Services Domestic Regulation: Developing countries insist on right to regulate services

Original Publication Date: 
11 May, 2006
Many developing countries and their groupings have declared at a WTO services meeting on new disciplines on domestic regulation that there is no need to establish rules based on a 'necessity test', and that the rules should adequately recognize the developing countries' right to regulate their services.

Five new papers, from Brazil and the Philippines; the ACP Group; the African Group; the small and vulnerable economies (SVEs); and from India, Chile, Mexico, Pakistan and Thailand, were presented at the meeting of the Working Party on Domestic Regulation (WPDR), held on 2 May.

The first four papers broadly promoted similar themes, stressing that it was vital that the rules on domestic regulation do not affect the developing countries' right to regulate. Some of the papers or presentations linked to them also emphasized that there was no need to include a 'necessity test' as part of the rules.

The negotiations are being held under Article VI. 4 (on domestic regulation) of the General Agreement on Trade in Services (GATS) which mandates that disciplines be developed to ensure that measures relating to qualification requirements and procedures, technical standards and licensing requirements do not constitute unnecessary barriers to trade in services.

The disciplines 'shall aim to ensure that such requirements are based on objective and transparent criteria, not more burdensome than necessary to ensure the quality of the service and (in the case of licensing procedures) not in themselves a restriction on the supply of the service.'

In the past years of negotiations, a key issue has been whether to include a necessity test and if so how to draft it. Though there is no agreed definition in the GATS context, a necessity test is often taken to mean that measures covered should not unduly restrict trade, and would require that such measures do not go beyond what is 'necessary' to achieve the member's policy objective.

In the discussion on domestic regulation, at the WTO and in the public arena, there is on one hand the aim that measures should not unduly restrict trade, and on the other hand serious concerns that countries should be allowed to maintain the right to regulate services to meet national policy objectives.

According to a trade diplomat, the 2 May meeting was the first time so many developing country members and groupings spoke clearly, and with papers, on the right of developing countries to regulate.

Brazil and the Philippines presented a paper in the form of the legal text of proposed disciplines, containing sections on general disciplines, definition of terms, licensing requirements and procedures, qualification requirements and procedures, technical standards, transparency, developing country members, and a review mechanism.

Introducing the proposal, Brazil said that the core of the document are in paragraphs ( c) to (f) of the general principles, which are based on the right to regulate notion embodied in the third paragraph of the GATS preamble.

Paragraph c recalls the reference to the right to regulate and introduce new regulations in order to meet national policy objectives; Paragraph f recalls the asymmetries prevailing among developing and developed countries in terms of regulatory maturity; Paragraph d outlines the relation between these disciplines and areas of the GATS that contain specific provisions related to regulations; and Paragraph e highlights the right Members enjoy to establish and maintain universal services obligations.

Brazil said that the new element in its joint paper (compared to a previous paper) was the absence of reference to the 'necessity test'. It added that the necessity test represents a major concern to it and its reading of the mandate contained in Article VI: 4 indicates that members are not obliged to adopt the necessity test.

Therefore, Brazil believed that a necessity test is neither convenient nor necessary. The aggregate effects of the disciplines will make sure that domestic regulation will not be used with an 'a priori' intention to nulify or impair commitments.

The paper's section on developing countries contains five elements to take into account the needs of developing countries.

The Brazil/Philippines paper was criticized by Mexico, Hong Kong and Switzerland which said that it lacked ambition. Mexico said 'it is like the large Chair in Place des Nations in Geneva, it lacks equilibrium, since it has one of its legs missing. It has no ambition.'

In response Brazil said that it saw the Chair in the Place des Nation differently. It saw it as a monument to negotiators, whose views were clouded by unrealistic ambitions and who do not realize that a necessity test is like a minefield. The mission of negotiators is to turn the minefield of the current rules in GATS, vis-a-vis domestic regulation, into a safe playing field, by abolishing any trace on necessity test in GATS, remarked Brazil.

A paper by the ACP Group, entitled 'Pro Development Principles for GATS Article VI: 4 Negotiations' said pro development and flexibility principles have to be incorporated into any possible future disciplines.

Such pro-development principles can play a role in developing countries towards promoting appropriate domestic regulatory reform and help exporters address regulatory barriers they face in foreign markets. They can also allow for proper timing and sequencing of regulatory reforms with liberalisation, with a view to promoting sound and sustainable regulatory practices in developing countries.

The main challenge for developing countries is how to create disciplines that underpin Members' specific commitments while at the same time preserving the right to regulate and recognising the particular need of developing countries to resort to this right fully. In many developingcountries, regulatory and institutional frameworks are still at an emerging stage or non-existent.

The ACP Group's pro-development principles focus on three main objectives: (1) ensuring adequate regulatory flexibility for developing and least developed countries; (2) ensuring possible future disciplines promote developing and least developed countries' export capacities and opportunities; and (3) setting the basis for technical assistance and capacity building to improve the countries' abilities to meet Article VI: 4 disciplines and for their service suppliers to comply with Article VI: 4 disciplines in export markets.

Any possible future Article VI: 4 disciplines must meet and not detract from or compromise these principles. The principles proposed to be incorporated include the following.

Under the first principle, Regulatory Flexibility, the paper says there must be a clear affirmation of the right to regulate. Developing countries require flexibility to maintain and introduce regulations. As economies develop the need for additional regulation becomes necessary.

Therefore, it is important for developing countries to have the fullest flexibility to design regulations suited to individual development needs. The existing right to regulate and to introduce new regulations must be explicitly stated so as to ensure that any possible future disciplines do not prescribe, prevent or constrain in any way the ability of a Member to regulate.

Regarding treatment of new regulations vis-a-vis existing ones, the paper says many developing countries are undertaking services reforms and introducing new laws and regulations. There is concern among ACP Members that some of the existing WPDR proposals would discipline, and possibly constrain, new laws and regulations more strongly than existing ones.

This could result in greater regulatory constraints and administrative burdens for those ACP Members that are introducing new regulations currently or in the future.

The Group cited as example the prior comment requirement that has been suggested in some of the proposals for transparency related disciplines. ACP countries undergoing regulatory reforms would face greater burden in providing prior comment opportunities and responding to possible comments than those countries who have already undertaken or completed regulatory reforms.

Thus, future rules should not discipline new regulations more strongly than existing ones. In the case of transparency, future disciplines must not contain prior comment requirements either in a legally binding or best endeavour form. Such requirements may be contrary to constitutional structures and legal systems in many developing countries as well as result in granting foreign-service suppliers opportunities to exert undue pressure on domestic decision making process, which is the core of sovereignty.

On the issue of 'necessity test', the ACP Group said that in developing domestic regulations, regulators balance the interests of various stakeholders, which do not always result in the least trade restrictive or least burdensome of all possible regulations.

The adoption of a necessity test in possible future disciplines on domestic regulation would not guarantee enough flexibility to safeguard all national policy objectives and the different ways available to achieve them. The paper noted the concern of regulators in many countries that a necessity test would constrain domestic regulatory prerogatives.

In order to ensure developing countries have the full right to regulate and introduce new regulations to meet national policy objectives, they must not be subject to a necessity test in the Article VI: 4 disciplines.

The ACP stressed the need for flexibility for individual developing countries in applying the disciplines. It proposed that flexibility be granted, in terms of appropriate timing and sequencing of the application of disciplines, to developing countries individually.

The timing and application of disciplines must recognise that the development of regulatory regimes differs among Members and also within a Member's services sectors. The phase in period of application should not be tied to generalised time frames but based on an individual country's ability to comply with the disciplines.

Developing countries should be responsible for determining, based on their state of domestic regulatory and institutional capacity, the timing of their compliance of possible future disciplines.

The Group also proposed exemptions for development objectives. It said attention must be given to the extent and manner to which any possible future disciplines apply to regulations aimed at fulfilling national development objectives.

These include regulations that ensure universal access to essential services and meeting human development goals and those aimed at ensuring transfer of technology and other performance requirements needed for development.

The Group proposed that developing countries be allowed to temporarily suspend their application of disciplines in cases where specific circumstances impose resource constraints and/or imperatives that require such suspension. These include economic, civil and environmental crises or highly dynamic domestic reform processes.

LDCs shall not be bound by any future disciplines as the regulatory and institutional frameworks are not well developed or lacking altogether in LDCs.

It also proposed that any disciplines shall not prevent a Member from availing itself of the rights provided under Articles IIIbis, XII, XIV and XIVbis of the GATS. Similarly, disciplines shall not prevent a Member from taking measures for prudential reasons, including those set out in the Annex on Financial Services, qualifying examinations administered or offered by financial service regulators or self-regulatory bodies, or other measures applied to ensure financial stability.

In the course of any WTO dispute settlement process, in the interpretation and application of provisions of any future disciplines, the level of development and administrative capacity of an individual developing country Member must be taken into account.

Any possible disciplines should facilitate increased services exports by developing and least developed countries.

The Group said that implementation of disciplines may stress limited budgetary and human resources. Thus, developing countries shall not be obliged to fully implement the disciplines beyond their existing resources and abilities. Members should also ensure that financial and technical assistance to help developing country Members establish and build effective regulatory frameworks is guaranteed.

The Africa Group paper said the main challenge for its members is to achieve the right balance between: the creation of disciplines to underpin Members' specific commitments, the preservation of the 'Right to Regulate' (RtR), taking into account the fact that in many developing countries, many regulatory and institutional frameworks are still at an emerging stage or at times non-existing, and the establishment of special and differential treatment.

The paper proposes several cross cutting elements and principles. Firstly, future disciplines should include a clear reference to and affirmation of the 'Right to Regulate'. Any disciplines shall not prevent Members from exercising their right to maintain existing regulations or introduce new ones to meet national objectives.

Secondly, on Transparency and Due Process, any proposal should take into account the constraints and burden that it may impose on the African countries. The Group stressed concerns on possible obligations on prior comment and asked for ways to promote reforms which are less intrusive of domestic regulatory prerogatives.

On Fees, the Group said they serve important regulatory functions but they may also result in an impediment to trade. When charging fees, the authorities shall have regard to the costs of administrative activities involved.

Future disciplines shall clearly state that they are subject to the GATSgeneral and other exceptions. Similarly, disciplines shall not prevent a Member from taking measures for prudential reasons, including to ensure financial stability.

The Group also said future disciplines must clearly cover Mode 4 related issues. Also, complicated procedures for obtaining visas can impede developing countries' exports. It is therefore important to ensure that visa related issues are covered by the future disciplines. The paper also describes elements for particular regulatory measures, as well as SDT and review provisions.

18 members of the small and vulnerable economies (SVEs) group (Antigua and Barbuda, Barbados, Cuba, Dominica, Dominican Republic, El Salvador, Fiji, Grenada, Guatemala, Honduras, Jamaica, Mauritius, Mongolia, Nicaragua, Paraguay, St. Kitts and Nevis, St. Vincent and The Grenadines, and Trinidad and Tobago) also presented a paper.

It said an important and overarching principle is the right of Members to regulate and introduce new regulations to meet national policy objectives with recognition of the particular need of developing countries to exercise this right.

They added that Article VI: 4 type regulations in services are utilised by SVEs for various national development and trade policy objectives, for example to build capacity of domestic service providers and to increase their competitiveness and quality for consumers. SVEs must meet these objectives within the limits of their smaller regulatory budgets and human resources. Similarly, many smaller service exporters of SVEs face capacity constraints in fulfilling domestic regulations for entry into export markets.

In general, SVEs have low levels of human, financial and technical resources for the development of regulatory frameworks.

Regulatory management of services in SVEs is commonly dispersed among several ministries or regulatory bodies. This lends to a complex system of functions for administering Article VI: 4 type domestic regulations.

In SVEs, regulations are often in place only for those service sectors in which their services suppliers are concentrated, leaving other service sectors without adequate regulation.

Suppliers and regulatory authorities face challenges in implementing technical standards for services trade. Technical standards developed by plurilateral standard setting bodies may not adequately consider the concerns of SVEs.

Service providers in SVEs are small and lack resources to meet export requirements and monitor changes on legislation and regulation in export markets. They face onerous qualification and licensing requirements and procedures in their export markets. Moreover, multiple requirements by different levels of government can result in high costs and time.

The SVEs proposed the following general principles: that the disciplines preserve the right to regulate and shall not prevent or prescribe the development and adoption of future legislation to meet Members' national policy objectives; that implementation of disciplines that require adjustment of existing domestic regulation or new mechanisms shall be consistent with their financial, administrative and institutional capabilities; that the disciplines shall only apply to measures affecting services sectors when they are related to a Member's schedule of commitments; and that application of the disciplines in domestic regulation shall not prevent Members from establishing measures to support regional economic integration.

The paper by Chile, India, Mexico, Pakistan and Thailand on proposed disciplines on qualification requirements and procedures was an update of an earlier paper.

Its general principles include that the disciplines shall apply to those services sectors where a member has undertaken specific commitments and to different levels of government.

Each member shall ensure that measures relating to qualification requirements and procedures are: (a) Based on objective and transparent criteria, such as competence and the ability to supply the service; (b) Not more burdensome than necessary to meet national policy objectives; and ( c) In the case of qualification procedures, not in themselves a restriction on the supply of the service.

The paper has detailed draft provisions on qualification requirenments, qualification procedures, transparency and SDT.