Thursday, July 19, 2012

China, electronic payments and WTO - Who won?

The WTO Dispute Settlement Mechanism's first forays into the financial payments sector were made with a Panel report on the electronic card system of China in relation to China's GATS obligations. It was widely reported here and here.The U.S. had challenged certain aspects of the electronic card payment system of China at the WTO. The Panel Report was out on the WTO website.

The Panel seemed to have ruled in the favour of the U.S. In a detailed over 100 page Report the WTO Panel has discussed in detail the nature of payment transactions, General Agreement on Trade in Services (GATS) obligations in relation to electronic payment systems, China's specific obligations under GATS and the violation of GATS obligations of market access and national treatment by China in this regard.This Panel report also is one of the few reports that discusses in detail the interpretation of certain provisions of the GATS.

The main U.S. challenge is found in para 7.208 of the Panel report:

"7.208 The United States has identified a series of six requirements, or measures, which it claims operate alone or in combination to impose market access restrictions and national treatment limitations on service suppliers of other WTO Members seeking to supply EPS in China.  The United States argues that these measures are maintained through a series of legal instruments.  As will be discussed in detail in Sections VII.F and VII.G, the United States asserts that these six requirements are inconsistent with China's obligations under Articles XVI:1 and XVI:2(a), and Article XVII of the GATS.
7.209    The United States has alleged the existence of the following requirements
(a)        Requirements that mandate the use of CUP and/or establish CUP as the sole supplier of EPS for all domestic transactions denominated and paid in Renminbi (RMB) (hereafter referred to by the Panel as "sole supplier requirements");
(b)        Requirements on issuers that payment cards issued in China bear the CUP logo ("issuer requirements");

(c)          Requirements that all ATMs, merchant card processing equipment and POS terminals in China accept CUP cards ("terminal equipment requirements"); 

(d)         Requirements on acquiring institutions to post the CUP logo and be capable of accepting all payment cards bearing the CUP logo ("acquirer requirements");
(e)      Prohibitions on the use of non-CUP cards for cross-region or inter-bank transactions ("cross-region/inter-bank prohibitions"); and
(f)        Requirements pertaining to card-based electronic transactions in China, Macao, and Hong Kong ("Hong Kong/Macao requirements")

7.210     The United States considers that these requirements are maintained through a series of Chinese legal instruments that are themselves identified in the United States' request for establishment of a panel."
The Panel Report contains a detailed analysis of China's financial payment sector, it's GATS obligations and the contravention of GATS obligations. Rejecting many of the U.S.arguments that China's measures were inconsistent with GATS obligations (pertaining to monopoly and market access) the Panel concluded that China maintains a requirement that all payment cards issued in China must bear the “Yin Lian”/“UnionPay” logo and be interoperable with that network, a requirement that all terminal equipment in China must be capable of accepting “Yin Lian”/“UnionPay” logo cards, and finally, a requirement that acquiring institutions post the “Yin Lian”/“UnionPay” logo and be capable of accepting all payment cards bearing the “Yin Lian”/“UnionPay” logo.  The panel found each of these requirements to be inconsistent with China's mode 1 and mode 3 national treatment obligations under Article XVII of the GATS.  It found, through these requirements, that China modifies the conditions of competition in favour of CUP and therefore fails to provide national treatment to EPS suppliers of other Members, contrary to China's commitments.

The Report itself requires a number of readings since it dwells into the details of China's financial payment system regulations as well as GATS obligations. I will leave that to the experts. This blogpost does not attempt to decipher the decision. That requires far more expertise and analysis.

Some initial thoughts on the Panel Report, though:

1. This Report is another classic case of threadbare analysis of the trade/service (electronic payment system, in this case) and applying legal principles enshrined in the multilateral rules to business realities. It reinforces the point I often make of multidisciplinary teams required to represent a country's interests - in this case, ideally, the team representing both countries should have consisted (I am sure they would have) of trade lawyers, economists, financial sector experts, financial payment system experts, technologists and the government's trade policy specialist. The expertise required is so multidisciplinary that it must involve a combined effort. Just as negotiating teams should be multidisciplinary, teams working on the dispute resolution side should also be multidisciplinary.

2. The Panel responding to a claim of the U.S. regarding establishing the monopoly status of China's agency, signified the importance of economic data and evidence in Panel reports:
"7.504  Nevertheless, in the absence of specific legal provisions designating a company as the single supplier in a market, the United States in our view needs to provide evidence to sustain the assertion that the instruments produce economic effects that are so significant that they preclude other EPS suppliers from operating in the market. In the present case, we have no evidence, e.g. economic analyses of profitability, price-cost margins, or demand elasticity, including in comparison with other markets, that would allow us to assess whether indeed the instruments at issue make it economically unviable for other EPS suppliers to establish themselves and operate in China. We note that parties in previous disputes have submitted economic analyses and econometric studies when alleging actual economic and trade effects of particular measures, and to support allegations that those effects are attributable to the measures. Additional information on the conduct of CUP (e.g. price discrimination or evidence that CUP charges different customers different prices for the same service) could have assisted us in our analysis, but no such information was submitted.   We are aware that relevant data may be difficult to obtain.  However, given the lack of concrete evidence, we are unable to conclude that CUP is the sole supplier.  Assertion without more is simply not enough."
The importance of economic analysis, econometric evidence and use of economic principles in interpreting the law is abundantly obvious. This underscores the other point I have often made on this blog that WTO law is a heady amalgam of law and economics. Using one to the exclusion of the other is counterproductive.

3. Who won this case? As is increasingly becoming common practise in WTO disputes, bothcsides claimed victory. The USTR promptly announced that the U.S. had prevailed in the WTO:

"“This decision will help U.S. companies and increase American jobs as a more efficient credit and debit payment system in China enables consumers to buy more goods, including quality, made-in-America products,” said Ambassador Kirk. “The WTO panel agrees that China’s pervasive and discriminatory measures deny a level playing field to American service providers, which are world leaders in this sector. The panel also found that China has entrenched the market dominance of its own company, China Union Pay (CUP), and distorted competition in China to the detriment of U.S. providers. Open financial services markets are critical, and China should honor its WTO commitments and eliminate this discrimination.”
China, on the other hand, retorted that WTO had rejected many of U.S.'s contentions regarding monopoly status of China UnionPay while remaining silent on the violation of its GATS obligations.

4. It is certain that both parties would appeal to the Appellate Body of the WTO. Compared to other long pending cases (Airbus-Boeing dispute), this may see the light of day earlier.

5. This is the first time the WTO has decided on a financial sector policy measure - electronic payment systems. In terms of the multilateral rules, it is a service and countries have obligations under GATS as per their agreed schedule commitments. Eyes on Trade has warned of an impending onslaught domestic policy space in the critical financial sector.

"The final takeaway from the ruling, in addition to what we've laid out above: this case fails to resolve the major controversies about financial services regulation and the GATS. The panel did not meaningfully delve into the so-called prudential measures defense, or the provisions that explicitly deal with capital controls. As such, the allowable policy space for financial re-regulation is still a major question mark."

6. Another aspect that comes to the fore in this case is the protection of "national interest". Here, the interest of electronic payment companies like Visa and Mastercard headquartered in the U.S. and U.S. national interest were perceived to be one. Thus, issues of market access or alleged unfair treatment for these companies in China was taken as affecting U.S. national interest and hence the dispute at the WTO. The affecting of business interests of these companies and the rights of the U.S. under the WTO were one and the same. As the USTR website said:
"Most of the world’s top providers of electronic payment services for credit and debit card transactions are headquartered in the United States. By industry estimates, the U.S. stands to gain 6,000 jobs related to EPS."
Are there lessons for other countries to align "national interests and national business interests at multilateral fora?

The controversy over this Panel Report will not die out soon. It will be appealed against, dissected, reviewed, criticised in the coming days. It will also be critically analysed in the context of financial sector domestic regulatory space as against multilateral trade rules. How far should the adjudicative body go and what are the limits to sovereign power. It will also bring the GATS into special focus with its quagmire of commitments, modes and rules. All in all, interesting times for legal interpretation and judicial discourse in international trade law.

No comments: