CHAPTER 11 TRADE IN SERVICES 1. OVERVIEW OF RULES (1) Trade in Services The phrase Trade in Services applies to international transactions involving such fields as financial services, transport and shipping, communications, construction, and distribution. When considering barriers to trade in services, domestic regulations governing their supply and consumption are more important than border measures (such as tariffs), unlike trade goods, where border measures play a significant role. These domestic regulations are put in place for a variety of reasons. Sometimes they have been put in place solely to protect domestic industries, but just as often to meet public objectives such as to protect culture and tradition, or to protect consumers interests. Thus, the need for multilateral disciplines in the service area was not considered great until recently. However, trade in services has been steadily increasing. According to WTO statistics, services now account for 19.8 percent of world trade (by shipping value), or about $1,312 billion in 1997 (see Figure 11-1). This increase in trade in services has led to a greater call for the need for disciplines in this area. The General Agreement on Trade in Services (GATS), requiring most-favoured-nation Treatment, market access commitments and national treatment was agreed upon at the end of the Uruguay Round negotiations with the participation of all Member nations including developing countries. The GATS covers a wide range of service industries such as financial services, transport and shipping, communications, construction, and distribution. <Figure 11-1> World Trade in Services in the World (Export Value Basis) (unit:$1 billion) Export Value Change over three years 1991 1994 1997 '90-'94 '94-'97 Goods(*1) 3,436 4,116 5,303 19.8% 28.8% Services 833 1,036 1,312 24.4% 26.6% Total 4,246 5,152 6,615 Services Total 19.5% 20.1% 19.8% Source: World Trade Organization Annual Report 1998, WTO Note*1: excluding re-export by Hong Kong (2) Legal Framework Four Modes The GATS covers governmental measures that would influence trade in any and all services (excluding services supplied in the exercise of governmental authority). The GATSdefines 155 service sectors based on categories developed by the GATT Secretariat, and specifies four modes of trade in services (see Figure 11-2): (a) (b) Cross-border supply (supply of services from the territory of one Member into the territory of another Member); Consumption abroad (supply of services in the territory of one Member to a service consumer of another Member);
(c) (d) Commercial presence (supply of services by a service supplier of one Member through commercial presence in the territory of another Member); and Presence of natural persons (supply of services by a service supplier of one Member through the presence of natural persons of that Member in the territory of another Member.) Framework of Liberalization Commitments Members make liberalization commitments by service sectors and modes. Obligations under the GATS can be classified into three types: (1) obligations applied to all sectors regardless of whether a commitment has been made or not, (2) obligations applied equally to sectors in which commitments have been made, and (3) obligations applied according to the specific commitment undertaken. General obligations that must be applied in all service sectors include Most-Favoured- Nation treatment to foreign service suppliers and assurance of transparency of relevant laws and regulations. In sectors where specific commitments are undertaken, Members must ensure objective application of domestic regulations and, in principle, cannot restrict payments and transfers. Finally, obligations are undertaken with respect to market access and national treatment in these sectors according to the specific commitment undertaken in each sector and mode. Furthermore, special rules for specific sectors, such as financial services and telecommunications, are defined in the annexes of the GATS. Outlines of major provisions are described in Figure 11-3. For the financial sector, Understanding on Commitments in Financial Services, which describes very specifically the measures to be taken for market access, national treatment and other issues, and defines a very high degree of liberalization, was made. For the basic telecommunications sector, there are reference papers that define frameworks for insurance of interconnection, universal service, public availability of licensing criteria, and other competition-enhancing regulations. Many Members, particularly the developed countries, made liberalization commitments voluntarily on principles. (See Figure 11-4 for reference paper definitions and principles on the regulatory framework.) As part of the Uruguay Round negotiations, Members made schedules of specific liberalization commitments in addition to the GATS itself. An example of a schedule of specific commitments is shown in Figure 11-5. For an overview of Members specific commitments and Most-Favoured-Nation treatment exemptions, see Figure 11-6 and 11-7 respectively. Japan made commitments in approximately 100 sectors and maintained no exemptions from Most-Favoured-Nation treatment. <Figure 11-2> Four Modes of Trade in Services
<Figure 11-3> Outline of Major Rules and Regulations in the GATS Obligations Regarding Trade in Services in all Service Sectors (i) Most-Favoured-Nation Treatment (Article II) Members must accord equal treatment (MFN treatment) to all other Members (See Chapter 1 for MFN Principle).
Trade in services spans a wide range of fields, however, and these contain many measures that cannot be subject to MFN treatment for various historical or other reasons. Accordingly, the GATS stipulates that if such measures are registered at the time the GATS enters into force, those measures may be exempted from obligation of MFN treatment. The Council for Trade in Services shall review all exemptions granted for a period of more than five years. The first such review shall take place no more than five years after the entry into force of the WTO Agreement. In principle, such exemptions should not exceed a period of ten years. These exemptions are subject to negotiation in subsequent trade liberalizing rounds. (Cases in which MFN treatment obligations do not apply under the GATS provisions.) - Each Member is not prevented from taking part in an agreement liberalizing trade in services between or among the parties. (Article V) - Each Member is not prevented from taking part in an agreement establishing full integration of the labour markets between or among the parties. (Article V bis) - Each Member may recognize the education, licenses, or certification granted in a particular country as domestically valid. (Article VII) - Most-Favoured-Nation treatment shall not apply to the procurement by governmental agencies of services purchased for governmental purposes not with a view to use in the supply of services for commercial sale. (Article XIII) (ii) Transparency (Article III) The lack of transparency of laws, regulations, and other measures pertaining to or affecting trade in services may constitute a barrier to trade in services. The GATS, therefore, provides a general obligation to publish all such laws and regulations. This provision will remove any barrier resulting from non-transparent procedures, as well as facilitate future negotiations on such procedures. Obligations Regarding Trade in Services in Sectors where Specific Commitments have been Undertaken (i) (ii) Domestic Regulations (Article VI) In sectors where specific commitments are undertaken, each Member shall ensure that all measures of general application affecting trade in services are administered in a reasonable, objective, and impartial manner. Payments and Transfers (Article XI) Except to safeguard its balance of payments, a Member may not restrict international payments and transfers for current transactions covered by specific commitments undertaken in the GATS. Nothing in the GATS, however, affects the rights and obligations of the Members of the International Monetary Fund. A Member shall not impose restrictions on any capital transactions inconsistent with its specific commitments regarding such transactions, except under Article XII (Restrictions to Safeguard the Balance of Payments) or at the request of the IMF. Obligations Dependent on the Content of Specific Commitments (i) Market Access (Article XVI) Market access is one of the obligations whose terms and conditions are determined through specific commitments.
(ii) Each Member may decide through negotiations to undertake a market access commitment (i.e.. a commitment not to maintain or adopt certain measures contained in an exhaustive list in Article XVI), in each sector and mode. There are six types of measures: (a) limitations on the number of service suppliers; (b) limitations on the total value of services transactions or assets; (c) limitations on total output; (d) limitations on the total number of natural persons that may be employed; (e) measures which restrict the types of legal entity through which a service is provided; and (f) limitations on the participation of foreign capital. Members may maintain some or all of these restrictions, which must then be specified in the Schedule of Commitments. Member countries may take measures which do not fall in the six types, or which have been reserved unless they violate other articles in the GATS. This Article on market access does not ensure a specific market presence (in terms of market share etc.) National Treatment (Article XVII) National treatment is a principle that requires each Member to accord services and service suppliers of any other Member no less favourable treatment than that accorded to its own like services and service suppliers (See Chapter 2 for National Treatment Principle). The provision of national treatment is another obligation to be determined through specific commitments. Each Member may decide whether to undertake national treatment commitments in each sector and mode through negotiations. In undertaking a national treatment commitment, a Member may still maintain some discriminatory measures by making reservations. For example, in undertaking a national treatment commitment in the banking sector, a Member may promise national treatment in all sectors of banking except deposit operations. Any such reservation must be specified in the Schedule of Commitments. Other Provisions (i) Negotiation of Specific Commitments (Article XIX) To further the objectives of the GATS, Members shall enter into successive rounds of negotiations aimed at achieving progressive liberalization of trade in services, beginning not later than five years from the date of entry into force of the WTO Agreement (1 January 1995) and periodically thereafter. The process of liberalization shall take place with due respect for national policy objectives and the level of development of individual Members, both overall and in individual sectors. (ii) Annexes (a) Annex on Financial Services Nothing in the GATS prevents a Member from taking measures for prudential reasons and to ensure the integrity and stability of its financial system. (b) Annex on Telecommunications Members shall ensure that any service supplier of any other Member is accorded access to and use of public telecommunications networks and services on reasonable and non-discriminatory terms and conditions, for the supply of a service included in its Schedule. (c) Annex on Air Transport Services The Annex applies to measures affecting trade in air transport services and ancillary services. The GATS shall not apply to measures affecting a Member's traffic rights, or services directly related to the exercise
of those rights, as recognized under existing bilateral agreements. (d) Annex on Movement of Natural Persons Supplying Services under the GATS The Annex applies to measures affecting natural persons who are service suppliers of a Member, and natural persons of a Member who are employed by a service supplier of another Member. The GATS shall not prevent a Member from applying measures to regulate the entry of natural persons into, or their temporary stay in, its territory, provided that such measures are not applied in such a manner as to nullify or impair the benefits accruing to any Member under the terms of specific commitments regarding market access, national treatment, and similar issues. <Figure 11-4> Reference Paper of definitions and principles on the regulatory framework Scope of application Major suppliers which have the ability to materially affect the terms of participation in the relevant market for basic telecommunications services as a result of control over essential facilities or use of its position in the market. Competitive Safeguards Appropriate measures shall be maintained for the purpose of preventing suppliers who are a major supplier from engaging in or continuing anti-competitive practices. Interconnection to be ensured Interconnection with a major supplier will be ensured at any technically feasible point in the network. Universal Service Any Member has the right to define the kind of universal service obligation it wishes to maintain. Such obligations will not be regarded as anti-competitive per se provided they are administered in a transparent, non-discriminatory and competitively neutral manner and are not more burdensome than necessary for the kind of universal service defined by the member. Public availability of Licensing Criteria Where a license is required, the following will be made publicly available: (a) (b) All the licensing criteria and the period of time normally required to reach a decision concerning an application for a license; and The terms and conditions of individual licenses. Independent Regulators The regulatory body is separate from, and not accountable to, any supplier of basic telecommunications services. Allocation and Use of Scarce Resources Any procedure for the allocation and use of scarce resources, including frequencies, numbers and rights of way, will be carried out in an objective, timely, transparent and non-discriminatory manner.
<Figure 11-5>Example of Schedule of Specific Commitments HORIZONTAL COMMITMENTS Sector or subsector Limitations on market access Limitations on national treatment Additional commitments 4)Unbound except for measure concerning the entry and temporary stay of a natural person who falls in the following category: i)activities to direct a branch office as its head. 3)Unbound for research and development subsidies. SECTOR SPECIFIC COMMITMENTS Sector or subsector Limitations on market access Limitations on national treatment Additional commitments d)services related to management consulting 1)Unbound 2)None 1)Unbound 2)None (*2) (*1) 3)The number of licences conferred to service suppliers may be limited. 4)Unbound except as 4)Unbound indicated in 3)None except as indicated in Modes of supply : 1)Cross border supply2)consumption abroad3)commercial presence4)presence of natural persons Note(*1)Sector or subsector, when making liberalization available, shall be inscribed in this column. Article XVI and XVII shall not apply to sector or subsector not indicated in this column. (*2)Commitments with respect to measures affecting trade in services but not subject to put in the schedule under Article XVI or XVII shall be inscribed in this column.
<Figure 11-6> Specific Commitments of Major Trading Partners
<Figure 11-7> Overview of Article II(MFN) Exemption Lists of Major Trading Partners
(3) Recent Development The Uruguay Round and After During the Uruguay Round negotiations, views were split on which areas the agreement should cover, and negotiations were continued after the Round in four disputed areas: movement of natural persons; maritime services; financial services; and basic telecommunications. (See Figure 11-8.) Though a conclusion was quickly reached for movement of natural persons in July 1995, no progress at all was seen in the maritime services negotiations, causing them to be suspended in June 1996. The negotiations in maritime services will be resumed when the next round of services
negotiations starts in 2000. The initial deadline for basic telecommunications was April 1996, but negotiations were subject to considerable delay, and a successful agreement was finally reached on a Most-Favoured-Nation basis with the participation of 69 countries in February 1997. Regarding financial services, a provisional agreement was reached in July 1995, and in December 1997, a full agreement was reached with the participation of 70 countries on a Most-Favoured-Nation basis. There are also several working groups that are studying other aspects of the Services Agreement. In professional services, work had been begun in the accounting sector, where it was considered that work towards standardization was relatively underway. The work focused on two topics: 1) guidelines for the signing of mutual recognition agreements for accounting qualifications and 2) multilateral disciplines for matters not covered in the Services Agreement but that nonetheless constitute barriers to trade. The guidelines for mutual recognition agreements were completed in May 1997. The disciplines on domestic regulation (transparency, licensing requirements, licensing procedure, qualification, requirements and others were generally, abstractly, and neutrally provided) were also adopted in December 1998. Discussions are continuing on developing general disciplines for professional services, the legal form of the disciplines on accountancy and other issues. Working groups are also studying government procurement, safeguards, and subsidies as they relate to services, but major progress has yet to be seen. The division of opinion has been particularly sharp on safeguards, where some countries think that some form of safeguards are needed, and others think that approval of any safeguards should be subject to strict conditions. The deadline of the negotiation was therefore extended from the end of 1997 to the end of June 1999 at the Council on Trade in Services in November 1997, thus discussions are continuing. In addition, the Committee on Specific Commitments is discussing development of the procedures for the modification of schedules and revision of the current classification. For the former, the coverage of cross-retaliation is one of the major points under discussion. For the latter, the committee is studying the assessment of the need to revise the current classification, the question of new services and other issues in preparation for the next round of services negotiations. Future Issues The GATS was a revolutionary step forward in that it provides comprehensive disciplines on trade in services, but there are still many issues left to be tackled. First, the disciplines on services are still in their infancy, and the interpretation of the GATS text is still to be established through future implementation of the text. It will also be necessary to further define and add clarity to the text itself. The GATS calls for talks on the creation of criteria for qualification, and also on disciplines to cover safeguards, government procurement, and subsidies as stated above. Japan should take active part in the drafting of these disciplines. Second, it will be important for countries to expand the range of service areas for which they have committed to liberalization, and to improve the nature of their commitments. Negotiations were successfully concluded on basic telecommunications in February 1997 and in financial services in December 1997. These developments will help the cause of progressive liberalization. Negotiations in the next round of services liberalization will begin in 2000, and Japan will need to contribute positively to the preparation of the programme for the next round of services negotiations (information exchange programme, assessment of the trade in services, the establishment of negotiation guidelines and procedures, etc.) in closer coordination with the industries. Further expansion of trade in services and the emergence of many global scale service suppliers are expected as a
result of the development of the disciplines and liberalization negotiations. The Next Round of Service Negotiations The next round of service negotiations is scheduled to begin in 2000, and the WTO secretariat and participating countries are now in the process of preparing for them. The Council for Trade in Services began the Information Exchange Programme in June of last year and completed it in December. The next step is to complete the assessment of the trade in services and formulate negotiation guidelines and procedures. <Outline of the Information Exchange Programme> Singapore Ministerial Conference on December 1997 agreed to conduct the Information Exchange Programme that would clarify countries' interests and other relevant items in preparation for the start of services negotiations in 2000. This work had not progressed because of the financial services negotiations, but the Council for Trade in Services did go ahead and conduct area-specific information exchange between June and December of last year. This Information Exchange Programme was conducted under the secretariat's sectoral classification list(w/120),and did not exclude specific sectors. The Council used documents prepared by the secretariat and information provided by members to review the nature of specific areas, the status of trade within those areas, and the domestic regulation that currently applies to them. The Service Sector Discussed June Council: July Council: October Council: November Council: December Council: postal and courier, audio-visual, construction and engineering, distribution legal, advertising, architectural, computer and related, environmental education, health and social, tourism, energy transport (road, rail, air and maritime) financial, telecommunication, accountancy, the presence of natural persons In Japan, the WTO Committee of the Industrial Structure Council, Ministry of International Trade and Industry has established the Sub-committee on Services Trade to discuss the liberalization of the trade in services toward the next round of negotiations. In February it submitted an interim report (discussed below) to the WTO Committee. Preparations are also under way in other countries in cooperation with the private sector. In the United States, the Coalition of Service Industries (CSI) is holding meetings and conducting studies on the next round of negotiations, and in Europe, a European Service Network was formed in January. <Interim Report of the Sub- Committee on Service Trade Committee, Industrial Structure Council, Summary> 1. Basic Policy Liberalization of Service Trade - With structural changes to the service industry such as globalization, advancement of the information society, and progress toward a service economy, the next service negotiation will be a significant opportunity and challenge for Japan, pointing to the need for it to develop a proactive strategy. 1) As the service industry globalizes, harmonization of respective regulations will make the business activities of the world market more efficient. In other words, the manufacturing industry, which is a user of the service
industry, can lessen its cost for its worldwide business activities. 2) Through further liberalization, Japan can achieve its own continuing economic structural reform. Enhancing Liberalization Commitments Further liberalization can be achieved through expansion of the scope of GATS, as well as revision of the content of each WTO Member s specific commitments regarding market access and national treatment - Through liberalization of the service industry of each WTO Member, the opportunity for export and investment 2. Eight Guidelines by Japan s service industry will increase. Horizontal Approach Cross-cutting liberalization based on such standards as ensuring transparent administrative procedures, deregulation of foreign investment, and relaxation of regulations on foreign workers. Harmonization and Mutual Recognition Broad harmonization of countries respective domestic regulations with certain standards in major service areas that go beyond the traditional liberalization framework, also multilateral or plurilateral mutual recognition of qualifications and standards. Electronic Commerce Active discussion at the WTO of rules regulating electronic commerce, which will contribute to the development of electronic commerce. Development of GATS Rules GATS has only formulated basic rules on MFN and national treatment. Development of rules governing safeguards, government procurement and subsidies is needed. Safety-Nets Examining responses to the economic and social damage that liberalization may cause is important. Cooperation among International Institutions International cooperation among specialized agencies needs to be included in the construction of the international framework for the service industry of the 21 st century. Developing Countries Participation At the next liberalization negotiation, active participation of developing countries is necessary. Industry Participation Establishment of a framework within Japanese industry is needed. <Figure 11-8> Framework of The Four Unfinished Areas Financial Basic Maritime Movement Services Telecommu Transport of Natural nication Services Persons
The Present Situations Concluded in Concluded Suspended in Concluded in 13.12.1997 in 15.2.1997 June 1996 28.7.1995 (the effect (the effect (Negotiations) (the effect came into came into to be resumed came into force in 1.3. force in 5.2. with next force in 31.1. 1999) 1998) round) 1996) The Present Treatments Standstill At The End of Negotiation Concluded Concluded Not concluded Concluded Modification to List of Allowed MFN Exemption( ) Modification and/or deletion to the Allowed Schedule of Specific Commitments without quid pro quo ( ) ( ) In the case of modifying or withdrawing any commitment in the Schedule of Specific Commitments or MFN exemption List, the modifying or withdrawing menber shall make a compensatory adjustment on the basis of MFN treatment. (4) Economic Implications In many developed countries, service industries account for about 60 to 70 percent of the gross domestic production and from about 60 to 70 percent of the total labour force, making them a vital component of the national economy. This tendency towards a so-called soft-economy or service economy is something that can be observed around the world, although to varying degrees. Movement of Production Factors Unlike trade in goods, trade in services is usually accompanied by movement of production factors, such as capital, labour, technology, and managerial resources. Although trade in services can sometimes be accomplished without any movement of the service provider or consumer, as in the case of cross-border movement of visual and software products, this is rarely the case. Trade in services often requires relocation of the service provider to the place of consumption (e.g., establishment of a business in the country of consumption, relocation of natural persons to the country of consumption to provide services), or movement of the consumer to the place where the service is provided (e.g., repair of machines abroad, overseas trips for sight-seeing purposes). In addition, services have another characteristic distinct from that of goods: one cannot hold stock in services. Since trade in services often requires movement of production factors, including capital, labour, technology and management expertise, liberalization of trade in services will create new relationships among production factors originating in different countries. The effects on the domestic economy tend to be large, although the degree differs according to the form it takes such as direct investment and movement of labour.
Direct investment will, in many cases, take the form of market entry of high-quality competitive service providers. Their participation may, in turn, change business practices in the importing country, and have a positive effect on efficiency in the service industry there, as well as providing consumers with a wider range of choices. In this case, existing domestic service suppliers would be faced with increased competition, and at times be subject to merger or driven out. However, negative effects on the labour market are often small, and in the case where new services are created, will have a positive effect. Movement of labour will have a more direct on the labour market. For example, if there is movement of unskilled labour from a low wage country to a high wage country, service suppliers will benefit from the use of cheap labour, and will be able to supply services more cheaply. On the other hand, foreign unskilled labour will directly compete with domestic unskilled labour, and may cause a dual standard for wages to emerge. A big social cost may be necessary when the dual standard has to be eliminated. Effects of Increased Efficiency in a Service Sector We need to keep in mind that most services such as financial services, transport and shipping, communications, distribution, construction, and energy are inputs to other industries. Therefore increased efficiency in a certain service sector may benefit not only the service sector itself, but will often have a greater positive spill-over in other service and manufacturing sectors. Benefits of trade in a service sector are not limited to increased efficiency in that specific service sector. To conclude, although the liberalization of trade in services may result in a short-term selection of some inefficient service providers, it will lead to improved economic welfare for consumers through increased competition over quality and prices. Over the long term, it will contribute to better productivity and competitiveness of service providers not only in the liberalized service sector, but also in industries that use that service as an input. The economic benefits to be had from liberalized trade in services are therefore immense, and even in areas where regulation is required, steps must be taken to ensure transparency, procedural fairness, and fair competitive conditions. 2. Problems of Trade Policies and Measures of Individual Countries Under the GATS, not all limitations on trade in services which deviate from Most-Favoured-Nation treatment ( MFN ) or national treatment will constitute a violation, if the limitation is registered as an exemption of MFN treatment or reserved in the Schedule of Specific Commitments. Such limitations will be subject to further negotiations aimed at liberalization. Nonetheless, there are certain sectors or measures where liberalization is considered desirable with a view to increasing trade in services even though they may not be contrary to a Member s obligations under the GATS. In this chapter, we list measures which we hope will be liberalized from the perspective of expanding trade in services, unless explicitly stated otherwise. Each service sector has its own background and characteristics, so we group the problems by sector. (1) Cross-sectoral Regulations
Among the most prominent regulations that cut across industrial sectors are those governing investments and the movement of natural persons. These general regulations have a deep impact on market entry and subsequent activities, and their impact is heightened by the fact that they cover broad swathes of industry rather than specific sectors. Investment regulations harm recipient countries as well since they delay the rationalization and modernization of the recipient country's economy. Regulations regarding those "natural persons who are essential to the trade in services," for example, corporate executives, top managers, and people with high advanced specialization, have a detrimental effect on the location of commercial presence. (a) Canada Under the Investment Canada Act, acquisitions of Canadian companies worth $160 million and more (in the case of financial services, transportation services, cultural services and uranium, $50 million) must be submitted to the Investment Canada Bureau. Some are submitted simply for notification, while others are subject to examination. All foreign investments in cultural industries (publishing and distribution of books; production, distribution and sale of films, video, and music; and entertainment) are subject to examination by the Bureau and can be restricted. The Investment Canada Act requires notification to the Canada Investment Agency before controlling rights in an existing businesses may be purchased. Although WTO Members receive favourable treatment under separate standards, investments are still subject to review when they are direct investments (investments directly in Canadian companies) of C$5 million or more, indirect investments (indirect acquisition of a Canadian subsidiary by an investment in a non-canadian parent company) of C$50 million or more, or investments of 50 percent or more of total assets. (For investments in finance, transportation, culture, and uranium mining, all direct investments in excess of C$5 million and indirect investments in excess of C$50 million are subject to review regardless of whether the investor is a WTO Member.) (b) Korea Korea deserves praise for the gradual elimination and liberalization of its regulations on foreign investment that has been seen in recent years. These efforts are described below and we look forward to further implementation of these programmes. The holding of shares by foreign companies, and market entry through acquisitions were restricted. However, in December 1997, the Korean government announced that it would raise the permitted share of foreign ownership up to 55 percent from 30 December 1997 and would abolish all restrictions by the end of 1998. Afterwards, this limitation was abolished on 25 June 1998. These measures will contribute to increased foreign investment and recovery of the Korean economy as well. In addition, the establishment of the Law Concerning Alien Land Acquisition and Management in April 1994 allowed foreign companies established under the Foreign Capital Inducement Act to own land for use in all sectors with a few exemptions, such as agriculture, forestry, fishing, mining, and real estate development, although permission or notification was still required. However, this law was changed to the Foreign Land Ownership Law on 26 June 1998. Under the new law, all that is required is an after-the-fact report of the land transaction contract, except in certain areas. Restrictions on the parties to the transaction and the use of the land have been lifted.
The Five-year Prospectus for Opening Foreign Investment (1996-2000) is reducing the number of industries for which there are restrictions in place on foreign investment. Of the 1,148 industries open to foreign investment (including sectors other than services), only thirty one were subject to restrictions under the Foreign Capital Inducement Act at the end of May 1998 (eighteen partially liberalized sectors, thirteen prohibited sectors). (c) Australia Australia defines radio and television broadcasting, daily newspapers, and commercial airlines as sectors subject to investment regulation. (d) Indonesia According to the Indonesian law on foreign investment, in order to protect domestic capital, Indonesia has enforced an unconditional ban on foreign capital in bus and taxi services, passenger maritime transportation, retail and similar businesses, sectors supporting domestic commerce (i.e. advertising), commercial television and radio broadcasting, and cinema operation. Under the Ministry of Finance Order No.96, dated 2 July 1998, the government reviewed the negative list of industries in which the participation of foreign capital was restricted. This resulted in an encouraging relaxation of restrictions, including permission for foreign capital to enter the wholesale, retail, and distribution fields. Still, many industries, for example, the bus and taxi industry described above, are still restricted and further relaxation is desirable. Part of the relaxation eliminated the stipulation that foreign capital could have no more than 49 percent of public share purchases (Ministry of Finance Order No. 467 of 11 September 1997). The Amended Banking Law that was passed in October 1998 also eliminated the restrictions on the percentage of bank shares owned by foreigners. We find both of these developments praiseworthy. (e) Thailand The Foreigner s Operation Law determines the types of businesses in which foreigners may own a majority share. This restriction applies to many types of services businesses, including engineering and most retailing services, making it extremely difficult for foreigners to do business in these sectors. However, the government submitted an amendment bill to the last ordinary session of the national legislature last October, and deliberations on the bill are continuing as of this writing. The bill, if it passes, would reduce the number of industries for which there are restrictions on foreign participation to 34 from 63 in the current law. Trade mediation, wholesale, retail, and hotel management would be deregulated above a set threshold size, and the remaining industries would be open to foreign participation subject to licensing from the relevant authorities. In addition, requirements that foreign companies must employ eight Thai for each foreigner were eliminated in the amendment bill. We hope that such measures will be passed from the perspective of promoting foreign investment activity. (f) Malaysia
According to the provisions and implementation of the guidelines set by the Foreign Investment Committee, foreign investment is not allowed to exceed 30 percent of ownership in sectors where Malaysian skills and capital can be used such as trading, publishing, shipping, home development, and construction as well as in sectors which is of national interest such as advertising and mass media. Also, within the remaining 70 percent, 30 percent of the capital must be invested by ethnic Malaysian. (ii) Financial Services Trade in services in the banking industry has substantially increased, due largely to the rapid globalization of economic activities in recent years. Despite recent growth, however, it is often difficult or impossible to establish bank branches, subsidiaries, and other forms of commercial presence overseas. Even where establishing a presence is possible, restrictions on local operations often remain in force, and national treatment may not be accorded to foreign banks. It has been customary for the principle of reciprocity to be broadly applied to international banking operations. In other words, many countries accorded the same treatment to the institutions of a foreign country as their own institutions are accorded in that foreign country. As a result of the conclusion of negotiations on financial services in December 1997, an agreement based on the MFN principle was reached, so further liberalization in this sector is expected. The agreement was scheduled to go into effect on 1 March 1999, and was scheduled to be ratified by 29 January. In the end, 52 of 70 embers that agreed to the former negotiation, had ratified the agreement by the deadline and agreed to implement the agreement as originally scheduled on March 1. The Council also agreed to extend the target date to 15 June for unratified countries. (a) United States The United States has different regulations related to financial services from state to state, and in some states, establishment of the branch and the agency of a foreign bank are prohibited. There are a few states that permit all types of establishment (branch, agency, representative office, and so on): Massachusetts, Michigan, and New York. There are no US federal laws nor federal regulatory agencies regulating insurance, except for a federal law regulating insurance companies pension operations. Rather, each state has its own insurance laws and insurance regulators. Below are examples of state regulations that make entry by foreign companies difficult: 1) Foreign insurance companies granted licenses are required, when they start business, to hold within the United States in the form of deposits or trust assets the amount equivalent to the minimum capital and surplus, required for insurance companies operating the same business within the state, plus net liabilities within the United States (including reserves for insurance policies). Domestic insurance companies are under no such obligation. 2) The tender guarantees and performance guarantees required for construction projects commissioned by federal, state, or public agencies must be issued by insurance companies that are on the list of guarantee underwriters approved by the Department of Treasury. No branch of a foreign insurance company is included on this list. 3) Some states require foreign insurance companies setting up operations in the United States to have the state license designated as the "Port of entry." Other states require foreign insurance companies to have previous experience of a certain number of years in other states before granting licenses. 4) Some states will not grant licenses to foreign insurance companies for insurance products which are not approved
for other in-state insurance companies. As a result, foreign insurance companies are unable to apply for licenses for new products even if they develop them. 5) Most states require that a fixed percentage of the directors of insurance companies operating within their borders be US citizens or US residents. 6) Branches of foreign insurance companies must receive permission from the state insurance regulators to transmit overseas sums exceeding $50,000 in any three month period when they are not ordinary commercial activities, such as payment of insurance benefits or setting reinsurance contracts. For example, permission would be required to transfer surplus funds to their overseas home office. 7) The Industry Risk Insurers (IRI) is an underwriting organization made up of more than forty of the United States' largest private casualty insurance companies. Membership within the organization is necessary to diversify large risks, such as fire insurance for corporate properties. But membership is conditional on licenses in all fifty states. Since obtaining licenses in all states is not easy for foreign companies, joining the IRI is also difficult. The United States committed to encourage the National Association of Insurance Commissioners (NAIC) to take the following measures in order to promote business activities of foreign insurance companies within the United States: 1) harmonization of state regulations; 2) acceleration of permission procedures; and 3) deregulation of nationality requirements for boards of directors in the additional commitments of the US schedule of specific commitments. We hope that these commitments will be carried out steadily. (b) Canada Foreign banks wishing to do business in Canada have been required to incorporate subsidiaries in Canada in accordance with its Banking Law. In other words, they have been barred from entering the market via branch offices. However, the Canadian government made a commitment to allow the provision of banking services through the establishment of branch offices in the negotiation on financial services. A special committee report was published in September 1998 which recommended that quick action be taken to allow foreign banks to participate in Canadian markets through branch offices. The bill amending the Banking Law is scheduled to be announced shortly. (c) Asian Countries Asian countries have in recent years made remarkable progress in liberalizing their financial markets, due in part to the desire to induce foreign investment. Many Asiancountries, however, still impose numerous regulations on the entry and operation of foreign banks because their own domestic banks do not necessarily have a strong base of operations. Though currency crises have spread, especially in Southeast Asia, we hope to see further liberalization in the future considering the viewpoint that liberalization in financial services may support the stabilization of the domestic economy. In the case of Korea, in particular, we have already noted the elimination of regulations on foreign ownership of shares in Korean companies. In addition, Korea permitted foreigners to establish banking subsidiaries and securities companies in April 1998 and will eliminate the restriction on entrance for foreigners into the corporate bond and domestic short-term
financial instruments markets by March 1998. Korea also relaxed the restrictions on foreign borrowing by private companies in August 1998. All of these liberalization measures under commitments related to IMF support are laudable, but it is hoped that Korea will make a binding commitment in its GATS schedule. In October 1997, Thailand suspended the measure that restricted foreign investment in financial institutions to no more than 25 percent. Though the suspension is only for a period of ten years, we find it praiseworthy nonetheless. In September of last year, Malaysia imposed stronger foreign exchange controls and a fixed foreign exchange rate in order to contribute to the stability of its crisis-ridden domestic economy. One of the September measures was a ban on foreign exchange and transfer of funds from the sale of stock. This measure was eliminated in February of this year, but in its place Malaysia imposed a new outflows tax. The measure seeks to restrain unstable, short-term investment and encourage long-term investment, but Japan will need to monitor the actual impact that it has on investors. (d) Australia A government report was issued in April 1997 proposing positive deregulation including measures such as the abolition of the prohibition on the acquisition of domestic banks by foreign banks. However, the revised policy related to the foreign joint investment has not yet been implemented. We look forward to the results of financial system reform. (iii) Basic Telecommunications Traditionally, the telecommunications market has been dominated by telephone and telegraph services. Recently, however, advancements in technology have resulted in improvements in telecommunications services, and an increase in the variety of services offered. Since telecommunications services are a part of the infrastructure for trade in other service sectors, the development of telecommunications services has significantly contributed to the rapid growth of overall trade in services In the United States, and in several other countries, where telecommunications services are considered to be the most advanced, the surge in the variety of telecommunications services offered has been brought on by deregulation and the introduction of a competition regime that ensures fair competition. By contrast, in many other countries, telecommunications services are operated by the government itself or by monopolistic public entities, where foreign providers of telecommunications services are restricted from market entry and/or investment. These restrictions, as prescribed in the provisions of the International Communication Convention, are rooted in the public nature of telecommunications and should not be rejected out of hand. In order to ensure conditions for fair competition in the telecommunications industry in the future, however, gradual deregulation is considered an issue of great importance. The negotiations on basic telecommunications services (telephone, telegraph, and other services involving the creation and use of telecommunications circuits) were concluded on 15 February 1997 with the participation of 69 countries. The result of the negotiation came into effect on 5 February 1998, although it was behind schedule, establishing the framework for global liberalization in this sector. Further liberalization is expected to be greatly enhanced. (a) United States The United States as well as Japan and the United Kingdom is regarded as one of the most open telecommunications
markets in the world. The Telecommunications Act of 1996 (passed in February) will, with certain conditions, remove the barriers between long-distance and local telephone services, broadcasting, and cable television. This should lead to competition in the heretofore monopolistic local telephone market. On the other hand, there are still some problems with foreign companies access to the US markets. New FCC (Federal Comminations Commission) regulations on the entry of foreign service suppliers, which came into force in February 1998, basically exempted WTO Members from Economic Competitive Opportunity (ECO). However, restrictions on foreign service suppliers remain inthat the new rules; retain foreign ownership restrictions regarding wireless telecommunications services; provide the FCC with wide discretionary powers by failing to articulate specific criteria for public use and extremely high threat to competition in the review standards for carrier certification and wireless station licensing; may allow licenses to be refused for reasons unrelated to the application by listing foreign policy and trade concerns among the elements of public use; and allow competing carriers to file petitions for licenses to be refused without rational reason, thereby needlessly prolonging the application procedure. All of these constitute substantial barriers to foreign company participation in the market. As one example from the recent past, it required a year and one month for a KDD subsidiary to gain a license (applied in August 1995, license granted in September 1996). In addition to the licensing delays, the license was conditional upon KDD notifying the FCC in advance of any and all changes in rates, the rationale being that KDD had a dominant position in the Japanese market and therefore had the potential to set unfair rates (after-the-fact notification is all that is required of other carriers). In January and February of 1997 US subsidiaries of NTT and KDD applied to the FCC for licenses to provide international telecommunications services between the United States and Europe (three applications filed by KDD, one by NTT for a total of four). In March, the USTR, Department of Commerce, and Department of State required that the applications be reserved because of trade concerns (specifically, the extension of the NTT procurement agreement). The FCC complied with this. In September, the USTR and others withdrew the suspension request, and the FCC approved two of the KDD applications (out of a total of four applications). On 30 September, an agreement was reached on NTT procurement, and on 3 October the remaining two applications were approved. In August, 1997 the FCC added a further condition on participation that when foreign companies participate in the home-country market of the applicant, the international settlement fees applied are to be within the benchmarks set by the government of the United States. This regulation took effect in January 1998, but provides a grace period of 1-5 years depending on the stage of development of the country in which the carrier is domiciled. It took effect for Japan and other developed countries in January of this year. This new regulation could become a de facto barrier to participation in the US market, and allows the US government to unilaterally link the entry into the US market to settlement fees, which are something that ought to be a strictly commercial issue. The consistency of this regulation with the WTO's national treatment and MFN treatment obligations are also questionable. Because of this, more than one hundred carriers from around the world, including Japanese international carriers, filed a suit in US federal court in September 1997 asking that the FCC regulation be struck down. The verdict was reached in January of this year, and the court ruled entirely in favour of the FCC. In December 1998, the International Telecommunication Union (ITU) discussed the idea of drafting rules that would reduce the cost of international settlement fees, but was not able to reach any conclusions. The FCC has therefore announced that it will take mandatory measures against carriers from countries that are unable to meet benchmark standards.