WORLD TRADE ORGANIZATION

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1 WORLD TRADE ORGANIZATION WT/REG238/1 9 May 2008 ( ) Committee on Regional Trade Agreements FACTUAL PRESENTATION Protocol of Montevideo on Trade in Services in the MERCOSUR Report by the Secretariat This report, prepared for the consideration of the Protocol on Montevideo on Trade in Services in the MERCOSUR has been drawn up by the WTO Secretariat on its own responsibility and in full consultation with the Parties. The report has been drawn up in accordance with the rules and procedures contained in the Decision for a Transparency Mechanism for Regional Trade Agreements (WT/L/671). Any technical questions arising from this report may be addressed to Mrs. Maria Pillinini (tel: ) and Mr. Martin Roy (tel.: ).

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3 Page iii TABLE OF CONTENTS Page I. TRADE ENVIRONMENT 1 II. CHARACTERISTIC ELEMENTS OF THE PROTOCOL 13 A. BACKGROUND INFORMATION 13 B. SCOPE AND DEFINITIONS 15 C. DENIAL OF BENEFITS 15 D. GENERAL PROVISIONS ON TRADE IN SERVICES Market access and national treatment MFN Movement of natural persons 17 E. LIBERALIZATION COMMITMENTS Argentina 18 (a) Horizontal commitments 18 (b) Sector-specific commitments Brazil 19 (a) Horizontal commitments 19 (b) Sector-specific commitments Paraguay 22 (a) Horizontal commitments 22 (b) Sector-specific commitments Uruguay 23 (a) Horizontal commitments 23 (b) Sector-specific commitments 23 F. REGULATORY PROVISIONS Domestic regulation Recognition Subsidies Safeguards Other 25 (a) Government procurement 25 (b) Competition policy 26 (c) Intellectual property rights 27 G. SECTOR-SPECIFIC PROVISIONS Financial Services Transport Services 28 (a) Land and water transport services 28 (b) Air transport services 28 H. GENERAL PROVISIONS Transparency Payments and capital movements Exceptions Accession Institutional Framework Dispute Settlement Relationship with agreements concluded by the Parties 34 ANNEX I 36 ANNEX II 38

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5 Page 1 PROTOCOL OF MONTEVIDEO ON TRADE IN SERVICES IN THE MERCOSUR Factual Presentation by the Secretariat I. TRADE ENVIRONMENT 1 1. In 2006, MERCOSUR as a whole ranked 15 th in world exports of commercial services (excluding intra-eu (25) trade) and 11 th as regards imports. 2 During the period , Argentina and Brazil have remained net importers of services and Uruguay has been a net exporter; as for Paraguay, trade figures that take into account "royalties" place it as a net services exporter, but if these are disregarded, then Paraguay would qualify as a net services importer. 2. In 2006, Argentina's exports of services reached US$7.2 billion and imports were US$8.1 billion, ranking it in the 48th and 50th positions in world exports and imports of services. The evolution of Argentina's trade in services for the period , reported in Chart I.1, shows a significant drop in 2002 by 25% for exports and 41% for imports compared to Since the economic crisis in 2002, trade has increased consistently and by 2006 exports had increased by 66% as compared to the 2001 level, while imports had reached the 2001 level. No figures have been made available regarding the trade vis-à-vis the other MERCOSUR Parties. Chart I.1 Argentina, trade in services to world, US$billion Total imports Total exports Note: Source: Data on trade with MERCOSUR Parties were not provided by the Argentinian authorities. Ministry of Economy, Argentina. 1 Aggregate figures in this section are from the WTO publications "International Trade Statistics 2007" and "Trade Profiles 2007". These figures may therefore not match data provided by national authorities (reflected in particular in the Charts), in particular due to the definition of "services". 2 For trade in goods under the same basis, MERCOSUR ranks 13 th both in exports and imports.

6 Page 2 3. Argentina's services imports from the world increased by 33% between 2003 and Chart I.7, which reports average imports for by sectors, shows that two services sectors, namely travel and transportation, accounted for 63.4% of total imports, with business services and royalties accounting for an additional 11.8% and 7.8% of imports, respectively, with all others sectors and sub-sectors being below 5%. The increase in imports took place in all sectors and sub-sectors, with the exception of personal travel and construction; transportation services were a major contributor to the increase in imports almost doubling from 2003 to 2005 while the largest increase was in maritime transport. 4. Argentina's services exports to the world registered an increase of 41% between 2003 and Average exports for by sector in Chart I.7, indicate that the three main sectors were travel, transportation and business services, which together represented 86.5% of total exports; all other sectors or sub-sectors accounted for less than 5% of exports. Exports have increased in all sectors and/or sub-sectors with the exception of business travel; increases in real terms have been particularly important in travel, business and transportation services. 5. Brazil is by far the largest MERCOSUR trader in services; in 2006, imports and exports of services reached, respectively, US$26.9 and US$17.9 billion, placing Brazil respectively in 27 th and 32 nd place in world trade. For 2007, world imports of services amounted to US$37.2 and exports to the world reached US$23.9 billion. Chart I.2 shows that since 2002, trade vis-à-vis the world and MERCOSUR increased constantly, with the exception of a decrease in exports towards MERCOSUR Parties in 2006 as compared to However, the ratio of Brazilian trade with MERCOSUR vis-à-vis the world has decreased during that same period, and by 2006 it was at the level of 2.5% of imports and 1.1% for exports. By 2007, world imports and exports had increased by more than 250% compared to 2002 levels, illustrating the dynamism of the services sector in Brazil. 3 Statistics for trade in travel and transportation services by country are not available; therefore, and throughout this section, Brazilian imports from and exports to MERCOSUR Parties do not include figures for these two sectors. This is of particular importance given that they account for a significant percentage of Brazilian trade in services (around 40% in ).

7 Page 3 Chart I.2 Brazil, trade in services to world and MERCOSUR Parties *, US$billion 40 US$billion Left hand scale: Total imports Total exports Right hand scale: Imports from Mercosur Exports to Mercosur Source: Central Bank of Brazil. * Trade with MERCOSUR excludes data on travel and transportation, for which a breakdown by country is not available. 6. As reflected in Chart I.7, Brazilian imports of business services and transportation accounted on average for 52.3% of imports, with travel being the third largest importer (the relevant percentages are 29.5%, 22.7% and 17.3%, respectively). The major sub-sectors in business services were rental and leasing (more than half of the sector, 52.1%) and professional services (36.1%). All sectors registered an increase in imports during this period, with the exception of communication services which dropped by 69.2% between 2003 and On the other extreme of the spectrum, imports of construction services have increased by a factor of six during the same period although in absolute terms they remained negligible. 7. Chart I.7 shows that three sectors business, travel and transportation accounted for 83.9% of Brazilian exports to the world on average for the period Balance-of-payments figures show that for the business sector, more than half of the exports were from architectural, engineering and other technical services, and installation, maintenance and rental of offices (representing respectively 54.8% and 36.3% of the total exports of business services). With the exception of communications and audiovisual services, exports by all other sectors and sub-sectors increased during this period; in particular, revenues from professional services in 2006 were 26 times higher than in 2001, reaching 7.4% of total exports in The comparison of Brazil's trade in services by sector of activity vis-à-vis MERCOSUR reported in Charts I.3 and I.4 and the world is difficult because a breakdown by country is not available for travel and transportation sectors of major importance in Brazilian trade. Brazilian imports from MERCOSUR of business services were mainly focused on professional and distribution services (the former reaching three-quarters of the total), with rental and leasing services occupying the third position. Royalties and licences constituted the second sector of importance as regards imports; these were followed by computer and informatics and communication services, all of which have consistently reported an upward trend during the period analysed. The profile of Brazilian

8 Page 4 exports towards MERCOSUR Parties is similar to that towards the world, with business services largely concentrated in technical and professional services (between 80%-90% of business services exports in ). During , exports of computer and informatics services were subject to important fluctuations. Chart I.3 Brazil, imports from MERCOSUR Parties by sector of activity, Million US$ Computer and informatics Communications Construction Business services Royalties and licences Insurance Other financial services Government services Personal, cultural and recreational services Note: Excluding data on travel and transportation, for which a breakdown by country is not available. Source: Brazilian Authorities. Chart I.4 Brazil, exports towards MERCOSUR Parties by sector of activity, Million US$ Computer and informatics Communications Construction Business services Royalties and licences Insurance Other financial services Government services Personal, cultural and recreational services Note: Excluding data on travel and transportation, for which a breakdown by country is not available. Source: Brazilian Authorities. 9. Paraguay is the smallest of the MERCOSUR traders in services; in 2006, imports from and exports to the world reached respectively US$406 and US$716 million, making Paraguay the world's 143 rd importer and 113 th exporter of services. During , as shown in Chart I.5, exports of services to the world increased consistently growing by 45.3% by 2006 compared to 2001 levels;

9 Page 5 imports in 2006 were 8.8% above the 2001 level. No figures have been made available regarding trade vis-à-vis other MERCOSUR Parties. Chart I.5 Paraguay, trade in services to world, US$million 1, Left hand scale: Total imports Total exports Note: Source: Data on trade with MERCOSUR Parties were not provided by the Paraguayan authorities. Departament of Informatics, Paraguay. 10. Chart I.7 shows that, of all of the MERCOSUR Parties, imports were least diversified in Paraguay, with two sectors transportation and travel accounting for around three-quarters of services imports in Insurance accounted for an additional 13.1% of imports; all the other sectors had a small participation in total trade. It is worth noting the relatively small share of business services (4.1%) compared to that in other MERCOSUR Parties. 11. Royalties and licences were by far the largest services sectors as regards exports, accounting for 33.2% of exports on average during ; this can be explained by the very high revenue collected thorough the exploitation of electricity in the Itaipú and Yacyretá hydroelectric power stations. Business services accounted for an additional 30.6% of exports while transportation and travel accounted for 13.6% and 11% respectively. 12. Uruguay's imports and exports of services in 2006 reached respectively US$885 and US$1,258 million, making it respectively the world's 116 th and 96 th trader. Chart I.6 shows a constant increase in trade in the period ; exports and imports have increased at similar rates in all years except in 2004, when exports registered a very high increase. In 2006, trade growth has slowed down but in 2007 both exports and imports have increased by around 27% as compared to the 2006 levels. No figures have been made available regarding trade vis-à-vis other MERCOSUR Parties.

10 Page 6 Chart I.6 Uruguay, trade in services to world, ,000 US$ million 1,800 1,600 1,400 1,200 1, Total imports Total exports Note : Source: Data on trade with MERCOSUR Parties were not provided by the Uruguayan authorities. Central Bank of Uruguay. 13. Chart I.7 illustrates that on the basis of the average for , around two-thirds of Uruguay's imports were in travel and transportation services, with business services being the third most important sector. Compared to 2001 levels, imports of business services have shown the greatest increase (an increase of 240% between 2001 and 2005); other sectors where 2005 imports have bypassed the 2001 levels were transportation, computer and information, and government services.

11 Page 7 Chart I.7 MERCOSUR Parties, trade in services with the world by sector of activity, annual average Per cent Royalties 7.8 Business 11.8 Argentina's imports from the world Argentina's export to the world Financial 2.1 Other 2.4 Other 3.8 Computer 2.3 Personal 2.5 Insurance 2.8 Communication 3.3 Computer 3.8 Communication 3.6 Travel Government Business 20.8 Travel 44.2 Transportation 23.7 Total: US$6.7 billion Brazil's imports from the world Insurance 3.4 Financial 3.5 Royalties 6.2 Other 3.1 Business 29.5 Transportation 21.5 Total: US$5.3 billion Brazil's exports to the world Communication 2.4 Other 2.6 Financial 3.3 Governnment 7.7 Business 40.5 Computer 7.1 Government 7.2 Transportation 19 Travel 17.3 Transportation 22.7 Travel 24.5 Total: US$19 billion Paraguay's imports from the world Business 4.1 Other 3.0 Government 6.0 Transportation 53.2 Insurance 13.1 Total: US$13 billion Paraguay's exports to the world Communication 2.4 Insurance 2.8 Goverrnment 5.1 Travel 11.0 Other 1.3 Royalties 33.2 Transportation 13.6 Travel 20.6 Total: US$328.1 million Uruguay's imports from the world Communication 2.4 Other 3.9 Insurance 3.0 Government 4.7 Business 15.6 Transportation 44.1 Business 8.2 Business 30.6 Total: US$589.9 million Uruguay's exports to the world Goverrnment 2.4 Other 2.8 Computer 4.8 Financial 5.4 Travel 43.6 Travel 26.2 Total: US$787.3 million Transportation 32.8 Total: US$1.1 billion Source: BOP statistics from national authorities. Note: Equivalent data for intra-mercosur trade has not been provided by the Parties, with the exception of Brazil; these are reflected in Charts I.3 and I.4.

12 Page Chart I.7 indicates that on the basis of the average for , Uruguay's two major exporting sectors were travel and transportation services, with the latter taking the lead. Business services came third and financial services, excluding insurance, followed suit. 4 The most dynamic export sectors from 2001 to 2005 were computer and related services as well as business services, with exports in 2005 around five times those in 2001; together, they represented 13.2% of total exports in On the other side of the spectrum, communication, personal and cultural services and insurance services saw a significant loss in exports revenues in 2005 as compared to Chart I.7 indicates that on the basis of the average for , Uruguay's two major exporting sectors were travel and transportation services, with the latter taking the lead. Computer and informatics or information came third and financial services, excluding insurance, followed suit. 15. As reflected in Chart I.8, the stock of foreign direct investment (FDI) in Argentina dropped by almost half between 2001 and While FDI has increased consistently since then, by 2004 none of the sectors had achieved the FDI levels prevailing in Petroleum and manufacturing have suffered less from this disinvestment; in services, transport and communications were the only sectors where the fall had not reached 50%. Chart I.8 Argentina, Stock of FDI by economic activity, US$billion Petroleum Electricity, gas and water Banks Mining Commerce Other Manufacturing industry Transport and communications Note: Provisional data for Source: DNCI - INDEC 4 While aggregate numbers for the business sector as a whole placed it as the third major export sector, if sectors are taken at a more disaggregate level computer and information would become the third major sector of exports for Uruguay.

13 Page Chart I.9 shows that FDI in Brazil has mainly been directed towards services and manufacturing, with FDI in agriculture and mining being comparatively of minor importance. 5 In services, the stock of FDI was highest in transport and communications. FDI stock increased by 147.1% between 1995 and 2000, and by 2007 it had tripled as compared to Inward flows of FDI from 2001 to 2007 reached US$150.4, with manufacturing, and transport and communications being the major recipients of FDI during that period. Chart I.10 shows that FDI by MERCOSUR countries in Brazil represented around 3% of the stock in 2000 and 1.65% of total FDI inward flows to Brazil. Participation of MERCOSUR FDI inward flows has fluctuated between 0.8% and 1.8% of world FDI flows during ; Uruguay and Argentina respectively accounted for around twothirds and one-third of this investment, while Paraguay has had negligible levels of FDI in Brazil. Chart I.9 Brazil, FDI by economic activity, and US$ billion Stock 40 US$ billion Inward flows Petroleum Mining Other agriculture Manufacturing Electricity, gas, water Commerce Transport and communications Financial Other services All sectors Note: Data on "stock" only includes equity capitals; it does not include intercompany loans and real state acquisitions. Data on "inward flows" include inflows of investment, and convertion of loans and financing of direct investment. Source: Brazilian Central Bank. 5 The Census of Foreign Capitals in Brazil considers, in measuring FDI position, only equity capital (excluding intercompany loans and real estate acquisitions); figures reflected in this document are therefore based on that definition.

14 Page 10 Chart I.10 Brazil, FDI from MERCOSUR countries, and US$billion 3.00 Stock US$million 400 Inward flows Argentina Paraguay Uruguay Source: Brazilian Central Bank. 17. Chart I.11 shows that FDI stock in Paraguay decreased significantly in 2002; from 2003 onwards, it has increased and by 2006 it had more than doubled as compared to 2003 levels. FDI from MERCOSUR countries during the period under review represented around 20% of Paraguay's total FDI; in 2006 this ratio had reached its highest level of 23%, with FDI by MERCOSUR amounting to US$360.1 million. Data for FDI by activity, available only for the period , indicate that services were the most attractive sector, and one where flows and stock consistently increased during ; during that same period, negative inflows of FDI were registered for the other two sectors of economic activity.

15 Page 11 Chart I.11 Paraguay, FDI by sector of activity, US$ billion Stock US$million Flows 2006 Note: Provisional data for Source: Central Bank of Paraguay. Agriculture and mining Manufacturing Services All sectors 18. Uruguay's stock of FDI, as reflected in Chart I.12, has consistently increased; in 2006, stocks represented three times those in The increase was particularly marked in 2006 compared to %; however, the absence of data on FDI by activity or by origin does not permit a more in-depth analysis of the increase. As indicated in Chart I.13, for the period , around one fifth of FDI flows into Uruguay originated from other MERCOSUR countries, in particular Argentina; the ratio of FDI flows from MERCOSUR vis-à-vis the rest of the world has decreased in but has followed an upward trend in As regards flows of FDI by sector of activity, agriculture and hotels and restaurant have been the major recipients of FDI during While only one sector namely electricity, gas and water has registered a disinvestment though minimum (-0.4%) during that period, few other sectors, including agriculture, have registered negative flows in one of the years under consideration. 6 As of 2003, FDI figures also include investment in land.

16 Page 12 Chart I.12 Uruguay, FDI Stock and flows from the world, Thousand US$ Note: From 2003 ownwards, includes investment in land. Source: Central Bank of Uruguay. Stock Flows Chart I.13 Uruguay, FDI flows by country of origin and by economic activity, Flows by origin Thousand 900 US$ 800 Flows by sector of activity Argentina Brasil Paraguay Rest of the world Agriculture Electricity, gas, water Commerce Transport and communications Business services Manufacturing Construction Hotels and restaurants Financial Other

17 Page 13 II. CHARACTERISTIC ELEMENTS OF THE PROTOCOL A. BACKGROUND INFORMATION 19. The Protocol of Montevideo on Trade in Services in the MERCOSUR the Southern Common Market comprising Argentina, Brazil, Paraguay and Uruguay (hereinafter "the Protocol") was signed by the Parties on 15 December 1997; its Annexes and the Parties' initial lists of specific commitments were adopted on 23 June The Protocol along with initial lists entered into force on 7 December 2005, following ratification by three of the Parties, namely Argentina, Brazil and Uruguay The Protocol is one of the legal instruments concluded under the auspices of the Treaty of Asunción which established MERCOSUR. The Asunción Treaty, in force since November 1991, aims at creating a common market with free movement of goods, services, and persons; its first step, the implementation of a customs union, has been in place since 1 January The goods aspects of the Treaty of Asunción, notified in March 1992 to the GATT 1947 under the Enabling Clause, was examined in the WTO Committee on Regional Trade Agreements (CRTA). 9 The Protocol on the accession of Venezuela to the Treaty of Asunción was signed in July 2006; as of end-march 2008, ratification procedures had not been completed and accession was therefore not in force Pursuant to GATS Article V:7, the Protocol of Montevideo on Trade in Services in the MERCOSUR was notified to the Council for Trade in Services (CTS) on 5 December 2006 (S/C/N/388, and Corr.1 in the English version) as liberalizing trade in services within the meaning of GATS Article V. 11 For information purposes, the text of the Protocol was submitted to the Committee on Trade and Development (WT/COMTD/60). At the meeting held on 1 March 2007, the CTS took note of the notification and referred the Protocol to the CRTA (S/C/M/86). 22. The Protocol is of indefinite duration and aims at applying the relevant services provisions of the Treaty of Asunción in light of the Treaty's objective of creating a common market with free movement of goods, services, and persons. It establishes a programme for the liberalization of intra-trade in services within an overall implementation period of ten years from the date of entry into force, i.e. by December The Parties have agreed (Article XXVI) that the Protocol may be revised taking into account trends and regulation of trade in services in MERCOSUR, as well as progress achieved in relation to trade in services, in particular in the WTO. Particular reference is made to possible amendments to Part IV on institutional provisions. 7 Decisions of the Council of the Common Market N o 13/97 and 9/98, respectively. 8 Ratified by Argentina on 17 July 2002 (Protocol and list of specific commitments), by Brazil on 8 November 2005; and by Uruguay on 20 December 2004 (Protocol and list of specific commitments). Ratification by Paraguay is still pending. 9 GATT document L/6985, 5 March 1992 and WTO document WT/COMTD/5/Rev.1, 25 October The CRTA has concluded the examination on 3 April 2006; relevant documentation can be found in the WT/COMTD/1/- series. 10 In accordance with Article XXIX of the Montevideo Protocol, such accession also applies to the services Protocol i.e. once the accession is in force, Venezuela will be a Party to the Montevideo Protocol. 11 An early announcement of the notification was made by the Parties at the CTS meeting held on 30 November 2006 (S/C/N/85).

18 Page 14 Box II.1 Outline of the Protocol of Montevideo on Trade in Services in the MERCOSUR Preamble Part I - Purpose and Scope of Application Article I Purpose Article II Scope of application Part II - Obligations and General Rules Article III Most-favoured-nation treatment Article IV Market access Article V National treatment Article VI Additional commitments Article VII Schedules of Specific Commitments Article VIII Transparency Article IX Disclosure of confidential information Article X Domestic regulation Article XI Recognition Article XII Competition Article XIII General exceptions Article XIV Security exceptions Article XV Government procurement Article XVI Subsidies Article XVII Denial of benefits Article XVIII Definitions Part III - Liberalization Programme Article XIX Negotiation of specific commitments Article XX Modification or suspension of commitments Part IV - Institutional Provisions Article XXI Common Market Council Article XXII Common Market Group Article XXIII MERCOSUR Trade Commission Article XXIV Settlement of disputes Part V - Final Provisions Article XXV Annexes Article XXVI Review Article XXVII Term Article XXVIII Notifications Article XXIX Accession or denunciation Article XXX Denomination Appendix I: Sectoral Annexes Annex on Movement of Natural Persons Supplying Services Annex on Financial Services Annex on Land and Water Transport Annex on Air Transport Services Appendix II: Schedules of Specific Commitments Schedule of Argentina Schedule of Brazil Schedule of Paraguay Schedule of Uruguay 23. Since the Protocol in December 1997, six rounds of negotiations on specific commitments have been conducted, the last concluded in July The Schedules of Specific Commitments have to be incorporated into national legislation (Article XXVII:3); 12 their entry into force is subject to the same rule as that of the Protocol itself that is they enter into force 30 days after the deposit of the third instrument of ratification. A seventh round of negotiations has been launched in June Article XXVII:3 states that "The Schedules of Specific Commitments shall be incorporated into the national legal system in accordance with the procedures laid down in each State Party."

19 Page 15 (GCM Res. 16/07) on the basis of parameters and guidelines agreed by the Parties in November 2007 (see also paragraph 31 below) As of end-march 2008, the Schedules of Specific Commitments in force for Argentina, Brazil and Uruguay are the initial Schedules; therefore, this document is based on the trade in services regime created by the Montevideo Protocol and its original Schedules. Table AI.1 in the Annex summarizes the status of ratification of the Schedules by individual MERCOSUR Parties. In the absence of ratification by Paraguay, its schedule is not in force; trade in services between other MERCOSUR Parties and Paraguay is therefore carried out in accordance with the WTO's General Agreement on Trade in Services. B. SCOPE AND DEFINITIONS 25. The Protocol applies to measures adopted by the Parties affecting trade in services, which is defined, as in GATS, through four modes of supply (see Article II on scope). The measures concerned are those taken at all levels of government and authorities i.e. central, state, provincial, departmental, municipal or local and non-governmental bodies, in exercising powers delegated by any such governments or authorities; Parties are to take the necessary measures to ensure that the Protocol's provisions are observed by all of these entities. The following are not covered by the Protocol: "services supplied in the exercise of a governmental authority", as defined in Article II:3(c); a different definition applies for financial services and is contained in paragraph 1(b)-(d) of the Annex on financial services; measures affecting natural persons seeking access to a Party's employment market or regarding citizenship, residence or employment on a regular basis (paragraph 2 of the Annex on movement of natural persons); and on a temporary basis, bilateral agreements on land and water transport services in force by, or signed prior to, 7 December i.e. the date of entry into force of the Protocol (paragraphs 3 and 5 of the Annex to the Montevideo Protocol on land and water transport services; see paragraphs below). Also excluded are commercial air traffic rights for routes established under the terms of bilateral air services agreements signed between the States Parties; cabotage traffic remain excluded (paragraphs 2 and 3 of the Annex to the Montevideo Protocol on air transport services; see paragraph 93 below). 26. The promotion and protection of investments is covered by the Protocol of Colonia signed in 1994 but not yet in force Article XVIII contains the definitions applying to the Protocol. C. DENIAL OF BENEFITS 28. Article XVII of the Protocol deals with the denial of benefits; it provides that benefits may be denied by a Party to a service supplier in another Party upon demonstration that the service is supplied 13 CMC/DEC. N o 24/07, CMC/DEC. N o 30/06, GMC/RES. N o 16/07. The deadline of December 2007 for setting parameters and guidelines for the seventh round has not been met. 14 None of the MERCOSUR countries has ratified this Protocol.

20 Page 16 by a person from a country that is not a MERCOSUR Party. 15 Denial of benefits is subject to previous notification and the holding of consultations. It can be noted that to be considered as a supplier from another State Party, a legal person must, among other things, have its head office within MERCOSUR (Article XXVIII(k)). D. GENERAL PROVISIONS ON TRADE IN SERVICES 29. The Protocol's architecture is similar to that of the GATS's "positive list" approach; thus, while some Articles apply only to those sectors where commitments have been undertaken in the Schedule (e.g. market access and national treatment), others in particular MFN treatment apply to all trade in services. 30. Article VI provides that Parties are free to negotiate commitments that would normally not be subject to scheduling under Articles IV (market access) and V (national treatment) such as on qualifications, standards, licensing; in such cases, these commitments shall also be inscribed in the Party's Schedule of Specific Commitments. 31. The modalities, criteria and instruments for the negotiation of specific commitments on the first phase of MERCOSUR's liberalization, initially agreed in December 1998 and complemented in June 2000, 16 binds the status quo as a general principle; modalities and criteria for starting dismantling protection are still to be defined. 1. Market access and national treatment 32. Article VII provides that each Party set out in a schedule the sectors in which it undertakes commitments for each corresponding mode of supply, indicating the terms, limitations and conditions of market access and national treatment. 33. As determined by its Schedule of Specific Commitments, pursuant to Article IV (Market access) of the Protocol, neither Party may maintain or adopt the following six types of measures, whether for a regional subdivision or the entire territory: the number of service suppliers; the total value of services transactions or assets; the total number of service operations or the total quantity of service output, except measures that limit inputs to be used for the supply of services; the total number of natural persons that may be employed in a particular service sector or that a service supplier may employ and which are necessary for, and directly related to, the supply of a specific service; the specific type of legal person or joint venture through which a service supplier may supply a service; and the participation of foreign capital in terms of maximum percentage limits on foreign shareholdings or the value of individual or aggregate foreign investment. Pursuant to Article VII (Schedules of Specific Commitments), all MERCOSUR Parties have listed in their schedule the sectors and sub-sectors where they undertook market access as well as national treatment commitments, along with the non conforming measures that they are allowed to use; details on these are provided in section E of this document. 34. In addition, a decision adopted in December 2001 provides that if a Party had not regulated a service sector or sub-sector, it must not apply restrictive measures to service providers from other MERCOSUR countries in cases where the other three members had inscribed "none" in their schedules for that sector or sub-sector (CCM Dec. 11/01). This aims at insuring that, in any future scheduling, a Party will not restrict market access nor national treatment whenever the other Parties had already fully committed the relevant sector/mode of supply. 15 In order to benefit from the agreement, a service provider has to comply with the definition of "legal person of another State Party", as stated in Article XVIII(k); in doing that, account is taken of each Party's legislation and any relevant conditions inscribed in the Schedule. 16 GCM RES. N o 73/98 and N o 36/00, respectively.

21 Page National treatment is dealt with in Article V, which specifies that each State Party shall accord to services and service suppliers of any other State Party treatment no less favourable that that it grants to its own services and service suppliers. Like for the market access obligation, each State Party sets out in its Schedule the sectors and modes to which this obligation will apply, along with relevant limitations. Article V indicates that national treatment either through formally identical or formally different treatment between national and foreign services and /or suppliers exists when the treatment granted does not modify the conditions of competition in favour of national services or suppliers of like services. It also specifies that nothing obliges the Parties to compensate for intrinsic competitive disadvantages resulting from the foreign nature of the relevant services or service suppliers. 2. MFN 36. Article III contains the MFN clause of the Protocol; it mirrors the relevant provision in the GATS, but does not provide the possibility for MFN exemptions. Thus, with respect to all measures covered by the Protocol and irrespective of whether or not the Parties have undertaken commitments in sectors, sub-sectors, activities or measures the treatment granted by a Party to any other Party or third country is to be extended immediately and unconditionally to services and services suppliers of any other Party. Article III:2 embodies an MFN derogation for the granting of advantages to neighbouring countries in order to facilitate exchanges limited to contiguous frontier zones of services that are both locally produced and consumed. While no general derogation is provided for in relation to concessions granted to third parties in the context of preferential agreements covering trade in services, the sectoral annexes provide that the MFN clause does not apply vis-à-vis bilateral air, land and water transport agreements; these annexes are however to be revised by December Movement of natural persons 37. Like in the GATS, the Protocol's Annex on the movement of natural persons applies to measures affecting natural persons who are service suppliers of a Party, and natural persons of a Party employed by a service supplier of a Party. Among other things; it: (a) (b) (c) excludes measures regarding natural persons seeking access to employment in a Party, citizenship, residence or employment on a permanent basis, from coverage the Protocol. In that respect, some instruments have been negotiated by the Parties (see paragraph 38(a)-38(b) below); clarifies that Parties are free to apply measures to regulate the entry of natural persons into, or their temporary stay in, its territory, provided they are not applied in such a manner as to nullify or impair the benefits of a specific commitment; and unlike in the GATS, states that the labour-related laws of the place in which the service contract is carried out shall apply, to regulate labour-related situations affecting natural persons covered by the Agreement. 38. A number of instruments, the majority of which not ratified and in force by end-march 2008, have also been negotiated by the Parties, with relevance for the movement of natural persons: (a) "Agreement on the Internal Immigration Normalization of MERCOSUR Citizens" (CCM Dec. 28/02, adopted in December 2002), which allows the nationals of any Party to carry out immigration formalities in the country where they are living; In parallel, a similar agreement has been signed between the MERCOSUR Parties, Bolivia and Chile.

22 Page 18 (b) (c) (d) (e) "Agreement on Residence Status for Nationals of the MERCOSUR State parties" (CCM Dec. 28/02, adopted in December 2002), providing the terms and requirements for MERCOSUR nationals to obtain legal residence in one of the Parties; the creation of a "MERCOSUR visa" for higher level professionals - i.e. managers and executive directors, administrators, directors, delegated-managers or legal representatives, scientists, researcher, professors, artists, sportsmen, journalists, highly qualified or specialized - to be granted for two years with the possibility of one extension (CCM Dec. 16/03, adopted in December 2003); the establishment of a "Mechanism for Temporary Professional Practice" (CCM Dec. 25/03, adopted in December 2003); and "Agreement for the Facilitation of Business Activities" (CCM Dec. 32/04, adopted in December 2004), in force for Argentina, Brazil and Uruguay since 27 November E. LIBERALIZATION COMMITMENTS 1. Argentina 39. Argentina's list of initial commitments under MERCOSUR's Protocol include specific commitments in seven of the 11 sector groups found in the Services Sectoral Classification List (SSCL). 18 It covers about 40% of all services sub-sectors in the List. Argentina's commitments tend to replicate, with few exceptions, its existing commitments under the GATS. (a) Horizontal commitments 40. Argentina's horizontal commitments in MERCOSUR are the same as under the GATS; they include both market access and national treatment limitations e.g. Argentina's horizontal mode 4 commitments under MERCOSUR are limited to senior personnel, namely managers, executives and specialists. Mode 4 bindings at the level of sector-specific commitments always refer to horizontal commitments. (b) Sector-specific commitments 41. Argentina's schedule under the Protocol of Montevideo includes full commitments under modes 1 to 3 in such sectors as computer and related services, courier services, wholesale and retail distribution, franchising, tourism and travel related services, and in all construction services except general construction work for civil engineering. 42. Like in the GATS, Argentina's MERCOSUR commitments cover essentially all basic and value-added telecommunications services, with few limitations. 19 Commitments under modes 1 and 3 for voice telephony, international data, facsimile and telex services, and leased circuit services provide for full commitments as of 8 November For mobile services, the schedule provides for the maintenance of a duopoly in telephony and allows authorities to limit the number of suppliers of personal communication services per operating area on the basis of perceived needs. Other telecommunication services except telegraph services for which there are no commitments provide for full commitments in modes 1 to Document MTN.GNS/W/ Argentina has subscribed to the "Reference Paper" on regulatory obligations for basic telecommunications, developed in the Post-Uruguay Round negotiations on basic telecoms.

23 Page Argentina's initial commitments on financial services under the Montevideo Protocol also mirror those it contracted in the extended GATS negotiations in this area. In insurance, commitments under mode 3 provide that authorization for the establishment of new entities is suspended. Commitments on life and non-life insurance are unbound for modes 1 and 2, while full commitments are undertaken for maritime and air transport insurance services, as well as for reinsurance and retrocession. There are no specific commitments on insurance intermediation and services auxiliary to insurance. 44. Argentina has undertaken commitments in all sub-sectors encompassing banking and other financial services, each with full commitments in modes 2 and 3. Mode 1 is left unbound, except for "advisory and other auxiliary financial services" and "provision and transfer of financial information and financial data processing services", where no limitations are maintained Commitments on professional services, similar to those under GATS, are undertaken on legal services; accounting, auditing and bookkeeping services; architectural services; and engineering services. Full commitments in modes 1 to 3 are undertaken in these sub-sectors; however, the schedule specifies that for all professional services sectors listed (for modes 1, 3 and 4), "(p)ersons seeking to provide professional services must obtain recognition of their professional degree, enrol in the relevant college and establish legal domicile in Argentina" and notes that the legal domicile condition does not mean that residency is required. Unlike in its GATS schedule, Argentina's MERCOSUR commitments also comprise psychology services (full commitments under mode 3), as well as integrated engineering services and urban planning and landscape architectural services (although modes 1 and 2 are unbound and mode 3 is unbound for market access). 46. Argentina's MERCOSUR schedule of commitments does not include sectors such as education, environmental, health, audiovisual, or transport services Brazil 47. Brazil's list of initial commitments under MERCOSUR's Protocol include specific commitments in seven of the 11 sector groups found in the SSCL and covers almost 30% of all services sub-sectors in the List. (a) Horizontal commitments 48. Brazil's horizontal commitments in the MERCOSUR Protocol, which relate to modes 3 and 4, are almost identical to those under the GATS. The differences are as follows: (a) any existing proportionality (i.e. ratio of Brazilian employees vis-à-vis total employees) is waived for natural persons from MERCOSUR working as specialized technicians, provided the requirements of the "necessity test" administered by the Ministry of Labour are fulfilled; however, a proportional of 2 Brazilians to 3 employees still applies as related to juridical persons engaged in communications, land transportation, commercial stores and offices, insurance, advertising, hotels and restaurants. While that same requirement is included in Brazil's GATS schedule, the Montevideo schedule introduces an additional commitment by Brazil, in the context of reforms on labour legislation, to attempt to reduce the required proportionality 20 For banking and other financial services, financial operations by the Government and State-owned enterprises are excluded from the conditions specified in the schedule; they may carry out operations through their own designated entities. 21 Regarding transport services, it is noted, however, that commitments included in the initial list result from the application of bilateral and multilateral agreements pursuant to the Protocol's Annexes on Air Transport Services and Land and Water Transport Services.

24 Page 20 vis-à-vis natural persons from a MERCOSUR party on the basis of a necessity test and also to work with other MERCOSUR parties to try to increase flexibility vis-à-vis other limitations on the movement of natural persons; and (b) Market access and national treatment limitations in the area of subsidies, unbound under the GATS, do not appear in the Montevideo schedule; thus, the relevant disciplines are those of the Protocol. 49. At the sector-specific level, commitments under mode 4 generally include a cross-reference to horizontal commitments. (b) Sector-specific commitments 50. Brazil's Schedule under the Protocol includes various sub-sectors not listed under the GATS, including a significant number of professional services such as: (a) engineering design services n.e.c, and other engineering services provided during the construction and installation phase; limitations vis-à-vis other engineering services listed under the GATS also apply to these services; (b) pharmacy, psychology, library and computer and related services (CPCs 841, 842, 843, 844 e 849) are bound with no limitations on modes 1-3; (c) (d) R&D in the natural sciences (chemistry, biology and interdisciplinary) is unbound for modes 1-2, bound with no limitations on mode 3; and technical testing and analysis services, and related scientific and technical consulting services are unbound for modes 1-2; for mode 3, foreign providers are required to from a specified legal entity jointly with Brazilian companies with the latter having leadership. 51. In communications, courier services are covered to a larger extent as compared to the GATS i.e. they cover more multi-modal services. 52. As regards telecommunications, the MERCOSUR schedule is identical to the commitments that Brazil had negotiated during the post-uruguay Round negotiations on basic telecommunications. However, unlike the MERCOSUR commitments, the commitments emerging from these WTO negotiations never came into force. Brazil therefore has no commitments on telecommunications under the GATS; however, the Brazilian service offer made in the context of the Doha round of negotiations does include telecommunication commitments. 53. Brazil has a number of limitations applying to all its telecommunication services commitments. For example, licenses for services supplied in Brazil are only granted to juridical persons that have their head office and management located in Brazil, and EMBRATEL has exclusive rights to link with Intelsat and Inmarsat. 54. Regarding basic telecommunication services, Brazil has commitments for public domestic and international services on a facilities basis only (excluding private leased circuits). Under mode 1, international traffic has to be routed through a gateway in Brazil. Mode 3 is unbound, but it is specified that Brazil will undertake commitments one year after the enactment of the then draft General Telecommunications Law. Brazil also has commitments on domestic and international services for closed user groups, on a facilities basis. These provide for no limitations under modes 2 and 3; for cross-border trade, the commitment specifies that network facilities in Brazil have to be provided by a duly licensed supplier.

25 Page Brazil undertook full commitments under modes 1 to 3 for all value-added services. Under "other services", Brazil made commitments in facilities-based mobile, and paging services and satellite telecommunications transport services. National treatment for all of these is bound without limitations; for market access, mode 1 is unbound for mobile and paging services, and bound with limitations for satellite services. Mode 3 is fully liberalized for paging services and bound with limitations for the other sub-sectors, including provision through a duopoly in the mobile segment. 56. Brazil has, in many instances, undertaken additional commitments, in particular for further bindings within one year from the adoption by the Congress of a new "General Telecommunications Law" A similar situation is seen for financial services, where the MERCOSUR Schedules mainly mirror significantly the GATS supplementary schedule resulting from the negotiations on financial services, and which never came into force. 58. In the area of insurance, few sub-sectors are added to those under the GATS, namely insurance for work accidents and for vessels (body, machinery and civil liability), 23 as well as reinsurance and retrocession. Other differences with the GATS relate to: market access for transport insurance where no limitations on foreign participation apply; 24 national treatment which is bound with limitations under mode 1 for transport and vessels insurance (unbound under the GATS); 25 and allowing for the commercial presence of juridical persons incorporated under Brazilian law in auxiliary services/agencies and brokers (under the GATS mode 3 only allows for commercial presence for natural persons). For work accident insurance, and reinsurance and retrocession, no market access liberalization is provided for initially; 26 however, Brazil has agreed to undertake liberalization commitments within two years from the adoption by the Congress of legislation regulating their presence. 59. For banking services provided by financial institutions, some sub-sectors are added compared to the GATS i.e. acceptance of funds for housing finance (the GATS reference was to "financing of commercial transactions"), money brokerage (in GATS brokerage of foreign exchange only), and settlement and clearing services for securities and derivatives; less-restrictive limitations apply on market access (the number of branches) and national treatment (use of automatic teller machines, minimum paid-in capital and net worth requirements, and expansion of operations); Brazil has also undertaken additional commitments regarding credit cards and factoring so that national treatment will be provided to commercial presence if these services are defined as "financial services" in future legislation adopted by the Congress. Further, the MERCOSUR Schedule also includes various banking services provided by non-financial institutions, whereas under the GATS none of these were covered; these are scheduled with modes 1 and 2 unbound and mode 3 without limitations, provided that (i) juridical persons are incorporated under Brazilian law, (ii) only juridical persons provide clearing services for, and public offerings of securities and derivatives, and (iii) settlement and clearing services be provided by a corporation ("sociedade anônima"). 22 At the time of the scheduling of MERCOSUR s initial commitments, Brazil was in the process of reforming the telecommunications sector, through the termination of the sector s state monopoly and its privatization; this situation explains the reasons for the scheduling of additional commitments. The Brazilian offer for the first round of negotiations in the context of the Montevideo Protocol consolidated the changes made to the sector s domestic regulations. 23 Insurance on vessels may be authorized for vessels registered in the Brazilian Special Registry, depending on the internal supply conditions. 24 In the GATS, foreign participation in a company is limited to 50% of its capital and 1/3 of its voting stock. 25 This binding does not apply to contracts on and any liability arising from imported goods as regards transport insurance, while for vessel it requires that it is registered in the Brazilian Special Registry. 26 Only the already existing provider is authorized, namely the National Institute of Social Security for work accident insurance and the Brazil's Institute of Reinsurance for reinsurance and retrocession.