RESTRICTED
WORLD TRADE S/WPGR/W/15/Add.6
22May1997
ORGANIZATION(97-2370)
Original: Spanish Working Party onGATS Rules
COMMUNICATION FROM MEXICO
Response totheQuestions Relating toanEmergency
Safeguard Mechanism inGATS
Addendum
Thefollowing communication isbeing circulated attherequest ofMexico toMembers ofthe
Working Party onGATS Rules.
Theintention ofthisresponse tothequestionnaire istocontribute tothediscussion andanalysis
forevaluating thepossibility ofapplying safeguards totrade inservices.
Thedocument doesnotprejudice Mexico 'sposition onthismatter andshould notbeinterpreted
assuch.
_______________
1. What isthejustification andpurpose ofanemergency mechanism under GATS?
Thequestion ofwhat asafeguard mechanism would beforinvolves thefollowing
considerations:
(a) Would anemergency safeguard forservices beintended todealwiththekindofsituation
foreseen inArticle XIXofGATT -thatis,atemporary threat toadomestic "industry" arising
from increased imports? Would ithave anyother objective?
Ifthetemporary safeguard measure forservices wasapplied inthesame way, itwould have
thesame objective asArticle XIXoftheGATT inrelation togoods: toprotect adomestic industry
temporarily from international competition thatmight cause orthreaten serious injury asaresult of
asignificant increase incompetition fromforeign suppliers. Thesafeguard would restrict imports over
aspecified period oftimesoastoallow thedomestic industry tomake adjustments inorder toface
theforeign competition.
(b) Areexisting "safeguard" mechanisms inGATS, notably those contained inArticle XII
andArticleXIV,sufficienttoaddressanydifficultiesgovernmentsmightencounterasaconsequence
oftheirGATScommitments?Similarly,doesArticleXXIprovideanadequatevehicleforreversing
ormodifying scheduled commitments intheevent ofunanticipated difficulties?
Article XII(Restrictions toSafeguard theBalance ofPayments) covers situations thataffect
theeconomy asawhole byallowing temporary measures ofageneral nature tobeimposed. The
mechanism isnotselective andalthough itmight resolve problems insectors facing difficulties, itcould
alsoaffect other services thatmaybevitalforthefunctioning oftheeconomy.S/WPGR/W/15/Add.6
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Articles XIV(General Exceptions) andXIVbis(Security Exceptions) apply under specific
circumstances (toprotect morals ortomaintain public order; toprotect human oranimal lifeorhealth;
compliance withlaws; furnishing ofconfidential information forreasons ofsecurity; protection of
essential security interests, etc.), which isnotthesame astheobjective pursued when applying a
safeguard inorder toprevent serious injury toadomestic industry asaresult ofasignificant increase
incompetition from foreign suppliers.
Article XXI(Modification ofSchedules) allows aMember tomodify orwithdraw definitively
anycommitment initsschedule afterthreeyears haveelapsed fromthedateonwhich thecommitment
entered intoforce. Thedraftprocedures formodifying schedules (textof23May1996) donotspecify
theconditions orcircumstances thatwould allow commitments tobemodified orwithdrawn, soa
Member modifying itsschedule hasalarge measure ofdiscretion when applying them. Moreover,
there isnoprovision forutilizing thismechanism before three years haveelapsed, evenifunforeseen
difficulties arise. There isnoprovision inArticle XXIeither allowing aMember toreinstate thelevel
ofcommitment modified orwithdrawn within aspecified period.
(c) Does thenature ofcommitments undertaken inGATS -whereby Members maychoose
whether toschedule asector, andmayalsocondition market access andnational treatment with
respect tocommitments thataremade -obviate theneedforsafeguards? Orwould itbemore
appropriate tothink interms oftheideathattheexistence ofasafeguard would allow governments
tobemore forthcoming withrespect totheir scheduled commitments?
Theestablishment ofasafeguard mechanism forservices should notbeaparameter todetermine
thelevelofandcompliancewithcommitmentsbyMembers.Nevertheless,theelaborationofinstruments
toresolve unforeseen situations arising from anincrease inimports thatcause injury toadomestic
industry, under certain conditions, could enhance thelevelofcommitment ofMembers.
(d) What would betheeconomic objective ofasafeguard -toprotect production, investors
oremployment? Would itprotect alldomestic production, oronlythatpartofproduction
attributable tonational suppliers? Would itaimtoprotect investment bynationals, orall
domestically-based investments? What would betheobjective ofallowing departures fromnational
treatment under modes 3and4?Isthedistinction between establishment rights perseand
post-establishment operations relevant inrelation topossible safeguard measures under modes
3and4?
Itisdifficult apriori todetermine whether themeasure should protect investment, production
oremployment because anincrease inimports directly affects allthree variables. Forexample, when
anindustry facesproblems caused byforeign competition, thishasanimpact onthesalesoftheservices
sector orsubsector onthedomestic market and,consequently, canhave aneffect onproduction,
investment andemployment.
Oneofthefirstelements tobedefined inrelation tomode 3iswhatismeant by"domestic
industry" because inmany Members foreign-owned enterprises havebeensetupinaccordance with
theirrespective lawsandareconsidered domestic enterprises, andtherefore thewhole domestic industry
would havetobeprotected. Likewise, safeguards should notallow exceptions totheprinciple ofnational
treatment.
Perhaps theonlydifference thatcould beallowed would beinrelation tomarket access for
newforeign-owned enterprises andalready-established enterprises, towhich safeguard measures would
notapply.
(e) Would asafeguard mechanism need tocontemplate special provisions fordeveloping
countries ordoestheconcept ofprogressive liberalization offer adequate leeway inthisrespect?S/WPGR/W/15/Add.6
Page3
Theconcept ofprogressive liberalization gives developing countries flexibility toopenuptheir
sectors according totheirnational interests. Nevertheless, when faced withanemergency situation
andevenifthecountry hasadopted progressive liberalization commitments, aMember maynotbe
abletomove ahead withitscommitments onopening upacertain sector and,consequently, asafeguard
measure isnecessary, which means suspending orwithdrawing these commitments. Thismeans that,
despite theflexibility offered byprogressive liberalization, itdoesnotalways constitute aguarantee
thatacountry willnotapply asafeguard measure.
Inthecaseoftradeingoods,experiencesuggeststhatdevelopingcountriesrequirelongerperiods
toadjust theirmarkets tounforeseen circumstances. Asafeguard mechanism could, therefore, include
special provisions forthese countries, along thelinesofthose established within theGATT.
(f) Isthere anything intrinsic toservice transactions, suchasintangibility, simultaneity of
production andconsumption, ortheneed forphysical proximity between theproducer andthe
consumer, which makes (some) services transactions different from goods transaction inways
thatmight influence arguments astothenecessity orutility ofsafeguard measures inservices?
Because ofthedifferent characteristics oftrade ingoods andtrade inservices itisextremely
complicated toapply theelements ofasafeguard forgoods totrade inservices. Consideration should
begiven, however, tothose elements ofsafeguards forgoods thatcould beapplied bothinpractice
andintheory totheareaofservices. Inthisconnection, themode ofsupply thatmostresembles trade
ingoods iscross-border supply because itisthe"service" assuchthat"crosses" theborder, sosome
mechanism could beestablished torestrict these flows inthesame wayasoccurs fortrade ingoods.
Fortheother modes ofsupply, however, thedisciplines applying totrade ingoods donotappear to
bewholly applicable. Accordingly, provisions thatapply more specifically tothecharacteristics of
these three modes ofsupply ofservices would havetobedeveloped.
(g) Isanything intrinsic toservices markets, suchastheroleandimportance ofregulatory
regimes, standards andcertification requirements, which makes services markets different from
goods markets inways thatmight influence arguments astothenecessity orutility ofsafeguards
measures inservices?
Asmentioned intheprevious reply, oneofthebasic differences between trade ingoods and
trade inservices isthevariety offorms ofthelatter.
Inthecaseofservices, thevarious forms ofmarket access arebased onlawsandregulations
thatdefine thecharacteristics ofservices inaparticular sector. Inthisconnection, inthehypothetical
casethatasafeguard were applied, irrespective ofthemode ofsupply, thiswould mean thatinthe
majority ofcases changes would havetobemade tothelegalstructure inorder toremedy asituation
caused byasignificant increase incompetition from foreign suppliers.
(h) Isanything intrinsic totheroleofservices intheeconomy, suchastheirimportant support
andinfrastructure role,which makes services markets different from goods markets inways that
might influence arguments astothedesirability ofsafeguards measures inservices?
Some services sectors playavitalroleintheeconomy, justassome goods mayplayastrategic
role. Each Member willtherefore havetoassess therisks anddecide whether theapplication ofa
safeguard forservices could havenegative effects ontherestofitseconomy.
(i) DoMembers maintain anyemergency safeguard measures innational legislation? Ifso,
what arethese measures andhowaretheyimplemented?S/WPGR/W/15/Add.6
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There arenoemergency safeguard mechanisms intheservices sector inournational legislation.
Theonlysafeguard measure forservices istobefound intheNorth American FreeTrade Agreement
(NAFTA) andapplies tothefinancial sector. Thisisanautomatic measure thatcomes intoeffect when
thesumofauthorized capital offoreign commercial bank, affiliates reaches 25percenttheaggregate
capital ofallcommercial andinvestment banks inMexico. Mexico mayrequest consultations with
theother NAFTA parties onthepotential adverse effects arising fromthepresence ofcredit institutions
ofother parties ontheMexican market andthepossible needforremedial action (seeWTO Secretariat
document S/WPGR/W/2).
2. What criteria might bebrought tobear indetermining when anemergency safeguard
measure maybejustified?
Anumber ofquestions canbeidentified inrelation tothecriteria thatmight apply in
determining thecircumstances inwhich emergency safeguard measures aretobeused. The
questions included below assume thatessentially thesame GATT concepts ofincreased imports,
injury andcausality would apply under anemergency safeguards mechanism inGATS.
(a) What,intermsofGATSistheequivalentofincreasedimportsunderArticleXIXofGATT?
Inmode 1,thecross-border flowofservices maybesimilar totheimport ofgoods, butthesituation
isquite different under other modes. How should thepossibility ofsafeguards betriggered in
these circumstances?
Mode 1(cross-border supply). Thisistheformoftrade mostsimilar totrade ingoods. The
safeguard mechanism could betriggered inasimilar waytothatestablished intheGATT, although
thecharacteristics ofthesector concerned would havetobetaken intoaccount. Themechanism would
betriggered iftheinformation available showed thattheincrease inimports wascausing injury toan
economic activity. Theproblem thatarises isthatthelackofstatistics ontheservices sector isa
constraint ontriggering thismechanism.
Mode 2(consumption abroad). Forthismode ofsupply, itisdifficult toexercise control over
theentry andexitofconsumers from onecountry toanother. Ingeneral, immigration forms show
thecountry towhich aperson isgoing andthereason forhistravel (business, tourism orother), but
itwould bedifficult tousethisasabasisfordetermining theperson 'sspecific activity andconsumption
abroad. Itwould therefore bevirtually impossible toprove serious injury caused byflows under this
mode ofsupply.
Mode 3(commercial presence). Asmentioned inthereply toquestion 1(d), once a
foreign-ownedenterprisehasbeenestablished,itshouldbeconsideredanationalenterprise.Thepossible
safeguard would, therefore, apply tomarket access fornewenterprises. Inthiscaseaswell,itisdifficult
toquantify theserious injury caused toexisting national-owned orforeign-owned enterprises asaresult
oftheincreased share ofnewforeign enterprises inthemarket.
Theforegoing alsoapplies paripassu tomode 4.
(b) How should serious injury bedetermined? Injury towhom orwhat?
Inthecaseofgoods, according totheWTO Agreement onSafeguards, inorder todetermine
whether there hasbeenserious injury itisnecessary toevaluate "allrelevant factors ofanobjective
andquantifiable nature having abearing onthesituation ofthatindustry, inparticular therateand
amount oftheincrease inimports oftheproduct concerned inabsolute andrelative terms, theshare
ofthedomesticmarkettakenbyincreasedimports,changesinthelevelofsales,production,productivity,
capacity utilization, profit andlosses, andemployment".S/WPGR/W/15/Add.6
Page5
Forservices, thefactors tobeevaluated inorder todetermine theexistence ofserious injury
could bethesameasthose applying togoods; however, theproblem istheabsence ofadequate statistics
foreachofthefactors orindicators. Serious injury would beevaluated inrelation tothedomestic
industry concerned.
(c) What standards would berequired todetermine thatincreased competition from foreign
sources caused injury tothenational industry?
Alltheelements affecting thedomestic industry should beevaluated, including factors other
thancompetition fromforeign suppliers, inorder todetermine whether thelatter factor resulting from
thecommitments entered intoistheonlyorthemost important element causing theserious injury.
(d) How would thenational industry bedefined forthepurpose ofdetermining injury?
Asmentioned above, indefining thedomestic industry itmustbedetermined whether itincludes
enterprises whose equity iswholly orpartly foreign-owned.
(e) Should alinkbeestablished between thenature ofaspecific commitment inaparticular
sector, including inrelation tolimitations onmarket access andnational treatment, andthe
availability ofasafeguard measure? Inother words, should theavailability ornature ofa
safeguard berestricted where limitations have been inscribed?
Theschedules ofcommitments bymember States oftheGATS indicate theservices activities
theyhavebound andspecify theconditions formarket access andnational treatment foreachofthem.
Forsome oftheseactivities, binding means thatseveral restrictions havebeenmaintained sothatmarket
access andnational treatment areconsiderably restricted. Even though suchrestrictions maybebound
intheschedule ofcommitments, anactivity might cause problems resulting fromincreased competition
from foreign suppliers, andtherefore thecountry inquestion should beabletoapply asafeguard.
(f) What measurement andidentification problems arise inservices thatmight complicate
thedevelopment ofasafeguard instrument, andhowshould theybedealt with?
Themajor problem intheservices sector isthelackofstatistics. Iftherewereamethodology
andbetter statistics, thiswould beamajor stepforward forquantifying theflows oftrade inservices
and,possibly, quantifying theinjury thatmight becaused byunexpected increases incompetition from
foreign suppliers. Thedevelopment ofstatistics should notonlycover cross-border flows, butalso
statistics atthenational levelidentifying themajor elements concerning production, employment and
investment, which areessential above allformode ofsupply 3.
3. What form might asafeguard mechanism forservices take?
Ifincreased foreign competition andserious injury todomestic services orservice suppliers
have occurred, andcausality between thetwohasbeen established, aquestion arises astothe
characteristics ofasafeguard measure thatmight beapplied.
(a) What typeofmeasure should beapplied? Would taxes, foreign exchange restrictions,
other quantitative limitations, orregulatory restraints besuitable assafeguard measures?
Fortrade ingoods, thesafeguard measures thatcanbeapplied aretariffs andquantitative
restrictions. Fortrade inservices, thesafeguards could basically beintheform ofquantitative
restrictions.S/WPGR/W/15/Add.6
Page6
Foreign-exchange restrictions would notbeadvisable assafeguard measures toprotect aspecific
services sector because theirusecould haveadverse effects onother activities, astheyhaveageneral
impact ontheeconomy asawhole.
(b) What would betheimplications ofdifferent modes ofsupply forthekindofmeasures
employed?
Given thecharacteristics ofeachmode ofsupply, itwould bedifficult toadopt ameasure that
could beapplied uniformly toallofthem. Inprinciple, safeguards mechanisms would havetobe
developed foreachmode ofsupply andinsome cases perhaps forspecific sectors.
(c) Would there becircumstances inwhich theapplication ofasafeguard measure inrespect
ofonemode ofsupply would provoke ademand forcomparable measures inrelation toother
modes atthesame time?
Yes. Itispossible, forexample, thatcompetition from foreign suppliers thatcauses serious
injury andissubject toasafeguard measure applying tooneparticular mode ofsupply could thenoccur
through another mode ofsupply, thusevading thesafeguard measure.
(d) Should safeguards beapplied onanon-discriminatory basis inallcircumstances?
Yes,safeguard measures should beapplied toallcountries supplying theservice, irrespective
ofwhich onecauses theserious injury.
(e) How quickly would itbepossible foraMember totakeasafeguard measure? Would
thenotion of"critical circumstances", asdeveloped intheAgreement onSafeguards, apply in
theservices area?
No,inprinciple. Provisional safeguards fortrade ingoods areimposed because ofcritical
circumstances thatmean thatanydelay intheirapplication would leadtoinjury itwould bedifficult
toremedy and,ingeneral, apply toagricultural goods, which aremuch more likely toinvolve critical
circumstances because oftheirperishable nature. Inthecaseofservices, itisdifficult tothink of
examples which could besubject tosuchcircumstances.
(f) What should betheduration ofanysafeguard measures adopted?
Theperiod ofapplication ofsafeguard measures would depend onthetimethesector required
toadjust; nevertheless, theduration applicable totheservices sector would havetobediscussed,
considering whether thetime-limits laiddown fortrade ingoods could beutilized.
(g) Would safeguard measures bemade degressive during their period ofapplication?
Onecould think so.Theprogressive reduction ofthesafeguard measure would facilitate
readjustment ofmarkets.
(h) Would aMember taking asafeguard action berequired alsotoadopt adjustment measures?
Yes,soastoencourage thesectors benefiting fromasafeguard measure tomake theadjustments
thatwould allow them tocompete onceagain withforeign suppliers andtoensure thatthemeasures
donotbecome protectionist.S/WPGR/W/15/Add.6
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(i) Wouldtheapplicationofsafeguardmeasuresbeaccompaniedbycompensatoryadjustments
intheschedule oftheMember taking themeasure?
Compensation forcountries subject toasafeguard measure could bedecided upon, thecost
tobeborne bythecountry applying themeasure, sothatsafeguard measures would onlybeusedin
exceptional circumstances andwould notbecome protectionist trade-policy tools.