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2020 | OriginalPaper | Chapter

Services Liberalization by Sub-Central Entities: Towards Deeper Commitments?

Author : Johanna Jacobsson

Published in: Coherence and Divergence in Services Trade Law

Publisher: Springer International Publishing

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Abstract

The chapter addresses an issue that has so far been left to little attention in literature dealing with international trade in services. It asks how services liberalization is conducted by countries that have a federal structure and where services are not regulated only on the level of the central government but also by various sub-national entities. Some of the most powerful nations, such as the United States (US) and Canada, have divided competencies over services regulation. So does the European Union (EU) which can be compared to federal states in its external trade relations due to its common trade policy. The chapter analyses the different ways in which federations and other federal-type structures engage in international services liberalization by using the EU, the US and Canada as examples. In order to shed more light on their treaty practice and to see to what extent sub-central levels of government appear in their services schedules, the chapter reviews the GATS commitments as well as the services commitments that the EU, the US and Canada have made in some of their recent PTAs. The chapter shows that there are crucial differences in the way that these federal entities engage in international services liberalization. The chapter also draws more far-reaching conclusions on the approach to take towards liberalization commitments by sub-central levels of government and assesses the effect that they have, or rather the effect that the lack of such commitments has, on the liberalization levels reached in modern trade agreements.

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previous chapter Coherence and Divergence in Agreements on Trade in Services: A Drama in Three Acts

next chapter Disciplines on Domestic Regulations Affecting Trade in Services: Convergence or Divergence?

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See Press Release “European Union and United States to launch negotiations for a Transatlantic Trade and Investment Partnership”, available http://trade.ec.europa.eu/doclib/press/index.cfm?id=869, 13 February 2013.

Three-level government (federal, state/provincial and local government) is common to all federal systems; however, there are varieties in the place and role of local government. The impact of regional and local government to international services trade is particularly relevant in the case of federal states but may arise also in the case of unitary states where certain regulatory powers are given to local levels of government. For an overview of the role of local government in federal states, see Steytler (2005).

There is plenty of literature on the question of the extent to which the EU can be compared with federations. The fragmented polity of the EU has often been viewed as exceptional in terms of political development. That distinction, however, is increasingly challenged by scholars who choose to focus on systematic comparison between the EU and federal states. An increasing amount of research spanning across comparative politics, public and constitutional law and international relations no longer treats the EU as sui generis. See references in Egan (2015), p. 3. On the EU as a federal-type polity, see Schütze (2009) and Cloots et al. (2012). Much of the research compares the EU and the US. See e.g. Menon and Schain (2006).

From climate change and renewable energy to international trade, subnational governments are increasingly active in tackling matters of international concern. Meyer notes that 41% of the claims brought under the investor-state dispute settlement (“ISDS”) provisions of NAFTA have challenged subnational government action. Canada, the most frequent respondent under NAFTA Chapter 11, also has the highest percentage of claims involving local action. 22 of its 38 claims involve local action, a remarkable 58% of claims. The WTO has also seen its share of claims challenging local action. Out of 502 cases filed to date, at least 41 have challenged subnational action (including claims against EU Member States)—a bit more than 8% of cases. See Meyer (2017), pp. 276–277.

“Technical Summary of Final Negotiated Outcomes, Agreement-in-principle, documents summarizing the important negotiated outcomes of the Canada-European Union Comprehensive Economic and Trade Agreement as of October 18, 2013”, The Government of Canada, available at http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/ceta-aecg/ceta-technicalsummary.pdf, p. 13.

See p. 12 of KORUS, Annex I, the schedule of the United States and Appendix I-A to the same schedule. Page 12 includes the following statement: “For purposes of transparency, Appendix I-A sets out an illustrative, non-binding list of non-conforming measures maintained at the regional level of government”.

P. 12 of KORUS, Annex I, the schedule of the United States. The exempted measures are “All existing non-conforming measures of all states of the United States, the District of Columbia, and Puerto Rico”. In addition to the KORUS, a similar exclusion is present in all US EIAs that have been concluded in accordance with negative listing (all agreements have been concluded after the entry into force of the GATS). The service schedule of the US-Jordan FTA of 2010 is the only US EIA that follows a positive listing model and appears to reflect the US GATS commitments to a large extent.

Hennig J, “Under Pressure To Show TTIP Progress, U.S., EU Focus On Market Access”, Inside U.S. Trade—04/18/2014, Vol. 32, No. 16 (posted 17 April 2014). According to the news piece, an EU source signaled that the list demanded by the EU also served a tactical reason: once the US had admitted not being able to provide the list, it would give Brussels a free pass to push back on US demands. At that point, the negotiations could begin on services, the source had said.

See e.g. Australia-United States FTA (2005), Schedule of Australia, Annex I, p. 1. In its Annex II, Australia reserves the right to adopt or maintain any measure at the regional level of government that is not inconsistent with Australia’s obligations under Article XVI of the GATS. This is similar to the US and the earlier Canadian practice, even though the Canadian reservation applies to the regional level only. With regard to Mode 4 commitments, the reservation applies also to the central government (Australia’s Annex II, p. 2).

“Measures” by Members means measures taken by “central, regional or local governments and authorities” (Article I:3(a)(i)).

See e.g. the horizontal commitments in Canada’s GATS schedule. For “commercial presence”, Canada has inserted the following limitation on national treatment: “Federal and sub-central tax measures (generally pertaining to small business) may result in a difference in treatment in respect of all or some “Canadian controlled private corporations” as defined by the Income Tax Act”. Canada, Schedule of Specific Commitments, GATS/SC/16, 15 April 1994.

One example are the Åland Islands that form an autonomous region in Finland. In contrast to other Finnish regions, Åland enjoys a high degree of home rule. Limitations to the possibility to supply services in Åland are included in the horizontal commitments of Finland. See Draft consolidated GATS Schedule, Communication from the European Communities and its Member States, S/C/W/273, 9 October 2006. The commitments of Finland were upon its accession to the EU in 1995 included in the consolidated EU schedule but are based on the national GATS Schedule of Finland, GATS/SC/33, 15 April 1994.

For example, in the area of education the regional laws are almost identical to the federal laws. In the area of culture, some more differences exist, reflecting the cultural diversity of the country.

About the poor level of liberalization in the WTO Members’ GATS commitments, see e.g. Adlung and Roy (2005).

Research has shown that the market access commitments in EIAs tend to go significantly beyond the level of liberalization in the same countries GATS commitments. See Roy (2014). However, sub-central levels of government have not been addressed in most studies.

The US-Jordan FTA (signed in 2000) follows a positive listing in its services schedules. However, the commitments appear to be copied from both states’ GATS commitments of 1994. In the case of Jordan, its schedule includes some improvements to its GATS commitments.

In general sense, a “grandfather clause” is an exemption that allows an entity to continue with activities or operations that were approved before the implementation of new rules, regulations or laws. See Investopedia: https://www.investopedia.com/terms/g/grandfatherclause.asp. On the use of the grandfathering clause, see e.g. Adlung and Carzaniga (2009).

In the case of the US, the only exception is the US-Jordan EIA. However, the US commitments are copied from its GATS commitments and include the same sub-central measures as its GATS schedule.

We checked this by going through all EIAs signed by the US and Canada. The US EIAs are available on the website of the USTR: https://ustr.gov/trade-agreements/free-trade-agreement. The US has PTAs in force with 14 countries. 13 of them include a services agreement. Sub-central non-conforming measures are exempted through a blanket reservation included in Annex I of the agreements. The Canadian EIAs are available on the website of the Government of Canada: https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc. Canada has 14 PTAs in force. Nine of them include an EIA. In some of the Canadian EIAs, existing non-conforming measures applied by Canadian sub-central governments are exempted already in the text of the agreement (see e.g. Art. 10.07 “Reservations” of the Canada-Panama FTA). In others, they are exempted through a separate clause in Annex I (e.g. Canada-Chile FTA, Canada’s Annex I).

The chapter reviews only a couple PTAs but the author has reviewed also earlier PTAs of US and Canada and found that they very limited references to sub-central entities.

However, the commitments for the temporary entry and stay of natural persons for business purposes (the Mode 4 category of CETA) are described in positive manner, sector by sector. See Annexes from 10-B to 10-E of CETA. The negatively schedules reservations apply to Cross-Border Trade in Services (modes 1 and 2) and Investment (covering mode 3 but also non-services sector investment).

Walker J, Negotiation of Trade Agreements in Federal Countries, SPICe Briefing, the Scottish Parliament, 17 November 2007, available at https://sp-bpr-en-prod-cdnep.azureedge.net/published/2017/11/17/Negotiation-of-Trade-Agreements-in-Federal-Countries/SB17-79.pdf.

The provision can be contrasted with the obligation for WTO Members to take “such reasonable measures as may be available to it” to ensure the observance of the GATS disciplines by regional and local governments and authorities and non-governmental bodies within their territory (Art. I:3(ii)). The language in CETA appears stronger as it requires each Party to “ensure” compliance by taking any “necessary measures” without any mention of them being “reasonable” or “available” to the Party.

NAFTA does not include a list of NCMs for the Temporary Entry of Business Persons but the commitments for them are included in annexes and appendixes directly under the relevant Chapter Sixteen. The commitments appear to apply across all levels of government of all three Parties. There do not seem to be differences in the relevant immigration categories across the different levels of government of the three states.

The side letters of the US, Canada and Mexico are available on the webpage of the NAFTA Secretariat: https://www.nafta-sec-alena.org/Home/Texts-of-the-Agreement/North-American-Free-Trade-Agreement. See all three letters in Annex I, under “Non-Conforming Measures” placed at the top of the page below “Schedule of Canada”. Each state’s side letter says that, “for transparency”, attached are documents that list NCMs maintained at the provincial and territorial level. However, such documents were not attached to the publicly available copies of the original side letters (which are scanned fax documents) and we were not able to locate them elsewhere either. The lists are unlikely to have been very detailed considering that later lists included by the US and Canada for “transparency” purposes in their FTAs with Korea are very vague and non-binding illustrations of the types of measures applied.

The situation has not got any easier over the years. The recently negotiated United States-Mexico-Canada Agreement (USMCA), meant to replace NAFTA, also sets out a reservation for all existing sub-central NCMs. No lists of such measures are available in the version that is currently available on the webpage of the USTR. The lack of legally binding and exhaustive lists of sub-central measures is probably due to a variety of reasons—economic and political, but probably also technical. Going through all such measures may be a Herculean endeavour indeed, as noted by the Obama administration during the TTIP negotiations. See Hennig J, “Under Pressure To Show TTIP Progress, U.S., EU Focus On Market Access”, Inside U.S. Trade—04/18/2014, Vol. 32, No. 16 (posted 17 April 2014).

P. 12 of KORUS, Annex I, the schedule of the United States and Appendix I-A to the same schedule.

The same list was put forward along the US services commitments in the TPP. The original text and schedules of commitments is provided on the website of the USTR “for reference purposes”: https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text.

In the original TPP agreement, the information can be similarly found in Annex I, the schedule of the United States and Appendix I-A to the same schedule, at page 16. The US has withdrawn from the TPP but the originally negotiated commitments are available at https://ustr.gov/trade-agreements/free-trade-agreements/trans-pacific-partnership/tpp-full-text.

In the context of the TiSA negotiations the same pressure is visible in the bilateral market access request by the EU to the US. The EU wanted the US to update its TiSA offer by providing full transparency for sub-central measures. As an alternative option, the EU requested the US to provide transparency related to local content in all sectors where the US has MA commitments and to take a commitment to provide the remaining information on transparency with respect to other sectors after TiSA enters into force. See “TiSA – bilateral market access request by the European Union” (June 2016), Copy for the Council and the European Parliament. Available at: https://www.bilaterals.org/?tisa-bilateral-market-access&lang=en (source: Wikileaks).

These high-level local governments are Seoul Special City, six metropolises, eight provinces, and Jeju Special Self-Governing Province. See the webpage of the Korean Culture and Information Service: http://www.korea.net/Government/Constitution-and-Government/Local-Governments. Korea’s Annex I in KORUS reveals some sub-central measures applied on local levels of Korean government.

P. 8 of Appendix II-A of Annex II-US.

It is worth noting that the US has included a similar reservation to MA in all of its EIAs since the conclusion of the GATS. The reservations are typically included at the end or towards the end of the US Annex II. The formulations differ to some extent, but all set the US GATS commitments as the baseline of its MA commitments under the EIA.

Appendix II-A starts by the following statement: For the following Sectors, U.S. obligations under Article XVI of the General Agreement on Trade in Services as set out in the U.S. Schedule of Specific Commitments under the GATS (GATS/SC/90, GATS/SC/90/Suppl.1, GATS/SC/90/Suppl.2, and GATS/SC/90/Suppl.3) are improved as described.

P. 11 of Appendix II-A of Annex II-US.

It is noteworthy that the NT obligation sets as a point of comparison the service suppliers of the Party of which the sub-central entity forms a part, not to the service suppliers of the sub-central entity itself. As noted by Carlo Cantore regarding a similar NT clause in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), this formulation transforms the NT obligation into a type of “most-favoured region” obligation. See the chapter by Cantore in this volume.

Footnote 2 to the Appendix notes that the document is provided for “transparency purposes only”, and is “neither exhaustive nor binding”. Furthermore, it states that the information contained in the document is drawn from Canada’s May 2005 Revised Conditional Offer on Services (TN/S/O/CAN/Rev.1, 23 May 2005).

See Annex I of Canada to the CPTPP, available at https://international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/cptpp-ptpgp/. At the time of writing, the agreement had entered into force for seven of the 11 states that signed it (including Canada). The original US commitments under the draft TPP are available on the webpage of the USTR.

Many of the new commitments consist of the removal of discriminatory MA requirements, such as commercial presence requirements or foreign ownership restrictions. Several removed restrictions seem to apply to NT, rather than MA, e.g. those that remove citizenship or residence requirements. Therefore, even if the list is provided as an improvement to Canada’s MA commitments as compared to the GATS, it does also provide for a limited number of new NT commitments for Canadian provinces.

Article 9.6 and Annex 9-A.

Also Mexico has done the same.

The difference between Annex I and Annex II measures is that existing measures that do not comply with the disciplines of the services agreement must be listed in Annex I and cannot be made more restrictive. Annex II includes a list of measures for which the state wants to maintain the freedom to introduce them at a later stage. Either way, a measure must be listed under one of the annexes to be upheld. Typically, an Annex I measure needs to be amended, continued or renewed in order to be validly upheld. If it is discontinued, the trading partner gets to benefit from autonomous liberalization and the measure cannot be re-introduced at a later stage, unless it has been included also in Annex II.

See the European Commission’s information page on the EU-South Korea Free Trade Agreement, available at http://ec.europa.eu/trade/policy/countries-and-regions/countries/south-korea/.

See Langhammer (2005), p. 311, who notes that given the significant amount of national sovereignties that remain in the services trade amongst EU Member States, the EU is not yet even a free trade area.

For an overview of the sub-central participation of the Canadian provinces and a comparison between sub-national perspectives in Canada and the EU in the context of the CETA negotiations, see Omiunu (2017).

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Title: Services Liberalization by Sub-Central Entities: Towards Deeper Commitments?
Author: Johanna Jacobsson
Publisher: Springer International Publishing
Book: Coherence and Divergence in Services Trade Law
Print ISBN: 978-3-030-46954-2

Electronic ISBN: 978-3-030-46955-9

Copyright Year: 2020
DOI: https://doi.org/10.1007/978-3-030-46955-9_3