2 November 2017 (17-4519) Page: 1/10 Committee on Regional Trade Agreements Original: English/Spanish FREE TRADE AGREEMENT BETWEEN MEXICO AND PANAMA (GOODS AND SERVICES) QUESTIONS AND REPLIES The following communication, dated 1 November 2017, is being circulated at the request of the delegations of Mexico and Panama. Question from the delegation of Canada 1.1. Paragraph 5.11.2: This section indicates that nothing in the Chapter on investment shall be construed to prevent a Party from applying or adopting any measure (consistent with the Agreement) to ensure that investments in its territory take into account environmental concerns (Article 10.9). During the negotiations, did the Parties considered including more comprehensive provisions on environment in the Agreement, aligned with other agreements concluded by the Parties? The disciplines that were the subject of negotiations in this Free Trade Agreement were originally agreed upon between the Parties and were reflected in the terms of reference for the negotiations on this international instrument. This Free Trade Agreement does not include disciplines in a specific chapter on the environment. Panama as a State, recognizes that each party has the right and responsibility to protect and preserve the environment. It has made a commitment to do so not only in this Free Trade Agreement but also in others to which it is party. The Ministry of the Environment has provided the following list of international agreements and conventions, to which Panama is party. Panama, as a State, applies its legislation in the interest of preventing the reduction or relaxation of environmental protection and maintains its commitment to applying such protection properly. Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES): The Panamanian Ministry of the Environment has been following up on the outcomes of the Sixteenth Session of the Conference of the Parties (COP 16) to the CITES. Convention on Biological Diversity (CBD): After the Tenth Session of the Conference of the Parties (COP 10) to the CBD (Nagoya, Japan, October 2010) at which the "Nagoya Protocol on Access to Genetic Resources and the Fair and Equitable Sharing of Benefits Arising from their Utilization" was adopted, Panama became the eleventh country to sign the Protocol (March 2011), the thirteenth country to ratify it (October-December 2012), and the second country in Latin America to ratify it. Over the past few years, our country has been focusing on preparations for the implementation of the Protocol.
-2 - Cartagena Protocol: Panama created a legal framework establishing the National Biosafety Commission (CNB) as a coordinating and advisory body to address the issue of living genetically modified organisms in the country (Law No. 48 of 2002). Under this legal framework, three sectoral committees (agricultural, health and environmental) were established, which serve as technical committees to assist with the management of the National Biosafety Commission. United Nations Framework Convention on Climate Change (UNFCCC): Panama chaired the Coalition for Rainforest Nations (CRFN) during the final stage of the negotiations on the Paris Agreement, which it signed in April 2016. Basel, Stockholm and Rotterdam Conventions: Panama supported Decision 8 on chemicals of the Forum of Ministers of Environment for Latin America and the Caribbean held in Cartagena, Colombia, on 28-31 March 2016. The Ministry of the Environment has already established its focal point for the Intergovernmental Network on Chemicals and Waste for Latin America and the Caribbean, which was created under the aforementioned Decision. Kyoto Protocol: Panama has registered 22 projects under the Clean Development Mechanism. Montreal Protocol: Since January 1989, the Republic of Panama has been party to the Montreal Protocol, under which it has worked actively through the National Ozone Unit of the Ministry of Health (focal point) to eliminate and control substances that deplete the ozone layer. Questions from the delegation of El Salvador Provisions on Trade in Goods Cumulation 1.2. Footnote 11: This implies that a Party can use originating inputs of the other Party in the production of a good as if they were their own. The final good will qualified as originating as long as it satisfies the requirements of Article 4.2 (Article 4.8). Although the Factural Presentation mentions only bilateral cumulation, please indicate whether there are clauses that allow for extended cumulation, given Panama's accession to the CACM and the Single Free Trade Agrement between Central America and Mexico. The Agreement does not contain any clause on extended cumulation in accordance with the provisions set out in Article 4.8. It should be mentioned that the Republic of Panama joined the Secretary of Economic Integration of Central America (SIECA) on 6 May 2013 after the relevant provisions were agreed upon by the Central American region in the framework of the bilateral Free Trade Agreement between Central America and Mexico. Bilateral Safeguards 1.3. Paragraph 3.34: The Parties may apply bilateral safeguards if as a result of the trade liberalization under the Agreement the imports of a good cause injury or a threat thereof to sectors in the importing Party producing a like or directly competitive good. The measure can be applied only during a given transition period, which varies between 2 and 17 years depending on the product 1, and only one year after the Agreement has entered in force. The measure will consist of a suspension of further tariff reductions under the Agreement or the increase of tariffs to a level that will not exceed the MFN applied tariff in effect at the time the action is taken or the day prior to the Agreement's entry into force. The maximum period of application of a bilateral safeguard is 1 The "transition period" corresponds to the tariff elimination period associated with a given product plus two years (Article 6.1).
-3 - three years, including an extension of one year and the period of application of any provisional measure, which is shorter than the eight years under the Safeguards Agreement (Article 7). Moreover, the measure can be applied to the same good only once, which is also more stringent than under the Safeguards Agreement, which allows that a safeguard measure be applied twice to the same good after a non-application period of at least two years. Upon termination of the bilateral safeguard, the applied rate shall be that established in the Parties' tariff schedules (Article 6.2). Please explain why bilateral safeguard measures which can be applied to the same good only once, unlike what is established in the Agreement on Safeguards are restricted. It was considered that the bilateral safeguard application period (three years) plus the extension period (one year) gave enough time to allow for the adjustment of the industry that might be damaged by imports of a similar or directly competing product from the other Party. Furthermore, for many products, the transition period is very short and, therefore, in such cases, it would be difficult to apply the measure more than once. Questions from the delegation of the European Union Provisions on Trade in Goods General provisions Customs-related procedures 1.4. Paragraph 3.39: Reference is made to Art. 5.5 on the administration of risk management. Could the Parties give further details on the strategy/techniques/criteria used for identifying the high-risk shipments of goods? Could also the Parties present what cooperation's plans have been adopted or are planned to be adopted for strengthen the risk management? In the case of Panama, there is/are: 1- A National Customs Authority risk model: A. A deterministic system that allows for the establishment of legal and operational rules. The legal rules require the application of control measures specific to a particular good through a tariff heading; the operational rules are the result of studies and analyses of customs findings, which enable certain risk factors for a good, operator or customs-related determination etc. to be identified. Other factors are also considered, such as origin, weight, the conduct of operators, and origin and destination routes. B. Prior controls are carried out on goods through the analysis of the cargo manifested, and the inspection of the cargo using non-intrusive and physical systems, where necessary. C. Immediate controls are carried out on the basis of an analysis of customs declarations data, in order to establish, via the computer system, the criteria that determine the use of the red channel (physical inspection) and the orange channel (documentary inspection). D. A posteriori controls are carried out through an analysis of the transactional conduct of trade operators over a certain period of time, in order to determine the need to carry out an audit in the enterprises concerned. 2- Cooperation plans adopted with international bodies to strengthen the prior control of maritime and air cargo, through agreements with the United Nations Office on Drugs and Crime (UNODC) the World Customs Organization (WCO). 3- Active participation in the development and implementation of the risk strategy for Central American countries. Mexico examines various elements to comprehensively assess the conduct of enterprises; this enables it to identify atypical conduct in accordance with existing legal and regulatory
-4 - provisions on foreign trade and, in turn, assess the risk of unlawful acts being committed in this regard. These elements include: (a) (b) (c) (d) (e) (f) (g) (h) an analysis of accounting records; customs and tax consistency; compliance with obligations; foreign trade operation processes and logistics; compliance with non-tariff rules and regulations; installed capacity of the enterprise; international certification demonstrating the validity of information on operations with related foreign parties; and relationships between shareholders, and legal and trade representatives. Furthermore, appropriate selection methods have been implemented and non-intrusive inspection instruments are being used. Inspection procedures are constantly being improved to speed up the process and reduce the physical inspection of all goods entering national territory. The latest agreements signed have established the commitment to adopt or maintain risk management systems that simplify the inspection of high-risk shipments. 1.5. Reference is made to Art. 5.7 on the AEO. Could the Parties give further details on the state of the play of the negotiations of an AEO Mutual Recognition Agreement? When it is planned to be adopted? Mexico and Panama have not yet discussed the possibility of negotiating an Authorized Economic Operator (AEO) Mutual Recognition Agreement (MRA) between both nations. Consequently, we cannot give any further details of progress on an MRA, or the date of its adoption, until we have signed the action plan that will lead to the signing of the Agreement. Intellectual property rights 1.6. Paragraph 5.26: Annex 15.5 contains the list of the GIs agreed by the Parties. Could the Parties clarify whether there is a review clause on the addition of future GIs in the FTA? There is no review clause in the FTA. However, the channels between the parties remain open for future discussions on this and other matters. Environment 1.7. Paragraph 5.33: According to the factual presentation, the Parties recognize that it is inappropriate to relax or reduce the environmental protection afforded by their legislation to promote investment in their territories, and thus commit to ensure that its legislation is properly applied. Could the Parties submit further information on the actions carried out for the implementation of the Agreement with an environmental protection dimension? Could the Parties clarify if and what type of information would they have to exchange on other concluded agreements?
-5 - It is important to know the context of the two questions asked by the European Union as they do not seem to be related to paragraph 5.33 of the factual presentation, which refers to an obligation not to relax or reduce environmental protection, with the aim of promoting investment in the territories of the Parties. Panama, as a State, recognizes that each party has the right and responsibility to protect and preserve the environment. It has made a commitment to do so not only in this Free Trade Agreement but also in others to which it is party. The Ministry of the Environment has provided the following list of international agreements and conventions, to which Panama is party. Panama, as a State, applies its legislation in the interest of preventing the reduction or relaxation of environmental protection and maintains its commitment to applying such protection properly. Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES): The Panamanian Ministry of the Environment has been following up on the outcomes of the Sixteenth Session of the Conference of the Parties (COP 16) to the CITES. Convention on Biological Diversity (CBD): After the Tenth Session of the Conference of the Parties (COP 10) to the CBD (Nagoya, Japan, October 2010) at which the "Nagoya Protocol on Access to Genetic Resources and the Fair and Equitable Sharing of Benefits Arising from their Utilization" was adopted, Panama became the eleventh country to sign the Protocol (March 2011), the thirteenth country to ratify it (October-December 2012), and the second country in Latin America to ratify it. Over the past few years, our country has been focusing on preparations for the implementation of the Protocol. Cartagena Protocol: Panama created a legal framework establishing the National Biosafety Commission (CNB) as a coordinating and advisory body to address the issue of living genetically modified organisms in the country (Law No. 48 of 2002). Under this legal framework, three sectoral committees (agricultural, health and environmental) were established, which serve as technical committees to assist in the management of the National Biosafety Commission. United Nations Framework Convention on Climate Change (UNFCCC): Panama chaired the Coalition for Rainforest Nations (CRFN) during the final stage of the negotiations on the Paris Agreement, which it signed in April 2016. Basel, Stockholm and Rotterdam Conventions: Panama supported Decision 8 on chemicals of the Forum of Ministers of Environment for Latin America and the Caribbean held in Cartagena, Colombia, on 28-31 March 2016. The Ministry of the Environment has already created its focal point for the Intergovernmental Network on Chemicals and Waste for Latin America and the Caribbean, which was created under the aforementioned Decision. Kyoto Protocol: Panama has registered 22 projects under the Clean Development Mechanism. Montreal Protocol: Since January 1989, the Republic of Panama has been party to the Montreal Protocol, under which it has worked actively through the National Ozone Unit of the Ministry of Health (focal point) to eliminate and control substances that deplete the ozone layer. Questions from the delegation of Thailand General provisions 1.8. Paragraph 3.2: The Parties agree to grant national treatment to each other's goods in accordance with Article III of GATT 1994, except for goods listed in Annex 3.3. For Mexico, the list includes fuels and second hand vehicles, while Panama lists measures affecting imports of lottery tickets, used motor vehicles, videos and games, as well as exports of woods from its national forests. Both Parties list actions authorized by the
-6 - WTO Dispute Settlement Body. They also agree to eliminate any non-tariff measure that prohibits or restricts their bilateral imports, except for the measures listed in Annex 3.3, or as provided in Article XI of the GATT 1994. Does this agreement provide for the liberalization of non-tariff measures (NTMs) at a higher level than what has been achieved by the WTO's agreements? If so, please explain. The Parties agree not to apply restrictions on imports and exports of goods between the Parties, or any exceptions thereto, in accordance with Articles III and XI of the GATT 1994, and to incorporate these Articles mutatis mutandis into the Agreement. Global safeguards 1.9. Paragraph 3.32: The Parties retain their rights and obligations under Article XIX of the GATT 1994 and the Agreement on Safeguards (hereafter the Safeguards Agreement), which shall govern the application of global safeguards, including any related disputed. They do not take any additional commitments under the Agreement in this area, except that imports from the other Party can be excluded from the imposition of global safeguards if they do not account for a substantial share of total imports nor contribute in a significant manner to the serious injury or threat thereof (Article 6.7). Are the global safeguards in this agreement more or less restrictive than the WTO safeguard measures? Please explain. The global safeguard measures are applied in accordance with WTO provisions (Article XIX of the GATT 1994 and the Agreement on Safeguards), as indicated in Article 6.7.1. Therefore, the global safeguard measures in this agreement are no more and no less restrictive than those established in the WTO Agreement on Safeguards. Bilateral safeguards 1.10. Paragraph 3.35: The Agreement also includes provisions on investigation procedures (Article 6.3), provisional safeguards (Article 6.4), transparency (i.e. notifications and consultations) (Article 6.5) and compensation (Article 6.6), all of which are in general more detailed than under the Safeguard Agreement, except for those on the application of provisional safeguards which closely mirror the Safeguard Agreement. To determine the need for a safeguard, the corresponding authority in the Party must carry out an investigation, on its own initiative or following a request from representatives of the domestic industry, who must account for at least 25% of the production of the like or directly competitive good (Article 6.1). Compared to the Safeguards Agreement, this definition of "domestic industry" seems less restrictive since under the latter, the "domestic industry" is defined as producers accounting for a major proportion of the total domestic production of a similar or directly competitive good (Article 4). The Agreement further describes in detail the various stages of the investigation, including data requests. a. Please elaborate on how bilateral safeguards are in general more detailed than safeguard measures under the WTO Safeguards Agreement. Some of the Agreement's procedures for adopting bilateral safeguards are more specific than the safeguard measures established in the WTO Agreement on Safeguards. For example, specific mention is made of the information that should be included in applications for the initiation of an investigation, initiating resolutions, and reports containing technical arguments on which the corresponding resolution is based. Furthermore, with regard to notifications and consultations, the Agreement establishes specific time-frames and the information that must be provided to the other Party when an investigation is initiated or when a measure is adopted or extended. Compensation consists of temporarily additional tariff concessions, while the Agreement on Safeguards establishes that any means of trade compensation may be granted.
-7 - b. How is the definition of "domestic industry" in the bilateral safeguards less restrictive than that in the WTO Safeguards Agreement? Please provide an example to illustrate this point. The definition of "domestic industry" in the case of bilateral safeguards is not less restrictive than that in the WTO Agreement on Safeguards, as it is in fact the same: "the domestic producers as a whole of the like or directly competitive products, or those whose collective output constitutes a major proportion of the total domestic production of those products". Denial of benefits 1.11. Paragraph 4.8: Prior to notification, a Party can deny the benefits of Chapter 9 to a service supplier of the other Party if the supplier is a company owned or controlled by nationals of a non-party, which has no substantial business activities in the territory of the other Party. It can also deny these benefits if the supplier is a company, owned or controlled by nationals of the denying Party that has no substantial business operations in the territory of the other Party (Article 9.10). 24 Footnote No. 24: the Agreement does not contain a definition for "substantial business activities". Pursuant to footnote 24 which provides that this agreement does not contain a definition for "substantial business activities", what are the criteria for determining the "substantial business activities" before a Party can deny the benefits of Chapter 9 to a service supplier of the other Party? This is correct. The Agreement does not contain a definition for "substantial business activities" and therefore there are no criteria for determining such activities. Movement of natural persons Table 4.1 Authorized business persons by the Parties Traders and Investors 1.12. Traders and investors who seek to (a) carry on substantial trade in goods and services principally between the Parties or (b) establish, develop, administer or advise on the administration of an investment to which the business person or its company has committed, or will commit, a significant amount of capital. What is the threshold for investment that would be considered as "a significant amount of capital"? In Mexico's case, the competent authority has not established a threshold for investment that would be considered a significant amount of capital. However, in the case of Panama, various amounts of capital have been established for the authorization of investors (persons), the minimum being US$160,000.00. Performance requirements 1.13. Paragraph 4.16: The Agreement prohibits the application of performance requirements in connection with investment activities of an investor of a Party or a non-party in its territory. 29 It also prohibits the Parties from granting an advantage related to an investment in their territories of an investor of the other Party or a non-party conditional on certain performance requirements, unless the requirement is to locate production, provide a service, train or employ workers, construct or expand particular facilities, or carry out research and development in their territories. Paragraph 4.17: Some performance requirements are allowed in the case of government procurement, export promotion and external support programmes. Performance requirements to achieve national content and benefit domestic goods can also be used to determine the origin status of products.
-8 - Footnote No. 29: The performance requirements prohibited under Article 10.7 are: (a) to export a given level or percentage of goods or services; (b) to achieve a given level or percentage of domestic content; (c) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; (d) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; (e) to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales to the volume or value of its exports or foreign exchange earnings; (f) to transfer technology, a production process or other proprietary knowledge to a person in its territory, except in certain cases; and (g) to supply exclusively from the territory of the Party the goods that such investment produces or the services it exports. a. Please provide examples of certain cases which would fall under the exception stipulated in item (f) of footnote 29. Do they need to be listed in the reservations on existing and futures measures with respect to performance requirements? To date, neither of the Parties have had cases in which this exception was applied. However, if there were such a case, it would not necessarily need to be listed in the reservations on existing and future measures. b. According to paragraph 4.17, some performance requirements are allowed in the case of government procurement, export promotion and external support programmes. Please clarify whether these exceptions need to be listed in the reservations on existing and futures measures with respect to performance requirements. As this concerns authorized performance requirements, if there were such a case, it would not need to be listed in the reservations on existing and future measures. Liberalization commitments 1.14. Paragraph 4.20: The liberalization of trade in services and investments follows a "negative list" approach, which means that provisions in Chapters 9 (Cross-border Trade in Services) and 10 (Investments) apply to all sectors, unless otherwise specified in the Parties' lists of reservations. Commitments in financial services (Chapter 11) are also defined according to a negative list, except for mode 1 which is also subject to a positive list (Annex 11.7). Paragraph 4.21: Annexes I and II to the Agreement contain the reservations on existing and futures measures with respect to national and MFN treatment, market access, local presence, performance requirements, and senior management and board of directors in cross-border trade in services and investments. Annex III lists reservations for financial services on existing and future measures with respect to national and MFN treatment, right of establishment, cross-border trade and senior management and board of directors. Reservations with respect to national and MFN treatment in Annexes I and II also apply to financial services, to the extent that the measure or activity in the reservation is covered by Chapter 11 (Article 11.11). Please elaborate more about the reservations with respect to national and MFN treatment in Annexes I and II which also apply to financial services, to the extent that the measure or activity in the reservation is covered by Chapter 11 (Article 11.11), given that Annex III already covers existing and future measures with respect to national and MFN treatment on the reservation lists for financial services. The Chapter on financial services applies to the measures adopted or maintained by a Party in relation to a financial institution of the other Party, an investor of the other Party or an investment by this investor in a financial institution in the territory of the Party, and cross-border trade in financial services.
-9 - The Chapter on cross-border trade in services applies to the provision of services, including financial services. In this regard, there may be some financial services that are not regulated by a financial authority, and which are therefore not covered by the scope of the Chapter on financial services. They are, however, covered by the Chapter on cross-border trade in services. Consequently, a non-conforming measure (reservation) established by a Party in its list in Annexes I or II with regard to Articles 9.3 (most-favoured-nation treatment), 9.5 (national treatment), 10.3 (national treatment) or 10.4 (most-favoured-nation treatment), must be treated as a non-conforming measure not subject to Article 11.3 or Article 11.4, as appropriate, to the extent that the measure, sector, subsector or activity established in the non-conforming measure is covered by the Chapter on financial services. Financial services 1.15. Paragraph 4.36: Mexico's commitments in financial services are broader than in the GATS but remain very limited as a number of reservations, largely reflecting those under the GATS, apply. For instance, in insurance and insurance related services, Mexico took some commitments for non-life insurance services but like in the GATS none were made for modes 1-2 for life insurance services and related auxiliary services. In non-life insurance services, in particular transportation insurances, Mexico took commitments in modes 1 and 2, which mirror those under the WTO Understanding on Commitments on financial services, but maintains a broad reservation that prohibits foreign companies from selling insurances to persons or companies located in Mexico or subject to Mexican legislation, unless they cannot be purchased locally. This includes private insurance for Mexican nationals and companies, insurance for Mexican vessels or aircraft, credit insurance, as well as any insurance intended to cover a risk in Mexico. Subject to authorization, Mexico may allow foreign companies to sell international or travel insurance in its territory. The provision of auxiliary services for the activities covered by the reservation is also prohibited. Mexico also prohibits equity participation by foreign financial entities in insurance or bonding agencies, and mutual insurance companies. Foreign individuals may participate in mutual insurance companies as long as they do so individually and not as part of a legal entity. Regarding the underlined sentences, what are the reasons behind the differential treatment in terms of equity participation in insurance companies between foreign financial entities and foreign individuals? Concerning the underlined sentences: a. The last paragraph under subsection 2 of Mexico's non-conforming measures contained in Section A of Annex III allows for financial institutions of the other Party to hold at least 51% of the shares representing the capital of insurance institutions, provided that they are "subsidiaries". b. Section 8 of Mexico's non-conforming measures contained in Section A of Annex III does indeed establish that groups of foreign natural or legal persons, regardless of their form, may not participate in mutual insurance companies, whether directly or through an intermediary. The reason for this is that such companies are organized and function in such a way that their insurance operations do not make any profit for the company or its associates, as they only have to charge the amount necessary to cover their general management costs and create the technical reserves needed to meet their commitments to insured parties. It should, however, be noted that foreign legal persons are allowed to participate in the capital of insurance institutions. Health related and social services 1.16. Paragraph 4.39: Mexico did not take any further commitment in health related and social services, which are subject under the Agreement to a broad reservation allowing the application of any measure affecting investment and cross-border trade in social
-10 - services such as correctional services, income security and insurance, social security, social welfare, health (public and private) childcare services, as well as measures for providing law enforcement. Under the GATS, commitments in health related and social services are limited to certain activities and modes. Health related and social services 1.17. Paragraph 4.60: Panama made no commitments in health related and social services, as they are subject to a broad reservation on social services. The reservation allows Panama to adopt any measure affecting investment and cross-border trade in social services such as correctional services, income security and insurance, social security, social welfare, health (public and private) childcare services, as well as measures for providing law enforcement. With regard to health related and social services, does the Agreement provide for GATS-minus commitments? Please advise. No; since the commitments undertaken in the Mexico-Panama FTA only cover health services, they are reflected in reservation 8 of Annex II of the Agreement, which specifies that this reservation applies to health services only insofar as they are social services established in the public interest. Any health service that is not established or maintained for reasons of public interest, such as private health services, will be included in and covered by the commitments in Annex I.