WTO News from the Swiss Institute for International Economics and Applied Economic Research (SIAW) No. 14, March 2006 English Language Edition ----------------------------------------------------------------------------------------------------------------------------- *** COMMENTARY *** COMPLETING THE DOHA ROUND: WHAT PROGRESS SINCE HONG KONG? After another year of false starts, contretemps, and lowered expectations, senior government officials agreed at the WTO Ministerial Conference in Hong Kong, China, to complete the Doha Round of trade negotiations in 2006. A series of deadlines was set, largely in recognition of the expiration of the U.S. administration's authority to negotiate trade agreements in the middle of 2007. The first of these deadlines was set for April 2006, by which modalities for the agricultural and non-agricultural negotiations are supposed to be agreed. This short note examines what has happened since the Hong Kong Ministerial Conference and what this means for the likelihood of completing the Doha Round in 2006. *Tough U.S. stance undermined?* For its part, the United States has continued to publicly call for Europe to make further cuts in its agricultural tariffs and domestic support programmes. Meanwhile, U.S. officials have insisted that its 2005 agricultural offer is conditional on other countries making more ambitious offers, so discounting the possibility that the latter would result in another, more generous offer from the United States. Moreover, U.S. officials continue to stress the binding nature of the deadline associated with the expiration of 'Fast Track' or Trade Promotion Authority in mid-2007. This tough U.S. line is partly undermined by two factors. The first is that the U.S. commitment to completing the Doha Round appears to have wavered in January 2006. To take just one example, in a closed briefing for Washington-based trade journalists, Ambassador Portman's opening remarks started with matters associated with a number of pending bilateral free trade negotiations before eventually moving on to the completion of the Doha Round, perhaps indicating his or the White House's true priorities. The second, and related, reason is that the U.S. administration needs Fast Track negotiating authority to implement many of the foreign policy-motivated free trade agreements that it expects to sign in 2007 and later. This suggests that there will be strong foreign policy as well as commercial policy interests supporting any Presidential request for extending Fast Track in 2007. This is not to say that obtaining Congressional approval for such a request will be at all easy, only that the expiration of Fast Track in mid-2007 may not be as immutable as it is currently made out to be. *Lack of serious European initiative* The two months since the conclusion of the Hong Kong Ministerial Conference have not been used well in Europe either. First, a spokesman for the European Commission's Directorate-General for Trade revealed in early January that they were undertaking a 'period of reflection', a classic Mandelson phrase. So much for starting the year with an energetic push towards the April deadline! Second, in a speech given in Berlin, Commissioner Mandelson indicated that the European Commission won't move until others do so. Then, after the Davos Meeting of 15 trade ministers in late January (which I will discuss below), Mr. Mandelson went to Mauritius to give a speech in which he implied that Europe and Africa had a common interest in limiting further cuts in agricultural tariffs. (Many African countries are beneficiaries of preferential market access to European markets.) How one reconciles this attempt to shore up opposition to more agricultural trade reform with an ambitious Doha Round outcome is beyond me. It would also seem that Commissioner Mandelson has concluded that making the case at home for further agricultural trade liberalisation is hopeless. Indeed, in a recent interview he ruled out asking Chancellor Merkel to impress upon the French government the need for greater flexibility in agricultural trade negotiations. This step is precisely what many European trade observers feel is needed to shift Paris from its current stance. *Only few positive developments* The one positive development, whose significance is debatable, was the agreement among 15 trade ministers meeting in Davos, Switzerland, that future negotiations should proceed 'in concert'. Moreover, a move away from making formal offers to informal 'bilateral soundings' of potential trade-offs was signalled. Certainly, dispensing with the 'you first' approach to negotiations is helpful (its track record in 2005 was pitiful). Moreover, to the extent that quiet bilateral discussions help identify the potential scope for compromises in the agricultural negotiations and elsewhere, these procedural steps can be helpful. However, it remains to be seen whether these steps will make the necessary political decisions any easier or forthcoming. Indeed, at the Davos meeting Ambassador Portman is reported to have said that 80 percent of the work that remains requires difficult political choices concerning the fate of domestic constituencies. Given those particular decisions are taken in national capitals, and not in Geneva or wherever else trade ministers and ambassadors choose to meet, the question arises as to whether the current group of trade negotiators have the authority to conclude this round. This last point has not been lost on everyone. Arguably, Prime Minister Blair and President Lula da Silva had this in mind as they explored the case for calling a special summit of world leaders to discuss the Doha Round. President Lula da Silva recently met with Prime Minister Blair to discuss this matter, but the latter appears unconvinced of the merits of holding a summit at this time. This proposal, however, is not without its risks. Leaving aside the question of who would represent the E.U. member states (that are supposed to negotiate trade matters collectively), one question to ask is: Who would attend? If it looked like he was going to be isolated, would President Chirac attend? (He might come just to say 'non' to the U.S. and U.K., just like he did over the invasion of Iraq!) If President Chirac does attend, what happens if he is able to persuade Japan, Korea, and possibly a few others countries with substantial agricultural interests to oppose further agricultural trade reform? This would create an impasse at the summit, possibly leading to the collapse of the Doha Round. Moreover, it would reveal that, at present, the WTO is not a forum where nations can do serious business. A high-profile summit, then, seems fraught with danger. *Success of the Doha Round at stake* These observations point to the following conclusions. First, little substantive progress has been made in the two months since the Hong Kong Ministerial Conference. Second, the recent statements of leading E.C. and U.S. trade negotiators cast doubt as to their resolve to complete the Doha Round in 2006. And, finally, that if the 2006 deadline for completing the Doha Round stands any chance of being met, then a low-profile way to engage heads of government and heads of state is urgently needed. Serious political direction for trade negotiators is at a premium. In the coming months we will learn just how much national political leaders really want the Doha Round to succeed. *SIMON J. EVENETT* ----------------------------------------------------------------------------------------------------------------------------- *** DISPUTE SETTLEMENT *** 'US–INTERNET GAMBLING': AND THE WINNER IS... FREE TRADE IN SERVICES! WTO Members have been reluctant to bring cases under the General Agreement for Trade in Services (GATS). This is unfortunate, as the interpretation of its rules and obligations would benefit from instructive dispute settlement cases. In April 2005, however, the Dispute Settlement Body (DSB) adopted the Appellate Body and Panel reports on the second-ever GATS case: ‘United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services’ (US-Gambling, WT/DS285). The US has to implement the DSB’s rulings by 3 April 2006. *What was the 'gamble' between the US and Antigua about?* At issue was a complaint by Antigua concerning certain US measures that make it unlawful for suppliers located outside the US to export on-line gambling services to US consumers. Antigua asserted that in the face of US GATS market-access commitments for cross-border gambling services, these prohibitions violate US obligations under GATS Article XVI. GATS Article XVI guarantees market access to trade partners through the prohibition of certain quantitative limitations once a WTO Member has made sector-specific commitments in its GATS schedule. Antigua also argued that the US allowed domestic suppliers to provide on-line gambling services, effectively discriminating against foreign service suppliers. The US maintained that it had never made specific GATS market-access commitments for cross-border gambling services. It argued that under US law, any remote supply of such services - even by domestic suppliers - is prohibited. The US also asserted that specific commitments under GATS Article XVI do not render impossible the 'total prohibition' of the electronic supply of certain services, given that this GATS provision is only concerned with avoiding specified quantitative limitations. Moreover, the US claimed that, in any case, the GATS exemptions under Article XIV would justify the derogation from existing specific GATS commitments due to overriding public policy considerations. In short, the Appellate Body ruled that indeed the US has market-access commitments that prevent it from outlawing the cross-border supply of gambling services. Yet, the Appellate Body judged that to preserve public order and/or morals, the US can benefit from an exemption from its trade obligations and maintain three out of the four US measures in question. The US has only to amend one Act which seems to permit electronic gambling, then foreign providers will not be able to supply electronic gambling services to the US. The following broader assessment sheds light on the substantive clarifications the US-Gambling case has produced with respect to the GATS and the treatment of Internet-supplied services. Three main areas of notable progress with implications for the ongoing Doha negotiations are identified. *The GATS now ready for the digital economy* The Internet has led to a growing cross-border delivery of services. Yet, for multilateral trade rules the electronic supply of services is a new phenomenon. While bilateral trade agreements are increasingly innovating as regards the cross-border delivery of services and incorporating Chapters on E-commerce, the WTO Work Programme on E-commerce, charged with reassessing WTO rules in the face of electronic delivery, never came to binding conclusions. The greatest advance of US-Gambling is the confirmation that GATS rules and commitments are indeed applicable to electronically-supplied services. For the Doha negotiations, this means that GATS Mode 1 commitments are needed to secure cross-border Internet-supplied services. Work remains on other questions raised in the WTO Work Programme on E-Commerce. The second-ever GATS case also contributed to a common understanding of the concepts of technological neutrality and the 'likeness' of services. According to US–Gambling, within a given mode of supply, a service is to be regarded as 'like' independently of the technological means by which it is delivered. A market-access commitment in a particular GATS mode thus implies the right to supply a service through mail, telephone, Internet, etc., unless otherwise specified. The rulings also insist that an electronically-supplied service is not – by definition – unlike a service supplied on-site. Rather, the likeness of services needs to be assessed on a case-by-case basis and depends on the attributes of the products in question, rather than on their form of delivery. Furthermore, US-Gambling has provided guidance on how to unmistakably schedule specific GATS commitments. At the minimum, it has provided a clear warning to those WTO Members who don’t. Members are assumed to use the GATS Services Sectoral Classification List in combination with the UN Central Product Classification (CPC) and to follow the 2001 GATS Scheduling Guidelines. Alternatively, they must clearly state when they deviate from these standards and use internationally-recognised classification systems. *Scope of GATS market-access commitments clarified* US-Gambling has clarified the meaning of market-access commitments under GATS Article XVI. The question was whether the US could maintain – despite full GATS Mode 1 commitments on online gambling services - a ban against them. Leaning on the above points on technological neutrality, both WTO courts considered this prohibition of online gambling a violation of the US GATS commitments. They judged that a prohibition of one, several or all means of cross-border delivery technologies is a 'limitation on the number of service suppliers in the form of numerical quotas' within the meaning of Article XVI and thus a quantitative limitation with a zero-quota effect. Unless it can be justified under the exceptions provision of the GATS, such a ban on particular delivery forms cannot be maintained when bound by full market-access commitments. The implication is that WTO Members should engage in revised GATS Mode 1 commitments only when they are ready to accept their electronic cross-border delivery (e.g. in medical services). Importantly, it is argued here that the rulings preserve the ability of WTO Members to regulate the quality of a service. The WTO courts emphasized the strict separation of GATS Articles VI on domestic regulation and XVI on market access, while asserting that they are mutually exclusive. GATS Article VI tries to ensure that – in sectors where specific commitments are undertaken – domestic regulations do not unnecessarily and intentionally negatively affect trade in services. The WTO courts also stressed that non-discriminatory domestic regulations that address the quality of the service supplied and/or the service supplier, can be maintained as long as they do not constitute 'unnecessary barriers to trade in services', pursuant to the criteria contained in GATS Article VI:5. Had the US, for instance, established certain security- or qualification-related requirements valid for both domestic and foreign on-line gambling services or their providers, these measures would likely not have been found incompatible with specific GATS market-access commitments. Rather they would have been assessed under GATS Article VI. *General exceptions of the GATS permitting policy flexibility* US–Gambling constitutes the first occasion for a WTO Member to invoke an exemption under GATS Article XIV. Under certain conditions, the latter provides WTO Members with the right to derogate from their trade obligations if overarching public policy prerogatives are at stake. Ultimately, the Appellate Body found that the US prohibition of on-line gambling is justified under the public morals exception of the GATS. Both the Panel and the Appellate Body avoided ruling directly on the legitimacy of US regulatory objectives, while pointing to cultural differences in policy choices and Members’ scope to define and apply for themselves the concepts of 'public morals' and 'public order'. In sum, the Appellate Body was not exceedingly restrictive when assessing whether the US policies are compatible with the 'necessity test' and the chapeau of GATS Article XIV. WTO Members can – despite full specific GATS commitments – rely on the GATS exemptions when trying to achieve certain public policy objectives captured by Article XIV. *GATS on its way to a stronger discipline* US–Gambling has contributed to securing unfettered (electronic) service trade while increasing the clarity of GATS rules and obligations. It should significantly boost the WTO negotiators’ confidence in the GATS and – while considering the 'lessons learnt' – in new specific GATS commitments. *SACHA WUNSCH-VINCENT* - THIS TEXT IS BASED ON AN ARTICLE AVAILABLE AT WWW.IIE.COM ----------------------------------------------------------------------------------------------------------------------------- *** FROM THE BOOK SHELF *** THOMAS A. ZIMMERMANN: NEGOTIATING THE REVIEW OF THE WTO DISPUTE SETTLEMENT UNDERSTANDING, LONDON: CAMERON MAY LTD., 2006, 340 PAGES, GBP 125.00 / USD 238.00 Although the dispute settlement mechanism of the WTO is generally perceived to work well, the first ten years of its existence have also revealed a number of serious deficits. Accordingly, WTO members agreed to clarify and improve the Dispute Settlement Understanding (DSU), and negotiations have been taking place since 1998 ('DSU Review'). Regrettably, they have not yet yielded successful results, and several deadlines have lapsed without reaching a substantive agreement. As a result, the mandate to continue the DSU Review was formally renewed in the Hong Kong Ministerial Declaration. THOMAS A. ZIMMERMANN takes stock of the DSU Review. He presents a fascinating insight into the system of GATT 1947/WTO dispute resolution, traces the negotiations aimed at improving the functioning of the system, and analyses the individual reform proposals in their broader context. ZIMMERMANN identifies a number of central reasons why the negotiations have failed so far. For example, he stresses the fact that the traditional voting system in the WTO, requiring consensus among the membership, sets high hurdles for any amendment to the DSU. Secondly, the issue of whether the system should continue to evolve into a more rules-based approach or whether the diplomatic element should prevail, has so far remained largely unresolved. Thirdly, reforming a system that is currently in use leads almost automatically to systemic difficulties. Fourthly, the mechanism, as it stands, has generally proven to be flexible enough to adapt to changing circumstances ('DSU Review in practice'). According to ZIMMERMANN, these reasons can explain why the prospect of an 'early harvest' is not realistic and the conclusion of the DSU Review as part of the Doha Round final package seems to be, from a political viewpoint, the most likely option. The book is carefully researched, adequately structured and very well written. It is easily accessible, and the quality and stringency of its reasoning are impressive. It is warmly recommended to all practitioners, diplomats and scholars interested in international dispute resolution in general. Of course, it will be fundamental for all those interested in the DSU Review, in particular for the country delegates directly involved in the negotiations. There is currently no better reading on the DSU Review available on the market. *MATTHIAS OESCH* ----------------------------------------------------------------------------------------------------------------------------- *** DETAILS OF PUBLICATION FOR "WTO NEWS" *** WTO NEWS FROM THE SWISS INSTITUTE FOR INTERNATIONAL ECONOMICS AND APPLIED ECONOMIC RESEARCH (SIAW-HSG) Editors: Prof. Dr. Heinz Hauser, Dr. Thomas A. Zimmermann Editing, Production, Marketing: Martin Gedult v. 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