Journal of International Economic Law

Journal of International Economic Law Advance Access originally published online on February 26, 2008
Journal of International Economic Law 2008 11(2):263-311; doi:10.1093/jiel/jgn010

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© Oxford University Press 2008, all rights reserved

East Asian Free Trade Agreements in Services: Key Architectural Elements

Carsten Fink^* and Martín Molinuevo^**

*Senior Economist at the World Bank Institute. E-mail: cfink_de{at}yahoo.de
**Martín Molinuevo is a Research Fellow at the World Trade Institute and a Consultant to the World Bank. E-mail: martin.molinuevo{at}wti.org

	ABSTRACT

TOP NOTES ABSTRACT INTRODUCTION I. SCHEDULING APPROACH II. INVESTMENT IN SERVICES III. MOVEMENT OF NATURAL... IV. RULES OF ORIGIN V. DISPUTE SETTLEMENT VI. OTHER ELEMENTS VII. CONCLUSION

 
Since the mid-1990s East Asian countries have negotiated 25 free trade agreements (FTAs) with a services component. There are important architectural differences in these agreements, which ultimately affect their value in promoting transparency, fostering the credibility of trade policies, and advancing market opening in services. This article reviews key architectural choices, focusing on the approach towards scheduling commitments, the treatment of investment and the movement of natural persons, rules of origin, provisions for the settlement of trade dispute, and selected deeper integration issues. In doing so, it assesses the advantages and drawbacks of different architectural approaches and discusses a number of lessons learned.

	INTRODUCTION

TOP NOTES ABSTRACT INTRODUCTION I. SCHEDULING APPROACH II. INVESTMENT IN SERVICES III. MOVEMENT OF NATURAL... IV. RULES OF ORIGIN V. DISPUTE SETTLEMENT VI. OTHER ELEMENTS VII. CONCLUSION

 
Bilateral and regional free trade agreements (FTAs) are proliferating at an unprecedented pace. Most of the recently negotiated agreements are comprehensive in their coverage and extend their market opening ambition to international commerce in services. This trend is powered by underlying economic forces, such as technological progress which has expanded the scope for trading services internationally and increased private sector participation in the provision of infrastructure services considered public monopolies not too long ago.

Have services FTAs actually served those economic forces? In particular, have they led to liberalization undertakings that go beyond those to which countries are committed under the WTO's General Agreement on Trade in Services (GATS)? Have they established stronger disciplines than the GATS? Few studies exist to answer these questions.¹ This article seeks to answer the latter question by offering a review of key architectural elements of East Asian FTAs in services.² In another paper, we assess the liberalization content of these agreements and their compliance with WTO rules on regional integration.³

The East Asia region offers an instructive case study of services FTAs. Figure 1 shows all 25 agreements that had been signed as of January 2007. Twenty-four of those agreements were negotiated in this decade. Only the ASEAN-Framework Agreement on Trade in Services (AFAS) dates back to the mid-1990s. East Asian FTAs offer a wide variety in architectural approaches, with some being closely modeled on the GATS and others following the structure of the North American Free Trade Agreement (NAFTA). In fact, the agreements concluded by East Asian countries offer an insightful window into global negotiating trends. The Singapore–US FTA, for instance, serves as a proxy for the FTA model promoted by the US in different regions of the world. Other NAFTA-inspired agreements in East Asia mirror the approaches adopted by many countries in the Western Hemisphere—including Canada, Chile, and Mexico. The region's GATS-inspired agreements, in turn, show many commonalities with EU FTAs and the Mercosur services accord. Uniquely, a number of East Asian FTAs—notably the Trans-Pacific EPA and the Australia–Singapore FTA—have combined elements of different models, setting new standards which, in future, may be adopted by countries outside the region.

View larger version (31K): [in this window] [in a new window] [Download PowerPoint slide]   Figure 1. East Asian FTAs with a services component.

 
Ultimately, trade agreements seek to promote international commerce. They can do so in three ways: by reducing barriers to foreign participation, by making trade policies more transparent, and by enhancing the credibility of the trade regime—the latter being defined as reducing the risk of policy becoming more restrictive. Architectural choices can make an important difference in this respect. In comparing the different approaches found in East Asia, we specifically seek to evaluate to what extent agreements promote trade along these three dimensions.

Due to space constraints, we cannot review all architectural elements of services FTAs, but rather focus on selected key elements that have not been discussed extensively in the previous literature and for which there is significant variation in East Asian agreements. In particular, our review starts with the scheduling approach adopted by FTAs (Section I)—one of the key distinguishing characteristics of trade agreements in services. We then consider the treatment of investment in services (Section II), the treatment of labor mobility (Section III), the rules of origin adopted (Section IV), and provisions for the settlement of trade disputes (Section V). In Section VI, we discuss to what extent East Asian FTAs have gone beyond the GATS on a number of deeper integration issues—notably recognition of professional qualifications, domestic regulation, and trade rules on government procurement, subsidies and emergency safeguards. In the conclusion (Section VII), we briefly discuss several lessons learned.

	I. SCHEDULING APPROACH

TOP NOTES ABSTRACT INTRODUCTION I. SCHEDULING APPROACH II. INVESTMENT IN SERVICES III. MOVEMENT OF NATURAL... IV. RULES OF ORIGIN V. DISPUTE SETTLEMENT VI. OTHER ELEMENTS VII. CONCLUSION

 
No services FTA has established immediate free trade in all service sectors.⁴ The East Asian FTAs make no exception in this regard. For a variety of reasons, governments wish to exempt certain activities from the coverage of trade disciplines or maintain certain trade-restrictive measures. A critical question in the design of an FTA is how these exemptions and limitations are inscribed into an agreement.

As a first step, most FTAs allow for sectoral carve-outs that exempt one or more activities from the scope of the agreement. Activities falling under such an exemption are not subject to any of the disciplines established in the agreement. The most frequently encountered carve-out pertains to air transport. Twenty FTAs exempt core air transport services related to the exercise of air traffic rights.⁵ This exemption is also found in the GATS and is explained by the fact that the provision of these services has historically been negotiated through separate bilateral treaties. Four FTAs also carve out cabotage in maritime transport—a sector in which foreign participation is often deemed sensitive. More significantly, four FTAs fully exempt financial services from the scope of the agreement—an issue to which we will return later.⁶

Five FTAs do not provide for any carve-out of service activities, making all service sectors subject to the agreements’ underlying provisions.⁷ However, it does not automatically follow that all sectors are subject to liberalization undertakings. The liberalization content of FTAs is detailed in country-specific market-opening schedules. A variety of approaches exist in drawing up these schedules. Fundamentally, these approaches differ along two dimensions: (i) the listing of service activities subject to liberalization commitments and (ii) the listing of levels of openness. Lists can either be drawn up on a positive basis—identifying what is covered or allowed—or on a negative basis—identifying what is not covered or not allowed, though mixed approaches are also possible.

Table 1 indicates the scheduling approaches adopted by the East Asian FTAs. In what follows, we first describe key features of these scheduling approaches. We then compare and assess these approaches, focusing on the three dimensions outlined above: incentives for liberalization, transparency, and credibility.

View this table: [in this window] [in a new window]   Table 1 Scheduling approaches

 
A. Agreements with a positive list of sectors
Fifteen East Asian FTAs have adopted a positive list of sectors in which trade commitments are undertaken (Table 1). In other words, only the sectors that parties have expressly identified are subject to market opening undertakings. Countries are free to maintain or impose trade-restrictive measures in non-scheduled sectors, although those measures may still be subject to an agreement's general disciplines (such as on transparency).

Once a sector is scheduled, the next question is how to set the level of openness in that sector. Interestingly, this question is not relevant for one of the East Asian FTAs—the Lao PDR–US Bilateral Trade Agreement (BTA). Under this agreement, Laos is committed to unrestricted market access and national treatment in listed sectors.⁸ However, the Lao PDR–US BTA should be considered a special case and, indeed, is unparalleled in its ambition. All other trade agreements in services allow parties not to immediately commit to free trade in sectors subject to liberalization undertakings. For the remaining 14 East Asian FTAs with a positive list of sectors, we observe two approaches for specifying levels of openness: pure positive lists and GATS-style hybrid lists.

1. Pure positive list agreements
Under a pure positive list, parties to an agreement specify for each listed service sector the level (and type) of foreign participation that is allowed. Only two East Asian FTAs follow this approach: the Mainland–Hong Kong and the Mainland–Macao Closer Economic Partnership Agreements (CEPAs). Interestingly, these two agreements do not establish binding disciplines, such as the ones created by the GATS market access and national treatment provisions. They also do not define any modes of supply, as is done for all other trade agreements in services (see subsequently). In fact, the legal disciplines established by the agreements’ services chapters are arguably the weakest among all the East Asian FTAs. Yet, China's; market opening undertakings under the two CEPAs grant service providers from Hong Kong and Macao substantial trade preferences.⁹

2. GATS-style hybrid list agreements
Under a GATS-style hybrid list, parties may define the level of openness in listed sectors either on a positive or negative list basis. In particular, agreements following this approach typically adopt the market access and national treatment provisions of the GATS. Schedules of commitments then specify the market access ‘terms, limitations and conditions’ and national treatment ‘conditions and qualifications’.¹⁰ In other words, countries are free to describe either how trade is restricted or what type of services transactions are allowed in a listed sector. As a rule of thumb, an entry in a GATS schedule that takes the form ‘None, except ...’ signifies a negative list of trade-restrictive measures, whereas an entry that takes the form ‘Unbound, except ...’ signifies a positive list of market-opening concessions.¹¹

One clarifying remark is in order. The GATS approach to the scheduling of commitments has frequently been referred to in the literature as a positive list approach. This terminology focuses solely on the selection of sectors subject to trade commitments. For the purposes of this article, we refer to GATS-style agreements as hybrid list agreements, because the fixing of the level of openness under this approach involves elements of both negative and positive listing.¹² We use the term positive list agreements to describe all agreements that adopt a positive list of sectors subject to trade commitments, encompassing the special case of the Lao PDR–US BTA, the pure positive list agreements, and the hybrid list agreements.

Several features associated with the GATS-style hybrid list approach are worth pointing out. First, commitments in each listed sector are made with respect to four different modes of supply: cross-border trade (mode 1), consumption abroad (mode 2), commercial presence (mode 3), and movement of natural persons (MNP) (mode 4).¹³ In actual GATS schedules, most entries for modes 1, 2, and 3 set the level of openness on a negative list basis, whereas the great majority of entries for mode 4 are made on a positive list basis.

Eleven, of the 12 East Asian hybrid list FTAs follow the structure of the GATS by distinguishing between four modes of supply and between market access and national treatment measures. The only exception is the Australia–Thailand FTA, whose schedule does not differentiate between modes of supply nor between market access and national treatment measures. To which mode and to which measures a particular commitment applies is determined by the nature of the scheduled entry. Compared to the GATS, this scheduling approach appears to reduce difficulties in scheduling measures that may be inconsistent with both market access and national treatment obligations.¹⁴

Second, several GATS-style hybrid list agreements adopt a most-favored nation (MFN) obligation which is subject to the scheduling of reservations. However, MFN reservations are always inscribed on a negative list basis in relation to both service activities and trade restrictive measures. Interestingly, some hybrid list agreements have not incorporated binding MFN disciplines in their text.¹⁵ MFN obligations in an FTA context have a different meaning than the multilateral MFN principle under the GATS. They mainly take two forms. On the one hand, regional trade agreements involving more than two countries may wish to establish an MFN obligation to ensure non-discriminatory treatment between service providers from countries within the region. In East Asia, this is the case for the ASEAN Framework Agreement on Services, which calls for preferential treatment to be accorded on an MFN basis.¹⁶ On the other hand, some FTAs require non-discrimination between parties and non-parties. In other words, a non-party MFN clause guarantees FTA parties the best current and future treatment that the other party grants to services suppliers from any country.

Third, GATS-style schedules allow for horizontal commitments. Measures scheduled in these horizontal commitments apply to all listed service sectors, unless the wording of a sectoral commitment unambiguously indicates otherwise. In assessing the level of openness of specific service sectors, it is therefore critical to take these horizontal commitments into account. Sometimes they can be far-reaching—for example, a joint venture requirement with foreign equity participation limited to 49%, or an entry that limits the movement of individual service providers to specific types of intra-corporate transferees. In such cases, they effectively fix a low level of openness across all sectors.

Fourth, GATS-style hybrid list agreements typically do not require signatories to make bindings at the level of actual openness. In fact, existing GATS commitments are often characterized as being less liberal than status quo policies—not least because substantial unilateral liberalization has taken place in many countries since the conclusion of the Uruguay Round of Trade Negotiations in 1994.¹⁷ A gap between bound and actual policies—a so-called binding overhang—may introduce uncertainty, because governments at any point can restrict foreign participation in their domestic service market, as long as they stay within their trade commitments. Most East Asian hybrid list FTAs similarly do not impose any requirement to bind at the actual level of openness.

However, Japan's Economic Partnership Agreements (EPAs) with Malaysia and the Philippines have introduced an innovation that serves to reduce the uncertainty associated with a binding overhang.¹⁸ These agreements offer the possibility to identify in schedules those service sectors in which a party agrees to bind status quo policies. In addition, the identified service sectors are subject to upward ratcheting: once a party unilaterally eliminates a trade-restrictive measure, policy will automatically be bound at the more liberal level.¹⁹

B. Negative list agreements
Ten East Asian FTAs have adopted a negative list approach in scheduling their market opening commitments. Negative listing generally applies to both sectors and measures. In other words, trade is unrestricted across all covered service activities, unless scheduled limitations indicate otherwise.

Again, it is useful to review several key features of negative list agreements. First, these agreements typically establish separate disciplines for cross-border trade and investment in services. Cross-border trade in services in the negative list model covers the GATS equivalent of modes 1, 2, and 4, although commitments do not formally distinguish between these three modes of supply. The GATS equivalent of mode 3 is covered by a horizontal investment chapter that applies to both goods and services, though the typical investment disciplines go beyond those established by the GATS.²⁰

Second, trade in financial services receives separate treatment in several of the negative list FTAs. Four agreements revert to a positive list for trade in financial services, either by adopting a positive list for cross border trade in financial services (modes 1, 2, and 4) or by entirely following GATS-style hybrid lists (Table 1). Furthermore, four of the remaining six negative list FTAs²¹ carve out trade in financial services entirely from the scope of the agreement, leaving only the Australia–Singapore FTA and the Panama–Taiwan (China) FTA for which the negative list applies, in principle, to financial services.

Third, negative list agreements establish additional classes of measures for the scheduling of specific commitments. Table 2 lists the obligations identified by the 10 negative list FTAs in the three areas subject to trade commitments: cross-border trade in services, investment, and trade in financial services. A number of patterns are worth pointing out:

• All 10 negative list FTAs feature obligations on national treatment, subject to sectoral reservations.²²
  
• Only six negative list FTAs feature a market access discipline mirroring GATS Article XVI.²³ Three of the remaining four agreements follow the original model of the NAFTA in requiring that quantitative restrictions be only notified.
  
• Like hybrid list agreements, not all negative list agreements feature binding MFN disciplines. Those agreements that do, allow parties to lodge sectoral reservations to the MFN principle.²⁴
  
• For cross-border trade in services, negative list agreements introduce a prohibition on local presence requirements. This provision reflects the fact that negative list agreements do not separately identify the GATS equivalent of mode 1. In hybrid list agreements, local presence requirements are implicitly dealt with by commitments under mode 1.
  
• For investment, there are two new classes of measures: performance requirements and limitations on the nationality or residency of senior managers and boards of directors. These disciplines have their origin in bilateral investment treaties, on which the horizontal investment chapters of FTAs are based.²⁵
  

View this table: [in this window] [in a new window]   Table 2 Classes of measures in negative list agreements

 
Fourth, negative list agreements allow for the scheduling of two categories of limitations: existing non-conforming measures and future measures. Existing non-conforming measures include all current laws and regulations that a country seeks to maintain, but which would be inconsistent with one or more of the obligations enshrined by the agreement. By definition, limitations scheduled in this category reflect status quo policies. In addition, all 10 negative list FTAs provide for upward ratcheting of policy bindings: once a trade-restrictive measure identified in this category is eliminated, policy will automatically be bound at the more liberal level. As described before, upward ratcheting enhances the credibility of unilateral reforms, but reduces the transparency of trade commitments.

Future measures are reservations that do not necessarily relate to existing laws and regulations. They allow a country to introduce new measures in the relevant sectors at any point after an agreement enters into effect. The scope of future measures is defined through their sectoral coverage and the description outlining the reserved policy actions. Broad future measures can de facto exclude full sectors from an agreement's market opening obligations—equivalent to not listing a sector or inscribing ‘unbound’ for one or more modes of supply under a positive list scheduling approach. For example, under the Korea–Singapore FTA, Korea scheduled a future measure under which the government reserves ‘the right to adopt or maintain any measure with respect to (a) broadcasting services [...] (b) foreign investment in the broadcasting services sector’.

C. Positive versus negative list scheduling: an assessment
Does an FTA's approach towards scheduling commitments matter? Some observers have argued that a negative list approach provides for greater transparency and lends greater credibility to services trade policies.²⁶ Knowing what is not allowed—rather than allowed—may help service providers better understand how they can do business in a foreign country.²⁷ In addition, as described before, non-conforming measures scheduled under a negative list reflect status quo policies. Thus, businesses are better informed about the actual level of openness in an FTA partner and are directly pointed to the laws and regulations affecting their ability to contest the FTA partner's market. Status quo bindings also maximize the credibility value of trade commitments, as foreign service suppliers are assured that actual policies will not become more restrictive.

The scheduling approach may affect an FTA's negotiating outcome, too. Under a negative list, governments need to reveal existing non-conforming measures in the course of FTA negotiations and, if they wish to maintain those restrictions, defend their rationale. This process may create greater incentives for eliminating unwarranted restrictions. Another pro-liberalization feature of negative list agreements is that they apply to future service activities, because those activities would not be subject to limitations at the time FTAs are concluded. New service activities may emerge from technological progress or new ways of organizing business and an automatic commitment to free trade may pre-empt protectionist pressures.

Having said this, there are several considerations that question the superiority of negative list agreements along these lines. First, the transparency value of knowing what is not allowed would seem to depend on the level of openness. Where few trade restrictions prevail, a negative list may indeed be more transparent. However, where trade-restrictive measures take the size of a ‘telephone book’, knowing what is allowed may equip foreign businesses with a better understanding of how they can do business.

Second, it is in principle possible to replicate every negative list schedule with a positive list schedule. In addition, GATS-style hybrid list agreements allow for the scheduling of measures on a negative list basis for each committed sector, preserving possible transparency benefits associated with negative listing. Theoretically, a positive list of sectors can even apply to future service activities by covering residual service sectors, such as ‘other business services’, ‘other financial services’, or ‘other services not included elsewhere’.²⁸

Third, benefits associated with status quo bindings are not necessarily limited to negative list agreements. The Japan–Malaysia EPA and the Japan–Philippines EPA illustrate that a requirement to schedule at the level of existing policies can also be incorporated into a pure positive list or hybrid list agreement.²⁹ Conversely, the possibility of scheduling future measures opens the door for excluding certain service activities from liberalization undertakings and binding policy above status quo levels in negative list agreements—diluting the difference between hybrid list and negative list agreements.³⁰

Some observers have also argued that a positive list of sectors combined with the possibility of binding above status quo policies may provide important breathing room to governments.³¹ Such breathing room may be needed in cases where governments have limited administrative capacity to compile an inventory of all trade-restrictive measures, including at the sub-federal level, or in sectors where there are sensitivities towards foreign participation.

In this context, it is interesting to note that four of the East Asian negative list FTAs have partially or fully reverted to a positive list in scheduling commitments for financial services—a sector where regulatory sensitivities towards foreign participation are common. As pointed out before, four of the remaining six negative list FTAs have carved out the financial service sector altogether, leaving the Australia–Singapore FTA and the Panama–Taiwan (China) FTA as the only agreements in which the negative list applies to financial services. However, in the case of the Australia–Singapore FTA, Singapore scheduled several broad future measures, preserving its freedom to maintain or impose restrictions on the supply of financial services by Australian institutions.³² The Panama–Taiwan (China) FTA in turn grandfathers all measures affecting cross-border trade in services that were adopted before the agreement's entry into force.³³

In sum, the structure of negative list agreements may not always be conducive to promote market opening in particularly sensitive sectors. In contrast, positive list agreements seem to afford governments the ability to tailor commitments to better accommodate regulatory concerns. They may thus give governments the confidence to embark on some liberalization rather than fully excluding sensitive sectors.

Finally, possible transparency and liberalization benefits of negative list agreements depend crucially on the nature of non-confirming and future measures scheduled. If non-conforming measures do not list all relevant laws and regulations, businesses may not be able to draw an accurate picture of the level of openness of an FTA partner. Reservations that exempt a broad range of measures can seriously reduce the liberalization content of trade commitments. Three examples of non-conforming measures and future measures in East Asian negative list FTAs that are seemingly incomplete and broad are worth pointing out:

• In the Singapore–US FTA, the United States scheduled a non-conforming measure that effectively exempts ‘[a]ll existing non-conforming measures of all states of the United States, the District of Columbia, and Puerto Rico’.³⁴ No state law or regulation is explicitly listed under this reservation, making it difficult for a Singaporean service provider to assess possible US trade barriers at the state level.³⁵
  
• In the same FTA, the United States scheduled a non-conforming measure under which it ‘[...] reserves the right to adopt or maintain any measure that is not inconsistent with the United States’ obligations under Article XVI of the General Agreement on Trade in Services’.³⁶ This limitation appears to nullify all market access concessions that the US offered to Singapore and that go beyond the US GATS commitments.³⁷ Moreover, fully understanding how open US service markets are for Singaporean service providers requires a careful reading of the US GATS schedule. Given that the latter follows a hybrid list approach, the presumed transparency value of the negative list seems seriously undermined. ³⁸
  
• In the Japan–Mexico EPA, both parties scheduled a future measure under which they reserve ‘[...] the right to adopt or maintain any measure relating to new services other than those services recognized [...] at the time of entry into force of this Agreement [...]’. The concept of ‘recognized services’ includes ‘[a]ny services classified positively and explicitly’ in existing industry or product classifications. In addition, the two parties reserve ‘[...] the right to adopt or maintain any measure relating to the supply of services in any mode of supply in which those services were not technically feasible at the time of entry of force of this Agreement’. This future measure effectively denies the application of the agreement to ‘other’ services and future service activities—one of the supposed benefits of negative listings.³⁹
  

In another paper, we compare the liberalization content of FTAs with different scheduling approaches in quantitative terms.⁴⁰ Yet from the present review of the architectural features of these approaches, we can make two observations. First, benefits associated with greater transparency, enhanced credibility and stronger incentives for committing to liberal trade policies may emerge from rules that require countries to bind status quo policies and that allow for an upward ratcheting of policy bindings once trade-restrictive measures are unilaterally liberalized. These rules exist in all East Asian negative list FTAs. However, the Japan–Malaysia EPA and the Japan–Philippines EPA illustrate that they can also be incorporated into positive list FTAs. Second, positive list FTAs may provide breathing room to governments that do not have the capacity to compile an inventory of all non-conforming measures—as is illustrated by the treatment of financial services in East Asian negative list FTAs.

This last observation suggests that causality not only runs from the scheduling approach to the liberalization outcome, but also the other way around. Trading partners which have limited administrative capacity to take stock of all their existing measures and which are cautious in committing to market opening in services may be more likely to adopt a positive list approach and shun overarching rules requiring status quo bindings and upward ratcheting. By contrast, countries that have a good understanding of all measures affecting trade in services and that are prepared to open up are more likely to adopt negative list agreements and accept status quo binding and ratcheting rules. In addition, it is not surprising that countries such as Japan, Korea, Singapore, and Taiwan (China) that have negotiated at least one negative list FTA, will seek the adoption of negative lists in subsequent FTAs, as they already went through the exercise of identifying all their non-conforming measures.

As a final consideration, the transparency, credibility, and liberalization value of any FTA commitment depends crucially on the nature of trade-restrictive measures scheduled—as illustrated by the examples of non-conforming and future measures described before. Indeed, it can be argued that the scope and nature of scheduled limitations is in the end more significant than the scheduling approach as such.

	II. INVESTMENT IN SERVICES

TOP NOTES ABSTRACT INTRODUCTION I. SCHEDULING APPROACH II. INVESTMENT IN SERVICES III. MOVEMENT OF NATURAL... IV. RULES OF ORIGIN V. DISPUTE SETTLEMENT VI. OTHER ELEMENTS VII. CONCLUSION

 
For historical reasons, many FTAs establish two different sets of disciplines for investment in services. On the one hand, investment is considered a mode of supply in the services chapters of numerous agreements. Given that many services require the physical proximity of suppliers and consumers, the concept of trade in services has typically been defined more broadly than trade in goods to also include services supplied through commercial presence abroad. Under the GATS, commercial presence is one of four modes of supply and FTAs that have adopted the GATS model have followed this approach.

On the other hand, countries have for a long time concluded bilateral investment treaties (BITs) that establish disciplines for investment in goods and services. No such horizontal investment disciplines have so far been established under the WTO.⁴¹ However, most FTAs negotiated in recent years have included separate investment chapters that are largely based on the BIT model. Indeed, a number of agreements—notably those that follow the NAFTA model—cover investment in services exclusively through horizontal investment disciplines. However, 12 East Asian FTAs feature both services disciplines covering commercial presence and horizontal investment disciplines.

The dual coverage of investment in services raises several questions about the transparency, credibility, and depth of liberalization undertakings. In what follows, we first compare the definition of investment and the key obligations established by the two different sets of disciplines. We then describe how FTAs have sought to address possible inconsistencies between services and investment chapters, evaluating the advantages and drawbacks of the different approaches encountered.⁴²

A. Definition of investment and key obligations
Table 3 provides an overview of the treatment of investment in the 25 East Asian FTAs analyzed in this article. Twenty agreements have incorporated horizontal investment disciplines. The definition of investment in most of these agreements is broad, covering foreign direct investment, portfolio investments, and various forms of tangible and intangible property.⁴³ Only two agreements depart from this broad definition, and restrict coverage to only foreign direct investment.⁴⁴

View this table: [in this window] [in a new window]   Table 3 The treatment of investment in services

 
The definition of commercial presence in FTAs’ services chapters is substantially narrower. Most FTAs that incorporate commercial presence as a mode of supply subject to services disciplines follow the GATS definition of commercial presence. This definition covers foreign direct investments in services only where the investor of the other party holds more than 50% of the equity interest or exercises control over the invested enterprise. Foreign investments with a minority equity stake and no exercise of control are not covered by services disciplines, though they would typically be covered by horizontal investment disciplines (either as FDI or portfolio investment).⁴⁵ The New Zealand–Singapore FTA and the Trans-Pacific EPA have adopted a more liberal definition of commercial presence in their services chapters. They do not attach any minimum ownership or control threshold to foreign investments, such that even investments without any lasting interest appear to be covered.⁴⁶

The obligations established by FTA services and investment are similar in one respect: they almost always establish a national treatment obligation. At the same time, most services chapters provide for a market access discipline, which is not included in investment chapters. In addition, services chapters often establish service-specific rules on domestic regulation not found in horizontal investment disciplines. By contrast, several obligations are, in principle, unique to investment chapters: fair and equitable treatment, prohibitions of performance requirements, bans on residency requirements for senior managers and boards of directors, regulations against direct and indirect expropriation, and guarantees on the free transfer of funds. Having said this, to the extent that measures covered by these obligations are discriminatory, they may also be subject to the national treatment obligation of services chapters. Finally, all horizontal investment disciplines provide for investor-state dispute settlement, which is not available under any of the services chapters (Section V.B).⁴⁷

B. Relationship between services and investment disciplines
In principle, the dual coverage of investment in services can be complementary or overlapping. Complementary coverage occurs whenever an investment transaction is covered by one set of disciplines, but not the other. It can emanate either from the different definitions of investment or from the different obligations established by the two sets of disciplines, as described in the previous section. Governments may specifically seek complementary coverage. A horizontal investment chapter promotes equal treatment of investors in manufacturing and services and may thus promote a more transparent investment regime for multinational enterprises that are engaged in both manufacturing and the provision of services. At the same time, a parallel services chapter allows parties to establish disciplines specific to the service sector, such as market access and domestic regulation. Thus, many of the negative list FTAs that do not include commercial presence as a mode of supply in the services chapter do not feature such service-specific obligations. However, three negative list FTAs have established a link between services and investment disciplines, which effectively extends the reach of the services chapter's market access and domestic regulation obligations to investment in services.⁴⁸ In other words, these three agreements reap the complementarity benefit associated with dual coverage without actually providing for dual coverage.

Overlapping coverage occurs whenever measures affecting foreign investment in services are covered by both sets of disciplines. In principle, such overlaps would not pose a problem if the disciplines and levels of openness under the services and investment chapters were identical. However, suppose that a measure is allowed in one chapter, but prohibited in the other chapter. Which chapter would prevail? Inconsistencies of this type would undermine the transparency of the investment regime and may even give rise to legal conflicts. To remedy such inconsistencies, most East Asian FTAs that provide for dual coverage of investment in services have established rules that define the relationship between the services chapter and the horizontal investment chapter. These rules are described in the last column of Table 3.

The Framework Agreement on the AIA has taken the most drastic approach by simply removing investment in services from the scope of investment disciplines.⁴⁹ This approach avoids any type of inconsistency, but does not provide the benefit of truly horizontal investment disciplines. Other agreements have established a rule that gives precedence to the services chapter in case of inconsistencies.⁵⁰ Investment disciplines still apply insofar they affect matters not covered by the services chapter. This rule again avoids inconsistencies between the two chapters and, at the same time, preserves some of the benefits of horizontal investment disciplines. However, the transparency of the investment regime is reduced, as an understanding of what type of investments are (not) allowed requires joint reading of the two chapters and possible interpretation of what might be considered an inconsistency.⁵¹

The New Zealand–Singapore FTA and the European Free Trade Association (EFTA)–Korea FTA provide that the national treatment and MFN obligations of the investment chapter do not apply to measures affecting commercial presence as governed by the services chapter. Since national treatment and MFN are the only two overlapping obligations in these FTAs, direct inconsistencies between the two chapters are avoided. This approach provides for somewhat greater transparency, as the liberalization content related to commercial presence is solely determined by the services chapter and no judgment is necessary about what might be considered an inconsistency. However, in the case of the EFTA–Korea FTA, a full understanding of the investment regime for services still requires joint reading of the services and investment chapters, as the investment chapter's national treatment and MFN obligations still apply to those forms of investments not covered by the services chapter—notably investments with a minority equity stake and no effective foreign control.⁵²

The EFTA–Singapore FTA and the Japan–Philippines FTA feature a variation of this approach. These agreements entirely remove investment in services from the scope of the investment chapter's core liberalizing obligations.⁵³ This rule offers a cleaner distinction of the roles of the services and investment chapters, but implies a loss of discipline for minority investments in services. Curiously, in the case of the Japan–Philippines EPA, this rule applies only to measures adopted or maintained by the Philippines. For Japan, the relationship between services and investment disciplines remains undefined. In addition, while services commitments are scheduled on a hybrid list basis, investment reservations are scheduled on a negative list basis and Japan's two commitment schedules do not provide for identical sectoral coverage. This approach seems to offer the least transparent treatment of investment in services and may even open the door to inconsistencies between services and investment disciplines.

A similar situation is encountered in the Japan–Singapore FTA. The agreement does not establish any rule defining the relationship between services and investment disciplines. However, Singapore has scheduled a reservation which stipulates that (i) the investment chapter's obligations on national treatment and performance requirements do not apply to sectors for which no specific services commitments are undertaken; and (ii) where sectors are subject to specific services commitments, these commitments are effectively incorporated into the investment chapter.⁵⁴ This reservation eliminates potential inconsistencies and improves on transparency along the lines discussed before. Yet again, no such reservation is found in the case of Japan.

Finally, Australia's FTAs with Thailand and Singapore offer what appears to be the most transparent solution to avoiding inconsistencies. Liberalization undertakings in these two agreements are inscribed in one single schedule of commitments, which also covers investment in goods. This approach offers the benefit of consulting only one schedule of commitments to determine the level of openness of the investment regime, while taking full advantage of the complementary coverage of investment in services by two different sets of disciplines.⁵⁵

	III. MOVEMENT OF NATURAL PERSONS

TOP NOTES ABSTRACT INTRODUCTION I. SCHEDULING APPROACH II. INVESTMENT IN SERVICES III. MOVEMENT OF NATURAL... IV. RULES OF ORIGIN V. DISPUTE SETTLEMENT VI. OTHER ELEMENTS VII. CONCLUSION

 
As in the case of investment, the inclusion of labor movements in trade agreements on services stems from the fact that the provision of many services requires the physical proximity of suppliers and consumers. At the same time, trade agreements typically seek the freeing of only certain labor flows—those directly linked to the provision of services, as distinct from permanent migration. As a second parallel to investment, many trade agreements establish two sets of disciplines for the supply of services through the presence of natural persons—namely, services chapters and horizontal chapters on the MNP. In this section, we focus on the different definitions of the MNP, exceptions of measures covered, and the relationship between services and horizontal MNP chapters.

A natural starting point for such a review is the treatment of the MNP at the multilateral level. The GATS defines mode 4 as the supply of a service ‘by a service supplier of one Member, through presence of natural persons of a Member in the territory of any other Member’. This definition extends to independent service providers, the self-employed and foreign individuals employed by foreign companies established in the territory of a WTO member. However, it excludes foreign individuals employed by domestic companies.⁵⁶

Two types of measures are expressly carved out from the scope of the GATS. First, the GATS does not apply to measures affecting access to the employment market of a member nor to measures regarding citizenship, residence, or employment on a permanent basis. Second, it does not prevent WTO members from regulating the entry of natural persons provided that regulations are not applied in such a manner as to nullify or impair the benefits accruing from specific commitments made by WTO members. In this context, the sole fact of requiring a visa for certain members and not for others is not regarded as nullifying or impairing benefits under a specific commitment.⁵⁷

Table 4 summarizes the architectural approaches adopted by the 25 East Asian FTAs. As can be seen, most of the positive list agreements have adopted the GATS definition of mode 4. Most positive list FTAs also provide for similar carve-outs with respect to covered measures as the ones established in the GATS.⁵⁸

View this table: [in this window] [in a new window]   Table 4 Movement of natural persons: key architectural choices

 
Some negative list FTAs have also followed the GATS definition of the MNP, including its carve out.⁵⁹ The other negative list FTAs have adopted a definition of the MNP that can be traced back to the NAFTA. Thus, disciplines on cross-border trade in services apply to services supplied ‘by a national of a Party in the territory of the other Party’ (whereby ‘national’ is essentially equivalent to a natural person). No further guidance is offered on what type of service suppliers are included under this definition.⁶⁰ These ‘NAFTA-style’ negative list FTAs also provide for a carve-out with respect to measures affecting access to the employment market of a party and most of them feature a carve-out for regulations affecting the entry of natural persons.⁶¹

In addition to the disciplines established in the services chapters of trade agreements, a number of East Asian FTAs feature separate rules affecting the MNPs. Like for horizontal disciplines on investment, these additional rules mostly take the form of self-standing FTA chapters which establish disciplines for the entry of business persons active in goods and services sectors. The substantive disciplines and depth of commitments established in these MNP chapters varies from agreement to agreement. They typically define categories of business persons eligible for preferential treatment, including business visitors, sales persons, traders and investors, professionals, and intra-corporate transferees. The main benefit then consists of commitments on the temporary entry of natural persons in the various categories, setting out the length of stay, eligibility conditions, applicable numerical quotas, and certain safeguards that parties can invoke. All MNP chapters feature the GATS-style carve-outs regarding access to the employment market of members and the regulation of entry of natural persons.⁶²

Historically, the inclusion of a horizontal chapter on the MNP can be traced back to the NAFTA. It is thus not surprising that all of the East Asian negative list FTAs contain such a chapter.⁶³ At the same time, the establishment of horizontal rules in this area is not inherently linked to the structure of negative list agreements. Indeed, some positive list agreements have also incorporated a horizontal MNP chapter (see right hand column of Table 4).

The dual coverage of this mode of service supply raises the question of how the two sets of disciplines are related. As in the case of investment, dual coverage can be complementary or overlapping. Complementary exists in both ways. Services disciplines apply to market access and national treatment barriers encountered ‘beyond the border’, whereas MNP chapters focus more narrowly on matters related to the entry of foreign individuals. Conversely, the latter establish certain transparency obligations not available in services chapters and offer horizontal treatment for individuals engaged in trade in goods and trade in services and investment.

The possibility of overlapping coverage emanates from the fact that services disciplines, in principle, also apply to entry measures—to the extent that they fall under the definition of market access, national treatment, or MFN. Unless commitments in the two chapters are identical, overlapping coverage may give rise to inconsistencies. Which chapter would prevail if a measure is allowed by one chapter, but prohibited by the other chapter? Just as we saw in the case of investment, most East Asian FTAs that provide for dual coverage of the MNP feature rules that define the relationship between the two sets of disciplines (also described in the right hand column of Table 4).

A number of agreements make clear that ‘immigration measures’ are exclusively dealt with by the MNP chapter. This rule effectively carves out measures affecting the entry of foreign individuals from the scope of the services chapter, thus providing for a clear delineation of the two sets of disciplines. Other agreements specify that commitments in the chapter on the MNP are subject to the limitations scheduled under the agreement's services chapter.⁶⁴ Effectively, this rule implies that commitments on the MNP emanate exclusively from the MNP chapter. However, their coverage is limited to the sectors included in the services commitments and, even then, may be qualified by limitations for specific service activities as detailed in the services schedule.⁶⁵

Some agreements do not offer a clear rule setting out the relationship between the agreements’ services and MNP chapters.⁶⁶ The absence of such a rule may give rise to inconsistencies between the two chapters, but in any case reduces the transparency of the commitments made.⁶⁷

As a final point, the EFTA–Korea FTA, the EFTA–Singapore FTA, and the Japan–Malaysia EPA offer additional benefits for foreign natural persons other than through dedicated chapters on the MNP through provisions granting temporary entry for investors and certain key personnel are found in the agreements’ investment chapters. These undertakings are subject to immigration laws and regulations relating to entry, stay, and work of natural persons. In the case of the two EFTA agreements, the relationship of the relevant provisions to the agreements’ services disciplines is not addressed, leaving the door open to potential inconsistencies. In the case of the Japan–Malaysia EPA, the relevant provision takes precedence over services disciplines.

	IV. RULES OF ORIGIN

TOP NOTES ABSTRACT INTRODUCTION I. SCHEDULING APPROACH II. INVESTMENT IN SERVICES III. MOVEMENT OF NATURAL... IV. RULES OF ORIGIN V. DISPUTE SETTLEMENT VI. OTHER ELEMENTS VII. CONCLUSION

 
FTAs extend trade benefits to signatory parties, thereby discriminating against trade with non-parties. Yet what exactly constitutes trade between signatory parties that is eligible for preferential treatment? FTAs resolve this question through so-called rules of origin. In the case of goods trade, rules of origin determine to what extent products with imported intermediate inputs from non-parties qualify for trade preferences. In the case of trade in services, rules of origin are broader, reflecting the fact that services agreements apply to both services and service suppliers. In principle, questions of origin arise in three different contexts:

• Origin of services. Would a service imported by country A from country B qualify for trade preferences, if the provision of the service relied on intermediate service imports from country C?
  
• Origin of service suppliers in the form of juridical persons. Suppose that a service provider from country C has established a commercial presence in country B. Under which circumstances, if any, would this service provider be allowed to export services to country A—through modes 1, 2, or 3?
  
• Origin of service suppliers in the form of natural persons. Suppose that an individual from country C has certain ties with country B. What kind of ties would allow this individual to export services to country A via mode 4?
  

In what follows, we discuss the relevant rules of origin established by East Asian FTAs. The discussion is divided into three parts, corresponding to the three different types of rules of origin.

A. Rules of origin for services
Most FTAs establish a rule of origin for services through the definition of what constitutes a ‘service of another party’. Thus, services disciplines apply to services that are supplied ‘from or in the territory of another party’—corresponding to modes 1 and 2.⁶⁸ Five agreements expressly allow a party to deny the benefits of the services chapter, if it establishes that the service is supplied from or in the territory of a non-party.⁶⁹ In other words, as long as a service originates within the territory of the exporting party, it would seem to be eligible for preferential treatment.⁷⁰

Twelve East Asian FTAs feature a special rule of origin for maritime transport services.⁷¹ Thus, maritime transport services are eligible for preferential treatment only if they are supplied by a vessel registered under the law of another party or by a person of that other party which operates and/or uses the vessel with which services are supplied. The five FTAs mentioned before again expressly allow a party to deny the benefits of the services chapter, if similar conditions are not met.⁷² The intent of this special rule of origin is to exclude from preferential treatment maritime transport services which are supplied by transiting vessels which do not have any association with the exporting FTA partner.

Neither the GATS nor the East Asian FTAs establish rules of origin for services supplied through commercial presence or the presence of natural persons. For these modes of supply, services agreements define a ‘service of another member’ as a service supplied by a service supplier of that other member. Service suppliers, in turn, are subject to separate rules of origin which we discuss in the remainder of this section.

B. Rules of origin for juridical persons
FTAs feature provisions that determine to what extent a non-party service supplier established in the territory of an FTA party in the form of a juridical person can benefit from preferential treatment. Such provisions affect services exported by a juridical person on a cross-border basis, via consumption abroad, or through the establishment of a commercial presence in another FTA territory.

The rules of origin for juridical persons are embedded in the definition of a juridical person, denial of benefit clauses, and extension of benefit clauses of FTA services chapters. For FTAs that govern investment in services in separate investment disciplines, additional rules are found in the definition of ‘investors of the other party’ and investor denial of benefit clauses.

Most East Asian FTAs have created ‘fairly’ liberal rules of origin, extending FTA benefits to juridical persons that are constituted or otherwise organized under the laws of a party and that have substantive business operations in the territory of that party—regardless of who owns or controls the juridical persons. In other words, service suppliers from non-parties can take advantage of the market opening negotiated under an FTA, as long as they establish a juridical person in one of the FTA member countries and are commercially active in that country. The latter requirement arguably serves to exclude ‘mailbox’ companies that merely seek to exploit an FTA's trade preferences and that do not have any commercial interest in the country of establishment.⁷³

Notwithstanding this liberal picture, there are important exceptions and qualifications. First, two FTAs have adopted a significantly more restrictive rule of origin, limiting the benefits of FTAs to domestically owned or controlled firms.⁷⁴ In countries with substantial ‘non-party’ foreign participation in the service sector, such a requirement can narrow markedly the set of service suppliers eligible for preferences.⁷⁵ Both FTAs define domestic ownership as domestic persons holding a majority equity share in the service supplier and domestic control as domestic persons having the power to name the majority of directors or otherwise directing the service supplier's actions.⁷⁶

Second, several agreements provide for a more liberal application of the substantive business operations requirement.⁷⁷ In particular, the services chapters of these agreements extend FTA benefits to duly constituted juridical persons with substantive business operations in the territory of any FTA party—not just the territory of the party in which the juridical person is constituted or otherwise organized. The investment chapter of the New Zealand–Singapore FTA goes further by eliminating the substantive business operations test altogether—requiring only establishment or registration under a party's applicable laws.

Third, a number of agreements have incorporated foreign policy-related exceptions to otherwise liberal rules of origin, for which a party is allowed to deny FTA benefits to a juridical person from a non-party if (i) the denying party does not have diplomatic relations with the non-party, or (ii) the denying party prohibits transactions with the enterprise in question.⁷⁸

Fourth, as pointed out before, most FTAs require juridical persons to be constituted or otherwise organized under the laws of a party to be eligible for FTA benefits. The concept of ‘constitution or other organization’ arguably encompasses non-incorporated legal entities such as branches and representative offices.⁷⁹ The only exceptions are the investment chapters of the Japan–Malaysia EPA and the Japan–Philippines EPA, which expressly exclude branches of enterprises of third states from the definition of ‘investor of the other party’.

Fifth, 16 of the 25 FTAs do not require service suppliers that are owned or controlled by parties to show substantive business operations in the territory of any party.⁸⁰ They only need to be constituted or otherwise organized under the laws of a party. This differential treatment implies that branches of such service suppliers located in a non-party benefit from preferential treatment, because these branches can be seen as being ultimately constituted under the laws of a party. In other words, the relevant FTAs offer party-owned or controlled service providers the benefit of relying on their global branch networks when supplying services to FTA markets.⁸¹

C. Rules of origin for natural persons
The origin question for natural persons is relatively straightforward. An individual's economic ties with a particular country are closely linked to that individual's nationality or residency. Indeed, all East Asian FTAs extend trade benefits to the nationals of the signatory parties.⁸² In addition, a number of agreements extend benefits to individuals that have the right to permanent residency in an FTA member.⁸³ In certain cases, permanent residents only qualify for trade preferences, if the importing party accords substantially the same treatment to permanent residents as to nationals in respect of measures affecting services trade.⁸⁴

Provided the nationality or right to permanent residency conditions are met, agreements generally extend FTA benefits regardless of whether individuals actually reside in the territory of an FTA party. The only exception is the US–Vietnam BTA, which requires natural persons to reside in the territory of the ‘exporting’ FTA party. For example, a US citizen residing in Hong Kong would appear to be ineligible for trade preferences under this bilateral agreement.

	V. DISPUTE SETTLEMENT

TOP NOTES ABSTRACT INTRODUCTION I. SCHEDULING APPROACH II. INVESTMENT IN SERVICES III. MOVEMENT OF NATURAL... IV. RULES OF ORIGIN V. DISPUTE SETTLEMENT VI. OTHER ELEMENTS VII. CONCLUSION

 
Rules, rights, obligations, and commitments established in trade agreements are of limited value if they are not supported by an instrument capable of determining when they are being infringed and to compel parties to abide by them. Thus, most East Asian FTAs provide for dispute settlement mechanisms (DSMs) to resolve differences between parties on the interpretation and implementation of the agreements’ disciplines.

Effective dispute settlement is central for harnessing the credibility benefit offered by trade agreements. The existence of a sound mechanism for remedying non-compliance with legal obligations assures traders and investors that trade policy will not become more restrictive at the discretion of the ‘importing’ party.

Most East Asian FTAs follow the standard practice in modern FTAs of establishing two distinct dispute settlement procedures: first, a state-to-state DSM that usually applies to all chapters of the agreement—including trade in goods, trade in services, investment and intellectual property; and second, an investor-to-state DSM that applies only to disputes between a private party and a host country government on an agreement's investment disciplines.

The substantive and procedural elements of DSMs embedded in East Asian FTAs vary in important ways. In general, the effectiveness of a DSM can be seen to depend on three factors: the ability of a party to prevent the establishment of arbitral panels; the power of instruments to enforce arbitral rulings; and the mechanism's institutional underpinnings. In what follows, we will review the state-to-state and investor-to-state DSMs found in East Asia and evaluate their effectiveness along these three dimensions.

A. State-to-state dispute settlement
Except for China's CEPAs with Hong Kong and Macao and the US–Vietnam BTA, all agreements feature rules governing the resolution of disputes between parties. State-to-state DSMs typically apply to all FTA disciplines covering trade and investment in services. The only exception is the Japan–Mexico EPA, which removes provisions found in the financial services chapter from the reach of the agreement's dispute settlement system.

In many ways, state-to-state DSMs found in FTAs share many of the procedural elements of the WTO Dispute Settlement Understanding (DSU). In particular, they typically foresee three procedural stages: consultations, decision, and implementation. The consultations phase offers a diplomatic forum for discussion, ideally leading to a mutually satisfactory solution to the dispute between the parties. Even if consultations fail to produce such a solution, they can serve the parties to better understand their respective positions and the measures at issue, providing the basis for well-informed arbitration.

If consultations do not lead to a resolution of the dispute, most FTAs foresee the establishment of an arbitral panel that decides on the consistency of the measures in question with the obligations established in an FTA. It is at this second stage where significant differences between DSMs exist. WTO dispute settlement rules do not require the party complained against—the ‘defending’ party—to consent to the establishment of an arbitral panel. In fact, this feature of the WTO DSU was brought about by the Uruguay Round and has been hailed as one of the most important improvements in multilateral trading rules.⁸⁵

Ten East Asian FTAs have followed the WTO DSU in providing for a ‘right to a panel’.⁸⁶ Typically, parties are required to appoint the panelists charged with ruling on the dispute. In case a party fails to do so—or fails to put forward candidates for a list from which panelists are selected—the relevant DSMs have established mechanisms to overcome a possible procedural deadlock. Several agreements have directly followed the WTO DSU in allowing the complaining party to ask the Director-General of the WTO to perform the necessary appointments if the defending party fails to make its appointment(s).⁸⁷ Other agreements provide for a missing panelist to be drawn by lot from a list submitted only by the complaining party, or allow for a panel to be composed of a single panelist appointed by the complaining party.⁸⁸

In contrast, the DSMs of 11 East Asian FTAs ultimately allow parties to block the establishment of panels.⁸⁹ Even though those agreements also require parties to appoint panelists, they do not feature any mechanism to resolve a procedural deadlock if a party fails to make its appointment(s) or fails to put forward candidates for the list from which panelists are to be selected. Experience with dispute settlement under NAFTA has shown that ‘defending’ parties make use of this procedural loophole to prevent the establishment of arbitral panels.⁹⁰

The possibility of blocking the establishment of panels limits the effectiveness of dispute settlement. Moral suasion and the fact that trade disputes are ‘repeated games’ with reversing roles may still induce the defending parties to agree to the establishment of arbitral panels. However, from the point of view of private traders and investors, the absence of an automatic right to a panel introduces uncertainty that ultimately reduces the credibility of FTA liberalization undertakings.

The decision of an arbitral panel determines the consistency of the disputed measures with FTA obligations and, in certain cases, may also provide recommendations to parties on how to best put inconsistent measures into conformity with FTA rules. Most East Asian FTAs follow the WTO DSU in allowing the defending party a ‘reasonable’ period of time to implement the panel's decision. If the complaining party feels that the implementation period proposed by the defending party is excessive, it can seek a further arbitral decision on what timeframe can be considered reasonable. The Chile–Korea FTA has sought to expedite the implementation process by requiring panel decisions to immediately spell out a timeframe for compliance. In addition, some agreements have established fixed terms in their text to ensure a prompt implement of the panels’ rulings.⁹¹

If the defending party has not complied with the panel's decision at the end of the implementation period, the complaining party has the right to retaliate. Like under the WTO DSU, retaliation in FTAs takes the form of suspending trade benefits equivalent in value to the damages caused by the defending party's inconsistent measures. The economic drawbacks of this form of ‘shoot yourself in the foot’ enforcement are well-known.⁹² Nonetheless, parties to most FTAs see the suspension of trade benefits as the only effective political economy instrument to induce implementation of panel decisions. One noteworthy innovation is introduced by the DSM of the Singapore–US FTA. Under this agreement, the defending party can avoid the suspension of trade benefits by offering the complaining party the payment of an annual monetary compensation. Unless the parties agree otherwise, the amount of the compensation is equivalent to 50% of the level of damages suffered by the complaining party.⁹³

The Lao PDR–US BTA stands out with a unique dispute settlement system. While parties are encouraged to hold consultations on matters relating to the interpretation and implementation of the agreement, the BTA does not provide for arbitral panels if consultations cannot resolve parties’ differences. Instead, a party can make a unilateral determination that the other party has failed to implement one or more obligations and request compensation for the damages suffered. If the requested party fails to provide such compensation, the agreement allows the requesting party to unilaterally determine and impose retaliatory measures equivalent in value to the damages suffered. Arguably, the lack of independent arbitration under the Lao PDR–US BTA transforms disputes resolution into a power-driven—rather than law-based—system. As pointed out before, unilateral retaliatory measures can exacerbate trade controversies rather than solve them, especially when non-compliance with BTA obligations is not obvious. In addition, differences in the size of the two parties’ economies suggest that the agreement's retaliation mechanism may be effectively used by one party only.

Finally, the credibility of a DSM does not depend only on its procedural rules, but also on the broader institutional framework in which it is embedded. At the multilateral level, the WTO Secretariat provides legal assistance for arbitral panels, drawing on a pool of experienced trade lawyers. In addition, parties have the right to appeal panel decisions before a permanent seven-member Appellate Body. Since the establishment of the WTO in 1995, there have been more than 100 panel decisions and more than 70 rulings by the WTO's Appellate Body—forming a substantial body of accumulated case law. The record of WTO members in implementing arbitral decisions is generally considered good, notwithstanding implementation deficiencies in certain cases.⁹⁴

No comparable institutional underpinnings exist in FTAs. Most agreements establish ad-hoc administrative committees composed of government officials from the parties, but no self-standing secretariats with the mandate and capacity to provide legal support to arbitral panels. In addition, they do not provide for the possibility of appealing the findings of arbitral panels. The only exception is the ASEAN dispute settlement mechanism. It has both an independent secretariat equipped to provide legal support and a permanent Appellate Body, closely following the WTO model.⁹⁵

To the extent that the weaker institutional underpinnings of FTA DSMs lower the real or perceived quality of dispute settlement, parties may be more reluctant to implement adverse panel decisions—thereby reducing the credibility of FTA commitments.

B. Investor-to-state dispute settlement
As suggested by their name, investor-to-state DSMs afford private investors the ability to invoke an FTA's (or separate) investment disciplines directly against a government before an international arbitration court. This form of dispute resolution offers certain advantages to foreign investors. They do not need to convince their home governments to challenge non-compliant measures of the host country. In addition, if arbitral tribunals confirm the inconsistency of host country measures with investment disciplines, foreign investors can request monetary compensation for the damages suffered. A government's acceptance of such scrutiny, in turn, can strengthen the credibility of its investment regime. At the same time, economists disagree about the extent to which the credibility afforded by this form of arbitration is associated with greater foreign investment flows, with some studies suggesting only a small, if any, effect.⁹⁶

It is also worth noting that foreign investors mostly resort to this form of arbitration when a government's action leads them to exit a market—especially, in the case of asset expropriation. The pursuit of international arbitration implies a rupture in an investor's relations with the host government, which may be difficult to reconcile with continued business operations. In addition, investor-to-state arbitration decisions do not require governments to bring non-compliant measures into conformity with an agreement's investment disciplines, thus offering no forward-looking relief for foreign investors. From an investor's viewpoint, state-to-state and investor-to-state arbitration should therefore be seen as complements, rather than substitutes.⁹⁷ From the viewpoint of defending governments, in turn, some arbitral decisions have been criticized for their ‘expansive’ interpretation of treaty provisions, creating more burdensome obligations than those originally intended by the signatory parties.⁹⁸

Except the Japan–Philippines EPA, all of the East Asian FTAs that have an investment chapter or a separate investment treaty provide for investor-to-state dispute settlement.⁹⁹ For agreements with dual coverage of investment in services, the reach of an investor-to-state DSM depends critically on the rules that define the relationship between trade in services and horizontal investment chapters (Section II.B). For example, private investors in services may not be able to challenge national treatment violations through investor-to-state arbitration, if an agreement gives precedence to services disciplines in the legal effect of the national treatment obligation.

The ability of a foreign investor to initiate an arbitration claim depends on whether that investor is covered under the rule of origin established by an FTA or investment treaty. In other words, access to investor-to-state arbitration is itself a trade preference. As discussed in Section IV.B, most East Asian FTAs feature liberal rules of origin which include all service providers constituted under the laws of a party and engaging in substantive business operations, regardless of who owns or controls them.

In addition to being a covered investor, the initiation of investor-to-state arbitration proceedings is subject to the consent of the affected government. Most East Asian FTAs and investment treaties provide for automatic consent to arbitration by the parties. Exceptions are the EFTA–Singapore FTA and the New Zealand–Singapore FTA, which allow parties to block the initiation of arbitration claims. In the case of the EFTA–Korea FTA, a party's consent to arbitration depends on the nature of the dispute. Automatic consent only applies to disputes initiated by foreign investors that already have an investment position in a host country and not to those involving investors that merely seek to make an investment. The Nicaragua–Taiwan (China) FTA conditions automatic consent to investors coming forward with arbitration claims within 3 years from the moment they have become aware of the alleged violation of the agreement. As in the case of state-to-state dispute settlement, the absence of a right to arbitration may weaken the effectiveness of an investor-to-state DSM and, ultimately, the credibility of the investment regime.

Most East Asian investor-to-state DSMs follow standard international practice in allowing for two types of arbitration procedures. Foreign investors can submit their arbitration claims either to the International Centre for the Settlement of Investment Disputes (ICSID) or to ad-hoc arbitral tribunals established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).¹⁰⁰

Finally, some agreements feature special provisions for investor-to-state disputes in the area of financial services. As pointed out above, the provision of financial services raises special regulatory sensitivities. Several governments have shunned the exposure of measures in this sector to the full scrutiny of an investor-to-state DSM.¹⁰¹ In particular, the Nicaragua–Taiwan (China) FTA, the Panama–Singapore FTA, and the Singapore–US FTA allow arbitration claims based on the breach of certain obligations only—namely, expropriation and compensation, transfer of funds, and denial of benefit.¹⁰² Thus, even though these three FTAs provide for national treatment, MFN and market access in financial services, private investors cannot bring arbitration claims against governments pertaining to breaches of these core market opening obligations.¹⁰³

Some agreements introduce yet another restriction on investor-to-state arbitration in financial services.¹⁰⁴ These agreements require authorization from a joint FTA committee to proceed with investor-to-state arbitration, if the defending government invokes one of the exceptions to financial services disciplines—relating to prudential measures, monetary and exchange rate policy, and matters affecting the soundness and integrity of the financial system. If the joint FTA committee does not reach a conclusion, one agreement—the EFTA–Korea FTA—allows the investor to proceed with its arbitration claim. The other agreements allow the defending party in this case to request the establishment of a state-to-state arbitration panel that makes a binding ruling on the legality of the exceptions defense.

	VI. OTHER ELEMENTS

TOP NOTES ABSTRACT INTRODUCTION I. SCHEDULING APPROACH II. INVESTMENT IN SERVICES III. MOVEMENT OF NATURAL... IV. RULES OF ORIGIN V. DISPUTE SETTLEMENT VI. OTHER ELEMENTS VII. CONCLUSION

 
In principle, FTAs offer a fertile forum to address a number of rule-making and market opening questions for which progress at the multilateral level has been lacklustre or where it is more ‘natural’ to cooperate at the bilateral or regional level. In this final section, we point to a number of elements in which East Asian FTAs have (and have not) seized on the potential for deeper integration.¹⁰⁵ In particular, we focus on three topics: recognition of professional qualifications, domestic regulation, and trade rules on government procurement, subsidies and emergency safeguards.

A. Recognition of professional qualifications
For professional services, the absence of explicit trade barriers is only a necessary but not sufficient condition for the entry of foreign service providers. To effectively compete, foreign professionals must either obtain the mandated local qualifications or have their foreign qualifications recognized. For certain professions, the former may require significant educational investments over several years, which may pose a de facto barrier to market entry. The latter is an option for those professions with a high degree of generic skills content—for example, doctors, architects, or engineers. Even then, a government would be only willing to consider recognition if it has confidence that the foreign educational system and professional standards applied abroad are comparable to domestic requirements. Thus, recognition is more likely to be feasible where professional standards are harmonized or, for historical reasons, share a common foundation.¹⁰⁶

The majority of East Asian FTAs contain ‘soft-law’ provisions, which encourage parties—or their competent regulatory bodies—to enter into negotiations towards the recognition of professional qualifications.¹⁰⁷ Some agreements identify specific professions for which such negotiations should take place on a priority basis. In some cases, FTAs have established a negotiating timeframe of 1–3 years after entry into force of the FTA or simply call ‘for an early outcome’.

In the 25 FTAs under review, only five agreements feature binding commitments to recognize foreign qualifications.¹⁰⁸ ASEAN members concluded mutual recognition agreements for engineers and nursing professionals, along with a set of minimum qualification requirements that eligible professionals need to meet.¹⁰⁹ Under the Korea–Singapore FTA, the two parties committed to recognize the professional qualifications of engineers obtained from 20 Korean universities (for Singapore) and two Singaporean universities (for Korea). The universities were to be selected by each party ‘based on mutual trust and common benchmarks’.¹¹⁰ Under the Singapore–US FTA, Singapore committed to recognize the degrees of four US law schools for the purposes of admission into the Singapore Bar. However, recognition is limited to individuals who are Singapore citizens or Singapore permanent residents and additional qualifications in Singapore law are necessary for those individuals to be eligible for recognition.¹¹¹ The four universities were to be selected through consultations between the two parties.

Finally, a different form of recognition is established by China's commitments in its two CEPAs with Hong Kong and Macao. For professionals in the fields of law and healthcare, permanent residents from Hong Kong and Macao who meet certain qualification standards in those two territories are allowed to ‘sit’ the Mainland's qualifying exams. These commitments fall short of full recognition.¹¹² However, they still serve to facilitate the mobility of professionals, because they grant permanent residents from Hong Kong and Macao the right to have their qualifications tested in the Mainland without undergoing additional training. Similarly, under the Japan–Philippines EPA, nurses who meet certain qualification standards in the Philippines can enter Japan for the purpose of obtaining additional training to eventually supply their services in Japan. Even though this type of commitment falls short of full recognition, it offers some benefit to nurses from the Philippines in that they do not have to re-qualify ‘from scratch’ in Japan.

B. Domestic regulation
Most services agreements establish disciplines on domestic regulation. These disciplines are intended to cover measures that are non-discriminatory and qualitative in nature, presumably falling outside the scope of agreements’ MFN, national treatment, and market access obligations.¹¹³ Governments adopt these types of measures for legitimate regulatory purposes—such as protecting consumers, remedying market failures, and ensuring the quality of services. At the same time, domestic regulatory measures may impose restrictions to trade in services much beyond what is warranted to attain certain policy goals. Thus, disciplines on domestic regulation seek to ensure that internal government measures do not unnecessarily undermine the market opening offered by the core obligations on national treatment, MFN, and market access. In doing so, these disciplines serve to enhance the credibility of domestic services policies, because foreign service providers are offered some assurance that a government will not seek recourse to domestic regulatory measures to protect domestic service suppliers. We focus here on two types of regulatory obligations: a necessity test for domestic regulations and sectoral regulatory disciplines.

1. Necessity test
The GATS features what may be called a ‘weak’ necessity test for certain regulatory measures. WTO members are required to ensure that licensing and qualification requirements and technical standards are based on objective and transparent criteria and are not more burdensome than necessary to ensure the quality of a service. In addition, licensing procedures should not in themselves pose a restriction on the supply of a service. However, these requirements are subject to two important caveats. They can only be invoked if the relevant regulatory measures nullify or impair specific commitments and could not reasonably have been expected when specific commitments were made.¹¹⁴

A number of East Asian FTAs have effectively replicated the weak necessity test of the GATS.¹¹⁵ Several others adopt language similar to the GATS, but the necessity test applies only on a best endeavor basis.¹¹⁶ In other words, these agreements provide for an even weaker regulatory discipline than the GATS. The only East Asian FTA featuring a strong necessity test is the Trans-Pacific EPA. It lists all the requirements found in the GATS, but does not limit regulatory scrutiny to situations where specific commitments have been nullified or impaired and regulatory measures could not reasonably have been expected. The necessity test of the Trans-Pacific EPA is potentially far-reaching. In principle, it applies to all sectors, all four modes of supply, and all measures—even those for which reservations have been listed by the parties.

2. Sectoral disciplines
Like a necessity test, sectoral disciplines seek to ensure that legitimate regulatory interventions do not lead to unwarranted barriers to trade in services. However, sectoral disciplines can better account for the regulatory environment in which specific services are provided and thereby strengthen the reach of regulatory rules. Ultimately, greater regulatory scrutiny serves to enhance the credibility of market opening commitments in relevant service sectors.

WTO members have established regulatory rules under the GATS in two service sectors—accountancy services and telecommunications services. In the case of accountancy services, WTO members agreed on a set of disciplines that, among other things, establishes a ‘strong’ necessity test for measures relating to licensing requirements and procedures, technical standards and qualification requirements.¹¹⁷ In the area of telecommunications, post-Uruguay Round negotiations led to a liberalization package that included a Reference Paper on regulatory principles. Among other things, this reference paper sets rules on network interconnection, universal service, the independence of regulatory agencies, and the allocation of the radio spectrum.¹¹⁸

Several East Asian FTAs have introduced new sectoral disciplines, focusing mainly on telecommunications services and electronic commerce-related services.¹¹⁹ In the case of the former, dedicated chapters on telecommunications have deepened the obligations of the GATS Reference Paper. In the case of the latter, FTAs have established rules on the electronic supply of services, online consumer protection, data protection, electronic signatures, and other matters. In addition to these two main areas, the Panama–Singapore FTA features certain regulatory disciplines in the maritime transport sector, such as non-discriminatory access to a list of essential port services.¹²⁰

The scope of regulatory disciplines in these areas varies significantly from agreement to agreement. In addition, some of the regulatory provisions create binding obligations on the matters covered, whereas others establish only ‘soft-law’ or best-endeavor principles. A detailed comparative review of regulatory rules in East Asian FTAs and their value added relative to the GATS would go beyond the scope of this paper.¹²¹

3. Government procurement, subsidies, and emergency safeguards
Government procurement of services is largely carved out from the GATS. Specifically, the GATS provides that obligations on national treatment, MFN, and market access do not apply to measures ‘governing the procurement by governmental agencies of services purchased for governmental purposes’.¹²² Most East Asian FTAs have followed the same approach or have carved out government procurement from the scope of services disciplines altogether.¹²³ The only exceptions are the services chapters of the Lao PDR–US BTA and the US–Vietnam BTA which do not feature a government procurement carve-out. Thus, government purchases of services—like any measure affecting trade in services—are subject to the core market opening obligations of these agreements, especially national treatment.¹²⁴

In the area of subsidies, the GATS does not establish any special discipline. It merely provides for a negotiating mandate to develop necessary disciplines to avoid ‘trade-distortive’ effects of subsidies. In the absence of special rules, subsidies in services are subject to all obligations under the GATS—most importantly, national treatment. In other words, in sectors where specific commitments are undertaken and unless national treatment limitations with respect to subsidies are inscribed, government aid offered to domestic service suppliers has to be extended on a non-discriminatory basis to foreign service suppliers. Like the GATS, East Asian FTAs have not established any dedicated disciplines for subsidies. On the contrary, rules on subsidies in 15 East Asian FTAs fall short of multilateral rules as they carve out subsidies from the scope of services disciplines.¹²⁵

Finally, the GATS does not provide for a mechanism by which WTO members can temporarily depart from their commitments in response to an unanticipated surge in services imports with harmful effects on domestic service suppliers. The establishment of such emergency safeguard measures (ESMs)—similar to those provided for in the WTO Agreement on Safeguards for goods trade—was considered during the Uruguay Round, but no consensus could be achieved. The GATS merely calls for negotiations ‘on the question of emergency safeguard measures based on the principle of non-discrimination’. These negotiations have not led to a tangible outcome, as WTO members still disagree about the feasibility and desirability of such measures.¹²⁶

East Asian FTAs have not established services ESMs either. Only one agreement—the Japan–Malaysia EPA—foresees the development of guidelines and procedures for the application of ESMs within 5 years of the entry into force of the agreement. Interestingly, the India–Singapore Economic Cooperation Agreement (ECA) expressly forbids the initiation of safeguards investigations and the imposition of safeguards measures.

Two additional observations in relation to ESMs are worth making. First, the group of ASEAN countries has been one of the main advocates for the establishment of ESMs at the WTO.¹²⁷ At the same time, ASEAN's own regional trade agreement in services—the AFAS—does not feature an emergency safeguard mechanism.¹²⁸ Second, the lack of ESMs in bilateral and regional agreements may constrain the application of multilateral emergency safeguard measures, if WTO members were ever to agree on such measures. Unless ESMs are also incorporated into FTAs, countries departing from their GATS commitments may run afoul of their FTA liberalization undertakings and may be liable to dispute settlement under these agreements.

	VII. CONCLUSION

TOP NOTES ABSTRACT INTRODUCTION I. SCHEDULING APPROACH II. INVESTMENT IN SERVICES III. MOVEMENT OF NATURAL... IV. RULES OF ORIGIN V. DISPUTE SETTLEMENT VI. OTHER ELEMENTS VII. CONCLUSION

 
The East Asia region offers an interesting case study of architectural approaches towards services FTAs. The existing 25 agreements reviewed in this study offer a wide variety of architectural approaches, each with their own advantages and drawbacks. As such, they hold important lessons for future agreements—in East Asia and elsewhere. In this conclusion, we briefly wish to emphasize three findings emerging from our study that we feel are of particular relevance for policymakers.

First, much of the discussion in policy circles on services FTAs has focused on the choice of scheduling approach. We would argue that this choice is a mere technicality that should be separated from a government's willingness to commit to open service markets. Any trade lawyer trained in the art can produce without much difficulty a negative list schedule with the same legal effect as a given positive list schedule—and vice versa. To put it differently, governments that wish to make use of trade agreements to advance liberalization and enhance the credibility and transparency of the trading regime can do so under either positive listing or negative listing. Equally, governments that seek to retain future ‘policy flexibility’ will be able to embed appropriately crafted reservations in any commitment schedule, regardless of the scheduling approach. In the end, there are no inherent transparency or credibility advantages associated with either negative or positive listing.

Second, a considerable number of East Asian FTAs provides for dual coverage of two modes of service supply—investment and the MNP. Dual coverage offers the benefit of complementing a set of trading obligations that apply to every sector in the economy with disciplines specific to services. At the same time, dual coverage requires rules that define the relationship between services disciplines and the relevant horizontal obligations. Some of the rules found in East Asian agreements appear to reduce the transparency and credibility of market opening commitments and may even give rise to inconsistencies in these commitments. It is difficult to evaluate the severity of this problem. None of the FTAs analyzed in this study has been legally tested in this respect. That said, to avoid misinterpretations, governments are well-advised to opt for rules that offer a clear delineation of overlapping disciplines.

Third, there are encouraging signs of progress in promoting regulatory cooperation between countries. Several FTAs have incorporated agreements towards the recognition of professional qualifications. Admittedly, the number of these agreements and the range of professions covered are still small. However, it should be kept in mind that the negotiation of such agreements can be a complex undertaking, as national regulatory systems may not be easily compatible. Often, recognition requires some level of prior harmonization of qualification standards. In addition to actual recognition agreements, most East Asian FTAs feature soft-law provisions encouraging national regulators to engage in a dialog towards facilitating the movement of professionals. It would be unrealistic to expect rapid progress in this area. However, in the longer term, such regulatory initiatives have the potential to promote positive integration in a way not feasible at the WTO.

	NOTES

TOP NOTES ABSTRACT INTRODUCTION I. SCHEDULING APPROACH II. INVESTMENT IN SERVICES III. MOVEMENT OF NATURAL... IV. RULES OF ORIGIN V. DISPUTE SETTLEMENT VI. OTHER ELEMENTS VII. CONCLUSION

 
This article is an output of a research project undertaken by the World Bank's Poverty Reduction and Economic Management Department for East Asia. The authors are grateful to Rolf Adlung, Nasser Al Zubi, Daniel Crosby, Panos Delimatsis, Felipe Hees, Christoph König, Juan Marchetti, Sébastien Miroudot, Christian Pauletto, Sebastián Sáez, Constantinos Stephanou, Carlos Gimeno Verdejo, and Mahani Zainal-Abidin for helpful comments and suggestions. The views expressed in this article are the authors’ own and do not necessarily represent those of their respective institutions.

¹ For a review some of the key architectural innovations of services FTAs, see OECD, ‘The Relationship between Regional Trade Agreements and the Multilateral Trading System: Services’, Working Party of the Trade Committee, OECD document TD/TC/WP(2002)27/FINAL, 2002; and Sauvé Pierre, ‘Adding Value at the Periphery: Elements of GATS+ Regional Agreements in Services’, Paper prepared for the seminar Eyes Wide Shut? Beyond Market Access in North-South Regional Trade Arrangements, International Development Research Center, Ottawa 2005. Stephenson Sherry, ‘Examining APEC's Progress towards Reaching the Bogor Goals for Services Liberalization’, Draft paper prepared for Pacific Economic Cooperation Council, 2005. Available online at http://www.apec.org/content/apec/documents_reports/committee_trade_investment/2006.html, visited September 2006) and Roy et al., Services Liberalization in the New Generation of Preferential Trade Agreements (PTAs): How Much Further than the GATS?, WTO Staff Working Paper No. ERSD-2006-07 (Geneva: World Trade Organization, 2006) evaluate the liberalization content of selected bilateral and regional agreements. On the negotiating experiences of countries in Latin America and the Caribbean, see Stephenson Sherry (ed.) Services Trade in the Western Hemisphere: Liberalization, Integration, and Reform. (Washington, DC: Organization of American States and Brookings Institution Press, 2000); Sáez Sebastián, Trade in Services Negotiations: A Review of the Experience of the United States and the European Union in Latin America. SERIE Comercio Internacional, no. 76, (Santiago, Chile: United Nations Economic Commission for Latin America and the Caribbean, 2005); Marconini Mario, Services in Regional Agreements between Latin American and Developed Countries. SERIE Comercio Internacional, no. 71 (Santiago, Chile: United Nations Economic Commission for Latin America and the Caribbean, 2006), and Pereira Goncalves et al., Financial Services and Trade Agreements in Latin America and the Caribbean: an Overview, Policy Research Working Paper No. 4181 (Washington, DC: The World Bank, 2007).

² For the purposes of this article, we adopt the World Bank's classification of East Asia, which encompasses countries in both Eastern Asia and Southeast Asia, as classified by the United Nations.

³ Fink Carsten and Molinuevo Martín, East Asian FTAs in Services: Liberalization Content and WTO rules, Mimeo, 2007.

⁴ Throughout the article and unless other terms are employed, we use the term ‘FTA’ loosely to also include other types of trade agreements that seek the liberalization of trade in services—such as bilateral trade agreements (BTAs) or economic partnership agreements (EPAs). Similarly, we refer to ‘countries’ in a broad sense, so as to encompass any geographical entity with international personality and capable of conducting an independent foreign economic policy.

⁵ However, this exception usually does not apply to aircraft repair and maintenance services, the selling and marketing of air transport services, and computer reservation system services.

⁶ In addition to the sectoral carve-outs found in the services chapters of FTAs, investment chapters may also exclude certain activities from the scope of investment disciplines. For example, under the Japan–Mexico EPA, Mexico scheduled a list of activities reserved to the state—including telegraph services, postal services, and electricity distribution—and for which foreign entry may be refused.

⁷ Namely, the Lao PDR–US BTA, the Mainland–Hong Kong CEPA, the Mainland–Macao CEPA, the New Zealand–Singapore FTA, and the Vietnam–US BTA.

⁸ In principle, the agreement specifies that ‘each party’ is not allowed to maintain any restriction on market access in the listed sectors and on national treatment. However, the agreement also provides that the obligations of the US are subject to the market access and national treatment limitations scheduled by the US under the GATS (see Articles 32 and 33 of the Lao PDR–US BTA). In addition, market access and national treatment do not apply to the United States with respect to the financial services sector (see Article 35 of the agreement).

⁹ See Fink Carsten, ‘A Macroeconomic Perspective on China's Liberalization of Trade in Services’, in Henry Gao and Donald Lewis (eds), China's Participation in the WTO (London: Cameron May, 2005).

¹⁰ See GATS Articles XVI.1 and XVII.1.

¹¹ A negative list of trade-restrictive measures also prevails, when a scheduling member does not explicitly indicate ‘None, except ...’, but inscribes one or more limitations applying to a listed sector. For further details on the scheduling of GATS commitments, see WTO document S/CSC/W/19.

¹² Other studies have also characterized GATS-style agreements as hybrid list agreements. See Hoekman Bernard and Sauvé Pierre, Liberalizing Trade in Services, Discussion Paper No. 243 (Washington, DC: The World Bank, 1994); OECD, above n 1; and UNCTAD, ‘National Treatment’, UNCTAD Series on Issues in International Investment Agreements (New York and Geneva: United Nations, 1999).

¹³ For a more comprehensive discussion of modes of supply, see Adlung Rudolf and Mattoo Aaditya, ‘The GATS’, in Aaditya Mattoo et al. (eds), A Handbook of International Trade in Services (Washington, DC: The World Bank and Oxford University Press, 2008).

¹⁴ The relationship between the GATS market access and national treatment disciplines has been subject to conflicting legal interpretations. See Mattoo Aaditya, ‘National Treatment in the GATS: Corner-Stone or Pandora's Box?’ 31 (1) Journal of World Trade (1997), at 107–35; Pauwelyn Joost, ‘Rien ne Va Plus? Distinguishing Domestic Regulation From Market Access in GATT and GATS’, 4 (2) World Trade Review (2005), at 131–70; Delimatsis Panagiotis, ‘Don't Gamble with GATS—The Interaction Between Articles VI, XVI, XVII and XVIII in the Light of the US-Gambling Case’, 40 Journal of World Trade (2006), at 1059–80; and Molinuevo Martín, ‘GATS Article XX—Schedules of Specific Commitments’, in R. Wolfrum et al. (eds), Max Planck GATS Commentary (Biggleswade, UK: Brill Publishers, forthcoming in October 2008).

¹⁵ Namely, the ASEAN–China TIS, the Australia–Thailand FTA, the India–Singapore ECA, the Japan–Singapore EPA, the Jordan–Singapore FTA, and the New Zealand–Singapore FTA.

¹⁶ However, a 2003 amendment to the AFAS allows for departure from MFN if two or more members agree to liberalize trade in services faster than the remaining ASEAN members. It is worth pointing out that an intra-regional MFN obligation may not be necessary for regional agreements involving WTO members, as FTA parties would already be bound by the MFN obligation under the GATS. It would only be needed if FTA parties wanted to eliminate at the regional level the application of MFN exemptions scheduled under the GATS or desired to make MFN subject to a regional dispute settlement mechanism.

¹⁷ For example, see Hoekman Bernard, ‘Assessing the General Agreement on Trade in Services’, in Will Martin and L. Alan Winters (eds), The Uruguay Round and the Developing Countries (Cambridge: Cambridge University Press, 1996).

¹⁸ For example, Article 99.3 of the Japan–Malaysia EPA provides that ‘[w]ith respect to sectors or sub-sectors where the specific commitments are undertaken [...] and which are indicated with "SS", any terms, limitations, conditions and qualifications [...] other than those based on measures pursuant to immigration laws and regulations, shall be limited to those based on non-conforming measures, which are in effect on the date of entry into force of this Agreement’.

¹⁹ Even though upward ratcheting enhances the credibility of unilateral trade reforms, it arguably implies a loss of transparency in committed policies, because parties are not required to notify these reforms or periodically update their schedules.

²⁰ Two negative list agreements in East Asia depart from this basic model. The Trans-Pacific EPA does not establish separate investment disciplines, but services supplied through commercial presence are covered under the agreement's services disciplines—reverting to the structure of the GATS. Similarly, the Australia–Singapore FTA covers commercial presence in the services chapter, but in this case separate investment disciplines still apply.

²¹ Namely, the Guatemala–Taiwan (China) FTA, the Korea–Chile FTA, the Trans-Pacific EPA, and the Japan–Mexico EPA. The latter agreement features a chapter on financial services. However, provisions in that chapter merely ratify existing multilateral and plurilateral commitments, and carve out financial services from the services, investment and dispute settlement chapters of the agreement.

²² The language of the national treatment provision mostly follows the NAFTA standard of providing for national treatment for services and services suppliers ‘in like circumstances’. The only exception is the Australia–Thailand FTA, which incorporates the ‘like services and service suppliers’ language found in GATS Article XVII. For a discussion of the ‘likeness’ standard under the GATS, see Cossy Mireille, Determining ‘Likeness’ under the GATS: Squaring the Circle? WTO Staff Working Paper ERSD-2006-8 (Geneva: World Trade Organization, 2006).

²³ The catalog of measures covered by these agreements is the same as the one adopted by the GATS, with the exception that all six agreements except the Australia–Singapore FTA do not cover restrictions on foreign equity participation under market access. In the case of the Korea–Singapore FTA, market access does not apply to investment in services and the question of foreign equity participation thus does not arise. In the remaining four cases, foreign equity limitations would likely be covered under the agreements’ national treatment obligation, because they are discriminatory in nature.

²⁴ Namely, Trans-Pacific EPA, Guatemala–Taiwan (China) FTA, Japan–Mexico EPA, Panama–Taiwan (China) FTA, Nicaragua–Taiwan (China) FTA, Panama–Singapore FFTA, and Singapore–US FTA.

²⁵ In addition, for financial services, Taiwan's (China) FTAs with Nicaragua and Panama as well as Singapore's FTAs with Panama and the United States allow for the scheduling of limitations on cross-border purchases of financial services—again, reflecting the absence of a distinction between modes of supply in the scheduling of commitments.

²⁶ For example, see Hoekman and Sauvé, above n 12 and Stephenson Sherry, ‘Regional versus Multilateral Liberalization of Services’, 1 (2) World Trade Review (2002), at 187–209.

²⁷ See OECD, above n 1.

²⁸ In practice, however, commitments with a positive list of sectors do not seem to provide for substantial coverage of these residual categories. Negative list agreements therefore appear to be more liberalizing with respect to future service activities.

²⁹ That said, this requirement falls somewhat short of the list of non-conforming measures found in negative list agreements, as parties are not obliged to list the specific laws or regulations underlying a scheduled limitation.

³⁰ This point is also emphasized in World Bank, ‘Brazil: Trade Policies to Improve Efficiency, Increase Growth and Reduce Poverty’, Report No. 24285-BR, 2004.

³¹ See UNCTAD, World Investment Report 2004: The Shift Towards Services (New York and Geneva: United Nations, 2004).

³² For example, one such future measure reserves Singapore's right ‘[...]to adopt or maintain any measure affecting the supply of services by foreign full banks or in relation to Qualifying Full Bank licenses’. See Annex 4-II(B) of the Australia-Singapore FTA.

³³ See Article 12.05 of the Panama–Taiwan (China) FTA.

³⁴ See Annex 8A of the Singapore–US FTA.

³⁵ The Japan–Mexico EPA recognizes the burden of collecting information on all trade-restrictive measures applied at the sub-federal level. Instead of scheduling a single reservation like the one described for the US, Mexico committed to list all non-conforming measures applied by Mexican states within 1 year after entry into force of the FTA.

³⁶ See Annex 8A of the Singapore–US FTA.

³⁷ This reservation also raises questions about the agreement's compatibility with GATS Article V. GATS Article V.1(b) calls for the elimination of ‘substantially all discrimination’ for an FTA to constitute a lawful exception to the MFN principle. In light of GATS Article XX.2, measures scheduled under Article XVI too may be discriminatory in nature.

³⁸ The transparency and credibility of the US commitment in the Singapore–US FTA is further reduced by another provision of this agreement. Schedules of non-conforming measures contain both a description of the relevant measures and a reference to the relevant laws and regulations. Article 2(g) of Annex 8 of the Singapore–US FTA provides that ‘description, for Singapore, sets out the non-conforming aspects of the measure for which the entry is made; and description, for the United States, provides a general, non-binding, description of the measures’.

³⁹ See Annex 7 of the Japan–Mexico EPA.

⁴⁰ See Fink and Molinuevo, above n 3.

⁴¹ WTO Members considered the establishment of a multilateral investment agreement in the initial stages of the Doha Development Agenda. However, no consensus on launching negotiations in this area could be formed and the topic was removed from the DDA's work programme as part of the July 2004 General Council Decision.

⁴² Roy discusses the treatment of investment in services under services and investment disciplines more generally. See Roy Martin, ‘Implications for the GATS of Negotiations on a Multilateral Investment Framework: Potential Synergies and Pitfalls’, 4 (6) Journal of World Investment (2003), at 963–86.

⁴³ For example, under the Singapore–US FTA ‘investment means every asset owned or controlled, directly or indirectly, by an investor, that has the characteristics of an investment. Forms that an investment may take include: (a) an enterprise; (b) shares, stock, and other forms of equity participation in an enterprise; (c) bonds, debentures, other debt instruments, and loans; (d) futures, options, and other derivatives; (e) turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts; (f) intellectual property rights; (g) licenses, authorizations, permits, and similar rights conferred pursuant to applicable domestic law; and (h) other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges’ (Article 15.1, para. 13, footnotes omitted).

⁴⁴ As indicated in Table 3, these two agreements are the Framework Agreement on the ASEAN Investment Area (AIA) and the Australia–Thailand FTA. The former does not further define FDI, whereas the latter refers to the International Monetary Fund's definition of FDI which uses a 10% ownership threshold to distinguish FDI from portfolio investment.

⁴⁵ The definition of commercial presence in most FTAs extends to ‘the creation or maintenance of a branch or a representative office’—mirroring GATS Article XXVIII. These forms of foreign presence appear to be covered also under the definition of investment adopted by horizontal investment chapters.

⁴⁶ The services chapter of the Lao PDR–US BTA neither offers a definition of commercial presence nor of a ‘juridical person of the other party’. The range of investments in services covered by this agreement remains therefore unclear. Since the structure of this agreement's services chapter follows in many ways the GATS, can one assume that the GATS criteria of majority ownership or control apply? Or does the absence of a definition imply that any level of foreign participation in a juridical person would be covered?

⁴⁷ For a review of the services and investment chapters in NAFTA-like and GATS-like FTAs, see Houde Marie-France et al., The Interaction between Investment and Services Chapters in Selected Regional Trade Agreements, OECD Trade Policy Working Paper No. 55, 2007.

⁴⁸ Namely, the Nicaragua–Taiwan (China) FTA, the Panama–Singapore FTA, and the Singapore–US FTA.

⁴⁹ A 2001 amendment to the Framework Agreement on the AIA increases the scope of the AIA to include services incidental to manufacturing, agriculture, fishery, forestry, and mining and quarrying. The relationship between ASEAN Framework Agreement on Services and the AIA for these service activities is not further defined.

⁵⁰ Namely, the India–Singapore ECA, the Japan–Malaysia EPA, the Jordan–Singapore FTA, and the US–Vietnam BTA. In the case of the Japan–Malaysia EPA, the precedence of services discipline only applies to inconsistencies with the investment chapter's obligations on national treatment, MFN, and performance requirements. The investment chapter takes precedence in the case of inconsistencies with all other investment disciplines. In the case of the US–Vietnam BTA, precedence of services disciplines only applies to inconsistencies between ‘provisions set forth’ in parties’ schedule of specific services commitments and the BTA's investment disciplines (see Article VII.6).

⁵¹ For example, suppose that a sector is not subject to specific service commitments but no investment reservations are listed in that sector. Would this situation be considered an inconsistency, as one could argue that the right to restrict investment is afforded by one set of disciplines and denied by the other? A side letter to the Jordan–Singapore BIT on this question makes clear that such a case would indeed be considered an inconsistency. The same conclusion may be drawn for the US–Vietnam BTA, which stipulates that the investment disciplines ‘shall not be construed or applied in a manner that would deprive a Party of rights’ provided for in the schedule of specific services commitments (see Article VII.6). The other two agreements do not explicitly address this question.

⁵² As pointed out above, the definition of commercial presence in the New Zealand–Singapore FTA includes minority investments.

⁵³ In the case of the EFTA–Singapore FTA, this exemption is subject to a review after 10 years.

⁵⁴ See Annex V.B of the Japan–Singapore FTA. It appears that limitations scheduled under the services disciplines would then also apply to minority investments in services. At the same time, where specific services commitments have been undertaken, the investment chapter's obligations on national treatment and performance requirements would still apply, insofar as they are not inconsistent with Singapore's services commitments.

⁵⁵ Theoretically, the EFTA–Singapore FTA, the New Zealand–Singapore FTA, the EFTA–Korea FTA, the Japan–Philippines EPA, the Australia–Thailand FTA, and the Australia–Singapore FTA leave the door open to potential inconsistencies between obligations not subject to liberalization undertakings, such as provisions on the ‘transfer of funds’.

⁵⁶ See, for example, Nielson Julia, ‘Labor Mobility in Regional Trade Agreements’, in Aaditya Mattoo and Antonia Carzaniga (eds), Moving People to Deliver Services (Washington, DC: The World Bank and Oxford University Press, 2003); and Chaudhuri Sumanta et al. ‘Moving People to Deliver Services: How Can the WTO Help?’, 38 (3) Journal of World Trade (2004) at 363–93.

⁵⁷ In this regard, it could be argued that a consistent practice of denying visas to service providers of a certain WTO member, or plainly denying the possibility to apply for visas, may entail a nullification of GATS commitments on mode 4.

⁵⁸ Exceptions are China's CEPAs with Hong Kong and Macao and the Lao PDR–US BTA, for which no comparable carve-outs are found. In addition, the services chapter of the Japan–Singapore EPA does not expressly carve out regulations affecting the entry of natural persons.

⁵⁹ An exception is the Nicaragua–Taiwan (China) FTA, which does not carve out immigration measures from the scope of services disciplines.

⁶⁰ The concept of supply of a service by a national—rather than through presence of natural persons as in the GATS—may imply a different scope. On the one hand, one may argue that the NAFTA definition does not extend to foreign employees of companies, because services are eventually supplied by a juridical person. On the other hand, the involvement of foreign employees in the production, distribution, and delivery of a service by juridical persons may in itself be considered a supply of a service, so that employees would be covered.

⁶¹ The Trans-Pacific EPA has expressly incorporated the second GATS-style carve-out relating to entry regulations. The Chile–Korea FTA, the Guatemala–Taiwan (China) FTA, the Korea–Singapore FTA, and the Singapore–US FTA generally exempt immigration measures from the scope of services disciplines, thus offering a similar exception. The only negative list agreement not providing for a similar exemption for regulations affecting the entry of natural persons is the Japan–Mexico EPA.

⁶² The Chile–Korea FTA and Taiwan's (China) FTAs with Guatemala, Nicaragua, and Panama do not feature the second carve-out. However, the commitments on temporary entry in these cases make clear that a party may require a business person to obtain a visa in accordance with domestic immigration laws.

⁶³ However, the Chapter on Temporary Entry of the Trans-Pacific EPA is of a ‘soft-law’ nature. It merely commits parties to review the rules and conditions applicable to the movement of natural persons two years after the entry into force of the agreement.

⁶⁴ As shown in Table 4, these agreements are the Australia–Singapore FTA, the India–Singapore ECA, and the Panama–Singapore FTA. In addition, the services schedules of these three FTAs include a horizontal reservation according to which parties are free to adopt any MNP-related measure subject to the provisions of the MNP chapter.

⁶⁵ A similar approach is followed by the Japan–Singapore EPA. Commitments under the agreement's MNP chapter are effectively incorporated into the horizontal section of the two parties’ services schedules. Given the hybrid list scheduling approach of this agreement, these commitments apply only to listed sectors and are further subject to limitations scheduled for specific service sectors. The MNP chapter of that agreement further specifies that horizontal MNP commitments apply only where specific services commitments are undertaken. At the same time, for certain service sectors, schedules of specific commitments indicate an ‘unbound’ entry for mode 4. Such situations could well give rise to inconsistencies between the two sets of disciplines.

⁶⁶ The MNP chapter of the Australia–Thailand FTA indicates as an objective the provision of rights and obligations additional to those set out in the services and investment chapters. However, this language does not seem to offer any guidance on which chapter would take precedence if a measure was allowed by one chapter, but not the other.

⁶⁷ The Trans-Pacific EPA does not feature a rule on the relationship between services and MNP disciplines. However, since the MNP chapter of this agreement does not feature any ‘hard’ commitments on the movement of natural persons, the absence of such a rule does not give rise to legal inconsistencies.

⁶⁸ The definition of a ‘service of another party’ found in FTAs mirrors the one established by GATS Article XXVIII(f). Several agreements do not provide for a definition of a ‘service of another party’, but the territoriality concept is embedded in the definition of modes 1 and 2. The only two agreements that offer neither a definition of a ‘service of another party’ nor definitions of modes of supply are China's two CEPAs with Hong Kong and Macao.

⁶⁹ Namely, the ASEAN–China TIS Agreement, the India–Singapore ECA, the Japan–Singapore EPA, the Jordan–Singapore FTA, and the US–Vietnam BTA. The denial of benefit provision in these agreements mirrors GATS Article XXVII(a), which applies in relation to non-members of the WTO.

⁷⁰ This rule of origin raises interpretive questions. Suppose a firm in country A ‘imports’ call center services from its FTA partner country B. Suppose further that the service supplier in country B subcontracts the answering of telephone calls to a company in country C, but channels the calls between countries A and C through country B and fully manages the business from country B. Would such a service qualify for preferential treatment under the FTA between A and B? Admittedly, such a question may appear theoretical. Cross-border trade in services has so far been largely unrestricted and technological advances may make it increasingly difficult to enforce trade restrictions. However, in view of the rapid growth of cross-border trade in services and associated adjustment pressures, trade protection may not be inconceivable in future and questions about the origin of services may well arise. Mattoo and Wunsch describe that the imposition of trade restrictions on international business process outsourcing has been considered by several US states. See Mattoo Aaditya and Sacha Wunsch-Vincent, ‘Pre-Empting Protectionism in Services: The GATS and Outsourcing’, 7 (4) Journal of International Economic Law (2004), at 765–800.

⁷¹ This special rule of origin is based on GATS Articles XXVII and XXVIII(f). The 12 FTAs are the AFAS, the ASEAN–China TIS Agreement, the Australia–Singapore FTA, the EFTA–Korea FTA, the EFTA–Singapore FTA, the India–Singapore ECA, the Japan–Malaysia EPA, the Japan–Philippines EPA, the Japan–Singapore EPA, the Jordan–Singapore FTA, the New Zealand–Singapore FTA, and the US–Vietnam BTA.

⁷² The denial of benefit provisions are modeled after GATS Article XXVII(b). However, they apply in respect of non-parties to the FTA.

⁷³ Most FTAs do not offer a definition of ‘substantive business operations’. The only exceptions are China's CEPAs with Hong Kong and Macao, which closely circumscribe this concept for service suppliers from Hong Kong and Macao. To qualify for trade preferences, service suppliers must have had substantive business operations for 3–5 years in Hong Kong or Macao for the services they intend to provide in the Mainland; they must have paid profit tax in Hong Kong or Macao; they must own or rent premises for business operations in Hong Kong or Macao; and more than 50% of employees must be Hong Kong or Macao residents (or Chinese people staying in Hong Kong or Macao on a one way permit). Additional rules exist for law firms, which require the sole proprietor and all partners of a firm to be registered as practicing lawyers. The two CEPAs also establish a registration procedure which verifies that interested service suppliers meet the above requirements.

⁷⁴ Namely, the Australia–Thailand FTA and the India–Singapore Economic Cooperation Agreement (ECA). In the case of the Australia–Thailand FTA, the domestic ownership or control requirement does not apply to the agreement's chapter on the promotion and protection of investments. In the case of the India–Singapore ECA, this requirement only applies to services supplied through commercial presence and to the agreement's investment disciplines. It does not apply to services supplied cross-border or through consumption abroad. In addition, the India–Singapore ECA has a special clause that allows a party to deny FTA benefits if a juridical person is owned or controlled by persons from the denying party. Since FTA benefits for services supplied through commercial presence are already limited to domestically owned or controlled juridical persons, this clause applies only to services supplied through modes 1 and 2.

⁷⁵ For a review of a number of simulation studies on services rules of origin for ASEAN countries confirming this point, see Fink Carsten and Deunden Nikomborirak, ‘Rules of Origin in Services: A Case Study of Five ASEAN Countries’, in Marion Panizzon et al. (eds). Trade in Services: New Perspectives on Liberalization, Regulation, and Development (Cambridge: Cambridge University Press, forthcoming in October 2008).

⁷⁶ The India–Singapore ECA introduces a special rule of origin for certain services sectors only—audiovisual, education, financial, and telecommunications services. For these activities, eligible service suppliers also include juridical persons which are owned or controlled by ‘the other Party’—presumably, referring to state-owned enterprises. Furthermore, in the case of financial services, the agreement explicitly lists several Singaporean financial institutions that are to qualify for preferences and specifies the types and numbers of legal entities through which these institutions can supply financial services in India.

⁷⁷ The AFAS, the ASEAN–China TIS Agreement, the EFTA–Korea FTA, the EFTA–Singapore FTA, the Japan–Singapore EPA, the Jordan–Singapore FTA, the New Zealand–Singapore, and the Trans-Pacific EPA.

⁷⁸ Namely, the Chile–Korea FTA (investment chapter only), the Japan–Malaysia EPA, the Japan–Mexico EPA, the Japan–Philippines EPA, and the Singapore–US FTA. The Lao PDR–US BTA and the US–Vietnam BTA have incorporated a similar exception that allows the denial of benefits if the denying party does not maintain normal economic relations with the third party.

⁷⁹ Several negative list FTAs and investment chapters expressly refer to branches in the definition of a juridical person or the definition of an enterprise.

⁸⁰ The exceptions are the AFAS, the ASEAN–China TIS Agreement, the Australia–Thailand FTA, the EFTA–Korea FTA, the EFTA–Singapore FTA, the Japan–Malaysia EPA, the Jordan–Singapore FTA, the Mainland–Hong Kong CEPA, the Mainland–Macao CEPA, and the US–Vietnam BTA. These agreements follow the GATS in requiring all juridical persons to show substantial business operations in at least one FTA party, regardless of who owns or controls them.

⁸¹ The services chapter of the EFTA–Korea FTA requires service suppliers that are owned or controlled by a person of a party and constituted or otherwise organized in that party to only show substantial business operations in the territory of any WTO member. This treatment offers a similar benefit of drawing on a service supplier's international branch network insofar as this network extends to WTO member countries.

⁸² The only two exceptions are the Mainland–Hong Kong and Mainland–Macao CEPAs, as these agreements are between separate customs territories within the same nation. For these agreements, eligible natural persons are citizens (for China) and permanent residents (for Hong Kong and Macao).

⁸³ Namely, the Australia–Singapore FTA, the Chile–Korea FTA, the India–Singapore ECA, the Jordan–Singapore FTA, the Korea–Singapore FTA, the Japan–Malaysia EPA (for Malaysia only), the Japan–Singapore EPA (for Singapore only), the Nicaragua–Taiwan (China) FTA, the Panama–Singapore FTA, and the Trans-Pacific EPA.

⁸⁴ Such is the case for the AFAS, the ASEAN–China TIS Agreement, the EFTA–Korea FTA, the EFTA–Singapore FTA, the New Zealand–Singapore FTA, and the US–Vietnam BTA.

⁸⁵ See, for example, Hoekman, Bernard and Petros Mavroidis ‘WTO Dispute Settlement, Transparency and Surveillance’, 23 (4) The World Economy (2000), at 527–42.

⁸⁶ Namely, the AFAS, the ASEAN–China TIS Agreement, the EFTA–Korea FTA, the EFTA–Singapore FTA, the India–Singapore ECA, Japan–Mexico EPA, the Jordan–Singapore FTA, the New Zealand–Singapore FTA, the Panama–Singapore FTA, and the Trans-Pacific EPA.

⁸⁷ Namely, the EFTA–Singapore FTA, Jordan Singapore FTA, the New Zealand–Singapore FTA, the Panama–Singapore FTA, and the Trans-Pacific EPA. In the case of the AFAS, such appointments would be performed by the ASEAN Secretary-General.

⁸⁸ Namely, the ASEAN–China TIS Agreement, the EFTA–Korea FTA, the India–Singapore ECA, and the Japan–Mexico EPA.

⁸⁹ Namely, the Australia–Singapore FTA, the Australia–Thailand FTA, the Chile–Korea FTA, the Guatemala–Taiwan (China) FTA, the Japan–Malaysia EPA, the Japan–Philippines FTA, the Japan–Singapore EPA, the Korea–Singapore FTA, the Nicaragua–Taiwan (China) FTA, the Panama–Taiwan (China) FTA, and the Singapore–US FTA. Interestingly, the Guatemala–Taiwan (China) FTA has established separate DSMs for maritime and air transport services. In contrast to the main state-to-state DSM of this agreement, the two sectoral DSMs feature a mechanism to overcome a procedural deadlock.

⁹⁰ The issue of establishment of a panel under NAFTA Chapter 20 disciplines arose in the context of the Mexico- Soft Drinks dispute at the WTO. In that case, Mexico argued that a complaint against the United States under NAFTA ‘stalled at the stage of constituting the arbitral panel because of the United States’ refusal to appoint panelists and to agree on the appointment of a chairperson’ (response by Mexico to Question 7 from the Panel). On the same matter, the United States expressed that ‘[u]nlike the DSU, which permits a party to request that the Director-General appoint panelists 20 days after the panel's establishment if the parties are unable to agree, there is no parallel provision in the NAFTA. As Mexico concedes: "NAFTA's Chapter Twenty lacks the automaticity of the DSU." In this regard, the NAFTA Secretariat did not appoint panelists in the NAFTA sugar dispute pursuant to Mexico's request, because under NAFTA dispute settlement rules the NAFTA Secretariat does not have the authority to appoint panelists’ (response by the US to Question 76 of the Panel). See Panel Report, Mexico — Tax Measures on Soft Drinks and Other Beverages (Mexico – Soft Drinks), WT/DS308/R, Adopted 24 March 2006, Annex C, pages C-5 and C-87, respectively.

⁹¹ The ASEAN DSM sets a uniform 60-day implementation period from the adoption of the panel decision, unless parties agree otherwise. Similarly, Taiwan's (China) FTAs with Guatemala, Nicaragua, and Panama require panel reports to be implemented within 6 months after issuance of the panel report, again unless parties agree on a different timeframe. Somewhat confusingly, the Panama–Taiwan (China) FTA also requires the arbitral panel to set an implementation timeframe not exceeding 180 days.

⁹² See, for example, Hoekman and Mavroidis, above n 85; and Pauwelyn Joost, ‘Enforcement and Countermeasures in the WTO: Rules are Rules’, 94 (2) The American Journal of International Law (2000), at 335–47.

⁹³ In principle, the WTO DSU also allows for ‘mutually acceptable compensation’ if rulings are not implemented within a reasonable period of time (Article 22.2 of the DSU). However, the term ‘compensation’ is generally understood to take the form of trade concessions. In any case, no WTO dispute has so far made use of this option.

⁹⁴ See Davey William J., ‘The WTO: Looking Forwards’, 9 (1) Journal of International Economic Law (2006), at 3–29.

⁹⁵ However, to our knowledge, no disputes have led to the adoption of panel or Appellate Body reports under ASEAN, so far. This may, in part, reflect the fact that the ‘enhanced’ ASEAN DSM was only created in 2004. The original ASEAN DSM was created in 1996, but was perceived as ineffective due to a lack of independent decision-making. See Greenwald Alyssa, ‘The ASEAN–China Free Trade Area (ACFTA): A Legal Response to China's Economic Rise?’, 16 Duke Journal of Comparative & International Law (2006), at 193–217.

⁹⁶ Hallward-Driemeier, Rose-Ackerman, and Tobin, find no or only a weak empirical relationship between the existence of a bilateral investment treaty and inflows of foreign investment. However, using a different estimation sample, Neumayer and Spess, find a strong positive relationship. See Hallward-Driemeier Mary, Do Bilateral Investment Treaties Attract Foreign Direct Investment?, Policy Research Working Paper No. 3121 (Washington, DC: The World Bank, 2003); Rose-Ackerman Susan and Tobin Jennifer, Foreign Direct Investment and the Business Environment in Developing Countries: The Impact of Bilateral Investment Treaties, Yale Law & Economics Research Paper No. 293 (Yale Law School, 2005); and Neumayer Eric and Spess Laura, ‘Do bilateral investment treaties increase foreign direct investment to developing countries?’, 33 (10) World Development (2005), at 1567–85.

⁹⁷ For a more detailed discussion of the benefits and drawbacks of state-to-state versus investor-to-state arbitration, see Molinuevo Martín, Can Foreign Investors in Services Benefit from WTO Dispute Settlement? Legal Standing and Remedies in WTO and International Arbitration. NCCR Trade Working Paper No. 2006/17, forthcoming in Marion Panizzon et al. (eds). Trade in Services: New Perspectives on Liberalization, Regulation, and Development. (Cambridge: Cambridge University Press, forthcoming in October 2008).

⁹⁸ According to some legal commentators, certain arbitral decisions have interpreted the concept of ‘investment’ to include transactions that parties did not intend to be covered. Similarly, certain interpretations of obligations relating to ‘fair and equitable treatment’ and measures ‘tantamount to expropriation’ have been considered to go beyond parties’ original intentions. In response to some of these arbitral decisions, the United States and Canada have included interpretative notes in their BITs and FTA investment chapters, clarifying the scope of the fair and equitable treatment and expropriation provisions. See Sornarajah Muthucumaraswamy, The International Law on Foreign Investment, 2nd edn. (Cambridge: Cambridge University Press, 2004).

⁹⁹ The Japan–Philippines EPA calls for the establishment of an investor-to-state DSM through further negotiation.

¹⁰⁰ Exceptions are the Australia–Thailand FTA, which provides only for ICSID arbitration, and the EFTA–Singapore FTA, Jordan–Singapore FTA, and New Zealand–Singapore FTA, which provide only ad hoc arbitration under UNCITRAL rules.

¹⁰¹ The Chile–Korea FTA and the Japan–Mexico EPA fully carve out financial services from the scope of the agreements’ investment chapter. By design, investor-to-state dispute settlement therefore does not extend to financial services in these cases.

¹⁰² The Nicaragua–Taiwan (China) FTA and the Singapore–US FTA also allow for arbitration that a party has breached the ‘Special Formalities and Information Requirements’ obligation of the investment chapter.

¹⁰³ The purpose of extending application of the investor-to-state DSM to the denial of benefit provision is not clear. One motivation may be to prevent governments from circumventing the expropriation and transfer of funds disciplines by simply denying investors the benefits of the investment chapter. At the same time, the question arises whether investors could challenge violations of national treatment, market access, or MFN as a denial of benefit.

¹⁰⁴ Namely, the EFTA–Korea FTA, the Korea–Singapore FTA, the Nicaragua–Taiwan (China) FTA, the Panama–Taiwan (China) FTA, and the Singapore–US FTA.

¹⁰⁵ Sauvé offers a more general review of rule-making advances in recent services FTAs. See Sauvé, above n 1.

¹⁰⁶ In principle, an agreement to recognize the professional qualifications of individuals from one particular country may depart from an FTA's MFN obligation. The GATS expressly allows for such a departure provided that the WTO member in question affords adequate opportunity to other interested members to negotiate a comparable arrangement. Most East Asian FTAs that have established a binding MFN obligation feature a similar carve-out. The only exceptions are the Guatemala–Taiwan (China) FTA, the Panama–Taiwan (China) FTA, and the US–Vietnam BTA, for which no such carve-out is found. Under these agreements, a party's recognition agreement with a third country may therefore need to be extended to the other party of the BTA. The Japan–Mexico EPA, while exempting recognition agreements from the agreements’ MFN principle, does not impose the condition of giving interested parties the opportunity to negotiate a comparable agreement. At the same time, this latter requirement is found in four FTAs that do not feature a binding MFN obligation, namely the ASEAN–China TIS Agreement, the India–Singapore ECA, the Japan–Singapore EPA, and the Korea–Singapore FTA.

¹⁰⁷ Nine FTAs do not feature such provisions, namely the EFTA–Korea FTA, the Guatemala–Taiwan (China) FTA, the Japan–Malaysia EPA, the Japan–Mexico EPA, the Japan–Philippines EPA, the Lao PDR–US BTA, the Panama–Taiwan (China) FTA, the Panama–Singapore FTA, and the US–Vietnam BTA.

¹⁰⁸ Our research was confined to undertakings on recognition that are published alongside trade agreements. It is possible that negotiations between regulatory bodies subsequent to the conclusion of an FTA have led to additional recognition agreements. For example, information published on the webpage of the Government of Hong Kong indicates that China and Hong Kong signed a mutual recognition agreement for planners and quantity surveyors (Government of Hong Kong, Press release, http://www.info.gov.hk/gia/general/200505/24/05240244.htm visited 22 January 2008).

¹⁰⁹ See ASEAN Mutual Recognition Arrangement on Engineering Services (available at http://www.aseansec.org/18009.htm, visited 22 January 2008) and ASEAN Mutual Recognition Arrangement on Nursing Services (available at http://www.aseansec.org/19210.htm, visited 22 January 2008).

¹¹⁰ See Annex 9D of the Korea–Singapore FTA.

¹¹¹ This recognition agreement seems less designed to facilitate the movement of legal professionals between Singapore and the US than to promote the export of higher education services of US law schools.

¹¹² In the case of medical and dental services, the Mainland fully recognizes the qualifications of Hong Kong and Macao permanent residents for the purpose of ‘short-term practice in the Mainland’.

¹¹³ Services agreements typically do not define measures falling under domestic regulation and measures falling under one of the core market opening obligations in a mutually exclusive way. Pauwelyn argues that it is possible for a measure to fall under the scope of both domestic regulation and, say, market access; see Pauwelyn, above n 14.

¹¹⁴ The GATS also calls for the development of additional disciplines to ensure that qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services. See GATS Article VI:4.

¹¹⁵ These agreements are all GATS-style hybrid list FTAs, except Japan's EPAs with Malaysia and the Philippines, as well as the Australia–Singapore FTA, the Korea–Singapore FTA, and the Panama–Singapore FTA. In the case of the latter three agreements, the reach of the necessity test is different in three respects. First, given the negative list structure, it applies to all service sectors, rather than only to the sectors in which specific commitments are undertaken. Second, these three agreements exempt all scheduled non-conforming and future measures from the scope of the necessity test. Third, in the case of the Korea–Singapore FTA and the Panama–Singapore FTA the necessity test does not apply to commercial presence, as the services chapter of these two agreements does not extend to this mode of supply.

¹¹⁶ Namely, the Chile–Korea FTA, the Guatemala–Taiwan (China) FTA, the Japan–Malaysia EPA, the Japan–Mexico EPA, the Japan–Philippines EPA, the Nicaragua–Taiwan (China) FTA, the Panama–Taiwan (China) FTA, and the Singapore–US FTA.

¹¹⁷ However, Adlung argues that the necessity test embedded in the WTO's Accountancy Disciplines is weaker, because regulatory measures only need to fulfill ‘a legitimate objective’—a concept vaguer than ‘ensuring the quality of a service’ as established by GATS Article VI.6. See Adlung Rudolf, ‘Public Services and the GATS’, 9 (2) Journal of International Economic Law (2006), at 455–85.

¹¹⁸ For a detailed review of GATS regulatory rules in these two sectors, see Gamberale Carlo and Mattoo Aaditya, ‘Domestic Regulations and Liberalization of Trade in Services’, in Bernard Hoekman et al. (eds), Development, Trade and the WTO: A Handbook (Washington, DC: The World Bank, 2002).

¹¹⁹ East Asian agreements with regulatory disciplines for telecommunications services are the Australia–Singapore FTA, the Chile–Korea FTA, the EFTA–Korea FTA, the EFTA–Singapore FTA, the Japan–Singapore EPA, the Korea–Singapore FTA, the Nicaragua–Taiwan (China) FTA, the Panama–Singapore FTA, the Panama–Taiwan (China) FTA, and the Singapore–US FTA. Agreements that feature electronic commerce-related disciplines are the Australia–Singapore FTA, the Australia–Thailand FTA, the India–Singapore ECA, the Jordan–Singapore FTA, the Korea–Singapore FTA, the Nicaragua–Taiwan (China) FTA, the Panama–Singapore FTA, and the Singapore–US FTA.

¹²⁰ The Nicaragua–Taiwan (China) FTA, the Panama–Singapore FTA, and the Singapore–US FTA have also established certain regulatory rules for financial services. For example, these FTAs require non-discriminatory access to payment and clearing systems operated by public entities. The EFTA–Korea FTA establishes certain disciplines on the co-production of broadcasting programs. However, these disciplines seem to mainly take the form of core market opening obligations (national treatment and market access).

¹²¹ For a discussion of provisions on electronic commerce in US FTAs, see Wunsch-Vincent Sascha, The WTO, the Internet and Trade in Digital Products. Studies in International Trade Law, No. 3 (Oxford: Hart Publishing, 2006).

¹²² See GATS Article XIII. At the same time, purchases of services are covered by the disciplines of the WTO Agreement on Government Procurement. However, this agreement is a plurilateral agreement, extending only to 37 WTO members (see WTO Secretariat, ‘The plurilateral Agreement on Government Procurement (GPA)’, http://www.wto.org/english/tratop_e/gproc_e/gp_gpa_e.htm, visited 22 January 2008).

¹²³ At the same time, the majority of these FTAs feature self-standing chapters with disciplines on government procurement. Like the WTO Agreement on Government Procurement, these chapters encompass government purchases of services.

¹²⁴ The services chapters of China's two CEPAs with Hong Kong and Macao also do not feature any provision on government procurement. However, these two agreements do not establish a national treatment obligation in the first place (see Section I.A).

¹²⁵ These 15 agreements are the ASEAN–China TIS Agreement, the Australia–Singapore FTA, the Australia–Thailand FTA, the Chile–Korea FTA, the Guatemala–Taiwan (China) FTA, the Japan–Malaysia EPA, the Japan–Mexico EPA, the Japan–Philippines EPA, the Korea–Singapore FTA, the New Zealand–Singapore FTA, the Nicaragua–Taiwan (China) FTA, the Panama–Taiwan (China) FTA, the Panama–Singapore FTA, the Singapore–US FTA, and the Trans-Pacific EPA.

¹²⁶ See GATS Article X. Adlung discusses the role of services ESMs in greater detail; see Adlung Rudolf, ‘Negotiations on Safeguards and Subsidies in Services: A Never-ending Story?’, 10 (2) Journal of International Economic Law 235 (2007), at 265.

¹²⁷ In 2000, ASEAN submitted a concept paper on possible elements of an emergency safeguard mechanism (see WTO Document S/WPGR/W/30).

¹²⁸ ASEAN countries have adopted rules on emergency safeguard measures in the context of the ASEAN Investment Area (AIA). However, the AIA does not apply to investment in services (see Section II.B).

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