MFN applies to all services, but some special temporary exemptions have been allowed. Derogations are possible in the form of so-called Article II-Exemptions.

· initial exemptions: Members were allowed to seek initial exemptions before the Agreement entered into force. Individual Members have listed their initial exemptions in their schedules after consultation with interested Members.

· New/ Later exemptions: New/ Later exemptions can only be granted to new Members at the time of accession or, in the case of current Members, by way of a waiver under Article IX:3 of the WTO Agreement. In the latter case, a request for such a waiver will be made to the Council for Trade in Services. The Ministerial Conference will decide on this issue. A waiver can be allowed only by a decision of three-fourths of the Members.

All exemptions are subject to review; they should in principle not last longer than 10 years. The obligation to apply MFN treatment does not prevent adjacent countries from exchanging advantages in order to facilitate exchanges of services limited to contiguous frontier zones where such services are locally produced and consumed. Further, the GATS allows groups of Members to enter into economic integration agreements or to mutually recognize regulatory standards, certificates and the like if certain conditions are met.

Illustration of a schedule of exemption

LIST OF ARTICLE II MFN EXEMPTIONS Switzerland (GATS/EL/83)

Source: Damien Geradin/David Luff (eds.), The WTO and Global Convergence in Telecommunications and Audiovisual Services, Oxford University Press 2003.

Transparency

Services activities are typically subject to heavy domestic regulation, which makes transparency even more important than in any other Agreements. GATS says governments must publish all relevant laws and regulations. If publication is not practicable, such information must be made available publicly. Within two years (by the end of 1997) they have to set up inquiry points within their bureaucracies to provide information on laws and regulations affecting trade in services. Foreign companies and governments can then use these inquiry points to obtain information about regulations in any service sector. And they have to notify the Service Council of the WTO, at least annually, of any changes in regulations that apply to the services that come under specific commitments.

Domestic regulations

Since domestic regulations are the most significant means of exercising influence or control over services trade, the agreement says governments should regulate services reasonably, objectively and impartially. Disciplines are prescribed in respect of the following aspects:

· qualification requirements are based on objective and transparent criteria;

· technical standards are not more burdensome than necessary to ensure the quality of the service;

· licensing procedures are not in themselves a restriction on the supply of service.

Recognition process: Members are expected to adopt criteria or standards for the authorization, licensing or certification of service suppliers. Such recognition may be granted through harmonization, may be based on a mutual recognition agreement or an arrangement with other countries, or may be accorded autonomously. Different level of qualifications means different treatment granted to service suppliers, wherever the suppliers come from. When two (or more) governments have agreements recognizing each other's qualifications (for example, the licensing or certification of service suppliers), GATS says other members must also be given a chance to negotiate comparable pacts, or to join such harmonization agreements. The recognition of other countries' qualifications must not be discriminatory, and it must not amount to protectionism in disguise.

In order that there be at least some degree of harmonization among these standards and criteria, GATS provides that a Member may recognize:

· the education or experience obtained in another country,

· the requirement met in another country,

· the licenses or certifications granted in another country.

· Balance-of-payment provision

If there is a situation of serious BOP difficulties and external financial difficulties, or if there is a threat of such difficulties, a Member may adopt or maintain restrictions on trade in service on which it has undertaken specific commitments and adopt or maintain restrictions on payments or transfers for transactions related to such commitments. Such measures have to be non-discriminatory, temporary, avoid unnecessary damage to the commercial, economic and financial interests of other Members and must be phased out progressively.

Monopoly suppliers of service

In some cases, governments regulate certain service activities (usually services constituting inputs to other service activities) by granting monopoly or exclusive rights to certain entities to supply the service. Or sometimes a government establishes or provides authority to a small number of service suppliers, and substantially prevents competition among those suppliers in the country. GATS does not prohibit the maintenance of such monopoly right, but the behavior of such service suppliers must be consistent with the general obligations and specific commitments of the Member concerned.

Requirements in respect of monopoly suppliers of service:

· A Member has to ensure that a monopoly supplier of service of its territory does not act in a manner inconsistent with the obligations of the Member regarding MFN treatment and specific commitments;

· When such a supplier competes for the supply of a service outside the scope of the monopoly and yet in a sector covered by the obligations of the Member, the Member has to ensure that the supplier does not abuse it monopoly position to act in a manner inconsistent with the commitments of the Member.

· A new monopoly right in the area of trade in service granted after 1 January 1995 has to follow the procedure for modification of a Member's commitments.

Cases of monopoly: telecommunications, financial services, insurance, railway transport service

For example, if a telecommunications monopoly allows interconnection to suppliers of value-added telecommunications, it should do so without discrimination between suppliers of other Members. If the Member concerned has undertaken a national treatment commitment in value-added services, it must ensure that its telecommunications monopoly provides interconnection to service suppliers of other Members on a national treatment basis.

Competition-restrictive practices

If a Member considers that the business practices of a service supplier are restraining competition and are thereby restricting trade in services, it may request consultation with the Member concerned. The other Member has to enter into consultation with a view to eliminating these practices.

Economic integration

A Member may enter into an agreement of integration for liberalizing trade in services among parties to the agreement, whether the parties are Members or not. Such an agreement must have substantial sectoral coverage. A Member may also enter into an agreement providing for full integration of labor markets among parties to the agreement, such as free entry into the employment markets of the parties.

International payments and transfers

Capital transaction and international transfers and payments for current transactions relating to services activities covered by specific commitments should not be restricted by Members.

If a Member has undertaken a commitment of market access through the cross-border mode of supply of service and if cross-border movement of capital is an essential part of the service itself, the Member, in such a case, is committed to allowing such movement of capital. Further, in the case of a commitment of market access through the mode of commercial presence, a Member is committed to allowing related transfers of capital into its territory.

Once a government has made a commitment to open a service sector to foreign competition, it must not normally restrict money being transferred out of the country as payment for services supplied (“current transactions”) in that sector. The only exception is when there are balance-of-payments difficulties, and even then the restrictions must be temporary and subject to other limits and conditions.

Exceptions

General exceptions: The GATS permits Members in specified circumstances to introduce or maintain measures in contravention of their obligations under the Agreement, including the MFN requirement or specific commitments. The relevant Article provides for measures necessary to:

· protect public morals or maintain public order;

· protect human, animal or plant life or health; or

· secure compliance with laws or regulations not inconsistent with the measures necessary to prevent deceptive or fraudulent practices or to protect privacy of individuals and safety.

Security exceptions: A Member has the flexibility to take measures which it considers necessary for the protection of its essential security interests and those which it takes in pursuance of its obligations under the UN Charter for the maintenance of international peace and security.

Government procurement: The obligations of MFN treatment, specific market access commitments and specific national treatment commitments will not apply to laws, regulations or requirements governing procurement by government agencies for governmental purposes. This exception does not extend to government procurement for commercial resale or for use in the supply of services for commercial sale.

Moreover, the Annex on Financial Services entitles Members, regardless of other provisions of the GATS, to take measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system.

Finally, in the event of serious balance-of-payments difficulties Members are allowed to temporarily restrict trade, on a non-discriminatory basis, despite the existence of specific commitments.

Progressive Liberalization

In services, the Uruguay Round was only a first step in a longer-term process of multilateral rule-making and trade liberalization. Observers tend to agree that, while the negotiations succeeded in setting up the principle structure of the Agreement, the liberalizing effects have been relatively modest. Barring exceptions in financial and telecommunication services, most schedules have remained confined to confirming status quo market conditions in a relatively limited number of sectors. This may be explained in part by the novelty of the Agreement and the perceived need of Members to gather experience before considering wider and deeper commitments. Moreover, many administrations needed time to develop the necessary regulation -- including quality standards, licensing and qualification requirements -- that ensures that external liberalization is compatible with, and conducive to, core policy objectives (quality, equity, etc.) in socially or infrastructurally important services.