National treatment under general agreement on trade in services and assessment on implementation of national treatmemt in financial services under vietnamese regulation

From the above reason, the author decides to write a bachelor‟s thesis on “National treatment under General Agreement on Trade in Services, and the assessment on implementation of natio

MINISTRY OF EDUCATION AND TRAINING

HO CHI MINH UNIVERSITY OF LAW THE MANAGING BOARD OF SPECIAL TRAINING PROGRAM

-

HUYNH HUONG GIANG

NATIONAL TREATMENT UNDER GENERAL AGREEMENT ON TRADE IN SERVICES AND ASSESSMENT ON IMPLEMENTATION

OF NATIONAL TREATMENT IN FINANCIAL

SERVICES UNDER VIETNAMESE REGULATIONS

BACHELOR’S THESIS Major in International Law

HO CHI MINH CITY – 2014

HO CHI MINH UNIVERSITY OF LAW THE MANAGING BOARD OF SPECIAL TRAINING PROGRAM

-

-BACHELOR’S THESIS

NATIONAL TREATMENT UNDER GENERAL AGREEMENT ON TRADE IN

SERVICES AND ASSESSMENT ON IMPLEMENTATION OF NATIONAL TREATMENT IN FINANCIAL SERVICES UNDER VIETNAMESE

REGULATIONS

STUDENT CODE: 1055010070 SUPERVISOR: DR TRAN PHU VINH

`

HO CHI MINH CITY – 2014

I hereby confirm that this thesis is a presentation of my original work and contains

no material which was previously published or written by another person, except where due reference has been made in the text

I give consent to this copy for being published and being made available for

copying in the library of Ho Chi Minh University of Law, subject to provisions of Intellectual Property regulations

The work was completed under the guidance of Professor Tran Phu Vinh, at Ho Chi Minh University of Law

In my capacity as supervisor of the candidate‟s thesis, I certify that the above

statements are true to the best of my knowledge

Date: July 21, 2014

Acknowledgments

Apart from the efforts of myself, the thesis is completed depending largely on the encouragement and support of many others This is opportunity to expressing my gratitude to all those people who have supported me and had their contributions to this thesis possible

I express my deepest gratitude to my supervisor, Mr Tran Phu Vinh for his guidance and support to my thesis He has given me enough freedom during my research and substantial comments as well as encouragement, which helped me to coordinate the thesis

Furthermore, I would like to thanks all professors in Ho Chi Minh University of Law for their guidance, remarks and encouragement through the learning process of

my bachelor degree All the knowledge, experience I have acquired from the professors and other students in Ho Chi Minh University of Law are all contributions to materializing this thesis

I also would like to acknowledge with much appreciation to the support from Audier and Partners LLC for giving me encouragement to finish the thesis during

my training period Without the help from my mentor and staff of A&P, this thesis would not have been completed

Last but not least, I express my deepest gratitude to all my friends and my family who have continually supported me throughout the entire process, your help was vital for the success of this thesis as well as my future career

TABLE OF CONTENT

INTRODUCTION 1

CHAPTER I OVERVIEW ON NATIONAL TREATMENT UNDER THE GATS 8 1.1 Introduction 8

1.2 History background and structure of the GATS 8

1.2.1 The purpose and historical background of GATS 8

1.2.2 The substance and structure of the GATS 10

1.3 The substances of national treatment obligation under GATS 14

1.3.1 National treatment in general and the execution of this principle in the GATS 14

1.3.2 Descriptive analysis of national treatment under GATS 21

1.4 The relationship between national treatment obligation and market access 25 1.4.1 Market access under the GATS 25

1.4.2 The connection and intertwinement of market access and national treatment under Article XX:2 of the GATS 27

1.4.3 The approaches to address the overlap issue 29

1.5 Summary of Chapter I 32

CHAPTER II NATIONAL TREATMENT IN FINANCIAL SERVICES UNDER THE GATS AND ASSESSMENT ON IMPLEMENTATION OF NATIONAL TREATMENT IN FINANCIAL SERVICES UNDER VIETNAM LEGISLATIONS 33

2.1 Introduction 33

2.2 Specific national treatment rules in financial services and its exceptions 33

2.2.1 Specific national treatment obligation in financial services 33

2.2.2 Exceptions of national treatment related to financial services 35

2.3 Status of national treatment commitment of Vietnam in financial services sector 40

2.3.1 Commitment in Banking sector 40

2.3.2 Commitment in Securities sector 44

2.4 Assessment on Vietnam‟s implementation of national treatment commitment in financial services under domestic regulations 46

2.4.1 Vietnam legal framework for national treatment principle 47

2.4.2 Assessment on implementation of national treatment commitment in

banking regulations 48

2.5 Assessment on implementation of national treatment commitment in securities regulations 52

2.6 Proposals for domestic regulation to be compatible with accession commitment of Vietnam 56

2.6.1 Confirmation on the position of international treaties in the hierarchy of domestic regulations 56

2.6.2 Strengthening the law enforcement mechanism 56

2.6.3 Providing more detail in implementation of WTO commitment 57

2.7 Summary of Chapter II 57

CONCLUDING REMARKS 59

BIBLIOGRAPHY i

APPENDIX A COMMITMENT OF VIETNAM TO WTO IN BANKING SECTOR x APPENDIX B COMMITMENT OF VIETNAM TO WTO IN SECURITIES SECTOR xiii

INTRODUCTION 1.1 Significance of the study

The General Agreement on Trade in Services1 (“GATS”), which came into force on

January 1, 1995 is a breakthrough of Uruguay Round trade negotiations, marking a giant step for liberalization for trade in services For the very first time, there is a comprehensive multilateral legal framework of disciplines for trade in services,2

with the join of more than 150 World Trade Organization (“WTO”) Members In

order to ensure equal opportunities for foreign services and effective access to services market, the GATS use a three-pronged approach including market access, national treatment and disciplines on domestic regulations.3 National treatment is the commitment by a country to treat foreign competitors operating on its territory, but controlled by the national of another country, no less favorably than domestic counterparts in like situation This is just general definition of national treatment, in order to understand how national treatment applied to services, in particular financial services, and the difference of this principle applied to goods and services,

a study about national treatment under the GATS is essential

One of the characteristics of national treatment under the GATS is its complicated relationship with market access The clear demarcation between market access and national treatment with respect to trade in goods seems to blur in trade in services The relationship between national treatment and market access is complicated and confusing, and there is a viewpoint that researches or studies about this matter are just valuable in theory However, since the WTO dispute United States, China – Electronic Payment Services, the issue becomes a pressing one The Panel report although explained some question related to the GATS, it still shows the limited suitability of the current framework of the GATS and inadequate guidance regarding national treatment obligation and market access in financial services sector Therefore, it is essential to study about the national treatment and to identify the relationship between national treatment and its relationship with market access under GATS, helping WTO Members to define whether a measures shall be violate market access or national treatment obligation or not

1 General Agreement on Trade in Services (Apr 15, 1994), Marrakesh Agreement Establishing the World

Trade Organization, Annex 1B, The Legal Texts: The Results Of The Uruguay Round Of Multilateral

Trade Negotiations 284 (1999), 1869 U.N.T.S 183, 33 I.L.M 1167 (1994) [hereinafter the GATS]

2

WTO Agreement: Marrakesh Agreement Establishing the World Trade Organization, Apr 15, 1994, The

legal texts: the results of the Uruguay Round of multilateral trade negotiations 4 (1999), 1867 U.N.T.S

154, 33 I.L.M 1144 (1994)

3 M Krajewski (2003), National Regulation and Trade Liberalization in Services, The legal Impact of the

General Agreement on Trade in Services (GATS) on National Regulatory Autonomy, Kluwer Law

Inter-national, pp 130

Furthermore, financial sector, being an important part of the world economy and having huge effect to other sectors and globalization and liberalization of trade all over the world, is a sensitive sectors for all governments Due to that fact, financial services has been provided specific regulations under the GATS, and domestic regulators have always been cautious towards introduction competition in financial sector due to policies to develop domestic financial industries and due to prudential concerns This issue is extremely crucial for developing countries when joining WTO, including Vietnam Vietnam has become a Member of WTO since January 1,

2007 and has been taking step-by-step to integrate to the world financial markets In the era of globalization and liberalization of trade, national treatment obligation together with market access affects directly to trade in services of nations However,

as a WTO Member, Vietnam has its commitment to liberalization trade in services and still has to balance between its WTO obligation and the development of our young domestic financial sector The significance of the study is to provide in-depth knowledge about national treatment, to assess the regulations of Vietnamese law with the Accession Commitment of Vietnam to the WTO in financial services and

to give possible solutions for more efficient operation of Vietnamese‟s legislation in financial services

From the above reason, the author decides to write a bachelor‟s thesis on “National treatment under General Agreement on Trade in Services, and the assessment

on implementation of national treatment in financial services under Vietnamese domestic regulations.”

1.2 Literature review to the topic of the thesis

Study on national treatment obligation under the GATS and especially in financial services has received great attention from many scholars recently, mostly from international scholarly works

1.2.1 Foreign studies related to the topic

First and foremost, as the GATS is the multilateral agreement between WTO Members, the Secretariat of WTO has published a guideline for Members to have

an overview about the GATS namely “Guide to the GATS : An overview of issues for further liberalization of trade in services”, published by Kluwer law international in 2001 This guideline covers all the aspects of the GATS, however,

as a guideline; this book does not specifically aim at studying on national treatment obligation or its application in any specific sector

Besides, there are other scholarly works of many authors on national treatment

obligation under the GATS such as, "National Treatment in the GATS:

Corner-stone or Pandora's Box?" of Mattoo, Aaditya4; “A Comparative Analysis of GATS and GATT: A Trade in Services Departure from GATT„s MFN Principle and the Effect on National Treatment and Market Access” of Trachtman R5; “The Law and Policy of the WTO” of Peter Van D Bossche6, “National treatment and WTO dispute settlement: adjudicating the boundaries of regulatory autonomy” of Gaetan

Verhoosel Nonetheless, these books mainly focus on national treatment obligation

in general; there is no book cover national treatment in a specific sector such as financial services

There are also papers and journals which focus on national treatment obligation in

financial services such as “Market access and National treatment in Electronic Payment Services An illustration of the Structure and Interpretive Problem in GATS” of Rachel Block7; “National treatment in financial services in the context of the GATS/WTO” by Wei Wang8; etc., however, these journals or papers do not compare National treatment under the GATT9 and the GATS and they

China-do not study on the regulation of financial services under Vietnamese regulations

1.2.2 Research status in Vietnam

Regarding research status in Vietnam, there is a master thesis of Phạm Thị Nguyệt

Sương on “Quy chế đối xử quốc gia đối với nhà đầu tư nước ngoài và sự tác động của quy chế này đối với đầu tư trong nước” (National treatment to foreign investors

and its affect to domestic investors).10 This thesis mainly focus on studying on national treatment and measures usually used by countries to protect domestic investors Although the thesis of author Phạm Thị Nguyệt Sương also focuses on national treatment obligation, there are differences on the scope and the purpose of researching with the current thesis The purpose of the current thesis is to research about national treatment in a specific sector and to deal with the complicated

4 Aaditya Mattoo(1997), “National Treatment in the GATS: Corner-stone or Pandora‟s Box?”, 31 Journal of

World Trade, Issue 1

5 Ryan Teksten (2001), “A Comparative Analysis of GATS and GATT: A Trade in Services Departure from

GATT„s MFN Principle and the Effect on National Treatment and Market Access”, Legal and

Institutional Aspect of International Trade

6

Peter Van den Bossche, Werne Zdouc (2013), The Law and Policy of the World Trade Organization, Text

Cases and Materials, 3 rd ed, Cambridge University Press

7 Rachel Block (2013-2014), “Market access and National treatment in China-Electronic Payment Services

An illustration of the Structure and Interpretive Problem in GATS”, Chicago Journal of International

Law, Vol 14, No.2, pp 652-701

8 Wei Wang (2004), “National treatment in Financial Services in the context of the GATS/WTO”,

International Financial Economy and Technology Law Review,pp.149-181

9 General Agreement on Tariffs and Trade 1994, Apr 15, 1994, Marrakesh Agreement Establishing the

World Trade Organization, Annex 1A, The Legal Texts: The Results Of The Uruguay Round Of

Multilateral Trade Negotiations 17 (1999), 1867 U.N.T.S 187, 33 I.L.M 1153 (1994) [hereinafter the

GATT]

10 Phạm Thị Nguyệt Sương (2007), Quy chế đối xử quốc gia đối với đầu tư nước ngoài và sự tác động của

quy chế này đối với đầu tư trong nước (National treatment to foreign investors and its affect to domestic

investors), Master thesis, Ho Chi Minh University of Law

relationship between market access and national treatment in the GATS rather than focus on the domestic regulation of Vietnam related to foreign investment

There is also bachelor thesis of Nguyễn Thị Tuyết Minh on “Hiệp định chung về thương mại dịch vụ (GATS) và pháp luật ngân hàng Việt Nam trong quá trình gia nhập” (General Agreement on Trade in Services (GATS) and Vietnamese

legislation on banking in accession period).11This thesis‟ main aim is to provide an overview about the GATS and regulations on banking of Vietnamese It is different with the author‟s thesis as it does not study about national treatment and its implementation to Vietnamese regulation

Additionally, there are book by Vũ Như Thăng on “Tự do hóa thương mại dịch vụ trong WTO: Luật và thông lệ” (Liberalization in trade in services of WTO: Law and

common policy)12 or the journal of LLM Vũ Anh Thư: “Áp dụng nguyên tắc không phân biệt đối xử trong các cam kết về thương mại dịch vụ của Việt Nam khi gia nhập WTO” (Application of national treatment of Vietnam in the accession

commitment to WTO in trade in services) also study on National treatment in general

These books and papers help the author to have better understanding and profound knowledge about the topic to provide accurate and adequate information for the purpose of the thesis However, as there is no research or any scholarly works focus

on national treatment in financial services and the effect of national treatment to Vietnamese regulations on financial services, the thesis on this matter is not identical to any published scholarly works of any author

1.3 The purpose of conducting the thesis

The thesis is conducted with two major purposes:

Firstly, the aim of the research is to provide an overview about national treatment in GATS and how national treatment is adapted to characteristics of the trade in services Furthermore, by descriptively analyzing national treatment disciplines, the thesis shall clarify the interrelationship of national treatment and market access in GATS and provide possible approaches to address the overlap between national treatment and market access

Secondly, by studying on specific national treatment in financial services and the exemption designated for this specific sector, the study shall specifically concern on the assessment of national treatment and market access in banking and securities

11 Nguyễn ThịTuyết Minh, Hiệp định chung về thương mại dịch vụ (GATS) và pháp luật ngân hàng Việt Nam

trong quá trình gia nhập (General Agreement on Trade in Services (GATS) and Vietnamese legislation on

banking in accession period), Ho Chi Minh University of Law, Bachelor thesis

12

Vũ Như Thăng (2007), Tự do hóa thương mại dịch vụ trong WTO: Luật và thông lệ (Liberalization in trade

in services of WTO: Law and common policy), Ha Noi Publishing

sectors under the commitment of Vietnam to WTO and its implementation to domestic regulations Last but not least, subsequently to identifying the imbalance

or disparities between the regulations of Vietnamese law and the commitment of Vietnam to the WTO in banking and securities regulations, the thesis shall give possible solutions to improve or shorten the gaps of the Vietnamese law with the commitment to WTO

1.4 Scope of the thesis

National treatment under GATS is different from national treatment under the GATT as it is not a general principle but special commitments of WTO Members in each sector Therefore, the main scope of the thesis will focus on the functioning of national treatment obligation with respect to financial services and its effect on domestic financial services regulations

On the first part, prior to study about national treatment under the GATS, it is important to have an overview about the GATS including its history and purpose of establishment Consequently, the thesis will focus on descriptive analysis of national treatment which is regulated at Article XVII of the GATS and compare this principle with that of the GATT One of the significance of the study is to study about the interrelationship of national treatment with market access and provide possible methods to address the overlap issue and in order to do that, a short introduction about market access will be employed

The second part of the study deals with application of national treatment in financial services and the exceptions for this sector The thesis will define legal ground for national obligation in financial services sector and introduce its exceptions including general exceptions and specific exceptions which designated for trade related to financial services The exceptions the thesis shall focus on including exception to protect the Balance of Payments (Article XII of GATS), exception on Government Procurement (Article XIII of GATS), General Exceptions regulated at Article XIV of GATS, Security Exception pursuant to Article XIVBis of GATS and regulations on Prudential Crave-out under Annex on Financial Services

Last but not least, the thesis will focuses on understanding national treatment commitment of Vietnam in financial services sector Given the constraints of a bachelor thesis and timeframe‟s limitations, the thesis will not study on the implementation of national treatment obligation in practice of all trade in services and measures to ensure national treatment obligation in practice Nonetheless, the thesis will focus on the implementation of national treatment commitment in Vietnamese legislation of financial services, particularly in banking and securities sectors By assessing the regulations in these two services sector, the thesis shall demonstrate the effects of national treatment to foreign investment in financial

services and compare the disparities between the commitment of Vietnam in WTO and our current regulation and/or to find possible solution to improve our legislations

1.5 Research Methodologies

As the thesis is conducted in English and solely focuses on international law and giving comparison with domestic regulations, the main methodologies used to studying on the topic is analytic method, synthetic method, comparative legal analysis method, and exploratory method

Firstly, analytical method aims to collate, organize and describe descriptively legal rules and to offer commentary on the emergence and significance of the authoritative legal sources in which such rules are considered, in particular, case law, with the aim of identifying an underlying system Through analyzing regulations under GATS about national treatment, the thesis shall identify the scope

of application of national treatment and the relationship between national treatment and market access

The thesis uses comparative legal analysis to analyze and compare regulations under GATT and GATS for readers to have an overview about national treatment in general and in trade in services in particular This method is also employed to compare Vietnamese regulations with the commitment of Vietnam in WTO to find the disparities between them and to access the current legislation whether it is in accordance with the Commitment of Vietnam in WTO or not After determining the disparities or the differences, comparative legal analysis again applied to compare Vietnamese regulation regarding financial market with other legal system to find more efficient solutions to resolve the disparities

Exploratory method is also used to provide solutions to improve our law Exploratory method is about indicating the implications of possible developments

or events that may lie outside of these familiar trends based on the present situation Exploratory method would be helpful to locate turning points or policy actions that could create a more desirable future Based on the present trends of financial market

as the starting point, the thesis will use exploratory method to give possible solutions to the more efficient operation of Vietnamese law in the near future

Last but not least, the thesis applies synthetic methodology to conclude the analysis

or to give an overview about the arguments or to give commentaries of the author about specific legal aspect of the study

1.6 Structure of the thesis

Besides the Introduction to introduce about the thesis and the Concluding Remarks

to summarize main ideas of this thesis, the main content of the thesis comprises of two chapters and proceeds as follows:

Chapter I gives overview about national treatment under the GATS including the importance of the GATS in Section 1.1, the legal ground for national treatment obligation at Section 1.2 In Section 1.2, by illustrating overview about national treatment under the GATT and descriptive analysis of national treatment disciplines

in Article XVII of GATS, the thesis shall compare differences of this principle apply to goods and services This Chapter also identifies the relationship between market access and national treatment to determine the scope of application and introduces different approaches to resolve the overlap of application between national treatment and market access

Chapter II is designated to illustrate national treatment disciplines financial services under the GATS and in the accession commitment of Vietnam to WTO Furthermore, the thesis aims to assess the implementation of commitments in banking and securities sub-sectors under Vietnamese legislations (Section 2.3 and 2.4) Prior to do that, it is necessary to understand how financial services and national treatment in financial services are regulated under the GATS and examine the specific exemptions in relation to this principle This will be illustrated in Section 2.2 The last section in this Chapter is the proposals to improve the implementation of commitment of Vietnam to WTO in general and national treatment in particular to Vietnamese legislation

CHAPTER I OVERVIEW ON NATIONAL TREATMENT UNDER

THE GATS 1.1 Introduction

The GATS, which came into force in 1994, is a positive result of the Uruguay Round As a set of separate annex to the Marrakesh Agreement Establishing the WTO, in the accession to WTO, Members shall be subject to the GATS and all provisions provided therein including national treatment principle

National treatment obligation under the GATS was inspired by that of the GATT However, national treatment under the GATS is subject to specific commitment of Member and not a general principle as provided under the GATT By analyzing the nature of national treatment under the GATS, we can compare and explain the resemblances and differences of this principle under the GATT and GATS However, prior to analyze national treatment under GATS (Section 1.4), it is essential to provide the basis of the GATS such as the purpose for establishment of the GATS and its structure (Section 1.2)

As mentioned in the Introduction, the relationship between market access and national treatment in trade in services is complicated and rather confusing, which causes the overlap in scope of application between those regulations The possible approaches to address the overlap issues which were agreed by major WTO Members are described in Section 1.4

1.2 History background and structure of the GATS

1.2.1 The purpose and historical background of GATS

After the success in reducing barriers in trade in goods by GATT, economist and policy makers began to turn attention to liberalize services merchandise by establishing a multilateral agreement aimed at eliminating barriers to international trade in services.13 Despite the increasing importance of services in economic growth of countries, occupying as much as 70%-80% (seventy per cent to eighty per cent) of the GDP of developed countries and around 40% (forty per cent) of developing countries14, the attention to create legal basis for liberalization in trade

in services did not grow until trade negotiations in the 1980s The GATS, which is a major achievement of the Uruguay Round trade negotiation held from 1986 to 1993,

is the first multilateral trade agreement to regulate trade in services among WTO Members

13 Preamble of the GATS, General Agreement on Trade in Services, Apr 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, 1869 U.N.T.S 183

14 The World Bank (2014), Ratio of services sector in GDP of the world, OCED National account data files,

retrieved from http://data.worldbank.org/indicator/NV.SRV.TETC.ZS/countries/1W?display=default: (last visited on 24 May 2014)

In the past, international economists have ignored liberalization of trade in services, but technological progress and international trade negotiations are likely to keep liberalization of trade in services a high-profile policy issue.15 Before the establishment of the GATS, even for developed countries, there is perception that services are non-tradable and that they are exclusively domestic activities Traditionally, large areas of services such as transport, telecommunication, and energy have been viewed as being owned and controlled by governments, in other words, subject to government monopoly.16 Other services, such as education, health care, at a certain degree, are still under government control Services are also dependent on the factors of production such as labour, capital and technology Therefore, in order to liberalize services sector, liberalization of these factors of production is necessary However, from political perspective, in some cases, it is difficult to achieve liberalization in these factors, such as in labour mobility

17Thanks to technology changes as well as privatization in many areas of services, policy makers and economists realize that low cost and high quality services are important for the growth performance of the economy, hence, the dire need for establishment of multilateral agreement to process the internalization of services, to create competitive and effective services market

WTO Members realize that liberalization of trade in services is important as services are considered the real engine of economic growth First and foremost, services provide inputs for all of other sectors of an economy When there is an efficient, competitive transport services, it will affect the cost of shipping goods and movement of labourers within and between countries Likewise, internationalization

in business services such as accounting, consulting and legal services reduce the transaction costs and process the transition of innovations among countries Health and education services are also key inputs into the stock and growth of human resources.18Secondly, services also perform important public functions For demonstration, education, health care, and energy provide essential public functions Economic evidence demonstrates that, wherever the comparative advantage of a country might lie, a proper and functioning services sector would be likely to boost economic growth

15 Bernard Hoekman& Carlos A Primo Braga (1997), “Protection and Trade in Services”, World Bank, Policy Research Working Paper No 1747, Apr 1997, pp.3-4, retrieved from http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-1747 (last visited on 24 May 2014)

16

A WTO Secretariat Publication Prepared by the WTO Trade in Services Division (2005), A Handbook on

the GATS agreement, Cambridge University Press, pp.1

17 Dr Surya P Subedi D Phil (2012), Text book International Trade and Business Law of Hanoi Law University, Section 4, 1sted, The People‟s Publish Security Publishing House, pp.170

18

Bernard Hockman (2008), “The General Agreement on Trade in Services: Doomed to fail? Does it

matter?”, 8 Journal of Industry, Competition and Trade 295, pp.296

For the above reasons, the GATS was established with its major purpose to abolish direct and indirect barriers to international trade in services, consequently, enhancing its worldwide development.19Furthermore, by taking advantage of trade expansion, the GATS aims for its ultimate purpose: to promote growth and development In order to promote progressive liberalization through negotiations, the GATS aims at improving market access and extending national treatment for foreign services and services suppliers in a wider range of sectors It does not eliminate the right of governments to regulate their laws to meet their national policies, which are especially important for developing countries.20 Therefore, the GATS was established as a legal framework for WTO Members to regulate their domestic regulations associated with the GATS for improving efficiency

In conclusion, the GATS is a multilateral agreement aimed at eliminating barriers to international trade in services It was concluded in 1994 and came into force in 1995 and considered as one of the WTO agreements which applies to all WTO Members

1.2.2 The substance and structure of the GATS

As stated above, the GATS provides legal framework for trade in services, covers a wide range of services and also calls out attention for liberalization of regulations that hinder trade and investment in services However, due to distinctive characteristics of services, which adversely affect their tradability, it was a challenge for negotiators and drafters of the GATS to create a regulatory platform for services, which is an issue nothing similar to any other issues The design of the GATS stands out among other WTO Agreements and provides a comprehensive discipline governing international transaction in services

The GATS is divided into three main bodies The first segment comprising of twenty eight articles sets out disciplines for trade in services The second segment includes eight annexes to clarify or set out specific provision The third part is the Schedule of Specific Commitment of the Members

The first segment is structured in seven parts First is the Preamble describing the basic principles of the GATS, the philosophy behind it and its goals Part I (Article I) defines the scope of application and provides general definition of modes of supplies Part II comprises of fourteen articles (from Article II to Articles XV regulating about general obligation and disciplines applied to all services sectors ad its exceptions In contrast, Part III (Article XVI, XVII, XVIII) is the specific

19

The Preamble of the GATS, see also the Panel report in WT/DS363/R China – Publications and

Audiovisual Products, n.8, para 7.1219, 7.1348 : “the aim of establishing a multilateral framework of

principles and rules for trade in services with view to the expansion of such trade under conditions of transparency and progressive liberalization” and “to securing the overall balance of rights and obligations between the Members”

20 A WTO Secretariat Publication Prepared by the WTO Trade in Services Division, supra note 16, pp 296

commitment including regulations about market access, national treatment and additional commitment which only apply to specific services and modes of supply scheduled by each Member WTO Members are only obliged to enter into a specific commitment only if they has voluntarily agreed to be bound by the obligations; otherwise, they are not subject to any obligation It is a main difference between Part II and Part III of GATS as provisions in Part II apply to all service sectors irrespective of whether a Member has scheduled a commitment in this sector or not Part IV and Part V contain provisions regarding enhancement of trade liberalization, improvement of specific commitment and “institutional provisions” respectively Last but not least, Part VI includes provisions dealing with denial of benefit and attached annexes

From the overview of Part II and III of the GATS, it can be seen that the agreement creates three types of obligations for its Members, namely (i) unconditional and (ii) conditional obligation

(i) Unconditional obligation

Unconditional obligations, which can be found in Part II of the GATS, are called mandatory obligations or the top-down as they are applied to all services.21 This

category includes Most-Favoured-Nation (“MFN”) and transparency commitment

These two general principles were transited from the GATT and apply to government policies affecting trade in services

Transparency obligation requires governments of Members to publish all measures

of general application for services such as laws, regulations, rules, procedures, decisions, and administrative actions regulated in both domestic regulations and international agreements, as well as changes thereto.22 Furthermore, WTO Members are also required to promptly respond to request for information by other Members, and establish enquiry points Drafters of the GATS took inspiration from the GATT

by using terms and concepts that have been demonstrated for decades in merchandise trade Therefore, transparency and predictability, the fundamental obligations in the GATT are also implemented in the GATS The key factors for an effective market are having transparent and predictable rules and regulations so the traders can invest and conduct business

MFN is also a core general obligation of the GATS binding on WTO Members MFN principle is universally applied immediately and unconditionally to services and service suppliers of any other Members; a “no less favourable” treatment compared to “like” services and services suppliers of any other country

21

Nellie Munin (2010), Legal Guide to the GATS, Chapter II, Part II, Kluwer Law International, pp.22-25

22 Article III of GATS

Transparency and MFN are crucial elements for competition in domestic market, however, it does not necessarily lead to liberalization or limit the autonomy of domestic regulations Thanks to transparency principle, foreign services are more aware of business opportunities in other country, thus, the scope of competition in domestic services market will be enhanced It should be noticed that equal treatment for any services from different origins will help consumers gain access to the most competitive foreign providers of services However, these elements are not key factors to help liberalize trade in services.23

(ii) Conditional obligation

Conditional disciplines apply to subsectors in which a Member has made specific commitment and can be found in Part III of the GATS, including market access and national treatment, which are often called bottom-up obligation This is because they only apply to what Members voluntarily choose to include various subsectors

in its schedule of specific commitment; otherwise, the default is no commitment.24

To improve liberalization of trade in services, governments have made specific commitment in their schedules, either due to the pressure of demand from other negotiators in Uruguay Round or bilateral negotiations or on an autonomous basis The purpose of these commitments is to balance Member‟s domestic regulatory autonomy and trade liberalization as domestic regulation may have adversely protectionist effects

Besides national treatment and market access, there is another kind of specific commitment namely additional commitment which cannot be qualified in the schedule of commitment Additional commitment can be modified or withdrawn, but only three years after the commitment has come into force, and subject to negotiations The purpose of these negotiations is to agree on compensation in the form of alternative market-opening adjustment, and with MFN as a basis to all WTO Members.25

Despite the fact that drafters of the GATS took inspiration from the GATT to set out discipline for trade in services, the structure of the GATS is not analogous to the GATT and other WTO Agreements.26 This is due to typical characteristics of services such as: (i) intangibility, which means it is subject to invisible barriers and make international transactions in services hard to monitor; (ii) non-storability, which means production and consumption often occur at the same time and the same place; (iii) differentiation, which means services usually produced being

23 Laura Altinger Alice Enders (1996), The Scope and Depth of GATS Commitment, Blackwell Publisher,

pp.309

24 Article XVI, XVII of GATS

25

Laura Altinger, Alice Enders, supra note 24, pp.311

26 Dr Surya P Subedi DPhil, supra note 17, pp.145

accustomed with the need of consumers; and (iv) joint production, which means customers having to participate in the production process.27

In relation the substance of the GATS, modes of service supply should be noticed as

it is unconventional compared to trade of goods Drafters of the GATS have introduced four different modes of supply for trade in services, which are based on the legal status of services supplier and the movement of the consumer or of the service supplier:28

 Mode 1 – Cross-border supply: It refers to the services supplied “from the territory of one member into the territory of any other member”.29 It means that a consumer receives the services from abroad and does not require physical movement by the consumer or supplier Consumers will receive the products by means of telecommunications or postal infrastructure Examples to illustrate are market research reports, memorandum of legal services, distant training, or architecture drawings

 Mode 2 – Consumption abroad: It refers to the services supplied “in the territory of one member to the service consumer of any other member”.30

This mode of supply applied for certain services industry, namely tourism or healthcare In this mode of supply, a consumer shall move to another country (go abroad) to receive a service while a service supplier remains in his own country For example, a tourist moves to another country for traveling and staying in a hotel or a resort, or a patient goes

to a foreign hospital for treatment

 Mode 3 – Commercial presence: It indicates the mode of supply in which

a service is supplied through “a service supplier of one member, through commercial presence in the territory of any other member.” 31

In this mode of supply, a service is supplied by a company that moves to another country to provide service by establishing a commercial presence

in that country Commercial presence in this situation means service is provided by local affiliate, subsidiary, branch, or representative office of

a foreign company This concept avoids the requirement that the foreign entities must be fully incorporated or established in the host state 32This mode of supply constitutes majority of trade in services, plays an

27

Bernard Hockman, supra note 18, pp.2967

28 See Id at pp.147

29 Article I(2)(a) of the GATS

30 Article I(2)(b) of the GATS

31

Article I(2)(c) of the GATS

32 Peter Van den Bossche, WerneZdouc, supra note 6 , pp.325

important role in foreign direct investment, and is the main channel for foreign services or services supplier to contest in services market

 Mode 4 – Temporary Movement of Natural Persons: In this mode of

supply, services is supplied “by a service supplier of one member, through the presence of natural person of a member in the territory of any other member.” 33This mode of supply services shall be provided by employees who migrate to work in local affiliate or office of foreign firms, as well as services of a person who goes abroad to work independently, such as a doctor or engineering consultant This mode of supply may facilitate the exercise of Modes 1 and 3.34However, this mode of supply is considered to be sensitive as it interferes with countries‟ sovereign right to control entry of individuals into their territory and the movement of labour force from one country to another This thesis focuses on the scope of application of national treatment in four modes

of supplies which is included in specific commitments in order to analyze national treatment under the GATS in general and in financial services sector

1.3 The substances of national treatment obligation under GATS

1.3.1 National treatment in general and the execution of this principle in

the GATS

1.3.1.1 Overview of national treatment in general and in the GATT

In general, national treatment prohibits a country from discriminating against other countries.35 In other words, it was established to ensure equal treatment between host country and foreign countries Purpose of national treatment on one hand, is to prevent countries from taking discriminatory measures on imports On the other hand, it shall help to prevent countries from offsetting the effects of tariffs through non-tariff measures and to prevent domestic tax and regulatory policy from being used as protectionist measures that would defeat purpose of tariff bindings.36

National treatment, together with MFN, is two aspects of non-discrimination treatment exist in many areas from trade, investment o patent law or copyright law37

or even criminal law.38With respect to WTO Agreements, national treatment can be

33 Article I(2)(c) of the GATS

34 R Chanda (2001), Movement of Natural Persons and the GATS, 24 The World Economy, Blackwell

Publishers Ltd, pp.631-643

35 Peter Van den Bossche, Werne Zdouc, supra note 6, pp.70

36 John Howard Jackson (1997), The World Trading System: Law and Policy of International Economic

Relations, 2nded , MIT Press, pp.213

37

Article II of Paris Convention for the Protection of Industrial Property, 1883

38 See id at 37

found in three main areas: trade in goods39, trade in services40 and trade-related intellectual property rights.41 Moreover, one of plurilateral agreements namely the Government Procurement Agreement also contains national treatment provision in Article III

Although the thesis mainly focus on national treatment under GATS, it is essential

to study about national treatment under the GATT as GATS is broadly model on the GATT.42 National treatment principle is regulated under Article III of the GATT, whose characteristics are as follows: firstly, national treatment is general obligation applied to imported products regardless of whether Members have set tariff barriers

on them or not Secondly, national treatment as same as MFN, applies to both de factor and de jure discrimination Thirdly, Article III of the GATT applies only to

internal measures, not to border measures

General meaning of national treatment is provided in Paragraph 1 of Article III of

the GATT: “The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions should not be applied to imported or domestic products so as to afford protection to domestic production.” This

paragraph sets out the first and crucial purpose of national treatment clause which is

to avoid protectionism In Japan- Alcoholic Beverages, the Appellate Body stated

that “Article III: 1 articulates a general principle” which “informs the rest of Article III.”43

Paragraph 2 and 3 of Article III of GATT regulates in detail about internal taxes or other internal charges Paragraph 2 covers two types of products which are “like products” and “directly competitive or substitutable products” The introduction of

“like products” is contained in the first sentence of Article III:2 of GATT: “… [T]he products of the territory of any contracting party imported into the territory

of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products”

39 Article III of GATT

40

Article XVII of GATS

41 Article 3 of Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, THE LEGAL TEXTS: THE RESULTS OF THE URUGUAY ROUND OF MULTILATERAL TRADE NEGOTIATIONS 320 (1999), 1869 U.N.T.S 299, 33 I.L.M 1197 (1994) [hereinafter TRIPS Agreement]

42 Philip Ruttley (1999), “Financial Service and the General Agreement on Trade in Services”,

Liberalization and Protectionism in the World Trading System, Philip Ruttley and Iain MacVay et al

(eds), Cameron May, pp.184

43

Appellate Body Report, Japan –Alcoholic Beverages WT/DS8/AB/R, WT/DS10/R, WT/DS11/AB/R,

Section G

From the above mentioned provision, it is understood that whether there is a violation of Article III:2 of the GATT, two-tier test should be set out: (a) whether imported and domestics products are like products and (b) whether the imported products are taxed in excess of domestics products If the answer to both questions

is positive, the violation of first sentence of Article III: 2 is found.44

In order to examine “likeness” of products, it should be noted that there is no definite procedure to examine “like products”; and it must be based on case by case approach using three criteria, namely the product‟s end-users in a given market, consumers‟ tastes and habits, and product‟s properties, nature and qualities This approach is from conclusion in Working Party Report on Border Tax Adjustments45

and being cited again in Japan – Alcohol Beverages case, the first case where

Article III:1 was found violated.46 In Japan-Alcoholic Beverages II, the Appellate

Body reaffirmed the approach which has been introduced in the 1970 Report on Border Tax Adjustment However, it should be noticed that the range of “like products” should be kept narrow and tariff classification based on Harmonized System shall help in determining the “likeness”.47

In relation to the second element regarding the internal taxation to foreign services

or service suppliers exceed of the internal taxes applied to like domestic products, three steps should be taken Firstly, as same as determine “like” products, the determination of “directly competitive or suitable products” should be made on case-by-case basis, and should take into consideration of all relevant facts.48Secondly, competition in relevant markets can be used as a mean to identify broader category of products that might be described as “directly competitive or substitutable products” The Appellate Body in Korea – Alcoholic Beverages has confirmed that “products are competitive or substitutable when they are interchangeable or if they offer alternative ways of satisfying a particular need or taste”.49 Thirdly, in order to determine whether two products are directly competitive or substitutable, common end-uses, as shown by elasticity of substitution should be examined carefully.50

Appellate Body Report, Korea – Taxes on Alcoholic Beverages (Korea – Alcoholic

Beverages),WT/DS75/AB/R, WT/DS84/AB/R, para 137, pp 39

49 Appellate Body Report, Korea – Taxes on Alcoholic Beverages (Korea – Alcoholic Beverages),

WT/DS75/AB/R, WT/DS84/AB/R, para 115, p 33

50

Appellate Body Report, Japan – Alcoholic Beverages II, WT/DS8/AB/R, WT/DS10/R, WT/DS11/AB/R,

para 117, pp.26

After determination of competitive or substitutable products, the next step is to

identify whether these products are applied similar tax Appellate Body in Japan – Alcoholic Beverages held that “similar tax” and the phrase “in excess of” do not

have the same meaning.51Furthermore, the differential taxation must be more than the “de minimis” to be deemed “not similar taxed”, and should be determined based

on case-by-case basis.52

The last step in the national treatment test under Article III:2 is only taken in case

“directly competitive or substitutable” products are not “similar taxed” In case there is dissimilar in taxation, it is crucial to identify whether the tax applied is to afford protection In order to answer this question, it is required a comprehensive and objective analysis of the structure and application of the measure which applies

to domestics as compared to imported products.53The three tests applied by the

Appellate Body in Japan – Alcoholic Beverages have been followed by panels and

altered by other Appellate Body in other cases related to tax or regulatory measures

It should be noted that national treatment in GATT not only applies to fiscal measures but also non-fiscal measures, which is regulated under Paragraph 4 of Article III.54 Pursuant to the Appellate Body in Korea – Various Measures, in order

to establish a violation in Article III:4, three elements shall be satisfied: (i) the measure is a “law, regulation or requirement” which affect internal sale, offer for sale, purchase, transportation, distribution, or use of domestic and imported products; (ii) there is a “likeness” between domestic products and imported products sold in domestic market place; and (iii) less favourable treatment has been afforded

in the imported products than to the like domestics products.55

In order to prove the first element, in many cases, the Panel or the Appellate agreed that the term “affecting” should be interpreted widely and so does for the government action.56For the second element, Article III: 4 only apply to “like” products and does not apply to “directly competitive or substitutable” products, therefore, determination of “like” products in Article III:4 shall bear differences compared to Article III: 2 In identifying “like” products under Article III: 4, it is essential to take into account the principle of anti-protectionism in Article III:1

51 See id at para 118

52 See id at para 119

53

See id at para 120

54 Article III:4 of the GATT say: “The products of the territory of any contracting party imported into the

territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use.”

55 Appellate Body Report, Korean – Measures Affecting of Fresh Chilled and Frozen Beef (Korean –

Various Measures), WT/DS161/AB/R, adopted 10 January 2001, para 133

56 Appellate Body Report, United States – Tax Treatment for Foreign Sales Corporation – Recourse to

Article 21.5 of the DSU by the European Communities , (US-FSC (Article 21.5 - EC) , WTDS/108/AB/R,

para 208-210, pp.65

This is because protectionism exists only in competitive relationship, therefore, the Appellate Body held that determination about “the nature and extent” of competitive relationship between products is essential in determining “like” products under Article III:4.57However, no matter how broad the concept of “like” products in Article III:4 is, its concept shall not be broader than “like” products‟ concept under Article III:2 and should be based on case-by-case basis The final element is only considered when the two mentioned elements are satisfied In another words, only when there is differential treatment of “like” products amounts

to “less favourable treatment” between imported products and domestic products,

there would be violation of Article III:4 The Appellate Body in EC – Asbestos

stated that even where products are in close enough relationship to be considered

“like”, members of that class or group of “like” products may still be distinguished

in regulation provided that the result is not that of less favourable treatment, understood as protection of domestic production.58

The initial analysis of national treatment principle under the GATT is necessary as

it is provide profound foundation to understand about national treatment under the GATS, which is described in the next section

1.3.1.2 Negotiation history of national treatment in the GATS

Despite the long history of national treatment, national treatment in trade in services was still a new topic and it is worth considering the foundation of this principle in the negotiation of the GATS

In 1980, the United States suggested negations for framework of trade in services comparable to the GATT, including national treatment principle In 1986, service negotiation was conducted under guidance of Group of Negotiations on Services

(“GNS”), a part of the Trade Negotiations Committee.59In the negotiations at Punta

de Este, negotiating countries knew that it was worth trying to examine how far GATT‟s principles could be applied to services.60 Discussion in the GNS, some countries believed that national treatment might be difficult to apply to services than goods One country even thought that the concept of national treatment was the most complex in the negotiations.61With some countries, non-discrimination principle, especially national treatment should be fundamental and unconditional principle in services agreement, while other believed that it might not be practical

57 Appellate Body Report, European Communities – Measures affecting Asbestos and Asbestos containing

products (EC-Asbestos), WT/DS135/AB/R, para.94, pp.36

58 See id at para.100, pp.38

59 Ministerial Declaration on the Uruguay Round: Declaration on 20 September 1986, para 101-102

60 Note on the Meeting of 23-25 Feb.1987, 20 Mar 1987, MTN.GNS/7, para.29

61

Opinion of representative of India included in the Note on the Meting of 17-21 July 1989, para 212, MTN.GNS/24, August 1989

as their domestic legislature would not be ready to open up services market to countries which did not offer similar openings in return.62

In October 1987, the United States submitted comprehensive proposal, which proposed GNS to include national treatment as general principle to enhance liberalization of trade in services In 1988, the Montreal Agreement was made, including a list of principles applicable to trade in services, such as transparency, market access, national treatment, etc., which was what the United States suggested

In Montreal Declaration, there was preliminary definition of national treatment for trade in services:

“When accorded in conformity with other provisions of the multilateral framework, it is understood that national treatment means that services exports and/or exporters of any signatory are accorded in the market of any other signatory, in respect of all laws, regulations and administrative practices, treatment „no less favorable‟ than that accorded domestic services or service providers in the same market.”63

This provision only provided that national treatment principle shall be applied to foreign services or service exporters in the same market with domestic services and service providers It does not set out any criterion to compare domestic services or service providers and foreign services or service suppliers, therefore the scope of national treatment still remains unclear According to Montreal Agreement, national treatment to be one of the four basic principle governing trade in services, which confirmed the initial opinion of the United States On the other hand, European

Communities (“EC”) tended to regard national treatment as soft obligation.64 In addition, there was opposition from developing countries, which considered general obligation of national treatment was unacceptable For example, Brazil directly stated that “developing countries should not be expected to undertake the same level

of market access or national treatment commitment of developed countries.”65 In the end, the view of EC and developing countries prevailed, resulting the national treatment obligation in the final agreement was not general principle

In July 1990, the Chairman of the GNS issued Draft Multilateral Framework for

Trade in Services (the “Chairman’s July Text”), which included national treatment

article in Article XVII as follows:

62

John Croome (1999), Reshaping the World Trading System: a History of the Uruguay Round, 2nded

Kluwer Law International, pp.102

63 Ministerial Declaration (1993), MTN.TNC/8, Volume III: Document 62, Terence P Stewart ed., Kluwer Law and Taxation Publishers, Part II:7(c)

64

Note on the Meeting of 17-21 July 1989, MTN.GNS24, para 214

65 Note on the Meeting of 17-21 July 1989, MTN.GNS24, August 1989 para 214

“In conformity with other relevant provisions of the framework, and as set out in their appropriate schedules, parties shall grant to services and service providers of other parties, in the application of all laws, regulations, administrative practices, and decisions of general application, treatment no less favourable than that accorded to like domestic services or service providers in like circumstances.”66

From this provision, a signatory shall apply different treatment to services or service suppliers of another signatory from the treatment accorded to like domestic services

or domestic providers of like services, as long as the treatment to foreign services or service suppliers have equivalent in effect in comparison with treatment applied to domestic services or service providers in similar circumstances For the first time, definition of “like” services and service suppliers was introduced, however, explanation for determination of the “likeness” have not given yet Furthermore, the provision of national treatment shall not apply to the procurement by governmental agencies of services purchased for governmental purposes and not to use in production of services for commercial sale In addition, national treatment shall not prevent the payment subsidies or granting of incentives exclusively to domestic service providers

However, the Chairman‟s July Text did not provide agreement acceptable by negotiating countries, therefore, in December, the GNS Chairman released another

draft text (the “Chairman’s December Text”), in which provisions of national

treatment is similar to the Chairman‟s July Text Eventually, due to disagreement among negotiators, the negotiation in December 1990 collapsed and so did the Chairman‟s December Text

On 20 December 1991, the final draft act was released by Arthur Dunkel, the Secretary General of GATT at that time This final draft act was informally referred

to as “Dunkel Draft”, which was a basis for final agreement of trade in services In

the Dunkel Draft, national treatment was stipulated under Article XVII and there were only subtle differences between Article XVII of the GATS and the Dunkel Draft Article XII of Dunkel Draft was stipulated as follows:

1 “In the sectors or sub-sectors inscribed in its Schedule of Commitment,

and subject to any conditions and qualifications set out therein, each

Party shall accord to services and service providers of any other Party, in

respect of all measures affecting the supply of services, treatment no less

favorable than that it accords to its own like services and service providers.* (* Commitments assumed under this Article shall not be

construed to require any Party to compensate for any inherent

66 Article XVII, GATT, MTN GNS/35 (23 July 1990)

competitive disadvantages which result from the foreign character of the

relevant services or service providers.)

2 A Party may meet the requirement of paragraph 1 by according to services and service providers of other Parties, either formally identical treatment

or formally different treatment to that it accords to its own like services

and service providers

3 Formally identical or formally different treatment shall be considered to be less favorable if it modifies the conditions of competition in favor of

services or service providers of the Party compared to like services or service providers of another Party.”67

Except the terms used, national treatment provisions in Dunkel Draft and the GATS

is similar in terms of context and meaning In December 1993, the Uruguay Round ended with conclusion of legal framework for trade in services and so does national treatment which provided therein In January 1995, the GATS and other Uruguay Round agreements became effective Since then, national treatment has been applicable to trade in services

1.3.2 Descriptive analysis of national treatment under GATS

1.3.2.1 Analysis of Article XVII of the GATS

This section first describes the nature of national treatment obligation of Article XVII of the GATS then discusses the consistency of this obligation to determine when a measure of one Member Article XVII of the GATS, which is regulated about national treatment states, in paragraph I:

“1.In the sectors inscribed in its Schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers.68”

Paragraph I of Article XVII is the key rule for understanding national treatment in GATS Paragraph I clarify that national treatment obligation is only applied to sectors describes in each Members‟ Schedules and shall be subjected to certain conditions, limitations, and qualifications Typical national treatment limitations included in Schedules relate to:

 Nationality or residence requirement for executives;

67 The different terms from Article XVII of the GATS are in italics

68 Specific commitments assumed under this Article shall not be construed to require any Member to compensate for any inherent competitive disadvantages which result from the foreign character of the relevant services or service suppliers

 Requirement to invest a certain amount of assets in local currency;

 Restrictions on the purchase of land by foreign service suppliers;

 Special subsidy or tax privileges granted to domestic suppliers;

 Different capital requirements and special operational limits applying only

to operations of foreign suppliers.69

Once a Member has committed itself to grant national treatment, it must ensure that services and service suppliers of other Members shall be treated no less favourable than it accords to its own “like” services and service suppliers There are three elements needed to prove a violation of national treatment obligation under GATS

according to the Panel in EC-Banana III These elements are: (i) measures by

Members affecting trade in services; (ii) “like services” or “like service suppliers”; and (iii) treatment no less favourable

(i) Measures affecting trade in services

To prove a measure is a one “affecting trade”, two issues must be examined; namely whether there is trade in services; and whether the measure at issue affects such trade in services.70

Firstly, trade in services is a broad concept and defined under Article I:2 of the GATS as the “supply of a service” in any one of four of modes of supply Secondly,

to determine whether a measure affect trade in services, it is not necessary to prove that measure is to directly regulate or govern the supply of services A measure regulating a different matter can still affect trade in services and therefore, it is governed by the GATS.71

(ii) Determination of “like” services and service suppliers

As to answer the second question regarding “like” services or “like” service suppliers, only definition of service suppliers is defined under Article XXVIII(g) of the GATS Service suppliers is “any person who supplies a service”, including natural and legal persons or commercial presence The GATS also does not provide definition of “like” service or “like” service suppliers, and there has not been any case in the GATS that deal with this matter This is suggested that determination of

“likeness” of services and service suppliers should be based on case-by-case basis; however, there are some criteria might be useful in examining the “likeness” namely the characteristics of the services or service suppliers, the classification of

69 WTO Secretariat (2001), Market Access: Unfinished Business, Special Studies 6 WTO, pp.103

70 Appellate Body Report, Canada – Certain measures affecting the automotive industry (Canada – Autos),

WT/DS139/AB/R, WT/DS142/AB/R, para.155, p.51

71

Panel Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas

(EC- III), WT/DS27/R/ECU, para 7.285, pp.367

the service in the United Nations Central Product Classification (CPC) system, and the consumer habits and preferences.72 Article XVII also provides that two service suppliers provide same services do not indicate that two service suppliers are “like” service suppliers Factors such as the size of the company, their assets, their uses of technology their expertise should all take into account when considering the

“likeness” of service suppliers

(iii) Determination of “no less favourable” treatment

The third element related to the question is whether treatment to “like” services or

“like” service suppliers of one Member is accorded to services or service suppliers

of all other Members In other words, whether the foreign service or service suppliers receive treatment “no less favourable” than that of domestic services or service suppliers The requirement of “treatment no less favourable” is interpreted

in paragraphs 2 and 3 of Article XVII by the following terms:

“2 A Member may meet the requirement of paragraph 1 by according

to services and service suppliers of any other Member, either formally identical treatment or formally different treatment to that

it accords to its own like services and service suppliers

3 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.”

Under this provision, a Member shall apply the same procedures that apply to its domestic services and service suppliers The GATS Article XXVIII also clarifies that national treatment cannot be extended to any other parts of the supplier located outside the territory where the service is supplier 73 This limits the territorial application of the national treatment only to the territory of the Member Therefore, out of the four modes of supply, national treatment would most likely affect presence commerce (Mode 3) in the host state territory

Furthermore, paragraph 3 shows that even a Member give formally identical treatment to foreign and domestic services or service suppliers may still breach national treatment obligation under Article XVII if the conditions of competition are modified in favour of domestic services or services suppliers On the other hand, a Member that gives formally different treatment to foreign and domestic services or service suppliers might not breach national treatment obligation if that treatment

72

Peter Van den Bossche, WerneZdouc, supra note 6, pp.340

73 Note ad Article XXVIII of the GATS

does not modify the conditions of competition in favour of domestic services or service suppliers It means that the GATS Article XVII covers both de jure and defector inconsistency, which is the result from negotiations in Uruguay Round Moreover, “no less favourable” treatment in the GATS implies that foreign services and service suppliers might be accorded more favourable treatment than that of domestic services or service suppliers of a Member This definition is broader and is more favourable than “the same” or “as favourable as” for foreign services and service suppliers

1.3.2.2 Comparison between national treatment between GATT and GATS Indeed, many principles of the GATS were inspired by the GATT, including national treatment principle However, due to characteristic of services, national treatment in the GATT and GATS still contain many differences

In term of purpose, the primary goal of GATT national treatment is to eliminate tariff barrier for foreign goods by prohibiting discriminatory internal measures Meanwhile, as services is deemed to be exempted to border measures such as tariffs and quotas Hence, GATS national treatment provide broad and general prohibition

of discriminatory regulations to render all discriminatory measures that may modify the conditions of competition to the detriment of foreign services or service suppliers.74

Second, regarding the legal status of the principle, under GATT, national treatment

is a general principle under the GATT; therefore it shall be automatically applied to all products, regardless of whether or not they are subject to tariff bindings under the schedules to Article II GATT In contrast, GATS‟ national treatment only applies to the extent that Members agree to commit Members have the right to determine which services supplied under which modes of supply is subject to national treatment obligation In other words, WTO Members have explicitly committed themselves to grant national treatment for specific sectors At the same time, Members have the right to deviate from their own commitment by scheduling specific limitations.75 These limitations may be specific conditions, qualifications or other types of limitations For example, Members can grant national treatment in specific sector to certain modes of supply and no others

A third difference between GATT and GATS national treatment lies in the determination of whether there is an equal treatment between “in-land” and “out-land” services and service suppliers Article XVII of the GATS contains no

74 A WTO Secretariat Publication Prepared by the WTO Trade in Services Division (2005), A Handbook on

the GATS agreement, Cambridge University Press, pp.1

75

Aders Ahnlid (1996), “Comparing GATT and GATS: regime creation under and after hegemony”,

International Political Economy, Vol 3, No.1, pp.80

reference similar to the term “directly competitive or substitutable” in Article III:2

of the GATT At the same time, the scope of application of national treatment in the GATS is broad as it is prohibit “all measures affecting the supply of services”, including both taxes and regulations as well as other instrument no cover by GATT national treatment, such as subsidies.76

Last but not least, with respect to scope of application, national treatment obligation

in the GATS is wider in scope but more limited in application than that in the GATT It is because in GATS, national treatment applies for both services and service suppliers while national treatment in GATT only applied to products However, it is more limited as while national treatment applies across the board, in other words, it is applied automatically to all products, national treatment under GATS only applies to scheduled specific sectors, and there too maybe subject to limitations

1.4 The relationship between national treatment obligation and market

access

1.4.1 Market access under the GATS

As stated above, the scope of application between market access and national treatment are mingled due to techniques of scheduling Therefore, it is necessary to have an overview understanding about market access prior to tackle the overlap issue

Market access, which is provided under Part III of the GATS, similar to national treatment, is not a general principle but specific commitment of Member and both are the core of the GATS which adversely impact to liberalization of trade in services When a Member makes market access commitment in their Schedule, that Member is bound by the level of market access specified in the Schedule and undertakes that that Member shall not impose any market access barrier to the market beyond the level specified The GATS does not give definition of market access barriers in services, however, there is an exhaustive list of measures which can be found from point (a) to (f) of Article XVI:2 of GATS, which are:

(a) limitations on the number of service suppliers whether in the form of

numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test;

(b) limitations on the total value of service transactions or assets in the

form of numerical quotas or the requirement of an economic needs test;

76

Nicolas F Diebold (2010), Non-discrimination in international trade in services: „Likeness‟ in

WTO/GATS, 1sted, Cambridge University Press, pp.119

(c) limitations on the total number of service operations or on the total

quantity of service output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test;77

(d) limitations on the total number of natural persons that may be

employed in a particular service sector or that a service supplier may employ and who are necessary for, and directly related to, the supply

of a specific service in the form of numerical quotas or the requirement of an economic needs test;

(e) measures which restrict or require specific types of legal entity or joint

venture through which a service supplier may supply a service; and

(f) limitations on the participation of foreign capital in terms of

maximum percentage limit on foreign shareholding or the total value

of individual or aggregate foreign investment

Pursuant to Article XVI, market access commitment does not include all measures which could restrict market access, which means a Member is allowed to adopt restrictions that do not fall within scope of the six limitations For example, a Member can impose high tax regime for certain sector which would prevent or discourage market entry In this situation, the tax measure would still probably be in compliance with Article XVI Secondly, market access is interpreted to cover both discriminatory and non-discriminatory measures Finally, the limitations must be understood as “minimum guarantees” rather than “maximum quotas” It means that those requirements imposed upon the Members are only as minimum requirements Thus, a Member is entitled to provide more favourable treatment if it chooses to do

so For instance, a Member which undertakes to limit ownership of foreign parties

in commercial bank is free to increase this threshold.78

Regarding to the position of market access, market access is placed in the third column of one Member‟s Specific Commitment Schedule Any sector that Members want to open will be included in sector column, otherwise, it is presumed that the Member have not opened those sectors or sub-sectors yet This approach is positive approach or “bottom-up” approach In contrary, any limitations on market access and national treatment of specific sector or sub-sector must be inscribed in Member‟s Schedule, in addition to horizontal commitment applied to all trades Alternatively, it will be deemed that there is no limitation on that sector or sub-sector This approach is negative approach or “top-down” approach Commonly, a Schedule of one Member combine both bottom-up and top-down approach, called

77

Subparagraph 2(c) does not cover measures of a Member which limit inputs for the supply of services

78 Dr Surya P Subedi DPhil, supra note 17, pp.155

the hybrid approach Although conceptually, the separation between market access and national treatment is clear and independent from each other, however, in Article XX:2 of GATS, the distinction between of application of these two obligation may

be difficult to draw in practice

1.4.2 The connection and intertwinement of market access and national treatment

under Article XX:2 of the GATS

In case of services, due to the intangibility of services, there are few measures applied at the border, and most of the restrictions to trade in services come from internal measures It is difficult to determine which measure is market access and which one is discriminatory measure The question is when a Member applies discriminatory measures, that measure is a market access restriction or a limitation

of national treatment in Member‟s Schedule The answer that is consistent with content of market access and national treatment articles would be that such measure fall within the scope of both articles For example, all measures under Article XVI:2 from (a) to (d) in their discriminatory form can be seen as national treatment restrictions Further, measures relating to specific types of joint ventures through which service suppliers can supply a service (sub paragraph (e)) and foreign equity participation (sub paragraph (f)) also fall under the scope of both Article XVI and XVII This issue has been referred to as the “overlap” between Article XVI and XVII

Indeed, the overlap between application of market access and national treatment was anticipated by GATS under Article XX:2, which provides as follows:

“Measures inconsistent with both Articles XVI and XVII shall be inscribed in the column relating to Article XVI In this case the inscription will be considered to provide a condition or qualification to Article XVII as well.”

This regulation means that some measures inscribed in market access column are also limitation measures in national treatment column as well This is the overlap of application between these two principles, and the reasons for this overlap are clear Firstly, the scope of Article XVI of the GATS includes market access restrictions that apply equally to foreign and domestic services or service suppliers For instance, market access limitation measure can be a measure that limit the establishment of foreign banks to 5 and a measure that limits the number of all new banks, regardless of foreign or domestic, to 10 Secondly, as much as Article XVI is not limited to market access restrictions that only apply to imports (pre-entry measures), measures under Article XVII are not either limited to domestic regulations (post-entry measures) National treatment obligation in Article XVII

applies to “all measures affecting the supply of services.” It covers not only internal

regulations applying to both domestic and foreign services and service suppliers have entered the market, therefore, national treatment also covers market access restriction As a result, there is a complete overlap in the scope of application of Article XVI and Article XVII of GATS However, market access and national treatment articles are not integrated, as market access also pertains quantitative limitations applying on non-discriminatory basis The problem arises because there

is no indication or guidance in the GATS which of the two categorizes a particular measures falls Logically, there shall be four possibilities:

(i) While there no limitation in national treatment column, there may still have some limitations on national treatment inscribed in the market access column For example, in Vietnam‟s Schedule of Specific Commitment in Services, in market access column of banking sector of trade in services, charter capital contribution of foreign parties cannot exceed 30% of charter capital of a joint-stock commercial bank;79

(ii) While there are some limitations in national treatment column,

there may exist more limitations on national treatment inscribed in the market access column;

(iii) While there are some limitations in national treatment column,

there may have no national treatment limitation inscribed in market access column;

(iv) While there is no limitation in the national treatment column, there

is no limitation in market access column as well In this case, there

is no limitation on national treatment in both columns Or on the contrary, a Member has maintained no commitment in both market access and national treatment column (Unbound) In this event, a Member may introduce or maintain any limitation it wish in relation to any modes of supply

Out of four possibilities, the last one is the simplest, and indicates the openness and liberalization of trade in services to fullest extent The confusions lie in the other circumstances, and causing the overlap issue The overlap between those disciplines should be discussed in the case that, for the same sector and mode of supply, a full

commitment (“none”) has been inscribed in the national treatment column, and no commitment (“unbound”) has been employed under market access In these cases,

does a Member allow introducing a discriminatory quantitative restriction, as allowed by its “unbound” entry under Article XVI, or it is prevented from doing so

79

Schedule CLX – Viet Nam, Part II – Schedule of Specific Commitment in Serivces,

WT/ACC/VNM/48/Add.2

by its full commitment under Article XVII For instance, would a Member apply a limitation on the number of foreign suppliers only, or would it have to apply that limitation to all service suppliers in the market including foreign and national origin alike supplier? In order to resolve the confusions, the determination of which type

of measures inscribed in market access column, which type of measures inscribed in national treatment column must be dissolved as clear as possible The next section shall analyze about this problem and the approach to address the overlap issue

1.4.3 The approaches to address the overlap issue

According to Article XX:2, measures inconsistent with both market access and national treatment obligations are to be listed in the market access column It further clarifies that in such case inscription under market access shall be considered to provide limitations on national treatment as well From this perspective, Article XX:2 absolves Members from the need to inscribe the same inconsistent measures

in both the market access and national treatment column and can be seen as a rule to ease the scheduling process.80

While Article XX:2 means to simplify and to eliminate duplication and confusion, however, have caused confusions due to the ambiguity in the definition of domains

of market access and national treatment, and from lack of clarity in scheduling techniques One approach to address the overlap issues is to determine domains of market access and national treatment81 This determination is important because unless the real domain of national treatment obligation is identified, national treatment obligations, as well as Article XVII of the GATT would be uncertain and unpredictable

In the GATT, there is no such overlap National treatment in Article III of the

GATT is internal measures, laws, regulations, charges, quantitative regulations, etc

Therefore, all limitation measures on national treatment in light of the GATT are post-entry measures The pre-entry measures are subject to the Schedule of Concessions regulated in Article II of the GATT Because the tangibility and the ability to control flow of goods, which results in the separate between pre-entry and post-entry measures, there is no overlap between GATT Article II, III or Article XI Therefore, the GATT does not provide any clue to deal with the overlap between market access limitations and national treatment limitations under the GATS

80 Rudiger Wolfrum, Peter-Tobias Stoll, and Clements Feinaugle (2008), Max Planck Commentaries on

World Trade Law WTO – Trade in Services, Martinus Nihjoff Publishers, pp.458

81 Aaditya Mattoo, supra note 4 , pp 115

In order to address the overlap issue, WTO Members have proposed the following approaches which are conceivable to allocate the measures falling under

to either Article XVI or Article XVII:82

(i) The area of the overlap would be allocated to the market access column

According to some WTO Members, the best approach is to separate the scope of market access and national treatment It means that stating clearly all measures under paragraph 2 of Article XVI would fall exclusively under the scope of market access, and they would be excluded from the scope of Article XVII, even those

measures in discriminatory form In other words, Article XVI would be the lex specialis for those measures An example to illustrate this approach is that, in case there is an Unbound in market access column and None in national treatment

column, then Members can introduce any of six types of limitations, regardless of whether that limitation is in discriminatory or non-discriminatory form In contrary,

where a commitment existed in the market access column, with an Unbound in the

national treatment column, the Member would not be permitted to introduce any discriminatory market access type measure

(ii) The area of the overlap would be allocated to the market access column

Under this option, it would be made that Article XVI shall only cover measures listed in paragraph XVI:2 (a) to (f) in non-discriminatory form Any measures taken

in discriminatory form shall fall within the scope of Article XVII However, under this solution, measures listed in sub paragraphs (e) and (f), which could only be applied in a discriminatory form (e.g joint-venture requirement s and limitations on foreign share-holding), should be excluded from the scope of market access In the

event that there is and Unbound in market access and a commitment in national

treatment, Member would only permitted to take market access measures in form of

non-discriminatory measure If the Unbound existed in national treatment column,

the Member is free to introduce any discriminatory measures, even measures mentioned in Article XVI:2 (a-f) in discriminatory form

(iii) The Unbound entry prevails over the entry containing the

commitment Other approaches to address the issue are to allocate the overlap according to entries

in the schedule rather than by looking at the column in which the entries have

occurred Under the third approach, if the Unbound entry in either market access or

82

Chairman of the Committee on Specific Commitments (March 24, 2004), Consideration of issues relating

to Article XX:2 of the GATS, S/C/W/237, pp.5

national treatment column, Member is permitted to introduce discriminatory measures falling under the overlap regardless of the entry in the respective other

column For example, an Unbound in the market access column with a commitment

in national treatment column would allow the Member to apply any measures

regardless of it is a discriminatory measure In reverse situation, an Unbound

national treatment column would allow Member to take any discriminatory measures as well, including those falling under Article XVI:2

(iv) The entry containing the commitment prevails over the Unbound

This measure would allocate the overlap in the opposite way as in the third approach The column containing the commitment would prevail to the extent that the measures falling under the overlap could be specifically scheduled in either market access or national treatment column Under this situation, a commitment in

national treatment column, together with Unbound under market access would only

allow Member to operate measures falling under market acess in non-discriminatory

form Contraditorily, if there is a commitment under market access and an Unbound

in national treatment, the Member could operate market access measures only to the extent scheduled

(v) Avoidance the overlap in schedules of specific commitment

Last but not least, another possible approach, would be to seek avoid instances of the overlap in schedules using the wording to define the intended scope of the commitment Under this approach, the overlap would not disappear, but cases giving rise to the issue would be reeduced For instance, if a Member wish to

schedule an Unbound in market access and commitment in national treatment, the

Member would clarify in its schedule whether the area of overlap would be covered

by the Unbound or by the commitment If the Member wishes to maintain

discriminatory measures listed in Article XVI:2, that Member can clarify in national

treatment column “None, except for discriminatory measures falling under Article XVI:2.”Otherwise, if the Member wants to allocate the area of overlap to the area

covered by the commitment, that Member could enter under market acces

"Unbound, except for measures falling also under Article XVII”.Similar

clarifications could be conceived of for the situation where a Member wished to

inscribe None in the market access column, and Unbound in the national treatment

column

From personal perspective, the Approach 4 is the approach that does not show any inconsistency and in accordance with Article XX:2 This is because under the Approach 4, commitments of Members are respected in whatever column Therefore, Article XX:2 is needed as it would ease the schedule of Members and ensure streamlining in scheduling Furthermore, it does not give hiechary to either

market access or national treatment as the first two approach The Approach 3 although does not prefer either market access or national treatment, it does not reflect the intention of the GATS as it allows any measures which are inconsistent with both Articles XVI and XVII Therefore, despite of the full commitment “None

in market access column, some restrictions to market access could still be freely introduced in discriminatory form Approach 5 can only apply to new or improved commitment while the first two approaches giving hiechary to either market access and national treatment, which is not reflect the nature of the GATS

1.5 Summary of Chapter I

In summary, The GATS is an WTO Agreement that is not analogous to any other WTO Agreements due to the characteristics of services, therefore, national treatment under the GATS also contain differences with that of the GATT This Chapter has provided the overview about national treatment under the GATS by analyzing the nature of this principle and by comparison with national treatment under the GATT In general, national treatment under the GATS is a specific commitment and the determination of its violation should be examined through case-by-case basis

In relation to the overlap of application between market access and national treatment, from the author‟s perspective, the possible solution to address the overlap between market access and national treatment is to respect commitment of Members over the “Unbound” and to allow Members to grant measures to the extent scheduled

CHAPTER II NATIONAL TREATMENT IN FINANCIAL SERVICES UNDER THE GATS AND ASSESSMENT ON IMPLEMENTATION OF NATIONAL TREATMENT IN FINANCIAL SERVICES UNDER VIETNAM

LEGISLATIONS 2.1 Introduction

There is no objection about the importance of financial sector for development of one country‟s economy As an importance sector, the GATS has also introduced a specific Annex to regulate about this sensitive sector In terms of domestic regulation, domestic financial regulators have always been cautious in introduction competition in financial sector due to policies to develop domestic financial industries and due to prudential concerns Based on these concerns, regulators often apply licensing and authorization requirement to foreign services, although sometimes those conditions and requirements exceed beyond prudential objectives such as soundness and competence of applicants and usually inscribed as limitations

on market access and national treatment in Schedules of Members.83

Prior to study about national treatment commitment of Vietnam in financial sector,

it is important to have a look at how national treatment applies in financial services and its exemption (Section 2.1) It should be noticed that besides general definition

of national treatment under the GATS, national treatment obligation in financial services is more flexible and should be understand in specific context as stated Subsequently, the commitment of Vietnam to WTO in some specific financial services such as banking and securities sectors will be provided in order to assess on the implementation of those commitment into domestic legislations (Section 2.3 and 2.4) In general, limitations or conditions in national treatment column mainly applied to commercial presence of foreign services or service suppliers in respect of equity participation of foreign entities and requirements of total assets of parent company The implementations of Vietnamese regulations also comply with its commitment, however, there are still disparities regarding national treatment obligation in term of licensing criteria and de-factor discrimination Hence, in order

to improve the compliance to WTO commitment, some proposals are provided in light of amending the law and improving the law compliance and law enforcement (Section 2.5)

2.2 Specific national treatment rules in financial services and its exceptions

2.2.1 Specific national treatment obligation in financial services

83

WTO Secretariat (2001), Guide to the GATS: An Overview of Issues for Further Liberalization of Trade in

Services, Kluwer Law International, pp.344