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General Agreement on Trade in Services (“GATS”)

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For the outsourcing industry, the General Agreement on Trade in Services sets the key framework for enabling global access to local markets. It covers the “supply of service”, which is defined to include the production, distribution, marketing, sale and delivery of a service. GATS, Art. XXVIII(b).

Key Trade Promotion Principles. The GATS includes core provisions guaranteeing Most-Favoured-Nation treatment to foreign service providers and transparency in governmental regulation of trade in services. “In sectors where specific commitments are undertaken, each Member shall ensure that all measures of general application affecting trade in services are administered in a reasonable, objective and impartial manner.” GATS, Art. VI. Such principles apply to sectors in which the member state makes a commitment, not all sectors. Exceptions apply in all sectors to protect the local government’s national interests in taxation, security, safety, privacy and protection of the “public order,” as discussed below.

Anti-circumvention by Governments. There are cases in which a member state may deny benefits under GATS. A member state may deny benefits “for the supply of a service, if it establishes that the service is supplied from or in the territory of a non-Member or of a Member to which the denying Member does not apply the WTO Agreement.” GATS, Art. XXVII. A member state may also deny benefits “to a service supplier that is a juridical person, if it establishes that it is not a service supplier of another Member, or that it is a service supplier of a Member to which the denying Member does not apply the WTO Agreement.” Id. The GATS establishes a Council for Trade in Services to receive notifications of regional trade agreements and review the implementation of such agreements and other issues involving trade in services.

Anti-Circumvention by Service Providers. The rules under GATS encourage service providers to establish local subsidiaries rather than branch offices. The GATS applies the notion of nationality to juridical entities. Thus, an entity established under the laws of a member state is normally considered to be a national of that state, regardless whether it is owned 100% by third-country nationals, provided that it engages in substantive business operations in that territory. GATS, Arts V(6) and XXVII(m). Thus, a branch office of a service provider from a non-member state cannot enjoy the benefits of GATS, while a subsidiary can.

Educational Equivalency and Standards for Regulated Professions. The GATS does not require any government to recognized, for the purposes of the fulfilment of local governmental standards or criteria for the authorization, licensing or certification of services suppliers, the equivalency of any the education or experience obtained, requirements met, or licenses or certifications granted in a particular country. However, if a member state elects to adopt such an equivalency, the member state must accord recognition in a manner that does not discriminate between countries in the application of its standards or criteria for the authorization, licensing or certification of services suppliers, and for such cases it cannot use licensure as a disguised restriction on trade in services. In short, national prerogatives are maintained in their absolute discretion unless a member state elects to grant equivalency.

Foreign Service Provider’s Access to Utilities such as Telecom. Without specifically mentioning telecom, GATS also adopts a rule that local monopolies (or small groups of service providers) cannot be allowed to act in violation of the member state’s general commitments to MFN and non-discriminatory treatment. “Each Member shall ensure that any monopoly supplier of a 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 and specific commitments.” GATS, Art. VIII.

Antitrust and Competition Law. GATS also requires member states to enter into consultations if another member state seeks to enforce the member state’s commitment not to allow “certain business practices of service suppliers” that “restrain competition and thereby restrict trade in services.” GATS, Art. IX.

Governmental Procurement. The GATS adopts commitment by member states (regardless whether they adopt the Agreement on Government Producement, that the “laws, regulations or requirements governing the procurement by governmental 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 sale.” GATS, Art. XIII.

Exceptions. Individual member states retain extensive latitude in regulation local business for purposes of public policy, safety, privacy, consumer protection and taxation. Such local autonomy is limited by the principle that such regulation cannot be used as a hidden restraint on global services. Any debate about the regulation of foreign service providers must therefore reflect the many exceptions that the GATS (as well as other WTO agreements) reserve to the discretionary regulation by member states. To understand the scope of such reserved rights, it is worthwhile listing the exceptions in the language of the GATS convention:

ARTICLE XIV: Exceptions

Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures:

(a)          necessary to protect public morals or to maintain public order; ¹

(b)         necessary to protect human, animal or plant life or health;

(c)          necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement including those relating to:

(i)          the prevention of deceptive and fraudulent practices or to deal with the effects of a default on services contracts;

(ii)         the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts;

(iii)        safety;

(d)          inconsistent with Article XVII, provided that the difference in treatment is aimed at ensuring the equitable or effective ² imposition or collection of direct taxes in respect of service suppliers of other Members; [Emphasis added.]

Practical Impact on Types of Outsourced Global Services. The GATS is a cornerstone for promotion of global services. However, it has many policy exceptions, and not all services are treated equally. Certain services affect national sovereignty and security, such as management of airlines, ports, transportation generally, as well as financial institutions, banks, mining and extractive resources. Hence, there is more freedom in providing “back office” services than in providing services that normally require regulation. In short, GATS and other WTO agreements promote back office services, and service providers would have to submit to local regulation if they wanted full privileges of conducting cross-border services in a regulated industry.

References:
www.wto.org
www.wipo.org