Not everyone reads the comments on this blog, so I thought I'd put this very good comment by Pietro Poretti up as a post:
I would like to add a few thoughts to the captivating discussion on GATS and financial services bailouts and, more generally, on services subsidies.
The GATS does not contain any ad hoc disciplines on subsidies and the ASCM only applies to subsidies to manufacturers (Annex to 1A “Multilateral Agreements on Trade in Goods”). GATS Article XV is a negotiating mandate (one of the “Uruguay Round leftovers, with GATS Articles VI para.4, X, and XIII). In itself it does not establish any discipline either. It merely requires, at para.2, that sympathetic consideration be given to the request for consultations by a Member that considers itself adversely affected by a subsidy of another Member. Negotiations on GATS Article XV started at the end of 1995 under the auspices of the Working Party on GATS Rules (WPGR). It is safe concluding that they have not gone far.
I limit my post to the following relevant issues: (1) the scope of the GATS, (2) the scope of the National Treatment provision, and (3) the prudential carve-out of the Annex on Financial Services.
Subsidies are “measures by Members affecting trade in services” within the meaning of GATS Art. I:1. They are therefore covered by the existing GATS framework, including by provisions such as National Treatment, MFN, Art. VIII on Monopolies and Exclusive Service Suppliers, and Transparency. In particular, the applicability of National Treatment to subsidies is confirmed by para. 9 of GATT Document MTN.GNS/W/164, 3 Sep. 1993 ‘Scheduling of Initial Commitments in Trade in Services: Explanatory Note, stating “Article XVII applies to subsidy-type measures in the same way that it applies to all other measures …”. I don’t think the Explanatory Note adds anything to GATS Art. I:1. In the light of the exclusion of subsidies from the scope of the GATT National Treatment obligation (GATT Art. III:8(b)), this clarification is nevertheless helpful.
The lack of a definition of subsidy is not in itself an obstacle to the application of National Treatment. What matters is whether a given measure (regardless of whether we call it a bailout, a rescue or a restructuring intervention, and regardless of its form) affects trade in services. Bailouts, as described in Todd Tucker’s post, certainly affect trade in services. “As the Wall Street Journal recently noted, banks like Goldman Sachs that benefited from government largesse and thus weathered the storm, certainly have a leg up on the competition. Meanwhile, no foreign bank got TARP money, or had access to many of the other bailout programs. Banks that did not have access to these bailout funds and found themselves eliminated from competition […]”.
National Treatment applies to subsidies affecting every service activity with the two following exceptions: (1) subsidies affecting services supplied in the exercise of governmental authority (GATS Art. I:3 b and c) and (2) subsidies affecting traffic rights and services directly related to the exercise of traffic rights (Annex on Air Transport Services, Art 2.). Bailouts of airlines would therefore remain untouched by existing GATS rules, including National Treatment, unless they affect trade in aircraft repair and maintenance, the selling and marketing of air transport services and computer reservation systems (see Annex on Air Transport Services, para.3).
It remains to be determined what measure of discipline can National Treatment exert on services subsidies. GATS Art. XVII provides for foreign like services and service suppliers be treated no less favourably than domestic ones. GATS Art. XVII does not go any further in specifying who has right to a subsidy. It stops at “like services and service suppliers”. In this respect, the Explanatory Note provides at para. 10 that “There is no obligation in the GATS which requires a Member to take measures outside its territorial jurisdiction. It therefore follows that the national treatment obligation in Article XVII does not require a Member to extend such treatment to a service provider located outside the territory of another Member”. (para. 15 of the Guidelines for the Scheduling of Specific Commitments under the General Agreement on Trade in Services (GATS),WTO Document S/L/92, 28 Mar. 2001, has the same language).
The Explanatory Note clearly reduces the territorial scope of the National Treatment provision for the purpose of subsidies. Accordingly, Members are not requested to extend positive measures to services or service suppliers located outside of their territory. National Treatment nevertheless applies to foreign investment (or Mode 3 of Supply-commercial presence) in the financial services sector, regardless of the form and organization of the investment vehicle. In this respect, GATS Art. XXVIII (d) states “commercial presence means any type of business or professional establishment, including through (i) the constitution, acquisition or maintenance of a personal juridical person, or (ii) the creation or maintenance of a branch or a representative office, within the territory of a Member for the purpose of supplying a service”.
Bailouts should therefore be administered on a National Treatment and not discriminate against “like” financial services suppliers present in the territory of the intervening Member. The GATS National Treatment obligation, however, is a conditional obligation. This is why, I think, commentators tend to assess the efficacy of National Treatment for the purpose of subsidies as quite limited. In fact, its actual efficacy can only be determined on a case-by-case basis, based on the commitments undertaken by the subsidizing Member. Limitations on National Treatment for subsidies can be horizontal (i.e., apply to all sectors inscribed in a Member’s schedule of specific commitments) or sector-specific.
If a Member entered the relevant activity in its schedule and does not maintain any limitation on subsidies, then National Treatment fully applies. Such a Member gave up its freedom to discriminate against foreign like service suppliers located in its territory. Not making bailouts or other forms of intervention accessible to subsidiaries or branches of located in its territory would violate its National Treatment commitments (if, of course, “likeness” can be established). As mentioned above, the form of the governmental intervention is not decisive for the application of National Treatment, as long as the measure in question “affects trade in services”.
A final element that needs to be mentioned is contained in para. 2(a) of the Annex on Financial Services itself, stating “Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement”. This provision, also known as the “prudential carve-out” might provide a safe harbour for those measures that can be justified on systemic and stability grounds. The measures put in place by the Swiss Government go in this direction. Those who can read German might want to visithttp://www.admin.ch/ch/d/ff/2008/8943.pdf (Botschaft zu einem Massnahmenpaket zur Stärkung des schweizerischen Finanzsystems, para. 7.2.3).
Like any other measure affecting trade in services, a subsidy violating the National Treatment obligation can be challenged through the dispute settlement system. The non-violation complaints instrument (impairment and nullification of benefits) might also be considered. In practice, however, and as concluded by Simon, it is unlikely that the boundaries of the rules will be tested (glass house effect).
I stop here with what already looks like a very long post. More can (and probably should) be said and discussed, including on the nature of certain bailouts and on the effective use of the prudential carve-out in the financial services sector. I would like to draw your attention to an interesting study which was posted on this blog not too long ago: Van Aaken / Kurtz (2009) The Global Financial Crisis and International Economic Law, pp. 5-12, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1417957#
For those who can wait another 4-5 weeks, I suggest Pietro Poretti “The Regulation of Subsidies within the General Agreement on Trade in Services- Problems and Perspectives”, Kluwer Law International, forthcoming (Fall 2009).
