A GATS dispute after a long time

News of a WTO dispute concerning General Agreement on Trade in Services (GATS) after a very long time trickled in with Russia seeking consultation with EU on the "Third Energy Package".  More on that here.

"The measures concern the production, supply and transmission of natural gas or electricity, the alleged discriminatory certification requirements in relation to third countries in this sector and the requirement in respect of granting access to natural gas and electricity network capacity by transmission service operators. 

According to the Russian Federation, these measures are inconsistent with a number of obligations and specific commitments of the European Union and constitute an infringement of these obligations and commitments.

The inconsistencies alleged by Russia refer to the GATS (General Agreement on Trade in Services), the Agreement on Subsidies and Countervailing Measures and the Agreement Establishing the WTO."

Russia, being a new member of the WTO, seems to be initiating its forays into dispute settlement. The dispute being one relating to EU's commitments under GATS caught my attention. There are very few GATS disputes as compared to the other WTO Agreements.

Some chance of GATS jurisprudence evolving?

Is it time for GATS 2.0?

While the GATT and other WTO Agreements deal with the trade in goods, the General Agreement on Trade in Services (GATS) deals with the trade in services. It is the multilateral agreement dealing with the trade in services with individual member countries underrating varying commitments in different service sectors.

Now there is news that several countries are undertaking an exercise to enter into a new international services agreement to go beyond the GATS to further liberalize the services sector. The failure of the Doha round to achieve further liberalization of the services sector is put forth as one of the reasons for this move. It is another example of the "plurilateral" route that many countries are taking to international agreements with the failure of multilateralism. The USTR website explains the rationale for seeking fresh negotiations in this area with 20 other trading partners quoting USTR Ambassador's letter seeking fresh negotiations. Coverage of new services not covered under GATS, ensuring greater transparency and predictability in regulations covering services of trading partners and addressing new issues that arise int he global market place and the way services trade is conducted are offered as the reasons for entering into a new agreement apart from increasing access to markets for national services sectors. Stewart and Stewart summarizes the move well in this analysis. Peterson Institute for international Economics in this paper has suggested a new framework for an international agreement on services.

Will this be a movement towards GATS 2.0? While the US intends to enter into negotiations with 20 trading partners initially (Australia, Canada, Chile, Chinese Taipei, Colombia, Costa Rica, European Union, Hong Kong, China, Iceland, Israel, Japan, Korea, Mexico, New Zealand, Norway, Pakistan, Panama, Peru, Switzerland, Turkey), the notably absentees in this initial round are Brazil, Russia, India and South Africa. Will we see more countries joining the bandwagon or will it remain a plurilateral agreement without many emerging economies? What implications would this have on developing economies that have strong service sectors? It is clear that the US is leading this endeavour of a new agreement - a classic case where liberalization of the services regulation is linked to increase one sports of their services worldwide. This letter of the USTR Ambassador is clear about the intention of entering into new negotiations - more access to markets and more jobs at home.

While change in the way trade is conducted often does not get reflected in existing agreements making agreements not only obsolete but requiring change, what is the best route to go about it? Is this new international agreement in services another example of the failure of the WTO to address the realities of trade? Is it a triumph of plurilateralism over multilateralism? How should the WTO respond? A good analysis of whether the agreement should be within or outside the WTO and its implications is found here. How should developing countries outside the initial negotiations respond? Would there be a coalition of developing economies against this negotiation or will they eventually join viewing it as beneficial? Countries strong in the services sector would have to analyze their relative strengths and weaknesses and potential for their national service sector with increasing market access.

Antigua, gambling and a dispute

The US-Gambling case (DS 285) more popularly known as the Antigua case makes for an interesting case study of a WTO dispute settlement case.Yet another Caribbean country taking on the US, very similar to the rum cases that I had blogged about here. While I am not going into the legal aspects of the GATS violations in this blog post (it basically related to the interpretation of commitments that the US had undertaken under the GATS), the case brings to the fore many aspects of the nature of the dispute settlement process itself. For a brief summary of the dispute see this synopsis here.The AB essentially held that US measures of totally prohibiting online betting and gambling services of Antigua were inconsistent with the obligations it had undertaken under GATS.

Some observations about the dispute:

1. Long standing dispute - The request for consultations by Antigua was made in 2003. It is 2013 and the dispute has not reached a final conclusion to the satisfaction of the complainant even after the AB had ruled in its favor in 2007. This raises the issue of the efficacy of the dispute settlement system to provide efficacious remedies in a time-bound manner.

2. Evidence of a rule-based system - The case has been heralded by some as evidence that both smaller and large trading countries have equal rights in the system. As mentioned by Antigua's lawyer here:

"With Antigua, it’s $21 million. Maybe with China it’s going to be U.S. $21 billion. One of the messages we want to get across is that the WTO was sold to smaller countries as a level playing field and a way for them to expand the reach of commerce, subject to a set of rules that apply to everybody. I think more than anything else, this case is about fairness. The WTO is supposed to be fair.”

This goes back to the point that the dispute settlement mechanism, which is considered as as the crown jewel of the the WTO system, is based on rules and not on power politics. Countries irrespective of their trading and geo-political strength can challenge larger, more powerful trading partners at the dispute settlement. However, the inability of Antigua to meaningfully implement the WTO decision raises questions about the fairness of the system. Of what use is a rule-based system if the complainant cannot implement a decision or bear the fruits of it. Is the threat of other sanctions or the reality of trade much more overbearing that a judicial decision?

3. Landmark GATS case - This case is also considered as one of the few (there are only 23 cases that cite the GATS Agreement out of the over 400 WTO cases) cases where the commitments under the GATS were scrutinized by the dispute settlement mechanism. With services trade gaining in importance, this percentage is definitely going to grow.

4. Cross-Retaliation - The WTO has authorized Antigua to retaliate against the U.S. due to the latter's failure to comply with the decision. Antigua has threatened to retaliate in another sector - intellectual property - by ignoring copyrights of US holders by selling material on a website.This is an interesting strategy of retaliating in a sector not a subject matter of the dispute (the case was about GATS commitments, but the retaliation is proposed under copyrights) but which is a very strongly guarded right in the US. Will this strategy be used by other countries in their disputes? What implications does the suspension of obligations under TRIPS have for the legal framework that protects these rights? Shamnad Basheer has this detailed study of how a cross-retaliation model can be used by developing countries to ensure compliance in WTO cases. The USTR seemed concerned at the prospect of a suspension of obligations under TRIPS:

"The United States is concerned, however, that the Arbitrator agreed with Antigua’s request to suspend WTO concessions not just with respect to services, but also with respect to intellectual property rights (IPR).  Any authorization pursuant to the award would be strictly limited to Antigua; every other WTO Member remains obliged to protect U.S. IPR under WTO rules, including enforcement against any IPR-infringing goods.  Moreover, even with respect to Antigua, it would establish a harmful precedent for a WTO Member to affirmatively authorize what would otherwise be considered acts of piracy, counterfeiting, or other forms of IPR infringement.  Furthermore, to do so would undermine Antigua’s claimed intentions of becoming a leader in legitimate electronic commerce, and would severely discourage foreign investment in the Antiguan economy."

The Gambling case is an interesting case reflecting the many challenges that the dispute settlement mechanism faces. It also brings us back to the question as to what constitutes "compliance" in a case, which the US claims to be undertaking. We faced that in the long drawn Airbus-Boeing subsidies case too.

Shamnad Basheer has a great blogpost on the dispute on SpicyIP here.

For a different take, see Eyes on Trade blogpost which believes that this is yet another example of trampling of US domestic policy space by the WTO (after Tuna safe dolphins, COOL decision and Clove Cigarettes case) and it also sees "tiny" countries used as pawns by business interests to take on the major markets.

"The delicious and tsunami-scale irony is that now Antigua (population 88,000 and GDP $1 billion) is being "borrowed" by gambling interests to cross-retaliate against the United States - by removing intellectual property rights from U.S. products in the first use of such a sanction. Except, wait, didn't Ralph Nader warn against just this scenario of some commercial interest finding a tiny country to attack U.S. public interest policies back when the WTO was being debated?"

Another classic case study for the international trade law books?

Trade in services

The role of the services sector in the growth of an economy has been critical in recent years. In fact, many developing countries depend heavily on their services sector, as compared to manufacturing or agriculture, for exports, GDP growth and employment.

The World Bank blog had this piece on the importance and growth of the service sector in international trade. It highlights the potential of the services sector in employment creation in both the developed and developing worlds.

Sources of Job Creation in Developed and Developing counties

Source: Ghani et al

Except for a fall in 2008 due to the financial crisis, the growth of the services sector has been phenomenal.

"It is known that, after some income levels, services (tourism, health, education, and leisure-related activities) tend to rise as a proportion of households’ consumption baskets. Furthermore, on the production side, in the wake of the wave of restructuring, downsizing and all that corporate jazz of the eighties, sources of enhancing competitiveness have been found in divesting and contracting-out the provision of business, logistic and professional services once internalized by industrial firms. However, the deep transformation that new technologies of information and telecommunications have been bringing to a substantial range of services is yet to be widely realized. 

As Ghani et al. note, until recently “services were considered as menial, low-skilled, and low-innovation”, whereas now “the number of services that can be transported digitally is constantly expanding.” Modern services constitute sophisticated key components of value chains in agriculture and industry. They can also themselves be unbundled and broken down into value chains just like physical goods. In this context, the authors show that productivity – value-added per employee – growth in services has substantially outpaced that in industry, again in both developed and developing countries."

Stressing the importance of services led export growth, the importance of modernization and productivity in the sector has been brought out as a critical factor in the sustainability of the competitive advantage. The WTO has brought out a new interactive tool on international trade. This shows the growing importance of the services sector.With services being a small proportion of the total disputes brought before the dispute settlement mechanism of the WTO, the coming days will see an increase in its importance as well as probable disputes related to market access and other aspects of the commitments under the GATS.

GATS, electronic payments and country commitments

I have blogged about the China Electronic Payment Services case here and here. 

An ASIL Insight into the China Electronic Payment Services case by Panagiotis Delimatsis provides an overview of the implications of the WTO panel report on interpretation of various provisions of the General Agreement on Trade in Services of the WTO. The panel report as well as the commentary indicate the legal complexity and "country-specific" nature of GATS commitments.I am still very confused about the implications and import of this panel report. Concluding about the implications about the panel report, the author states:

"This case follows landmark decisions on the scope of GATS in US—Gambling and China—Publications and Audiovisual Products and is expected to further open China’s financial services market, benefiting American EPS suppliers in particular. Nevertheless, China will likely have several months to implement the Panel ruling. The Panel decision offered additional clarifications for the interpretation of Members’ Schedules of Specific Commitments under GATS. More importantly, as this case was not appealed, the Panel Report represents the only WTO dispute settlement ruling on the overlap in a Schedule of an  “Unbound” commitment (i.e., no liberalization) and a “None” commitment (i.e., full liberalization). The case confirms that the flexibility attributed to Members in drafting GATS Schedules can be a double-edged sword. At present, no clear solution exists to ensure predictability and security in the interpretation of GATS Schedules."

Unfortunately we will not have the Appellate Body opinion on this case as China has decided not to appeal.

Will require a few more decisions of the WTO panels and Appellate Body on the interpretation of GATS provisions to unravel the Agreement. India's challenge to the U.S. Visa rules perhaps can provide more answers?

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.

EU ETS and International Trade Law - Some scholarly analysis finally!

The IELP Blog  had references to scholarly analysis of the EU ETS Scheme by Lorand Bartels, Robert Howse and Henri Joel Nkuepo. I have blogged about this issue (with my limited understanding) ad nauseum here, here, here and here. They were "generalist" blog pieces which had not deep dived into the legal ramifications of scheme in the context of WTO Agreements. Finally some scholarly analysis of the EU ETS scheme is available. Does the EU ETS Scheme contravene WTO Agreements, especially the GATT and GATS obligations?

Lorand Bartels' study titled  " The Inclusion of Aviation in the EU ETS - WTO Law considerations" and Robert Howses' comments analyse threadbare the scheme in the light of the GATT and GATS provisions. Lorand Bartels comes to the conclusion that though the Scheme may violate provisions mainly related to Article XI 1 (being a quantitative restriction) and Article I 1 (Most Favoured Nation treatment), the exceptions provided in Article XX (b) and (g) of GATT related to protection of human, animal and plant life and conservation of exhaustible natural resource justified the scheme. Detailing the applicability  of the Chapeau in Article XX of GATT, the piece provides a glimpse of the complexity of interpretation of the provision in relation to discrimination and regulation. As regards GATS obligation it concludes that assuming that the Scheme is covered by GATS and is justiciable it would be most likely to be justified under Article XIV (b) of GATS related to environmental exceptions.

Robert Howse in his commentary agrees with the above analysis and states:

" The WTO is the one international regime that has addressed specifically in its jurisprudence the legality of unilateral measures to protect the environmental commons. In the landmark Shrimp/Turtle ruling the Appellate landmark Shrimp/Turtle ruling the Appellate Body held that such measures are in principle compatible with the legal framework of the World Trade Organization; in practice, to be legal, they must be applied in a non arbit- rary, non-discriminatory and non-protectionist manner. Thus, I cannot but agree with the ultimate conclusion of Dr. Bartels’ article that the coverage of non-European carriers under the ETS is compatible with WTO law, assuming that its application to those carriers is operated in an even-handed and non-protectionist fashion."

 Henri Joel Nkuepo strikes a slightly divergent note in his working paper "EU ETS Aviation Discriminates Against Developing Countries" where he argues that by treating the airlines of developed and developing countries on the same footing, the EU ETS Directive actually discriminates against the developing countries. Though Article XX of GATT allows for environmental concerns it cannot be discriminatory or arbitrary. Henri argues that the Scheme by not recognising the differences in circumstances of the developing and developed world in terms of their technological capabilities in the aviation sector has in fact discriminated against the developing countries of the WTO. Treating unequals on an equal footing is also discrimination.

The two papers and comment offer interesting, contrasting insights into the complex nature of EU ETS obligations in the context of international trade law. To what extent can the concerns of the environment "distort" trade? What measures can be considered adequate, reasonable and not being restrictive of international trade? Who decides this crucial question? Is it within the realm of WTO jurisprudence at all? Is it the preserve of domestic decision making? As long as the measure is not discriminatory and arbitrary, can it be justified on the grounds of the environment? Is this principle extendable to other non-trade issues - labour rights, human rights, democracy? For example, if a few developed countries, hypothetically, impose a tax on imported goods not complying with certain labour standards (equally applicable to local goods, hence non-discriminatory) which in effect cannot be complied with in the developing world or if complied with will lead to the imported good being non-competitive or inefficient, would this be justifiable under the Article XX exception of "public morals"? Is it opening the window to "disguised" protectionism? Are non-discrimination, non-arbitrariness and reasonableness the only tests to justify the measure? How should one interpret the Chapeau text of Article XX, GATT - "unjustifiable discrimination between countries where the same conditions prevail (emphasis added)"? Does it imply that when there are different conditions (including working conditions, technological advancement, cultural mores) a measure in a country, even on grounds of public morals or safety to human health, will be considered unjustifiably discriminatory? As Simon Lester said these are extremely complex issues and would, in all probability, require, a WTO dispute to get resolved!

General Agreement on Trade in Services - A need for a re-look?

Found this critique of the WTO Ministerial process in a piece that was critical of GATS rules and its possible impact on financial sector de-regulation in the context of the financial crisis. It argued for a renegotiation of the rules of GATS in order to ensure more domestic policy space in the financial sector in the context of the global financial crisis.

"Unfortunately, the official proceedings of the Ministerial Conference went on in Alice-in-Wonderland - style as if no financial crisis had ever happened.   Without anything real to deliver after more than ten years of negotiations on the Doha round, the WTO struggled to demonstrate its continued relevance by trumpeting the accessions of Russia and Samoa – even though accessions are rarely considered to be news at the Ministerial Conference level.  If the powerful countries in the WTO – and its Secretariat – continue to refuse to acknowledge that its extreme deregulation rules require revision, the WTO will continue to lose legitimacy on the international stage.

The good news is that Ecuador’s efforts did raise the profile of the issue among important WTO countries and that the Chair of the WTO’s Committee on Trade in Financial Services has agreed to keep Ecuador’s proposal for a review of the rules on the agenda for the Committee in 2012.  It will be important to watch closely to make sure that the U.S. and EU allow a robust review of the rules to go forward."

Does the GATS require an overhaul or does it give in its present form, sufficient policy space to deal domestically with financial crises?

Google, China, India and censorship!

With the topical issue of internet freedom and censorship soaring across the world including India, this paper on internet censorship in China and its consistency with its WTO obligations makes interesting reading. 

Henry S.Gao argues in this paper titled "Google's China problem: A case study on Trade, Technology and Human rights under the GATS"   that in the context of internet censorship of Google in China, the WTO would not be the right forum for the US (representing Google's interests) to address issue of "human rights" in the international trade law forum.Making an extensive, technical analysis of China's obligations under GATS (since internet service would be covered by this Agreement), the paper argues that the results of a WTO dispute will most likely not favour Google in this battle against Chinese internet censorship.

It would be interesting to see the analogy this has to the current debate in India about internet freedom and "objectionable" material on the internet. Are Indian laws consistent with India's specific commitments under GATS? Could a law, regulation or government measure that is constitutionally valid in India still be inconsistent with India's obligations under the WTO? Sometimes it is easier to just pose questions than offer answers!

If India commits for Retail service in GATS

Just a random thought occurred to me while writing my previous post. An incisive commentary on the state of affairs of FDI retail in India was alluded to in this piece  on Bloomberg. 


If India commits to retail trade under GATS, what are the implications of Article XVI and XVII on the FDI retail trade local sourcing debate. 

As per Article XVI of the GATS agreement.

"  Market Access

1. With respect to market access through the modes of supply identified in Article I, each Member shall accord services and service suppliers of any other Member treatment no less favourable than that provided for under the terms, limitations and conditions agreed and specified in its Schedule."

The treatment to be given here to the foreign service and service suppliers should be "no less favourable" than that provided under the terms, limitations and conditions agreed and specified in its Schedule. If the terms specified in the conditions agreed and specified by India in its schedule of commitments requires local sourcing from small and micro enterprises, this would satisfy the market access issue."

Regarding Article XVII of the GATS, it states

" Article X V IINational Treatment

1. In the sectors inscribed in its Schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers."

This mandates that the treatment accorded to a foreign service supplier must be identical to that of the local service supplier. What if the local sourcing requirement is mandated for both these categories of organised retail trade - the Walmarts as well as the Reliance stores. Would this be in consonance with WTO obligations?

Hence, is offering a commitment in the retail trade be more beneficial to India so as  to include the safeguards of local sourcing to ensure that the local products are protected and favoured.

I might be completely off the mark here. Would love to hear some comments on this one!

Wal-Mart Invades ...

The opposition and debate on FDI in retail in India has not settled down. Amongst the primary points of opposition to the move is that large retail houses like Wal-Mart and others will wipe out the local retailers due to low prices, have a monopoly, and control the retail trade domestically. This is viewed as an invasion of sovereignty and vesting of control on an important part of national interest.


The opposition to Wal-Mart, inspite of its pre-eminent position in organised retailing, is not peculiar to India. According to the Economist the Wal-mart is the third largest employer after the US Department of Defense and China's People's Liberation Army. Out of the 10 top employers in the world, Wal-Mart is one of the three private players, the rest being Government.





The Walmart stores website announces s simple purpose for their existence - helping customers save to help them lead better lives. However, Walmart Watch doesn't totally agree. A critique of the Wal-Mart chain it claims to achieving the purpose below:


"Since 2005, Walmart Watch has educated policymakers, media and communities about the impact of Walmart in America and across the globe. Walmart Watch exists to challenge Walmart to more fully embrace its corporate responsibilities and live up to its position as the world’s retail industry leader, a position that allows the company to set industry standards for wages, benefits and beyond. To date Walmart has used its dominant position in the market place only to lower standards for American retail workers, offering what amounts to poverty jobs for most of its Associates."


The New York Times in 2003 reported "Wal-Mart Invades and Mexico Gladly surrenders" raising similar fears that ave been raised in India against FDI in retail. It reported,


"Wal-Mart's power is changing Mexico in the same way it changed the economic landscape of the United States, and with the same formula: cut prices relentlessly, pump up productivity, pay low wages, ban unions, give suppliers the tightest possible profit margins and sell everything under the sun for less than the guy next door.


Indicating its scale the report notes,


"Though it came to this country only 12 years ago, Wal-Mart is doing more business -- closing in on $11 billion a year -- than the entire tourism industry. Wal-Mart sells $6 billion worth of food a year, more than anyone else in Mexico. In fact, it sells more of almost everything than almost anyone. Economists say its price cuts actually drive down the country's rate of inflation.

Last year, 585 million people -- nearly six times the population of Mexico -- passed through its check-out lanes. With 633 outlets, Wal-Mart's Mexican operations are by far the biggest outside the United States.

Its sales represent about 2 percent of Mexico's gross domestic product -- almost the same as in the United States. Analysts say it now controls something approaching 30 percent of all supermarket food sales in Mexico, and about 6 percent of all retail sales -- also about the same as in the United States."

The polarising impact Wal-Mart has had on the Mexican "manufacturing" sector is detailed in this post. The productivity of weak firms is said to decline while strong firms exhibit higher productivity as a result of Wal-Mart's entry. Wal-Mart has, as per this report,  sharpened the difference between weak and strong firms for Mexican manufacturing as a whole.

An interesting study  in 2005 on Wal-Mart's success in Mexico draws into focus the limitations of such a success,

"However, three factors are beginning to impose limits on that advantage.  The first is the rapid modernization of a portion of the Mexican retail sector—in many cases through imitation of Wal-Mart.  Second, the polarized Mexican income structure limits the population of consumers able to shop at Wal-Mart and its subsidiaries.  Finally, repeated economic crises and stagnation have driven many Mexican consumers back to traditional and informal retail outlets.  "

Supporting the consumer choice that Wal-Mart offers, William Anderson dismissed the charges that Wal-mart destroys local communities.

The issue of entry of foreign retail has many complex consequences for the local organised retailer, the local unorganised retailer, the local community, the local producers and ultimately to the consumer. While the entry could be detrimental to the local organised retailer, it may not necessarily be disadvantageous to the local producer (who gets good prices) or ultimate consumer (choice and low costs). Experts have opined that actual experience shows that it may not be detrimental to the local unorganised retailer too due to  the heterogeneity in consumers.

In this context, one is tempted to ask - What is in national interest?

As a local Mexican summed up the effect of Wal-Mart's entry in Mexico,

"At a Mexico City shopping center, Plaza Tepeyac, José Carrillo, 36, wended his way through the aisles on a weekday morning, admiring how neatly the merchandise was displayed.


''Sometimes I go to the street markets and sometimes I come here,'' said Mr. Carrillo, an administrative aide, who lives three blocks from a Wal-Mart. ''Sure, I know Wal-Mart is a multinational company, but what are you going to do? That's globalization, and Mexico has to play the game, right? Maybe some of the profit leaves Mexico, but Mexico gets back some foreign investment, right? That's how things work. It doesn't matter to me if I'm buying from a multinational company, as long as they give me what I want.''

No easy answers, I guess.

FDI in retail in India - All this talk about violating WTO norms

There appears to be significant confusion as to the interplay between the FDI policy on retail and impact on India's obligations in the WTO. Primarily, the FDI policy on retail, inter alia, seeks to mandate that certain percentage of  products need to be sourced from small and micro enterprises globally. 

While this requirement of global sourcing of products from small and micro enterprises may be permissible, would mandating sourcing of a certain percentage of products from small and micro enterprises locally violate India's WTO obligations? In other words, if the FDI policy mandates that the Walmarts, Carrefours etc set up in India have to mandatorily purchase a certain percentage of the products  from local producers, can a WTO member challenge this policy as being inconsistent with WTO obligations?

Some reports in the Indian media have viewed it as being violative of India's WTO obligations. Without going into the merits of such a policy requirement, let us look at some of the legal provisions (GATTS, TRIMS and GATS) that have a bearing on this issue:

GATTS

Article III which deals with the "national treatment" principles would be applicable. It states :

"Article III*: National Treatment on Internal Taxation and Regulation

1.       The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production.*"

Thus, any regulation and requirement affecting the internal sale, purchase, distribution or use of products SHOULD NOT BE applied to imported or domestic products so as to AFFORD PROTECTION to domestic production. Would mandating an internal sourcing requirement from small and micro enterprises tantamount to affording protection to domestic production? If so, it would be violative of Article III (1) of the GATT agreement.

TRIMS

The Agreement on Trade Related Investment Measures supposes that certain investment measures restrict and distort trade. It provides that no contracting party shall apply any TRIM inconsistent with Articles III (national treatment) and XI (prohibition of quantitative restrictions) of the GATT. To this end, an illustrative list of TRIMs agreed to be inconsistent with these articles is appended to the agreement.

As per Article 2 of the Agreement on TRIMS

" Article 2

National Treatment and Quantitative Restrictions

1. Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994.

2. An illustrative list of TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 and the obligation of general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of GATT 1994 is contained in the Annex to this Agreement. "

The illustrative list of TRIMs that are inconsistent with the obligation of national treatment is as follows:

"   Illustrative List

1. TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require: 

(a) the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production;

or

(b) that an enterprise's purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports."

Hence, TRIMS that require the purchase or use by an enterprise of products of domestic origin or from any domestic source and which are mandatory or enforceable under domestic law or administrative ruling will be in violation of the Agreement on TRIMS and hence in violation of the WTO obligations.

GATS

Where a member country undertakes specific commitments in sectors as per the schedule in the modes of supply, national treatment needs to be accorded as per Article XVI of GATS. Since India has not entered into specific commitments in the retail services sector, this obligation would not apply.

From the collective reading of the above provisions, it would indicate that mandating LOCAL sourcing of products in the FDI policy could violate WTO obligations. However, this would come up in a dispute only if a member country aggrieved by this measure challenges the measure in the Dispute Settlement Mechanism of the WTO.

The Indian Minister who is in charge of small and micro enterprises seemed to think otherwise

"I had raised the issue at the meeting and I was told that the clause is there. I will obviously demand support for Indian companies and not for foreign players," MSME minister Virbhadra Singh told TOI on Monday after DIPP clarified that the 30% sourcing clause will be for Indian units only."

Would this position be tenable under WTO obligations of India. At times the compulsions of local politics clash with the inevitability of global trade. This dichotomy is beautifully illustrated by Moises Naim in "The Dangerous Cocktail of Global Money and Politics" where he has argued that 

"‘All politics is local’ is an old truism popularised by the late US congressman Tip O’Neill. Understanding local problems, and even personal ones, and promising solutions to them, is far more critical for political success than hatching initiatives to address global threats. Planetary problems feel too remote to the average voter. Even in this information-saturated age, polls show that only a minority think about problems beyond their nation’s borders when deciding who to vote for or what political party to support"

He essentially argues that the need of local politics is diametrically opposed to the reality of international trade, global capital that they pull in different directions.

He concludes by sayng,

" Protecting economies from the vagaries of global money sounds tempting and surely something must be done to mitigate the risks. But it is difficult, expensive and it easily leads to decisions that make the problem worse. ’Globalise’ local politics is also a project that is as attractive as it is difficult. Undoubtedly politicians should do a much better job of explaining to their constituents’ that what happens beyond the borders of their country-or city has implications for what happens inside their homes. This task is now easier in Europe. Sadly, for millions this crisis has become a quick but painful lesson on the direct links between ‘out there’ and ‘right here’.

Despite all these problems, we have no choice: we must make local politics more attuned to global imperatives and make global finance more responsive to local needs.

Undoubtedly, this is easier said than done. It may even sound naïve to suggest it. But I wonder if it would not be even more naïve to dismiss the urgent need to find ways to bridge the gap between the two."

Reading this reaction of some Congressional Democrats against the decision of the Obama administration to implement a WTO ruling sounds very familiar to opposition to WTO compliance in India over FDI retail. 

We are still in search of that middle path of local politics with global imperatives, both locally and globally!