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Update on the GATS Negotiations

The Good and the Bad News for Local Governments 
by Ellen Gould 
In the past year, over seventy Canadian municipalities 
approved resolutions raising local government concerns 
about the General Agreement on Trade in Services (GATS). At 
its annual meeting in May 2001, Federation of Canadian 
Municipalities both passed a resolution and established a 
committee to take up the issue with the federal government. 
The minutes of GATS meetings show (1) that local government 
efforts have paid off, with Canadian negotiators objecting 
when local governments regulations are explicitly targeted. 
Local government initiatives have made a difference. 

However, as negotiating deadlines get closer, the federal 
strategy now seems to be to discount local government 
concerns. Trade officials are giving absolute assurances 
that cannot be justified by what is in the existing GATS 
and that are directly contradicted by sweeping proposals to 
expand the agreement. These officials are also dismissing 
out of hand that there are likely to be any WTO challenges 
to local government authority. In the past, similar 
assurances were given to other concerned sectors, only to 
be proven wrong when trade panels ruled against Canada. 
Just one of Canadas losses at the WTO was the Auto Pact - a 
case Canada lost partly due to its GATS commitments. 

By June 2002, all WTO members have to tell other countries 
what sectors they want them to add to their existing GATS 
commitments. By March 2003, they have to say what they are 
prepared to give up in return. All of this information is 
to be kept from the public, including from elected local 
government representatives. 

As these critical decisions are made, the risk is that 
trade officials will be successful in convincing local 
government representatives the GATS negotiations are 
nothing to be concerned about and their GATS resolutions 
were misguided. In reality, two developments over the past 
year highlight the urgency of increased local government 
involvement: 


The revelation through leaked documents that Europe is 
asking for unrestricted access to the Canadian water supply 
market. 
The placement of zoning and hours of operation on a list of 
regulations that will have to be limited to only what is 
necessary.
Councillors and Canadians generally may find the following 
report of developments in the GATS negotiations alarming. 
However, it is not a question of debate or interpretation - 
readers can verify what is stated below by looking up the 
sources listed and reading the words in context in the 
original WTO documents. Where the WTO has not made key 
documents public, they are posted on this site in order to 
promote democratic transparency. 

Are Municipal Services Covered by the GATS? 

The definition of measures covered by the GATS is 
incredibly broad, including anything a government does 
whether in the form of a law, regulation, rule, procedure, 
decision, administrative action, or any other form.(2). 
Anything a government does that even affects trade in 
services is covered. Measures taken by all levels of 
government and even by non-governmental organizations with 
authority delegated by governments are covered. 

Two very powerful provisions in the GATS apply when 
governments commit specific services. For example, when 
particular services are fully committed under the GATS, 
governments can no longer limit the supply of the service 
such as by maintaining or authorizing monopoly service 
providers. They cannot discriminate, even inadvertently, 
against foreign service suppliers. They are not even 
allowed to discriminate against foreign corporations when 
they give out grants. 

Current negotiations are designed to get more service 
sectors committed and to amend the agreement to create new 
disciplines on domestic regulation. But because of 
commitments Canada has already made, Canadian 
municipalities may currently be in violation of the 
agreement and vulnerable to a WTO challenge. For example, 
when they make zoning decisions some Canadian 
municipalities limit new retail development by taking into 
consideration potential negative impacts on existing 
stores. A WTO challenge to these policies might succeed 
because the federal government has already committed all 
Canadian governments not to limit retail development in 
this way (3). 

Canada has also taken commitments for service sectors where 
municipal governments deliver or contract out services, 
such as sewage, refusal disposal, sanitation, and snow 
removal. Canada is telling local government officials that 
all they meant to cover by these commitments were services 
businesses supply to other businesses or to individuals. 
But other countries that made commitments in these areas 
stated clearly that their commitments did not apply to 
publicly delivered services. Canada never did this, 
potentially jeopardizing the capacity to deliver these 
services in the public sector. In contrast, when Canada 
wanted to ensure public monopolies on alcohol sales were 
excluded from its commitments, it listed this limitation on 
its retail commitments. Although they deny it publicly, 
trade officials are obviously uncertain about whether GATS 
commitments cover publicly delivered services 

New Threats to Local Government Services 

The secret European GATS requests leaked in April 2002 (4) 
reveal the European Commission is bargaining to achieve 
unrestricted access to Canadian water services. If the 
federal government gives in to this European request, how 
will local governments be affected? 

Federal trade officials have two basic responses to 
questions about whether Canadas GATS commitments impact on 
municipal services: 


services provided by municipalities are exempt as services 
supplied in the exercise of governmental authority if they 
are neither supplied on a commercial basis nor in 
competition with other service suppliers. 
services contracted out by municipalities are exempt as 
government procurement.
Although the federal responses may seem to provide local 
governments with categoric guarantees, they cannot for the 
simple reason that all the terms involved in these 
exemptions remain undefined. Trade officials, if asked, 
will be unable to point to any passage in an official WTO 
document where negotiators have given clear direction to 
dispute panels the interpretation of these terms. 

There is no definition for what supplying a service on a 
commercial basis is. Some municipalities supply water 
services to other municipalities and get paid for it. Does 
this mean they are supplying a service on a commercial 
basis? There is no definition for what it means to supply a 
service in competition. Does the fact that no matter what 
the service, there is always some example of a private firm 
supplying it mean that there is competition for virtually 
all services? No one knows for sure. 

Even though there is some recognition that all this 
ambiguity is a problem, GATS negotiators have so far 
refused to make the agreement any more clear. They have 
effectively decided to let these issues be decided by WTO 
dispute panels. 

Contracting out a service to a private firm might be 
considered exempt from the GATS as government procurement, 
but then it might not be. If it is not exempt from GATS 
commitments, then governments could be challenged if they 
make a contract with an exclusive supplier. 

WTO countries have no common definition for procurement, 
and it is never defined in any WTO agreement. The 
definition Canada generally gives for procurement is 
purchases governments make for their own use. That would 
seem to cover contracts for supplying city hall with 
computer services, but not for contracted-out garbage 
services provided to local residents. The GATS says 
procurement involves services purchased for governmental 
purposes and not for commercial resale. Neither of these 
terms is defined. 

It is not as though WTO negotiators dont discuss the 
problems of a lack of definition for procurement or whether 
procurement covers situations like contracting out of 
public services to private firms, design-build-operate 
contracts, and public-private financing initiatives (5). 
They discuss all of these cases in depth, but always come 
up with the same answer - there is no agreement on what 
procurement involves. 

Perhaps of most significance for local officials is that at 
the GATS negotiations, the European Commission is 
describing monopolies and exclusive providers in the water 
supply sector as obstacles to trade. 

Imposing WTO-Defined Regulatory Reform 

Since 1999, a specific WTO working party has been 
developing a necessity test to be applied to licensing, 
standards, and qualification requirements set by 
governments at any level. The test is intended to be a 
legally binding revision to the GATS. Since pretty much any 
regulation contains a standard of some kind, governments 
will probably have to ensure all of their regulations can 
pass this test or risk being in violation of the GATS. (6) 

Such a revision to the GATS would be a WTO-imposed 
requirement that would go far beyond the organizations 
trade mandate, since regulations judged to be not really 
necessary would become violations of the GATS. This has 
nothing to do with banning unfair treatment of foreign 
companies, which is already prohibited under other sections 
of the agreement. It is about imposing an absolute 
constraint on regulation that would apply even when foreign 
and local companies are treated exactly the same. 

Incredibly, federal trade officials have told local 
government officials that a necessity test would not 
infringe on their regulatory authority. Within the inner 
circles of trade lawyers, no one claims necessity tests do 
not limit a governments regulatory authority. Of course, 
local governments might decide to work as they always have 
and just ignore the WTO. But under the terms of the 
agreement, the federal government is supposed to ensure 
compliance with the GATS by all levels of government. 

Likelihood of a WTO Challenge to Local Government 
Regulation 

Federal trade officials have ridiculed the notion that a 
WTO challenge would ever be taken as a result of a 
municipal decision. Yet an insider trade journal reports 
that the major transnational retail companies are keenly 
interested in this round of GATS negotiations, and that the 
GATS will help deal with the troublesome and excessive 
domestic regulation that impedes their global ambitions. 
(7) 

Evidence of this interest is demonstrated by the list of 
examples WTO members have submitted for what needs to be 
disciplined by new GATS constraints on domestic regulation. 
Zoning and hours of operation appears on this list, as well 
as many other items in municipal jurisdiction (8). There 
are clearly WTO members, acting on behalf of their domestic 
retail industry, who view municipal regulations as a 
problem and want new legal grounds to be able to challenge 
them. So it is entirely realistic to think that once new 
grounds are established in the GATS to challenge zoning 
regulations, we will see these challenges emerge. 

Impacts of Necessity Tests on Local Government 
Decision-Making 

How would having a necessity test change the way local 
governments make their decisions? Take, for example, a 
zoning decision over an area where a municipality was 
concerned about the potential impact of retail development 
on small shops, the traffic noise of commercial development 
on surrounding residential neighbourhoods, the allocation 
of adequate green space, the ability to service the area 
efficiently with transit. Under a necessity test, local 
councillors would be required to: 


Have an objective that a trade dispute panel would accept 
as legitimate. 
Choose the least burdensome or the least trade restrictive 
means of achieving their objective that is reasonably 
available to them.
This could mean that rather than curtailing new retail 
development, municipalities might be restricted to 
assisting small shops by improving shopping area features, 
like park benches or landscaped medians. Rather than being 
able to require fixed amounts of green space, they might be 
obligated to accept alternatives like payment from 
developers towards recreational facilities. Rather than 
ruling out high-traffic generating land uses, they might 
have to allow development if noise abatement measures were 
taken. Rather than requiring high density development for 
efficient transit, they might have to consider transit 
options designed to serve low density development. 
Ensure the measures taken and the objectives they are 
supposed to meet are an appropriate fit.
If a dispute panel considered measures were not an 
inefficient way of meeting the objective, they would not 
pass the necessity test. 

In the event of a challenge, it would be up to a WTO panel 
to decide: 


whether measures were not the least trade restrictive 
option 
whether other less burdensome options were reasonably 
available, and 
whether more effective measures could have been taken to 
meet the objective.
A municipality being challenged would have no right to 
present to the panel its reasons for passing a particular 
regulation nor could it comment on the practicality of less 
burdensome options. 

We know this is what a necessity test means because there 
are already necessity tests in WTO agreements other than 
the GATS and WTO panels have already stated explicitly what 
governments have to do in order to comply. (9) If elected 
representatives are uncertain what the WTO means by saying 
regulations have to be necessary, the organizations 
Appellate Body has already cleared this up. The WTO 
interprets necessary as tending to mean indispensable. This 
does not bode well for local government regulatory 
authority if a necessity test is inserted into the GATS. 
For example, is it likely that a WTO panel would conclude 
the measures local governments take to protect the 
character of neighbourhoods are indispensable? 

Regulatory Objectives Are At Risk 

We also know, contrary to what trade officials claim, that 
the WTO now not only gets to make judgements about the way 
governments go about achieving their objectives, but as 
well on the worthiness of these objectives themselves. 
There have been two WTO rulings (10) that have said the 
trade restrictiveness of a government measure has to be 
justified in relation to the importance of its underlying 
objective. 

Although it never hit the front pages of newspapers, the 
WTO Appellate Body ruling in one of these cases has been 
described by an international trade expert as breathtaking 
because it constitutes a significant shift toward a greater 
role of the Appellate Body in weighing regulatory values 
against trade values. (11) If a municipality decides to 
zone an area to forbid unsightly activities, this could be 
viewed as extremely trade restrictive because it is an 
outright ban on certain kinds of commercial investment. 
Would a panel of trade lawyers consider the underlying 
objective - to maintain a pleasing urban environment - 
justification enough for what would be viewed as a 
significant restriction on trade? 

The only objectives currently recognized as legitimate 
exceptions to the GATS (12) could be used only in extreme 
cases for measures to protect life or national security. 
Objectives like maintaining the character of neighbourhoods 
or reducing traffic noise would have very little chance of 
meeting this high standard. Negotiators considered coming 
up with an expanded list of objectives to be accepted as 
legitimate under a necessity test, but have already 
abandoned this effort. 

The Preamble Does Not Guarantee the Right To Regulate 

It is extremely misleading for trade officials to point to 
one sentence in the preamble of the GATS - Recognizing the 
right of Members to regulate, and to introduce new 
regulations, on the supply of services within their 
territories in order to meet national policy objectives - 
as though this would keep local government regulation safe 
from a challenge. Trade officials are counting on local 
government representatives not to have the time to read 
this statement in its context or not to know how preambles 
are treated in international trade law. 

In Canadas intervention in one trade dispute, the Attorney 
General of Canadas own lawyer explained why preambles to 
trade treaties should not be used in the way trade 
officials are currently using the preamble to the GATS. He 
cited the relevant rules of international trade law to 
underline that while the purposes of a treaty set out in 
the preamble may be considered in interpreting a treaty, 
interpretation must be based above all on the text of the 
treaty. It is only when an interpretation of the text is 
ambiguous or obscure that the preamble needs to be referred 
to.(13) Similar conclusions about the role of preambles 
have appeared in WTO rulings. 

The preamble to the GATS includes both a recognition of the 
right of governments to regulate and a commitment to expand 
trade in services. If a dispute panel had difficulty 
interpreting the meaning of text of the agreement, they 
would use both of these stated goals as guidance. The right 
to regulate would have to be balanced against the 
commitment to expand trade. 

But there is no reason a dispute panel would need to refer 
to the GATS preamble to interpret a necessity test if 
negotiators insert one into the agreement. There is already 
a track record of WTO rulings clarifying what necessity 
tests mean. In addition, WTO staff have given negotiators 
extensive briefings on how these tests work in other WTO 
agreements. A dispute panel could reasonably conclude that 
since they changed the agreement to include a necessity 
test, WTO members thought domestic regulation needed to be 
restricted even more than it already is by the other 
provisions in the GATS. 

GATS Necessity Test Would Be More Burdensome Than Necessary 
for Local Governments 

Those who are advocating a necessity test for the service 
sector, borrowing the concept from WTO agreements dealing 
with goods, appear to have no grasp of how bizarre this 
would be when applied to regulations like zoning. They are 
suggesting international standards could be used to 
determine which regulations were more trade restrictive 
than necessary. What is the equivalent of an international 
standard, comparable to international food safety 
standards, in the urban planning field? Communities around 
the world vary widely in terms of the zoning regulations 
they enforce, with some cities having none at all. How 
would a one-size-fits-all standard be set for communities 
worldwide? There is also discussion of a scientific risk 
assessment being required to justify regulations. How would 
urban planning regulations be scientifically assessed to 
determine the risk incurred if they were not in place? 

The notion that there is hard science that can answer 
questions once and for all, ignoring local preferences, is 
questionable even when dealing with goods. It is absurd to 
think such science exists to objectively decide issues like 
neighbourhood planning. But this is the model that is 
emerging from the trade arena, and there seems to be no 
grasp of how unacceptable it would be at the community 
level. It would fall to local government representatives to 
explain why these rules were put in place to limit local 
decision-making. 

Other Threats to Regulatory Authority 

Perhaps because it sounds less threatening than a 
requirement to prove your regulations are necessary, 
Canadian trade officials are now emphasizing the need for 
increased GATS rules on regulatory transparency to help 
Canadian companies with overseas investments. But minutes 
of GATS negotiating meetings indicate that transparency 
requirements are being stretched to the point that they 
would be as difficult to meet as a necessity test. Under 
some proposals, governments would be required: 


to allow foreign interests the right of prior comment on 
regulations and to have their comments given due 
consideration 
to state clearly the underlying objectives for their 
regulations, and then 
to justify why regulation was the best way to proceed.
This goes far beyond the traditional understanding of 
transparency as just making sure regulations and procedures 
are made public. It would significantly add to the 
administrative burden on governments, but also impinge on 
their regulatory authority as well. It would create rights 
of prior consultation normally reserved for citizens. The 
increased transparency obligations being talked about at 
the GATS negotiations go far beyond what Canadian local 
governments currently do. 

Conclusion 

Nothing in the GATS negotiations is yet fixed. Neither 
necessity tests nor extreme new transparency obligations 
nor Canadian commitments on water supply are inevitably 
going to emerge at the conclusion of the bargaining 
process. But in order for the federal government to take an 
informed stand on the issues now on the table, particularly 
the ones that will impact most heavily on lower levels of 
government, it needs to consult on the full range of 
proposals, even if these are controversial. It needs to 
actively solicit local government interest in the 
negotiations. 

Instead, the approach is to convince local government 
officials that devoting attention to the GATS negotiations 
is a waste of their time. Categoric reassurances are being 
provided that cannot be justified, statements are being 
made about negotiations being in their early stages despite 
the rapid approach of negotiating deadlines, and the 
draconian nature of necessity tests in international trade 
law is being concealed. Local governments are being told 
the expanded version of the GATS will not affect them. This 
despite the fact that transnational corporations, including 
the largest players in the retail and water sectors, have 
pushed for a new round of GATS negotiations precisely 
because they are dissatisfied with the existing GATS and 
want new provisions to get changes in how governments 
operate. 

Local governments in Canada need to take new initiatives on 
the GATS to convince the federal government their concerns 
are serious. Declarations that municipalities will not 
implement the GATS at the local level might help to 
discourage the federal government from bargaining away 
local government authority at the GATS negotiating table. 

Footnotes 

(1)At the July 3, 2001 meeting of the GATS Working Party on 
Domestic Regulation the delegate from Canada questioned the 
inclusion of Restrictive regulations relating to zoning and 
operating hours in the WTO Secretariats list of measures to 
be disciplined by new provisions in the GATS. July 3, 2001 
Meeting  

(2) Article XVIII of the GATS defines measures covered by 
the GATS. The GATS is posted on the Internet at: 
http://www.wto.org/english/docs_e/legal_e/26gats.pdf 

(3) The legally binding list of sectors Canada has already 
committed can be obtained on the Internet by searching for 
the WTO document symbol - GATS/SC/16 - at: 
http://docsonline.wto.org/gen_search.asp Note that where 
none is listed it means no limitations- that Canada has 
placed no limitations on its commitment. 

(4) The European Commission has acknowledged that the 
attached leaked document is its draft bargaining position 
of what it wants from Canada. Link to European Commissions 
requests of Canada. unreleased WTO document.  

(5) To see the diversity of opinion among WTO members of 
whether contracting out should be considered procurement, 
look up document - WT/WGTGP/M/11 - paragraphs 16 -24 at: 
http://docsonline.wto.org/gen_search.asp 

(6) There is a proposal to limit the application of a GATS 
necessity test to only sectors where governments have made 
market access and national treatment commitments. But since 
Canada has already makes these commitments in areas of most 
concern to local governments - retail development and 
construction - this moderation of the proposal would be of 
little use to local governments. 

(7) Large Retailing and Wholesaling Firms Expect to See the 
So-Far Neglected Distribution Services Sector a Priority in 
GATS 2000", World Trade Agenda, No. 11, June 5, 2000 

(8) See EXAMPLES OF MEASURES TO ADDRESSED BY DISCIPLINES 
UNDER GATS ARTICLE VI:4" excerpted from an unreleased WTO 
document.  

(9) See VI.B paragraph 13, of the WTO Appellate Body 
decision KoreaMeasures Affecting Imports of Fresh, Chilled 
and Frozen Beef, WT/DS/161,169/AB/R, at: 
http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm#disp
utes 

(10) The WTO Appellate Body has ruled in both KoreaMeasures 
Affecting Imports of Fresh, Chilled and Frozen Beef and 
European Communities Measures Affecting Asbestos and 
AsbestosContaining Products that they can pass judgements 
about the importance of government regulatory objectives. 

(11) Joel Trachtman, Lessons for GATS Article VI from the 
SPS, TBT and GATT Treatment of Domestic Regulation, p. 31, 
January 29, 2002, posted at: 
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=298760 

(12) Draft disciplines on accounting regulations have their 
own list of legitimate objectives. 

(13) Joseph de Pencier, Counsel for the Attorney General of 
Canada, paragraphs 37 - 40 of RESPONDENT OUTLINE OF 
ARGUMENT OF INTERVENOR ATTORNEY GENERAL OF CANADA in the BC 
Supreme Court review of the NAFTA Metalclad case, posted 
at: 
http://www.dfaitmaeci.gc.ca/tnanac/canada_submissione.pdf