services. Section 5 explicitly seeks to ensure that access to and use of
public telecommunications transport ne tworks and services is granted " for the supply of a service
included in [a Member's] Schedule". 1010 While the Annex is neutral as to the services that can be
supplied through access to and use of public telecomm unications transport networks and services, the
Annex on Financial Services only "applies to measu res affecting the supply of financial services". 1011
The fact that Members devoted an annex to measur es affecting the supply of services in one specific
services sector – financial services – does not provide a basis for interpreting the scope of another
annex – on telecommunications networ ks and services – which differs significantly in structure and
objective.
7.284 Mexico further argues that basic telecommuni cations are excluded from the Annex, since
these services "as a distinct economic activity" we re dealt with through Members making specific
commitments only after the Annex entered into forc e; therefore, basic telecommunications services
were not included in the GATS until 1997, when the Fourth Protocol was agreed.
1012 The provisions
of the GATS, however, do not support this argument. Article I:1 of the GATS provides that the
"Agreement applies to measures by Members affecting trade in services". Article I:3 (b) clarifies that
the term "services" "includes any service in any sector except services supplied in the exercise of
governmental authority" (emphasis added). The sectoral listing used by Members to schedule
commitments on trade in services (document "W/120" ) explicitly lists a set of telecommunications
services that includes both basic and value adde d services. Therefore all telecommunications
services, like all other services, were part of the sectoral coverage of the GATS at the time the Annex
entered into force. The fact that many Memb ers made substantive specific commitments on basic
telecommunications services only in 1997 should not be confused with the question of whether basic
telecommunications was a services sector within the scope of the Agreement.
7.285 An interpretation of the Anne x to exclude measures ensuring access to and use of public
telecommunications transport networks and serv ices for the supply of basic telecommunications

1009 See Mexico's answer to question No . 21 of the Panel of 19 Decembe r 2002, paragraphs 301-302.
For question No. 21, see footnote 589 of this Report.
1010 (emphasis added)
1011 See Annex on Financial Services, Section 1 (a) (S cope and Definition): "This Annex applies to
measures affecting the supply of financial services. Reference to the supply of a financial service in this Annex
shall mean the supply of a service as defined in paragraph 2 of Article I of the Agreement."
1012 See Mexico's first written submission, paragraph 214.

services would lead to unreasonable results. Pub lic voice telephone services, for example, can only
be supplied properly through access to and use of pu blic telecommunications transport networks and
services of other suppliers, except in markets where monopoly supply is maintained. While
monopoly supply can and does exist in domestic telecommunications markets, the international
market has always involved multiple suppliers. With respect to the supply of public voice telephony,
whether on a cross-border basis or through commercia l presence, it is essential that suppliers be able
to access and use public telecommunications transpor t networks and services of other suppliers to
complete calls placed by their customers to a user on another supplier's network.
7.286 While access to and use of public telecommunications transport networks and services may be
important generally for the supply of services, such access is indispensable fo r the supply of basic
telecommunications services. If the Annex did not apply to measures affecting access to and use of
public telecommunications transpor t networks and services for basic telecommunications services,
Members could effectively prohibit any supply other th an that which originated and terminated within
the same suppliers' network, even where commitments were undertaken, thereby rendering most basic
telecommunications commitments without economic value.
7.287 Finally, if Members had made such a far-reaching decision, they would surely have stated
specifically that basic telecommunications services we re excluded from the application of the Annex,
in the same way that they specifically stated in Section 2(b) that the Annex "shall not apply to
measures affecting the cable or broadcast distribution of radio or television programming".
7.288 It would thus be unreasonable to suppose that the access and use of public
telecommunications transport networks and services that is essential to the international supply of
basic telecommunications services was not intended to be covered by the Annex. We find therefore
that the Annex applies to measures of a Member that affect access to and use of public
telecommunications transport networks and service s by basic telecommunications suppliers of any
other Member.
(b) Does Section 5 of the Annex apply to the b asic telecommunications commitments scheduled
by Mexico?
7.289 The United States maintains that the "obligations under the Annex trigger only to the extent to
which [a Member] has undertaken commitments in its schedule".
1013 Mexico expresses a similar
view, arguing that the Annex neither overrides a sch edule, nor imposes obligations without regard to
specific commitments taken. 1014 We now examine whether, and to what extent, Section 5 applies to
the basic telecommunications commitments scheduled by Mexico.
7.290 We recall the wording of Section 2(c)(i) of th e Annex, which determines the scope of the
Annex. It states, in relevant part:
"Nothing in this Annex shall be construed:
(i) to require a Member to authorize a service supplier of any other Member to
establish, construct, acquire, lease, operate, or supply telecommunications
transport networks or services, other than as provided for in its Schedule ;"
(emphasis added)
7.291 This provision is explicit. The Annex does not require a Member to authorize the supply of a
basic telecommunications transport service "other than as provided for in its Schedule".

1013 See the United States' first written submission, paragraph 219.
1014 See Mexico's first written submission, paragraphs 229-231.

7.292 Paragraph (e)(iii) of Section 5 provides furthe r support for this interpretation, clarifying
Members' rights to prevent the supply of services th at are not permitted in the Members schedule. It
reads:
"(e) Each Member shall ensure that no condition is imposed on access to and use
of public telecommunications transport networks and services other than as
necessary:
 (iii) to ensure that service suppliers of any other Member do not supply
services unless permitted pursuant to commitments in the Member's
Schedule." (emphasis added)
7.293 We infer, and the parties recognize, that th e obligations contained in the Annex, and
particularly in Section 5, are aimed at facilitati ng the exploitation of scheduled commitments, and do
not create a right to supply a service where no commitments exist.
7.294 We have earlier examined Mexico's specific co mmitments with regard to the cross-border
supply of telecommunications services supplie d on both a facilities and non-facilities basis. We
concluded that Mexico, through its description of the services committed, and through the inscription
of a routing requirement, prohibits market access fo r the cross-border supply of the services at issue
over capacity leased by the supplier (i.e. on a non-facilities basis) in Mexico. 1015 Absent a
commitment, we find that the Annex cannot trigger a ny obligations on the part of Mexico to ensure
access to and use of private leased circuits with regard to the s ituations described under (iii) and (iv)
of the United States claim, in paragraph 7.271.
7.295 We will therefore examine, under Section 5(a) of the Annex, obligations arising with regard
to basic telecommunications services supplied on a facilities-basis in Mexico, for which we have
found that Mexico has granted market access thr ough cross-border supply (situations (i) and (ii)). 1016
We will then examine whether Mexico has an oblig ation resulting from Section 5(b) with regard to
the basic telecommunications services supplie d on a non-facilities-basis in Mexico, through
commercial presence (situation (v)).1017
2. Whether Mexico has fulfilled its obligations under Section 5 of the Annex
7.296 With respect to Section 5 of the Annex, the United States claims that Mexico has violated
paragraphs (a) and (b). Paragra ph (a) is a general obligation to en sure access to and use of public
telecommunications transport networks and services on "reasonable and non-discriminatory terms and
conditions". Paragraph (b) is a more specific obligation to ensure access to and use of public
telecommunications transport networks and services, including "private leased circuits".
7.297 Mexico, however, claims that a violation of pa ragraphs (a) or (b) of Section 5 cannot be
determined without also examini ng paragraphs (e) and (f). Paragr aph (e) prohibits the imposition of
any "condition" on access to and use of public tel ecommunications transport networks and services

1015 See paragraph 7.91.
1016 See, paragraph 7.271: claim by the United States that Mexico must ensure that: (i) suppliers of
facilities-based basic telecommunications services from the United States into Mexico (cross-border) are
accorded access to and use of public telecommunications tr ansport networks and services ("public networks")
on "reasonable terms and conditions"; and (ii) suppliers of basic telecommunications services on a non-facilities
basis from the United States into Mexico (cross -border) are accorded access to and use of public
telecommunications transport networks and services ("public networks") on reasonable terms and conditions.
1017 See paragraph 7.271: claim by the United States that Mexico must ensure that suppliers of basic
telecommunications services on a non-facilities basis through a commercial presence in Mexico must likewise
be afforded access to and use of private leased circuits to supply international telephone services.

"other than as necessary" to achie ve any of three stated policy objectives. Paragraph (f) sets out an
illustrative list of six types of regulatory conditions through which these objectives may be achieved.
7.298 Our first interpretative task is therefore to ex amine the structure of Section 5 and determine
the relationship between the paragraphs at issue in this dispute.
(a) Structure of Section 5
7.299 In Mexico's view, Section 5 has to be interpre ted as a whole, and paragraphs (a) and (b) are
qualified by paragraphs (e) and (f). The paragraphs of Section 5 are, for Mexico, part of the same
provision and must be read together to determine the meaning of a Member's obligation under that
provision. Since the general obligation in Section 5( a) is required, by its language, to be applied
through paragraphs (e) and (f), a violation of paragra phs (a) and (b) cannot be demonstrated without
also showing that Mexico's measures are not permitte d by paragraphs (e) and (f). Mexico maintains
that, as the complaining party, the United States has the burden of establishing a case of inconsistency
with all four provisions.
1018
7.300 The United States contests that Sections 5(e) and (f) are elements of a prima facie case under
Sections 5 (a) and (b) of the Annex. According to the United States, Sections (e) and (f) relate to
these obligations like exceptions, much as Article XX of the GATT relates to GATT obligations.
Therefore, for the United States, the burden of proof rests on the party invoking these exceptions.1019
7.301 Our first task is to determine whether a clai m under paragraph (a) or (b) requires examination
of any of the elements contained in other paragraphs of Section 5. Paragraph (a) reads:
"Each Member shall ensure that any ser vice supplier of any other Member is
accorded access to and use of public tel ecommunications transport networks and
services on reasonable and non-discriminatory terms and conditions for the supply of
a service included in its Schedule. This obligation is applied, inter alia, through
paragraphs (b) through (f)." [footnote omitted]
7.302 We note that the obligation in pa ragraph (a) "shall be applied, inter alia, through paragraphs
(b) through (f)". This wording differs from the text of the GATT provisions referred to by the United
States. The provision on "General Most-favoured Nation Treatment" in GATT Article I does not
include a similar proviso that it shall be applie d through the "General Exceptions" provision in GATT
Article XX. An obligation cannot be applied "through" another provision if that obligation is read in
isolation from that provision. For an obligation in one provision to be a pplied "through" another
provision, it is evident that the two provisions must be interrelated and must inform each other. We
read paragraph (a), in other words, as containing an obligation that informs paragraphs (b) through (f),
and must be read taking into account paragraphs (b) through (f).
7.303 We now examine paragraph (e), which reads:
"(e) Each Member shall ensure that no condition is imposed on access to and use
of public telecommunications transport networks and services other than as
necessary:

1018 See Mexico's first written submission, paragraphs 253-256.
1019 See the United States' second written submission, paragraph 107. See also the United States'
answer to question No. 26 of the Panel of 19 December 2002. For question No. 26, see footnote 694 of this
Report.

(i) to safeguard the public servi ce responsibilities of suppliers of
public telecommunications tran sport networks and services,
in particular their ability to make their networks or services
available to the public generally;
(ii) to protect the technical integrity of public
telecommunications transport networks or services; or
(iii) to ensure that service suppliers of any other Member do not
supply services unless permitted pursuant to commitments in
the Member's Schedule." (emphasis added)
7.304 Paragraph (e) requires Members to ensure that the only conditions th at are imposed on access
to and use of public telecommunications transpor t networks and services are those "necessary" to
achieve the three policy objectives set out in subparagraphs (i) to (iii).
7.305 Paragraph (f) contains an illustrative list of types of regulatory conditions that may be
imposed if "necessary" to achieve a policy goal mentioned in paragraph (e). Paragraph (f) reads:
"(f) Provided that they satisfy the criteria set out in paragraph (e), conditions for
access to and use of public telecommunications transport networks and
services may include:
 (i) restrictions on resale or shared use of such services;
 (ii) a requirement to use specified technical interfaces, including
interface protocols, for inter-connection with such networks and
services;
 (iii) requirements, where necessary, for the inter-operability of such
services and to encourage the achievement of the goals set out in
paragraph 7(a);
 (iv) type approval of terminal or other equipment which interfaces with
the network and technical requirements relating to the attachment of
such equipment to such networks;
 (v) restrictions on inter-connection of private leased or owned circuits
with such networks or services or with circuits leased or owned by
another service supplier; or
 (vi) notification, registration and licensing."
7.306 We determined earlier that paragraph (a) should be read together with the other paragraphs of
Section 5. We note that paragraph (a) addr esses "terms and conditions" for access to public
telecommunications transport networks and services, which must be "reasonable and non-
discriminatory". Paragraph (e) requires that no cond ition other than as necessary to achieve any of
three policy objectives contained in subparagraphs (e)(i ) to (iii) shall be imposed by a Member. We
infer that whenever a condition is "necessary" under paragraph (e), it must, in addition, be "reasonable
and non-discriminatory" under paragraph (a). Conversely, if a condition is not "necessary" to fulfil at
least one of the three policy objectives set out under subparagraphs (i) to (iii), paragraph (e) prohibits
the imposition of such a condition, which suggests that there may be no need to analyse in that case
whether that condition would otherwise be "reasonable and non-discriminatory".

7.307 We next examine the relationship of paragraph (b) of Section 5 with the other elements of
Section 5. This relationship is more straightforwar d. Paragraph (b) obligates Members to ensure that
suppliers of other Members "have access to and use of any public telecommunications transport
network or service offered within or across the border of that Member, including private leased
circuits". To this end, suppliers must be permitted, "subject to paragraphs (e) and (f)":
"(i) to purchase or lease and attach terminal or other equipment which interfaces
with the network and which is necessary to supply a supplier's services;
(ii) to interconnect private leased or owned circuits with public
telecommunications transport networks and services or with circuits leased or
owned by another service supplier; and
(iii) to use operating protocols of the service supplier's choice in the supply of any
service, other than as necessary to ensure the availability of
telecommunications transport networks and services to the public generally."
7.308 The obligations in paragraph (b) apply "subject to paragraphs (e) and (f)". We understand this
to mean that the obligations in paragraph (b) are subordinated to, and are, therefore, qualified by ,
paragraphs (e) and (f). The obligati ons in paragraph (b) are therefore subject to any condition that a
Member may impose that is necessary to achieve one of the policy objectives set out in paragraph
(e)(i) to (iii).
1020 We recall that paragraph (b) is inform ed also by paragraph (a), and that the
obligation in the latter provision to ensure reas onable and non-discriminatory access also applies to
paragraph (b).
7.309 Based on the foregoing, we make the following conc lusions with respect to Sections 5(a) and
5(b). We conclude that the obligation contained in Section 5(a) informs the other paragraphs of
Section 5, and is likewise informed by elements of these paragraphs. We cannot therefore examine
what constitutes "reasonable terms and c onditions" for access to and use of public
telecommunications transport networks and services in isolation from the question of whether or not a
particular condition may be imposed, an issue that is addressed in paragraph (e). We conclude that an
obligation arises for a Member under paragraph 5(b) subject to any term or condition that a Member
may impose in a manner consistent with the provisions of paragraphs (a) and (e).
(b) Claim under Section 5(a)
7.310 Having established that the analysis of a claim under paragraph (a) requires an examination of
whether any conditions that are imposed on access to and use of public telecommunications transport
networks and services are "necessary" in the meaning of paragraph (e), we now examine the specifics
of the United States claim under Section 5(a).
7.311 The United States claims that Mexico has faile d to ensure that cross-border suppliers of
facilities-based basic telecommunications services fr om the United States into Mexico are accorded
access to and use of public telecommunications tr ansport networks and ser vices on reasonable terms
and conditions. For the United States, the rat es that foreign suppliers must pay constitute
unreasonable, above-cost rates for access and use to the networks and services provided by Mexico's
long-distance operators. Cofetel's approval of the United States – Mexico settlement rate violates
Mexico's obligation under Section 5(a) to ensure, by whatever means necessary, that access and use is
provided on reasonable terms and conditions. The United States also challenges as "unreasonable"
the requirements that it considers responsible for th e rates that are charged by Mexican suppliers of
public telecommunications transport networks and services. These require that foreign suppliers must

1020 For an interpretation of the words subject to, see also: Appellate Body Report, Canada – Dairy ,
paragraph 134.

negotiate exclusively with Mexico's long-distance licensee with the greatest percentage of outgoing
long-distance market share over the preceding six months (ILD Rule 13), and prohibit foreign
suppliers from concluding alterna tive terms and conditions with ot her Mexican suppliers of such
networks and services (ILD Rules 3, 6, 10, 13, 22 and 23).
7.312 We now examine whether the substantive elements for a claim under Section 5 (a) are met.
We recall that this provision reads:
"Each Member shall ensure that any ser vice supplier of any other Member is
accorded access to and use of public tel ecommunications transport networks and
services on reasonable and non-discriminatory terms and conditions for the supply of
a service included in its Schedule. This obligation is applied, inter alia, through
paragraphs (b) through (f)." [footnote omitted]
7.313 The "access to and use of" referred to in this pr ovision must be granted: (a) to "any service
supplier of any other Member"; (b) with respect to "public telecommunications transport networks
and services"; (c) for the supply of a "service incl uded in its schedule"; and (d) on "reasonable…
terms and conditions". In order to determine whether Mexico has met the requirements of the Section
5(a), we need to examine each of these elements.
(i) "Any service supplier of any other Member"
7.314 The obligation of Section 5(a) arises only with respect to "any service supplier of any other
Member". It is uncontested that facilities-b ased suppliers (such as AT&T, WorldCom/MCI, and
Sprint) as well as commercial agencies supply or are seeking to supply the services at issue, and are
suppliers "of any other Member", in this case, the United States.
(ii) With respect to "public telecommunications transport networks and services"
7.315 The United States submits that a United States supplier of basic telecommunications must
access and use Mexican public telecommunications transport networks and services to transport its
service (such as a phone call originating in the United St ates) to its final destin ation in Mexico. This
is done through interconnection, which the United St ates considers the "principal method", by which
United States suppliers obtain access to and use of Mexican public telecommunications transport
networks and services for the cross-border supply of scheduled telecom services.
1021 T h e U n i t e d
States refers to Section 2.1 of Mexico's Refe rence Paper, which defines interconnection as the
"linking of suppliers … to allow the users of one supplier to communicate with users of another
supplier and to access services provided by another supplier".
7.316 We observe that Mexico's market access in scription on cross-border supply requires that
international traffic be routed through the facilitie s of a Mexican concessionaire. The facilities of
Mexican concessionaires are clearly "public teleco mmunications transport networks and services", as
this term is defined in the Section 3 of the A nnex. Mexico has not argued otherwise. We find
therefore that the facilities of the Mexican concessionaires which are relevant to the United States
claim with respect to access and use are "public telecommunications transport networks and services".
(iii) "For the supply of a service included in its schedule"
7.317 The obligation in Section 5(a) on a Member to ensure access to and use of public
telecommunications transport networks and services arises only "for the supply of a service included
in its schedule". This language might suggest that the obligation in paragraph (a) arises as soon as
any level of commitment is inscribed in a schedul e. However the overall scope of the Annex, as

1021 See the United States' first written submission, paragraph 223.

determined in Section 2, limits a Member's obligat ions under the Annex to those "provided for in its
Schedule". Similarly, paragraph (e)(iii) of Sec tion 5 permits the imposition of conditions on access
and use "to ensure that service suppliers of any other Member do not supply services unless permitted
pursuant to commitments in a Member's schedule". In the present case, we recall our findings that
Mexico has made market access commitments, subject to a routing requirement, and full national
treatment commitments on the supply of basic tele communications services. Therefore, even under a
restrictive reading of the obligation under paragrap h (a), these services are "included" in Mexico's
Schedule.
7.318 In Mexico's view, however, the services at issue in this dispute are the transport of customer-
supplied information or data between two or more points, which, being themselves public
telecommunications transport networks and services, cannot be supplied through access to and use of
public telecommunications transpor t networks and services. Therefore, according to Mexico, its
suppliers of "public telecommuni cations transport networks and services" cannot transport public
telecommunications transport services supplied by other suppliers.
1022
7.319 We have addressed earlier the question of the natu re of the services at issue, and have found
that the Annex applies to the access to and use of public telecommunications transport networks and
services for the supply of all transportation services, including basic telecommunications services.
The nature of the basic telecommunications services at issue, as inscribed in Mexico's Schedule and
described therein with reference to CPC numbers , includes services which require suppliers to link
their networks to those of other suppliers. 1023 The definition in Section 3(b) of the Annex of "public
telecommunications transport networks and services" also speaks of a transmission "between two or
more points". We therefore consider that fore ign suppliers of basic telecommunications services
require access to and use of public teleco mmunications transport networks and services for the supply
of their services.
7.320 We now examine whether access to and use of p ublic telecommunications transport networks
and services for the supply of the services at issue is accorded on "reasonable terms and conditions".
(iv) "On reasonable … terms and conditions"
7.321 The United States considers that the access to and use of public telecommunications transport
networks and services accorded to its suppliers through interconnection, by routing through the
facilities of a concessionaire, is not based on "reasonable terms and conditions". For the United States
the exclusive negotiating right of the dominant supplier as mandated by ILD Rule 13, the
impossibility of concluding alternative arrangements, and the above-cost rates for access to and use of
public telecommunications transport networks a nd services, are not "reasonable". Footnote 1 to
Section 2 of the Annex obliges Members to take "whatever measures necessary" to carry out their
obligations under the Annex, incl uding the obligation to ensure that foreign suppliers have access to
and use of public telecommunications transport networks and services on reasonable terms and
conditions. Therefore, in the United States view , the Annex prevents domestic operators from
hindering the expansion of trade in scheduled services, in accordance with the trade-liberalizing goal
of the GATS.
1024 The United States argues that the measu res taken by Mexico are anti-competitive
and contravene the purpose of the Annex, which is to prevent suppliers of basic telecommunications
from engaging in unfair, restrictive or anti-competitive conduct. Instead of ensuring access to and use
of public telecommunications transport networks and services "by whatever measures necessary," the
Mexican rules unreasonably concentrate all power in the hands of a dominant supplier.

1022 See Mexico's answer to question No. 21 of the Panel meeting of 19 December 2002, paragraph 306.
For question No. 21, see footnote 589 of this Report.
1023 See paragraphs 7.40-7.45 of this Report.
1024 See the United States' first written submission, paragraph 233.

7.322 Mexico states that "reasonableness" must be ju dged only within the context of all of the
relevant facts and circumstances. If Section 5 were to apply in this case, it would apply to Mexico's
accounting rate regime, and the "reasonableness" of any "terms and conditions" of that accounting
rate regime would have to be evaluated in the li ght of all of the facts and circumstances related to that
regime. The terms and conditions which the United States considers unreasonable were widespread in
accounting rate regimes around the world, and ex isted even in the United States' regime.
Accordingly, there was no basis for the United Stat es to demonstrate that Mexico's measures were
"unreasonable" within the meaning of Section 5(a) of the Annex.
aa) Rates charged for access and use
7.323 In assessing whether Mexico h as ensured access to and use of public telecommunications
transport networks and services on "reasonable … terms and conditions", we first examine the rates
that are charged by Telmex and other Mexican concessionaires. We look at whether the rates
constitute "terms" or "conditions" in the sense of Section 5(a), and then whether the rates are
"reasonable". We note that the United States does not claim that the rates, or any aspect of the ILD
Rules, constitute "discriminatory" terms or conditions.
7.324 Although paragraph (a) speaks of "terms and conditions", paragraph (e) refers only to
"conditions". Since we earlier found that paragraphs (a) and (e) info rm each other, we now analyse
whether "rates" are "terms", or whether they ar e "conditions". Building on our earlier analysis, 1025 if
the rates are terms, they would have to meet the "r easonable" standard in Section (a); if they are
"conditions," they would, in addition, have to meet the "necessary" standard in Section (e).
7.325 As discussed in part B of these findings, th e words "terms and conditions" may have many
meanings. In relation to contracts and agreements , the word "terms" is defined to mean "conditions,
obligations, rights, price, etc., as specified in contract or instrument" 1026, while "condition" is defined,
inter alia , as "a provision in a will, contract, etc., on which the force or effect of the document
depends".1027 Although the words "terms" and "conditions " are closely related, and are frequently
used concurrently, the ordinary meaning of the wo rd "terms" suggests that it would include pricing
elements, including rates charged for access to and use of public telecommunications transport
networks and services.
7.326 We now examine whether the word "conditions", as used in Section 5 of the Annex, would
also include pricing elements such as access rates. Pricing is a fundamental element of any access and
use. Moreover, the importance of pricing-related measures for access and use suggests that the word
"conditions" would also include pricing elements, such as conditions that re late to or affect the rate or
price. However, Section 5 (f), which lists examples of "conditions," does not refer to specific pricing
measures. In fact, pricing measures do not appear to be similar to any of the conditions included in
paragraph (f), such as restrictions on resale or in terconnection, and requirements to use specified
technical interfaces. Given the importance of pricing measures for access to and use of public
telecommunications transport networks and services, we cannot infer that Section 5 (f) would have
omitted pricing from its illustrativ e list, if the Annex had considered access charges to fall under
"conditions". Moreover, if access rates themselves constituted "conditions", a Member would have to
ensure that no rates were imposed "other than as necessar y" to fulfil one of the policy objectives in
subparagraphs (i) to (iii) of Section 5(e). Yet, with respect to access to and use of public
telecommunications transport networks and services s upplied on a commercial basis, it is evident that
some type of charge will be levied. Therefore, whet her or not to charge, or the existence of a price,
does not appear to fit within the meaning of the language of 5(f) and its subparagraphs.

1025 See paragraph 7.309 of this Report.
1026 Black's Law Dictionary, 6th edition, 1990.
1027 See Panel Report, US – Stainless Steel, paragraph 6.75.

7.327 We find therefore that rates charged for the access to and use of public telecommunications
transport networks and services are "terms" within the meaning of Section 5(a), but not "conditions"
within the meaning of Section 5(e).
7.328 We next examine whether the rates that are charged to United States suppliers for access to
and use of Mexican public telecommunications transport networks and services constitute
"reasonable" terms. The dictionary meaning of the word "reasonable" means "being in accordance
with reason", "not extreme or excessive".
1028 The word "reasonable" implies a degree of flexibility
that involves consideration of the circumstances of a particular case. What is "reasonable" in one set
of circumstances may prove to be less than "reasonabl e" in different circumstances. The elements of
"balance" and "flexibility", as well as the need for a "case-by-case analysis", are inherent in the notion
of "reasonable".1029
7.329 We note that the "terms" in paragraph (a) mu st be "reasonable and nondiscriminatory".
Unlike the word "reasonable", the word "non-discrimin atory" is defined in the Annex. Footnote 2
states:
"The term 'non-discriminatory' is unders tood to refer to most-favoured-nation and
national treatment as defined in the Agreement, as well as to reflect sector-specific
usage of the term to mean 'terms and conditions no less favourable than those
accorded to any other user of like public telecommunications transport networks or
services under like circumstances'."
7.330 This footnote clarifies that no discrimination is permitted with respect to other foreign
suppliers, to domestic suppliers, or to other users of like public telecommunications transport
networks and services under like circumstances. Th e word "non-discriminatory" therefore addresses
the conditions of competition of service suppliers in relation to other suppliers who are users of public
telecommunications transport networks and service s. The word "reasonable" would, on the other
hand, appear to include obligations that go be yond the non-discrimination requirement. This
interpretation is supported by an examination of the objectives of the Annex as expressed, for
example, by references in Section 1 and Section 5(a) to access to telecommunications transport
networks and services.
7.331 We now consider Mexico's argument that the term "reasonable" in Section 5(a) cannot refer
to rates for interconnection, b ecause such an interpretation would render a significant part of
Section 2.2(b) of Mexico's Reference Paper redundant or inutile.1030 The Panel noted that, although
the obligations in the Annex and the Reference Pape r may overlap in certain respects, there are clear
differences between the two instruments. First, the Annex sets out general obligations for access to
and use of public telecommunications trans port networks and services, applicable to all Members and
all sectors in which specific commitments have been undertaken. Reference Paper obligations, as
additional commitments, are applicable only by Memb ers that have included them in their schedules,
and they apply only to basic telecommunications. S econd, while the Annex applies to all operators of
public telecommunications transpor t networks and services within a Member, regardless of their

1028 Merriam Webster Online Dictionary; http://www.webster.com/cgi-bin/dictionary.
1029 The Appellate Body in US – Hot-Rolled Steel , paragraphs 84-85, stated that "[i]n sum, a
"reasonable period" must be interpreted consistently with the notions of flexibility and balance that are inherent
in the concept of "reasonableness", and in a manner that allows for account to be taken of the particular
circumstances of each case". Although the Appellate Body was interpreting a "reasonable" period of time in the
context of a different WTO Agreement, we consider that the same basic elements of the word "reasonable" also
apply in the present context.

1030 See Mexico's answer to questions No. 22 (If Section 5(a) and (b) of the Annex already ensure
interconnection at reasonable rates, what is the value-added of Section 2.2 of the Reference Paper?) and No. 23
of the Panel of 19 December 2002, paragrap hs 309-311, 313-317. For question No. 23, see footnote 621 of this
Report.

competitive situation, the Reference Paper obligatio ns on interconnection apply only with respect to
"major suppliers". Third, the Annex broa dly deals with "access to and use of" public
telecommunications transport networks and services, while the Reference Paper focuses on specific
"competitive safeguards" and on "interconnection".
7.332 In spite of these differences, the Annex recognizes that its provisions relate to and build upon
the obligations and disciplines contained in the Articles of the GATS – the Annex states expressly that
it "provides notes and supplementary provisions to the Agreement".
1031 Similarly, many of the
provisions of the Reference Paper also draw from a nd add to existing obligations of the GATS, such
as Articles III, VI, VIII and IX and the Annex on Telecommunications. Accordingly, there is a degree
of overlap between the obligations of the Annex a nd the Reference Paper, despite their differences in
scope, level of obligations, and specific detail provi ded. To the extent that the Reference Paper
requires cost-oriented interconnection on reasona ble terms and conditions, it supplements Annex
Section 5, requiring additional obligations as rega rds "major suppliers". The Reference Paper
commitments do not in this sense subtract from the Annex or render it redundant.
7.333 Consequently, we do not accept Mexico's argument that a reading of a pricing element into
the analysis of reasonable terms in Section 5(a) would render parts of Section 2.2(b) of Mexico's
Reference Paper inutile. We find therefore that access to and use of public telecommunications
transport networks and services on "reasonable" terms includes questions of pricing of that access and
use.
7.334 We now examine what constitutes access to a nd use of public telecommunications transport
networks and services on "reasonable" terms. We ha ve previously noted that Mexico's Reference
Paper contains obligations additional to those in the Annex. We consider therefore that rates charged
for access to and use of public telecommunications transport networks and services may still be
"reasonable", even if generally higher than rates for interconnection that are cost-oriented in terms of
Section 2.2(b) of Mexico's Reference Paper. If this were not the case, it would have been redundant
for Members to have made commitments additiona l to Annex obligations on access, especially on
cost-oriented rates for interconnection, one of the most important forms of access. Further, those
Members who took Reference Paper commitments di d so in order to estab lish specific disciplines
only for major suppliers, and especially for interconnection. This would not have been necessary if
Members already had an obligation to ensure that all suppliers, major or not, would have to provide
cost-based access and use, including interconnection.
7.335 In order to arrive at a finding in the present case, we do not consider it necessary to determine
the exact point at which a rate for access to and use of public telecommunications transport networks
and services is no longer "reasonable". We have alre ady determined in part B of these findings that
the rates charged to interconnect United States suppliers of the services at issue to public
telecommunications transport networks and servi ces in Mexico exceed cost-oriented rates by a
substantial margin. 1032 We find that rates which exceed cost -based rates to this extent, and whose
uniform nature excludes price competition in the re levant market of the telecommunications services
bound under Mexico's Schedule, do not provide access to and use of public telecommunications
transport networks and services in Mexico "on reasona ble … terms". Consequently, we conclude that
Mexico has failed to meet its obligations under Section 5(a) of the GATS Annex on
Telecommunications, by failing to ensure that ser vice suppliers of the United States are accorded
access to and use of public telecommunications transport networks and services in Mexico on
reasonable terms.

1031 For example, footnote 2 of the Annex expressly refers to most favoured nation treatment (Article
II) and national treatment (Article XVII). Section 4 (Transparency) builds upon Article III (Transparency). The
Annex further elaborates on concepts contained in Articles VI (Domestic Regulation), VIII (Monopolies and
exclusive service suppliers), and IX (Business Practices).
1032 See paragraph 7.216.

7.336 We arrived at this finding based on our determination that rates for access to and use of public
telecommunications transport networks and ser vices are "terms" under Section 5(a), but not
"conditions" under Section 5(e). We now examine whether our finding would differ if, in the
alternative, we considered access rates to be "cond itions" within the meaning of Section 5(e). Under
this alternative, Section 5(e) w ould require that no access rate is "imposed" other than "as necessary"
to fulfil one of the objectives in subparagraphs (i) through (iii). The question would then arise as to
how the words "as necessary" would be interpreted.
7.337 The word "necessary" in its ordinary meaning signifies something "that cannot be dispensed
with or done without, requisite, essential, needful".

1033 A law dictionary notes that the term may vary
in meaning, in that it:
"may import absolute physical necessity or inevitability, or it may import that which
is only convenient, useful, appropriate, su itable, proper, or conducive to the end
sought. It is an adjective expressing degrees, and may express mere convenience or
that which is indispensable or an absolute physical necessity."

1034
7.338 The term "necessary" in Section 5(e) describ es the relationship between a "condition" of
access to and use of a public telecommunications transport networks and services, and one of the three
listed policy goals. What may be "necessary" with re spect to one policy goal may not be with respect
to another. As the Appellate Body has noted under a different provision in a different WTO
Agreement, the term "necessary" can refer to a range of degrees of necessity, depending on the
context, and the object and purpose of the provision in which it is used. At one end of this continuum,
"necessary" can be understood to mean "indispensable" to achieving a policy goal; at the other end,
"necessary" can be taken to mean simply "making a contribution to" a policy goal.1035
7.339 We consider first an interpretation that "necessary" in Section 5(e) is closer in meaning to
"indispensable". This interpretation would imply that the rates charged for access and use would be
"indispensable" for the attainment of one of the th ree listed objectives. The relevant objective, with
respect to a condition which is an access charge, would most likely be that listed in paragraph (e)(i):
"to safeguard the public service res ponsibilities of suppliers of public
telecommunications transport networks and services, in particular their ability to
make their networks or services available to the public generally".
7.340 Under an interpretation that "necessary" mean s "indispensable", the access rates would have
to be set at a level that was no more than the minimum to achieve that objective. Minimum access
rates, however, would imply levels that reflected the approximate cost of access and use, because the
policy objective listed in paragraph (e)(i) could be fulfilled if public telecommunications transport
networks and services were chargi ng this rate, and it would not be "indispensable" to charge more
than this rate. Further, it could be argued that the responsibility of operators of public
telecommunications transport networks and services to make these public telecommunications
transport networks and services available to the public generally would require that no rates be
charged in excess of the cost incurred.
7.341 The interpretation of the word "necessary" in Section 5(e) as meaning "indispensable" would
however leave no room for an analysis of whether te rms were "reasonable". If cost-based rates were
"indispensable" to reach the policy objective, then th ese rates surely could not also be unreasonable.
Such an interpretation would empty the "reasonable" sta ndard in Section 5(a) of much of its meaning.

1033 The New Shorter Oxford English Dictionary, (Clarendon Press, 1993), Vol. II, page 1895.
1034 Black's Law Dictionary, (West Publishing, 1995), page 1029. Cited in the Report of the Appellate
Body, Korea – Various Measures on Beef, paragraph 160.
1035 See Appellate Body Report, Korea – Various Measures on Beef, paragraph 161.

It would also mirror the obligation of cost-based interconnection in the Reference Paper, with the
important difference that the general Annex obligation would encompass all suppliers of public
telecommunications transport networks and services, while the obligation in the Reference Paper only
refers to major suppliers. The Annex would in this respect achieve the same depth of obligation as
the Reference Paper, but on a broa der level, and applicable to all WTO Members, making any
particular Reference Paper commitm ents redundant. We would therefor e reject an interpretation of
"necessary" in Section 5(e) that would mean that a condition must be "indispensable" to achieve the
policy goals listed in subparagraphs (i) to (iii).
7.342 We now examine whether the word "necessary" in Section 5(e) is closer to the meaning of
"making a contribution to" one of the objectives listed in subparagraph (e)(i) to (iii). In this case, an
access rate would only have to be f ound to be "making a contribution" to one of these policy goals, in
order to satisfy the requirements of paragraph (e). In this case, it would be relatively easy to meet the
objectives listed in paragraph (e), especially subparagr aph (e)(i), and we consider that an examination
of whether the access rates were also "reasonabl e" under paragraph (a) w ould still have to be
undertaken. Even if a particular level of acces s rate were considered only to be "making a
contribution" to one of the policy goals liste d in subparagraph (e)(i), an examination under
paragraph (a) of whether that rate was also "reasonable" would still have meaning.
7.343 We conclude that if access rates, in the alte rnative, were considered to be "conditions" under
Section 5(e), then the term "necessary" in that provision would have a meaning that required a
determination of whether the access rates were "reas onable" under Section 5(a). We would therefore
arrive at the same finding that we have made in paragraph 7.334, that the access rates charged are not
"reasonable", and that Mexico has therefore not met its obligations under Section 5(a) to ensure that
such access rates are "reasonable".
bb) Underlying ILD Rules
7.344 The United States also claims that Mexico unreasonably conditions access to and use of
public telecommunications transport networks and se rvices in violation of Mexico's obligations under
Section 5(a) of the GATS Annex on Telecommunica tions, by granting the exclusive authority to
negotiate settlement rates with foreign suppliers to the long-distance licensee with the greatest
percentage of outgoing long-distance market shar e over the preceding six months (ILD Rule 13), and
by imposing the rate negotiated by that operator on all other operators of public telecommunications
transport networks and services, thereby preven ting foreign suppliers fro m reaching alternative
agreements for access to and use of the public tel ecommunications transport networks and services in
Mexico (ILD Rules 3, 6, 10, 13, 22 and 23). In addition, the United States claims that Mexican
authorities have rejected petitions by Mexican and foreign operators to be permitted to conclude
alternative terms and conditions.
7.345 The United States is of the view that these IL D Rules, and their application by the Mexican
authorities, are not reasonable, as they contravene the purpose of the Annex, which is to prevent
suppliers of public telecommunica tions transport networks and ser vices from engaging in unfair,
restrictive, or anti-competitive conduct. Far from ensuring this goal "by whatever measures
necessary", the Mexican measures concentrate all power and control over access to and use of
Mexico's public telecommunications transport netw orks and services in the hands of the dominant
supplier of such networks, thereby impairing the ability of United States and other foreign suppliers of
basic telecommunications services to negotiate fa ir and competitive access to and use of these
networks.1036
7.346 Having already found that Mexico has failed, in violation of Section 5(a) of the Annex, to
ensure that the interconnection rates resulting from Mexico's application of its ILD Rules provide

1036 See the United States' first written submission, paragraphs 237-241.

access to and use of public telecommunications transport networks and services in Mexico on
reasonable terms (see paragraph 7.335 above), the Panel does not consider it necessary to examine
whether, and to what extent, the individual ILD Ru les themselves are also inconsistent with Mexico's
obligations under Section 5(a) of the Annex.
(c) Claim under Section 5(b) of the Annex
7.347 The United States argues that Mexi co has failed to ensure that non-facilities-based,
commercially present suppliers (commercial agencies) have access to and use of private leased
circuits, and are permitted to interconnect these ci rcuits to public telecommunications transport
networks and services or with circuits of other service suppliers. According to the United States,
Mexico's commitments allow locally established, foreign-owned commercial agencies to provide
international basic telecommunications services (for example, from Mexico to United States) over
leased capacity.
1037 Contrary to its commitments, howev er, Mexico prohibits the commercial
presence of non-facilities-based foreign telecommunications suppliers. Even if permitted to establish,
ILD Rule 3 would prohibit the interconnecti on of these circuits to any foreign public
telecommunications transport networks and service , thereby preventing a foreign non-facilities based
supplier from using a private leased circuit from any point in Mexico to any foreign destination.1038
7.348 According to the United States, five years had elapsed since Mexico finalized its Mode 3
commitment in February 1997 (and four years had elapsed since this commitment had entered into
force in February 1998), and Mexico still had not is sued – and had indicated no intention to issue –
the relevant regulations which provide the basis for the authorization for the establishment of a
commercial presence by commercial agencies. Mexico 's refusal to issue such regulations raised
questions about its intentions ever to implemen t its scheduled mode 3 commitment for commercial
agencies.
7.349 Mexico responds that the commitment in its schedule, and any resulting obligation under
Section 5(b) with respect to the non-facilities-based supply of basic telecommunications services
through commercial presence, are conditioned on the prior issuance of regulations which has yet to
occur. In Mexico's view, the entry in its schedule indicates that, at the time of the inscription, no such
permits were being issued, which was consistent with Mexico's intention to make a "standstill"
commitment. According to Mexico, the entr y establishes a "zero quota" on mode 3 access for
commercial agencies, which amounts to a market access limitation under GATS Article XVI:2(a). 1039
Mexico is of the view that nothing in its en try committed Mexico to issuing the corresponding
regulations. If Mexico had made commitments to take certain actions in the future, those
commitments would have been inscribed in th e fourth column of its schedule as "additional
commitments" under GATS Article XVIII, similar to the practice other Members had followed in
making promises of review or other conditional undertakings.1040
7.350 The United States argues that Mexico's mode 3 limitation, if read as Mexico interpreted it,
rendered the commitment without effect or "inutile". The United States points to interpretations of

1037 See the United States' first written submission, paragraph 291.
1038 See the United States' first written submission, paragraph 295.
1039 See Mexico's answer to question No. 2(a) of the Panel of 19 December 2002, paragraph 39. For
question No. 2(a), see footnote 225 of this Report. See also Mexico's answer to ques tion No. 6(a) of the Panel
of 19 December 2002, paragraphs 89-91. For question No. 6(a), see footnote 282 of this Report. See also
Mexico's answer to question No. 6(c) of the Panel of 19 December 2002, paragraph 108; II 135. For question
No. 6(c), see footnote 653 of this Report.
1040 See Mexico's answer to question No. 6(c) of the Panel of 19 December 2002, paragraph 108. For
question No. 6(c), see footnote 653 of this Report.

Mexico's commitments by Telmex/Sprint in testimon y given to the FCC in 1997, that indicate that
Telmex/Sprint believed that Mexico would issue the required regulations shortly.1041
7.351 We recall the terms of Section 5(b) of the Annex, which states in relevant part:
"(b) Each Member shall ensure that serv ice suppliers of any other Member have
access to and use of any public tele communications transport network or
service offered within or across the border of that Member, including private
leased circuits, and to this end shall en sure, subject to para graphs (e) and (f),
that such suppliers are permitted:
 …
(ii) to interconnect pr ivate leased or owned circuits with public
telecommunications transport networks and services or with circuits
leased or owned by another service supplier;"
7.352 In examining the United States claim under S ection 5(b), we will first examine whether
Mexico has a commitment in effect to allow the supply of the ser vices at issue through commercial
presence (mode 3) in Mexico by commercial agencies of other Members. We will then examine the
extent of any such commitments, in particular whether that commitment extends to international
services from Mexico to the United States supp lied through commercial agencies commercially
present in Mexico. Finally, we will examine whether Mexico has fulfilled its commitment under
Section 5(b) with respect to "access to and use of" of private leased circuits, and under Section 5(b)(ii)
to "interconnect private leased or owned circuits" with public telecommunications transport networks
and services, or with circuits leased or owned by a nother supplier, taking into account Section 2(c)(ii)
and Section 5(e), (f) and (g) of the Annex.
(i) Whether Mexico has a commitment in effect to allow commercial agencies to supply the
services at issue through commercial presence (mode 3)
7.353 Mexico has included a commercial presence (m ode 3) commitment in its schedule with
respect to services supplied by "commercial agencies". It has entered "None" in the column relating
to national treatment, and inscribed limitations in the market access column, which read in relevant
part:
"A permit issued by the SCT is required . Only enterprises set up in accordance with
Mexican law may obtain such a permit.
 …
The establishment and operation of commercial agencies is invariably subject to the
relevant regulations. The SCT will not issue permits for the establishment of a
commercial agency until the corres ponding regulations are issued. " (emphasis
added)
7.354 We consider first Mexico's argument that the entry in its schedule establishes a limitation on
market access, under Article XVI:2(a) of the GATS. This provision states that, in sectors where
market access commitments are undertaken, the measures, which a Member shall not maintain or
adopt, unless otherwise specified in its schedule, are :
"limitations on the number of service suppliers whethe r in the form of numerical
quotas, monopolies, exclusive service suppliers or the requirements of an economic
needs test;
 "1042 (emphasis added)

1041 See the United States' answer to question No. 6(c) of the Panel of 19 December 2002. For question
No. 6(c), see footnote 653 of this Report. See also the United States' first oral statement, paragraph 17.

7.355 According to the first sentence in Mexico's entry, "a permit issued by the SCT is required" for
the supply of the service. Such a permit, according to the entry, may only be obtained by "enterprises
set up in accordance with Mexican law". This la nguage does not indicate that Mexico maintains a
quantitative limitation "on the number of suppliers". On the contrary, it suggests that any supplier
who is set up in accordance with Mexican law is eligible for a permit.
7.356 Mexico's entry goes on to state that "the est ablishment and operation of commercial agencies
is invariably subject to the relevant regulations". It further states that "permits for the establishment
of a commercial agency [will not be issued] until th e corresponding regulations are issued". Mexico
argues that at the time when the limitation was in scribed, no permits were issued, and no market
access was granted.
1043 Mexico appears to argue that the i ssuance of regulations is a condition, the
fulfilment of which is entirely at the discretion of Mexican authorities. If the meaning of Mexico's
entry is that Mexico has full discretion whether or not to issue regulations, then it follows that Mexico
has indeed not undertaken any commitment on the num ber of suppliers – in other words, it has left
market access "unbound" with regard to the number of suppliers.
7.357 We now consider whether Mexico's entry is equi valent to an "unbound" entry with respect to
market access through the supply, through comme rcial presence, of the services at issue. The
wording of the limitation, that "permits for the establishment of a commercial agency [will not be
issued] until the corresponding regulations are i ssued", does not specify that a numerical quota was to
be imposed on the issuance of permits. Rather, the sentence seems to introduce a temporal
qualification as to when establishment will be permitted – namely, after the issuance of the
regulations.
7.358 The six categories of measures in Article XVI:2 refer to the types of market access limitations
that can be imposed on the supply of a service. However, none of the six categories relate to temporal
limitations – such as dates for entry into force or for the implementation of commitments. This
suggests that temporal limitations cannot constitute limitations on market access under Article XVI:2
of the GATS.
7.359 Article XX:1 of the GATS provides useful context which supports this interpretation. Article
XX:1 describes how schedules are to be drawn up. It reads:

1042 GATS Article XVI:2 reads in full:
"In sectors where market-access commitments ar e undertaken, the measures which a Member
shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire
territory, unless otherwise specified in its Schedule, are defined as:
(a) limitations on the number of service suppliers whether in the form of
numerical quotas, monopolies, excl usive service suppliers or the
requirements of an economic needs test;
(b) limitations on the total value of service transactions or assets in the form of
numerical quotas or the requirement of an economic needs test;
(c) limitations on the total number of service operations or on the total quantity
of service output expressed in terms of designated numerical units in the form
of quotas or the requirement of an economic needs test;
(d) limitations on the total number of natural persons that may be employed in a
particular service sector or that a service supplier may employ and who are
necessary for, and directly related to, the supply of a specific service in the
form of numerical quotas or the requirement of an economic needs test;
(e) measures which restrict or require specific types of legal entity or joint
venture through which a service supplier may supply a service; and
(f) limitations on the participation of foreign capital in terms of maximum
percentage limit on foreign shareholding or the total value of individual or
aggregate foreign investment."
1043 See Mexico's answer to question No. 6(a) of the Panel of 19 December 2002, paragraph 90. For
question No. 6(a), see footnote 282 of this Report.

"Each Member shall set out in a schedul e the specific commitments it undertakes
under Part III of this Agreement. With r espect to sectors wher e such commitments
are undertaken, each schedule shall specify:
(a) terms, limitations and conditions on market access;
(b) conditions and qualifica tions on national treatment;
(c) undertakings relating to additional commitments;
(d) where appropriate the time-frame for implementation of such
commitments; and
(e) the date of entry into force of such commitments ."
7.360 Article XX:1 provides that Members "shall speci fy" certain elements in their schedules of
specific commitments. The need to sp ecify entries with regard to the substantive elements in
Articles XVI (market access), Article XVII (national treatment), and Article XVIII (additional
commitments) is dealt with in subparagraphs (a) to (c) of Article XX:1 respectively. Article XX:1
reiterates the need to "specify" the limitations for ma rket access to be scheduled under Article XVI.
Article XX:1 appears however to add to the requirements for the scheduling of national treatment
limitations under Articles XVII (which reads "subject to any conditions and qua lifications set out [in
the schedule]"), and additional commitments under Article XVIII (which reads "commitments shall be
inscribed in a Member's schedule").
7.361 The need for specificity on the temporal aspects of commitments is dealt with in
subparagraphs (d) and (e) of Article XX:1. Subparagraph (e) requires that each schedule shall specify
the date of entry into force of the commitments undertaken. Subparagraph (d) requires that a schedule
"shall specify … where appropriate the time-frame for implementation of such commitments". The
separate listing of temporal elements of entry into force and implementation in Article XX:1 confirms,
in our view, that temporal elements are not part of the substantive elements that can be market access
limitations under Article XVI:2.
7.362 Consequently, we find that Mexico's scheduled requirement that commercial agencies obtain
permits, and that these permits be based on regulations, is a temporal limitation that is not a market
access limitation within the meaning of Article XVI:2(a).
1044
7.363 Since we have found that Mexico's entry in the market access column of its schedule for
services supplied by commercial agencies through commercial presence is not a market access
limitation, we now need to determine what meani ng it does have. We return to Article XX:1, which
specifies how Members should inscribe their specific co mmitments in their schedules. In particular,
we examine Mexico's entry under the criteria set out in subparagraphs (d) (time-frame for
implementation) and (e) (date of entry into force).
7.364 We note at the outset that Mexico's comm itment on commercial agencies, along with
Mexico's other commitments on basic telecommunicati ons, was attached to the Fourth Protocol on

1044 The Addendum to the Explanatory Note on Scheduling of initial commitments on Trade in Services
(MTN.GNS/W/164/Add.1 , 30 November 1993, corroborates this finding: "The requirement to obtain an
approval or a licence is not in itself a trade restriction and therefore does not need to be scheduled. However, if
the criteria for granting licenses or approval contain a market access restriction (e.g . economic needs test) or
discriminatory treatment, the relevant measures would need to be scheduled if a Member wishes to maintain
them as limitations under Article XVI or XVII. It has been pointed out that in some offers the granting of
licences is subject to review, meaning they are granted on a discretionary ba sis. In such a case the right to
supply the service is unbound."

15 February 1997, and entered into force on 5 February 1998. Mexico has not included a date in its
schedule to indicate that its specific commitment on commercial agencies was to enter into force at a
date different from 5 February 1998 . We consider therefore that Mexico's entry relates to the time-
frame for implementation, and not the entry into force of the commitment.
7.365 We recall that Article XX:1 (d) requires, w ith respect to sectors where commitments are
undertaken, that each schedule shall specify "where appropriate the time-frame for implementation of
such commitments".
7.366 A "time-frame" is defined as "a period of time especially with respect to some action or
project".
1045 The term does not require the setting of a precise date, but it does imply a beginning and
an end of a time period. Where not expressed by beginning and end dates, a time-frame may be also
expressed in terms of maximum duration (for example: within three years). Unlike a condition which
may or may not occur, a time-frame is not open-e nded and does not leave the time of the occurrence
in doubt.
7.367 We consider that the obligation to speci fy "where appropriate" a time-frame for
implementation of a commitment must be considered in the overall context of Article XX:1. The
wording of that Article seeks to ensure a high degr ee of clarity and specificity as to the exact terms of
commitments made by Members. Members must be able to infer from each schedule the precise
conditions for market access, national treatment and, where inscribed in the schedule, any additional
commitments a Member has undertaken. By the sam e token, specificity as to when a commitment
enters into force and when it has to be implemented is equally important. A market access
commitment that leaves in doubt wh en a commitment takes effect is of little practical value. Unlike
for the implementation of GATT tariff reductions whic h entered into force on 1 January 1995, and for
which paragraph 2 of the Marrakesh Protocol provid ed a time-frame for implementation, the dates of
entry into force and implementation of specific commitments under the GATS coincide in principle.
7.368 Article XX:1(d) permits Members who wish to depart from this general rule to specify a
"time-frame" within which they implement their co mmitments. We consider that the words "where
appropriate" in that subparagraph must be underst ood to refer to situations where the date of
implementation differs from the date of entry into fo rce of a commitment. The consistent practice of
WTO Members in the scheduling of commitments s upports this understanding. During the extended
negotiations on basic telecommunications alone, twenty-seven Members who attached schedules of
commitments to the Fourth Protocol, but wished to implement their commitments at a later time than
the entry into force of their sch edule, specified a time-frame for implementation – typically by
entering dates upon which certain limitations would be removed. We consider that Article XX, the
objective of which is to ensure clarity and precisi on with regard to the scheduling of commitments,
cannot be interpreted to allow a window of discr etion with regard to temporal aspects of these
commitments that could erode the practical value of a commitment.
7.369 Mexico asserts that had it wished to schedule commitments to take future actions, it would
have done so as additional commitments under GATS Article XVIII. In its view, this reasoning is
"confirmed" by a Secretariat background note whic h includes a reference to "future undertakings
conditional upon the passing of legislation" in its de scription of measures that Members had inscribed
in the additional commitments column of schedules.
1046
7.370 In addressing Mexico's argument, we recall first that Article XX:1(d) relates to time-frames
for implementation of commitments under either Articles XVI, XVII, or XVIII. We therefore cannot
subscribe to Mexico's view that any future actions should be scheduled only as additional

1045 Merriam Webster Dictionary, Merriam Webster Online, 2003; http://www.webster.com/.
1046 See, Additional Commitments Under Article XVIII of the GATS: Note by the Secretaria t,
S/CSC/W/34, 16 July 2002, paragraph 8.

commitments; we described earlier how Members have, in fact, consistently inscribed time-frames in
the market access column of thei r schedules. Second, Mexico has inscribed its commitment in the
market access column, and not in the column rela ting to additional commitments. This difference
indicates Mexico's intention to make a commitment on market access (that is, to permit the
commercial presence of "commercial agencies"), and not an additional commitment "with respect to
measures affecting trade in services not subject to scheduling under Articles XVI or XVII". Third, the
Secretariat note mentioned by Mexico merely c ontains "examples of inscriptions found in the
additional commitments column", and an examination of such examples in Attachment I to that note
shows that only one of a total of fifty-two inscrip tions contains a condition similar to the one in
Mexico's' schedule.
7.371 We therefore consider that subparagraph (d) of Article XX:1 requires the specification of a
time-frame for implementation should a Member wish to implement a commitment after its entry into
force. Where a Member does not specify a time- frame, implementation must be deemed to be
concurrent with the entry into force of the commit ment. We have seen that the entry in Mexico's
Schedule does not contain language that expresses a condition "whether" regulations and permits
would be issued, but only "when" the permits w ould be issued. Interpreted in the context of
Article XX, this entry implies that regulations were not in place when Mexico finalized its
commitments on 15 February 1997, but expresses a commitment that these regulations would be
issued. Even if Mexico had needed time to comple te the issuance of the regulations beyond the time
of entry into force of its commitment on 5 February 1998, Mexico should, at the very minimum, have
initiated that process leading to th e issuance of the regulations. There is no evidence, however, that
Mexico has taken any steps to comply with its commitment. We do not consider it necessary to rule
on the length of a time period within which th e implementation of Mexico's commitment might
reasonably have been concluded, as more than five years have passed since the entry into force of
Mexico's commitment, and Mexico still has indicated no date by which it intends to issue the relevant
regulations and permits. Therefore, we find that Me xico's refusal to authorize the supply of services
by commercial agencies is inconsistent with the market access commitment inscribed in its schedule.
(ii) Whether Mexico's commitments on the supply of the services at issue by commercial agencies
through commercial presence include the supply of international telecommunications services
(from Mexico to the United States) through mode 3
7.372 The United States argues that the supply of th e services at issue through commercial presence
under mode 3 includes the supply of such services from Mexico into the United States.
7.373 In assessing this issue, we note that the supply of a service through commercial presence
(mode 3) is defined in Article I:2 (c) of the GATS as the supply of a service "by a service supplier of
one Member, through commercial presence in the territory of any other Member".
7.374 "Commercial presence" is defined in Article XXVIII (Definitions), as follows:
"(d) 'commercial presence' means any type of business or professional
establishment, including through
 (i) the constitution, acquisition or ma intenance of a juridical person, or
 (ii) the creation or maintenance of a branch or a representative office,
 within the territory of a Member for the purpose of supplying a service;"
7.375 The definition of services supplied through a commercial presence makes explicit the location
of the service supplier. It provides that a service supplier has a commercial presence – any type of
business or professional establishment – in the territory of any other Member. The definition is silent

with respect to any other territorial requirement (as in cross-border supply under mode 1) or
nationality of the service consumer (as in consum ption abroad under mode 2). Supply of a service
through commercial presence would therefore not excl ude a service that originates in the territory in
which a commercial presence is established (such as Mexi co), but is delivered into the territory of any
other Member (such as the United States).
7.376 We observe further that the Chairman's Note for Scheduling Basic Telecommunications
Services Commitments, states that:
"Unless otherwise noted in the sector column , any basic telecom service listed in the
sector column:
(a) encompasses local, long distance and international services for public and
non-public use;"
1047
7.377 In our analysis of Mexico's commitments in part B of these findings, we found that the
Chairman's Note is an important part of the ci rcumstances of the conclusion of the negotiations, and
should be given considerable weight. We note that Mexico did not exclude international services in
the sector column, or elsewhere in its schedule, from the scope of services that commercial agencies
may supply. We are therefore entitled to assume th at Mexico's mode 3 commitment at issue includes
supply of basic telecommunications services within Mexico, and from Mexico into any other country.
7.378 Having concluded that Mexico has a commitment in effect to allow the supply through
commercial presence (mode 3) of the services at is sue by commercial agencies, we now consider
whether Mexico has fulfilled its obligations in Sec tion 5(b) to ensure that suppliers of any other
Member have access to and use of any public te lecommunications transport networks and services
offered within or across Mexico's border, including private leased circuits.
(iii) Access to and use of private leased circuits
7.379 Mexico argues that Section 2(c)(ii) of the Annex renders Section 5 inapplicable in this case.
Section 2(c)(ii) establishes that nothing in the Anne x, including Section 5, "shall be construed ... to
require a Member (or to require a Member to ob lige service suppliers under its jurisdiction) to
establish, construct, acquire, lease, operate or supply telecommunications transport networks or
services not offered to the public generally". Acco rding to Mexico international simple resale is
prohibited in Mexico, and is therefore not offered to the public generally. 1048 The United States
argues that Mexican suppliers of public telecommunications transport networks and services do in fact
offer private leased circuits to the public generally.1049
7.380 The Panel cannot accept Mexico's argument that Section 2(c)(ii) makes Section 5(b)
inapplicable in this case. Whether "international simple resale" (international services transmitted
over leased capacity) is offered to the public gene rally is a different issue from whether "private
leased circuits" are offered to the public generally in Mexico. Whether a supplier is entitled under
Section 5(b) to access to and use of services, such as private leased ci rcuits, that are offered to the
public generally is determined by a Member's scheduled commitments on the service to be supplied.
In this respect, the fact that a particular service is restricted under domestic law cannot be invoked
under Section 2(c)(ii), since the obligations under Section 5 refer not to domestic law but to scheduled
GATS commitments.

1047 Notes for the Scheduling Basic Telecommunications Services Commitments; Note by the Chairman.
S/GBT/W/2/Rev.1.
1048 See Mexico's second written submission, paragraphs 147-151.
1049 See the United States' first written submission, pa ragraph 264, footnote 230, in which the
United States states that COFETEL's website lists Telmex private line tariffs.

7.381 The Panel notes that the United States presents ev idence that "private leased circuits" are in
fact "offered to the public generally" in Mexico. Further, the Panel recalls that it has found that,
although Mexico has not committed to allow commerc ial agencies to use lea sed capacity for cross
border supply, it has committed to allow commercial ag encies to use leased capacity for the supply of
the services at issue. We also recall that Mexico indicates no restriction on the geographic market
(i.e. local, long distance, international) for th e services that may be supplied by the commercial
agencies established in Mexico. Mexico has insc ribed no routing restriction – as it did for cross
border supply – for supply through commercial presence. Therefore, the Panel considers Mexico to
have undertaken commitments on the supply of the services at issue by commercial agencies through
commercial presence, for which access to and use of pr ivate leased circuits is not only relevant but ,
by Mexico's own definition in its schedule, is essenti al. Therefore, we find that Mexico has failed to
ensure access to and use of priv ate leased circuits for the supply of the committed services in a
manner consistent with the Section 5(b) of the Annex on Telecommunications.
(iv) Interconnection of private leased circuits
7.382 The United States maintains that according to Section 5(b)(ii), foreign suppliers must be
permitted to interconnect private leased circuits to foreign public telecommunications transport
networks and services. In its view, ILD Rule 3 would prohibit commercial agencies, even if they
were permitted to establish, to interconnect any private leased circuits to foreign public
telecommunications transport networks and services.
7.383 We note that ILD Rule 3 reads:
"Only international gateway ope rators shall be authorized to interconnect directly
with the public telecommunications networks of other countries' operators for the
purpose of carrying international traffic."
7.384 Under this rule, only international gateway op erators may interconnect with foreign public
telecommunications transport networks and services to supply international telecom services. The
ILD Rules require an international gateway operator to be a facilities-based supplier. ILD Rule 2:VII
defines a gateway operator as a supplier with a c oncession to supply long distance services, and ILD
Rule 7:3 requires such an operator to have infrast ructure in at least three Mexican states. As
discussed in part B, a gateway operator must alwa ys be a "concessionaire", and a commercial agency
can never be a concessionaire. Therefore, a commercial agency can never be an international gateway
operator. Thus, ILD Rule 3 prohibits a commercial agency to interconnect "directly with the public
telecommunications networks of other countries' op erators for the purpose of carrying international
traffic".
(v) Subject to paragraphs (e) and (f)
7.385 We note that the obligation in Section 5(b) is made subject by the terms of the provision to
paragraphs (e) and (f). Paragraph (e)(iii) permits Mexico to impose conditions "to ensure that service
suppliers of any other Member do not supply ser vices unless permitted pursuant to commitments in
the Members' Schedule". ILD Rule 3, as discussed above, would be a restriction on resale in the
sense of paragraph (f)(i) of Section 5. We have found that Mexico has undertaken a mode 3
commitment on the supply of the telecommunications services at issue by commercial agencies. This
commitment does not exclude supply of non-facilities-based services from Mexico into any other
country. Therefore, ILD Rule 3 does not impose a condition necessary to achieve the objective set out
in paragraph (e)(iii). Rather, this ILD Rule preven ts interconnection to private leased circuits for a
service on which a specific commitment has been take n. Therefore, we find that ILD Rule 3 is
inconsistent with Mexico's obligations under Section 5(b) of the Annex.

(d) Invocation of Section 5(g)
7.386 Mexico argues that it is necessary to cond ition access to its networks for the purpose of
strengthening its domestic telecommunication infra structure in accordance with paragraph (g) of
Section 5 of the Annex.
1050 According to Mexico, this Section gives cover to its measures.
7.387 Section 5(g) reads:
"Notwithstanding the preceding paragraphs of this section, a developing country
Member may, consistent with its level of development, place reasonable conditions
on access to and use of public telecommunications transport networks and services
necessary to strengthen its domestic telecommunications infrastructure and service
capacity and to increase its participation in international trade in telecommunications
services. Such conditions shall be specified in the Member's schedule."
7.388 Section 5(g) recognizes the right of developing countries to inscribe limitations in their
schedules for the objectives recognized in Section 5( g). The Panel notes that Mexico's Schedule of
Specific Commitments does not include any limita tions referring to Section 5(g) or to the
development objectives mentioned therein. Without such limitations in Mexico's Schedule, Section
5(g) does not permit a departure from specific commitments which Mexico has voluntarily and
explicitly scheduled. Moreover, even if – contrary to our views – Section 5(g) could be used as a
defence for imposing conditions inconsistent with a Member's specific commitments, Mexico has not
demonstrated that anti-competitive price-fixing and market sharing arrangements are "reasonable" and
"necessary" conditions for enhancing the development objectives referred to in Section 5(g).
7.389 We therefore conclude that Mexico has failed to meet its obligations under Section 5(b) of the
GATS Annex on Telecommunications, by failing to ensure that commercially present commercial
agencies of the United States have access to and u se of private leased circuits and are permitted to
interconnect these circuits to public telecommunica tions transport networks and services or with
circuits of other service suppliers.
VIII. CONCLUSIONS AND RECOMMENDATION
8.1 In the light of our findings, we conclude that:
(a) Mexico has not met its GATS commitments under Section 2.2(b) of its Reference
Paper since it fails to ensure that a majo r supplier provides interconnection at cost-
oriented rates to United States suppliers for the cross-border supply, on a facilities
basis in Mexico, of the basic telecommunications services at issue ;
(b) Mexico has not met its GATS commitments under Section 1.1 of its Reference Paper
to maintain "appropriate measures" to prevent anti-competitive practices, since it
maintains measures that require anti- competitive practices among competing
suppliers which, alone or together, are a major supplier of the services at issue;
(c) Mexico has not met its obligations unde r Section 5(a) of the GATS Annex on
Telecommunications since it fails to ensure access to and use of public
telecommunications transport networks and services on reasonable terms to
United States service suppliers for the cro ss-border supply, on a facilities basis in
Mexico, of the basic telecommunications services at issue;

1050 See Mexico's second written submission, paragraphs 265-266.

(d) Mexico has not met its obligations u nder Section 5(b) of the GATS Annex on
Telecommunications, since it fails to ensure that United States commercial agencies,
whose commercial presence Mexico has co mmitted to allow, have access to and use
of private leased circuits within or acro ss the border of Mexico, and are permitted to
interconnect these circuits to public tel ecommunications transport networks and
services or with circuits of other service suppliers.
8.2 The Panel has found that, contrary to claims of the United States :
(a) Mexico has not violated Section 2.2(b) of its Reference Paper, with respect to cross-
border supply, on a non-facilities basis in Mexico, of the basic telecommunications
services at issue;
(b) Mexico has not violated Section 5(a) of the GATS Annex on Telecommunications,
with respect to the cross-border supply, on a non-facilities basis in Mexico, of the
basic telecommunications services at issue;
(c) Mexico has not violated Section 5(b) of the GATS Annex on Telecommunications,
with respect to the cross-border supply, on a non-facilities basis into Mexico, of the
basic telecommunications services at issue.
8.3 The Panel notes that, pursuant to Article 12.11 of the DSU, it has taken into account in its
findings GATS provisions on differential and more -favourable treatment for developing country
Members. In particular, the Panel has examined Mexico's arguments that commitments of such
Members have to be interpreted in the light of Article IV of the GATS, paragraph 5 of the preamble to
the GATS, and paragraph 5(g) of the Annex on Te lecommunications The Panel emphasizes that its
findings in no way prevent Mexico from actively pursuing the development objectives referred to in
these provisions by extending telecommunications ne tworks and services at affordable prices in a
manner consistent with its GATS commitments.
8.4 The Panel notes that Article 19 of the DSU provi des that "[w]here a panel … concludes that a
measure is inconsistent with a covered agreement, it shall recommend that the Member concerned
bring the measure into conformity with that agreement."
1051 Unlike some other covered agreements
(e.g. GATT Article XXIII:1 in connection with Artic le 3.8 of the DSU), the GATS does not require
that, in the case of a violation complaint (GATS Article XXIII:1), "nullification or impairment" of
treaty benefits has to be claimed by the comp laining WTO Member and examined by a Panel.
Whereas Article XXIII:1 of the GATT specifically conditions access to WTO dispute settlement
procedures on an allegation that a "benefit" or the "attainment of an objective" under that agreement
are being "nullified or impaired", the correspondi ng provision in the GATS (A rticle XXIII:1) permits
access to dispute settlement procedures if a Member "fails to carry out its obligations or specific
commitments" under the GATS. In this respect, we note that the Appellate Body in EC – Bananas III
stated that the panel in that case "erred in extendi ng the scope of the presumption in Article 3.8 of the
DSU to claims made under the GATS". 1052 Having found that Mexico h as violated certain provisions
of the GATS, we are therefore bound by Article 19 of the DSU to proceed directly to the
recommendation set out in that provision.

1051 Footnotes in the original omitted.
1052 See Appellate Body Report, European Communities – Regime for the Importation, Sale and
Distribution of Bananas ("EC – Bananas III "), WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591,
at paragraph 250.

8.5 We therefore recommend that the Dispute Settlement Body request Mexico to bring its
measures into conformity with its obligations under the GATS.

IX. ANNEXES
A. ABBREVIATIONS USED FOR DISPUTE SETTLEMENT CASES REFERRED TO IN THE REPORT
SHORT TITLE F ULL TITLE
Canada – Autos Panel Report, Canada – Certain Measures Affecting the Automotive
Industry, WT/DS139/R, WT/DS142/R, adopted 19 June 2000, as modified
by the Appellate Body Report , WT/DS139/AB/R, WT/DS142/AB/R,
DSR 2000:VII, 3043.
Canada – Dairy Appellate Body Report, Canada – Measures Affecting the Importation of
Milk and the Exportation of Dairy Products , WT/DS103/AB/R,
WT/DS113/AB/R and Corr.1, adopted 27 October 1999, DSR
1999:V, 2057.
EC – Computer
Equipment
Appellate Body Report, European Communities – Customs
Classification of Certain Computer Equipment , WT/DS62/AB/R,
WT/DS67/AB/R, WT/DS68/AB/R, adopted 22 June 1998.
EC – Hormones Appellate Body Report, EC Measures Concerning Meat and Meat
Products (Hormones) (" EC – Hormones "), WT/DS26/AB/R,
WT/DS48/AB/R, adopted 13 February 1998, DSR 1998:I, 135.
India – Quantitative
Restrictions
Appellate Body Report, India – Quantitative Restri ctions on Imports of
Agricultural, Textile and Industrial Products , WT/DS90/AB/R, adopted
22 September 1999, DSR 1999:IV, 1763.
Japan – Alcoholic
Beverages II
Appellate Body Report, Japan – Taxes on Alcoholic Beverages ,
WT/DS8/AB/R, WT/DS10/AB/R , WT/DS11/AB/R, adopted
1 November 1996, DSR 1996:I, 97.
Korea – Various
Measures on Beef

Appellate Body Report, Korea – Measures Affec ting Imports of Fresh,
Chilled and Frozen Beef , WT/DS161/AB/R, WT/DS169/AB/R, adopted
10 January 2001.
US – Carbon Steel Appellate Body Report, United States – Countervailing Duties on Certain
Corrosion-Resistant Carbon Steel Flat Products from Germany ("US –
Carbon Steel "), WT/DS213/AB/R and Corr.1, adopted
19 December 2002.
US – Gasoline Appellate Body Report, United States – Standards for Reformulated and
Conventional Gasoline , WT/DS2/AB/R, adopted 20 May 1996,
DSR 1996:I, 3.
US – Hot-Rolled Steel Appellate Body Report, United States – Anti-Dumping Measures on
Certain Hot-Rolled St eel Products from Japan , WT/DS184/AB/R,
adopted 23 August 2001.
US – Stainless Steel Panel Report, United States – Anti-Dumping Measures on Stainless Steel
Plate in Coils and Stainless Steel Sheet and Strip from Korea ,
WT/DS179/R, adopted 1 February 2001.
US – Wheat Gluten Appellate Body Report, United States – Definitive Safeguard Measures on
Imports of Wheat Gluten from the European Communities ("US – Wheat
Gluten "), WT/DS166/AB/R, adopted 19 January 2001, DSR 2001:II, 717.

B. M
EXICO: SCHEDULE OF SPECIFIC COMMITMENTS, SUPPLEMENT 2
WORLD TRADE GATS/SC/56/Suppl.2
 11 April 1997

 (97-1326)

Trade in Services

MEXICO

Schedule of Specific Commitments

Supplement 2

(This is authentic in Spanish only)

 This text supplements the Telecommunication services section contained on pages 20 to 22 of
document GATS/SC/56.

MEXICO - SCHEDULE OF SPECIFIC COMMITMENTS
Modes of supply: (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments
2.C. TELECOMMUNICATIONS
SERVICES

Telecommunications services
supplied by a facilities based
public telecommunications
network (wire-based and
radioelectric) through any
existing technological medium,
included in subparagraphs (a),
(b), (c), (f), (g) and (o).

Radio broadcasting, cable
television, satellite
transmissions of DTH and
DBS services and of audio
digital services are excluded.

(1) None, except the following:

International traffic must be routed
through the facilities of an enterprise
that has a concession granted by the
Ministry of Communications and
Transport (SCT).

(2) None

(3) A concession
1 from the SCT is
required. Only enterprises
established in conformity with
Mexican law may obtain such a
concession.

(1) None

(2) None

(3) None

Mexico undertakes the
obligations contained in the
reference paper attached
hereto.
 Concessions for spectrum frequency
bands for specific uses will be
granted by public invitation to
tender.

1 Concession: The granting of title to install, operate or use a facilities-based public telecommunications network.

Modes of supply: (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments
 Foreign governments may not
participate in an enterprise set up in
accordance with Mexican law nor
obtain any authorization to provide
telecommunications services.

 Direct foreign investment up to
49 per cent is permitted in an
enterprise set up in accordance with
Mexican law.

Telecomunicaciones de Mexico
(Telecomm) has exclusive rights to
links with Intelsat and Inmarsat.

Services other than international
long-distance services which require
use of satellites must use Mexican
satellite infrastructure until the
year 2002.

 (4) Unbound, except as indicated in the
horizontal section.

(4) Unbound, except as indicated in the
 horizontal section.

(a) Voice telephony
(CPC 75211, 75212)
(b) Packet-switched data
transmission services
(CPC 7523**)
(c) Circuit-switched data
transmission services
(CPC 7523**)
(1) None, except as indicated in 2.C.1.

(2) None

(3) As indicated in 2.C.3.

(4) Unbound, except as indicated in the
 horizontal section.
(1) None

(2) None

(3) None

(4) Unbound, except as indicated in the
 horizontal section.

Modes of supply: (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments
(f) Facsimile services
(CPC 7521** + 7529**)
(1) None, except as indicated in 2.C.1.

(2) None

(1) None

(2) None

 (3) As indicted in 2.C.3.

A permit issued by the SCT is
required in order to provide a public
facsimile service. Only enterprises
set up in accordance with Mexican
law may obtain such a permit.

(4) Unbound, except as indicated in
the horizontal section.

(3) None

(4) Unbound, except as indicated in the
 horizontal section.

(g) Private leased circuit
services
(CPC 7522** + 7523**)
(1) None, except as indicated in
2.C.1.

(2) None

(3) As indicated in 2.C.3.

Operators of private networks
wishing to exploit services
commercially must obtain a
concession from the SCT, whereupon
such networks assume the character
of public networks.

(4) Unbound, except as indicated in the
 horizontal section.

(1) None

(2) None

(3) None

(4) Unbound, except as indicated in the
 horizontal section.

Modes of supply: (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments
(o) Other

- Paging services
 (PC 75291)
(1) None, except as indicated in 2.C.1.

(2) None

(3) As indicated in 2.C.3.

(4) Unbound, except as indicated in the
 horizontal section.

(1) None

(2) None

(3) None

(4) Unbound, except as indicated in the
 horizontal section.

- Cellular telephone services
(75213**) on the "A" and "B"
bands
2
 (1) None, except as indicated in
2.C.1.

(2) None

(3) As indicated in 2.C.3.

Foreign investment in excess of
49 per cent of an enterprise's capital
will be permitted following a
favourable decision by the Foreign
Investment Commission

(4) Unbound, except as indicated in
the horizontal section.

(1) None

(2) None

(3) None

(4) Unbound, except as indicated in
the horizontal section.

2 Frequencies 825-835/870-880 and 835-845/880-890 Mhz.

Modes of supply: (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments
- Commercial agencies 3 (1) None, except as indicated in 2.C.1.

(2) None

(3) None, except:
A permit issued by the SCT is required.
Only enterprises set up in accordance
with Mexican law may obtain such a
permit.

Foreign governments may not participate
in an enterprise set up in accordance with
Mexican law nor obtain any authorization
to provide telecommunications services.

Except where specifically approved by
the SCT, public telecommunications
network concessionaires may not
participate, directly or indirectly, in the
capital of a commercial agency.

(1) None

(2) None

(3) None

3 Agencies which, without owning transmissi on means, provide third parties with teleco mmunications services by using capacity le ased from a public network
concessionaire.

Modes of supply: (1) Cross-border supply (2) Consumption abroad (3) Commercial presence (4) Presence of natural persons
Sector or subsector Limitations on market access Limi tations on national treatment Additional commitments
 The establishment and operation of
commercial agencies is invariably subject
to the relevant regulations. The SCT will
not issue permits for the establishment of
a commercial agency until the
corresponding regulations are issued.

(4) Unbound, except as indicated in
the horizontal section.

(4) Unbound, except as indicated in
the horizontal section

REFERENCE PAPER

Scope

 The following are principles and definitions on the regulatory framework for the basic
telecommunications services.

Definitions

 Users mean service consumers and service suppliers.

 Essential facilities
 mean facilities of a public telecommunications network of service that:

 (a) Are exclusively or predominantly provided by a single or limited number of
suppliers; and

 (b) cannot feasibly be economically or tec hnically substituted in order to provide a
service.

 A major supplier
 is a supplier which has the ability to materially affect the terms of
participation (having regard to price and supply) in the relevant market for basic telecommunications
services as a result of:

 (a) Control over essential facilities; or

 (b) use of its position in the market.

1. Competitive safeguards

1.1 Prevention of anti-competitive practices in telecommunications

 Appropriate measures shall be maintained for the purpose of preventing suppliers who, alone
or together, are a major supplier from engaging in or continuing anti-competitive practices.

1.2 Safeguards

 The anti-competitive practices referred to in the above paragraph shall include in particular:

 (a) Engaging in anti-competitive cross-subsidization;

 (b) using information obtained from comp etitors with anti-competitive results; and

 (c) not making available to other services suppliers on a timely basis technical
information about essential facilities and co mmercially relevant information which
are necessary for them to provide services.

2. Interconnection

2.1 This section applies, on the basis of the specific commitments undertaken, to linking with
suppliers providing public telecommunications transpor t networks or services in order to allow the

users of one supplier to communicate with users of another supplier and to access services provided
by another supplier.

2.2 Interconnection to be ensured

 Interconnection with a major supplier will be en sured at any technically feasible point in the
network. Such interconnection is provided:

 (a) Under non-discriminatory terms, cond itions (including technical standards and
specifications) and rates and of a quality no less favourable than that provided for its
own like services or for like services of non-affiliated service suppliers or for its
subsidiaries or other affiliates;

 (b) in a timely fashion, on terms, conditions (including technical standards and
specifications) and cost-oriented rates that ar e transparent, reasonable, having regard
to economic feasibility, and sufficiently unbundl ed so that the supplier need not pay
for network components or facilities that it does not require for the service to be
provided; and

 (c) upon request, at points in addition to th e network termination points offered to the
majority of users, subject to charges that reflect the cost of construction of necessary
additional facilities.

2.3 Public availability of the pro cedures for interconnection negotiations

 The procedures applicable for interconnecti on to a major supplier will be made publicly
available.

2.4 Transparency of interconnection arrangements

 It is ensured that a major supplier will make publicly available either its interconnection
agreements or a reference interconnection offer.

2.5 Interconnection: dispute settlement

 A service supplier requesting interconnection with a major supplier will have recourse, either:

 (a) At any time; or

 (b) after a reasonable period of time which has been made publicly known

to an independent domestic body, which may be a regulatory body as referred to in paragraph 5, to
resolve disputes regarding appropriate terms, c onditions and rates for interconnection within a
reasonable period of time, to the extent that these have not been established previously.

3. Universal service

 Any Member has the right to define the ki nd of universal service obligation it wishes to
maintain. Such obligations will not be regarded as anti-competitive per se , provided they are
administered in a transparent, non-discriminator y and competitively neutral manner and are not more
burdensome than necessary for the kind of universal service defined by the Member.

4. Public availability of licensing criteria

 Where a licence is required, the following will be made publicly available:

 (a) All the licensing criteria and the period of time normally required to reach a decision
concerning an application for a licence; and

 (b) the terms and conditio ns of individual licences.

 The reasons for the denial of a licence will be made known to the applicant upon request.

5. Independent regulators

 The regulatory body is separate from, and not accountable to, any supplier of basic
telecommunications services. The decisions of and the procedures used by regulators shall be
impartial with respect to all market participants.

6. Allocation and use of scarce resources

 Any procedures for the allocation and use of scarce resources, including frequencies, numbers
and rights of way, will be carried out in an obj ective, timely, transparent and non-discriminatory
manner. The current state of allocated frequency ba nds will be made publicly available, but detailed
identification of frequencies allocated for specific government uses is not required.

C. ILD
 RULES

RULES FOR THE SUPPLY OF INTERNATIONAL LONG-DISTANCE SERVICES

To be Applied by the Licensees of Public Telecommunications Networks
Authorized to Provide Such Services

11 December 1996
 In the margin, a stamp displaying the Mexi can Coat-of-Arms and the words "United Mexican
States – Ministry of Communications and Transport, Federal Telecommunications Commission".

 On the basis of Article 36 of the Basic Law on the Federal Public Administration; Articles 1
and 3 and other relevant articles of the Federal La w on Administrative Procedure; Articles 7 and 47,
Transitional Article Ten, and other relevant ar ticles of the Federal Telecommunications Law;
Articles 2 and 37 bis of the Rules of Procedure of the Mini stry of Communications and Transport;
Articles 1, 2, 3, and 5 of the Decree establishi ng the Federal Telecommuni cations Commission, and
other applicable provisions; and

 WHEREAS:

 Pursuant to Article 7 of the Federal Telecommunications Law, the Ministry of
Communications and Transport shall promote the ef ficient development of telecommunications, and
foster fair competition among the various telecommuni cations service providers so that users may be
offered a better price, range, and quality of services;

 Transitional Article Ten of the Federal Tel ecommunications Law establishes that licensees of
public telecommunications networks that have concluded interconnection agreements, under the terms
of said Law, with licensees of public networks wish ing to provide national and international basic
public long-distance telephone services, may begin to operate their respective interconnections as of
1 January 1997;

 In the Regulations on Long-Distance Services, published in the Diario Oficial de la
Federación [Official Journal] of 21 June 1996, the Ministry of Communications and Transport has
determined the procedures that must be followed by licensees of public telecommunications networks
authorized to provide basic public long-distan ce telephone services for their operations with other
licensees or permit-holders, as well as for the supply of services to end users;

 It is therefore necessary to establish the procedure applicable to those licensees of
long-distance services wishing to establish and operate international gateways in order to interconnect
with foreign telecommunications networks for the pur pose of carrying international traffic, as well as
promoting the efficient interconnection of public telecommunications networks within Mexican
territory;

 By means of a decree published in the Diario Oficial de la Federación of 9 August 1996, the
Federal Executive established the Federal Te lecommunications Commission as a decentralized
agency of the Ministry of Communications and Tr ansport, with technical and operational autonomy,
for the purpose of regulating and promoting the efficient development of telecommunications;

 As established in Articles 7(II) and 47 of th e Federal Telecommunications Law, as well as
Article 37 bis (XIII) and (XIV) of the Rules of Procedures of the Ministry of Communications and
Transport, it is within the authority of the Fe deral Telecommunications Commission to promote and
oversee the efficient interconnection of public telecommunications networks and equipment,

including interconnection with foreign netw orks, as well as to approve the corresponding
interconnection agreements and authorize the in stallation of telecommunications equipment and
means of transmission that cross the country's borders;

 Under the terms of the aforementioned pr ovisions, the Federal Telecommunications
Commission may establish the terms to be included in agreements for the interconnection of public
telecommunications networks with foreign networks whenever it is deemed that such agreements
prejudice the interests of Mexico in general, of users, or of other licensees of public
telecommunications networks;

 As established in Article 7(III) of the Federal Telecommunications Law, Article 2(1) of the
Decree establishing the Federal Telecommunications Commission, and other applicable provisions of
the said Decree, as well as in Article 37 bis (I) of the Rules of Procedure of the Ministry of
Communications and Transport, it is within th e authority of the Federal Telecommunications
Commission to issue administrative provisions in the area of telecommunications; and

 In view of the imminent opening up of the market for international long-distance telephone
services, in a plenary session on 4 December 1996, and by means of Decision No. RES PC 961207,
the Commission unanimously approved the following:

 Rules for the Supply of International Long-D istance Services to be Applied by the
Licensees of Public Telecommunications Networks Authorized to Provide Such Services

General Provisions

 Rule 1. The purpose of these Rules is to regulate the supply of international long-distance
services and to establish the terms to be included in agreements for the interconnection of public
telecommunications networks with foreign networks.

 Rule 2. For the purposes of these Rules, the following definitions shall apply:

 I. Auditor: firm retained by the Commissi on to audit the uniform settlement rate and
proportionate return systems, as well as to pe rform other functions authorized under these
Rules.

 II. Commission: Federal Te lecommunications Commission.

 III. Committee: the Long-Distance Operator s Committee to which Chapter VI of the
Long-Distance Rules published in the Diario Oficial de la Federación of 21 June 1996 refers.

 IV. Long-distance service licensee: natural or legal person having a licence to instal,
operate, or exploit a public telecommunications network authorized to provide long-distance
services.

 V Call attempt: any call origination provided by a foreign operator to an international
gateway operator, regardless of whether or not the call is terminated.

 VI. Law: Federal Telecommunications Law.

 VII. International gateway operator: long -distance service licensee authorized by the
Commission to operate a switching exchange as an international gateway;

 VIII. International gateway: switching exch ange interconnected to incoming and outgoing
circuits, authorized by the Commission to carry international traffic.

 IX. Network terminal connection point: the s ite at which end-user facilities and equipment
are connected to a public telecommunications ne twork, or, as applicable, the site at which
other telecommunications networks are connected to that network.

 X. Ministry: Ministry of Communications and Transport.

 XI. International long-distance service: service whereby all international switched traffic is
carried through long-distance exchanges authorized as international gateways.

 XII. Uniform settlement rate system: the system whereby:

(a) The same settlement rates are applied by international gateway operators to all
long-distance calls from a given country, regardless of which operator originates the
call abroad and which licensee terminates the call within Mexican territory; and
(b) The same settlement rates are applied by the operators of a given country to
long-distance calls originating within Mexican territory and delivered to such
operators, regardless of which long-distance service licensee originates the call within
Mexican territory or which operator terminates the call abroad.
 XIII. Proportionate return system: the syst em under which internatio nal gateway operators
distribute call attempts entering Mexican te rritory in accordance with the following
procedure:

(c) The total settlements paid over a one-mont h period by all international gateway
operators to all operators of a given country shall be determined;
(d) The percentage of the total amount of th e above-mentioned settle ments generated by
each of the international gateway operators during the said period shall also be
determined;
(e) Regardless of the type of call, internationa l gateway operators sha ll have the right to
receive incoming call attempts from a given country during any one-month period, on
the basis of the percentages established for the previous monthly period, in
accordance with subparagraphs (a) and (b), above; and
(f) For this purpose, any international gateway operator that receives incoming traffic in
an amount exceeding its percentage pursu ant to the above subparagraph shall,
regardless of the type of call, (i) retain its own call attempts; and (ii) distribute the
excess call attempts to each of the internati onal gateway operators in order to meet
the percentages indicated.
 XIV. Settlement rate: the rate which:

(g) An international gateway operator charg es a foreign operator for receiving traffic
from a given country; and
(h) A foreign operator charges an internati onal gateway operator for receiving traffic
originating in Mexican territory.

 XV. Switched circuit traffic: traffic which is carried by means of the temporary connection
of two or more circuits between two or mo re users, allowing the said users the full and
exclusive use of the connection until it is released.

 Rule 3. Only international gateway operators shall be authorized to interconnect directly with
the public telecommunications networks of other countries' operators for the purpose of carrying
international traffic.

 Rule 4. In order to establish a private cross-borde r network, capacity must be leased form a
long-distance service licensee. Cross-border traffic carried through dedicated infrastructure that
forms part of a private network shall be originated and terminated within the same private network.

 Pursuant to Article 47 of the Law, only intern ational gateway operators or persons expressly
authorized by the Commission may instal telecommu nications equipment and means of transmission
that cross the country's borders.

 International gateway operators or persons expressly authorized by the Commission to instal
telecommunications equipment and means of transmi ssion that cross the country's borders shall apply
for prior authorization from the Commission before making any modifications to the said equipment
or means of transmission.

 Rule 5. In order to provide international long-di stance services in Me xico, a licence granted
by the Ministry under the terms of the Law shall be required. No foreign operator may make use of
means of transmission or switching for the direct supply of international long-distance services in
Mexico without the participation of a duly authorized Mexican licensee.

International Gateways

 Rule 6. Long-distance service licensees may only ca rry international switched circuit traffic
through international gateways, and solely in accordance with the provisions of these Rules.

 Rule 7. Only long-distance service licensees may apply to the Commission for authorization
to operate international gateways . For this purpose, applicants shall submit to the Commission an
application for each of the switching exchanges they wish to establish as an international gateway and
shall indicate which other exchanges, either belonging to the applicant or to other licensees, will be
interconnected with each of said international gateways.

 Applicants for international gateway authoriza tion and a record of the exchanges that are to
be interconnected with each such gateway shall be submitted at least ten calendar days prior to the
date on which the applicant wishes to begin operations at the international gateway in question. The
Commission shall issue its decision on an application within ten calendar days of the date of receipt of
the application.

 The Commission shall authorize the installati on and operation of intern ational gateways to
those long-distance service licensees that have co mplied with the obligations stipulated in their
respective licences; that show that they have inte rconnected, via their own infrastructure, cities in at
least three States of Mexico; and that have at least one interconnection agreement, previously
approved by the Commission, with a foreign operator.

 Where the Commission decides to grant an inte rnational gateway app lication submitted by a
long-distance service licensee, the licensee shall regist er the international gateway in question with
the Public Telecommunications Register.

 Rule 8. The Commission shall authorize exclusively the installation of international
gateways having the capacity to identify the techni cal and commercial parameters necessary to effect
the required invoicing and to exchange accounts with their correspondents.

 For this purpose, international gateways shall be equipped with the systems necessary to keep
daily accounts comprising at least the following information:

 I. Incoming and outgoing traffic volume in minutes for each type of call;

 II. Total revenue from incoming and outgoing calls;

 III. Duration of each call;

 IV. Type of traffic, broken down into the following categories:

(i) Telephone-to-telephone;
(j) person-to-person;
(k) country-direct;
(l) collect-call traffic;
(m) calls to 800 numbers;
(n) transit traffic; and
(o) other categories to be established by the Commission.
 V. Time at which call was carried;

 VI. Operators involved in traffic interexchange;

 VII. Countries of call origination and termination;

 VIII. Geographical area of destination with in Mexican territory, where applicable, when
traffic from a given country is subject to separate settlement rates; and

 IX. Geographical area in the destination c ountry, where applicable, when outgoing traffic
from Mexican territory is subject to separate settlement rates for different geographical areas.

 After consulting with the Committee, the Commission may at any time eliminate the
requirement stated under this Rule that one or mo re systems for the identification of technical and
commercial parameters be available at international gateways.

 Rule 9. Once an international gateway is author ized, its operator shall apply for prior
authorization from the Commission before making any modification in the assignment of exchanges
interconnected with that international gateway. The Commission shall issue its decision on an
application within ten calendar days of the date of receipt of the application.

 Rule 10. International gateway operators shall carry international incoming and outgoing
traffic, using the uniform settlement rate system and the proportionate return system.

 Rule 11. The Commission may at any time require international gateway operators to show
that the international gateways they own are e quipped with each and every technical facility and
capability needed to distribute traffic in accordance with the proportionate return system, without
prejudice to the terms of Rule 17.

 Rule 12. International gateway operators may suppl y, on a non-discriminatory basis, traffic
switching, routing, and accounting services to any long-distance service licensees that request them.

Settlement Rate

 Rule 13. The long-distance service licensee having the highest percentage of the outgoing
long-distance market for the six months prior to negotiations with a given country shall be the
licensee that is authorized to negotiate settlement rates with the operators of the said country. These
rates shall be submitted to the Commission for approval.

 Rule 14. Long-distance service licensees may register any rates or services, supplementary to
those already filed, that they wish to offer within Mexican territory in coordination with one or more
foreign operators. Their proposals shall be recorded in the Telecommunications Register to allow the
Commission and the Committee to make comments. The Commission shall approve the proposal or
request further information within 30 calendar days of the date of its receipt. Where the Commission
requests further information from the long-distance service licensee, the Commission shall issue its
decision within 15 calendar days of the date of receipt of the additional information.

 Rule 15. The weighted average rates long-distance service licensees charge the public for the
supply of international long-distance services may not be lower than the wei ghted average settlement
rate for the specific service provided.

 Notwithstanding the foregoing, the Commission reserves the right to issue any administrative
provisions it deems appropriate in the event that rates established in accordance with this Rule are
inconsistent with the objectives and conditions established by the Law for the supply of services.

 Rule 16. International gateway operators that r eceive international incoming traffic shall
charge their foreign correspondence the applicable settlement rate and shall pay the local operator that
terminates the call the applicable interconnection rate.

 Where an international gateway operator receives a greater share of incoming traffic than that
to which it is entitled under the terms of subparagraph XIII of Rule 2, the said operator shall distribute
the surplus to another international gateway operato r so as to remain within the limits of its own
percentage. In such cases, the operator concerned shall deduct any offsetting adjustments due to it for
the supply of switching, routing, and accounting ser vices at the international gateway and shall pay
the remaining balance of the settlement rate to the international gateway operators to which it
transfers the traffic in question. The latter operators shall, in turn, pay the applicable interconnection
rate to the local operator that terminates the call.

 Rule 17. International gateway operators may ne gotiate financial compensation agreements
among themselves, according to the rights applicab le to each of them, under the terms of the
proportionate return system established in these Rules. Such agreements shall be duly notified to the
Commission and shall meet the requirements of fair competition and non-discrimination.

 Rule 18. International gateway operators shall pa y the local operator having registered the
destination number a percentage of the settlement rate in effect for incoming traffic, as determined in
accordance with the applicable provisions.

 Rule 19. After consulting with the parties and taking into consideration the average long-
term incremental costs, as well as the trends in international references for interconnection rates and
settlement rates for Mexico's traffic with its principal trading partners and the growth and
development of the telecommunications market in Mexico, inter alia, the Commission may establish
the offsetting adjustments to which internationa l gateway operators are entitled for the supply of
switching, routing, and accounting services for any excess international traffic they distribute pursuant
to Rule 16. International gateway operators sha ll require payment of the above-mentioned offsetting
adjustments, on a uniform and non-discriminatory basis, from all long-distance service licensees that
request the said operators to supply the above-mentioned services.

 Rule 20. International gateway operators that r eceive international incoming traffic or send
outgoing collect-call traffic and that receive the corresponding settlement rate from their foreign
correspondents shall have a period not exceeding ten work ing days as of the date of receipt of the said
rate in which to make payment to the local operator pursuant to Rule 16. Such payment shall be made
at the exchange rate in effect on the day the lo cal operator is paid, in the currency in which the
settlement rate is to be paid pursuant to the in terconnection agreement c oncluded with the foreign
correspondent and in accordance with applicable provisions. The local access rate shall be paid
within the time-period agreed in the relevant contract.

 If after 180 calendar days the international ga teway operator has not received payment of the
settlement rate from his foreign correspondent, the sai d international gateway operator shall be liable
for immediate payment of the rate to the local operator in question.

 Rule 21. Under the terms of Article 71 of the Law, the Ministry may penalize long-distance
service licensees that commit acts intended to avoi d paying the local operator for international
interconnections, without prejudice to any civil and criminal liability incurred.

 Interconnection Agreements.

 Rule 22. Pursuant to Article 47 of the Law, the interconnection of public telecommunications
networks with foreign networks shall be carried out by means of an agreement to be concluded by the
parties concerned.

 Rule 23. Long-distance service licensees wishing to establish interconnection agreements
with foreign operators must submit the said agreem ents to the Commission for approval before they
are formally concluded.

 Such agreements shall comply with the following requirements. They shall:

 I. Expressly knowledge the authority of the Commission to approve all the terms of the
said agreements;

 II. Recognize the principles of the unifor m settlement rate and proportionate return
systems established in these Rules;

 III. Stipulate that incoming and outgoing traffic may be carried only through international
gateways previously authorized by the Commission;

 IV. Establish the last day of the calendar y ear as the date of expiry of the agreement;

 V. Establish the first five working days of each month as the period for making
settlement payments;

 VI. Set the first day of each calendar month as the deadline for making adjustments in the
percentages determined under the proportionate return system;

 VII. Provide mechanisms for automatic re newal and for the compulsory settlement of
disputes that, in the Commission's view, avoid the potential interruption of traffic
among interconnected operators;

 VIII. Incorporate the settlement rates approved by the Commission; and

 IX. Stipulate, where applicable, the geographical areas previously approved by the
Commission in which the same settlement rate shall be applied.

 Where a long-distance service licensee submits an interconnection agreement to the
Commission, the latter shall have 15 calendar days from the receipt of the respective agreement to
issue its decision, it is being understood that th e international gateway ope rator that submits the
interconnection agreement for the Commission's approva l shall first sign a contract with the Auditor
for the supply of professional services.

 Rule 24. Any international interconnection ag reement between a long-distance service
licensee and a foreign operator shall be recorded in the Public Telecommunications Register. Long-
distance service licensees that conclude interna tional interconnection agreements with foreign
operators shall have 15 calendar days from the date the agreement in question is concluded to submit
it to the Commission, which shall record it in the Public Telecommunications Register.

 Contracts for the Supply of International Gateway Services

 Rule 25. In order to carry international switche d-circuit traffic, long-distance service
licensees shall either have an inte rnational gateway or shall enter in to a contract with international
gateway operators so that the latter may provide th e long-distance licensees with international traffic
switching, routing, and accounting services.

 Rule 26. Long-distance service licensees that do not ha ve an international gateway shall be
responsible for interconnecting with one or more international gateway operators to handle their
traffic, and for having owned or leased capacity in order to terminate the call at its final destination.

 Rule 27. Long-distance service licensees that do not have an international gateway may
negotiate financial compensation agreements with international gateway operators to carry the
international traffic such licensees originate.

 Rule 28. The contracts to which Rule 25 refers shall be approved in advance by the
Commission.

 If, at the conclusion of 30 calendar days fro m the submission of the request for approval of
the contract, the Commission has not issued its decision, the contract shall be deemed to be approved.

 Where the Commission determines that th e terms established in the above-mentioned
contracts do not comply with the principles establis hed in the Law and in these Rules, it may request
that the contracts be modified in any way it deems necessary.

 Rule 29. Any contract for the supply of international traffic switching, routing, and
accounting services between a long-distance service licensee and an interna tional gateway operator
shall be recorded in the Public Telecommunications Register. International gateway operators that
enter into contracts with long-distance service license es shall have a period of five working days from

the date the contract is concluded to file it with the Commission, which shall record it in the Public
Telecommunications Register.

 Rule 30. Any international gateway operator invo lved in a long-distance call shall be
responsible for the quality of the service on its own network until the call reaches the network
terminal connection point at which interconnection w ith the next licensee participating in the call is
made. For this purpose, the international gatewa y operators and licensees participating in the call
shall establish the necessary mechanisms and procedures to maintain the levels of quality agreed upon
by the parties and provided for in their licences or permits.

 International Long-Distance Responsib ilities of the Long-Distance Operators
Committee

 Rule 31. The Committee shall have the following responsibilities, inter alia:

 I. To coordinate and oversee the implem entation and operation of the uniform rate
settlement and proportionate return systems;

 II. To inform the Commission of any irregu larities detected in the implementation of the
said systems that may affect the supply of international long-distance services;

 III. To hire the Auditor, subject to prior authorization by the Commission;

 IV. To propose to the Commission the adopti on of measures for the efficient operation of
international long-distance services and of the uniform settlement rate and
proportionate return systems;

 V. To assist the satisfactory supply of international long-distance services; and

 VI. To propose to the Commission a structure and format to be followed for the monthly
report that international gateway operators are required to submit to the Auditor for
the purpose of complying with the procedure for implementation of the proportionate
return system.

 Rule 32. The Committee shall adopt by consensus the percentages for call attempts to which
each international gateway operato r is entitled under the procedure established in subparagraph XIII
of Rule 2; if no consensus is reached, the Commissi on shall have the authority to request that the
Auditor make a recommendation concerning the establishment of such percentages.

 Rule 33. In the Committee, each long-distance service licensee shall have the right to express
its opinion and may propose measures related to international long-distance services and to the
uniform settlement rate and proportionate return systems.

 Proposals meeting with the consensus of the long-distance service licensees shall be
submitted to the Commission for its consideration. Where any proposal formulated fails to obtain the
consensus of all long-distance service licensees, th e procedure described in the Long-Distance Rules
published in the Diario Oficial de la Federación of 21 June 1996 shall be followed.

 Where, in the opinion of the Commission, a di spute needs to be settled within a time-period
shorter than that provided for under the procedur e described above, the Commission itself may settle
the said dispute.

 Auditor

 Rule 34. Subject to a favorable opinion by the Commission, the Committee shall hire an
Auditor. The Auditor shall have a recognized reput ation in the area of accounting and auditing in the
telecommunications field.

 The Auditor may not be a firm that is fina ncially controlled by the long-distance service
licensees represented on the Committee or by the partners or shareholders of the said licensees.

 Rule 35. The Auditor shall have the following responsibilities, inter alia:

 I. To recommend on a monthly basis, subject to consultation with the Committee and to
the approval of the Commission, for each registered international gateway, and in accordance with
available date on traffic, the percentages for the di stribution of international incoming traffic to the
various long-distance service licensees and of outgoi ng traffic to the various foreign operators. The
percentage recommendations shall take into account ca ll duration, time of day, type, and destination,
as well as optimal routing of traffic;

 II. To ensure that each international gate way operator applies its approved percentage;

 III. To recommend, subject to consultation w ith the Committee and to the approval of the
Commission, the accounting methodology to be applied to settlements with foreign
operators, and to ensure that each international gateway operator applies the approved
methodology;

 IV. To define, subject to consultation with the Committee and the approval of the
Commission, the information systems and formats to be used to transmit the
information needed to implement and opera te the proportionate return and uniform
settlement rate systems;

 V. To ensure that revenue from interna tional traffic is distributed among long-distance
service licensees and foreign operators in accordance with the uniform settlement rate
and proportionate return systems;

 VI. To inform the Committee and the Commiss ion of any irregularities detected in the
implementation of the said systems that affect the supply of international long-
distance services;

 VII. To reconcile the monthly information furnished to the Commission for that purpose
by the international gateway operators with respect to the rights and duties arising
from the calculation of proportionate return s, based on the methodology established
in these Rules. This information shall be duly reported and confirmed by the external
auditor of each international gateway operator; and

 VIII. To fulfil other responsibilities that the Commission deems necessary for the full
observance of these Rules.

 Rule 36. The cost of hiring the Auditor shall be sh ared by all long-distance service licensees
participating in the Committee, starting on the date each joins the Committee. The costs shall be
shared in accordance with a formula specified by the Committee and approved by the Commission
that assigns a portion of the total cost of operati ng the system to each licensee on the basis of the
activities that generate the said costs. For this purpose, each licensee's share of the total amount of

international traffic and the number of international gateways operated by each licensee shall be taken
into account, inter alia.

 In the case of special audits of internationa l gateway operators conducted on instructions from
the Commission and arising from a dispute between international gateway operators or as the
consequence of an irregularity detected by the Audi tor, the costs shall be paid by the international
gateway operator found liable for the irregularity or else by the operator(s) that requested the action
that gave rise to the special audit if the claim of irregularity is found to be without merit.

 Percentages

 Rule 37. The Committee shall determine the percen tages for each international gateway
operator applicable to the month following the m onth during which the traffic was originated and
shall make such determination within the first 15 calendar days of the month following the month
during which the traffic was originated, on the basis of the information furnished by the international
gateway operators in accordance with Rule 42 of these Rules. Where the Committee fails to arrive at
a recommendation by consensus within the afor ementioned period, the Auditor shall have an
additional several calendar days in which to recommend the percentages to be applied.

 As of the first calendar day of the calendar month following the recommendation of the
Committee or Auditor, as applicable, international ga teway operators shall adjust the percentages by
which international incoming and outgoing traffic is to be distributed.

 Rule 38. In calculating the percentages to which the above Rule refers, all settlements for the
types of traffic indicated in Rule 8(IV), except for country-direct services and services provided via
international non-geographical reversed-charge (800) numbers, shall be taken into account.

 In the case of collect-call traffic, for the calculation of the percentages applicable to
international outgoing traffic, settlements for collect -call traffic originated abroad and terminated
within Mexican territory shall be excluded. In cal culating the percentages for international incoming
traffic, settlements for collect-call traffic originat ed within Mexican territory and terminated abroad
shall be excluded.

 Rule 39. Traffic sent to a country with which Mexico does not share a border may be routed
either directly or through an intermediate count ry. For the purposes of calculating the percentage
arrangement in the latter case, the traffic in question shall be counted as if it were traffic destined for
the intermediate country.

 Rule 40. The proportionate return system established in these Rules may not be modified
prior to the third anniversary of its entry into effect.

 Notwithstanding the foregoing, after reviewing the competition and reciprocity conditions in
effect for the operation of Mexico's telecommunications services with other countries, as well as the
trends in international references for interconnecti on rates and settlement rates for Mexico's traffic
with its principal trading partners and the growth and development of telecommunications markets in
Mexico, the Commission may decide to modify the proportionate return system established in these
Rules prior to the above-mentioned third anniversary.

 Information

 Rule 41. Within the 15 calendar days following the end of each calendar month, and for each
of the international gateways, the internationa l gateway operators shall make the following
information, inter alia, available to the Committee and the Commission:

 I. Incoming and outgoing traffic volume in minutes;

 II. Total revenue from incoming and outgoing calls; and

 III. Any other information that the Commi ssion considers necessary and that Rule 8
indicates must be made available.

 Rule 42. Within ten calendar days following the end of each calendar month, and for each of
the international gateways, the international gatewa y operators shall make available to the Committee
information on the settlement income and settlement payments for the calendar month in question that
have been received from or made to their foreign correspondents.

 Rule 43. International gateway operators shall estab lish the control mechanisms necessary to
demonstrate the authenticity of the informati on they make available to the Committee and
Commission, in accordance with criteria to be established by the Auditor.

 Rule 44. Under the terms of Article 71 of the La w, the Ministry may penalize international
gateway operators that commit any irregularity re lating to the implementation or operation of the
uniform settlement rate or proportionate return syst ems or that furnish false information concerning
the operation of international gateways.

 Transitional Provisions

 First. These Rules shall enter into effect on th e day following their publication in the Diario
Oficial de la Federación.

 Second. As of 1 January 1997, long-distan ce service licensees may carry international
switched circuit traffic in accordance with the provisions of these Rules.

 Third. International gateway operators that have not carried international traffic prior to the
date of the entry into effect of these Rules may begin sharing in the distribution of international
incoming traffic as of 1 January 1997.

 Fourth. Within 15 days of the enactment of these Rules, the Commission shall make
available to long-distance service licensees the settleme nt rates applicable to international traffic
going out to or coming in from the various countries with which any long-distance service licensee
has international interconnection agreements.

 Fifth. Long-distance service licensees that have, pr ior to the date of enactment of these
Rules, concluded interconnection agreements with foreign operators or entities of an international
nature that carry traffic between Mexican territory and foreign countries, must file those agreements,
as well as the settlement rates in effect, with the Commission so that they may be recorded in the
Public Telecommunications Register. The licensee to which this provision refers shall have 15
calendar days from the entry into effect of these Rul es to file these agreements and rates. The terms
of the said agreements shall not contravene the provisions of these Rules.

 Sixth. The Committee shall hire the Auditor respon sible for auditing the uniform settlement
rate and proportionate return systems within 15 calenda r days of the entry into effect of these Rules.
Where the Committee fails to hire the Auditor wi thin that period of time, the Commission shall
appoint an Auditor and shall determine the terms under which it shall be hired by the Committee.

 Seventh. International gateway operators providi ng services during the month of January
1997, shall, for the first time, make available to the Committee and Commi ssion the information to
which Rules 41 and 42 refer, within the first 15 work ing days of February 1997. For international
gateways that are not in operation during the m onth of January 1997, the said 15-day period shall
begin on the first day of the calendar month immediately following the date on which the said
international gateway commences operations.

 Eighth. Prior to 14 February 1997, and on the basis of the information which the
international gateway operators make available to the Committee under Transitional Provision Seven
above, the Auditor shall establish the percentages a pplicable to the distribution of international
incoming and outgoing traffic for the month of Marc h 1997. These percentages shall be determined
by the Auditor on the basis of information concer ning international outgoing traffic generated during
the month of January. For international gateways that are not in operation during the month of
January 1997, the percentages shall be determin ed based on information concerning the calendar
month following the commencement of operations of the said international gateway.

 Mexico, D.F., 4 December 1996. Carlos Casa sús López Hermosa, Chairman of the Federal
Telecommunications Commission. Initialled.

 Wednesday, 11 December 1996.

 Diario Oficial 37 44

 Diario Oficial Wednesday, 11 December 1996.