RESTRICTEDWORLD TRADE
ORGANIZATIONS/WPGR/W/38
21 January 2002
(02-0350)
Working Party on GATS Rules Original:  English
COMMUNICATION FROM THE EUROPEAN COMMUNITIES
AND THEIR MEMBER STATES
The following communication is circulated at the request of the European Communities and
their Member States, to Members of the Working Party on GATS Rules.
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MODAL APPLICATION OF AN EMERGENCY SAFEGUARD MEASURE
1. This note seeks to look into some issues related to the discussions of the Working Party on
GATS rules on the basis of Article X of GATS, regarding a possible emergency safeguard measure
(ESM) for trade in services, in particular in the light of the four modes of supply a service.  Thefollowing comments are made without prejudice to a Community position on the desirability and
feasibility of such a mechanism and should in no way be interpreted as meaning acceptance of an
ESM.
I. STATE OF PLAY
2. Safeguard measures have been present in the goods area since 1947 (Article XIX of
GATT 47).  A safeguard is conceptually a straightforward instrument that applies to foreign goods
crossing the border.  It aims at protecting from fair trade the domestic industry, defined as follows:‘the producers as a whole of the like or directly competitive products operating within the territory of
a Member, or those whose collective output of the like or directly competitive products constitutes a
major proportion of the total domestic production of those products ’. (Article 4.1. (c) of the
Safeguard Agreement).  The main criterion therefore is the place of operation of the companies.
3. In services, there is no similar past history of safeguard measures.  Designing such an
instrument within the GATS framework is complicated among other things because of the four modes
of delivery of a service in contrast to the single mode of trading goods under GATT.
4. Mode 3 has been the main subject of discussions in the Working Party on GATS Rules during
the last year and several Members have concluded therefrom that they cannot apply a safeguard
against foreign established companies (i.e. to mode 3).  One should not, however, conclude from theabove that the application of a safeguard measure in the three other modes of supply does not raise
concerns.  There is now a need to discuss in-depth these other modes and inter-modal relations as
well, which have been neglected so far by the Working Party.
5. This note will consider the issue of applying a safeguard for each mode of supply individually
and make preliminary comments as to whether it is technically possible to have a uniform set of rulesapplying across the four modes.  This point was raised in the document submitted by Mauritius
(JOB(01)/143, 24 September 2001).S/WPGR/W/38
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II. APPLICABILITY OF A SAFEGUARD MEASURE TO THE FOUR MODES OF
SUPPLY
A. MODE 1 - CROSS BORDER SUPPLY OF SERVICES
6. A service supplier located within the territory of a Member provides services into the territory
of another Member.  If the service supplier is a juridical person, it has the origin of the Member whereit is located.
7. Some Members seem to consider that a safeguard for mode 1 does not present conceptual
difficulties as this form of trade is at first sight very similar to what happens in the goods area.
8. The situation, however, is not that straightforward.  In the goods area, it is feasible for
customs officers to impose duties on identified goods and, therefore, to prevent them from crossing
the border, where appropriate.  There is, however, no similar proceeding for services: no customs
officers identify services crossing the borders and services are not all embodied in a good.  Servicescan be provided by sending a communication, written or not, via mail, phone, fax or Internet (e.g.
professional services, travel agencies).  Indeed, no Member can seriously consider stopping all
incoming mail or communications: enforcing measures at the border therefore is not that simple for
services.
9. This being said, a Member may well state that cross border supply of services into its territory
is illegal, even though enforcement of such a prohibition is difficult, if not impossible, to implement.
Governments would thus have to trust that companie s act in accordance with their legislation.  If,
however, some companies breach this prohibition, trade would take place in practice but consumers
would most likely lose the right to legal action against foreign services providers not fulfilling
adequately their contracts. It remains to be seen whether this would have any impact.
10. Different sectors are likely to be affected in different ways.  Financial services under mode 1
take place in the form of wholesale commercial  banking, investment banking, private banking,
insurance of large risks, reinsurance and financial information services.  In telecoms, a Member could
be tempted to use a safeguard in order to protect companies established within its territory from
competition of companies operating from abroad.  This could be the case because establishedcompanies invest in its terrestrial infrastructure while, for instance, satellite companies operating on
cross border basis do not need to do so.  In addition, all distribution activities, and in particular
distance selling, could be affected as well as transport, and in particular maritime.  It is worth noting
that the above-mentioned sectors all have an infra-structural character and have close links with trade
in goods.  There is a need, therefore, to look at the implication of a safeguard measure in these
services, and in particular on possible effects on trade in goods and development.
11. Acquired rights are not easy to identify and to evaluate.  This is an important and difficult
issue.  Would operating prior to the date of implementation of the safeguard measure give rights to
continue business?  If so, a criterion might be whether the right to provide services under mode 1 was
used by service suppliers before the safeguard measure is taken.  In addition, would long term
business relationships deserve particular consideration ?  Alternatively, would acquired rights be
recognised only if previously formalised in contracts ?  In that context, an analysis of the provision on
products ‘en route’ in Article XIII :2.(b) of GATT 1994 would be useful.
12. In addition to companies operating prior to the application of the measure, other service
suppliers may be affected.  This is the case for companies that operate in activities related to the sector
directly concerned by the safeguards such as, for instance, for express delivery companies if a
safeguard were taken in the field of air transport freight forwarding.  In the goods area, downstream orupstream economic effects of a safeguard measure are disregarded, except for Members who apply aS/WPGR/W/38
Page 3
public interest clause.  In the GATS context, it is worth considering whether a different approach
would be preferable, in particular give n the lack of harmonised classification.
B. MODE 2 – CONSUMPTION ABROAD
13. A supplier provides services in the territory of a Member to a consumer of another Member.
In this case, the precise origin of the service suppli er is almost irrelevant, what matters is that the
consumption occurs in a foreign country.  As Mexico put it in its document (JOB(01)/67 of
9 May 2001), import takes place on a foreign market.
14. A safeguard measure for mode 2 would occur when a Member decides to reserve for its own
industry (including foreign established companies) all domestic consumption of a service sector and
consequently prevents its nationals from consuming similar services abroad (including from foreign
subsidiaries of its domestically owned enterprises).
15. It is important to keep in mind that the difficulties which may be remedied by a safeguard
measure must be sector specific and not across all activities of the economy.  In the latter case,
limitations are more likely to be linked to external financial difficulties of the Member, as defined in
GATS Article XII, and any solution should be found in conformity with this provision.
16. Under these circumstances, the need for a safeguard mechanism to cover this mode of supply
is not obvious.  One may envisage cases similar to mode 1, in particular where mode 1/mode 2distinction is not simple to draw (for instance, services provided on Internet).  In addition, as for
mode 1, enforcement will be difficult to ensure.
17. There is a need to clarify cases where a safeguard could be used in that mode of delivery.
The most commonly cited sector under mode 2 is tourism, but it is difficult to imagine a case where
preventing citizens from leaving the country to consume tourism services abroad would not result
from financial difficulties or wider political reasons covered by the general exemptions in Article XIV
and XIV bis.
18. Acquired rights:  If a service supplier established in another Member has had for a number of
years considerable share of its trade with cust omers originating in the Member invoking the
safeguard, would it be denied all rights to pursue this business relation?  If not, what is the meaning ofacquired rights under mode 2?  The situation is somehow similar to mode 1.
C. M
ODE 3 – COMMERCIAL PRESENCE
19. The service is supplied by the service supplier  of one Member, through commercial presence
in the territory of another Member.  The origin of the supplier is the one of those natural or legal
persons that control or own that supplier.
20. Mode 3 raises important practical difficulties, such as identification of domestic industry
(given that determination of nationals who own a nd control large companies or financial holdings can
prove difficult), standing of the complainant, representativity of the domestic industry.
21. In addition, under GATS, foreign-established companies1  are not considered as part of
domestic industry and can be treated less favourably than domestically-owned and controlled firms.
However, most WTO Members are bound by their internal legislation and network of bilateral
investment treaties, according to which they usually grant national treatment to foreign established
                                                     
1  ‘Foreign established companies’ mean companies established within the territory of a Member but
owned or controlled by natural or juridical persons of other Members.S/WPGR/W/38
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companies.  Applying a safeguard measure to mode 3, that is against foreign established companies,
conflicts therefore with such other sets of regulation.  More importantly, some Members question the
desirability of a safeguard mechanism applicable to mode 3, as this will scare foreign investors.
22. In that context, two options have been discussed: exclusion of mode 3 from the scope of any
safeguard mechanism or exclusion limited to new entrants.
23. Full exclusion of mode 3 would be satisfactory to   protect foreign investors, but would lead to
some discrimination as using a safeguard in mode 1 would favour established companies vis-à-vis
companies that provide services on a cross-border basis (same comments as for mode 1 - problem of
cross mode competition).  Here, the safeguard could then be used as an incentive to ‘attract’
investment and could distort trade flows.  In addition, this will send a very negative signal to small
and medium enterprises that cannot afford to establish a commercial presence in every export market
and that operate on a cross border basis.
24. Protection of already established foreign companies: a safeguard would only be used against
newcomers by preventing them from entering the domestic market.  There is a risk that Members see
this as an easy solution as it gives the impression of protecting adequately acquired rights.  One
should be cautious with this approach, as it does not seem to give the proper reply to the situation
justifying a safeguard measure.  If injury is caused by increase in supply of services under mode 3,new entrants cannot be responsible for this.  Closing the market to newcomers will not correct
insufficiencies in the market that, most likely, originate in a lack of sound regulatory framework,
including competition authority, in the services sector concerned.  On the other hand, this option may
encourage domestic industry to lobby their governme nt so as to use a safeguard to close the market
once a limited number of foreign companies enter the market.  In fact, the debate newcomers versustraditional operators is not new in the WTO context (see for instance Article 3(j) of the WTO Import
Licensing Agreement, which states that, for the purpose of granting non-automatic licences,
consideration shall be given to new importers.)
25. Acquired rights:  different options have appeared (cf. communication from Mexico):
(a) Full protection : companies established prior to the safeguard measure would not be
affected.  The level of protection needs to be clarified: would such companies be
guaranteed full national treatment or treatment bound in the list of specific
commitments of the Member invoking the safeguard?
(b) Protection limited to exercised rights : companies established would not be forced to
disinvest but they would not be allowed to expand their activities.  The situation
would be frozen and could create an imbalance in favour of the largest company on
the market, as the other ones would not be allowed to compete to gain market share.
26. Link with BITs needs to be examined.  If a Member has committed within a BIT to grant
national treatment to foreign investment, then a safeguard might give the right to pursue the matter
before the courts designated in the BIT as competent for solving disputes.
D. MODE 4 – MOVEMENT OF NATURAL PERSONS
27. The service is supplied by a service supplier of one Member, through presence of natural
persons of a Member in the territory of another Member.  The service supplier is either a natural or a
juridical person.  It could be a company sending employees abroad or a natural person providing
services for his own account.S/WPGR/W/38
Page 5
28. Most specific commitments made by Members in mode 4 currently concern entry of business
visitors, intra-corporate transferees or contractual service suppliers.   This means that natural persons
transferred are all employees (or minority partners) of juridical persons. In such cases, mode 4 cannot
be seen in isolation from modes 1 and 3: mode 4 supply of services is only authorised if there is
market access under either mode 3 (for intra-corporate transferees and business visitors seeking toestablish a commercial presence) or mode 1 (for contractual service suppliers and business visitors
seeking to negotiate or conclude contracts).  The service suppliers beneficiaries of the commitments
are companies and not individuals and, similarly, injury suffered on the domestic market of the
Member invoking the safeguard must be found on the whole service suppliers of the like service,
within the territory of the market of that Member.
29. Some Members have made mode 4 commitments for independent professionals.  In this case,
however, there is a need to reflect on the definition of the domestic industry: would the domesticindustry only include self-employed professionals or juridical persons as well?
30. In practice, a safeguard measure could take the form of a numerical limitation on entries of
natural persons.  It is probably one of the easiest safeguard measures to enforce, as Members control
at their external borders entry of foreign natural persons (passport, visa, working permit).  Here again,
it is worth noting that the problems must be sector-specific and not be linked to a general approachtaken by a Member on immigration or labour market policies applicable across all services sectors
31. Acquired rights:  who are the beneficiaries of acquired rights under mode 4? What treatment
would be granted to natural persons who are in the territory of the Member at the time a safeguard
measure is taken?  Would they be requested to leave the territory as soon as possible or would they be
allowed to remain until the end of their contract?  In the case of intra-corporate transferees, doacquired rights include the right to replace an expatriate once his posting has finished? In this case,
one may consider that the service supplier has exercised its right to send an intra-corporate transferee
and should be allowed to continue.
III. IS A UNIFORM SET OF RULES FOR ALL MODES OF SUPPLY POSSIBLE
32. More thought needs to be given to this question.  These are only preliminary comments:
(a) To preclude discussions of coverage of all modes would be premature for the
following reasons:
(i) It seems difficult to separate completely a safeguard under mode 1 from
mode 2.
(ii) Applying a safeguard to one mode only does not take into account reality of
cross-mode competition and would create trade distortion:
- A safeguard limited to mode 1 could be used as an instrument to  ‘encourage’
foreign companies to invest in a given ma rket in order to operate there.  This
would not be sufficiently attractive if the Member concerned has a small
economy, but for large market, this could be an effective instrument,
particularly detrimental to small and medium size enterprises as compared to
large companies.  On the other hand, a safeguard measure applied to modes 1and 3 would lead to discrimination between companies of the same Member:
a company that has established a commercial presence in the Member
invoking a safeguard prior to the adoption of the measure may be authorised
to pursue its activities while a company that would seek to invest after
adoption of the same measure, or that provides the like services from theS/WPGR/W/38
Page 6
territory of another Member, would be prevented from doing so and would
lose the market.  Again, this problem already exists in the goods area as
companies producing within the territo ry of the Member invoking the
safeguard are not affected by the safeguard measure and new investment is
allowed (except if this is a circumvention issue).  This deserves anassessment for services.
(iii) At the same time, a measure should be limited to the action necessary to
remedy the situation (does that means only to the mode that is causing
injury?)
(iv) Mode 4 is intrinsically linked either to mode 1 or mode 3 and cannot be
treated in isolation to other modes of supply.
(b) Some aspects do not appear mode-specific:
(i) The situation justifying a safeguard;
(ii) The conduct of the investigation;
(iii) Notification to WTO;
(iv) Consultation;
(v) Compensation mechanism, if any;
(vi) Indicators of injury: domestic industry supplying like services should show
injury.  There is no argument for changing criteria depending on the mode of
supply considered, as the affected industry remains the same: the producers
as a whole of the like or directly competitive services.
(vii) Determination of domestic industry: the same service supplier may have
different origins, depending on the mode of supply under which is has chosen
to operate.  Thus, a Brazilian subsidiary of a Community company, supplying
services both in Brazil and Argentina, will be considered by Brazil as a
Community company and by Argentina as a Brazilian company.  This is not a
problem because the safeguard may not be discriminatory.  The majordifficulty is about including or not foreign-established companies within the
domestic industry but is there a reason to take a different approach,
depending on the mode of supply considered?
(c) Some elements call for mode-specific solution:
(i) The most appropriate measure to remedy a situation justifying a safeguard;
(ii) Indicators and criteria for the purpose of measuring increase in supply of
service;
(iii) Acquired rights: however, consistency should be maintained across modes of
supply.  For instance, if acquired rights are broadly defined for mode 3, for
sake of consistency the same should apply for modes 1, 2 and 4.
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