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Prudence or Discrimination? Emergency Measures, the Global Financial Crisis and International Economic Law

Abstract

Economists and political scientists have begun to isolate the causes and implications of the spread of the global financial crisis in late 2008. Critical attention—often accompanied by strident disagreement—has also focused on the efficacy of various domestic plans implemented in response to the crisis. International economic lawyers have started to explore the legal implications of these developments. Our analysis offers a contribution by examining whether and how certain aspects of international economic law might act as a credible constraint on state tendencies toward domestic preference when formalizing emergency responses to the crisis. We begin by offering a typology of emergency measures implemented to date. We then assess whether particular international economic law rules can target the nuanced forms of protectionism embedded in those responses. We survey both treaty commitments on trading relations (especially under the World Trade Organization) and the treatment of foreign investors. We argue that international investment law is, in the short term due to legal and extra-legal factors, more likely than any other area of international economic law to give rise to initiation of legal action and examine the most probable substantive norms likely to be violated.

I. INTRODUCTION

Economists and political scientists have begun to isolate the causes and implications of the spread of the global financial and economic crisis in late 2008. Critical attention—often accompanied by strident disagreement—has also focused on the efficacy of various domestic plans implemented in response to the crisis. International economic lawyers have only started to explore the legal implications of these developments.1 We hope to contribute by examining whether and how international economic law might act as a credible constraint on state tendencies toward domestic preference when formalizing emergency responses to the crisis.

International economic law comprises a variety of sources, including commitments on trading relations and the treatment of foreign investors. The former—international trade law—encompasses bilateral free trade agreements, regional instruments such as the North American Free Trade Agreement and the multilateral World Trade Organization (WTO). In comparison, the latter—international investment law—not only comprises a heterogeneous network of investment treaties but also includes key aspects of customary international law (CIL). Our analysis aims to identify and assess

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which of these various mechanisms is likely, at least in the short term, to give rise to complaint and initiation of legal action.

We intend to focus closely on a variety of legal and extra-legal differences that cut across the international legal protections for trade in goods and foreign investment. In particular, we see three factors as especially probative in shaping the calculus of whether a state or private actor will initiate a legal complaint. First, the scope of most investment treaties is typically broader than instruments of trade law (and especially the WTO). This is particularly apparent in the relative absence of exceptions for state conduct under most investment treaties, compared with the detailed and elaborate carve-outs such as the prudential exception in the Annex on Financial Services of the WTO General Agreement on Trade in Services (GATS). Second, the right to initiate WTO dispute settlement is vested only in state parties. This has important limiting effects in the context of the current crises as WTO members may rationally refrain from invoking their legal rights given their own (discriminatory) attempts to respond to the crisis and the possibility of attracting retaliatory litigation.2 There is less risk of this glasshouse effect in international investment law. Modern investment treaties displace the default position at public international law by conferring standing on a private party, foreign investors of a signatory state. The foreign investor has the right to initiate action against a host (signatory) state in a range of institutional fora, including the World Bank’s Convention on the Settlement of Investment Disputes between States and Nationals of Other States3 (ICSID). There is, thus, no political filter at play in this system. A foreign investor will consider only the commercial imperatives for initiating action and recouping loss caused by state conduct and there is little possibility for the state party to retaliate through cross-claim or other invocation of the system. Third, and perhaps most crucially, international investment law is characterized by a range of hard, enforceable remedies adding further incentive to commencement of international litigation. The remedy nearly always consists of monetary compensation for loss suffered by the foreign investor and if a dispute is heard under ICSID processes, decisions are enforceable in all Member States of the ICSID Convention.4 In fact, foreign investors have already proven themselves willing to initiate investor-state arbitration where states have regulated in a discriminatory fashion when responding to the adverse effects of past financial crises.5 Significant monetary awards have been issued against states under this system, including Argentina which was found to be in breach of investment treaty obligations in the aftermath of its 2001–02 financial crisis.6

We begin our analysis in Section II by offering a typology of the typical emergency measures implemented by states to date that are at the greatest

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risk of breaching commitments under international economic law. We focus here on the early evidence of discrimination directed at foreign investors in the financial sector in the emergency plans of a number of developed states. Section III then examines whether these measures are likely to breach select and pertinent areas of WTO law and in particular, the GATS, the Agreement on Subsidies and Countervailing Measures and the plurilateral Agreement on Government Procurement (GPA). This is our primary focus but where relevant, we touch upon applicable disciplines under regional trading arrangements and the law of the European Union. Section IV then turns to international investment law. We review the various forms and sources of international investment law including treaties of friendship, commerce and navigation, bilateral investment treaties (BITs), CIL as well as the OECD National Treatment Instrument. We identify potential violations of investment law norms across the different categories of surveyed measures and focus on two key treaty obligations; the specific protection against discrimination of foreign investors in the obligation of national treatment (NT), as well as the broader guarantee of fair and equitable treatment (FET). We also assess the remote possibilities of escaping liability through prudential carve-outs and security exceptions in (some) BITs or CIL. Section V ties these lines of inquiry together and concludes.

II. A TYPOLOGY OF EMERGENCY MEASURES

States have taken different measures in order to save their financial sector and to mitigate the economic downturn. Most of these measures were introduced in a very short-time period and have often been subject to continuing changes. Many of them are codified in law but delegate significant discretion to the executive branch.7 As these laws are often imprecise and without implementing regulation, the regulatory landscape resembles somewhat of a moving target. A final assessment of legality will depend on the form and substance of implementation of various intervention strategies. Nonetheless, we regard an inquiry into legality, even at this early stage, as having merit in offering some guidance to policymakers. We begin by categorizing the most frequently taken measures with specific relevance to state commitments under international economic law.

These emergency measures can be grouped into three broad categories: (1) measures designed to bolster the stability of the financial services industry; (2) measures directed at the financial services industry but structured to increase the availability of credit to other sectors of the economy; and (3) measures targeting select and strategic industries (including the automotive industry).8 Most recently, there have also been various proposals (at both the domestic and multilateral level) for changes in financial regulation to deal with the underlying causes of the crisis.9 Our focus is, however, on categories

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1–3 as we regard these as more likely to give rise to complaint under international trade and investment disciplines. We set out below select, rather than comprehensive, analysis of key measures across these categories highlighting evidence of discrimination against foreign actors before examining whether and how this might attract liability under international economic law.

A. Category 1: measures directed at the financial services industry

The extensive measures undertaken in this first category are designed to increase the confidence of various market participants and to ensure the continuation of bank funding. They encompass liquidity support, recapitalization (through nationalization or otherwise), purchase of specific assets (including ‘toxic’ bank assets), interbank (wholesale) lending guarantees and increases in retail deposit guarantees.10

Within the European Union, the provision of state aid to domestic firms (including financial institutions) was identified early in the months following the outbreak of the crisis.11 The EU Commission has prepared several guidelines for Member States as well as a new framework for state aid. As there is no pan-European regulatory framework for the financial sector,12 the Commission’s role in offering guidance on compliance of financial sector support schemes with state aid rules is crucial as a matter of EU law. Communications by the Commission have, to date, targeted recapitalization measures,13 the treatment of impaired assets14 and support to the real economy.15 The Commission has taken the position that certain categories of state aid are justified, for a limited period, to remedy the crisis and that they may be declared compatible with the common market on the basis of Article 87(3)(b) of the EC Treaty.16 The Commission has examined the compatibility of certain national rescue packages with the state aid rules and issued a series of individual decisions. These measures have all been approved by the Commission.17 With this backdrop in mind, we regard it unlikely that any claim will arise under EU law to the extent a particular measure falls within these authorizations. The actions of the Commission do not, however, insulate the various national packages from liability under international economic law and for that reason, we now turn to a sample of key European interventions.

Germany has established a fund to stabilize the financial market by overcoming liquidity shortages and by creating framework conditions for strengthening the capital base of financial institutions. The Act covers only financial institutions with their seat in Germany, thereby excluding foreign branch operations.18 It enables the executive to take various measures, inter alia, to assume liabilities accrued by financial-sector

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enterprises up to an amount of 400 billion euros and to guarantee liabilities of special purpose vehicles which have assumed risk positions of a financial-sector enterprise.19 Furthermore, the fund may recapitalize financial-sector firms by acquiring shares or silent participations.20 It may also overtake risk positions, that is, buy toxic assets, such as receivables, securities, derivatives, rights and obligations from loan commitments.21 Interestingly, under this new law, all measures taken are immediately enforceable. The initiation of legal action for rescission against measures under the Act will not delay proceedings,22 contrary to the usual principle in German administrative law. The effectiveness of legal recourse by a foreign service supplier is thus significantly constrained, as any final court decision is likely to be too late to avoid harm to the claimant. Also, the Federal Administrative Court is the first and last instance forum for adjudicating disputes under the Act (except for measures with constitutional implications).23

There are similarities between parts of the German model and interventions of other European countries. Most European states exclude foreign bank branches from a variety of benefits. For example, the program in the UK covers only subsidiaries of foreign institutions (as authorized deposit takers).24 Austria has also limited its program to Austrian institutions and has excluded foreign branches.25 There are only very few EU countries that have extended the benefits of regulatory intervention to branches of foreign banks. These include Bulgaria and the Czech Republic, Lithuania and Denmark (but under limited circumstances) and Finland (in the form of an ad hoc guarantee for branches of the Icelandic Kaupthing Bank). But these differences can be accounted for by the reliance of those countries on the presence of foreign banks in their banking sector. The Swiss intervention is structured somewhat differently. Switzerland has elected to only bailout specific institutions taken to be of systemic importance.26 But the benefits of this ad hoc program have only been extended to a national bank—UBS—with a promise to do the same for another, Credit Suisse. Within the European Union, France appears to be the only country which has injected loan capital to a non-EU financial actor (being GE Capital SAS).27

We also see similar tendencies toward domestic preference in the construction of financial interventions outside of the Eurozone. Australia, for example, introduced an insurance scheme both for retail deposits and wholesale lending in early October 2008.28 The coverage of both guarantees was initially limited to Australian-owned banks and credit unions and Australian-incorporated subsidiaries of foreign institutions. Branches of foreign banks—such as Citibank, Credit Suisse and UBS—were excluded from the insurance scheme. This exclusion triggered flight of wholesale capital from foreign bank branches to domestic guaranteed institutions.29Australia is

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not alone in building adverse incentives for regulatory arbitrage in this area. Ireland has also temporarily guaranteed deposits, covered bonds, senior and dated subordinated debt but only in the six biggest banks of that country, reportedly leading to shifts in deposits to the perceived safety of those guaranteed institutions.30

Finally, the position under US law and practice is more nuanced. Early proposals put forward by Secretary of the Treasury Henry Paulson excluded foreign banks from the coverage of the US bailout plan. Following concerted lobbying, the Emergency Economic Stabilization Act of 200831 now authorizes purchase of distressed assets (especially mortgage-backed securities) in financial institutions if they have ‘significant operations’ in the US. The face of the Act then allows for the possibility of foreign bank participation in the US bailout scheme. This absence of formal differentiation though should be seen in light of the significant discretion vested in the Treasury Department under the Act. Early reports suggest that domestic US institutions are the exclusive recipients of capital injections under the scheme.32 Similarly, the ‘Public-Private Investment Programme’ within the Troubled Assets Relief Program not only foresees the buying of ‘toxic assets’ up to 1 trillion USD but also limits access to institutions with ‘significant operations’ in the US. If this trend continues, there may be differentiation against foreign institutions as a matter of fact,33 even if not on the face of the law.

B. Category 2: conditional measures—provision of credit

The second category of measure also addresses the banking industry but is meant to foster credit across the broader economy. The UK34 as well as Germany35 stress in their bailout plans that the provision of credit to national industry, especially small- to medium-sized enterprises is one of the conditions required to be imposed on banks if they take the benefit of the category 1 measures. Given scarce credit availability, lending to foreign industry may well be restricted under these conditions. In Switzerland, the Swiss Federal Banking Commission (SFBC) has agreed with Credit Suisse and UBS to raise current capital adequacy requirements by 2013. The banks will have to comply with a leverage ratio in addition to their risk-based capital adequacy requirement36 but critically, domestic lending activities are exempted from the leverage ratio.37 This exemption for domestic lending activities sets strong incentives for preferring domestic debtors and potentially shifts available credit away from foreign firms. These various biases toward domestic lending also have a broader spillover effect. Developing countries now face a severe financing shortfall as investors (including foreign banks) pull resources out of emerging markets to either meet home country conditions or take advantage of lower risk, newly guaranteed markets in developed states.38

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C. Category 3: measures targeting ‘strategic’ sectors and stimulus packages

The third category of measure is the most recent. These target strategic industry sectors as well as offering general stimulus to generate greater economic growth. In some cases, these measures have been passed without discriminatory impact on foreign producers that export to, or foreign investors present in, the regulating state. For example, a number of states (including the US and Germany) have introduced ‘Cash for Clunkers’ programs designed to incentivize the replacement of inefficient automobiles. None of these programs appear to confine the provision of consumption subsidies to purchases of cars produced only by domestic manufacturers.39 Other measures, however, clearly contain discriminatory elements. In the US for instance, there were early proposals to limit production subsidies for the automotive sector to sites that have been in operation for at least 20 years.40 This condition has the effect of confining those subsidies to the ‘Big Three’ American automakers (along with a single production facility maintained by Toyota in California) as all other production sites of foreign car makers in the US have been in operation for less than 20 years. Such differential effect may constitute impermissible discrimination under international economic law if foreign car makers who have invested in the US do not—as a class—qualify for those subsidies. The sizable loans provided to date to the US automakers under the Troubled Asset Relief Program (TARP)—US$9.4 billion (plus US$4 billion contingent on congressional action) for General Motors (GM)41 and US$4 billion for Chrysler—have prompted early threats of WTO litigation by the EC.42

The more general US stimulus package43—the American Recovery and Reinvestment Act of 2009 (ARRA)44—forbids the use of public funds for projects involving public works ‘unless all of the iron, steel, and manufactured goods used in the project are produced in the United States’.45 Similarly, section 604(a) of that Act provides that ‘(e)xcept as otherwise provided … , funds appropriated or otherwise available to the Department of Homeland Security may not be used for the procurement of [specified items of clothing or equipment] if the item is not grown, reprocessed, reused, or produced in the United States’. There are a number of open questions surrounding the US stimulus package. For example, the ARRA does not define what will constitute a ‘public building’ or ‘public work’, essential to delineating the overall scope of the procurement program. There is also discretion afforded to heads of government departments to waive these domestic purchase programs if in ‘the public interest’ but we have no guidance of what will constitute the ‘public interest’ in concrete cases. Interestingly, however, there is a mechanism by which the domestic

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purchase conditions can be waived where the inclusion of domestically produced goods ‘will increase the cost of the overall project by more than 25 percent’.46 Perhaps most significantly, it is unclear whether these conditions will preclude purchases even from US companies who have structured their operations to take advantage of international supply chains. The passage of the ARRA, with its overtly discriminatory features, triggered threats of trade litigation by a number of states against the US.47 The ARRA was then amended—at the insistence of President Obama—so that these purchase programs ‘shall be applied in a manner consistent with United States obligations under international agreements’.48 But even with this promise to comply with US obligations,49 there is evidence that the actual implementation of the program continues to preference government purchases of domestically produced goods.50 The US is not alone when it comes to structuring stimulus packages in a discriminatory fashion. Under the large Chinese stimulus program, government procurement is expressly confined to Chinese goods and services unless these are not available on reasonable commercial or legal terms.51 But as we will see later, the critical difference—at the level of legality—is that the US is a party to the plurilateral WTO GPA while China is not.

Finally, there are very recent developments in the treatment of shareholders or bondholders in banks and other strategic industries. In Germany, the shareholding of a US investor in a Germany company, Hypo Real Estate, may have been expropriated as there was no express agreement to sell those shares to the German government (as part of a government bailout).52In the US, the bondholders of General Motors appear to have been treated worse than other stakeholders (including the union movement). In exchange for their unsecured loans of US$27 billion, bondholders were only offered 10% of the ‘new’ General Motors. Even on the most optimistic equity-value valuation assumptions, this translates into a return of less than eight cents on the dollar.53 We mention these newer developments only in passing but they may trigger liability under guarantees against expropriation in international investment law.

III. POTENTIAL VIOLATIONS OF INTERNATIONAL TRADE LAW

International trade law comprises the multilateral treaty instruments of the WTO as well as a variety of bilateral and regional trade agreements. We expect this comprehensive body of treaty law to act as a firm limit on resort to traditional and identifiable forms of protectionism, such as increases in tariffs above bound levels and resort to unjustifiable trade remedies (especially anti-dumping measures). It is far more difficult to predict the likely influence of trade law on the nuanced forms of protectionism surveyed in Section II. This is both due to the hidden or embedded nature of the

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discrimination practiced and the complexity of the trade instruments in question. Since the beginning of the crisis, states have proposed and/or implemented approximately 78 trade measures, according to monitoring conducted by the World Bank.54 We identify below some of these complexities in three key WTO instruments, being the WTO GATS, the WTO Agreement on Subsidies and Countervailing Measures (SCM) and the plurilateral Agreement on Government Procurement (GPA). These are not the only WTO commitments that might apply55 nor is our analysis intended to be comprehensive. The next section distils a set of critical issues surrounding the application of these WTO instruments as part of a comparative exercise to identify the potentially broader scope of operation of international investment law, dealt with in Section IV.

A. GATS: financial services

As a starting point, the GATS is clearly relevant for the category 1 measures that intervene in the financial services sector. It is important, however, to bear in mind a key difference between the architecture of the GATS and the older GATT disciplines covering trade in goods. Many of the exceptions available to state parties under the GATT (including safeguard measures) are not reflected in the GATS, and remain the subject of on-going negotiations in the WTO.56

The GATS applies to measures that affect ‘trade in services’, which is defined to include provision of a service in a WTO Member State by the ‘commercial presence’ of the service supplier of another WTO member.57 This modality of service supply is the most important pathway by which financial services are supplied58 and hence the most relevant for our inquiry. Commercial presence can encompass foreign investment in the banking and finance sector, regardless of the form and organization of the investment vehicle. In particular, branches and representative offices of a foreign financial service supplier are expressly covered by GATS disciplines.59 Of these various substantive disciplines, the GATS NT Article XVII is potentially of greatest importance in assessing the legality of many of the category 1 measures. That article enjoins (de iure and de facto) discrimination directed at foreign services and foreign services suppliers. Specifically, it requires a WTO member to treat foreign services and suppliers no less favorably than its own ‘like’ services and suppliers. The goal here is to ensure the same conditions of competition apply for both domestic and foreign firms in the market.60 There are, however, a series of limiters that might constrain the likelihood of a dispute being brought before the WTO based on these GATS provisions.

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First, ‘specific’ commitments under the GATS—including the NT Article XVII—only apply if a WTO Member State has chosen to list the financial services sector as subject to those commitments. The conditional nature of this obligation means that its efficacy can only be assessed on a case-by-case basis through careful assessment of the commitments undertaken by individual WTO members. That task is beyond the scope of this article. Nonetheless, we can with some confidence point to commitments in this area. Currently, 100 countries have specific commitments for all insurance and insurance-related services while a further 102 countries have commitments for banking and other financial services.61

Second, it is important to bear in mind that many of the interventions we have surveyed take the form of explicit or implicit subsidies of domestic service suppliers. The GATS does not, as yet, contain any specific provisions on subsidies beyond the recognition in Article XV(1) ‘that, in certain circumstances, subsidies may have distortive effects on trade in services’. GATS Article XV simply sets a negotiating mandate, one of various Uruguay Round leftovers. Even though the GATS Article XV negotiations are ongoing,62 this does not mean that subsidies are excluded from the coverage of the GATS. Indeed, we have specific confirmation—in the Guidelines for Scheduling of GATS Commitments (adopted by WTO members in 2001)—that NT is applicable to subsidies in the services sector.63 Thus, for scheduled sectors, subsidies that favor domestic financial industries and are denied to ‘like’ foreign suppliers—whether subsidiaries or branches of a finance company—can potentially conflict with the GATS NT obligation. Once again, the devil lies in the detail of individual member commitments under the GATS. Early reports suggest that a majority of WTO members have included limitations to NT applying to the provision of subsidies, which would preclude liability on the part of those members.64 The US is, however, a notable exception; there is no limitation on NT concerning subsidies in the US schedule of commitments, other than horizontal carve-outs for research and development subsidies. Given that only banks incorporated in the US have to date received aid in the form of type 1 measures,65 there is a strong case for a violation of the GATS NT obligation by the US. Similarly, Switzerland has neither horizontal nor sector-specific limitations for NT in the financial market sector. In contrast, the EU commitment expressly limits subsidies to juridical persons established within the territory of a Member State and excludes branches of non-Community foreign banks.66

Third, assuming breach, there are a range of potential exceptions under the GATS. One possible, if marginal, route is Article XIV(a) of the GATS which enables WTO members to take measures ‘necessary’ to maintain ‘public order’ defined as a ‘genuine and sufficiently serious threat [that] is posed to

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one of the fundamental interests of society’.67 While the notion of ‘public order’ was interpreted by the Panel in US-Gambling in a manner deferential to the choice of an invoking member,68 we regard it unlikely that this line of jurisprudence will justify invocation in the present case. The measures surveyed are conceptually distinct from what might be regarded as central to the notion of ordre public, understood as the preservation of conditions of rule of law. In any event, those measures fall more naturally in line with other exceptions considered below.

Fourth, there are no firm disciplines on emergency safeguard measures as this remains a topic of negotiation under Article X(1) GATS.69 Assuming such future disciplines will be roughly analogous with existing safeguard provisions in the WTO compact, one should bear in mind that those provisions require any safeguard measures responding to an increase in imports to have been caused by, inter alia, obligations that the invoking state must respect under the GATT.70 In the present case, it would be hard to argue that the crisis in the various banking systems across WTO members has been necessarily caused by liberalization of the financial services sector.71

Last, but not least, even if a WTO member has made a commitment on NT, the Annex on Financial Services preserves the ability of states to adopt and maintain measures for prudential reasons, including those for the stability of the financial system.72 WTO members have consistently endorsed the need for regulatory policies to correct perceived market failures and systemic externalities in the financial sector, both to reduce systemic risk and maintain a safe and sound financial system.73 Prudential regulation is but one of a number of interventions justified with these objectives in mind.74 But the GATS exception for prudential measures is potentially the most relevant legal justification and may offer a safe harbor for those state measures (such as the Swiss or the US intervention) that are justified publicly on systemic and stability grounds.75 That carve-out is explicitly framed to cover measures aimed at the protection of investors, depositors, policy holders or persons covered by a financial service supplier’s fiduciary responsibilities, or to ensure the financial system’s integrity and stability. With this broad scope in mind, if a member takes a measure for prudential reasons, that measure is a priori covered by the exception. However, the precise scope and character of the sorts of interventions permitted under this heading have not been specified by the Council for Trade in Services. Although requested by some countries,76 ‘the central issue [of] what constitutes ‘prudential’ has hitherto not been defined or agreed by members’.77 Indeed, the very allowance of recourse to dispute settlement could be seen as an indication of the difficulty which negotiators of the GATS

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faced when it came to spelling out which measures are permissible under the prudential carve-out of the Annex on Financial Services.78

Those complex questions first arose after the Asian financial crisis in 1997, where wide restructurings of the banking industry were also accompanied by substantial injections of government funds, considered by some WTO members as distortive of competitive opportunities with discriminatory impacts. WTO dispute settlement was invoked but never completed against Korea, which had used significant injections of government funds to deal with nonperforming loans and to replenish bank capital.79 Switzerland has also expressed dissatisfaction at the manner in which domestic prudential regulation is often structured as a disproportionate response, relative to the size of the underlying financial problems encountered by WTO members. It has proposed greater recourse in the formulation of such measures to the financial (soft-law) standards developed by organizations such as the Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors (IAIS), the International Organization of Securities Commission (IOSCO) and the Joint Forum on Financial Conglomerates.80 These standards, according to Switzerland, could serve as the basis for a definition of the exceptional measures which may be taken for prudential reasons regardless of other provisions of the GATS.81 This proposal, which seems to be modeled on the deference accorded to select standardization bodies under the SPS Agreement, has not to date been accepted by the WTO membership. Nonetheless, if disputes are to arise under the GATS resulting from the current crisis, those standards may serve as an interpretative guide to panelists and the Appellate Body.

One final but marginal source for guidance is the NAFTA, where a Tribunal has examined the scope of the Article 1401(1) exception for prudential regulation in the financial services chapter. The Fireman’s Fund Tribunal ruled that ‘Article 1401(1) permits reasonable measures of a prudential character even if their effect (as contrasted with their motive or intent) is discriminatory’.82 By implication, the Tribunal seems to suggest that measures withdiscriminatory intent are somehow excluded from the scope of a prudential measures exception. This is, however, an unsatisfactory ruling. The Fireman’s Fund Tribunal fails to articulate why such a potentially large limit on invocation should be attached to this particular exemption. We would argue instead that the concept of prudential justification should be interpreted dynamically rather than statically as economic insights into the causes of the crisis and optimal forms of intervention continue to evolve. We then expect that the parameters of that concept be tied to state practice and what financial regulators, at a particular point in time, consider prudential.83 We are not however advocating for simple deference. The GATS

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provision is an exception and the burden of proof on invocation—like any exception—rests with the country taking the prudential measure. Moreover, the prudential exception is limited by certain good faith requirements including the requirement that ‘such measures shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement’. We see this, however, not as a mechanism to second-guess the judgment of a financial services regulator but, in keeping with other embodiments of good faith in WTO law (including the chapeau to GATT Article XX), as a means of catching hidden opportunistic and protectionist measures masquerading as prudential.84 We therefore conclude that type 1 measures of the sort implemented by the US, although in violation of NT, might be exempted from liability through an application of the prudential carve-out.

B. Agreement on Subsidies and Countervailing Measures

The various guarantees and government benefits across categories 2 and 3—which target the production of domestic goods rather than services—could potentially violate the disciplines on the provision of domestic subsidies in the WTO SCM Agreement.85 A ‘subsidy’ is defined as encompassing four basic elements: (i) a financial contribution;86 (ii) by a government or any public body within the territory of a Member;87 (iii) which confers a benefit;88 and (iv) to a specific recipient.89 All of these elements must be satisfied in order for a subsidy to exist. The SCM Agreement distinguishes between prohibited and actionable subsidies.90 Prohibited subsidies are those which are conditional on export performance or upon local content requirements,91 while actionable subsidies require a complaining country to prove that the measure has caused it ‘adverse effects’ (which includes material injury to its domestic industry or serious prejudice to the state’s interests).92

Depending on implementation, some of the benefits and guarantees extended by states responding to the crisis might constitute actionable subsidies. Subsidies designed to increase production of domestic goods and thereby increase employment capacity are a feature of various emergency measures adopted by a significant proportion of the WTO membership. In particular, we see a risk of potential breach of the SCM Agreement in the category 3 measures, targeting strategic economic sectors. There are, however, strategies by which states can protect themselves from liability in this area. For example, measures which target consumption and not production—leaving consumers free to choose among foreign and domestic goods and services—are unlikely to violate the SCM Agreement.93

Under the SCM Agreement, a country can use the WTO’s dispute-settlement procedure to seek the withdrawal of the subsidy or the removal of its

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adverse effects (the multilateral avenue). Alternatively, the country can launch its own investigation and charge extra countervailing duty on subsidized imports that are found to be hurting domestic producers (the unilateral avenue).94 To do so, a Member State must show the existence of a subsidy scheme, an injury to its domestic industry producing a like product and a causal link between the two. A threat of injury suffices for a lawfully imposed countervailing duty.95 But as raised earlier, there may be important extra-legal and political economy factors that restrain use of these legal avenues. A choice of a given member to initiate either a WTO complaint or a unilateral response might in turn trigger retaliatory action on the part of the targeted state. We examine later the manner in which this potential for reciprocity of legal action inherent in international trade law is largely absent in international investment law. This critical difference may, subject to scope of operation concerns, leave investment treaties as the more likely forum to challenge discriminatory state measures of this sort.

C. Government Procurement Agreement

Government procurement programs typically represent around 10% of GDP of developed countries.96 This extensive area of economic activity is not automatically covered by WTO disciplines. The WTO norms that target procurement—in the WTO Agreement on Government Procurement (GPA)—are plurilateral and require members to opt in to those commitments. There are currently 40 members who have signed up to the GPA.97 It is important to bear in mind that, even if a WTO member has committed to the GPA, they can still tailor their commitments in the Appendices to the Agreement.98 This can potentially lead to different levels of commitments at the national and sub-national levels, especially for federal states.99Strong commitments on liberalization of procurement programs are also increasingly featured in bilateral100 and regional trade agreements,101 while negotiations on deepening WTO disciplines proceed slowly.102 Thus, apart from any potential violation of the WTO GPA, the surveyed measures may also trigger a breach of bilateral and regional disciplines.

The most important obligation of the GPA is one of nondiscrimination. Article III:1(a) of the GPA requires state parties to accord to the products, services and suppliers of any other party to the Agreement treatment ‘no less favorable’ than they give to their domestic products, services and suppliers. Further, there is an MFN obligation; parties may not discriminate among goods, services and suppliers of other parties.103 These obligations cover both de iureand de facto discrimination.104 On enforcement, the GPA leans heavily toward procedures for providing transparency of laws, regulations, procedures and practices regarding government procurement. The GPA requires parties to publish laws, regulations, judicial decisions, administrative

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rulings of general application and any procedures regarding government procurement covered by the Agreement.105 Disputes on compliance with the GPA can be adjudicated under the DSU.106 Due to its plurilateral nature, there are a number of special rules or procedures that apply to compliance action.107 Interestingly, there is also a mandatory requirement for the establishment of a domestic bid challenge system under Article XX of the GPA. This would give suppliers—who believe procurement has been handled inconsistently with the requirements of the GPA—right of recourse to an independent domestic tribunal. This is the most likely way that a dispute will come up under the GPA, although only in national fora.

The category 3 measures described above, especially the US ‘Buy American’ provisions, are prone to litigation under the GPA. There are however complexities in the coverage of US commitments that could limit any compliance action. For example, only 37 state governments in the US have obligations concerning government procurement with differences in derogation for certain sectors and purchases, thus qualifying the overall reach of the GPA.108 More generally, under the GPA, a transfer of funds from one governmental body to another—such as from the federal to state level—does not necessarily bind the latter to the commitments of the former. A federal funding body can in this way potentially channel funds to state entities (withfewer listed commitments under the GPA) and impose discriminatory conditions downstream on the ultimate spending entity. No case has yet been decided on this point. Nevertheless, the Panel in Korea-Procurement examined the practice of channeling of funds to nonlisted entities under the GPA. It introduced a ‘degree of connection’ test ruling:In our view, it would defeat the objectives of the GPA if an entity listed in a signatory's Schedule could escape the Agreement’s disciplines by commissioning another agency of government, not itself listed in that signatory’s Schedule, to procure on its behalf.109The Panel’s statement contains an element of good faith; shifting the disbursement of funds to other entities with different obligations in order to escape procurement disciplines would amount to a modification of coverage as understood in Article XXIV(6) of the GPA. Those must, at the very least, be notified to the Committee of Government Procurement with indication of the ‘likely consequences of the change for the mutually agreed coverage’. Provision must then be made for ‘compensatory adjustments’ in order to maintain a satisfactory balance of rights and obligations.110

It is difficult at this point to judge whether the ‘Buy American’ provisions of the ARRA violate the GPA. With the amendments prompted by the intervention of President Obama, the formal terms of the ARRA do not of themselves violate the GPA. We now have a new qualification that ARRA ‘be

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applied in a manner consistent with United States obligations under international agreements’. This would seem, on first view, to preclude claims by signatories of the GPA as well as other states who have negotiated procurement obligations in separate trade agreements with the US. But there is a continuing risk of discrimination at the level of implementation, particularly at the sub-federal level (where GPA commitments are less strict). Even here, we see a reasonable case for a WTO panel to use the approach taken in Korea-Procurement to enable attribution of the acts of the sub-federal unit to the state itself. Any other outcome would, at the very least, raise a host of perverse incentives.

IV. POTENTIAL VIOLATIONS OF INTERNATIONAL INVESTMENT LAW

We now turn to the likely implications that might flow under international investment law from these various differentiations between foreign and domestic actors. It is difficult to formulate a single answer given the heterogeneity of the legal instruments in the field. There are, for instance, important textual differences in the formulation of key protective norms, such as ‘NT’ and ‘FET’. Moreover, certain investment treaties include exceptions for national security and prudential regulation, while these are absent in other instruments. Last, but not least, the jurisprudence on the relevant norms is often fractured and conflicting, which may again impact on a given reading. With these factors in mind, we set out below a survey of the key forms of international investment law.

A. OECD National Treatment Instrument

We will deal first with the OECD National Treatment Instrument. This forms part of the OECD Declaration on International Investment and Multinational Enterprises together with an OECD Council Decision obliging adhering countries111 to notify their exceptions to the Instrument.112

The OECD Instrument defines NT as the ‘commitment by a country to treat enterprises operating on its territory, but controlled by the nationals of another country, no less favorably than domestic enterprises in like situations’.113 The exceptions to be notified are classified and encompass mechanisms such as ‘official aids and subsidies’, ‘government purchasing’ and ‘access to local finance’. Differential treatment of national and foreign investors concerning state aid and government procurement thus seem to be accepted by the OECD states (together with eight nonmember countries) as contrary to the National Treatment Instrument.114

With this in mind, the explicit differentiations based on nationality evident throughout categories 1–3 are likely to violate the Instrument. A notification of exceptions now would also breach a standstill agreement.115 These

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breaches will not give rise to justiciable disputes, as the Instrument is nonbinding. Investors must rely on their home countries to raise these issues in the OECD Investment Committee. The Instrument is, however, likely to have a broader impact than this initial modest output. It may well inform a common understanding of the OECD states (and the eight nonmember countries) of the scope of NT protection, as the wording of the OECD Instrument is almost identical to many investment treaty formulations. Indeed, the Instrument has been pivotal in a number of investor-state cases in guiding the interpretative choices of arbitral tribunals.116

B. Treaties of friendship, commerce and navigation

Most modern BITs are signed between developed and developing states. On first view, this typical country pairing might preclude claims by foreign investors of OECD states against other OECD countries, even though a significant proportion of global financial transactions take place within the OECD grouping. There are however two possibilities that might allow for a claim by this class of investor against an OECD state. First, an investor of an OECD state may partly structure their business operations through a developing country to take advantage of select BIT protections.117 Second, older investment commitments—including Friendship, Commerce and Navigation treaties (FCN)118—remain in operation across a range of OECD states. For example, the US has FCN treaties in operation with both Germany119 and Japan.120These treaties usually allow disputes to be brought before the International Court of Justice121and, at least in the case of the US, may be self-executing as a matter of US constitutional law giving investors of a state party the ability to initiate claims before US courts.122 This latter aspect may be particularly pertinent for (German and Japanese) foreign investors who are excluded from the ‘Buy American’ procurement conditions of the American Recovery and Reinvestment Act 2009 as it offers them a potential avenue of complaint within the US judicial system. The primary FCN provision involved in actions of this sort would be the obligation of NT,123 a norm shared with modern investment treaties. We examine that legal obligation of nondiscrimination more fully in the next section.

C. International investment agreements

There are approximately 2800 bilateral and regional investment treaties (including investment chapters in free trade agreements) in operation across the globe.124 The ability of an investor to successfully initiate and conclude a claim under any part of this extensive network will depend on three fundamental issues.

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First, both the claimant and the measure in question must fall within the jurisdiction and scope of operation of the treaty instrument. On this fundamental question, we find a critical difference between US investment treaty practice and those of other states. Most US treaties—including the investment Chapter 11 of the NAFTA—exclude the provision of ‘subsidies or grants’ from the scope of NT protection.125 In contrast, the investment treaties of other states such as Germany and the UK contain no such exclusion.126 This would, on first view, appear to offer some protection for the US against potential complaint by foreign investors for exclusion from the provision of US government benefits. It is important, however, to reiterate that this is only a limited exclusion. It does not prevent claims based on other provisions such as the fair and equitable standard.

A second fundamental issue requires identification of the key substantive obligations of investment treaties that might be breached by the measures surveyed above. We confine our analysis to two key obligations being the requirement that states accord both ‘NT’ and ‘FET’ to foreign investors. Select and larger scale nationalization of shares in banks may also raise issues surrounding investment treaty guarantees of compensation in the event of expropriation.127

Finally, there is the issue of whether an exception might apply to shield state conduct from liability under an investment treaty. Some BITs contain specific carve-outs for certain sectors or explicitly allow for prudential regulation of the finance sector, while other instruments merely contain general exemptions for security interests.

1. National treatment

NT proscribes ‘less favorable treatment’ of a foreign investor that stands ‘in like circumstances’ or in ‘like situations’ with a domestic actor.128 There are three critical interpretative questions that have occupied arbitral tribunals in interpreting this obligation of nondiscrimination. First, when will a foreign investor stand ‘in like circumstances’ or ‘in like situations’ with a domestic actor? Second, what will constitute ‘less favorable treatment’ of a foreign investor? Third and perhaps most critically, is adverse purpose on the part of the regulating state required as a condition of breach and if so, what indicia should be used to evidence or construct such purpose?

As a start point, most of the early cases—including SD Myers v Canada (NAFTA, 2000), Pope & Talbot v Canada (NAFTA, 2001), Feldman v Mexico (NAFTA, 2002); and ADF v USA (NAFTA, 2003)—endorse some form of competition as a condition of likeness in a NT inquiry. Under this line of reasoning, a foreign investor will be ‘like’ a competing domestic investor.

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This jurisprudential line is disrupted by the awards in Occidental v Ecuador (U.S-Ecuador BIT, 2004) and Methanex v U.S (NAFTA, 2005). The Occidental Tribunal adopted a much broader approach by ruling that a foreign investor involved in oil exports was ‘like’ domestic companies exporting nonoil-related goods such as flowers and seafood products.129 The broadOccidental test remains largely an outlier in the jurisprudence, with only one later case adopting other parts of that award.130 The later Methanex Tribunal adopted a much narrower approach requiring identification of an ‘identical’ comparator to the foreign investor.131 This narrow test has not found reflection in later case law, which has largely returned to a competition-based reading of NT.132

With this in mind, we expect arbitral tribunals to adopt a robust method that looks to whether foreign investors in the finance sector are disadvantaged vis-à-vis competing domestic actors. It is unlikely that arbitral tribunals will endorse a narrow view that differentiates between different corporate actors (such as investment banks, wholesale banks or other investment vehicles) simply on their organizational structure. In any event, certain laws already define the type of financial sector industry133 or the automotive sector qualifying as potential institutions for supporting measures. In those cases, foreign investors falling within the definition (but not included merely because of their nationality and/or judicial organization), will have a strong claim for breach. The more difficult cases involve narrowly tailored definitions such as the Swiss measure targeting only banks that pose a systemic risk to the Swiss economy. But even here, foreign firms can still make credible claims for a broader basis for comparison, given the line in the arbitral jurisprudence affirming competitive interactions as a necessary condition of likeness.

The second fundamental interpretative issue involves the determination of ‘less favorable treatment’ of foreign investors and their investments. There is broad consensus that not onlyde iure (in law) discrimination but also de facto (in fact) discrimination amounts to a breach of the NT guarantee.134 This is in line with WTO jurisprudence135 and also with most constitutional interpretation in different states. There are various examples of de iurediscrimination in the measures surveyed above, not least the new Australian and Irish guarantees of retail and/or wholesale deposits that are explicitly limited to domestic institutions. The harder cases will involve origin-neutral measures that, while not discriminatory in law, pose a greater adverse burden on the foreign investor vis-à-vis ‘like’ domestic investors. For origin-neutral measures, there is the difficult issue of determining what level of less favorable treatment of domestic investors is an appropriate requirement of breach. One possibility is that NT entitles a foreign investor to

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the best treatment afforded to ‘like’ domestic investors. Provided that there is a single ‘like’ domestic actor who is treated more favorably by the regulating state, there will be ‘less favorable treatment’ of the foreign claimant. Under this broad approach, it is irrelevant that there may be other ‘like’ domestic actors who are treated equally to, or indeed worse than, the foreign claimant. This broad approach has found reflection in the jurisprudence, most notably in Pope & Talbot v Canada(NAFTA, 2001).136 It has also been affirmed in successive cases, including Methanex v U.S(NAFTA, 2005)137, parts of UPS v Canada (NAFTA, 2007)138 and most recently, ADM v Mexico(NAFTA, 2007).139 If this test were to be applied, many if not all of the origin-neutral measures surveyed above are likely to constitute ‘less favorable treatment’ of a foreign claimant. Significant competitive advantages flow to domestic banks and institutions from these measures including much lower refinancing costs through guarantees, recapitalization or liquidity support, and allowing supported banks to offer better interest rates than those actors which compete normally.140

Our third and final interpretative issue concerns the role (if any) of protectionist purpose in assessing breach of NT. Some tribunals have held that discriminatory intent is not a necessary element for the breach of NT. Following the Occidental award141, the Siemens v ArgentinaTribunal (Germany-Argentina BIT, 2007) held that ‘intent is not decisive or essential for a finding of discrimination, and that the impact of the measure on the investment would be the determining factor to ascertain whether it had resulted in nondiscriminatory treatment’.142Under this strict effects-based approach, the mere presence of less favorable treatment of a foreign investor will be sufficient for breach. For example, the US subsidies for the ‘Big Three’ American automakers—which de facto exclude almost all non-American car producers—would breach the NT obligation of an operative investment treaty.143

Other awards adopt a very different approach to this interpretative question. These tribunals have explored, with different emphases, whether the distinction is based on legitimate policy grounds and justifiable or solely as a means of conferring protection to domestic actors and thus impermissible. For example, the 2000 NAFTA Pope & Talbot Tribunal strongly endorses competition as a necessary condition of likeness in a NT inquiry144 but also requires evidence of protectionist purpose as a condition of breach.145 Under this competing approach, differentiation between foreign and domestic actors is permissible if rational nonprotectionist grounds are shown for it. This may have particular relevance for interventions such as the Swiss bailout of Credit Suisse and UBS which were publicly justified on systemic grounds. The problem, however, is that the investor-state arbitral tribunals

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have not clearly defined what will constitute ‘rational’ grounds for differentiation. On the one hand, the 2004 NAFTA GAMITribunal found that the Mexican measure—nationalization of potentially insolvent sugar refiners—did not breach NT because it was motivated by a legitimate public policy goal as advanced by the respondent state, namely keeping the sugar industry in the hands of solvent enterprises.146 But in the Saluka award, the Tribunal adopted a less deferential standard in testing the claimed legitimate purpose of the respondent state. The Tribunal looked at a range of different criteria in assessing the legitimacy of the Czech Republic’s exclusion of a bank with foreign shareholding from a program of state financial assistance to stabilize the Czech banking system.147 In particular, it surveyed criteria such as the systemic importance of the bank, its business strategy and liquidity positions.148 It held that none of these features (as relied upon by the Czech Republic) provided rational grounds for differentiation with domestic banks that took the benefit of the assistance program.149 With this in mind, even those measures adopted formally for reasons of systemic concern may still be in risk of breach of the NT obligation.

2. Fair and equitable treatment

The obligation to accord FET will cover, at a minimum, three possible grounds of breach: (i) discriminatory conduct on the part of a regulating host state; (ii) an absence of due process (including the failure of a state to act in a transparent manner); and (iii) denial of justice especially in limiting access to forms of judicial review.

As a start point, the FET standard has often been held to include protection against discrimination. The Tribunal in Eureko v Poland, for example, has linked ‘discriminatory conduct’ with a finding of breach of the FET standard.150 This, however, raises a fundamental interpretative issue that has largely been ignored in the jurisprudence to date. The type of discrimination caught under the FET standard must be something different to that covered by NT otherwise we face the problem of redundancy. Most recent awards simply and bluntly conflate NT and the FET standard, where discrimination is at issue in the latter.151 This is an untenable outcome given the need to give separate effect to each treaty provision.

In our view, the type of discrimination caught by NT is purposeful protectionism, defined as a desire of a host state to protect a domestic actor vis-à-vis a competing foreign investor. There is then the question of what other forms of discrimination might be caught by the FET standard. Few arbitral awards have examined this in any detail, given the tendency to conflate NT and the FET standard. One possibility is a type of hostile ‘singling out’ where the foreign investor is targeted for disadvantage by the host state

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simply because of their foreignness (rather than any desire to tilt the competitive scales in favor of a domestic actor).152 If this is to be the type of discrimination caught by the FET standard, there is little evidence of hostile singling out at play in the measures we have surveyed. To put it bluntly, we are dealing with classic protectionist measures, rather than any desire to harm or evict foreign actors, per se.

As a second possibility, the failure to act in a transparent manner in administrative decision-making has been used by arbitral tribunals to ground breach of the FET standard.153 InMetalclad for instance, the Tribunal relied on a reference to transparency in part of the NAFTA in its analysis of the FET standard154 while the Tecmed Tribunal drew on the notion of good faith in finding transparency to be component of the FET standard.155 States have to some degree acted in a transparent manner in promulgating many of the emergency measures surveyed. Those measures have largely been enshrined in law (rather than simple administrative practice) and often published immediately on government web sites. Nevertheless, there is still considerable uncertainty as to the eligibility of foreign actors to benefit from certain measures. For example, the US interventions do not clarify what constitutes ‘substantial business activities’ and whether or not foreign branches are included, or what is meant by ‘government owned’.156 It is however too early to offer a definitive assessment of breach here given the likelihood that the executive branch will offer guidance or regulation on these different criteria.

Finally, the FET standard will be breached where foreign investors have been denied justice (usually in the domestic court systems of host states). In Germany157 as well as in the US,158special procedures have been constructed in emergency laws. Both countries restrict the review mechanisms usually available against state actions, but they do not entirely exclude judicial review. As there is no complete denial of due process, it is unlikely that a violation will be found on these current trends.

3. Exceptions

There are exceptions for host state conduct in the event of a finding of liability for breach of an obligation in an applicable investment treaty. Given the heterogeneity of this field, there are three possible categories of exemption that might apply depending on the instrument in question. First, certain newer investment treaties—especially those concluded as part of a free trade agreement—offer qualified exemption for prudential regulation of the financial services industry (modeled on the similar carve-out in the GATS)159 or specific exemption for the application of NT to the financial services sector.160 These are likely to offer safe harbor for state conduct

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otherwise in breach of an investment treaty obligation.161 Second, certain states have amended their model bilateral investment treaty to ensure that any invocation of a treaty exemption for, inter alia, ‘essential security interests’ is a matter of competence for signatory states alone.162 This shift toward auto-interpretation may preclude any role for an adjudicator in assessing whether the constituent elements of the treaty exception have in fact been proven. In general, both these categories of exemption are relatively rare and reflect new trends in investment treaty rule-making.

In contrast, older investment treaties will only typically exempt measures ‘necessary’ to maintain ‘public order’ or to protect ‘essential security interests’.163 This form of exemption is not explicitly self-judging and indeed has been adjudicated in a range of cases brought against Argentina in the aftermath of its 2001–02 financial crisis. We should, however, exhibit some caution in relying on this case law. Early arbitral awards—including CMS, Enron and Sempra—engage in a questionable interpretative methodology of conflating the terms of the treaty exception with the stringent customary plea of necessity (represented by Article 25 of the International Law Commission’s Articles on the Responsibility of States for Internationally Wrongful Acts).164

This then raises our first interpretative question of whether the effects of financial crises might somehow engage a state’s ‘essential security interests’. Of the few cases that have avoided the error of conflating the treaty defence with the customary plea, the Continental award offers especially pertinent guidance on this question. That Tribunal was prepared to accept that the grave economic and social dislocations of the Argentine financial crisis were sufficient to engage that state’s ‘essential security interests’.165 Ultimately, however, the likely success of this defence may turn more so on whether an adjudicator will find that the particular measures chosen by the state are indeed ‘necessary’ to protect such ‘essential security interests’. The necessity component of the treaty exception asks a question of the closeness or fit between the chosen means and the asserted regulatory purpose of the state in question. There are various methods of engaging in means-end inquiry, with the Continental Tribunal electing to endorse a ‘reasonable less restrictive means’ test.166 This approach requires an adjudicator to assess whether there are any reasonably available alternatives to the chosen measure that have less restrictive effects on the rights of foreign investors. On the whole, there are serious questions as to whether some of the measures surveyed would meet even this test. In particular, we see some difficulty with the argument that discrimination directed against foreign bank institutions (with domestic depositors) was

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indeed ‘necessary’ to protect a set of ‘essential security interests’ triggered by the financial crisis.

Finally, one should keep in mind that most of the investment treaties contain a most favored national clause (MFN). Even if the relevant treaty provision at issue restricts a possible claim by an investor, that investor may be able to use the MFN clause to invoke more favorable protections in other investment treaties ratified by the host state. The exceptions surveyed above, if used to shield the host state from suits concerning measures in the financial sector, might therefore be rendered obsolete through this legal maneuver.

V. CONCLUSION AND OUTLOOK

We draw two tentative and sobering conclusions from this analysis.

First, there is clear evidence of both overt and factual discrimination directed at foreign actors (and goods) in the laws we have surveyed. This is not confined to any individual state or select grouping; it is a marked characteristic of emergency responses to the financial crisis across a significant proportion of the globe. This then is a timely reminder to revisit the lessons associated with the outbreak of protectionism leading to the Great Depression in the interwar period. Protectionism is the result of a prisoner’s dilemma understood in game theory terms. Cooperation would make every state better off, but it is individually rational for states to pursue their self-interest (and protect domestic industry) at least in the short run. While protectionist instincts are now more nuanced, it is difficult to escape the conclusion that states are failing to cooperate in the current crisis, with possible cascading consequences. One pertinent example is the sharp contraction in credit availability across Eastern Europe, where much of the banking sector is controlled by Western European banks who now have strong incentives to lend only within their home countries.

This leads to our second, tentative assessment. The framers of the post-Second World War architecture of international law (especially the GATT, the forerunner of the WTO), were deeply influenced by the lessons of the interwar period. They had drafted those rules hoping to embed a loose form of cooperation and constrain the freedom of states to resort to short-term protectionist measures. Of course, the challenge in designing international disciplines of this sort is how to strike an appropriate balance between flexibility and commitment.167 If there is too much flexibility, this will undermine the value of state commitments, but too little may render the rules unsustainable and lead to exit on the part of states. Of the WTO disciplines surveyed, we take the view that the GPA in particular offers far too much flexibility for the continuation of discriminatory procurement

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practices. That aside, many of the interventions surveyed (especially in categories 1–2) will primarily implicate the GATS. Accordingly, we see a case for further development of the few existing GATS disciplines on subsidies and most importantly, greater calibration of the scope and conditions of the prudential carve-out (perhaps under the auspices of the WTO Council for Trade in Services).168 The current uncertain legal position under the GATS is unlikely to afford legal security either to private economic actors or WTO members. In contrast with the WTO, investment treaties as a grouping tend to be far too restrictive where states regulate in response to financial crisis in large part due to the absence or limited forms of exemptions for state conduct. With this in mind, we see a case for greater and tailored flexibility for states when faced with such unforeseen consequences to appropriately distinguish between instances of protectionism andbona fide interventions of a prudential nature. Ultimately, however, these complex issues may be addressed, at least in the short-term and in a less than optimal manner, in adjudicatory rather than diplomatic fora. The 2001 Argentine financial crisis triggered a wave of international investment litigation against that state. There is good reason to expect foreign investors will eventually also use their strong rights under international investment law to challenge a range of state interventions to the current crisis.

Footnotes

↵ 1 Of the various subdisciplines of international economic law, commentators with expertise in international finance law have to date been the most active in tracking the implications of the crisis. For a good example of this contribution, see Douglas W Arner, ‘The Global Credit Crisis of 2008: Causes and Consequences’ (2009) 43 TIL 91–126. To some degree, this early response has been driven by the various proposals for changes in financial regulation commissioned in the aftermath of the crisis. For details of these proposals, see n 9, below.

↵ 2 This assumption is not entirely stable for WTO members—including Argentina, Brazil and India—who have not resorted to large-scale bailouts. In fact, the Brazilian Foreign Minister has indicated that Brazil may initiate a WTO challenge to the legality of a ‘Buy American’ clause in the recently approved US economic stimulus package. See Raymond Colitt, ‘Brazil may challenge “Buy American” at WTO’, Reuters (UK 17 February 2009) <http://uk.reuters.com/article/usPoliticsNews/idUKTRE51F52920090217> accessed 4 September 2009. See also Gary Clyde Hufbauer and Jeffrey J. Schott, ‘Buy American: Bad for Jobs, Worse for Reputation’ (2009) Peterson Institute Policy Brief No. PB09-2 <http://www.iie.com/publications/pb/pb09-2.pdf> accessed 4 September 2009.

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↵ 3 Convention on the Settlement of Investment Disputes between States and National of Other States, signed in Washington 18 March 1965, entered into force 24 October 1966, 575 UNTS 159; (1965) 4 ILM 524.

↵ 4 See generally Edward Baldwin and Mark Kantor, ‘Limits to Enforcement of ICSID Awards’ (2006) 23 J Intl Arb 1.

↵ 5 See for example Saluka Investments BV v Czech Republic, Partial Award, UNCITRAL Arbitration (17 March 2006); Fireman’s Fund Insurance Company v Mexico, ICSID Case No. ARB(AF)/02/01, Award (17 July 2006). For an overview of the investor-state cases brought against Argentina in the aftermath of its 2001–02 financial crisis, see generally Jürgen Kurtz, ‘Adjudging the Exceptional at International Law: Security, Public Order and Financial Crisis’ (2008) Jean Monnet Working Paper No 06/08 <www.jeanmonnetprogram.org> accessed 2 September 2008.

↵ 6 UNCTAD, ‘Latest Developments in Investor-State Dispute Settlement’ (2008) IIA Monitor No. 1, 10 (detailing that, in 2007 alone, five investment tribunals awarded foreign investors a total of US$615 million in damages against Argentina).

↵ 7 The massive liquidity assistance provided by central banks across the globe is an example of an intervention that is typically not codified in law.

↵ 8 For an overview of typical measures taken to date, see WTO, Report to the TPRB from the WTO Director-General on the Financial and Economic Crisis and Trade-Related Developments (26 March 2009) Annex 2 <http://www.wto.org/english/news_e/news09_e/trdev_dg_report_14apr09_e.doc> accessed 4 September 2009.

↵ 9 For an analysis of the causes of the crisis and future regulatory proposals, see FSA, ‘The Turner Review. A Regulatory Response to the Global Banking Crisis’ (2009) <http://www.fsa.gov.uk/pubs/other/turner_review.pdf> accessed 2 November 2009; United Kingdom House of Lords, European Union Committee, ‘The Future of EU Financial Regulation’ 14th Report of Session 2008–09 (17 June 2009) <http://www.publications.parliament.uk/pa/ld200809/ldselect/ldeucom/106/106i.pdf> accessed 2 November 2009; Jacques de Larosière, ‘The High-Level Group on Financial Supervision in the EU’ Brussels (25 February 2009) <http://ec.europa.eu/internal_market/finances/docs/de_larosiere_report_en.pdf> accessed 2 November 2009; US Treasury, ‘Financial Regulatory Reform: A

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New Foundation, Rebuilding Financial Regulation and Supervision’ 2009 <http://www.financialstability.gov/docs/regs/FinalReport_web.pdf> accessed 2 November 2009.

↵ 10 For a detailed account of measures taken by European Union Member States, see Ana Petrovic and Ralf Tutsch, ‘National Rescue Measures in Response to the Current Financial Crisis’ (2009) European Central Bank Legal Working Paper Series No 8 <http://ssrn.com/abstract_id=1430489> accessed 4 September 2009.

↵ 11 On 7 October 2008, common principles to guide governmental actions were adopted at an Economic and Financial Affairs Council meeting, including the requirement of protection of the legitimate interests of competitors across various sectors. Five days later, the heads of state of the Euro-zone issued a ‘Declaration on a Concerted European Action Plan of the Euro Area countries’. A record of these developments is available on the French Presidency web site, www.ue2008.fr, accessed 21 November 2009. The Declaration was endorsed by the European Council for all Member States on 16 October 2008.

↵ 12 Under the Financial Services Action Plan, specific issue areas have been harmonized to create a single market in the financial sector. But there is no complete harmonization and several issues areas, such as deposit guarantees, remain subject to state laws. For an overview including the role of international standards, see Anne van Aaken, ‘Transnationales Kooperationsrecht nationaler Aufsichtsbehörden als Antwort auf die Herausforderung globalisierter Finanzmärkte’, in Christoph Möllers, Andreas Voßkuhle and Christian Walter (eds), Internationales Verwaltungsrecht (Siebeck/Mohr, Tübingen 2007) 219–58. The crisis has, however, prompted reform proposals by the European Commission for a series of pan-European regulatory agencies including a new European Systemic Risk Board and a European System of Financial Supervisors. For details, see Larorsière Report (n 9), ch III and the legislative proposals adopted by the European Commission, IP/09/1347 Brussels, 23 September 2009.

↵ 13 Communication from the Commission on the Recapitalization of Financial Institutions in the Current Financial Crisis: Limitations of Aid to the Minimum Necessary and Safeguards against Undue Distortions of Competition (OJ C 10, 15 January 2009, at 2).

↵ 14 Communication from the Commission on the Treatment of Impaired Assets in the Community Banking Sector, of 25 February 2009 (OJ C 72, 26 March 2009, at 1).

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↵ 15 Temporary Community Framework for State Aid Measures to Support Access to Finance in the Current Economic and Financial Crisis (OJ C 83, 7 April 2009, at 1).

↵ 16 Art 87(3)(b) of the EC Treaty provides that the Commission may declare compatible with the common market, aid used ‘to remedy a serious disturbance in the economy of a Member State’.

↵ 17 See n 10 above.

↵ 18 S 2 para 1 of the Financial Market Stabilization Act (Finanzmarktstabilisierungsgesetz) of 17 October 2008.

↵ 19 S 6 para 1 of the Financial Market Stabilization Act.

↵ 20 S 7 para 1 of the Financial Market Stabilization Act.

↵ 21 S 8 para 1 of the Financial Market Stabilization Act.

↵ 22 S 15 of the Financial Market Stabilization Act.

↵ 23 Ibid.

↵ 24 HM Treasury, Statement on the Government’s Asset Protection Scheme, 19 January 2009.

↵ 25 These measures are based on the Intermarket Support Act (Interbankmarktstärkungsgesetz (IBSG)), BGBl. I 2008/136, the Law on financial market stability (Finanzmarktstabilitätsgesetz (FinStaG)) BGBl. I 2008/136 and amendments to the Law of 2000 on ÖIAG (ÖIAG Gesetz 2000), the Law on banking (Bankwesengesetz), the Law on the stock exchange (Börsegesetz), the Law on the Financial Markets Authority (Finanzmarkt aufsichtsbehördengesetz) and the Federal Law of 2008 on finance (Bundesfinanzgesetz 2008). For details, see Petrovic and Tutsch (n 10) 9ff.

↵ 26 Botschaft zu einem Massnahmenpaket zur Stärkung des schweizerischen Finanzsystems (5 November 2008) 8969, <http://www.admin.ch/ch/d/ff/2008/8943.pdf>, accessed 21 November 2009).

↵ 27 Petrovic and Tutsch (n 10) 34.

↵ 28 Financial Systems Legislation Amendment (Financial Claims Schemes and Other Measures) Act 2008 (Cth); Banking Amendment Regulations 2008 (No. 1) (Cth).

↵ 29 Gemma Daley, ‘Australia Refuses Deposit Guarantee for Foreign Banks’, Bloomberg(21 October 2008) <www.bloomberg.com> accessed 18

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November 2008, <http://www.bloomberg.com/apps/news?pid=20601081&sid=au5F5blO7B88> accessed 21 November 2009.

↵ 30 For an overview of the development of deposit insurance schemes in the crisis, see Sebastian Schich, ‘Financial Crisis: Deposit Insurance and Related Financial Safety Net Aspects’ (2008) OECD <http://www.oecd.org/dataoecd/36/48/41894959.pdf> accessed 4 September 2009.

↵ 31 Public Law 110–343.

↵ 32 See ‘Beneficiary Banks’ New York Times (October 2008) <http://www.nytimes.com/imagepages/2008/10/14/business/14bailout.graphic2.html> accessed 4 September 2009.

↵ 33 For one thing, there will be a positive effect on the prices of bonds of institutions receiving aid by the state. This might well be used as a proxy for refinancing costs, crucial for competitive conditions in the market.

↵ 34 HM Treasury, Statement to the House of Commons on Bank Lending, 19 January 2009: ‘support small and medium businesses’; ‘The government could now own up to 70 per cent of RBS (Royal Bank of Scotland). In return for this, we have agreed with them an extension of lending commitments to large companies, and an increase in lending over £6bn in the next 12 month … . These agreements will be specific –covering both the quantity and the type of lending made available to people and businesses across the country … .’

↵ 35 S 10 para 2 (1) of the Financial Market Stabilization Act.

↵ 36 The leverage ratio defines the proportion of core capital to total assets and it will be set for both banks at a minimum of 3% at group level and at 4% for the individual institutions.

↵ 37 Media Release of SFBC of 4 December 2008 <http://www.finma.ch/archiv/ebk/e/publik/medienmit/20081204/mm-em-leverageratio-20081204-e.pdf> accessed 4 September 2009, which somehow changes the Verordnung über die Eigenmittel und Risikoverteilung für Banken und Effektenhändler (Eigenmittelverordnung, ERV) of 29 September 2006 (last changed 1 January 2009).

↵ 38 World Bank, ‘Swimming Against the Tide: How Developing Countries are Coping with the Global Crisis’, Report prepared for the G20 Finance Ministers and Central Bank Governors (13–14 March 2009), and World Bank News Release No. 2009/245/EXC; WTO, Report to the TPRB (n 8).

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See also Anthony Faiola and Mary Jordan, ‘British Bank to the World Takes Its Cash Back Home: Battered RBS Caught in Protectionist Storm’ The Washington Post (<location>28 March 2009) A1, A10 (detailing RBS’s planned closure of branch operations in 15 countries undertaken to comply with the domestic lending requirements of the UK bailout scheme).

↵ 39 Measures like car premiums to buy new cars are not discriminatory if they do not put any conditions on the origin of the new car, as is done by Germany <http://www.bafa.de/bafa/de/wirtschaftsfoerderung/umweltpraemie/index.html> accessed 4 September 2009.

↵ 40 Energy Independence and Security Act of 2007; s 136: ‘ADVANCED TECHNOLOGY VEHICLES MANUFACTURING: INCENTIVE PROGRAM. (g) PRIORITY.—The Secretary shall, in making awards or loans to those manufacturers that have existing facilities, give priority to those facilities that are oldest or have been in existence for at least 20 years. Such facilities can currently be sitting idle.’

↵ 41 U.S. Department of the Treasury, ‘General Motors Final Terms and Appendix’ (19 December 2008) 15 <http://www.treas.gov/press/releases/hp1333.htm> accessed 30 June 2009.

↵ 42 On 14 November 2008, European Commission President Barroso publicly announced that he was considering the possibility of challenging the American Automobile Bailout Plan under WTO law, Reuters 2008, EU Might Complain to WTO over US Car Plan—Barroso <http://www.reuters.com/articlePrint?articleId=USLE47953820081114> accessed 30 April 2009.

↵ 43 The economic justifications for the ‘Buy American’ provisions of this package are questionable. See for an excellent discussion Hufbauer and Schott (n 2) and Simon Evenett, ‘The Devil is in the Details: The Implementation of the Stimulus Packages and their Effects on International Commerce’ (2009) Aussenwirtschaft, forthcoming also available as ebook, <http://www.voxeu.org/reports/WorldBank.pdf> accessed 4 September 2009. For a more general analysis of the economic impact of discrimination of foreign suppliers, see Simon Evenett and Bernard Hoekman, ‘Government Procurement: Market Access, Transparency, and Multilateral Trade Rules’ (2005) 21 Europ J Pol Econ 163.

↵ 44 Public Law 111-5, signed into law by President Obama 17 February 2009.

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↵ 45 BUY AMERICAN: s 1605. ‘Use of American Iron, Steel and Manufactured Goods. (a)None of the funds appropriated or otherwise made available by this Act may be used for a project for the construction, alteration, maintenance, or repair of a public building or public work unless all of the iron, steel, and manufactured goods used in the project are produced in the United States. (b) Subsection (a) shall not apply in any case or category of cases in which the head of the Federal department or agency involved finds that—(1) applying subsection (a) would be inconsistent with the public interest; (2) iron, steel and the relevant manufactured goods are not produced in the United States in sufficient and reasonably available quantities and of a satisfactory quality; or (3) inclusion of iron, steel, and manufactured goods produced in the United States will increase the cost of the overall project by more than 25 percent. (c) If the head of a Federal department or agency determines that it is necessary to waive the application of subsection (a) based on a finding under subsection (b), the head of the department or agency shall publish in the Federal Register a detailed written justification as to why the provision is being waived. (d) This section shall be applied in a manner consistent with United States obligations under international agreements.’ (emphasis added).

↵ 46 Ibid.

↵ 47 Elliot J Feldman, ‘ “Buy American” Gets a Hot Reception: Despite Obama Visit, Stimulus Provisions Force Canada to Re-Examine Its Relationship with U.S.’ Legal Times (23 February 2009) <www.law.com/jsp/nlj/legaltimes/index.jsp> accessed 23 November 2009.

↵ 48 SS 1605(d) and 604(k).

↵ 49 The conference report that accompanied the legislation sheds light on Congress’ intent: Section 1605(d) is not intended to repeal by implication the President’s authority under Title III of the ‘Trade Agreements Act of 1979’. The conferees anticipate that the Administration will rely on the authority under 19 U.S.C. 2511(b) [affording the President authority to waive trade barriers] to the extent necessary to comply with U.S. obligations under the WTO Agreement on Government Procurement and under U.S. free trade agreements and so that section 1605 will not apply to least developed countries to the same extent that it does not apply to the parties to those international agreements. The conferees also note that waiver authority under section 2511(b)(2) [a special waiver authority for nations, other than major industrial nations, which will comply with the GPA] has not been used.’

↵ 50 See Evenett (n 43).

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↵ 51 See ‘China’s Turn to Buy National’, Bridges Monthly Trade News Digest No. 3 (July–August 2009) <www.ictsd.net> accessed 9 September 2009.

↵ 52 Hypo Real Estate. Steinbrück bemitleidet Flowers. Focus Online (30 April 2009), <http://www.focus.de/finanzen/boerse/finanzkrise/hypo-real-estate-steinbrueck-bemitleidet-flowers_aid_394938.html>, accessed 21 November 2009; Hauptversammlung. Bund sichert sich das Sagen bei der HRE. Die Zeit (3 June 2009), from Zeit online, <http://www.zeit.de/online/2009/23/hypo-real-estate-hauptversammlung> accessed 21 November 2009.

↵ 53 Chrysler and General Motors American carmakers in the end game. The Economist(30 April 2009), <http://www.economist.com/businessfinance/displayStory.cfm?story_id=E1_TPVSJDRJ>, accessed 21 November 2009.

↵ 54 Elisa Gamberoni and Richard Newfarmer, ‘Trade Protection: Incipient but Worrisome Trends’ <VoxEU.org> (4 March 2009) accessed 4 September 2009; see also Richard Baldwin and Simon Evenett, ‘The Collapse of Global Trade, Murky Protectionism, and the Crisis: Recommendations for the G20’, <VoxEU.org> (5 March 2009) accessed 4 September 2009.

↵ 55 There may also be pertinent issues that arise under the WTO Agreement on Trade-Related Investment Measures.

↵ 56 These include: (1) emergency safeguards (under Art X of the GATS); (2) subsidies (under Art XV of the GATS); (3) government procurement (under GATS Art XIII); and (4) domestic regulation (under Art VI of the GATS). These issues are pertinent to some but not all of the measures taken by states to deal with the crisis.

↵ 57 GATS, Art I(2)(c).

↵ 58 Mamiko Yokoi-Arai, ‘ “GATS” Prudential Carve Out in Financial Services and its Relation with Prudential Regulation’(2008) 57 ICLQ 613, 621.

↵ 59 See Art XXVIII (d) GATS: ‘ “commercial presence” means any type of business or professional establishment, including through (i) the constitution, acquisition or maintenance of a juridical person, or (ii) the creation or maintenance of a branch or a representative office, within the territory of a Member for the purpose of supplying a service’. The Annex on Financial Services clarifies the concept of ‘commercial presence’ as follows: ‘2. “Commercial presence” means an enterprise within a Member’s territory for the supply of financial services and includes wholly-or partly-owned

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subsidiaries, joint ventures, partnerships, sole proprietorships, franchising operations, branches, agencies, representative offices or other organizations.’

↵ 60 Art XVII(3) of the GATS.

↵ 61 For details of the GATS schedules of commitments for these states, see generally the WTO web site <http://tsdb.wto.org/default.aspx> accessed 21 November 2009.

↵ 62 Negotiations on subsidies have been carried out in the Working Party on GATS Rules (established on 30 March 1995) by the Council for Trade in Services. A Report by the Chairperson was circulated on 30 June 2003 (S/WPGR/10) summarizing the progress made in the negotiations.

↵ 63 See also the Guidelines for Scheduling GATS Commitments, adopted by the Council for Trade in Services on 23 March 2001 (S/L/92) para 16: ‘any subsidy which is a discriminatory measure within the meaning of Article XVII would have to be either scheduled as a limitation on national treatment or brought into conformity with that Article. Subsidies are also not excluded from the scope of Article II (MFN). In line with the paragraph above, a binding under Article XVII with respect to the granting of a subsidy does not require a Member to offer such a subsidy to a services supplier located in the territory of another Member.’

↵ 64 Pierre Sauvé, ‘Completing the GATS Framework: Addressing Uruguay Round Leftovers’ (2002) 57 Aussenwirtschaft 301, 326.

↵ 65 Cf n 32, above.

↵ 66 Under horizontal commitments, the EU schedule lists the following as a limitation to NT on mode 3: ‘Treatment accorded to subsidiaries (of third country companies) formed in accordance with the law of a Member State and having their registered office, central administration or principal place of business within the Communities is not extended to branches or agencies established in a Member State by a third-country company.’ Directly concerning subsidies, the schedule states: ‘None, other than for branches established in a Member State by a non-Community company. Eligibility for subsidies from the Communities or Member States may be limited to juridical persons established within the territory of a Member State or a particular geographical sub-division thereof. Unbound for subsidies for research and development. The supply of a service, or its subsidization, within the public sector is not in breach of this commitment.’ There are no sector-specific limitation on NT concerning subsidies in the financial market sector.

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↵ 67 Art XIV(1) and Footnote 5 of the GATS.

↵ 68 WTO Panel Report, United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/R, adopted 10 November 2004, para 6.461.

↵ 69 Members have on a number of occasions extended the deadline referred to in Art X:1 GATS. On 15 March 2004 in relation to the Fifth Decision on Negotiations on Emergency Safeguard Measures (S/L/159), Members decided the following: ‘1. The first sentence of paragraph 1 of Article X shall continue to apply. 2. Subject to the outcome of the mandate in paragraph 1, the results of such negotiations shall enter into effect on a date not later than the date of entry into force of the results of the current round of services negotiations. 3. Notwithstanding paragraph 3 of Article X, until the entry into effect of the results of the negotiations mandated under paragraph 1 of Article X, the provisions of paragraph 2 of that Article shall continue to apply.’ For a summary of the latest negotiations, see Report by the Chairperson of the Working Party on GATS Rules of 14 March 2003 (S/WPGR/9).

↵ 70 Examples of this type of safeguard can be found in Art XIX GATT, the Agreement on Safeguards, Art 5 of the Agreement on Agriculture and Art 6 of the (phased out) Agreement on Textiles and Clothing as well as in numerous regional trade agreements, including the NAFTA and most Association Agreements concluded between European Union members and various countries. See generally Sauvé, n 64.

↵ 71 For an excellent analysis of the economic causes of the crisis, see Martin Hellwig, ‘Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis’, Preprints of the Max Planck Institute for Research on Collective Goods 2008/43 (2008).

↵ 72 Para 2(a), Annex on Financial Services, GATS.

↵ 73 WTO, Background Note by the Secretariat, Financial Services, Council for Trade in Services, S/C/W/72, 2 December 1998, para 33.

↵ 74 In general terms, at least four types of government intervention can have an impact on the financial services sector: (i) macroeconomic policy management, (ii) prudential regulations, (iii) non-prudential regulation to pursue various public policy objectives other than that falling under (iv) and (iv) trade restrictions concerning market access or NT

↵ 75 This exception has not been adjudicated in the case law but the good faith qualifications are similar to parts of the chapeau to GATT Art XX.

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On this latter point, see Eric Leroux, ‘Trade in Financial Services under the World Trade Organisation’ (2002) 36 JWT 413–42, 430ff.

↵ 76 For details, see Andrew Cornford, ‘The WTO Negotiations on Financial Services: Current Issues and Future Directions’ (2004) UNCTAD Discussion Paper No. 172 (UNCTAD/OSG/DP/2004/6), 15 <http://www.unctad.org/en/docs/osgdp20046_en.pdf> accessed 21 November 2009.

↵ 77 Yokoi-Arai (n 58) 639.

↵ 78 Cornford (n 76) 15.

↵ 79 Ibid.

↵ 80 See also Sydney J Key, ‘Trade Liberalization and Prudential Regulation: The International Framework for Financial Services’ (1999) 75 Intl Aff 61; Yokoi-Arai (n 58) (for analysis of the relationship between the prudential carve-out and the international standards).

↵ 81 Cornford (n 76) 15.

↵ 82 See Fireman’s Fund (n 5) para 162.

↵ 83 See also Leroux (n 75) 430ff.

↵ 84 Aaditya Mattoo and Sascha Wunsch-Vincent, ‘Pre-Empting Protectionism in Services: The GATS and Outsourcing’ (2004) 7 JIEL 765, 795.

↵ 85 According to Hufbauer, almost $4 trillion of subsidies, bailouts and guarantees in the US and EU have a distinctly national flavor and could raise the specter of WTO-illegal subsidies, see German Marshall Fund, Discussion Analyzes WTO Disciplines for Subsidies during the Economic Crisis, 27 July, 2009, <http://www.gmfus.org/event/detail.cfm?id=608&parent_type=E> accessed 4 September 2009.

↵ 86 These include grants, loans, equity infusions, loan guarantees, fiscal incentives, the provision of goods or services, the purchase of goods.

↵ 87 This applies not only to measures of national governments, but also to measures of subnational governments and public bodies such as state-owned companies. If newly nationalized banks give credit to domestic firms which they would not have obtained otherwise in the market, these actions would be included. Furthermore, Art 1.1. SCM Agreement distinguishes between direct and indirect subsidies. In the latter the funds are channeled through private institutions, thus a link to a government

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agency needs to be found. Type 2 measures could constitute indirect subsidies.

↵ 88 Often the existence of a benefit and its valuation will be clear. This is especially the case in the Type 3 Measures. In case of doubt, the Appellate Body uses the private investor test, that is, the existence of a benefit is to be determined by comparison with the marketplace (ie on the basis of what the recipient could have received in the market); see Appellate Body Report, Canada—Measures Affecting the Export of Civilian Aircraft, WT/DS70 of 2 August 1999. Art 14 SCM Agreement provides some guidance with respect to determining whether certain types of measures confer a benefit.

↵ 89 There are four types of ‘specificity’ within the meaning of the SCM Agreement, of which two are of interest here: (i) enterprise-specificity where a government targets a particular company or companies for subsidization; or (ii) industry-specificity where a particular sector or sectors is targeted for subsidization.

↵ 90 Non-actionable subsidies no longer exist, Art 8 SCM Agreement. They included subsidies for environmental purposes, to make up for regional inequalities, and the promotion of R&D. They were included on a provisional basis for five years ending 31 December 1999 (Art 31 SCM).

↵ 91 A detailed list of export subsidies is annexed to the SCM Agreement.

↵ 92 Art 5-6 SCM Agreement.

↵ 93 Report to the TPRB (n 8) para 8.

↵ 94 Those forms of relief may not be used simultaneously. See footnote 35 to the SCM Agreement.

↵ 95 See Art 15 of the SCM Agreement; WTO Appellate Body Report, United States-Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, WT/DS257/AB/R of 19 January 2004.

↵ 96 Hufbauer and Schott (n 2) 6, Table 3. Other estimates go from 7–14 %, see Simon Lester and Bryan Mercurio, World Trade Law (Hart, Oxford 2008) 665.

↵ 97 These are Canada; the European Communities (including its 27 Member States); Hong Kong, China; Iceland; Israel; Japan; Korea; Liechtenstein; the Kingdom of the Netherlands with respect to Aruba; Norway; Singapore; Switzerland and the US.

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↵ 98 Art I(1) of the GPA defines scope and coverage: ‘This Agreement applies to any law, regulation, procedure or practice regarding any procurement by entities covered by this Agreement, as specified in Appendix I.’ Pursuant to this article, parties have submitted their lists of covered entities. Those entities include central governmental entities as well as some subcentral governmental entities and public agencies.

↵ 99 For the commitments undertaken by the individual countries <http://www.wto.org/english/tratop_E/gproc_e/appendices_e.htm> accessed 21 November 2009. While US commitments under the GPA cover many federal government entities and 37 states, there is a general exclusion for federal funds destined for mass transit and highway projects. Moreover, many of the 37 states that acceded to the GPA also reserved sensitive procurement areas, such as motor vehicles, construction-grade steel and construction services. But not all states made these reservations. As a result, it can become very difficult to isolate precisely where a violation of the GPA is taking place.

↵ 100 See eg Art 9.2 of the Chilean-US FTA <http://www.ustr.gov/trade-agreements/free-trade-agreements/chile-fta/final-text> accessed 21 November 2009: ‘Article 9.2: General Principles: National Treatment and Non-Discrimination. 1. With respect to any measure governing procurement covered by this Chapter, each Party shall accord to the goods and services of the other Party, and to the suppliers of the other Party of such goods and services, treatment no less favorable than the most favorable treatment the Party accords to its own goods, services, and suppliers. 2. With respect to any measure governing procurement covered by this Chapter, neither Party may: (a) treat a locally established supplier less favorably than another locally established supplier on the basis of degree of foreign affiliation or ownership; or (b) discriminate against a locally established supplier on the basis that the goods or services offered by that supplier for a particular procurement are goods or services of the other Party.’

↵ 101 Under ch 10 of NAFTA, government procurement of the federal level of the three Member States is covered, although not state and provincial government entities. Nevertheless, if the federal-level channels the money not freely but with detailed conditions, arguably, this would fall under the federal-level procurement. On this point, see Hufbauer and Schott (n 2) 7.

↵ 102 The issue was dropped as an issue of negotiation in the Doha Development Round in 2004. Renegotiation of the GPAs terms was concluded in December 2006 but the accord has not come into effect (GPA/W/297) of 11 December 2006.

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↵ 103 Art III(1)(b) of the GPA.

↵ 104 Lester and Mercurio (n 96) 680.

↵ 105 Art XIX(1) of the GPA.

↵ 106 Art XXII(1) of the GPA.

↵ 107 Art XXII(3), (5–7) of the GPA.

↵ 108 For a detailed overview, including implementing decisions and guidelines issued so far, see Evenett (n 43).

↵ 109 Panel Report, Korea—Measures Affecting Government Procurement, adopted 19 June 2000, WT7DS163/R, para 7.59.

↵ 110 Lester and Mercurio (n 96) 676.

↵ 111 Adhering to it are the thirty OECD Member Countries and 11 non-member countries. The latter group comprises: Argentina (22 April 1997), Brazil (14 November 1997), Chile (3 October 1997), Egypt (11 July 2007), Estonia (20 September 2001), Israel (19 September 2002), Latvia (9 January 2004), Lithuania (20 September 2001), Peru (25 July 2008), Romania (20 April 2005) and Slovenia (22 January 2002).

↵ 112 Although the Instrument is not binding, states have consented to a procedure of notification and negotiation of their exceptions, thus fostering transparency. The exceptions are periodically examined by the Investment Committee. These examinations result in a decision by the OECD Council, which formulates proposals for action by the country concerned. The results of the examinations are published in the series OECD Reviews of Foreign Direct Investment. Typically, the exceptions cover sectors like mining, transport, fisheries, broadcasting and telecommunications as well as real estate. Exceptions to national treatment cannot be found in the banking sector concerning stabilizing measures, just as there are no exceptions concerning state aid for finance and automotive sectors.

↵ 113 OECD, ‘National Treatment for Foreign-Controlled Enterprises Including Adhering Country Exceptions to National Treatment’ (2008) 5 <http://www.oecd.org/dataoecd/32/21/1954854.pdf> accessed 4 September 2009.

↵ 114 To put this slightly differently, as these measures would be a violation of the Instrument, Member States would be obliged to notify them as exceptions.

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↵ 115 In 1988, an unanimous pledge of all adhering countries to refrain from introducing new exceptions (‘standstill pledge’).

↵ 116 For example, see SD Myers, Inc. v Canada, UNCITRAL Award under the NAFTA (13 November 2000) para 248; Pope & Talbot Inc v Canada, UNCITRAL Award under the NAFTA (10 April 2001) para 78 (and footnote 73).

↵ 117 While this is a commonly accepted strategy within the jurisprudence, it has occasionally elicited criticism by arbitral tribunals. For example, see Phoenix Action, Ltd. v Czech Republic, ICSID Case No. ARB/06/5, Award (15 April 2009).

↵ 118 After the Second World War, the so-called Modern FCN Treaty Series contained provisions on MFN status and national treatment, but also on the protection from expropriation without prompt, adequate and effective compensation, see Andreas Paulus, ‘Treaties of Friendship, Commerce and Navigation’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law <www.mpepil.com> accessed 4 September 2009.

↵ 119 Signed at Washington D.C., 29 October 1954, entered into force 14 July 1956<http://tcc.export.gov/Trade_Agreements/All_Trade_Agreements/exp_005539.asp.>.

↵ 120 Signed at Tokyo 9 April 1953, entered into force 30 October 1953.

↵ 121 As, eg Case Concerning Elettronica Sicula SpA (ELSI) (United States of America v Italy) [1989] ICJ Rep 15.

↵ 122 See Asakura v City of Seattle, 265 US 332 (1924), Spiess v C. Itoh & Co. (America), Inc. United States Court of Appeals Fifth Circuit [24 April 1981] 356; McKesson HBOC, Inc. v Islamic Republic of Iran, United States Court of Appeals for the District of Columbia Circuit [16 November 2001] 1107–8.

↵ 123 For example, Art XVII of the Japan–US FCN treaty provides:1. Each Party undertakes (a) that enterprises owned or controlled exclusively by its Government, and that monopolies or agencies granted exclusive or special privileges within its territories, shall make their purchases and sales involving either imports or exports affecting the commerce of the other Party solely in accordance with commercial considerations, including price, quality, availability, marketability, transportation and other conditions of purchase or sale: and (b) that the nationals, companies and commerce of such other Party shall be afforded adequate opportunity, in accordance with customary

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business practice, to compete for participation in such purchases and sales. 2. Each Party shall accord to the nationals, companies and commerce of the other Party fair and equitable treatment, as compared with that accorded to the nationals and commerce of any third country, with respect to: (a) the governmental purchase of supplies, (b) the awarding of concessions and other government contracts, and (e) the sale of any service sold by the Government or by any monopoly or agency granted exclusive or special privileges.

↵ 124 UNCTAD, Recent Developments in International Investment Agreements, IIA Monitor No. 32, 6–7 (2007).

↵ 125 North American Free Trade Agreement, 17 December 1992, Can-Mex-US, 32 ILM 289, 605, Art 1108(7)(b).

↵ 126 See, for example, the model German and UK BITs extracted in Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, Oxford 2007) 379–85 and 417–22.

↵ 127 On this point, see N Jansen Calamita, ‘The British Bank Nationalizations: An International Law Perspective’ (2009) 58 ICLQ 119.

↵ 128 For a review of NT clauses in BITs, see Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Nijhoff, The Hague 1995) 63–5 and for a short survey on the meaning and jurisprudence of NT, see Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, Oxford 2008) 178ff. As an example, NAFTAs provision is quoted: Art 1102(2). ‘Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.’ (Art 1102(1) is the same except that it refers to ‘investors’ rather than to ‘investments of investors’; under Art 1102(3), the obligation applies to state/provincial governments as well.

↵ 129 Occidental Exploration and Production Company v Ecuador, Award, LCIA Case No UN 3467, IIC 202 (1 July 2004) para 173.

↵ 130 Siemens AG v Argentina, Award and Separate Opinion, ICSID Case No ARB/02/8 (6 February 2007) paras 320–1.

↵ 131 Methanex Corporation v USA, UNCITRAL, Final Award (3 August 2008) pt IV, ch B, para 17.

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↵ 132 For example, Corn Products International, Inc. v Mexico, ICSID Case No. ARB(AF)/04/01, Decision on Responsibility (15 January 2008)paras 120–2.

↵ 133 For example, s 2 of the German Financial Market Stabilization Act.

↵ 134 For example, the NAFTA Tribunal in Feldman v Mexico ruled clearly that ‘de facto difference in treatment is sufficient to establish a denial of national treatment under Article 1102.’ Marvin Feldman v Mexico, ICSID Case No. ARB(AF)/99/1, Award (16 December 2002) para 169.

↵ 135 See Henrik Horn and Petros Mavroidis, ‘Still Hazy after All These Years: The Interpretation of National Treatment in the GATT/WTO Case-law on Tax Discrimination’ (2004) 15 EJIL 39 as well as Thomas Cottier and Matthias Oesch, International Trade Regulation: Law and Policy in the WTO, the European Union and Switzerland (Stämpfli, Bern 2005) 383.

↵ 136 Pope & Talbot v Canada (n 116) paras 39–42.

↵ 137 Methanex v U.S (n 131) paras 20–1.

↵ 138 Arbitrator Cass ruled in his Separate Statement: ‘It is, as UPS urges, enough to establish that a NAFTA Party has given one or more of its investors or investments more favorable treatment.’ United Postal Service of America Inc. v Canada, ICSID und the NAFTA, Award on the Merits (24 May 2007), Separate Opinion of Arbitrator Cass, para 60.

↵ 139 Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v Mexico, ICSID Case No. ARB(AF)/04/05, Award (21 November 2007) para 205.

↵ 140 The perceived security of state guaranteed banks or bank bonds is mirrored in the spread of credit default swaps, which diminished considerably for those institutions getting help, see only Cash, Gesicherte Bankanleihen bieten attraktive Renditen (14 May 2009) <http://www.cash.ch/news/newsletter/gesicherte_bankanleihen_bieten_attraktive_renditen-795407-440> accessed 4 September 2004. See also Stijn Claessens, ‘The Financial Crisis and Financial Nationalism’, in Simon Evenett, Bernard Hoekman and Olivier Cattaneo (eds),The Fateful Allure of Protectionism: Taking Stock for the G8 (CEPR, London 2009) 59–62, 65 <http://www.voxeu.org/index.php?q=node/3728> accessed 4 September 2009.

↵ 141 For example, Occidental (n 129) para 177: ‘In the present dispute the fact is that OEPC has received treatment less favorable than that

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accorded to national companies. The Tribunal is convinced that this has not been done with the intent of discriminating against foreign–owned companies. […]However, the result of the policy enacted and the interpretation followed by the SRI in fact has been a less favorable treatment of OEPC.’

↵ 142 Siemens AG v Argentina (n 130) para 321. Similarly, the NAFTA Tribunal inThunderbird v Mexico (n 150), did not require the claimant to show that the less favorable treatment was motivated by nationality. See para 177: ‘It is not expected from Thunderbird that it show separately that the less favourable treatment was motivated because of nationality. The text of Article 1102 of the NAFTA does not require such showing. Rather, the text contemplates the case where a foreign investor is treated less favourably than a national investor. That case is to be proven by a foreign investor, and, additionally, the reason why there was a less favourable treatment.’

↵ 143 Of course, the likely complainants in such an action will be German and Japanese investors in the automotive industry in the US. However, neither Germany nor Japan has executed modern investment treaty protection with the US. As we noted earlier, however, both those states have older FCN treaties with the US which may be an alternate avenue of complaint. See CSR Report for Congress: U.S.-Japan Economic Relations: Significance, Prospects, and Policy Options (9 July 2007) 20ff <http://www.fas.org/sgp/crs/row/RL32649.pdf> accessed 4 September 2009.

↵ 144 Pope & Talbot (n 116) para 78.

↵ 145 Ibid para 79 (ruling that difference in treatment must ‘be justified by showing it bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investments’).

↵ 146 GAMI v Mexico, NAFTA under UNCITRAL, Award (15 November 2004) para 114.

↵ 147 Saluka v Czech Republic (n 5).

↵ 148 Ibid para 327ff.

↵ 149 For example, on liquidity, the Saluka Tribunal held that it ‘is not convinced that different liquidity ratios warranted different treatment with regard to the provision of State financial assistance in order to overcome the bad debt problem’. Ibid para 345.

↵ 150 See also Separate Opinion Wälde in International Thunderbird Gaming Corp. v Mexico, NAFTA under UNCITRAL, Award (26 January 2006) para 103.

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↵ 151 See for example Siemens AG v Argentina (n 130) paras 318–21 (drawing on NAFTA national treatment jurisprudence in interpreting the treaty prohibition of ‘arbitrary or discriminatory measures’).

↵ 152 We can trace a concern with this type of hostile discrimination in customary international law (which is incorporated into particular FET standards such as NAFTA Art 1105) together with intriguing hints in this direction in the decision of the ICJ Chamber inELSI. See ELSI (n 121).

↵ 153 Metalclad Corp. v Mexico, ICSID Case No. ARB(AF)/97/01, Award (30 August 2000). See for more details: Akira Kotera, ‘Regulatory Transparency’ in Peter Muchlinski, Frederico Ortino and Christoph Schreuer (eds), Oxford Handbook of International Investment Law(Oxford University Press, Oxford 2008) 617–36. But note that the NAFTA Free Trade Commission issued a binding statement in 2001 concerning the interpretation of Fair and Equitable Treatment. See ‘Free Trade Commission Clarifications Related to NAFTA Chapter 11’ (31 July 2001) <http://www.ustr.gov/regions/whemisphere/nafta-chapter11.html> accessed 4 September 2009. The Free Trade Commission’s Interpretation confines the scope of the NAFTA fair and equitable standard to the customary minimum standard of treatment, making it less likely that transparency applies as a standalone requirement in the NAFTA. That Interpretation does not, however, apply to investment treaties other than the NAFTA.

↵ 154 Metalclad Corp. v Mexico (n 153) para 99.

↵ 155 Tecnicas Medioambientales TECMED S.A. v Mexico, ICSID Case No. ARB (AF)/00/2, Award (29 May 2003) para 154: ‘The Arbitral Tribunal considers that this provision of the Agreement, in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations.’

↵ 156 Public Law 110–343, 12 USC 5202, s 3: ‘Financial institution—The term “financial institution” means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District

44

of Columbia, […] and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.’

↵ 157 SS 15 and 16 of the Financial Market Stabilization Act.

↵ 158 12 USC 5229, s 119.

↵ 159 For example, the US-Uruguay BIT of 2006 contains a prudential carve-out in Art 20 (1): ‘Notwithstanding any other provision of this Treaty, a Party shall not be prevented from adopting or maintaining measures relating to financial services for prudential reasons […]’. Similarly, Canadian 2004 Model Foreign Investment Protection and Promotion Agreement (FIPA), Art 10 (2) <http://www.sice.oas.org/Investment/NatLeg/Can/2004-FIPAmodel-en.pdf>accessed 7 May 2009: ‘2. Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining reasonable measures for prudential reasons, such as: (a) the protection of investors, depositors, financial market participants, policyholders, policy-claimants, or persons to whom a fiduciary duty is owed by a financial institution; (b) the maintenance of the safety, soundness, integrity or financial responsibility of financial institutions; and (c) ensuring the integrity and stability of a Party’s financial system.’ Almost identical also Art 12.10 of the Chilean-US FTA (n 100).

↵ 160 For example, some US BITs contain MFN/NT exceptions for the financial sector. The 1994 Argentinian-US BIT includes exceptions to national treatment in a Protocol to the BIT: ‘(2) With reference to Article II, paragraph 1, the United States reserves the right to make or maintain limited exceptions to national treatment in the following sectors: […] banking; insurance […]’. The 1994 US-Bulgaria BIT and 1990 US-Turkey BIT contain similar clauses. The 1996 Ukraine-US BIT explicitly excludes financial services from MFN/NT: ‘The U.S. portion of the Annex contains a list of sectors and matters in which, for legal and historical reasons, the federal government or the States may not necessarily treat investments of nationals or companies of the other Party as they do U.S. investments or investments from a third country. The U.S. exceptions from national treatment are: […] banking; insurance […].’ However, none of the Swiss, the German or UK BITs contain prudential carve-outs or MFN/NT exceptions for the financial service sector.

↵ 161 A direct carve-out on national treatment in the financial services sector will offer a substantive defense based on national treatment, leaving only a second and possibly marginal claim on FET. If there is only a prudential carve-out, much will depend on how this carve-out is interpreted

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by an arbitral tribunal. As a point of comparison, the GATS prudential carve-out has not to date been interpreted by a WTO panel. See Yokoi-Arai (n 58).

↵ 162 See 2004 U.S Model BIT, Art 13 <http://www.ustr.gov/Trade_Sectors/Investment/Model_BIT/Section_Index.html> accessed 21 November 2009.

↵ 163 See eg Art XI of 1991 U.S-Argentine BIT.

↵ 164 For extended analysis on this point, see Kurtz (n 5).

↵ 165 Continental Casualty Company v Argentina, ICSID Case No. ARB/03/9 (5 September 2008) paras 78–9.

↵ 166 Ibid 87–8.

↵ 167 For a contract theory approach to international trade law, see Simon Schropp,Trade Policy Flexibility and Enforcement in the WTO. A Law and Economics Analysis(Cambridge University Press, Cambridge forthcoming 2009), for one to international investment law, see Anne van Aaken, ‘International Investment Law Between Commitment and Flexibility: A Contract Theory Analysis’ (2009) 12 JIEL 507. See also Roberta Piermartini, ‘Trade Policy Commitments and Contingency Measures’ VoxEU.org (26 July 2009), accessed 21 November 2009.

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The Global Financial Crisis and Government Support for Banks: What Role for the Gats?

1. Bart De Meester *

1. * PhD Candidate and Research Fellow, Fund for Scientific Research Flanders (FWO Vlaanderen) at the Institute for International Law, University of Leuven. E-mail:bart.demeester@law.kuleuven.be.

 Abstract

This article examines whether the General Agreement on Trade in Services (GATS) is a useful instrument to tackle government support that creates distortions of international competition in the banking sector. The GATS has no specific provisions on subsidies. However, general support schemes ‘as such’ or ‘as applied’ may violate Article XVII if they exclude foreign-owned banks with a commercial presence in the territory of the World Trade Organization (WTO) Member that adopts the scheme. This depends on the specific commitments of the WTO Member and the limitations to this

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commitment. Moreover, it is required that the excluded banks are ‘like’ the domestic banks. A single application of a general scheme may violate Article VI(1) if solid evidence is available that this application is not reasonable, objective or impartial. Despite these possible violations, the great majority of measures will still be justified under the broad ‘prudential carve-out’. Only support measures that are not reasonably able to achieve the prudential goal will not be exempted. Hence, the GATS imposes restraint on government support only in very limited cases. The WTO Members should address the remaining uncertainties with regard to both the obligations and the exception. This would ensure that the GATS is able to prevent that government support distorts competition and would also alleviate concerns that the GATS constitutes a danger to financial stability.

I. INTRODUCTION

The widespread occurrence of government strategies to address the global crisis has given rise to concerns with regard to the competitive impact of such strategies on other countries. Despite promises by world leaders to fight all forms of protectionism and maintain open trade and investment,1 it cannot be ignored that the arsenal of legal weapons to fight such effects at the international level is quite limited. States have adopted subsidies and other emergency measures in many sectors.2 However, in this article I focus only on the banking sector. I want to examine to what extent the General Agreement on Trade in Services (GATS) is a useful legal instrument for tackling the international distortions of competition that may arise in the market for banking services when governments take certain measures that aim to help banks weather the crisis and to prevent the financial system from collapsing. Such measures may involve direct financial aid, like capital injections, but also indirect financial support, like government guarantees.

I want to stress from the outset that the chance that States will challenge other States’ support to banks may be quite low. This is due to the legal problems of challenging such measures. As I will explain, there are only a few legally binding international obligations that are relevant in this respect. Moreover, these obligations still provide for much flexibility. Furthermore, the relief found by the challenging State can only be prospective. Hence, the recommendation a panel can make in a World Trade Organization (WTO) Dispute will never be the repayment of financial assistance already granted.3 However, there are also clear political reasons for not launching a legal challenge. A State may fear that a challenge provokes a wide range of counter-challenges against its own support schemes. States may also consider that the measures are only of a temporary nature and therefore that it is not useful to devote resources to launching disputes.

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I think it is nevertheless useful to examine the international rules that can be relied upon by States to challenge government support. First, the financial sector is characterized by sunk costs.4 It is difficult for competitors to challenge banks that have obtained a strong position in certain markets because sunk costs constitute high entry barriers.5 Hence, if certain banks obtain strong positions in markets thanks to government support, the position of these banks may be difficult to challenge once the crisis is over. It is thus important that considerations of competition are not ignored in the current situation. The future constellation of the global banking market (especially its competitive characteristics) is defined by measures taken today. Second, not all countries have the same resources to grant support. While countries with similar resources may indeed be hesitant to challenge each other’s measures, countries that feel the impact of other States’ measures and are not able to support their banking sector to a similar degree may want to rely on the multilateral legal system to address the effect of such measures. Third, even if the WTO Dispute Settlement system does not provide for retrospective remedies, the elimination of discriminatory or other GATS-inconsistent elements in a financial aid scheme or in a government guarantee scheme constitute prospective remedies that are in line with the WTO practice and law. Finally, and more generally, pointing out the limits of the current international legal framework is necessary in order to provide guidance for possible modifications to the framework.

I thus seek to identify the international legal restraint the GATS imposes on governments that support banks. After this introduction, I will address this research question in five sections. I will show that only in very specific circumstances can a violation of some obligations in the GATS be found and that, moreover, a broad exception is available. First, I will briefly summarise how government support to banks may create international distortions of competition (Section II). Thereafter, I introduce the GATS and its Annexes as the relevant legally binding international instruments to tackle possible distortions (Section III). In Section IV, I will explain the scope and content of the relevant obligations in the GATS. Finally, I will address the important provision in the GATS Annex on Financial Services that provides an exception from the obligations: the so-called ‘prudential carve-out’ (Section V).

II. GOVERNMENT SUPPORT TO BANKS CAN CREATE INTERNATIONAL DISTORTIONS OF COMPETITION

As indicated in the introduction, I will examine the legal restraint imposed by the GATS on government support in the banking sector. Such support has taken diverse forms: provision of liquidity, recapitalisation by the government (sometimes amounting to nationalization), purchase of so-called

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‘toxic assets’ of banks or provision of government guarantees for bank liabilities.6 The support to large banks that suffered from the global financial crisis was essential, not only for protecting financial stability, but also for limiting the effects of bank failures on the real economy. Surely, the banking sector shows characteristics that explain why the effects of bank failures are different from failures in other sectors.7 First, when a large bank fails, this event may trigger problems with other banks (‘contagion’), affecting the stability of the financial sector.8 Second, banks are essential for the real economy. Not only do they channel savings to investment projects, but they are also an essential link in the payment system. For these reasons, governments could not let systemically-important banks (ie banks that are of such size, complexity or level of interconnection that their failure will trigger the mentioned effects) go bankrupt.

Nonetheless, even if government support to banks that suffer from a financial crisis may be desirable, it is important that such support does not create international distortions of competition. In a joint report of September 2009, the WTO, Organization for Economic Cooperation and Development (OECD) and United Nations Conference on Trade and Development (UNCTAD) warned that ‘emergency measures may effectively create advantages for domestic sectors and put foreign players at a disadvantage’.9 Government support that favors domestic banks will disturb the ‘level playing field’ for competition among domestic and foreign banks in a given market.

It is possible that general government support schemes limit their availability to banks that are domestic-owned. Such schemes are de jure discriminatory.10 However, even if a scheme is notde jure discriminatory, the decisions by the government agency on the eligibility of banks may be biased towards domestic banks. A variation of this problem is government support that is ‘tailor-made’ for a specific bank. While such measures appear to address a specific individual case, they may in fact ignore the situation of foreign-owned banks that suffer from the same problems. Finally, when financial markets return to stable circumstances and States withdraw their support, they should be vigilant not to distort competition by selling their stakes predominantly to domestic investors.11

It should be noted that support may also create international distortions of competition when the government attaches to the support the (explicit or implicit) condition to provide loans predominantly to domestic industries.12 Hence, in an indirect manner, these measures also create competitive distortions in sectors outside the banking sector. However, in this article, I only examine the role of the GATS to discipline competitive distortions created in the market for banking services.13

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III. GOVERNMENT SUPPORT IN THE BANKING SECTOR MUST BE ASSESSED UNDER THE GATS AND ITS ANNEXES

The organization one thinks of in the first instance for being responsible to avoid that government support in the banking sector distorts international trade in banking services is of course the WTO. However, the WTO as an organization does not constitute an international ‘policeman’ for ensuring that States comply with the obligations in the different WTO Agreements. The WTO Director-General can remind WTO Members of their obligations (as he has done repeatedly14) but cannot launch a case against a WTO Member for violating its obligations.15 This depends entirely on the Members themselves. They decide whether or not to bring a case against another WTO Member.

The WTO Agreements cover distinct subject-matters. The relevant substantive legal rules with regard to international trade are contained in the agreements in Annex 1 to the Marrakesh Agreement Establishing the World Trade Organization.16 This Annex is further sub-divided into three Annexes relating to trade in goods (Annex 1A), trade in services (Annex 1B) and trade-related aspects of intellectual property rights (Annex 1C). Since each Annex contains specific agreements with distinct obligations (some of them allowing for more flexibility than others) it is of essential importance to determine under which Annex a legal issue needs to be assessed. Even if the WTO Agreements do not include definitions clarifying the distinction between ‘services’ and ‘goods’, it appears logical to assess government support in the banking sector under Annex 1B relating to trade in services. Annex 1B consists of the GATS17 and its specific Annexes.

I will explain that government support in the banking sector can be assessed under the GATS. However, it should be noted that the GATS is only a framework agreement, laying down a number of obligations that nevertheless need to be specified and implemented by the WTO Members. Moreover, the content or application of some provisions is further defined in Annexes to the GATS. This is for instance the case for the obligation not to discriminate between services and service suppliers from different trading partners (obligation of Most-Favoured-Nation (MFN) Treatment in Article II(1) GATS). The Annex to the GATS on Article II Exemptions18 specifies the conditions under which WTO Members are exempted from the obligation in Article II(1). The WTO Members were indeed allowed, upon accession, to inscribe certain exceptions to the MFN obligation in their list of MFN exemptions. Furthermore, theGATS Annex on Financial Services19 sets out definitions (especially a broad definition of ‘financial service’) as well as a number of rules specifically for the financial services sector. Finally, it should be mentioned that the WTO Members have attached Member-

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specificSchedules of Specific Commitments to the GATS, which indicate to what extent specific GATS obligations on Market Access or National Treatment apply in certain service sectors (e.g. the financial sector). Some WTO Members have made use of the option to make commitments on the basis of the Understanding on Commitments in Financial Services.20 This Understanding provides a ‘model’21 or ‘formula approach’22 for far-going commitments in the field of financial services, with regard to Market Access and National Treatment or Additional Commitments for those WTO Members that desire so. The Annexes (but not the Understanding) are an integral part of the GATS.23 All these sources need to be consulted in combination to determine the specific constraint the GATS imposes on WTO Members.

As already mentioned, the WTO Agreements do not clearly indicate where the distinction between trade in goods and trade in services lies. The GATS only indicates that it applies to ‘measures affecting trade in services’.24 The Annex on Financial Services indicates that the specific provisions in the Annex apply to ‘measures affecting the supply of financial services’. This requires three elements to be present.

First, Article XXVIII(a) defines ‘measure’ as ‘any measure by a Member, whether in the form of a law, regulation, rule, procedure, decision, administrative action, or any other form’. The measures may be taken by central, regional or local governments and authorities, as well as by non-governmental bodies in the exercise of powers delegated by central, regional or local governments or authorities.25 It is essential that the measures that are challenged can be attributed to the government of a WTO Member. It is clear that the support granted in the financial sector qualifies as such measures. The measures at issue are adopted by the government (the Treasury, the Ministry of Finance) or the central bank of States. The measures may be of a general nature (general support programmes) or may be specific (granting assistance or guarantees to an individual bank in trouble).

Second, the measures must ‘affect’ trade in services. The Appellate Body in EC—Bananas III has stated that there is no a priori exclusion of any measures from the scope of the GATS.26Measures that regulate other matters but nevertheless indirectly affect trade in services are within the scope of the GATS. It is clear that government support in the banking sector ‘affects’ trade in banking services. It affects the competitive strength of banks that compete with other (including foreign) banks.

Third, it is required that trade in ‘(financial) services’ is at stake. The concept of ‘service’ in the GATS is a broad one and covers ‘any service in any sector except services supplied in the exercise of governmental

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authority’.27 ‘Financial Service’ is defined in the Annex as ‘any service of a financial nature offered by a financial service supplier of a Member’ and a non-exhaustive list of financial services is provided.28 However, the Annex on Financial Services provides a more specific definition for the excluded services than the one in Article I GATS.29The Annex excludes the following activities from the scope of the GATS: (i) activities conducted by a central bank or monetary authority or by any other public entity in pursuit of monetary or exchange rate policies; (ii) activities forming part of a statutory system of social security or public retirement plan and (iii) other activities conducted by a public entity for the account or with the guarantee or using the financial resources of the Government. Importantly, this does not mean that the measures taken by a central bank or monetary authority or other public entity are outside the scope of the GATS. Activities conducted by a central bank, monetary authority or any other public entity in pursuit of monetary or exchange rate policies are not considered ‘services’ within the scope of the GATS. Hence, if a government adopts a measure that affects such activities, this measure cannot be scrutinised under the GATS.30 However, if a central bank or monetary authority elaborates an assistance programme, this does not mean that such assistance programme is outside the scope of the GATS (provided it affects trade in services).

Now that I have shown that the government support in the banking sector falls within the general scope of the GATS, I can examine the obligations the GATS imposes upon WTO Members in this respect.

IV. OBLIGATIONS IN THE GATS TO ADDRESS TRADE-DISTORTIVE GOVERNMENT SUPPORT

A. No specific subsidies disciplines in the GATS

The majority of the emergency measures in the banking sector take the form of government assistance, either by providing government guarantees to reinstate trust in banks or by granting direct financial aid (recapitalization, liquidity assistance, acquisition of ‘toxic assets’). The most natural legal reflex would be to examine whether such measures are subsidies. The Agreement on Subsidies and Countervailing Measures (SCM Agreement)31 is indeed the WTO Agreement that prohibits certain subsidies32 and provides rules on how to deal with other types of subsidies that cause adverse effects to the interests of WTO Members.33 Nevertheless, since this Agreement is included in Annex 1A to the Marrakesh Agreement Establishing the WTO, these provisions only apply to subsidies in the goods sector. With regard to subsidies in the services sector, there exists currently no specific agreement. The GATS has only a provision that requires WTO Members to enter into negotiations for developing the ‘necessary multilateral disciplines to avoid

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[ … ] trade-distortive effects [of subsidies]’.34 The current Doha Round of trade negotiations has until now not produced any results in this regard.35 If a WTO Member considers that it is adversely affected by the subsidy of another Member in the service sector, it may request consultations with that Member. While the GATS indicates that such request should not be considered a hostile act and thus must ‘be accorded sympathetic consideration’,36 there is no further specification on the outcome of such consultations, nor any further clarification what to do in case consultations do not result in a solution.

However, this does not mean that the GATS is entirely irrelevant with regard to government support in the banking sector. Two obligations should be considered here: first of all, the important obligation in Article XVII not to treat domestic services and service suppliers more favourable than like services and service suppliers of other WTO Members (‘National Treatment’ obligation); second, the obligation in Article VI(1) to administer all measures of general application affecting trade in services in a reasonable, objective and impartial manner.37 Nonetheless, as already pointed out in the introduction, these GATS obligations apply in a very flexible manner. For each individual WTO Member, one needs to determine to what extent it has made commitments in the banking sector indicating that these obligations apply. Moreover, as I will explain in Section V, the wide exception to the GATS obligations may make a successful challenge of government support to banks particularly difficult. However, that does not mean that it is entirely unimaginable.

B. National Treatment

The National Treatment obligation in Article XVII(1) GATS requires each WTO Member to ‘accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers’.

1. Scope of application

(a) Measures affecting trade in services.

The scope of application of this obligation consists of ‘all measures affecting trade in services’. Interestingly, in contrast to the corresponding Article III of the General Agreement on Tariffs and Trade (GATT),38 which explicitly excludes subsidies39 from the National Treatment obligation,40 the GATS does not contain such exclusion. Hence, measures that could be considered subsidies are in principle fully subject to the National Treatment obligation in the GATS.

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To be sure, Article XVII constitutes one of the obligations in the GATS that only apply as far as the WTO Member whose measures are under scrutiny has indicated in its Schedule of Commitments that the obligation applies in the service sector at stake (here: the banking sector). Moreover, even if a WTO Member has made a commitment, the Member may still have included limitations to the commitment in its schedule.41 The GATS is thus an extremely flexible agreement. It involves only gradual liberalization at the pace the individual WTO Member deems appropriate. Hence, in order to examine whether a WTO Member’s support to banks complies with Article XVII GATS, one needs to consult the Schedule of Commitments of this Member. One should have a look at the ‘National Treatment’-column of this Schedule and consider both the horizontal section (indicating commitments and limitations for all possible sectors) and the sector-specific section dealing with banking services.

Before considering the content of the National Treatment obligation, three further specifications should be made with regard to the scope of Article XVII.

(b) No measures affecting ‘export’ of services.

The National Treatment obligation only applies to measures that affect the competitive opportunities in the territory of the Member taking the measures.42 It is possible that government support also distorts competition outside the territory of this Member. If a bank benefits from a government guarantee, it may be more trustworthy to depositors abroad and therefore this bank may be able to expand abroad on the basis of a competitive advantage the banks in these foreign markets do not benefit from, unless their home countries also provide such guarantees. Nevertheless, such effect is not caught by Article XVII GATS.

(c) No obligation to extend benefits outside the territory.

What is more, it should be noted that banking services can be supplied by a foreign bank within the territory of the WTO Member providing support by means of four ‘Modes of Supply’. In the first two Modes, the foreign bank does not maintain any physical presence in the host territory. The foreign bank can provide services cross-border into the territory of another Member without any physical presence in this territory and without the consumer moving (e.g. online banking) (Mode 1).43 It can also do this by providing banking services to a consumer who travels from his/her home territory to the territory of the bank to receive the service (Mode 2).44 In contrast, the other two Modes involve some physical presence of the foreign bank in the host country. The bank can provide services by means of a ‘commercial presence’ in the host country.45 This means ‘any type of business or

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professional establishment’, in the form of a juridical person, branch or representative office.46 Finally, the bank can provide services by sending a natural person to the host country.47

The measures by a WTO Member may lead to less favourable treatment of banking services or service providers of another WTO Member in all four situations. However, the Guidelines for the Scheduling of Specific Commitments under the GATS indicate that WTO Members are not obliged to take measures outside their territorial jurisdiction.48 Hence, if a WTO Member grants certain favours (like financial assistance or a guarantee) to service suppliers in its territory, it is not required to grant the same benefits to suppliers that are active in the territory but are located in the territory of another Member (like for service provision by means of Mode 1 and 2). Nonetheless, the National Treatment obligation requires a WTO Member to extend the benefit of direct or indirect financial assistance in favour of national service suppliers to all ‘like’ foreign service suppliers that have a physical presence in the territory of the Member (e.g. banks that have a subsidiary, branch or representative office in this Member (Mode 3)).49 This depends of course on whether the Member in question has made a National Treatment commitment for banking services for Mode 3 and has not explicitly limited this commitment for financial assistance.

Since the government support targets banks, rather than the services they supply, I should consider whether foreign banks that have a commercial presence in the territory of the Member experience less favourable treatment in this territory when compared to the ‘like’ domestic banks.

(d) Specifications in the Understanding on Commitments in Financial Services.

The government support involves specific measures in the financial sector. Some WTO Members, like the United States and the majority of the Member States of the EU, have indeed made commitments on the basis of the Understanding on Commitments in Financial Services. Section C(1) of the Understanding specifies with regard to National Treatment that ‘each Member [who has made commitments by reference to the Understanding] shall grant to financial service suppliers of any other Member established in its territory access to [ … ] official funding and refinancing facilities available in the normal course of ordinary business’. This provision confirms explicitly the application of the National Treatment obligation to government assistance measures available in the normal course of ordinary business. However, it does not add anything with regard to support measures that are granted in circumstances of emergency. The measures States have been

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taking in the light of the global financial crisis can hardly be considered ‘in the normal course of ordinary business’.

In this respect, it could be argued by a WTO Member that seeks to defend its support that, when commitments were made by reference to the Understanding, the National Treatment obligation does not cover the government support in the current financial crisis, since these measures are not ‘available in the normal course of ordinary business’.50 The question thus arises whether the fact that a WTO Member has made commitments by reference to the Understanding, means that for financial services the scope of the National Treatment obligation is entirely determined by Section C(1). If indeed so, government support in crisis circumstances must not comply with the National Treatment obligation. Such argument would be based on the fact that the introductory paragraph of the Understanding states that it constitutes ‘an alternative approach to [the approach] covered by the provisions of Part III of the [GATS]’. Hence, it would appear that the Understanding applies to the exclusion of the provisions in Part III of the GATS.51 Therefore, official funding and refinancing facilities that arenot in the normal course of ordinary business (excluded from the scope of Section C(1) of the Understanding) would not be still covered by Article XVII GATS.52 The only counterargument a claimant may then still try to make is that the support at issue does not qualify as ‘official funding or refinancing facilities’.53

Nonetheless, this reasoning leads to an odd outcome. It would be a remarkable result that WTO Members that made a commitment by reference to the Understanding are not obliged to extend the benefit of emergency government support to foreign-owned banks with a local establishment, whereas WTO Members that made an open-ended National Treatment commitment in their Schedules for banking services are still obliged to do so (unless they have inscribed a limitation). The drafters of the Understanding most likely did not intend to limit the scope of the National Treatment obligation by means of the Understanding.54 The first paragraph of the Understanding states explicitly that the alternative approach could be applied only in so far as ‘it does not conflict with the provisions of the [GATS framework agreement]’. Therefore, the National Treatment obligation in the framework agreement still applies to measures not ‘in the normal course of ordinary business.’ It appears that it was unfeasible at the time of the negotiations to confirm explicitly in the Understanding that the obligation also applied to such measures. The WTO Members wanted to maintain the possibility to inscribe specific limitations in this regard.

In sum, the fact that a WTO Member has made commitments with regard to banking services by reference to the Understanding does not imply that for

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official funding and refinancing facilities the application of the National Treatment obligation is limited to the situation where these facilities are ‘in the normal course of ordinary business’. The National Treatment obligation in the GATS framework agreement still applies to government support in crisis circumstances.

The Understanding still makes one qualification to the application of National Treatment in case of one specific type of measure. The final sentence of Section C(1) of the Understanding provides that the section ‘is not intended to confer access to the Member’s lender of last resort facilities’. Hence, the facilities provided by the central banks can be reserved to domestic-owned banks. The question then emerges what definition of ‘lender of last resort facilities’ should be used. The purpose of lender of last resort assistance is to solve temporary liquidity shortfalls, to avoid liquidity problems becoming solvency problems (when the value of the assets becomes smaller than that of the deposits).55 The assets (loans) of the ailing bank are used as collateral for the loan obtained from the central bank. In economic literature, it has been argued that the interest rates at which a bank receives support cannot be subsidized.56 If they would be subsidized, the bank will not be sufficiently penalized for engaging in the risky conduct. This creates ‘moral hazard’, in the sense that banks will not have the right incentives to refrain from such conduct in the future. Hence, subsidized facilities would not amount to appropriate lender of last resort assistance because they endanger financial stability in the future. Such facilities would thus not qualify as the excluded ‘lender of last resort’ facilities in the last sentence of Section C(1). Nonetheless, one may wonder whether a panel would adopt an interpretation that takes such considerations into account. The Understanding nowhere indicates what should be ‘appropriate’ lender of last resort facilities and it is arguably not desirable that a panel makes such determination.

In sum, government support will come within the scope of the National Treatment obligation if a number of conditions are fulfilled. The WTO Member in question must have made relevant National Treatment commitments, without excluding government support in crisis circumstances from the commitment. Only foreign-owned banks with a commercial presence in the territory of the WTO Member can claim the benefit of government support on a National Treatment basis. Finally, when the WTO Member in question has made commitments by reference to the Understanding and the measure at issue is part of lender of last resort facilities, the benefit of the National Treatment obligation does not extend to such measure.

2. ‘Less favourable treatment’ of ‘like’ foreign-owned banks

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Once it is established that government support falls within the scope of the National Treatment obligation in the GATS, a WTO Member challenging this measure must prove a violation of this obligation by establishing that two conditions are fulfilled. First, the complainant must show that the foreign-owned banks are ‘like’ the domestic banks. Secondly, it must be demonstrated that the measure provides ‘less favourable treatment’ to the foreign-owned banks.

(a) Likeness.

A measure will only be discriminatory vis-à-vis foreign banks with a local presence if the banks that are treated less favourable are ‘like’ the domestic banks of the WTO Member taking the measure.57 With regard to banks, it is nevertheless far from evident how to define whether they are ‘like’ or not. There has been written quite a lot on the concept of ‘likeness’ in services trade.58

The Panel in Canada—Autos indicated with regard to ‘likeness’ of service providers that ‘to the extent that service suppliers concerned supply the same services, they should be considered “like” ’.59 The characteristics of services and of the suppliers that provide these services are indeed very much intertwined: the quality and characteristics of banking services depend almost entirely on the quality and skills of the bank providing these services. The focus on the ‘likeness’ of services to determine the ‘likeness’ of the suppliers is also logical, given the fact that the National Treatment obligation is meant to ensure the equality of competitive opportunities. Consumers should be able to choose from a range of different banking services, foreign and domestic, that are therefore in competition with each other. What a consumer in fact purchases is the service and not the provider of the service. Only to the extent the characteristics of the bank are relevant for the decision by the consumer whether or not to buy the banking service, these characteristics should be taken into account for determining whether a foreign-owned bank is in competition with the domestic bank. With regard to foreign-owned banks that have a commercial presence in the Member providing support, consumers may indeed consider that the services these banks provide are ‘like’ the domestic services. These services are thus in competition with each other. Foreign-owned banks will need to comply with the local banking rules and will provide banking services according to the local contract law. Therefore, the foreign-owned banks should also be considered ‘like’ the domestic banks. When a consumer considers whether to buy a banking service, the fact that a bank that provides the service is foreign-owned will only rarely be taken into account by the consumer when this bank has a local presence.60 Consequently, domestic and foreign-owned banks can be considered ‘like’.

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However, it could be suggested that the policy concerns underlying a particular measure cannot be ignored when determining whether banks are ‘like’ for the purpose of assessing the treatment by this measure. Even if certain services or suppliers may be in competition with each other (because consumers consider them as substitutes), they should not necessarily be considered ‘like’. Banks that experience difficulties from the financial crisis should not be considered to be ‘like’ banks that are not in such position. Hence, under this interpretation the criteria used in the regulation to make a distinction are also used for determining likeness. Such interpretation (called the ‘aims and effects’ test) was developed in the (pre-WTO) GATT 1947 case law.61 Nevertheless, in case-law since the establishment of the WTO, the Appellate Body has explicitly rejected taking into account the aim of a regulatory measure to determine likeness.62

Nevertheless, it should be noted that the characteristics of the products on the basis of which the determination of ‘likeness’ is done may sometimes be closely linked to the regulatory aim. The Appellate Body in EC—Asbestos noted that the health risk linked to asbestos fibres makes them different from other fibres.63 To be sure, the Appellate Body linked this distinction to the competitive relationship of the products: consumers are aware of this difference and thus will treat asbestos and non-asbestos fibres as different, thus they are not in a competitive relationship.64 Still, it is clear that it is precisely because of the aim of avoiding the health risk that they receive different regulatory treatment. Nevertheless, the statement by the Appellate Body links the risks clearly to the perceptions of consumers. A similar reasoning can be made with regard to banks. Consumers may consider that the services provided by banks that experience difficulties are not ‘like’ banks that are not in such situation. However, in the midst of a financial crisis it may often be quite difficult for consumers to know which banks are in trouble and which are not.

Therefore, it would indeed seem to make sense to take into account the regulatory aim of a measure when applying the obligation of National Treatment. A distinction made between different banks on the basis of whether they experience difficulties or not would then not amount to a violation of Article XVII. Yet, the explicit rejection of the “ ‘aim and effects’ test” by the Appellate Body indicates that the intent of a measure is not taken into account when considering ‘likeness’. Nonetheless, WTO case-law may provide indications that the intent of the measure is still relevant when considering the treatment of the products, in the second tier of the non-discrimination test (less favourable treatment).

In any event, when determining likeness based on the use of above-mentioned criteria of consumer perceptions of whether banks are in

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competition, domestic and foreign-owned banks will in many cases be considered to be ‘like’, even if they do not all experience the same financial difficulties.

(b) Less favourable treatment.

Once it is clear that domestic and foreign-owned banks are ‘like’, the second question is whether the government support leads to less favourable treatment. Article XVII(3) GATS specifies that treatment is ‘less favourable’ ‘if it modifies the conditions of competition in favour of services or service suppliers of the Member compared to like services or services suppliers of any other Member.’65 It is clear that certain government support is able to modify the conditions of competition between domestic banks and the foreign banks that are active in the market of the WTO Member taking the measures. It has already been indicated that when e.g. a government guarantee is only available to domestic banks, the foreign-owned banks that are established in the host country are in a competitive disadvantage when compared to these domestic banks. Depositors will less likely deposit their money with banks without a State guarantee and investors will be hesitant to invest in such banks.

However, as I indicated earlier, the mere focus on consumer perceptions with regard to the substitutability of banking services to determine ‘likeness’ of banks may in fact result in a situation where domestic and foreign-owned banks are considered ‘like’, even if some of them are experiencing trouble and others are not. The aim of a measure is indeed not taken into account as a criterion to determine ‘likeness’ and consumers are not always able to distinguish between both groups of banks. Combined with the fact that many government support will modify the conditions of competition, one could conclude relatively quickly that a government support scheme that excludes foreign-owned banks from the scheme violates Article XVII, even if these foreign-owned banks are not in the same problematic situation as domestic banks (e.g. because they can rely on financial back-up by the parent company that benefits from support in the home country). It is for this reason that the aim of the measure may still play a role when determining whether the different treatment of the ‘like’ banks is ‘less favourable’. It should be noted that it has been stressed in case-law with regard to GATT that ‘the measure's purposes, objectively manifested in the design, architecture and structure of the measure, are intensely pertinent to the task of evaluating whether or not that measure is applied so as to afford protection to domestic production.’66 The phrase ‘so as to afford protection’ is absent in Article XVII GATS, and one may wonder whether a panel or the Appellate Body will accept the same analysis when considering whether the treatment is ‘less favourable’, without a textual basis.67 If this would be done,

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the question arises, however, when the purpose of a measure is ‘objectively manifested’?68 Factual evidence of a protectionist intent (e.g. in preparatory documents of a measure) has indeed been considered when determining whether there is a violation of National Treatment in GATT.69 Yet, such evidence will rarely be available. Given the warnings by the WTO Director-General and by the G20, governments will be quite careful not to put protectionist intent on paper.

It is still another issue to consider a non-protectionist objective (rescuing banks in trouble to avoid contagion) in the analysis with regard to National Treatment. Could it be argued by a defendant that a government support scheme that modifies the competitive competitions of foreign-owned banks does not treat these banks ‘less favourable’ because these banks can benefit from financial back-up by their parent company abroad and thus will not give rise to contagion? This may easily involve a subjective assessment of the measure’s purposes by a panel or Appellate Body and thus does not fit with the statement by the Appellate Body that only ‘objective manifestation’ of intent can be considered. Moreover, this may give rise to questions with regard to the use of GATS provisions that set out exceptions to the obligations. On the basis these provisions, explicitly-mentioned policy concerns can be invoked by a defendant as justifications for violations of obligations. These provisions also explicitly indicate what relation should exist between the measure taken and the objective pursued: should it be ‘necessary’ for the objective or is a more ‘loose’ connection acceptable? There seems no textual basis for a similar ‘justification analysis’ on the basis of the obligation of National Treatment.

Nonetheless, in order to prove a violation of the obligation of National Treatment a complainant has to demonstrate a link between the effect of a measure and the origin of the specific group of banks that is adversely affected. When a government support scheme makes a de jure distinction between domestic banks and foreign-owned banks, this will be relatively easy. However, if a government support scheme does not make such explicit distinction but leads de facto to less favourable treatment of foreign-owned banks, the complainant will need to establish that this less favourable treatment is indeed based on origin and cannot be explained by other reasons.70 However, it seems that, under existing case-law, these reasons will need to be factual and must not give rise to a subjective assessment of the regulatory purposes invoked as a justification by the defendant. The focus has thus rather been on the factual evidence the complainant advances to establish a link between the effect of the measure and the origin of the adversely affected banks. In a concrete dispute, the defendant will probably advance counter-arguments. The defendant may then argue that

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also some domestic banks are excluded. It will be for the panel to consider these factual arguments. However, this may not involve a subjective evaluation of the possible justifications for the distinction on the basis of the objectives that are pursued. It should be added that it is not sufficient to find only one or a few foreign-owned banks in a less competitive position because of the support scheme that is allegedly de facto discriminatory. A comparison must be made between the group of domestic banks and the group of ‘like’ foreign-owned banks to establish whether there is less favourable treatment. This will only be the case of the measure is having an asymmetrical aggregate impact on the group of the foreign-owned banks.71

In sum, while it can clearly be argued that a government support scheme that de jurediscriminates between foreign-owned and domestic banks violates Article XVII, it is much more difficult to establish that a scheme is de facto discriminatory. It will be required that the complainant proves convincingly that the less favourable treatment is linked to the foreign origin of the group of adversely affected banks.

(c) ‘Tailor-made’ support.

Finally, while the reasoning set out until now supports a challenge of general support schemes that explicitly exclude foreign-owned banks from their scope, it should be recognized that many schemes do not have a general scope. Very often, support has been tailor-made for each individual bank.

It should be noted that such specific support that focuses on a single bank falls within the scope of the National Treatment obligation. The definition of ‘measure’ in Article XXVIII(a) is broad enough to encompass individual decisions.72 An interpretation of likeness that does not take the regulatory purpose of the support measure into account would at first sight consider all foreign-owned banks that have a commercial presence ‘like’ all domestic banks, no matter whether they experience problems or not. However, this would mean that an individual support measure amounts to discrimination by the mere fact that it grants a guarantee to a particular bank with specific problems and not to other (including foreign-owned) banks. In contrast, an interpretation that takes the aim of such measure into account (solving the individual bank’s specific problems in order to avoid systemic failure) to determine ‘likeness’ will clearly consider such bank ‘unlike’ other banks and thus no less favourable treatment can be at stake. However, as explained, no such interpretation has been adopted in WTO dispute settlement.

Even if no such interpretation is applied, I indicated that the focus on the consumer perceptions as the major criterion for determining the likeness of services can lead to the same conclusion that an individual bank in trouble is

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‘unlike’ banks that experience less severe problems or no problems at all.73 When specific banks experience serious trouble in the current financial crisis, this has been subject to much media attention. Consumers will therefore not consider the services provided by such banks to be ‘like’ the services by other banks. Hence, the bank in trouble is not ‘like’ other banks. The problem is of course that the financial crisis makes it for consumers extremely difficult for consumers to distinguish between healthy banks and banks in trouble.

Nonetheless, I also discussed that in order to prove a violation of Article XVII, a complainant will have to demonstrate convincingly that the ‘less favourable treatment’ is based on the origin of the group of adversely affected banks. Of course, in case of tailor-made support it makes not much sense to compare groups of banks. The group of ‘less favourably’ treated banks will include all foreign-owned banks and all domestic banks, except the one benefiting from the tailor-made support. Arguably, the situation at hand will be one where a WTO Member claims that a specific foreign-owned bank must benefit from this single, tailor-made support. When tailor-made support is assessed, the complaining Member will have to advance factual evidence of protectionist intent, which will only rarely be available. Alternatively, the complainant has to show that the criteria used to distinguish between the specific bank obtaining support and a foreign-owned bank that is in a very similar situation are in fact based on the origin of the bank rather than any other reason. It goes without saying that, while the analysis of the impact of a measure on groups of banks can still be based on factual evidence, this analysis of whether the tailor-made measure is merely based on origin or on some other reason inevitably involves a subjective assessment by a panel or the Appellate Body and thus almost necessarily requires ‘second-guessing’ of the decision of the WTO Member’s authorities. It is therefore likely that a panel or the Appellate Body will be quite deferential and only accept a violation if there is very clear evidence of protectionist intent.74

Even if it is unlikely that a single ‘tailor-made’ support measure will be found to violate Article XVII, it is still possible that several of such individual measures form a general ‘practice’ that establishes a non-written norm with a general and prospective application and is ‘as such’ discriminatory.75 However, such may be difficult to prove, since every individual support measure depends on the specific circumstances.

Admittedly, to construct a violation of the National Treatment obligation in the GATS, many conditions have to be fulfilled. Our situation of a possible violation has been narrowed down quite a lot. The most likely case of violation would be a general support scheme that explicitly excludes foreign-

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owned banks from its scope or that uses criteria that can be convincingly linked to origin. Moreover, as I will discuss, even if such violation could be established, a broad exception can still apply.

3. Reasonable, objective and impartial administration

Before considering the relevant exception in the GATS, I should briefly pay attention to another GATS obligation that is relevant when assessing government support to banks. Article VI(1) GATS obliges WTO Members to administer ‘measures of general application affecting trade in services [ … ] in a reasonable, objective and impartial manner.’ This obligation is important to tackle situations where a general support scheme does not make any distinction between foreign-owned and domestic banks, but the administration of this scheme is not reasonable, objective or impartial.76

If a repeated pattern of discriminatory applications could be shown, it is possible to challenge the practical application of the facially neutral support scheme under the National Treatment obligation. A ‘practice’ (ie ‘a repeated pattern of similar responses to a set of circumstances’77) may thus provide evidence in support of the claim that a measure ‘as applied’ violates the National Treatment obligation.78 However, the administration of such measure can also be challenged under Article VI(1). Similar to the National Treatment obligation in Article XVII GATS, it is again required that the WTO Member has made specific commitments in its Schedule for the banking sector.79

Article VI(1) GATS has until now never been interpreted by a panel or the Appellate Body.80Nonetheless, in legal doctrine an attempt was made to interpret this provision by means of case-law relating to Article X(3)(a) GATT, which provides a similar obligation.81 With regard to the latter Article, a panel has clarified that requirements relating to the administration of measures of general application are meant ‘to ensure that traders are treated fairly and consistently [ … ]’.82

The case-law with regard to Article X(3)(a) GATT indicates, however, that this obligation doesnot cover a situation where, in one individual case, the administration is not uniform, impartial or reasonable. The actions must have a ‘significant impact on the overall administration of the law, and not simply on the outcome in the single case in question’.83 It seems that, if this case-law were applied to Article VI(1) GATS, a situation where a measure of general application (eg a general support scheme involving recapitalization) is applied in an individual case (eg a foreign-owned bank claims the benefit of such scheme and the government assesses this application) would not come within the scope of the obligation. Nonetheless, I wonder whether such

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an interpretation is correct for Article VI(1). It conflates the requirement that the measure must be of general application with the specification that Article X(3)(a) GATT and Article VI(1) GATS are concerned with the administration of such measure.84 Moreover, the case-law may be inspired by the presence in Article X(3)(a) GATT of the requirement for ‘uniform’ administration. This requirement suggest a consideration of several instances of administration but is not mentioned in Article VI(1) GATS. Nonetheless, the importance of this case-law may lie in the fact that it points out that the impact of the unreasonable, subjective and partial administration is sufficiently important to be of concern for international trade.

In my view, the scope of application of Article VI(1) is indeed limited to measures of general application. Nonetheless, the application of this general measure in an individual cases (eg the decision whether or not to grant a bank the benefit of crisis funding) can come within the scope of the obligation. What is in fact excluded is the administration of a measure with an individual reach, independent from any general measure, like eg an individual rescue programme that is tailor-made for a specific bank.

Hence, a specific measure that does not have a general application and is not an application of a general measure (a specific, ‘tailor-made’ rescue measure for a particular domestic bank) does not fall within the scope of Article VI(1). However, the individual application of a measure of general application (the decision whether to grant financial assistance to a domestic bank on the basis of a general scheme) can in principle be challenged under Article VI(1) GATS. Nonetheless, it is necessary to prove that the application is not ‘reasonable, objective and impartial’. It is important to note that these requirements do not necessarily imply a comparison between the situation of domestic and foreign services or services suppliers. The decisions of whether government support should be extended to a certain bank are based on difficult appreciations of the situation of the bank at stake. Therefore, it is doubtful (and, arguably, undesirable) that a panel would make its own determination of the financial situation of the bank at stake. It is thus unlikely that a panel will decide that there is no rational reason for refusing the benefit of government funding to a specific bank.85 However, the individual decision may be found unreasonable if, for instance, it grants the funding, but on the condition that confidential information is disclosed by the bank in a manner that does not provide the necessary safeguards to prevent this information from being obtained by competitors.86 The individual administration of the support scheme may also lack impartiality and objectivity, for instance if competitors of the bank at stake were able to influence the decision by the competent government agency. Nonetheless, such claims should be based on solid evidence.87

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In sum, WTO Members cannot rely on Article VI(1) to challenge a ‘tailor-made’ government support measure. In contrast, it is possible to challenge a single application of a general support scheme in a specific situation under Article VI(1). Nonetheless, such claim would require specific and solid evidence of unreasonable, subjective or partial administration.

V. A BROAD, BUT NOT UNLIMITED, ‘PRUDENTIAL CARVE-OUT’

I explained in the previous sections that the case for bringing a successful challenge against a general government support scheme or an individual application of such a general scheme is subject to specific conditions. Even if a violation is found, there is still a chance that the broad exception for prudential measures applies.

The GATS Annex on Financial Services has a specific exception (the so-called ‘prudential carve-out’) stating that ‘notwithstanding any other provisions in the [GATS], a Member shall not be prevented from taking measures for prudential reasons [ … ]’.88 The Annex does not define ‘measures for prudential reasons’, but provides some examples of such measures. It includes measures ‘for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system [emphasis added].’

However, this does not mean that all government support to banks is excluded from any GATS obligation and thus that any challenge would necessarily be unsuccessful. The ‘prudential carve-out’ specifies at the end: ‘Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means for avoiding the Member’s commitments or obligations under the Agreement.’

It is far from clear what the exact scope of the ‘prudential carve-out’ is.89 Neither is it clear what exact conditions are imposed upon prudential measures that do not conform to the GATS obligations. It appears that this vagueness was intended by the treaty negotiators. Only when the carve-out provided a sufficiently wide ‘escape route’ were WTO Members willing to make liberalization commitments for financial services.90 The sensitivity of the financial sector to crises required such emergency exception. Nevertheless, the opposite result seems to have been achieved. In the current Doha trade negotiations round, many WTO Members are hesitant to make further commitments for the financial sector. One of the reasons is that they do not know how wide this exception in fact is and thus how much restraint the GATS nevertheless imposes upon the WTO Members to adopt prudential measures.

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One can discern two limitations on this carve-out. First of all, there is the question of what is exactly meant by ‘measures for prudential reasons’. Second, the prudential measures that are not in conformity with the GATS must not be used for avoiding the Member’s commitments or obligations under the GATS.

As to the first limitation, the GATS provides no definition of ‘prudential’.91 When banks go bankrupt, private costs are imposed upon the individual depositors of the bank, and because of contagion financial stability may be endangered and eventually the real economy may be affected.92 The primary goal of government regulation in the banking sector is therefore to avoid banks going bankrupt. Regulation to prevent banks from failing is called ‘prudential regulation’: it seeks to ensure that banks engage in ‘prudent’ conduct so that they lower the risk of bank insolvency. As indicated, the non-exhaustive list of possible prudential measures in the Annex includes measures to ‘ensure the integrity and stability of the financial system’.

An important question for the discussion at hand here is whether this involves only preventivemeasures to ensure financial integrity and stability (eg capital requirements, ‘fit and proper’ tests of bank managers etc) or also protective measures. This protective government regulation is sometimes not seen as part of prudential regulation since it is not aimed at providing the necessary incentives to banks to engage in less risky activity so that they do not go bankrupt. On the contrary, it has been argued in some economic literature that this government ‘safety net’ provides exactly the opposite incentives to banks rather than to induce prudent behaviour: because the banks know the government will intervene when their risky behaviour turns bad, they feel fewer incentives to engage in prudent conduct (so-called ‘moral hazard’). The existence of protective regulation then in fact provides the rationale for prudential regulation.93

It is not certain whether a panel or the Appellate Body would adopt such an ‘economics-based’ approach to the concept of ‘prudential’. In WTO dispute settlement, treaty provisions are in the first place interpreted according to the ‘ordinary meaning’ of the words in the light of their ‘context’ and the treaty's ‘object and purpose’.94 The text of the prudential carve-out in the Annex on Financial Services explicitly refers to measures ensuring the integrity and stability of the financial system. The first question at hand here is thus rather whether the objectivepursued by the government by means of the support measure is prudential. The present support is in principle granted to avoid individual bank failures spilling over to other banks and eventually creating a system-wide financial crisis. Hence, it aims to ensure ‘the integrity and stability of the financial system’, one of the ‘prudential

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reasons’ explicitly mentioned in the Annex on Financial Services. Even if they may create ‘moral hazard’ for future bank activities, they seek at present to ensure the stability of the financial system. Hence, it is likely that a panel will accept that the support constitutes a ‘measure for prudential reasons’. Still, it is possible that a panel does not consider the support as an appropriate means to achieve the prudential objectives (eg central bank liquidity assistance at subsidised rates creating ‘moral hazard’).95Nonetheless, this is rather a question to address under the second limitation of the ‘prudential carve out’.

Indeed, even if a measure is adopted for prudential purposes, there is still a further limitation on the leeway of WTO Members. When such prudential measure is not in conformity with the provisions of the GATS, it cannot be used to avoid the GATS commitments and obligations of the WTO Member in question. One of these obligations is of course the National Treatment obligation. Would this mean that as soon as a support measure that is ‘taken for prudential reasons’ violates the National Treatment commitment by the Member in question in Mode 3 for banking services, the measure cannot be adopted?96 I would argue that this is not the case. The last sentence of the carve-out starts from the premise that some prudential measures do not conform with the GATS-obligations. If such a prudential measure indeed violates one of the GATS obligations, it can be maintained (and is thus exempted from the obligation) providedthat it is not used as a means to avoid the Member’s commitments and obligations under the GATS.

This test can be compared to the test applied in the introductory paragraph (the so-called ‘Chapeau’) of the ‘general exceptions’-provisions in the GATT and the GATS.97 This paragraph reads: ‘subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade [in goods or services], nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member of measures [that pursue one of the objectives listed in the subparagraphs of the Article]’. It would be odd to have a provision that provides an exception from one of the obligations (like eg the prohibition to discriminate) and then to require again that the obligation of nondiscrimination must still be complied with. The Appellate Body has stated that ‘[ … ] the chapeau serves to ensure that Members' rights to avail themselves of exceptions are exercised reasonably, so as not to frustrate the rights accorded to other Members by the substantive rules of the GATS’.98 The chapeau is in fact ‘but one expression of the principle of good faith. This principle, at once a general principle of law and a general principle of international law, controls the exercise of rights by states. One application

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of this general principle, the application widely known as the doctrine of abus de droit, prohibits the abusive exercise of a state's rights [ … ]’.99

While the text of the second sentence of paragraph 2(a) of the Annex and of the Chapeau of the general exception provision is not exactly the same, the mentioning of ‘avoiding’ in the Annex shows that the underlying rationale is in fact the same.100 Both phrases seek to prevent WTO Members from abusing their rights under the exception in order to pursue protectionist objectives.

The test applied is thus an enquiry of whether the measure in question is genuinely for prudential reasons or rather for protectionist reasons, ie to avoid commitments and obligations. This may mean that a prudential measure can be discriminatory, provided this has some rational relationship with the prudential goal. In order to assess whether a measure is taken for prudential reasons rather than pursuing protectionist objectives, it can be argued that the test may involve an examination of whether the means (the government support) is reasonably able to achieve the end (prudential objective).101 Hence, if support schemes are discriminatory in the sense that they exclude foreign-owned banks that have a local presence in the market and are of an equal systemic significance, such schemes are not genuinely taken for prudential reasons. The prudential goal is not genuinely served by such a measure and thus it can be concluded that the Member is abusing its right to take prudential measures.102The same can probably be said of support that creates moral hazard. Rather than achieving a prudential goal (because it creates ‘moral hazard’), it creates a competitive disadvantage for foreign-owned banks in the market. However, it is doubtful that a panel will be willing to make such a delicate determination in the latter case.103

VI. CONCLUSION

I can conclude that the GATS indeed imposes some legal restraint on WTO Members that provide support to banks, although this restraint is rather limited. Only in very specific circumstances might a GATS obligation be violated. A general support scheme can be found to violate the National Treatment obligation on the condition that the WTO Member in question has made a specific National Treatment commitment without relevant limitations. The measure must affect the competition in the territory of the WTO Member taking the measures. The affected service suppliers must be foreign banks with a commercial presence in the territory. Finally, likeness of banks and less favourable treatment must be established. Individual applications of the general scheme may provide proof that the general scheme ‘as applied’ violates Article XVII. I noted that it is highly unlikely that

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‘tailor-made’ support to a specific bank will violate Article XVII. Furthermore, even if a general support scheme ‘as such’ or ‘as applied’ is not discriminatory, such scheme might still be applied in a manner that is not reasonable, objective or impartial, thereby violating Article VI(1). In my view, this can already be the case in one individual application. The WTO Member in question must have made commitments in the banking sector. However, it requires very specific and solid evidence. Again, ‘tailor-made’ support cannot be challenged under Article VI(1).

Even if a violation of the GATS is not entirely unimaginable, the GATS Annex on Financial Services still provides a broad ‘prudential carve-out’. I explained that government support will most likely be considered to be granted ‘for prudential reasons’, since the maintenance of the integrity and stability of the financial system is explicitly mentioned. However, if these prudential measures are not consistent with a GATS obligation (like eg National Treatment), these measures cannot be used as a means to avoid the obligations and commitments. I argued that it should be considered whether the measures are genuinely for prudential reasons or rather protectionist. It should therefore be assessed whether the government support stands in a rational relationship with the prudential objective. In other words, is the support reasonably able to achieve the prudential objective? I suggested that general support schemes that exclude foreign-owned banks with a local presence from their scope would not be justified under this measure if these foreign-owned banks are of an equal systemic importance to the country.

Where does this leave us? Even if the GATS seems the most logical international instrument for imposing some restraint on government support that distorts international competition in banking services, it includes only a few relevant obligations: Articles XVII and VI(1). These obligations are flexible because WTO Members were allowed to define themselves to what extent the obligations apply in the banking sector. Moreover, there is still uncertainty on the impact of these obligations. For instance, how will likeness be interpreted for banking services? Furthermore, can Article VI(1) be applied to a single, individual application of a general measure? Finally, even if the prudential carve-out will save the majority of government support measures, there is uncertainty on its scope and conditions. It is clear that such flexibility and uncertainty is due to political reasons. Negotiating parties did not want to commit to an international agreement that would endanger their policy space to safeguard financial stability. However, this flexibility and uncertainty need to be addressed by the WTO Members. If not, the GATS will not impose any credible restraint on WTO Members who use government support that creates international distortions of competition. Moreover,

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removing uncertainty will reassure WTO Members that the GATS does not stand in the way of measures that genuinely protect financial stability.

Acknowledgments

I am grateful for the comments by Rudolf Adlung, Juan Marchetti, Markus Krajewski and by the anonymous reviewers. All errors are mine.

Footnotes

↵ 1 See G20 Leaders’ Declaration of Washington, 15 November 2008, at para 13; G20 Leaders’ Statement of London, 2 April 2009, at para 22 and G20 Leaders’ Statement of Pittsburg, 25 September 2009, at para 48.

↵ 2 The WTO prepares periodical overviews of general economic stimulus measures. See Annex 2 to the Report to the Trade Policy Review Board (TPRB) from the Director-General on the Financial and Economic Crisis and Trade-Related Developments, WT/TPR/OV/W/2, 15 July 2009 and Annex 2 and 3 to the Annual Report by the Director-General, Overview of Developments in the International Trading Environment, WT/TPR/OV/12, 18 November 2009. Moreover, other trade and trade-related measures are used in the crisis. Some WTO Members raise their import tariffs up to the levels that they have bound themselves to in the WTO. WTO Members also make use of so-called ‘contingency measures’ or ‘safety-valves’ to address problems, by e.g. starting anti-dumping investigations or adopting safeguard measures. The WTO discussed this in its most recent World Trade Report. (See WTO, World Trade Report 2009. Trade Policy Commitments and Contingency Measures(Geneva, WTO 2009) 172pp.) A joint WTO-OECD-UNCTAD Report was issued on 14 September 2009 relating to the trade and investment measures taken by the Members of the G20. (See WTO, OECD and UNCTAD, Report on G20 Trade and Investment Measures (14 September 2009), <http://www.wto.org/english/news_e/news09_e/trdev_dg_report_14sep09_e.doc> accessed 11 January 2010.) For an overview of the state aid measures in the real sector in the European Union, see State Aid: Overview of National Measures Adopted as a Response to the Financial and Economic Crisis, MEMO/09/564, Brussels, 17 December 2009, <http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/09/564&format=HTML&aged=0&language=EN&guiLanguage=en> accessed 11 January 2010.

↵ 3 Article 19(1) of the Dispute Settlement Understanding indicates that a panel or the Appellate Body can only recommend a losing Member to ‘bring

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the measure into conformity’ with the applicable WTO agreement. It should be noted that, nonetheless, the Implementation Panel in Australia—Automotive Leather II (Article 21.5—US) stated that the recommendation to withdraw a prohibited subsidy, based on Article 4(7) of the Agreement on Subsidies and Countervailing Measures, encompassed in that case the obligation for Australia to require the recipient of the subsidy to repay the subsidy in full. (Note that the United States had argued that the repayment should be limited to the subsidies paid after the Panel report was adopted and thus not the entire amount of the subsidy paid.) (See WTO Panel Report, Australia—Subsidies Provided to Producers and Exporters of Automotive Leather, Recourse to Article 21.5 of the DSU by the United States, WT/DS126/RW and Corr 1, adopted 11 February 2000, para 6.48.) However, this report was heavily criticized. (See G Goh and A Ziegler, ‘Retrospective Remedies in the WTO After Automotive Leather’ (2003) 6 JIEL 545 at 547–8 and 551–61 and P Grane, ‘Remedies under WTO Law’ (2001) 4 JIEL 755 at 767–9.) The Panel in Canada—Aircraft Credits and Guarantees stated (referring to Australia—Automotive Leather II (Article 21.5—US)): ‘In our view, however, it is not entirely clear that the WTO dispute settlement system only provides for prospective remedies in cases involving prohibited export subsidies.’ (See WTO Panel Report, Canada—Export Credits and Loan Guarantees for Regional Aircraft, WT/DS222/R and Corr.1, adopted 19 February 2002, para 7.170.) Finally, it is interesting to note that the Panel in US – Cotton (Article 21.5)argued that it found in that dispute no support for the argument that the obligation to withdraw a prohibited subsidy involves an obligation to withdraw or review subsidies that were granted in the past. (However, reference was made to the fact that Brazil itself argued that it did not believe that Article 4.7 includes a retroactive remedy). According to the Panel, this implied that the obligation to withdraw a prohibited subsidy was not violated when the losing WTO Member continued to make payments on the basis of outstanding guarantees found to be in violation of the SCM Agreement. What was prohibited was rather to grant newguarantees. This point was not appealed before the Appellate Body. (See WTO Panel Report,United States—Subsidies on Upland Cotton, Recourse to Article 21.5 of the DSU by Brazil, WT/DS267/RW and Corr.1, adopted 20 June 2009, as modified by Appellate Body Report, WT/DS267/AB/RW, para 14.38.)

↵ 4 A Mattoo and C Fink, ‘Regional Agreements and Trade in Services: Policy Issues’, World Bank Policy Research Working Paper No 2852 (June 2002) at 25.

↵ 5 Banks need to have access to a branch network in the markets where they are active and need to obtain knowledge of the characteristics of

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these markets and the clients they serve there. This requires serious investments by banks that can only be recouped in the long run and if a bank achieves a sufficiently large scale.

↵ 6 The support measures of specific States are described in the reports mentioned above in n 2.

↵ 7 See B Lyons, ‘Competition Policy, Bailouts and the Economic Crisis’, CCP Working Paper 09-4 (March 2009) <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1367688> accessed 11 January 2010, at 4–5 and OECD, Competition and Financial Markets: Key Findings (OECD, Paris 2009) at 7.

↵ 8 This is due to linkages between banks (they lend to each other and are linked through the payment system), but also because depositors with other banks lose confidence in their own banks and start to withdraw their deposits. When a large number of depositors start withdrawing funds, banks will often have insufficient liquid assets to repay. (R Cranston,Principles of Banking Law (OUP, Oxford 1997) at 72; M Dewatripont and J Tirole, The Prudential Regulation of Banks (MIT Press, Cambridge 1994) at 15; D Diamond and P Dybvig, ‘Bank Runs, Deposit Insurance, and Liquidity’ (1983) 91 J Pol Econ 401 at 403 and K Alexander, R Dhumale and J Eatwell, Global Governance of Financial Systems (OUP, Oxford 2006) at 23–6.)

↵ 9 WTO, OECD and UNCTAD, Report on G20 Trade and Investment Measures, above n 2, at 15.

↵ 10 Even though the WTO-OECD-UNCTAD Report mentions this problem, it does not provide explicit examples of such schemes. One may wonder whether the US Temporary Liquidity Guarantee Program (TLGP) of the Federal Deposit Insurance Corporation does not constitute such a measure. Branches of foreign banking institutions are not eligible for such guarantee, even if they are insured with the Federal Deposit Insurance Corporation. (See Temporary Liquidity Guarantee Program, 12 C.F.R. §370.2(b), <http://www.fdic.gov/news/board/08BODtlgp.pdf> accessed 11 January 2010). (It is indicated that ‘insured depositary institutions’ are eligible for the guarantee (as well as US bank holding companies and US savings and loan holding companies). An ‘insured depositary institution’ is defined as: ‘an insured depository institution as defined in Section 3(c)(2) of the FDI Act, 12 USC 1813(c)(2), except that it does not include an “insured branch” of a foreign bank as defined in section 3(s)(3) of the FDI Act, 12 USC 1813(s)(3), for purposes of the debt guarantee program.’ The TLGP constitutes a general guarantee for senior unsecured debt with a maturity of greater than 30 days.) In the European Union, the Commission has in its

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Communications on state aid in the financial sector stressed the obligation of non-discrimination. (See European Commission, The Application of State Aid Measures Taken in Relation to Financial Institutions in the Context of the Current Global Financial Crisis, [2008] OJ C270/8, at paras 18 and 35 and Commission Communication on the Return to Viability and the Assessment of Restructuring Measures in the Financial Sector in the Current Crisis under the State Aid Rules, [2009] OJ C195/9, at 18.)

↵ 11 WTO, OECD and UNCTAD, Report on G20 Trade and Investment Measures, above n 2, at 17.

↵ 12 Ibid 16.

↵ 13 Arguably, such conditional support may create distortions of international trade in goods. One thus needs to assess such measures under the Agreement on Subsidies and Countervailing Measures (one of the agreements included in Annex 1A to the WTO Agreement and specifically dealing with subsidies to the goods manufacturing industry (see below, Section III). It can be argued that the bank constitutes a ‘private body’ that has been ‘entrusted’ by the government the task to provide a financial contribution. Article 1(1)(a)(1)(iv) SCM Agreement indicates that there is a financial contribution where ‘[…] a government makes payments to a funding mechanism, or entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above [i.e.transfer of funds; government revenue that is otherwise due is foregone; or provision of goods or services or purchasing goods] which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments’. See on the interpretation of ‘entrusted’: Appellate Body Report, United States—Countervailing Duty Investigation on Dynamic Random Access Memory Semiconductors (DRAMS) from Korea (‘US—Countervailing Duty Investigation on DRAMS’), WT/DS296/AB/R, adopted 20 July 2005, para 116.

↵ 14 For instance, on 23 February 2009, the WTO Director-General called upon WTO Members to fight protectionism. (See Speech of Director-General Lamy, ‘Keeping Trade Open. Resisting Isolationism’, Seoul, 23 February 2009 <http://www.wto.org/english/news_e/sppl_e/sppl115_e.htm> accessed 11 January 2010.) On 2 March 2009, he stressed that there is no such thing as ‘smart protectionism’, warning against a domino effect of global challenges. (See Speech of Director-General Lamy, ‘The Values of the Multilateral Trading System’, Sydney, 2 March 2009 <http://www.wto.org/english/news_e/sppl_e/sppl117_e.htm> accessed 11 January 2010.) In a speech of 13 July 2009, he repeated that ‘at a time when the global economy is still fragile worldwide and in the face of the

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unprecedented decline in trade flows, we must send a clear and credible message that protectionism is not the answer’. (See Speech of Director-General Lamy, ‘Global Crisis Requires Global Solutions’, Geneva, 13 July 2009 <http://www.wto.org/english/news_e/news09_e/tpr_13jul09_e.htm> accessed 11 January 2010). He also participated in the G20 Meeting in London in April 2009 and in Pittsburg in September 2009. In 2009, the Director-General has already drafted three factual reports describing the trade-related developments in the financial and economic crisis. These reports are in fact preparatory reports for the annual report by the Director-General to assist the Trade Policy Review Body (TPRB) of the WTO to make an annual overview of trade-related developments. They do not constitute legal findings of incompatibility of certain measures with the WTO obligations. (See the latest Annual Report by the Director-General, Overview of Developments in the International Trading Environment, WT/TPR/OV/12, 18 November 2009 and see also the joint WTO-OECD-UNCTAD Report, mentioned above in n 2.)

↵ 15 This can be contrasted with the situation in the European Community, where all state aid needs to be notified to and approved by the Commission. (See Article 108(3) Treaty on the Functioning of the European Union (previously Article 88(3) EC Treaty).)

↵ 16 Agreement Establishing the World Trade Organization, done in Marrakesh on 15 April 1994, UNTS no. 31874, published in WTO, The Legal Texts. The Results of the Uruguay Round of Multilateral Trade Negotiations (CUP, Cambridge 2007) 4.

↵ 17 See WTO, The Legal Texts, above n 16, at 284.

↵ 18 Ibid 308.

↵ 19 Ibid 311.

↵ 20 Ibid 418.

↵ 21 SJ Key, ‘Financial Services’ in P Macrory, A Appleton and M Plummer (eds), The World Trade Organization. Legal, Economic and Political Analysis, vol 1 (Springer, New York 2005), 955–88, at 985.

↵ 22 See Committee on Specific Commitments, Additional Commitments under Article XVIII of the GATS. Note by the Secretariat, S/CSC/W/34, 16 July 2002, para 72.

↵ 23 Article XXIX GATS.

↵ 24 Article I(1) GATS.

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↵ 25 Article I(3)(a) GATS.

↵ 26 Appellate Body Report, European Communities—Regime for the Importation, Sale and Distribution of Bananas (‘EC—Bananas III’), WT/DS27/AB/R, adopted 25 September 1997, para 220.

↵ 27 Services supplied in the exercise of governmental authority are services which are supplied neither on a commercial basis nor in competition with one or more service suppliers (Article I(3)(b) and (c) GATS).

↵ 28 Para 5(a) GATS Annex on Financial Services.

↵ 29 Para 1(d) GATS Annex on Financial Services.

↵ 30 However, it should be added that as soon as the WTO Member in question allows one of the activities mentioned to be provided by private suppliers in competition with the public entities, these services are no longer excluded from the definition of ‘service’. (Para 1(c) GATS Annex on Financial Services.)

↵ 31 WTO, The Legal Texts, above n 16, at 231.

↵ 32 More specifically: export subsidies and local content subsidies. (See Article 3 SCM Agreement.)

↵ 33 Article 5 SCM Agreement.

↵ 34 Article XV(1) GATS.

↵ 35 For a discussion, see R Adlung, ‘Negotiations on Safeguards and Subsidies in Services: A Never-Ending Story?’ (2007) 10 JIEL 235; P. Poretti, ‘Waiting for Godot: Subsidy disciplines in services trade’, in M Panizzon, N Pohl and P Sauvé (eds), GATS and the Regulation of International Trade in Services (CUP, Cambridge 2008) 466–88 and P Sauvé, ‘Completing the GATS Framework: Safeguards, Subsidies and Government Procurement’, in B Hoekman and A Mattoo (eds) Development, Trade and the WTO. A Handbook (World Bank, Washington, DC 2002) 326–35.

↵ 36 Article XV(2) GATS.

↵ 37 A third obligation in the GATS can in theory also be relevant. Article II GATS requires WTO Members to treat services and service suppliers from all WTO Members no less favourably than like services and providers from other trading partners (obligation of ‘Most-Favoured-Nation’ Treatment). The above-mentioned WTO-OECD-UNCTAD report does not mention problems where government support treats banks owned by persons from one State worse than banks owned by persons from another State. However, if such

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situation would occur, the ‘discrimination analysis’ explained for National Treatment (see Section IVB2) will need to be applied mutatis mutandis for analyzing discrimination between banks from different trading partners.

↵ 38 See WTO, Legal Texts, above n 16, at 423.

↵ 39 With regard to trade in goods, the definition of ‘subsidy’ consists of two elements. First, there should be a ‘financial contribution’ by a government. Second, this financial contribution should confer ‘a benefit’. Finally, in order for such a subsidy to be disciplined under the SCM Agreement, it should be ‘specific to an enterprise or industry or group of enterprises or industries […] within the jurisdiction of the granting authority’. (Article 1(2)juncto Article 2 SCM Agreement.)

↵ 40 Article III(8)(b) GATT provides that the National Treatment obligation in Article III ‘shall not prevent the payment of subsidies exclusively to domestic producers […]’.

↵ 41 The Schedules of the WTO Members are annexed to the GATS. The schedule of the United States is contained in: The United States of America, Schedule of Specific Commitments, GATS/SC/90 (15 April 1994), with three Supplements. The commitments in the financial services sector are contained in Supplement 3 (GATS/SC/90/Supp3). The European Community (and now, after the entry into force of the Lisbon Treaty, the European Union) conducts the negotiations for its members in the WTO. The EC has submitted a Schedule of specific GATS commitments in 1995, covering the 12 States that were Members of the EC at that time. The EC submitted two modifications (supplements) in 1997 (relating to telecommunications and financial services), which covered the 15 Member States. The commitments are contained in: European Communities and their Member States, Schedule of Specific Commitments, GATS/SC/31 (15 April 1994), with four supplements. The financial service commitments that are applicable are contained in (Revised) Supplement 4 (GATS/SC/31/Supp4/Rev. (18 November 1999). Moreover, the gradual enlargement of the Community requires bringing the commitments acceding Member States in line with the EC schedule. The EC has drafted a consolidated Schedule of Commitments, merging all schedules of the Member States when the Community grew to 25 Members in 2004 and 2005. The results of this process can be found in Communication of the European Communities and its Member States, Draft Consolidated GATS Schedule, 14 and 29 September 2006, S/C/W/273 (9 October 2006). However, at the time of writing, this Consolidated Schedule is not in force yet. Moreover, the accession of Romania and Bulgaria in 2007 means that the Schedule will again need an update. In the meantime, the

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individual Schedules of those two countries need to be consulted (in combination with the EC Schedule).

↵ 42 It should be noted that the definition of ‘trade in services’ for the purposes of the GATS in Article I(2) GATS is neutral as to the direction of the trade. The different ‘Modes of Supply’ may concern situations where a foreign supplier provides services into or withinthe territory of a host Member. (This is also the case for Mode 2, where a consumer goes abroad to the territory of the supplier to receive the service and then returns. Here also, the foreign supplier acts in competition with the providers in the territory of the consumer.) However, they may also involve a situation where a service is supplied by a provider in the territory of the State taking the measure and exported to another WTO Member. Nonetheless, the obligation in Article XVII does not apply to measures affecting services exports. The obligation involves the non-discriminatory treatment of foreign services and suppliers in the territory of the Member taking the measure at stake. (See Adlung, above n 35, at 240.)

↵ 43 Article I(2)(a) GATS.

↵ 44 Article I(2)(b) GATS.

↵ 45 Article I(2)(c) GATS.

↵ 46 Article XXVIII(d) GATS.

↵ 47 Article I(2)(d) GATS. It may concern self-employed service suppliers who travel abroad, as well as natural persons who, employed by a service supplier, travel abroad to offer a service.

↵ 48 Guidelines for the Scheduling of Specific Commitments under the General Agreement on Trade in Services (GATS), S/L/92 (28 March 2001) at paras 15 and 16 (specifically dealing with subsidies). The Appellate Body in US—Gambling has considered that the Guidelines can be used as ‘supplementary means of interpretation’ (in the sense of Article 32 of the Vienna Convention on the Law of Treaties) of the provisions in the GATS. (See Appellate Body Report: United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R (7 April 2005) (US—Gambling) at para 195.)

↵ 49 Furthermore, it is interesting to note that footnote 12 to Article XXVIII GATS (definitions) indicates that, even if branches and representative offices of a foreign service supplier must receive the treatment that is accorded to service suppliers that are juridical persons (eg subsidiaries of foreign banks), this treatment must only “be extended to the presence

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through which the service is supplied and need not be extended to any other parts of the supplier located outside the territory where the service is supplied.”

↵ 50 See, in this sense, A Von Bogdandy and J Windsor, ‘Understanding on Commitments in Financial Services’ in R Wolfrum, P Stoll and C Feinäugle (eds), WTO – Trade in Services(Martinus Nijhoff Publishers, Leiden 2008) 647–66 at 662–3.

↵ 51 According to Trachtman, the Understanding ‘purports to take the place of the provision of GATS dealing with national treatment and market access’. (See J Trachtman, ‘Trade in Financial Services under GATS, NAFTA and the EC: A Regulatory Jurisdiction Analysis’ (1996) 34 Col J Transnatl L 40 at 69.)

↵ 52 Arguably, this may also be in line with the expectations of the WTO Member that has made a commitment on the basis of the Understanding. If Section C(1) refers explicitly to official funding and refinancing facilities available in the normal course of ordinary business, such WTO Member may be quite surprised to find that crisis funding is nevertheless covered by the National Treatment obligation in Article XVII GATS.

↵ 53 The crucial issue is then of course to define the exact meaning of ‘official funding and refinancing facilities’. A facility should be considered ‘official’ when it is provided by the government rather than by a private body. This is logical because the GATS only applies to ‘measures by Members’. The measures should emanate from ‘central, regional or local governments and authorities’. (See Article I(3)(a)(i) GATS.) Nevertheless, the assistance may also be provided by ‘non-governmental bodies in the exercise of powers delegated by central, regional or local governments or authorities’. (Article I(3)(a)(ii) GATS.) It is more difficult to define the meaning of ‘funding and refinancing facilities’. For instance, would agovernment guarantee granted to a bank constitute ‘funding and refinancing facilities’?. It could be argued that this guarantee does not constitute ‘funding’. It is merely an insurance against the bank not being able to meet certain claims of creditors. Nonetheless, it should be noted that a guarantee in the goods sector may constitute a subsidy in the sense of Article 1 SCM Agreement. (Article 1(1)(a)(1)(i) states that a financial contribution may involve ‘potential direct transfers of funds […]’). If one would rely on an interpretation by analogy, a government guarantee in the bank sector would arguably involve a potential transfer of funds. Hence, the guarantee would involve ‘funding’.

↵ 54 The Understanding emerged from the difficult negotiations in the Uruguay Round with regard to financial services. Issues relating to specific

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commitments that could not be included in the Annex on Financial Services (which is an integral part of the GATS and thus immediately applies to all WTO Members) were placed in the Understanding (which is part of the Uruguay Round ‘package’, but does not form an integral part of GATS). (Committee on Specific Commitments, Additional Commitments under Article XVIII of the GATS. Note by the Secretariat, S/CSC/W/34, 16 July 2002, para 65–71.)

↵ 55 The ‘lender of last resort’ function of a central bank is part of the broader task of ‘emergency liquidity assistance’ by the central bank. To safeguard financial stability, the central bank might not only lend to a specific bank but may also try to provide liquidity to the financial system as a whole through open market operations. When performing such operations, central banks pump money in the market. However, such measures may increase inflation and thus conflict with the monetary policy of the country. (See D Heremans, ‘Regulation of Banking and Financial Markets’ in B Bouckaert and G De Geest (eds.), Encyclopedia of Law and Economics. Volume III. The Regulation of Contracts (Edward Elgar, Cheltenham 2000), 950–86 at 961. See also R Lastra, ‘Lender of Last Resort, An International Perspective’ 48 (1999) ICLQ 340 at 347–50.)

↵ 56 J Barth, G Caprio and R Levine, Rethinking Bank Regulation. Till Angels Govern (CUP, Cambridge 2006) 57.

↵ 57 However, it should be noted that discrimination may also be at stake if ‘unlike’ services or providers are treated exactly in the same manner. This is explicitly recognized in Article XVII(2) GATS, which states: ‘A Member may meet the requirement of para 1 by according to services and service suppliers of any other Member, either formally identical treatment or formally different treatment to that it accords to its own like services and service suppliers.’

↵ 58 The concept of ‘likeness’ has been interpreted frequently with regard to goods. The criteria that are used are the so-called ‘Border Tax Adjustment’ criteria. Three criteria have been used: (i) the end-use of the product on the market, (ii) consumers’ tastes and habits, as well as (iii) the product’s properties, nature and quality. (See Working Party Report on Border Tax Adjustments (2 December 1970), BISD 18S/97, para 18.) A further criterion to determine ‘likeness’ is the tariff classification in the Harmonized System. If two products are included in the same classification, they may be considered ‘like’. (See for instance (sometimes also referring to services trade) M Bronkers and N McNelis, ‘Rethinking the ‘Like Product’ Definition in GATT 1994: Anti-Dumping and Environmental Protection’, in M Bronkers (ed), A Cross-Section of WTO Law (Cameron, London 2000) 15–56;

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WM Choi, ‘Like Products’ in International Trade Law: Toward a Consistent GATT/WTO Jurisprudence (OUP, Oxford 2003) xxi+265pp; L Ehring, ‘De Facto Discrimination in World Trade Law. National and Most-Favoured-Nation Treatment – or Equal Treatment?’ (2002) 36 JWT 921; R Howse and E Türk, ‘The WTO Impact on Internal Regulations – A Case Study of the Canada-EC Asbestos Dispute’, in J Scott and G De Búrca (eds), The EU and the WTO: Legal and Constitutional Issues (Hart, Oxford 2001) 283–328; R Hudec, ‘GATT/WTO Constraints on National Regulation: Requiem for an “Aim and Effects” Test’ (1998) 32 Int’l Law 619; A Porges and J Trachtman, ‘Robert Hudec and Domestic Regulation: The Resurrection of Aim and Effects’ (2003) 37 JWT 783 and G Verhoosel, National Treatment and WTO Dispute Settlement. Adjudicating the Boundaries of Regulatory Autonomy (Hart, Oxford 2002) at 19–49.) However, in recent years, increased attention is paid also to ‘likeness’ in services trade. Since services are immaterial, criteria that look at physical characteristics are of no use. The consumer tastes and habits will therefore be an essential criterion for determining the likeness of services and suppliers. (See for instance M Cossy, ‘Some Thoughts on the Concept of ‘Likeness’ in the GATS’, in M Panizzon, N Pohl and P Sauvé (eds), GATS and the Regulation of International Trade in Services (CUP, Cambridge 2008) 327–57; A Mattoo, ‘National Treatment in the GATS – Corner-Stone or Pandora’s Box?’ (1997) 31 JWT 107 and J Pauwelyn, ‘Comment: The Unbearable Lightness of Likeness’, in M Panizzon, N Pohl and P Sauvé (eds), GATS and the Regulation of International Trade in Services (CUP, Cambridge 2008) 327–57.)

↵ 59 WTO Panel Report, Canada—Certain Measures Affecting the Automotive Industry(Canada—Autos), WT/DS139/R, WT/DS142/R, adopted 19 June 2000, as modified by Appellate Body Report, WT/DS139/AB/R, WT/DS142/AB/R, para 10.248.

↵ 60 This may of course be different in case of banking services provided online. Consumers may be much more concerned about the quality and characteristics of the foreign bank and decide not to purchase the banking service.

↵ 61 See GATT Panel Report: United States—Measures Affecting Alcoholic and Malt Beverages, DS23/R (19 June 1992), BISD 39S/206, paras 5.73–5.74 and GATT Panel Report:United States – Taxes on Automobiles, DS31/R (29 September 1994, unadopted), paras 5.9–5.10.

↵ 62 See WTO Appellate Body Report, Japan—Taxes on Alcoholic Beverages (Japan—Alcoholic Beverages II), WT/DS8, 10 and 11/AB/R, adopted 1 November 1996, 18–19. Also with regard to trade in services, the Appellate Body saw ‘no specific authority either in Article II or in Article XVII

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of the GATS for the proposition that the "aims and effects" of a measure are in any way relevant in determining whether that measure is inconsistent with those provisions’. Appellate Body Report, EC—Bananas III, above n 26, para 241. The Appellate Body stated that the ‘aims and effects’ doctrine in GATT was based on the phrase in Article III(1) GATT that national measures (taxation and regulation) ‘should not be applied to imported or domestic products so as to afford protection to domestic production’. The absence in the GATS of a reference to ‘so as to afford protection’, made it clear that the aim of a measure should not be considered here.

↵ 63 See WTO Appellate Body Report, European Communities—Measures Affecting Asbestos and Asbestos-Containing Products (‘EC—Asbestos’), WT/DS135/AB/R, adopted 5 April 2001, paras 114–7.

↵ 64 It should be noted that there was a concurring opinion in EC—Asbestos, in which one Appellate Body member noted that it agreed with the ‘likeness’ conclusion but did not agree with the fundamentally economic approach taken, which focused solely on the competitive relationship between the products. The member stated: “[T]he necessity or appropriateness of adopting a ‘fundamentally’ economic interpretation of the ‘likeness’ of products under Article III(4) of the GATT 1994 does not appear to me to be free from substantial doubt. Moreover, in future concrete contexts, the line between a ‘fundamentally’ and ‘exclusively’ economic view of ‘like products’ under Article III(4) may well prove very difficult, as a practical matter, to identify. It seems to me the better part of valour to reserve one's opinion on such an important, indeed, philosophical matter, which may have unforeseeable implications, and to leave that matter for another appeal and another day, or perhaps other appeals and other days. I so reserve my opinion on this matter.” See Appellate Body Report, EC—Asbestos, above n 63, paras 149–54.

↵ 65 With regard to trade in goods, the Appellate Body has even stressed that the question is not whether there is protective effect, in the sense that certain trade volumesare guaranteed. The question is rather whether competitive opportunities are guaranteed. The regulatory distinction may thus lead to less favourable treatment, even if there are no actual changes in trade volumes noticeable. (Appellate Body Report, Japan—Alcoholic Beverages II, above n 62, 15.)

↵ 66 WTO Appellate Body Report, Chile—Taxes on Alcoholic Beverages (‘Chile—Alcoholic Beverages’), WT/DS87 and 110/AB/R, adopted 12 January 2000, para 71.

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↵ 67 The Appellate Body in EC—Asbestos has noted: ‘The term “less favourable treatment” expresses the general principle, in Article III:1 [GATT], that internal regulations “should not be applied … so as to afford protection to domestic production”.’ (See Appellate Body Report, EC—Asbestos, above n 63, para 100.) Even if Article III(4) GATT did not refer to Article III(1), it considered Article III(1) to express a general principle. Nonetheless, this phrase is completely absent in Article XVII GATS and this has indeed been stressed by the Appellate Body in EC—Bananas III. (See Appellate Body Report, EC—Bananas III, above n 26, para 241) On the other hand, it can be easily be argued that the wish to expand trade in services by means of ‘progressive liberalization’ (as expressed in the second paragraph of the Preamble to the GATS) involves the removal of protectionist measures (be it only gradually).

↵ 68 See also Appellate Body Report, Japan—Taxes on Alcoholic Beverages II, above n 62, 29 and Appellate Body Report, Korea—Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, para 150.

↵ 69 See Appellate Body in WTO Appellate Body Report, Canada—Certain Measures Concerning Periodicals (‘Canada—Periodicals’), WT/DS31/AB/R, adopted 30 July 1997, 30 and WTO Panel Report, Mexico—Tax Measures on Soft Drinks and Other Beverages (‘Mexico—Taxes on Soft Drinks’), WT/DS308/R, adopted 24 March 2006, as modified by Appellate Body Report, WT/DS308/AB/R, para 8.91.

↵ 70 In Dominican Republic—Cigarettes, the Appellate Body noted that ‘the existence of a detrimental effect on a given imported product resulting from a measure does not necessarily imply that this measure accords less favourable treatment to imports if the detrimental effect is explained by factors or circumstances unrelated to the foreign origin of the product’. (The market share of importers was so small that the impact of a measure was felt more intensely.) See WTO Appellate Body Report, Dominican Republic—Measures Affecting the Importation and Internal Sale of Cigarettes (‘Dominican Republic—Import and Sale of Cigarettes’), WT/DS302/AB/R, adopted 19 May 2005, para 96. See also WTO Panel Report, European Communities—Measures Affecting the Approval and Marketing of Biotech Products (‘EC—Approval and Marketing of Biotech Products’), WT/DS291/R, WT/DS292/R, WT/DS293/R, Corr.1 and Add.1, 2, 3, 4, 5, 6, 7, 8 and 9, adopted 21 November 2006, para 7.2411, where the Panel noted that ‘it is not self-evident that the alleged less favourable manner of processing applications concerning the relevant imported biotech products (eg imported biotech maize) is explained by the foreign origin of these products rather than, for instance, a perceived difference between

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biotech products and novel non-biotech products in terms of the required care in their safety assessment, risk for the consumer, etc.’

↵ 71 See Appellate Body Report, EC—Asbestos, above n 63, para 100. Ehring has suggested that the effect must be based on an ‘asymmetric impact’ analysis. This way, only if the impact of the measure on a group of services or service suppliers is asymmetric to the impact on another group, there would be a violation. (Ehring (n 58) 924–5.)

↵ 72 Article XXVIII(a) refers indeed explicitly to ‘decision’ and ‘administrative action’. It can be noted that with regard to the corresponding National Treatment obligation in Article III(4) of the GATT, the GATT Panel in Canada—FIRA has already stated that ‘in judging whether a measure is contrary to the obligations under Article III:4, it is not relevant whether it applies across the board or only in isolated cases’. The Panel noted unambiguously that ‘any interpretation which would exclude case-by-case action would […] defeat the purposes of Article III:4’. (See GATT Panel Report, Canada—Administration of the Foreign Investment Review Act (Canada—FIRA), L/5504, adopted 7 February 1984, BISD 30S/140, para 5.5. On the possibility of applying GATT regimes to individual decisions by competition authorities, see C-D Ehlerman and L Ehring, ‘WTO Dispute Settlement and Competition Law: Views from the Perspective of the Appellate Body’s Experience’ (2003) 26 Fordham Int’l L J 1505, at 1526–32.)

↵ 73 See Appellate Body Report, EC—Asbestos, above n 63, para 117.

↵ 74 DiMascio and Pauwelyn have compared the principle of non-discrimination in investment law and WTO trade law. Based on an analysis of case-law, they noted that under international investment law, ‘it is enough for a foreign investor to prove that it was treated less favorably than a single domestic investor in like circumstances. The objective of BITs is, after all, the protection of individual investors.’ In contrast, international trade law focuses on trade liberalization generally (equality of competitive opportunities of all traders). (See N DiMascio and J Pauwely, ‘Nondiscrimination in Trade and Investment Treaties: Worlds Apart or Two Sides of the Same Coin?’ (2008) 102 AJIL 48 at 82.) The disputes before the WTO have therefore mainly involved measures that have a general application and thus a comparison is made between the group of the domestic goods/services/suppliers and the group of ‘like’ foreign goods/services/supplier. Yet, if a case of the treatment of an individual bank comes before the WTO (as is indeed theoretically possible), the panel or Appellate Body might stress the need for actual proof of protectionist intent (even if this is normally not necessary, since an actual or potential modification of conditions of competition is generally sufficient). International trade law is indeed not about protection of individual investors

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and if such individual case would arise, a violation may only be found if there is clear trade protectionism at stake.

↵ 75 The Appellate Body in US—Zeroing (EC) has accepted that a non-written ‘practice’ (in that case a ‘methodology’ for calculating dumping margins) can constitute a measure that can be challenged ‘as such’. (WTO Appellate Body Report, United States—Laws, Regulations and Methodology for Calculating Dumping Margins (‘Zeroing’) (‘US—Zeroing (EC)’), WT/DS294/AB/R, adopted 9 May 2006, para 193.) According to the Appellate Body in US—Zeroing (EC) the complaining party needs to establish ‘through arguments and supporting evidence, at least that the alleged ‘rule or norm’ is attributable to the responding Member; its precise content; and indeed, that it does have general and prospective application’. (Appellate Body Report, US—Zeroing (EC), para 198.) Hence, three elements need to be proven: (i) the attribution of the measure to the Member; (ii) the precise content and (iii) the general and prospective application. To meet this high threshold, the complainant may advance evidence of ‘systematic application’ of the challenged rule or norm.

↵ 76 Since Article VI(1) refers to the administration of measures of general application, it does not apply to the previously mentioned situation of an individual support scheme that is tailor-made for a specific bank.

↵ 77 WTO Panel Report, United States—Anti-Dumping and Countervailing Measures on Steel Plate from India (‘US—Steel Plate’), WT/DS206/R and Corr.1, adopted 29 July 2002, para 7.22; repeated in WTO Panel Report, United States—Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan (‘US—Corrosion-Resistant Steel Sunset Review’), WT/DS244/R, adopted 9 January 2004, as modified by Appellate Body Report, WT/DS244/AB/R, para 7.131.

↵ 78 In US—Gambling it appeared that Antigua also tried to challenge three court cases as a violation of the GATS. While referring to some ambiguity in the statements of Antigua, the Panel concluded that Antigua was in fact not challenging the specific applications of the laws (eg in the court decisions), but that these applications could show how the legislative measures that were challenged in fact violated the GATS. (See Panel Report, United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services (‘US – Gambling’), WT/DS285/R, adopted 20 April 2005, as modified by Appellate Body Report, WT/DS285/AB/R, paras 6.191–6.192.) In Brazil—Tyres, a number of relevant court injunctions were not considered by the Panel as separate measures, but rather as part of the manner in which an import ban was applied, when assessing this ban under the chapeau of Article XX GATT. (WTO Panel Report, Brazil—Measures

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Affecting Imports of Retreaded Tyres (‘Brazil—Retreaded Tyres’), WT/DS332/R, adopted 17 December 2007, as modified by Appellate Body Report, WT/DS332/AB/R, para 7.107.)

↵ 79 Nonetheless, the Schedules of the WTO Members do not have a column dealing with Article VI(1). What is required for the application of Article VI(1) is that it concerns a sector where the WTO Member in question has undertaken specific (Market Access, National Treatment or Additional) commitments.

↵ 80 Article VI(1) GATS was invoked by Antigua in the US—Gambling case. However, the Panel found that Antigua had failed to identify the ‘measures of general application’, the administration of which would violate this provision. (See Panel Report, US—Gambling, above n 78, paras 6.434 and 6.437.)

↵ 81 The analysis of Article VI(1) GATS in the light of the case law relating to Article X(3) GATT was made in: P Delimatsis, ‘Due Process and ‘Good’ Regulation Embedded in the GATS.’ International Trade in Services and Domestic Regulation (OUP, Oxford 2007) 96–103 and P Delimatsis, ‘Due Process and ‘Good’ Regulation Embedded in the GATS – Disciplining Regulatory Behaviour in Services through Article VI of the GATS’ (2007) 10 JIEL 13 at 19–28. Delimatsis refers to the EC—Bananas III case, where the Appellate Body found that Article X(3)(a) GATT is similar to Article I(3) of the Agreement on Import Licensing Procedures. According to the Appellate Body, the two relevant phrases were ‘for all practical purposes, interchangeable’. See Appellate Body Report, EC—Bananas III, above n 26, para 203. He argues that the same reasoning can apply to Article X(3) GATT and Article VI(1) GATS. (P Delimatsis, this note, at 20 (footnote 27).) Nonetheless, Article X(3)(a) GATT and Article VI(1) GATS do not use exactly the same words for these requirements. While Article X(3)(a) requires ‘uniform, impartial and reasonable’ [emphasis added] administration, Article VI(1) requires administration to be ‘reasonable, objective and impartial’ [emphasis added]. Krajewski points to these differences in the criteria of Article X(3)(a) GATT. He argues that for assessing ‘uniformity’, it is ‘usually necessary to take more than one decision into account […]’. In contrast, ‘objectivity’ ‘refers to the circumstances of an individual decision’. (See M Krajewski, ‘Article VI GATS. Domestic Regulation’, in Wolfrum, Stoll and Feinäugle (eds), WTO – Trade in Services (Martinus Nijhoff Publishers, Leiden 2008) 165–96 at 171–2.)

↵ 82 WTO Panel Report, European Communities—Selected Customs Matters (‘EC—Selected Customs Matters’), WT/DS315/R, adopted 11

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December 2006, as modified by Appellate Body Report, WT/DS315/AB/R, para 7.108.

↵ 83 WTO Panel Report, United States—Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan (‘US—Hot-Rolled Steel’), WT/DS184/R, adopted 23 August 2001, as modified by Appellate Body Report, WT/DS184/AB/R, para 7.268. It concerned the application of the US Anti-dumping Act in a single anti-dumping investigation.

↵ 84 Sunde has argued that the combination of the phrase ‘measures of general application’ with the word ‘administration’, implies that also individual measures (that apply measures of general application) are covered by the scope of Article VI(1) GATS. He states: ‘Für die Beantwortung der Frage, ob nur abstrakt-generelle Maßnahmen von Art. VI:1 erfasst werden, ist es deshalb notwendig, das Tatsbestandsmerkmal “of general application” im Zusammenhand mit dem Tatsbestandsmerkmal “administered” zu lesen.' (See T Sunde, ‘Möglichkeiten und Grenzen innerstaatlicher Regulierung nach Art. VI GATS’, in C Tietje, G Kraft and R Sethe (eds) Beiträge zum Transnationalen Wirtschaftsrecht (Halle-Wittenberg, Martin-Luther-Universität, Juli 2006) Part 59, at 13–4.) In contrast, Krajewski has argued: ‘This view ignores the difference between the scope of application of an obligation and its effects. While the obligation of Art. VI:1 affects the outcome of individual decisions, it nevertheless does not apply to individual decisions. Only the administration of measures of general application can be tested under Art. VI:1.’ (See M Krajewski, ‘Article VI GATS. Domestic Regulation’, above n 81, at 170.) Krajewski seems to stress that an individual measure that does not involve the administration of a general measure cannot be challenged under this provision.

↵ 85 Note that several of such individual applications may form a general ‘practice’ that provides proof that the general support scheme ‘as applied’ is discriminatory and thus violates Article XVII.

↵ 86 Compare: WTO Panel Report, Argentina—Measures Affecting the Export of Bovine Hides and Import of Finished Leather (‘Argentina—Hides and Leather’), WT/DS155/R and Corr.1, adopted 16 February 2001, para 11.94.

↵ 87 The Appellate Body in US—Corrosion-Resistant Steel Sunset Review stated (with regard to Article X(3)(a) GATT) that allegations that measures are administered in a non-uniform, unreasonable or biased way ‘are serious under any circumstances’ and ‘should not be brought lightly’. Appellate Body, United States—Sunset Review of Anti-Dumping Duties on Corrosion-Resistant Carbon Steel Flat Products from Japan (‘US—Corrosion-

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Resistant Steel Sunset Review’), WT/DS244/AB/R, adopted 9 January 2004, para 217.

↵ 88 Para 2(a) GATS Annex on Financial Services.

↵ 89 Academic literature seeks to define the scope. See A Gkoutzinis, ‘International Trade in Banking Services and the Role of the WTO: Discussing the Legal Framework and Policy Objectives of the General Agreement on Trade in Services and the Current State of Play in the Doha Round of Trade Negotiations’ (2005) 39 Int’l Law 877 at 902–3; Key (n 21) 964–6; E Leroux, ‘Trade in Financial Services under the World Trade Organization’ (2002) 36 JWT 413 at 430–1; L Panourgias, Banking Regulation and World Trade Law (Hart, Oxford 2006) at 11–5; Von Bogdandy and Windsor (n 50) 634–6; W Wang, ‘The Prudential Carve-Out’, in K Alexander and M Andenas (eds), The World Trade Organization and Trade in Services(Martinus Nijhoff, Leiden 2008) 601–14 and M Yokoi-Arai, ‘GATS’ Prudential Carve Out in Financial Services and Its Relation with Prudential Regulation’ (2008) 57 ICLQ 613.

↵ 90 See Working Group on Financial Services Including Insurance, Note on the Meeting of 11–13 June 1990, MTN.GNS/FIN/1, 5 July 1990, paras 48–95. This right to take prudential measures was considered so important by some States that they wanted to exclude such measures entirely from dispute settlement. (See Working Group on Financial Services Including Insurance, Communication from the Delegation of Malaysia, MTN.GNS/FIN/W/3, 12 September 1990, at 7.) Other negotiation parties, like the EC and Canada, opposed this option, which ‘appeared to allow almost an unlimited degree of regulatory abuse’. (See Working Group on Financial Services Including Insurance, Note on the Meeting of 13–15 September 1990, MTN.GNS/FIN/3, 16 October 1990, paras 12 and 15.)

↵ 91 A suggestion by Australia to clarify the meaning of ‘prudential’ received mixed responses by the other WTO Members. The EC, for instance, agreed that it was useful to discuss the subject but that it was too ambitious to develop a definition. (See Committee on Trade in Financial Services, Report of the Meeting Held on 25 May 2000, S/FIN/M/26, 29 June 2000, paras 21–34.) Japan has stated that ‘Members should be cautious in embarking on a discussion that might limit the right of each Member to take regulatory measures for prudential reasons in an appropriate and timely manner’. (See Council for Trade in Financial Services Special Session, Report of the Meeting held on 3–6 December 2001, S/CSS/M/13, 26 February 2002, at para 267.)

↵ 92 See above, text accompanying n 7.

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↵ 93 See for instance G Benston, Regulating Financial Markets: A Critique and Some Proposals (Institute of Economic Affairs, London 1998) 45. See also F Mishkin, ‘Prudential Supervision: Why is it Important and What Are the Issues?’, in F Mishkin (ed), Prudential Supervision: What Works and What Doesn’t?, (University of Chicago Press, Chicago 2001) 1–29 at 8. However, Mishkin argues further that there is a case for government regulation to reduce risk taking by banks ‘even without the presence of a government safety net such as deposit insurance’. He nevertheless adds: ‘the need for restrictions on risky activities is even greater when there is a government safety net which increases the incentives for risky behavior’. (Mishkin, this note, at 8–9.) See also T. Padoa-Schioppa, Regulating Finance. Balancing Freedom and Risk (OUP, Oxford 2004) at 99–102.

↵ 94 Article 3.2 of the Dispute Settlement Understanding (Annex 2 to the Agreement establishing the WTO. See WTO, The Legal Texts, above n 16, at 354.) indicates that legal interpretations should be made in accordance with customary rules of interpretation of public international law. The Appellate Body has stressed that such interpretations should be based on the Articles 31 and 32 of the Vienna Convention on the Law of Treaties (VCLT). (Vienna Convention on the Law of Treaties, done at Vienna on 23 May 1969, UNTS 18232. See the references in the WTO Appellate Body Report, United States—Standards for Reformulated and Conventional Gasoline (‘US—Gasoline’), WT/DS2/AB/R, adopted 20 May 1996, 15 and, with regard to services, Appellate Body Report, US—Gambling, above n 48, at para 164.) Article 31 VCLT states that provisions in international agreements should be interpreted ‘in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’.

↵ 95 Note that Para 4 of the GATS Annex on Financial Services requires that Panels that have to deal with disputes relating to prudential issues and other financial matters must ‘have the necessary expertise relevant to the specific financial service under dispute’. Such experts may indeed be more sensitive to the ‘moral hazard’ argument.

↵ 96 Gkoutzinis has argued that ‘if a measure is taken for genuine prudential reasons, the measure is not caught by the GATS commitments unless the measure breaches one of the fundamental GATS disciplines’. (See Gkoutzinis (n 89) 903.) However, in my opinion, the last sentence of the prudential carve-out should not be read as re-instating the relevant GATS obligation. This would be a circular reasoning: if a measure breaches a GATS obligation, it is nevertheless exempted from this obligation because it is prudential. However, if such prudential measure breaches a GATS obligation, it is still subject to it! The test applied to prudential measures that are

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normally exempted from the GATS should be of a different nature than the one applied in the first assessment whether a measure breaches a GATS obligation in the first place.

↵ 97 See Article XX GATT and Article XIV GATS.

↵ 98 See Appellate Body Report, US—Gambling, above n 48, at para 339, referring to the original statement of the Appellate Body with regard to the Chapeau of Article XX GATT in Appellate Body Report, US—Gasoline, above n 94, at 22.

↵ 99 See WTO Appellate Body Report, United States—Import Prohibition of Certain Shrimp and Shrimp Products (‘US—Shrimp’), WT/DS58/AB/R, adopted 6 November 1998, para 158. See also Leroux (n 89) 431.

↵ 100 It is interesting to consider that the EC submitted in July 1990 a proposal for a draft Annex on Financial Services. (See Communication from the European Communities, Proposal by the European Community Draft Financial Services Annex, MTN.GNS/FIN/W/1, 10 July 1990.) Article 13(1) of this draft, relating to domestic regulation read: ‘Notwithstanding any other provisions of the Agreement and of this Annex, in order to prevent or to solve a serious economic or financial disturbance, parties may take reasonable measures to safeguard the integrity of the financial system, provided that these measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination against financial services providers of other parties.’ Largely the same wording as in the Chapeau of the general exception provisions in the GATT and GATS was used. The EC clarified during the preparations of the Annex on Financial Services that: ‘Article 13 on domestic regulation represented an extension of article V of MTN.GNS/W/105 and spelled out the public policy considerations which had to be taken into account in the financial services area, such as the need to ensure an appropriate supervision of the activities of financial institutions, the need to protect depositors, investors and policy holders, the need to secure monetary policy objectives, etc. His delegation chose not to draw up a list of public policy considerations strictly for practical reasons; any such list might raise more problems than it solved. The right of authorities to regulate and supervise financial markets and institutions should not be challenged but had nonetheless to be exercised in accordance with the provisions of the agreement and should not result in a denial of market access on arbitrary grounds [emphasis added].’ (See Working Group on Financial Services Including Insurance, Note on the Meeting of 12–13 July 1990, MTN.GNS/FIN/2, 10 August 1990, at para 18.) The focus was thus rather on compliance with the GATS obligations in the exercise of the right to adopt prudential measures rather than on compliance in the measures

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themselves. While the text of the draft was not maintained in the final, adopted version of the Annex, it is arguable that the same rationale still underlies this provision: it seeks to avoid WTO Members abusing the exception for protectionist reasons. There is thus some parallel with the Chapeau to Article XX GATT and Article XIV GATS.

↵ 101 See J Trachtman, ‘Transatlantic Regulatory Cooperation from a Trade Perspective: A Case Study in Accounting Standards’, in G Bermann (ed), Transatlantic Regulatory Cooperation: Legal Problems and Political Prospects (OUP, Oxford 2000) 223–42 at 237. See also Von Bogdandy and Windsor (n 50) 635–6, who state that the carve-out cannot permit ‘measures that are purely or primarily protectionist in effect’.

↵ 102 Note that there is therefore a difference with a test that examines whether the discriminatory measure is necessary to achieve the prudential goal. (The necessity test is explicitly absent in the carve-out, when compared to the goals mentioned in the general exceptions provision in Article XIV GATS.) A discriminatory support scheme may be unnecessary for achieving the prudential goal, but is still permitted under the carve-out. In contrast, a discriminatory scheme does not stand in a rational relationship with the prudential goal (and thus is not genuinely pursuing this goal but rather protectionist objectives) if this discriminatory measure does not address financial stability concerns at all. A foreign-owned bank with a local presence constitutes an equal danger to domestic financial stability. Hence, a measure that excludes these banks will not be able to achieve financial stability.

↵ 103 It should nonetheless be noted that Paragraph 4 of the Annex on Financial Services requires that panels that deal with disputes on prudential issues ‘shall have the necessary expertise relevant to the specific financial service under dispute’.