AITIC : Documents: Background Notes

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Background Note

October 2002

Negotiating Tool
Trade in Services Negotiations: How to Prepare a Request / Offer

Introduction
The Schedule of Specific Commitments
A. The Four Modes of Supply
B. The Three Types of Commitment
C. The Three Levels of Commitment
How to Prepare a Request? - Content, Format, Process
How to Prepare an Offer? - Content, Format, Process
Annex

I. Introduction

1. Regarding the negotiations on trade in services at the World Trade Organization (WTO), Paragraph 15 of the 2001 Doha Ministerial Declaration spells out that each WTO member country had to submit initial requests for specific commitments before 30 June 2002, flexibility being maintained with respect to this date, and initial offers by 31 March 2003. By making a request, one WTO member asks another member (or members) to undertake liberalisation of its (or their) services markets. Thus, requests are made with the objective to remove trade barriers in the markets of export interest. By submitting an offer, a WTO member responds to the requests it has received from other members and declares the commitments that it is willing to make with respect to its own services market.

3. There are three major technical aspects of requests and offers: content, format, and process. The first two - content and format - are closely related to the Schedule of Specific Commitments that each WTO member is required to table under the General Agreement on Trade in Services (GATS). Thus, before discussing the content and format of requests and offers and the process for their submission and exchange, it is important to outline the major components of a schedule of specific commitment.

II. The Schedule of Specific Commitments

5. The schedule of specific commitments is essentially a matrix, which indicates the levels of commitment that each WTO member is willing to take with respect to specific types of commitment for various modes of supply of services. In short, there are four modes of supply of services (cross-border supply; consumption abroad; commercial presence; and presence of natural persons).

6. There are three types of commitment for each specific service sector (market access (MFN principle); national treatment; and additional commitments); and three levels of commitment (unbound; none; and limitations).

7. Therefore, a commitment is defined by four indispensable elements:

● the sector or sub-sector it covers;
● the mode of supply it covers (at least one of them);
● whether it covers market access or national treatment or both; and
● the level of commitment.

8. It should also be pointed out that commitments, which apply to all services sectors listed in a countrys schedule of specific commitments, are known as horizontal commitments and are usually written at the beginning of the schedule.

A. The Four Modes of Supply

9. The modes of supply of services are categorised on the basis of origin of the supplier and consumer of the service, and degree and type of territorial presence that they have at the time that the service is delivered (Article 1).

● Mode 1 - Cross-border supply refers to the delivery of a service from the territory of one country to a consumer in another country. In this case, only the service itself crosses the countrys border but not the service provider, who does not establish any presence in the territory where the service is consumed.

● Mode 2 - Consumption abroad occurs when in order to consume a service, the consumer of one country goes to another country where the service is provided, i.e. the consumer travels to the service supplier.

● Mode 3 - Commercial presence refers to the case in which the supplier of a service crosses the border of the country where he resides and establishes a legal entity (in the form of a branch, incorporation, joint venture, representative office, subsidiary, etc.) through which he provides his service in the foreign country.

● Mode 4 - Presence of natural persons includes the cases in which the service supplier travels in person to a foreign market in order to provide his service.

B. The Three Types of Commitment

● Market access (Article XVI). This article reflects in this context the MFN principle enunciated in Article II of the GATS. This means treating ones trading partners equally. Under the GATS, if a country allows foreign competition in a sector, equal opportunities in that sector should be given to service providers from all other WTO members. (This applies even if the country has made no specific commitment to provide foreign companies access to its markets under the WTO.) Nevertheless, a country could restrict access to its markets by limiting the number of suppliers, operations, or employees in a specific sector; the value of transactions or assets; the legal form of the supplier; or the participation of foreign capital as long as these restrictions are applied equally to all.

● National treatment (Article XVII) means that services and service providers have to receive the same treatment as domestic ones whether that is through formally identical treatment or formally different treatment, i.e. de jure and de facto foreign service providers should have identical commercial opportunities and treatment as domestic ones. The words formally identical mean that while on paper (i.e. in the text of the law or regulation) the treatment is identical for locals and foreigners, there may be discrimination in fact; should this be the case it must be reflected in the schedule. The words formally different refer to the fact that when the laws or regulations explicitly discriminate against foreigners and the country wishes to maintain that situation it must be reflected in the schedule. Formally identical or formally different treatment shall be considered to be less favourable if it modifies the conditions of competition in favour of services or service suppliers of the member compared to like services or service suppliers of any other member. In short, national treatment means that once foreign companies have been allowed access to a WTO member countrys markets, they must be treated in the same way as domestic companies, unless otherwise indicated in the schedule.

● The additional commitments (Article XVIII) include those measures affecting the trade in services that are not covered under Articles XVI (market access) and XVII (national treatment) and could include qualifications, standards, licensing, etc.

● Unbound commitment means that a country has not made any commitment with respect to a particular services sector and mode of supply to either liberalise it or to keep it as open as at the time of WTO accession. This, however, does not mean that the market is effectively closed to foreigners, but it means that the current or future access of foreign service-suppliers to that market is not guaranteed under GATS rules.

● None means that a country has committed itself to ensuring that there are no restrictions, which are inconsistent with GATS rules, with respect to foreign service-suppliers. In addition, when none is entered in a countrys schedule of specific commitments with respect to both market access and national treatment, it signals that this countrys services market is fully opened to foreign service suppliers and they are guaranteed the same level of fair treatment as domestic counterparts.

● Limitations refer to the specific conditionalities, usually required by existing national laws or regulations, which a WTO member could enter in its schedule of specific commitments. Limitations are a level of commitment somewhere in between the unbound (i.e. no commitment) and none (i.e. full commitment). Limitations, however, should comply with Articles XVI (see list of measures allowed) and XVII of the GATS.

III. How to Prepare a Request? - Content, Format, Process

A. Content

12. There are four types of content in a request, which are not mutually exclusive. The content of the requests usually relates to the commitments on market access (Article XVI), national treatment (Article XVII), and additional commitments (Article XVIII). A request may be addressed to one WTO member or to a group of members.

13. Under the first type of request one member may request that another member add sectors in its schedule of specific commitments that are currently not included.

14. The second type of request calls for the elimination of existing limitations or the reduction of its level of restrictiveness. For example, there may be a sector in a country with a 21% limitation on foreign equity. Through this type of request, another country may demand that this limitation be eliminated or at least made less restrictive by increasing it to 51%. This type of request includes also the cases in which a country may request the transformation of an unbound commitment into a binding one.

15. The third type of request is one that includes requests for additional commitments (Article XVIII), which are not covered by Article XVI (market access) and Article XVII (national treatment).

16. The fourth type of request refers to the MFN exemptions as prescribed by Paragraph 6 of the Annex on Article II. Through this type of request, members may ask for the reduction of the scope or level of specific MFN exemptions or for their removal.

B. Format

17. Typically, a request is presented in a letter format, in which the requestor country states what it requests of another country or group of countries. Out of the above-mentioned four types of requests, additional commitments under Article XVIII may require a higher level of technical specificity. The scheduling of commitments under Article XVI (market access) and Article XVII (national treatment) is basically the removal of limitations. Therefore, if a country wishes to undertake a full commitment on either, it needs to enter none in its schedule of specific commitments, indicating that there are no limitations. The substance of the commitment is defined in Articles XVI and XVII themselves.

18. However, if a country wishes to request additional commitments that relate to matters not covered by market access and national treatment, Article XVIII (additional commitments) provides no definition of what the legal undertaking could be. Article XVIII provides only a framework for members of what to request of each other to inscribe in their schedules additional legal commitments, not covered by market access and national treatment, for example regulatory principles, qualifications, technical standards and licensing.

C. Process

19. Traditionally, the process of exchanging requests takes place on a bilateral basis. This is a process whereby the requesting country addresses a request in the form of a letter to another country. Upon receiving the requests, the negotiating partners may start bilateral consultations.

IV. How to Prepare an Offer? - Content, Format, Process

A. Content

20. The content of an offer is similar to the content of the requests discussed above. There are four types of offers, through which a country may state its willingness to: 1) Add new sectors to its schedule of specific commitments; 2) Remove existing limitations on modes of supply or bind those modes which have been unbound so far; 3) Undertake additional commitments under Article XVIII; and 4) Reduce or terminate its MFN exemptions.

21. A participant is required to submit an initial offer in response to all the requests it had received. This initial offer, however, does not necessarily have to address each and every element contained in the requests received.

B. Format

22. Normally, an offer is submitted in the form of a draft schedule of specific commitments. Therefore, offers require considerable technical preparation and knowledge of how to read and fill in a schedule. The current round of negotiations requests and offers will be based on the already existing schedules of commitments that were submitted in the Uruguay Round.

23. A couple of important technical issues:

(1) The relationship between the offers, which are due 31 March 2003, (which could eventually become new commitments) and the old schedules will raise a number of technical questions. The most important of these questions is whether the countries will have to submit new commitments in separate schedules as supplements to the old ones or whether they will submit complete revised schedules containing all their commitments, both old and new, in a consolidated list.

(2) For the sake of clarity, legal certainty, and efficiency, it is advisable that countries develop their initial offers on the basis of the old schedules to which the newly offered commitments are added. This could also be a good opportunity for countries wishing to introduce technical refinements to their old commitments, if this is finally agreed and is acceptable to all members. In doing so, countries may wish to use techniques, such as bold or italics, that would clearly indicate what the new additions are.

24. It should be pointed out, however, that such revised schedules would only constitute working documents with no binding legal effect on the country submitting it. As mentioned earlier, these will only be initial offers upon the submission of which there will be a succession of requests and offers will be subject to several revisions as a result of the negotiations.

C. Process

25. Offers are traditionally circulated multilaterally, unlike requests, which are usually addressed bilaterally to the negotiating partners. This is because any commitment that may result from the negotiations will apply to all members on an MFN basis. In an offer, a country is, in effect, responding to all the requests it has received. By disseminating it multilaterally, any given offer is open to consultations and negotiations by all negotiating countries, not only those which have made the requests to the country under question but also any other participant in the negotiations. Thus, this procedure provides greater transparency, and is also beneficial from a functional point of view.

26. The submission of offers could also trigger the submission of further requests, thus making it a process of successive requests and offers. This process also allows for certain substantive issues that have arisen during the bilateral negotiations to be given multilateral consideration. Such issues may include certain regulatory issues raised in requests and offers relating to additional commitments under Article XVIII, for which a group of participants might decide to develop a reference paper like in the case of basic telecommunications. The drafting and finalising of a reference paper is essentially a multilateral undertaking. It should be noted, however, that once such a reference paper is agreed upon, it does not take legal effect until a country actually incorporates it in its schedule of specific commitments.

Sector or Subsector [Note 3]	Limitation on Market Access	Limitation on National Treatment	Additional Comments
Telecommunication Services All Subsectors Local service: a) Public switched telephone service (CPC 7521) b) Circuit switched public data network services (CPC 7523**) c) Teleconferencing services	1) None	1) Unbound	(i) The foreign service supplier must be a world class operator with extensive international experience (ii) Type approval mechanism is in place (iii) Basic telecommunication service tariff is decided by the government
	2) None	2) Unbound
	3) Local services are provided exclusively by PT Telkom and 5 regional joint operation scheme operators. Type of legal entity required: - Joint venture - Joint operation, or - Contract management Foreign equity participation is limited to 35 percent	3) None
(CPC 75292)	4) Natural person for management and technical expert for JVC is limited to 20 persons.	4) As specified in the Horizontal Measures	The period of exclusivity for local services expires in 2011. The government will conduct a review of policy with respect to whether to permit additional suppliers of such services upon the expiry of this period.
Long distance: a) Public switched telephone service (CPC 7521) b) Circuit switched public data network services	1) None	1) Unbound	The period of exclusivity for long distance services expires in 2006. The government will conduct a review of policy with respect to whether to permit additional suppliers of such services upon the expiry of this period.
	2) None	2) Unbound
	3) Long distance services are provided exclusively by PT Telkom Type of legal entity required: - Joint venture - Joint operation, or - Contract management	3) None
c) Teleconferencing services	Foreign equity participation is limited to 35 percent
(CPC 75292)	4) Natural person for management and technical expert for JVC is limited to 20 persons	4) As specified in the Horizontal Measures
International: a) Public switched telephone service (CPC 7521) b) Circuit switched public data network services (CPC 7523**) c) Teleconferencing services	1) Only through networks of PT Indosat and PT Satelindo. Callback is not permitted	1) Unbound	The period of exclusivity for long distance services expires in 2005. The government will conduct a review of policy with respect to whether to permit additional suppliers of such services upon the expiry of this period.
	2) Callback is not permitted	2) Unbound
	3) International services are provided exclusively by PT Indosat and PT Satelindo (duopoly) Type of legal equity required: - Joint venture - Joint operation - Contract management Foreign equity participation is limited to 35 percent.	3) None
(CPC 75292)	4) Natural person for management and technical expert for a JVC is limited to 20 persons	4) As specified in the Horizontal Measures
Packet-switched public data network services	1) Only through networks of PT Indosat and PT Satelindo	1) Unbound
	2) None	2) Unbound
	3) Three service suppliers are now operating on non-exclusive basis. Type of legal entity required: - Joint venture or - Joint operation Foreign equity participation is limited to 35 percent	3) None
	4) Natural person for management and technical expert is limited to 20 persons	4) As specified in Horizontal Measures
Telegraph services	1) Only through networks of PT Indosat and PT Satelindo.	1) Unbound
	2) None	2) Unbound
	3) Type of legal entity required: - Joint venture or - Joint operation Foreign equity participation is limited to 35 percent	3) Foreign service supplier should be a world class operator
	4) Natural person for management and technical expert is limited to 20 persons	4) As specified in Horizontal Measures
Domestic: Mobile cellular telephone (CPC 75213)	1) None	1) Unbound
	2) None	2) Unbound
	3) Seven operators are now providing service Type of legal entity required: Joint venture	3) None
	Selection of new operators is dependent on availability of frequency and economic needs Foreign equity participation is limited to 35 percent
	4) Natural person for management and technical expert for JVC is limited to 20 persons	4) As specified in Horizontal Measures

Note 1: According to the most favoured nation principle, as defined in Article I of the GATT, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties. (Return to text)

Note 2: This is an abridged version of Indonesias Schedule of Specific Commitments and is meant for training purposes only. See GATS/SC/43, 15 April 1994 and GATS/SC/43/Suppl.2, 11 April 1997. (Return to text)

Note 3: The names of the Sectors and Subsectors and their respective CPC are in accordance with the WTO Services Sectoral Classification List - MTN.GNS/W/120. (Return to text)

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