EXTRA-TERRITORIAL RIGHTS FOR TNCS IN SERVICES?

Apr 16, 1986

EXTRA-TERRITORIAL RIGHTS FOR TNCS IN SERVICES?

GENEVE, APRIL 14 (IFDA/CHAKRAVARTHI RAGHAVAN) – Exchange of information among GATT Contracting parties on "services" are due to resume in GATT this week, with focus on a controversial note prepared by the GATT Secretariat.

If some of the concepts put forward by the Secretariat are accepted, and if affirmative answers are given to some questions posed, TNCS engaged in "service" activities would gradually get extra-territorial rights abroad, reminiscent of the situation in China before the 1949 revolution, according to one third world delegate.

Under the 1982 decision of GATT Ministers, national studies were undertaken by interested countries, and under a 1984 decision of the GATT CPS, a group chaired by Felipe Jaramillo of Colombia, is engaged in exchange of information on service matters.

This group is to submit its recommendations to the next meeting of the GATT CPS, to enable them to decide whether any multilateral action on services is "appropriate and desirable".

The GATT CPS also agreed in 1984 that the GATT Secretariat should carry out such tasks in facilitating this work, as may be agreed upon.

Under this mandate, the GATT Secretariat had been asked to prepare a note analysing issues and concept related to national and international regulations affecting international transactions in services, "with specific reference to their tradeability".

Instead, the Secretariat has suggested concepts that would make services "tradeable", and reduce national territorial jurisdiction of states.

It seeks to do this by making every transaction in services between nationals of one country and another "an international transaction", where national regulations would have to be justified abroad and gradually deregulated.

Some third world delegates note that while over the last two decades, the GATT economists have been propagating such laissez faire economics, this is not a doctrine either embodied in the GATT charter or accepted by the GATT Contracting parties as such.

The GATT in its objectives in fact propagates keynesian economics rather than neo-classical ones – calling for governmental actions to raise standards of living, ensuring full employment, growing real incomes and demand, and expanding production and exchange of goods, through arrangements for substantial reductions of tariffs and other trade barriers and to elimination off discriminatory treatment in international commerce.

In an effort to de-legitimise national jurisdiction and rights in area of services, the GATT Secretariat note has suggested a new definition of "international transactions"; different from accepted ones, and the theory of "legal vacuum" in the international arena.

An accepted definition of international transactions, based on trade theories and used in GATT so far, is that of movements of goods or services across borders.

The other, related to payments (used by the IMF), is of goods or services sold by a resident of one country to a resident of another country.

However, as the various national studies, and the UNCTAD study on services, have brought out only a very small portion of services produced in the world (eight percent, according to UNCTAD studies) are internationally traded or tradeable.

This is because of the nature of the "services" – many of which have to be produced at the point of consumption, and can neither be transported nor stored.

The UNCTAD studies and their implications were presented by a representative of the UNCTAD Secretariat to the GATT group in March, and discussed at length in the group.

The UNCTAD study, and discussions on it, underscored the view that "services" could not be viewed merely through the "lens" of trade, and that they have tremendous linkages with the rest of the economy and infrastructures of economic activity in a country, and that governments have to look at "services" from the point of their availability to citizens and how it would further economic activity, rather than mere trade aspects.

Also, in looking at "services" in some of the sectors, like information-based services or in technology transactions, the role of the transnational corporations and their restrictive business practices could not be ignored.

The relaxation of anti-trust measures in the U.S., for example, has enabled the rise of TNC conglomerates, supplying goods and services, and having an oligopolistic impact on the market.

Instead of a note relating to the "tradeability" of the services, the GATT Secretariat would appear to have posed the issue whether the definition of "international transactions in services" should not be changed or its concept extended to enable "international transactions" or tradeability of services that could not be stored or transported.

While the criteria of movement across borders, in effect prevents their international tradeability, and thus any international transaction, the IMF payments criteria does not involve any movement across borders.

All that is required is that the sale involves a change of ownership between the resident of one country and a resident of another – whether the sale takes place across the borders or in the country of sale.

Whether and how a "sale" could take place in a country between a resident and a non-resident would thus depend on the national regulations, based on concepts of national sovereignty and socio-economic and development policies of the state concerned.

To get around this, the GATT Secretariat has suggested what it calls "an IMF plus" definition, to cover "all forms of sales involving a change of ownership between nationals of one country (or firms controlled by them) and nationals of another (or firms controlled by them)".

The "IMF plus" definition, the Secretariat suggests, is no indication of its own choice "choice", but merely used to discuss every possible range of issues and related concepts.

Third world delegates however note that without such a definition, expanding current GATT jurisdiction in "trade" and in "goods", rights of "investment" or "establishment" could not be brought in, as the U.S. wants, even if GATT jurisdiction is extended to deal with "trade in services".

While using a much broader definition of international transaction that would enable all types of national and international regulations of any type of transaction to be covered, the paper ignores the basic issue whether the various heterogeneous activities (that national studies have been able to define only as "invisible" or "residuals"), in fact have any commonality to justify a common approach.

The note assumes that services have a commonality, that there is an international vacuum to be filled, and this via GATT.

In the various individual services sectors, various international organisations have been involved, and have created international frameworks to the extent needed in their respective sectors, dealing with their development, providing technical standards, and transactions in such services across national frontiers.

This is on the basis of their respective charters, and what the governments have been willing to agree upon, in each particular case, through a convention or treaty, as the case may be.

So far under international law, everything that has not been specifically ceded to international jurisdiction by a state lies entirely within national jurisdiction and sovereignty, leaving no scope for the concept of "legal vacuum" of jurisdiction in international law.

The existing international regulations in specific services sectors, GATT suggests, are "piecemeal" actions in particular service activities that have taken place in the "legal vacuum", and dealing with "certain aspects" of the services.

It cites, in this connection, the Chicago Convention on Air Transport and the UNCTAD Code on Liner Conferences, to suggest that the Chicago Convention only deals with first and second "freedoms" in air transport, and UNCTAD code only with "liner shipping trade", and there is thus a "vacuum" in international law relating to other aspects of the trade in air services or shipping that could be dealt with via GATT.

However this is misreading of current international law. In fact the states that have joined these conventions have ceded their national sovereignty in civil aviation and maritime transport only to the extent provided in these two instruments, and in all other matters their respective national jurisdictions apply.

Also, to the extent states have joined the United Nations, of which UNCTAD is an organ of the General Assembly, or the specialised agencies, they have ceded a portion of their national sovereignty to the respective organisations to consider, discuss and recommend national and international measures in their respective sectors of competence.

This would really mean that any international framework in specific "service" sectors would have to be addressed within the particular international organisation, or if there is to be an overall framework for "services" as such, governments must first agree on this and create an institutional framework to do this.

The GATT Secretariat in effect has sought to get around this through its concept of "legal vacuum".

In terms of national regulations and their impacts on "IMP plus" international transactions, the Secretariat would appear to look at regulations from the point of view of their intents and effects, and whether the protection granted to domestic activity is intended or incidental.

Regulations restricting take-over of local banks by foreigners, restrictive visa and work permit regulations are viewed as intentionally restricting international transactions, where the only issue is whether or not there is ground for reduction or elimination of protection.

Surprisingly, cabotage regulations, reserving coastal trade to national flagships, are viewed as restricting international transactions "only incidentally".

The Secretariat also would appear to suggest an approach based on whether national and international regulations in force increase on restrict "market access", thus creating a case for restricting or reducing national regulations that reducer market access – whether by restricting "imports" or restricting the rights of "establishment" or "investment" for foreign enterprises wanting to undertake these service activities.

It also poses the question whether countries should not be obliged to have "consistent" approach in regulation of services, either across services sectors or within each sector.

This is on the basis that without such consistency, international transactions in services are hampered "by raising the cost of operating simultaneously in several countries".

This assumes and existing international right for a TNC to operate in several countries simultaneously, and the right to do so at less cost.

While pushing the case for "equality" of treatment in the "services" area for national and foreign enterprises, the GATT note also appears to suggest such a "national treatment" only in respect of "rights" and not "obligations".

It thus makes out a case that foreign exchange regulations should not apply equally to domestic and foreign banks, since latter tend to depend on parent institutions and inter-bank borrowings.