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| CHAPTER IX
The two agreements differ substantially with respect to both the scope and the legal character of the commitments. The services agreement with Israel covers all areas of cross-border trade in services, with no exclusions. It does not cover foreign investment or the production of services in the local market. It is also not legally binding, and instead commits the two countries to implement its principles on a best efforts basis, and to pursue sector-by-sector negotiations with the aim of filling in enough details so the agreement can be converted into a legally binding document. The services agreement with Canada covers not only cross border trade in services but also foreign investment in services. Unlike the Israeli agreement, the agreement with Canada is legally binding. All existing regulations are grand fathered, however, and the application of the principles of the agreement to existing regulations that are inconsistent with the agreement will have to be pursued through future negotiations. Key service sectors are also completely excluded from the agreement, including basic telecommunications, air transport, shipping, and legal services. Banking services are not covered by the general services agreement, though they are covered by a separate agreement. The bilateral agreements with Israel and Canada thus provide two separate approaches to the negotiation of trade agreements in services. Each can provide some useful insights into the negotiation of a multilateral agreement on trade in services in the Uruguay Round of multilateral trade negotiations. The basic purpose of this chapter is to draw some practical insights from the bilateral negotiations with Israel and Canada for the negotiations in the Uruguay Round.
On April 22, 1985, the United States and Israel. signed a Declaration on Trade in Services. The declaration establishes a set of principles for trade in services between the United States and Israel. The provisions of the declaration Ore not legally binding, but the two countries have committed themselves to apply the provisions on a "best efforts" basis. More recently, the two countries have conducted sectoral reviews of trade in tourism, telecommunications, and insurance services and have prepared sectoral annotations that describe with greater precision how the general provisions are to be interpreted with respect to each sector. From the beginning of the negotiations between Israel and the United States, it was clear that the volume of trade in services between the two countries is limited, except in tourism. There have also been few pressing commercial issues that needed to be resolved. This raised the question why the two governments should commit resources to such a negotiation, particularly since the negotiation of an agreement made it necessary to address a number of sensitive regulatory issues that could otherwise have been avoided. One reason the negotiations were pursued despite these negative considerations is that both countries realized trade in services would become a more important factor in their relationship in the future. Another reason is that these negotiations were expected to help both countries define the issues that will have to be addressed in the broader negotiations on trade in services in the Uruguay Round. Officials on both sides have also enjoyed the intellectual challenge involved and have found it a useful vehicle for bringing out the broader economic implications of many sectoral regulatory issues.
The principal provisions of the Declaration on Trade in Services by the United States and Israel deal with market access, national treatment, obligations of governmental authorities below the national level, domestic regulations, public monopolies, due process obligations, the resolution of trade problems, and the negotiation of a legally binding agreement. Open Market Access. The agreement establishes open market access as a basic principle, within the constraints imposed by the differences in the regulatory regimes in effect in the two countries in specific service sectors. National Treatment. Trade in services between the two countries is given national treatment. National treatment is defined in terms of the ability of producers from the other country to market or distribute services under the same conditions as like services sold by domestic producers. The commitment is framed in terms of cross-border trade in services, but also covers any commercial presence that may be required in the importing country to facilitate the export of services. A footnote to this provision defines commercial presence for banking as the establishment of representative offices, but not agencies, branches, or subsidiaries of a foreign bank. Political Subdivisions. National authorities are expected to consult with the authorities of political subdivisions in order to assure that their regulations are consistent with the principles contained in the declaration. Domestic Regulation. The national treatment principle is explicitly applied to domestic regulations, but at the same time its application is limited to the area of discretion available to domestic regulatory authorities under current laws. Since this is a best efforts agreement, the reservation makes explicit what is otherwise implicit: that the declaration does not alter any domestic laws. This provision also commits trade officials to consult with officials in regulatory agencies in order to assure consistency in their actions with the principles of the declaration. Public Monopolies. Each country has the right to establish public monopolies to supply certain services, but such monopolies are expected to abide by the principles of the declaration insofar as they make sales or purchases that affect exports or imports of services from the other country. Due Process. Each country is committed to publish domestic laws and regulations affecting trade in services and to notify its trading partner of any laws and regulations that discriminate against foreign producers. The provision also gives foreign suppliers access to established domestic procedures for reviewing regulatory proposals and to established judicial proceedings for resolving disputes over the application of regulations. Problem Solving. Each country agrees to consult periodically on specific problems that arise concerning trade in services between the two countries and to review the existing regulatory regime that applies to services in each country insofar as it affects trade. These reviews have led to the negotiation of sectoral annotations. Negotiation of Binding Commitments. The two countries are committed to review the operation of the agreement after eighteen months, and to explore the possibility of transforming the provisions of the declaration into a legally binding agreement. The review was held in fall of 1986, and the decision was made at that time to pursue the negotiation of a legally binding agreement through the development of sectoral annotations.
One difficult issue was the relationship of the bilateral agreement on trade in services to the bilateral treaty on friendship, commerce, and navigation (FCN). Israel is one of the countries with whom the United States has negotiated such treaties. Drafted in fairly broad terms, the FCN treaty between the United States and Israel appears to give all businesses of each country the right of establishment and national treatment in the other country. Since the provisions of the treaty apply to services as well as to goods, the question arose whether a trade agreement in services was needed at all, or whether it would overlap with the FCN treaty and create conflicting obligations. Careful review of the FCN treaty led to the conclusion that it was deficient in-a number of respects, and that a conflict between a trade agreement and the FCN treaty could be avoided. First, the FCN treaty primarily focuses on investment obligations, rather than trade obligations. Second, major sectors in services had been carved out of the national treatment provision of the FCN treaty. U.S. legislation restricts the activities of foreign investors in many of the principal service sectors, and it appeared easier at the time the FCN agreement was negotiated to carve out the whole sector rather than to tailor the provisions of the treaty to the requirements of the U.S. law. Third, the FCN treaty was drafted in the early 1950s when trade in services was not a major issue and was not well understood. Services are included only incidentally, and not in a manner that is relevant to the problems faced by exporters of services. Fourth, the dispute settlement provisions of the FCN treaty are not very strong, providing only for voluntary consultations and referral of unresolved issues to the International Court of Justice. This undermined the effectiveness of the agreement. One approach considered was to expand the coverage of the FCN treaty, but that would have led to too many legal questions. The simplest approach, in the end, was to separate trade issues from investment issues. While it had been the original intention of U.S. trade negotiators to draft an agreement that would cover both trade and investment issues, it was now clear that a potential legal conflict could be avoided by giving the U.S./Israeli services agreement a trade focus. Establishment issues are thus covered only insofar as a commercial presence is required in the other country to carry out cross-border trade. Since most current restrictions on the sale of services by foreign enterprises in the United States take the form of restrictions on foreign investment, it also became possible to minimize sectoral exceptions to the agreement by excluding investment commitments. A fuller description of the debate over these issues is found in Carol Balassa's article in the Journal of World Trade Law, "Negotiation of Services in the U.S.-Israel Free Trade Area." A closely related issue was how the agreement should deal with banking services and the establishment of foreign branches. It was decided that the establishment of a foreign branch would be considered an investment issue and that the agreement would only cover the establishment of representative offices by foreign banks. In effect, commercial presence in banking was defined as the establishment of representative offices. The decision not to cover the establishment and operation of branches and subsidiaries in the importing country significantly reduced concerns expressed by bank regulators that the agreement would undermine their fiduciary authority. Another key issue was the application of the agreement to political subdivisions and, in particular, to the state governments in the United States, which enjoy considerable authority in regulating services. An agreement that would not commit the state governments in the United States would reduce the value of an agreement to Israel and raise questions about appropriate reciprocity. At the same time, it was equally clear that the United States could not negotiate an agreement binding the states without extensive consultations with the state governments and a great deal of work. Such a process could not be completed within the time available; it therefore made more sense to negotiate a best efforts agreement that could be used as a basis for subsequent consultations with the states. Consultations that have been held with state authorities on the basis of the Declaration on Trade in Services have not brought out any major substantive issues, and the ground has now been laid for getting over the sensitive political issue of state rights. What has to be made clear to the states is that the federal government is not planning to federalize regulatory responsibilities now reserved to the states. Consultations with national regulatory authorities in the course of the negotiations revealed that the application of the national treatment principle and the market access principle to domestic regulations raises difficult issues in a number of sectors that will require in-depth consultations with regulatory officials to resolve. It also became apparent that it is difficult to persuade regulatory officials to accept the discipline of a trade agreement in services without a sector-by-sector review with full participation of regulators. The decision to pursue the negotiation of sectoral annotations to the general principles thus emerged naturally out of the internal debates in each government over the extent to which the principles would be applied to specific sectors. Regulatory officials were willing to go along with the signing of an interim best efforts agreement without the sectoral details only because it was not legally binding. One of the first issues that had to be sorted out was who would have the responsibility for negotiating a broad agreement on trade in services. In the United States the responsibility of the U.S. Trade Representative for the negotiation of such an agreement had been established in both law and practice. No department in the Israeli government had a similar set of responsibilities. A team of Israeli officials with the necessary responsibility was constituted from government ministries. Some of the officials have maintained their involvement in the process despite transfers from one ministry to another.
Sectoral reviews have followed a standard pattern. The first step has been to discuss the scope of activities that should be covered in the discussions of the sector and the relevant policies that affect trade in services in that sector. The second step has been to develop national papers that specify the regulatory regime that applies to the covered activities and how trade in the covered services is treated under the regulations. The third step has been to conduct bilateral exchange on the basis of the papers, with each side raising pointed questions regarding the treatment of foreign suppliers under a broad range of circumstances. The fourth step has been to develop an initial draft of a sectoral annotation, which is then subjected to detailed review to identify key issues. The most difficult part of the process has naturally been the last step, namely, the resolution of politically difficult issues that involve important conflicts between principle and political reality. Each sectoral annotation follows the structure of the declaration. Since the first provision in the declaration deals with the definition of trade in services, each sectoral annotation also begins with a detailed description of the sector-the activities covered by the sector, the various ways in which trade in services is conducted in that sector, and the major functional activities associated with trade in services in that sector. This is followed by sections dealing with the meaning of market access in the sector, the application of national treatment to trade and to the commercial presence of foreign suppliers inside the importing country, application to political subdivisions, adherence to the provisions of the agreement by domestic regulatory authorities, the responsibilities of public monopolies, and due process. Since the sectoral annotations are still under negotiation, it is too soon to discuss the substantive details. A few general comments, however, could be added with respect to the scope and definition of the sectors covered. In the Annotation on Tourism, there was considerable discussion of the scope of activities that should be covered, and it was agreed to cover a very wide range of activities. Since tourism is very popular and is supported by strong domestic political groups, tourism proved a useful context for addressing a broad range of issues. In the Annotation on Telecommunications, it proved extremely useful to specify both supplier interests and user interests, and to distinguish between the interests of small and large users and suppliers. The most important definitional issue, however, has not surprisingly been the dividing line between basic telecommunications services and value-added telecommunications services.
President Reagan and Prime Minister Mulroney signed the U.S./Canadian Free Trade Agreement_ on January 2, 1988. The agreement must now be ratified by the U.S. Congress and the Canadian Parliament. The provisions on services are an integral part of the Free Trade Agreement and will become legally binding once the two legislatures ratify the agreement. In contrast with the situation that exists between Israel and the United States, Canada and the United States have a large volume of bilateral trade in services. This is not surprising, given the proximity between the two countries. In some sectors such as insurance, the United States and Canada also have fairly similar regulatory systems, and businesses reported few problems in these sectors. In other sectors, the United States and Canada have very different regulatory systems and these differences inevitably constrained the scope of the agreement in these sectors. The air transportation sector and the basic telecommunications sector, for example, were excluded from the provisions of the agreement because it proved too difficult to establish a reciprocal basis for trade in these sectors. . Unlike the agreement with Israel, the agreement with Canada covers investment in local facilities as well as the movement of business persons between the two countries (this category is meant to cover white-collar professionals as well as independent entrepreneurs, but not blue-collar workers). Moreover, the agreement with Canada includes detailed sectoral agreements with respect to architecture, tourism, computer services, and telecommunications-network-based enhanced services.
Coverage. Covered services include (a) the production, distribution, sale, marketing, and delivery of a covered service and the purchase or use thereof; (b) access to, and use of, domestic distribution systems; (c) the establishment of a commercial presence (other than an investment) for the purpose of distributing, marketing, delivering, or facilitating a covered service; and (d) subject to the provisions of Chapter Sixteen on investment, any investment for the provision of a covered service and any activity associated with the provision of a covered service.1 National Treatment. Each country agrees to give firms from its trading partner treatment no less favorable than that accorded in like circumstances to its own firms. States and provinces are expected to give firms from the trading partner the same treatment they would give firms from another state or province within their own country, or the same treatment they give their own firms, whichever is better. Treatment of producers from the trading partner can be different, however, provided the difference in treatment is no greater than that necessary for prudential, fiduciary, health and safety, or consumer protection reasons, and such treatment is equivalent in effect to the treatment accorded local firms. The burden of proof is on the country taking a regulatory action to show it is consistent with national treatment. The national treatment provision does not apply to existing laws and regulations that are inconsistent with national treatment, or to future amendments of them, provided they do not increase the level of protection. Nonestablishment. Each country agrees not to require establishment or commercial presence by a supplier from its trading partner insofar as such a requirement would create a barrier to cross-border trade in services covered by the agreement. Licensing and Certification. Each country agrees that in principle licensing and certification requirements should be used only to establish competence or the ability to provide covered services, and not have the purpose or effect of restricting market access by professionals from its trading partner. Future Negotiations. The two countries agree to pursue negotiations to extend coverage to excluded sectors and to existing regulations that are inconsistent with the agreement. Temporary Entry for Business Persons. Chapter Fifteen of the agreement commits each country to provide for the temporary entry of "business persons" from its trading partner. Business persons are defined as citizens who are engaged in the trade of goods or services or in investment activities. In practice, this definition is meant to include businessmen as well as white-collar professionals engaged in producing services, but not blue-collar workers. 2 Implementation will take the form of a special visa that will be issued by the immigration authorities of the two countries to eligible persons.
One of the important lessons learned from the negotiations on trade in services with Canada is that it is difficult to establish a basis for free trade in a sector where there are large differences in domestic regulations, particularly if one country has a regulatory regime that permits open competition among domestic firms and the other country has a regulatory regime that limits domestic competition. In both long-distance telecommunications and air transport services, deregulation in the United States has resulted in open competition among domestic firms in these sectors, while Canada has maintained tight regulatory controls over these sectors. Extending national treatment provisions to these two sectors would have meant, in effect, that Canadian firms would have had unlimited access to the U.S. market, while access of U.S. firms to the Canadian market would have remained under the administrative control of Canadian regulatory authorities. Not surprisingly, Canadian firms were in favor of applying the national treatment obligation to these sectors, while U.S. firms in these sectors vigorously argued against such treatment. U.S. negotiators expressed a willingness to extend the national treatment commitment to both of these sectors, provided Canada was prepared to permit open domestic competition. Since this would have required major regulatory reforms, Canada could not agree to this U.S. request, and the United States in turn refused to commit itself to national treatment in these sectors. In the area of banking, the shoe was on the other foot. Canada permits commercial banks to engage in investment banking activities while the Glass Steagall Act prohibits commercial banks in the United States from engaging in such activities. Canada argued that it would be willing to give American banks national treatment in Canada, provided Canadian banks in the United States were allowed to engage in investment banking activities. This would have given Canadian banks in the United States preferential treatment as compared with local banks, unless the United States had been prepared to abandon the Glass Steagall restraints on investment banking activities by commercial banks. While there is growing sentiment in the United States in favor of a relaxation of the Glass Steagall Act, the Treasury was not in a position to tackle this issue in the context of the U.S./ Canadian negotiations. Treasury officials, instead, came up with a compromise. They agreed to allow commercial banks in the United States to handle securities issued by the Canadian government, thus opening the way for Canadian banks to pursue this lucrative business in the United States. In return, the Canadian authorities agreed to relax regulatory restraints on the growth of some American banks in Canada. The shipping sector was excluded from the agreement because of determined opposition by the U.S. shipping industry. Canadian negotiators asked for exemption from the Jones Act, which limits shipping in American waters to U.S.-owned and-crewed vessels. After resisting Canadian pressures, U.S. negotiators proposed a compromise, exempting Canada from future extensions of the Jones Act to new areas. Even that proved more than the industry could accept, and it succeeded in mobilizing congressional opposition, forcing the administration to withdraw its compromise proposal.
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