Free Trade Area of the Americas - FTAA

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Source: Economic Commission for Latin America and the Caribbean



The extent to which the commitments actually provide a rollback of restrictions can only be determined by an analysis of the legislative changes introduced by members to implement their concessions.

The term, transparency, stands for the proposition that "the marking of legislation, including regulations, rules and all subordinate legislation, and including the detail of special arrangements for the benefit of a particular corporation or class of corporation, should be a public process." One issue on which at least all the market-economy country regimes ought to be able to agree, and with regard to all service industry, is that laws and regulations should be notified to trading partners and should be administered under public procedures, that rules should be published and therefore that the scope for discrimination against legitimate foreign traders can be reduced. Article X of the GATT, for instance, sets out requirements regarding the "Publication and Administration of Trade Regulations". Also, many important sections of the various Tokyo Round codes on procurement, technical standards, subsidy-countervailing measures and on anti-dumping actions are addressed to "transparency". Article III of the GATS on Transparency requires all Members to establish enquiry points to provide specific information concerning any laws, regulations, and administrative practices respecting services covered by the Agreement.

For detailed historical analysis of the concept of transparency, see Grey, op.cit., pp.130-133


Grey, pp.120-121.



a) Reciprocity

Though the articles of GATT do not define reciprocity or specify how reciprocal negotiations may be arranged, the Preamble of GATT refers to "entering reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade". However, that:

"Reciprocity, the notion that there has to be some broadly equal and specific, identifiable concession from the foreign country obtaining the benefit of a particular concession...and, carried to the extreme, from each separate foreign country obtaining that benefit, is a concept with a long and controversial history. In its extreme and most precise form, it is obviously much the same, in relation to trade in goods, as, conditional - MFN treatment. But at different times, for different countries and in various political contexts, the term, reciprocity - has had different meanings." The concept is hence used in negotiations, not in economics. Messerlin (1990, p. 142) defines reciprocity as "the threshold of mutual concessions that trade partners consider satisfactory enough to sign a trade agreement". From a pure mercantilist point of view, as Dell (1986) writes, "What it means is obscure and subjective and, in the end, may be determined simply by what is politically acceptable", and "There is free trade and there is reciprocity". Similarly, Winters (1987, p.45) argues that "Reciprocity in trade negotiations comes in many disguises, ranging from the simple bilateral swapping of tariff reductions, through multilateral reciprocity, to qualitative reciprocity in which mutual concessions are made in the design of agenda or of codes of practice."

In cross-border services, national treatment links reciprocity to host country rules, as it does in trade in goods. However, the fact that suppliers of services are subject to host country rules does not necessarily lead to an acceptable bargain, when producers in the most liberal country are seen as disadvantaged in comparison with the counterparts in the less liberal country. Thus, the "comparable competitive opportunities" concept makes the assessment of reciprocity more complex because it compares host and home country rules (Messerlin, 1990, p.142). Under these circumstances, either the rule of the most regulated home country, the rule of the most liberal country, or somewhere in between the two extremes could be accepted as the international standard for reciprocity.



For the concept of reciprocity, see: Grey, op.cit., Chapter 6, pp. 97-119; Patrick A. Messerlin, "The European Community" in World Bank and UNCTC, pp.132-149, The Uruguay Round, Services in the World Economy, op.cit.; Murray Gibbs and Michiko Hayashi "Sectoral issues and the multilateral framework for trade in services: an overview", Trade in Services: Sectoral Issues, UNCTAD, (UNCTAD/ITP/26) Geneva, 1989; Alan Winters, "Reciprocity", in J. Michael Finger and Andrzej Olechowski eds., The Uruguay Round: A Handbook for the Multilateral Trade Negotiations, The World Bank, Washington D.C. 1987; Edmund Dell, "Of Free Trade and Reciprocity", The World Economy, 9, June, 1986, pp. 125-40; William R. Cline, "Reciprocity: A New Approach to World Trade Policy", in W. R. Cline ed., Trade Policy in the 1980s, Institute for International Economics, Washington D.C., 1983.






Messerlin, op.cit..



This wide range of options makes trade negotiations difficult. It is to be noted that reciprocity is a conflict of interests not only between trading partners but also within each domestic industry of the two trading partners. In trade in services, the application of multilateral reciprocity is more complex, due to the difficulty of applying a mechanism affecting all service sectors, comparable to an across-the-board tariff reduction and the need to address the different modes of supply.

The term "relative reciprocity" has emerged in the negotiations as a means of calibrating developing country concessions in line with their development needs. This approach appears somewhat analogous to the so-called "non-reciprocity" provision contained in Part IV of GATT (Article XXXVI:8) which states that "the developed contracting parties do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of less developed countries." Relative reciprocity appears to imply that concessions granted by developing countries should be matched by much more substantial liberalization by developed countries. In contrast to the case of trade in goods, in which developing countries are the demandeurs, seeking access to markets for specific products, in trade in services, it is primarily the developed countries which are seeking access commitments in developing country markets. "The problem in the negotiation on trade in services is not the ability of developing countries to grant reciprocity, it is rather how developing countries will obtain reciprocity from developed countries in respect of any concessions they might agree to make." (Gibbs and Hayashi, 1989, p. 43).

b) Partial liberalization (regional)

Agreements to liberalize international transactions in trade on a regional basis have been of recent vintage. Examples include the Canada-United States Free Trade Agreement (FTA), the Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA), the European Community's Single Market (EC-92), and NAFTA. In conjunction to the GATS, Hoekman and Sauvé (1994) provide a detailed comparative analysis on services, especially from the viewpoints of modalities and instruments of liberalization, sectoral coverage, disciplines on related government policies, enforcement and dispute settlement, rules of origin and safeguards.







Gibbs and Hayashi, op.cit..













Reference to regional integration in the context of the GATS is found in: Bernard Hoekman and Pierre Sauvé, Liberalizing Trade in Services, World Bank Discussion Paper No. 243, Washington D.C., 1994: Handbook, op.cit., as well as UNCTAD (1994, pp. 157-158), also refer to regional integration in the context of the GATS. Richard, Snape, "History and Economics of GATT's Article XXIV," in Kym Anderson and Richard Blackhurst eds., Regional Integration and the Global Trading System, London, harvester-Wheatsheaf, 1993; Frieder Roessler, "The Relationship Between Regional Integration Agreements and the Multilateral Trade Order", in Kym Anderson and Richard Blackhurst eds., Regional Integration and the Global Trading System, London, harvester-Wheatsheaf, 1993.



Article XXIV of GATT and Article V of GATS are the provisions covering economic integration, requiring arrangements to have "substantial sectoral coverage" and to "provide for the absence or elimination of substantially all discrimination" between the parties. Yet, both contain provisions which allow for the formation of agreements that do not comply with multilateral disciplines. In the former, with a two-thirds majority GATT members may approve a proposed regional trade agreement that does not fully comply with Article XXIV, provided that such proposals lead to the formation of a customs union or free trade area in the sense of Article XXIV. Similarly, Articles V:2 and V.3(a) of the GATS respectively allow for consideration to be given to the relationship between a particular regional agreement and the wider process of economic integration among member countries, and give developing countries flexibility regarding the realization of the internal liberalization requirements (Art. V:1). Both agreements impose conditions that external barriers may not be increased unless affected parties are compensated, and internal (preferential) liberalization must have substantial sectoral coverage. In those cases where there remains ambiguity with respect to the standstill-cum-substantial sectoral coverage, Article V:2 of GATS allows that a regional agreement should be accepted insofar as it is part of a wider process of economic integration or trade liberalization among the member countries. (Hoekman and Sauvé, 1994, p. 62).

c) Developing country-specific provisions

Article XVIII of GATT of 1947, entitled "Government Assistance to Economic Development" allowed developing countries to impose quantitative and other restrictions in order to protect infant industries and (after amendment in 1955) to combat payments imbalances. Part IV of GATT relieved developing countries from the obligation to make reciprocal concessions in order to benefit on a MFN basis from the tariff and other concessions made by other GATT members. In addition, the Decision of the Contracting Parties of 28 November 1979 on Differential and More Favorable Treatment, Reciprocity, and Fuller Participation of Developing Countries stated:

"Notwithstanding the provisions of article I of the General Agreement, contracting parties may accord differential and more favourable treatment to developing countries, without according such treatment to other contracting parties" (GATT, 1979, pp.5-7).

A selective bibliographic list of a detailed treatment on services includes:with respect to the European Community, see Brian Hindley, "Trade in services with the European Community", in Herbert Giersch, ed., Free Trade in the World Economy, Tubingen, J.C.B., Mohr, 1987 and Patrick Messerlin, "The European Community", in the World Bank and UNCTC, op.cit., pp. 132-149; with respect to the USA-Canada agreement, Jeffrey Schott and Murray Smith, "Services and Investment", in J. Schott and M. Smith, eds., The Canada-US Free Trade Agreement: The Global Impact, Washington D.C., Institute for International Economics, 1988; for NAFTA, see Gary Clyde Hubbauer and Jeffrey J. Schott, NAFTA: An Assessment, Washington D.C., Institute for International Economics, 1993; and Alberto Musalem, Dimitri Vittas and Asli Dermirguc-Kunt, "North American Free Trade Agreement: Issues on Trade in Financial Services for Mexico", Policy Research Working Paper No. 1153, Washington D.C., The World Bank, 1993. Regarding the ANZCERTA, Richard Snape, "A free trade agreement with Australia", in J. Schott, ed., Free Trade Areas and U.S. Trade Policy, Washington D.C., Institute for International Economics, 1989, pp. 167-196.




For a more detailed discussion, see UNCTAD and World Bank, Handbook, op.cit. (1994, pp.144-146). UNCTAD, The Outcome of the Uruguay Round: An Initial Assessment. Supporting Papers to the Trade and Development Report 1994, New York, (Sales No.: E.94.II.D28), 1994, pp. 155-157. UNCTAD, The Outcome of the Uruguay Round: An Initial Assessment, Supporting Papers to the Trade and Development Report, 1994, Annex 1 to Chapter 1, pp. 17-27, New York, 1994; Brian Hindley, "Different and more favorable treatment -- and graduation", in J. Michael Finger and Andrzej Olechowski eds, The Uruguay Round: A Handbook for the Multilateral Trade Negotiations, World Bank, Washington D.C., 1987; Martin Wolf, "Differential and More Favorable Treatment of Developing Countries and the International Trading System", The World Bank Economic Review, Vol. 1, No.4, pp. 647-668; GATT Descripción de las disposiciones relativas a los países en desarrollo contenidas en los acuerdos, instrumentos jurídicos y decisiones ministeriales de la Ronda Uruguay,



This article had four aspects: i) special and different (S & D) treatment in the context of codes on non-tariff barriers; ii) exemption from the requirement of Article XXIV, mentioned above; iii) eligibility under the GSP for lower rates of duty on their exports to developed countries than apply to similar exports from other developed countries; and iv) particularly special treatment for least developed countries. The narrowest definition of "differential and more favorable treatment" would look only at item i) above. A somewhat broader definition would include all the four enumerated exceptions (Wolf, p. 649).

The Tokyo Round was a culminating point in the process of creating consensus in favor of S & D treatment. The so-called Enabling Clause provided a legal basis for the GSP, but did not make it obligatory. The codification of S & D treatment resulted in the explicit introduction of the concept of graduation into the Enabling Clause, stating that it should be available only according to need and for a limited time period. Without a clear criterion for classifying a country as developing and for graduation, in practice developed countries 'graduated' developing ones unilaterally from GSP eligibility. The result of the Uruguay Round has reduced the S & D concept further: with minor exceptions, it is addressed in terms of longer periods of adjustment for developing countries to international norms that are applicable to all countries (Agosin, Tussie and Crespi, 1994).

The GATS does not contain provisions similar to Part IV of the GATT on more favorable treatment of developing countries (S & D treatment), or to the (unilateral) arrangements for tariff preferences that exist for merchandize trade flows (e.g., GSP). Instead, all provisions relating to economic development are considered integral elements of the GATS.

Although Article XIX allows developing countries to offer fewer specific commitments than industrialized countries, this is either a right nor obligation. No developing country (including least developing ones) has been allowed to become a Member of the GATS without scheduling at least one service sector. Other provisions addressing developing country concerns include Article IV (Increasing Participation of Developing Countries), III (Transparency), V (Economic Integration), XV (Subsidies), and XXV (technical cooperation). Article IV and XXV are the only two provisions that deal exclusively with developing countries.

Nota de la Secretaría, (COM.TD/W/510), November, 1994; GATT, Descripción de las disposiciones relativas a los países menos adelantados contenidas en los acuerdos, instrumentos jurídicos y decisiones ministeriales de la Ronda Uruguay, (COM/TD/LLDC/W/54), November, 1994; Manuel Agosin, Diana Tussie and Gustavo Crespi, Developing Countries and the Uruguay Round: An Evaluation and Issues for the Future, Documento de Trabajo No. 129, Departamento de Economía, Universidad de Chile, October, 1994.


Agosín, Tussie and Crespi, op.cit..



Article IV states that increasing the participation of developing countries in world trade in services is to be facilitated through negotiated specific commitments relating to : i) access to technology on a commercial basis; ii) the improvement of access to distribution channels and information networks; and iii) the liberalization of market access in sectors of export interest to them. As such, this Article does not exempt developing countries from any obligations of the agreement. On transparency, industrialized countries are to establish contract points to facilitate the access of developing country service suppliers to information relating to: i) the commercial and technical aspects of specific services; ii) requirements for registration, recognition, and obtaining of professional qualifications; and iii) the availability of services technology. Article XV recognizes the role of subsidies in development programs of developing countries, though the GATS disciplines for subsidies are yet to be drafted. Moreover, the telecommunications annex contains a separate Article on technical cooperation in this industry.




There is a wide variety of policy instruments to restrict access to markets. Five broad categories of instruments can be distinguished as impediments to trade in services (Hoekman, 1994,p.7): i) measures that are quantity-based (i.e., that explicitly restrict the volume or value of transactions); ii) those that are price-based, involving the imposition of a monetary fee (tax) on foreign suppliers who desire to access to a market; iii) those that require physical or corporate presence in market; iv) those relating to standards, certification requirements and industry-specific regulations; and v) measures relating to government procurement and subsidization, where discriminaiton tends to be the rule rather than the exception.

a) Non-discriminatory Quantitative Measures

Among those mentioned, the most important in the services context are quantitative restrictions and standards. Quantitative restrictions may limit the quantity and/or value of imports of specific products for a given time period; restrict the number and/or market share of foreign service providers allowed to establish; or ration the amount of foreign exchange that may be used to import services. Such discriminatory quantitative measures are often complemented by non-discriminatory ones (i.e., measures that apply generally regardless of the nationality or origin of service providers). The latter are called "quantitative restrictions" in the NAFTA (Hoekman and Sauvé, 1994, p.17). These usually consist of limitations on the number of firms allowed to contest a market, or on the nature of their operations. Frequently, this involves either a monopoly (e.g., basic telecomunications services) or oligopolistic market structures (e.g., banking or self-regulating professional services) (Hoekman and Sauvé, 1994, p.7).

b) Price-based Measures

Though import tariffs and taxes rarely impede trade in services, when found, they often take the form of discriminatory user charges, such as, for instance, port taxes and airline landing fees. Tariffs are, however, potentially important barriers to trade in servicies either embodied in goods (e.g., films, television programs and computer software on disk or tape) or for goods that are necessary inputs into the production of servicies (e.g., computers and telecommunications equipment). More common are price controls.

On the issue of market access from the viewpoint of services, consult, Bernard Hoekman, "Market Access Through Multilateral Agreement: From Goods to Services", The World Economy, Vol.15, No.6, pp.707-727. A series of detailed sectoral studies on market access are provided in: A Typology of Barriers to Trade in Services, Prepared by Peat Marwick, Michell & Co., July, 1986; and UNCTAD, Trade in Services: Sectoral Issues, op.cit..





For a review on quatitative restrictions, see: Handbook, op.cit., p.57 and pp.115-119; Bernard Hoekman and Pierre Sauvé, Liberalizing Trade in Services, op.cit..








Handbook, 1994, op.cit., pp. 119-121.



These measures might consist either of price-setting by government agencies (e.g., imposition of minimum or maximum prices, enforcement of uniform pricing) and/or price monitoring and approval procedures. Often being exercised together with capacity or quantitative restrictions, they intend to ensure that prices are not set either market-clearing levels or at the monopoly level. Examples of service industries suject to price controls include air transportation, financial services and telecommunications.

c) Right of Establishment and Market Presence

The term, establishment, normally connotates "the relatively lengthy residence of an alien or a foreign-controlled firm in the territory for the purpose of exercising some activity." (UNCTC, 1990, p.7). In tax treaties, "permanent establishment" refers to the setting up of a local operation, of a commercial or other character. In the context of Treaties of Friendship, Commerce and Navigation, the term is "normally applied in reffering to some of the rights provided therein."(UNCTC, 1990, p.7). Therefore, the "right" or "freedom" of establishment covers the right of an alien or a foreign-controlled enterprise: i) to enter the territory of the State concerned; ii) to reside there; iii) to set up and manage companies; iv) to pursue the economic and other activities expressly listed in the agreement; and v) sometimes subject to qualifications, to acquire, own and use property in that State." Though not necessarily connected with investment, the term is especially associated with it (UNCTC, 1990, p.7).

In the definition of Grey (1989, p.121), "The right of establishment is the right of a foreign controlled entity to create a facility in the domestic jurisdiction, in conformity with the licensing procedures and requirements as to capitalization etc. which apply to demestically-organized entities". In this sense, an unequivocal right of establishment would carry with it national treatment for such purposes. In practice, however, rights of establishment are often not absolute rights, but are severely conditioned or, for certain industries, non-existent. For example, application of the principle of national treatment can significantly limit the exercise of that right (Hindley, 1990, p.15).

The notion of "commercial presence" has been used to account for various degrees of permanent activity of a foreign firm within the importing country. Though in some cases it may resemble the types of activity associated with the export of goods, such presence often goes beyond it becuase a flow of production factors is often invovled. In fact, the degree of presence varies, ranging from a local representative, a plant for assembly of products whose components are all imported, a full local production by foreign-controlled firms.







Bernard Hoekman and Pierre Sauvé, Liberalizing Trade in Services, World Bank Discussion Paper No. 243, Washington D.C., 1994. Rodney de C. Grey, Concepts of Trade Diplomacy and Trade in Services, Thames Essay No.56, Trade Policy Research Centre, London. Bian Hindley, "Principles in Factor-related Trade in Services" in World Bank and UNCTC, The Uruguay Round, Services in the World Economy, Washington, D.C. and New York, 1990.UNCTC, Key Concepts in International Investment Arrangements and Their Relevance to Negotiations on International Transactions in Services, UNCTC Current Studies, Series A. No. 13, United Nations, February, 1990, Chapter I.



Therefore, when it assumes the character of foreign direct investment, "commercial presence" blends into "establishment". The types of questions concerning foreign direct investment often relate to capital movements, including exchange control and profit remittances, transfer of technology, employment, regulation of the professionals, double taxation, etc.

Many service markets are only contestable by establishing a physical presence. Considerations relating to consumer protection, prudential supervision and regulatory oversight often induce governments to require establishment by foreign providers (e.g., financial or professional services. By contrast, drawing from the FTA, the NAFTA provides for an explicit right of non-establishment by outlawing all future measures the local presence of firms or service providers (i.e., residency requirements for professionals) as a pre-condition for the delivery of a service (Hoekman and Sauvé, 1994, p.18).

d) Standards, Certification Requirements and Industry-Specific Regulations

With respect to certification requirements, there are fudamentally two different systems. One the one hand, the countries in Western and Eastern Europe, Latin America, Asia and Africa tend to use a state-regulated system of licensing in which licenses are obtained upon satisfactory completion of a univeristy or vocational-technical level course. On the other, Anglo-Saxon countries and those borrowed this approach, tend to rely on industry-regulated professional licensing systems. Under the latter, the acquisition of a license is usually contingent upon completion of an appropriate educational degree, a period of practical training under the supervision of licensed practitioners, as well as satisfactory completion of licensing examinations administered by the professional association.

When extending a licence to a foreign professional, the regulatory bodies of individual host countries may creat a number of limitations, ranging from the nationality or residency, language profeciency, diploma equivalency, defined locations permmited for the practice, the scope of services, compulsory membership in a professional association, etc.










A concise summary of the issues related to this topic is provided in Handbook, op.cit., pp.103-114; and Thierry Noyelle, "Business services and the Uruguay Round negotiations on trade in services", in UNCTAD, Trade in Services: Sectoral Issues, op.cit., pp.309-363.



e) Government Procurement and Subsidization

Government procurement and sourcing policies often entail preferences given to domestic over foreign firms in bidding on public-procurement contracts. Examples of such discriminatory practices, which restrict market access for foreign firms, include outright prohibitions of foreign sourcing, formal criteria for foreign sourcing to be permitted (e.g., minimum cost or price differentials, offset or local content requirements), and informal procedures favoring procurement from domestic firms.

Government procurement tends to be excluded from the scope of most of the agreements. The procurement disciplines of the FTA applied only to goods, while the GATS and ANZCERTA do not cover government procurements of services (Hoekman and Sauvé, 1994, p. 52). Article XIII:1 of GATS on Government Procurement states that " Articles II, XVI and XVII shall not apply to laws, regulations or requirements governing the procurement by government agencies of services purchased for governmental purposes and not with a view to commercial resale or with a view to use in the supply of services for commercial resale." The question of rules on this matter is left for future negotiations to be completed two years after the date of entry into force of the Agreement Establishing the WTO. Given that government contracts are extremely important in certain sectors (e.g., construction), the absence of provisions could create distortions in trade in services.

However, the revised Government Procurement Agreement (GPA), Annex 4 of the Agrement Establishing the WTO, which entered into force in January 1996 but applies only to signatories, in principle prohibits preferences for domestic firms by imposing GATT's national treatment and nondiscrimination principles. This way, foreign suppliers and foreign goods and services should be given no less favorable treatment in government procurement by the coverved entities than national suppliers and goods and services. The entities covered by the GPA consist of central government entities (e.g., Ministries), sub-central entities e.g., Provinces) and all other entities, including public utilities (Hoekman, 1995, p. 39). The GPA scope was enhanced in the Uruguay Round not only by the entities covered but also by the inclusion of services and construction contracts. Procurement of the latter product categories is covered only for listed entities, and then only for those services that are explicitly listed in annexes to the GPA for each signatory (Hoekman, 1995, p. 39).


Bernard Hoekman, Trade Laws and Institutions: Good Practices and the World Trade Organization, op.cit., pp. 38-39; Bernard Hoekman and Pierre Sauvé, Liberalizing Trade in Services, World Bank Discussion Paper 243, Washington D.C., World Bank, 1994, pp.52-53; The Outcome of the Uruguay Round: An Initial Assessment. Supporting Papers to the Trade and Development Report 1994, New York, (Sales No.: E.94.II.D28), 1994, pp. 160-161; Handbook, 1994, op.cit., pp.121-122.



Regarding subsidies destined towards service industries, none of the agreements examined by Hoekman and Sauvé (1994, p.52) imposes significant disciplines, with the exception of EC. For instance, Article XV of the GATS on subsidies states that while Members to the Agreement recognize that in certain circumstances subsidies may have distortive effects on trade in services, they shall enter into negotiations with an aim to developing the necessary multilateral disciplines to avoid such effects. Though the Protocol on services of the ANZCERTA prohibits new exports subsidies or measures which have a direct distorting effect on trade, it does not address more general subsidies insofar as they affect services. The FTA and the NAFTA do not impose disciplines on services-related subsidies.


This document (DOC.CEPAL/ALCA/GTS/001) was prepared by the International Trade Unit of the International Trade, Finance and Transport Division, to be presented at the Second Meeting of the FTAA Working Group on Services, Santiago, December 2-3. It has not been subjected to editorial revision.

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