AUSFTA: Services

This is the eighth in a series of Freehills articles containing overviews and observations about the text of the Australia–United States Free Trade Agreement (AUSFTA).

The text is that which was released on 5 March 2004 by the respective governments, noting that we have relied on the version released by the Australian Department of Foreign Affairs and Trade, which is marked 'Draft – Subject to Legal Review for Accuracy, Clarity, and Consistency – March 1, 2004'.

AUSFTA is a lengthy and complex document. The intention of our newsletter series is to give a general overview of the more important aspects, and to identify specific issues of legal or commercial interest.

To discuss AUSFTA in more detail, please contact Daniel Moulis.

The Australia–United States Free Trade Agreement (AUSFTA) seeks to liberalise, among other things, trade in services between two World Trade Organization (WTO) members, Australia and the United States (US).

The principal provisions of AUSFTA relating to services are contained in Chapter Ten (Cross-Border Trade in Services). Chapters Eleven (Investment) and Thirteen (Financial Services) are also relevant to services. To some extent, all three chapters overlap, potentially offering a variety of benefits relating to trade in services.

Article V of the WTO General Agreement on Trade in Services (GATS) does not prevent WTO members from entering into agreements to liberalise trade in services only between themselves.

Australia and the US claim to have made deeper and wider commitments under AUSFTA than under GATS. AUSFTA should therefore enhance the capacity of Australian service suppliers to gain market access to the US and compete in US markets.

It is interesting that under article 20 of Chapter 7 of the Singapore–Australia Free Trade Agreement (SAFTA), Australia must give 'positive consideration' to a request by Singapore to incorporate certain of AUSFTA's liberalising measures into SAFTA, subject to maintaining 'the overall balance of commitments' undertaken in SAFTA.

One of the main aims of bilateral free trade agreements (FTAs) is to improve on GATS commitments in advance of the completion of the WTO Doha round of multilateral trade negotiations. There are several reasons for this.

First, for now, developed or advanced developing countries are generally the parties to FTAs. Their economies have matured into a mix of activities, including trade in services. They wish to increase their trade by seeking greater market access in comparable economies for their services and services suppliers. The Australian Government has been emphatic that one of the chief qualitative benefits for Australia under AUSFTA is the benchmarking of Australia's services and services suppliers to like US services and services suppliers via closer links to the US economy, the most competitive services economy in the world.

Second, greater market access and protection raises the bar for other WTO Members in the Doha round to liberalise their services economies.

In principle, the structure of the reservations in GATS and AUSFTA to the liberalisation of trade in services suggests that AUSFTA is more liberalising than GATS. Thus, in trade-speak, AUSFTA is 'GATS Plus'.¹

GATS applies most-favoured-nation (MFN) treatment to trade in services through the four modes of supply unless members 'opt-out' by making reservations. GATS only applies national treatment and market access to service sectors where members 'opt-in' through listing services sectors and sub-sectors in their schedules of commitments to GATS. In contrast, AUSFTA requires Australia and the US to apply Chapter 10 disciplines to services and service suppliers unless Australia and the US 'opt-out' through reservations in Annexes I or II. Therefore, the onus is on Australia and the US to identify the non-conforming measures that they wish to protect, and the manner in which they wish to protect them. However, Australia and the US have reserved existing non-federal non-conforming measures under AUSFTA, which waters down its impact and makes outcomes less predictable.

Chapter Ten of AUSFTA applies 'to measures that are adopted or maintained' by Australia and the US 'affecting cross-border trade in services' (article 10.1:1). These measures are measures taken by central, regional or local governments or authorities, including non-governmental bodies exercising powers that have been delegated by these governments or authorities (article 10.1:2).

While the word 'affecting' has not been expressly defined in AUSFTA, article 10.1:1 provides some indication of its coverage by suggesting that the measures that might be affected include:

• the production, distribution, marketing, sale, and delivery of a service

• the purchase or use of, or payment for, a service

• the access to and use of distribution, transport, or telecommunications networks and services in connection with the supply of a service

• the presence in its territory of a service supplier of, relevantly, Australia or the US, and

• the provision of a bond or other form of financial security as a condition for the supply of a service.

Chapter Ten imposes disciplines on Australia and the US in relation to three of the four modes of supply of services that are identified in the GATS, namely cross-border supply, consumption abroad and the presence of natural persons (article 10.14:1).

Chapter Ten does not apply to cross-border services that are supplied through the fourth GATS mode of supply, namely commercial presence. This mode of supply is, to some extent, covered by Chapter Eleven of AUSFTA, which relates to investment. However, article 10.1:3 does extend the coverage of Chapter Ten in relation to market access, domestic regulation and transparency to measures by Australia or the US affecting the supply of a service by an investor of the other country, or a covered instrument (which is defined in Chapter Eleven as an investment in the territory of one party by an investor of the other party established, acquired or expanded on, or following, AUSFTA's entry into force).

Chapter Ten does not apply to financial services—which are the subject of Chapter Thirteen—although article 10.1:4(a) imposes market access, domestic regulation and transparency obligations on Australia and the US in relation to certain financial services and covered investments.

Further, Chapter Ten does not apply to government procurement, air services, subsidies or grants, or 'services supplied in the exercise of governmental authority' (article 10.1:4(b)–(e)).²

Chapter Ten imposes four core disciplines on Australia and the US.

Article 10.2 requires Australia and the US to accord service suppliers of the other country treatment no less favourable than that it provides in like circumstances to their own service suppliers.

Article 10.3 requires Australia and the US to accord service suppliers of the other country treatment no less favourable than that it accords in like circumstances to service suppliers of a country other than Australia and the US.

Article 10.4 prevents Australia and the US from adopting or maintaining measures that:

• impose limits, in essence, on the number of service suppliers, the value of service transactions, the number of service operations, the quantity of services output or the number of national persons that may be employed in a particular service sector, or

• restrict or require specific types of legal entity or joint venture for the supply of services.

Under article 10.5, neither Australia nor the US can require that a service supplier of the other country establish or maintain a representative office or any form of enterprise, or be resident, in its territory as a condition for the cross-border supply of a service.

Article 10.6 allows Australia and the US to exclude certain measures from the application of Chapter Ten disciplines on national treatment, MFN, market access and local presence (non-conforming measures). The lists of such non-conforming measures are set out in the parties' Schedules to Annexes I and II of AUSFTA. Article 10 provides for two types of non-conforming measures.

First, Australia and the US have listed in Annex I existing central, regional and local government non-conforming measures. A subsequent amendment to an Annex I measure is subject to a 'ratchet mechanism', which means that the amendment must not decrease that measure's conformity with the Chapter Ten obligations on national treatment, MFN, market access or local presence (article 10.6(1)(c)). The listing of a non-conforming measure in Annex I therefore essentially imposes a 'standstill' commitment on discrimination in relation to that measure.

Second, Australia and the US can reserve the application of national treatment, MFN, market access and local presence obligations to any measure that they adopt or maintain in relation to the sectors, sub-sectors or activities that they set out in their respective schedules to Annex II. The listing of a sector or activity in Annex II carves out that sector or activity from Chapter Ten's coverage, on the basis that it is considered to be too sensitive, or not appropriate, to regulate.

Australia has excluded:

• foreign fishing vessel authorisation

• locality requirements for patent attorneys, migration agents, company auditors, customs brokers and international cargo liner shipping

• existing non-conforming regional government measures

• local content transmission quotas for free-to-air commercial analogue and digital (other than multi-channelled) television and associated advertising, and

• wheat exportation.

Australia has used Annex I to protect two traditional, but increasingly contentious, examples of Australian economic regulation: Australian rules on television content and Australian Wheat Board programmes. Australia has also taken out reservations in Annex I in relation to its foreign investment regime in the context of Chapter Eleven on Investment, which maintains Australia's long-standing screening procedures for some forms of overseas investment, including, where relevant, US investments. Investment aspects of AUSFTA are discussed in more detail in our earlier newsletter on investments.

Here, Australia excluded:

• the supply of services by the presence of natural persons, subject to compliance with article XVI (market access) of GATS

• law enforcement and correctional services

• social services

• indigenous people services

• broadcasting and audiovisual services (see below for further comment on this sector)

• tobacco products, alcoholic beverages and firearms distribution services

• primary education services

• registration of maritime vessels, maritime cabotage and offshore transport services

• existing bilateral or multilateral international agreements, and

• future international agreements on aviation, fisheries and maritime activities.

Australia has used Annex II to carve out, to a large degree, its audiovisual services sector to protect non-conforming measures such as:

• local content transmission quotas for multi-channelled free-to-air commercial television and associated advertising

• local content expenditure quotas for subscription television

• local content transmission quotas for free-to-air commercial radio

• market access to interactive audio/video and spectrum management, and

• tax concessions for film and television production investment.

The US has excluded measures relating to:

• export conduct and licences

• air services authorisation

• locality requirements for customs brokers, patent attorneys and agents, and trademark attorneys, and

• existing non-conforming regional government measures.

In its Schedule to Annex II, the US has carved out sectors and activities relating to, among other things:

• communications

• law enforcement, correctional and social services

• minorities

• maritime transportation

• market access measures that are not inconsistent with article XVI (market access) of GATS, and

• existing and future international agreements.

Like Australia, the US has reserved existing non-conforming regional government measures in Annex I, which effectively means that Australian State Governments and the Governments of US States can maintain current non-conforming measures. In federal systems, it is not uncommon for regulatory barriers to trade in services to exist at regional level. Thus, this reservation will undermine the trade liberalising objectives of Chapter Ten. Notably, neither Australia nor the US has committed in AUSFTA to mitigate this reservation by 'phasing-in' the application of the core obligations to existing regional non-conforming measures.

In addition to the four core obligations discussed above, there are five other significant obligations in Chapter 10

Article 10.7 addresses domestic regulation. Where Australia or the US require authorisation for the supply of a service, that country's 'competent authorities' must, 'within a reasonable period of time' after a service supplier submits a compliant application for authorisation, inform the applicant of its decision concerning the application. The competent authorities must also, at the applicant's request and 'without undue delay', provide an applicant with information concerning the status of its application. These obligations do not apply to the excluded sectors and activities listed in Annex II.

In addition, article 10.7 contains a relatively weak obligation requiring Australia and the US to 'endeavour to ensure, as appropriate for individual sectors' that authorisation requirements 'do not constitute unnecessary barriers to trade in services', in that:

• they are based on objective and transparent criteria

• they are not more burdensome than necessary to ensure the quality of the service, and

• in the case of licensing procedures, they are not in themselves a restriction on the supply of the service.

Article 10.8 imposes obligations on Australia and the US of AUSFTA for responding to inquiries and comments on, and providing notice of, regulation of cross-border trade in services.

US recognition of Australian education, experience, requirements, licenses or certifications is crucial for Australian services suppliers wishing to 'trade their wares' in the US market. In essence, article 10.9 permits Australia and the US to recognise these qualifications through harmonisation, agreement/arrangement or autonomously.

Perhaps the most vocal candidates for US recognition are professional services suppliers. Professional services are defined as 'services, the supply of which requires specialized post-secondary education, or equivalent training or experience, and for which the right to practice is granted or restricted'. Included in the group are lawyers, accountants, architects, engineers, doctors, and so on.

Annex 10-A (Professional Services) to article 10.9 applies to measures relating to licensing or certification of professional services suppliers. It requires Australia and the US 'to encourage the relevant bodies … to develop mutually acceptable standards and criteria for licensing and certification of professional services suppliers and to provide recommendations on mutual recognition to the Joint Committee' of AUSFTA so that the Joint Committee can review them for their consistency with AUSFTA.

A Professional Services Working Group is to be established to facilitate the development of such mutually acceptable standards and criteria.

AUSFTA does not make recognition of professional services regimes mandatory. However, article 10.9 establishes a framework for Australia and the US to consult on recognition issues. In light of the similarities between Australian and US education systems, work places, ethical standards and economic development, there is no apparent barrier, other than protectionism, preventing Australia and the US proceeding quickly to grant recognition and to benefit from exchanges of expertise and practices.

Under article 10.10, Australia and the US must allow transfers and payments relating to cross-border supply of services to be made freely and without delay into and out of their territory, and to be made in a freely usable currency at the market rate of exchange prevailing on the date of transfer. Article 10.11 allows Australia and the US to deny a services supplier of the other party AUSFTA benefits in certain circumstances. An example of this is where a service supplier of the other country is owned or controlled by persons of a third country, and it has no substantial business activities in the territory of Australia or the US.

Specific commitment: Express delivery services

There are specific commitments in article 10.12 dealing with express delivery services to allow a party to request consultations with the other party if it considers that the other party is not maintaining 'at least the level of market openness for express delivery services existing on the date this Agreement is signed'.³

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.