c

Ê
   
      


     


    

î


Economists and political scientists have begun to isolate the causes and
implications of the spread of the global financial crisis in late 2008. Critical
attention³often accompanied by strident disagreement³has 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.


 
 

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 attention³often accompanied by strident disagreement³has
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
former³international trade law³encompasses bilateral free trade agreements,
regional instruments such as the North American Free Trade Agreement and
the multilateral World Trade Organization (WTO). In comparison, the latter³
international investment law³not 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 which of these various
 a

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‘

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  ,
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 2001²02 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 risk
of breaching commitments under international economic law. We focus here on
 D

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 1²3
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.

î






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  
financial institutions with their seat in Germany, thereby excluding
foreign branch operations.18 It enables the executive to take various
measures,  
‘  to assume liabilities accrued by financial-sector
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
 r

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 ‘  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 ‘  program have only been
extended to a national bank³UBS³with 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 banks³such as
Citibank, Credit Suisse and UBS³were excluded from the insurance scheme.
This exclusion triggered flight of wholesale capital from foreign bank branches
to domestic guaranteed institutions.29Australia is 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.



!


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

  " 

  #
$

 



!%

 *

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 not³as a class³qualify for those subsidies. The
sizable loans provided to date to the US automakers under the Troubled Asset
Relief Program (TARP)³US$9.4 billion (plus US$4 billion contingent on
congressional action) for General Motors (GM)41 and US$4 billion for Chrysler³
have prompted early threats of WTO litigation by the EC.42

The more general US stimulus package43³the American Recovery and

Reinvestment Act of 2009 (ARRA)44³forbids 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 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 amended³at the insistence of President Obama³so 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 difference³at the level of legality³
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 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).
 X

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.

î&î
'



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
(
‘ 
and 
‘ ) 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.

First, ¶specific· commitments under the GATS³including the NT Article XVII³

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
 c

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 confirmation³in the Guidelines for
Scheduling of GATS Commitments (adopted by WTO members in 2001)³that
NT  applicable to subsidies in the services sector.63 Thus, for scheduled
sectors, subsidies that favor domestic financial industries and are denied to
¶like· foreign suppliers³whether subsidiaries or branches of a finance
company³can 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 one of the
fundamental interests of society·.67 While the notion of ¶public order· was
interpreted by the Panel in   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  
‘ , 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
 cc

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,  
‘ , 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 
 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 ‘
   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 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
 ca

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 —
 ‘ —  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  discriminatory
intent are somehow excluded from the scope of a prudential measures
exception. This is, however, an unsatisfactory ruling. The —
 ‘
—  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 provision is an exception
and the burden of proof on invocation³like any exception³rests 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  
 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.
 cD

î'

(



The various guarantees and government benefits across categories 2 and 3³

which target the production of domestic goods rather than services³could
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 production³leaving consumers
free to choose among foreign and domestic goods and services³are 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 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
 c[

treaties as the more likely forum to challenge discriminatory state measures of

this sort.

&)î

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
procurement³in the WTO Agreement on Government Procurement (GPA)³are
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 
‘ 
and 
‘
 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 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 suppliers³who
believe procurement has been handled inconsistently with the requirements of
the GPA³right 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  .

The category 3 measures described above, especially the US ¶Buy American·

provisions, are prone to litigation under the GPA. There are however
 cr

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 another³such as from the federal to state level³does
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
(with

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 
 

 examined
the practice of channeling of funds to  
 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 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 
 

 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
 c 

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.

î*  



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 1²3 are likely to violate the Instrument. A notification of
exceptions now would also breach a standstill agreement.115 These 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




!+

Most modern BITs are signed between developed and developing states. On
first view, this typical country pairing might preclude claims by foreign
 c*

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 commitments³including Friendship, Commerce and Navigation
treaties (FCN)118³remain 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.





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.

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 treaties³including the
investment Chapter 11 of the NAFTA³exclude 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 
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
 c

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.

c     

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 cases³including ‘ 

‘ ‘
  (NAFTA, 2000), 
‘ ‘ !‘ ‘   (NAFTA, 2001), —
 ‘ ‘

" (NAFTA, 2002); and #—‘ ‘ # (NAFTA, 2003)³endorse 
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. This
jurisprudential line is disrupted by the awards in $
‘ ‘ % (U.S-
Ecuador BIT, 2004) and 
 
"‘ ‘ & (NAFTA, 2005).
The $
 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
broad$
 test remains largely an outlier in the jurisprudence, with only
one later case adopting other parts of that award.130 The
later 
 
" 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 
  domestic actors. It is unlikely that arbitral tribunals will
 cX

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 only
‘
(in law) discrimination but also 
‘ (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 
‘ 
discrimination 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 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 
‘ ‘!‘‘ (NAFTA, 2001).136 It has
also been affirmed in successive cases, including 
 
"‘ ‘ &(NAFTA,
2005)137, parts of ‘ ‘   (NAFTA, 2007)138 and most recently, #‘ ‘

"(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
 a

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 $
 award141, the 

‘ ‘ # 
 Tribunal (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
automakers³which 
‘ exclude almost all non-American car producers³
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 
‘ ‘ ! 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 have not clearly
defined what will constitute ¶rational· grounds for differentiation. On the one
hand, the 2004 NAFTA #'Tribunal found that the Mexican measure³
nationalization of potentially insolvent sugar refiners³did 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 ( 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.

a  
   
 ac

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 %
(‘ ‘  , 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 
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 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, 
‘
.

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 In
 for instance, the Tribunal relied on
a reference to transparency in part of the NAFTA in its analysis of the FET
standard154 while the !

 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
 aa

¶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.

D  


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 treaties³especially those concluded as part of a free trade
agreement³offer 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 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,  
‘, ¶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 2001²02 financial crisis. We should, however, exhibit some
caution in relying on this case law. Early arbitral awards³
including , %  and 
 ³engage 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
 aD

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  
 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  
 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 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 
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
 a[

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 practices. That
aside, many of the interventions surveyed (especially in categories 1²2) 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 and ‘ 
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  & 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
 ar

O‘ ö1 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 91²126. 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.

O‘ ö2 This assumption is not entirely stable for WTO members³

including Argentina, Brazil and India³who 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 Americanµ at
WTO·, º

 (UK 17 February 2009)
<http://uk.reuters.com/article/usPoliticsNews/idUKTRE51F529200902
17> 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.

O‘ ö3 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.

O‘ ö4 See generally Edward Baldwin and Mark Kantor, ¶Limits to

Enforcement of ICSID Awards· (2006) 23 J Intl Arb 1.

O‘ ö5 See for example (‘' 

‘)*‘‘+
 Լ
, Partial

Award, UNCITRAL Arbitration (17 March 2006); —
 ‘ — ‘
'   
‘
‘‘
" 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 2001²02 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.

O‘ ö6 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).
 a 

O‘ ö7 The massive liquidity assistance provided by central banks

across the globe is an example of an intervention that is
typically  codified in law.

O‘ ö8 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_14apr
09_e.doc> accessed 4 September 2009.

O‘ ö9 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 2008²09 (17 June 2009)
<http://www.publications.parliament.uk/pa/ld200809/ldselect/ldeuco
m/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_repor
t_en.pdf> accessed 2 November 2009; US Treasury, ¶Financial Regulatory
Reform: A New Foundation, Rebuilding Financial Regulation and
Supervision· 2009
<http://www.financialstability.gov/docs/regs/FinalReport_web.pdf>
accessed 2 November 2009.

O‘ ö10 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.

O‘ ö11 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.
 a*

O‘ ö12 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), ' 
 
‘ *
 
  (Siebeck/Mohr, Tübingen 2007)
219²58. 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.

O‘ ö13 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).

O‘ ö14 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).

O‘ ö15 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).

O‘ ö16 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·.

O‘ ö17 See n 10 above.

O‘ ö18 S 2 para 1 of the Financial Market Stabilization Act

(Finanzmarktstabilisierungsgesetz) of 17 October 2008.

O‘ ö19 S 6 para 1 of the Financial Market Stabilization Act.

O‘ ö20 S 7 para 1 of the Financial Market Stabilization Act.

O‘ ö21 S 8 para 1 of the Financial Market Stabilization Act.

O‘ ö22 S 15 of the Financial Market Stabilization Act.

 a

O‘ ö23 Ibid.

O‘ ö24 HM Treasury, Statement on the Government·s Asset Protection

Scheme, 19 January 2009.

O‘ ö25 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.

O‘ ö26 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).

O‘ ö27 Petrovic and Tutsch (n 10) 34.

O‘ ö28 Financial Systems Legislation Amendment (Financial Claims

Schemes and Other Measures) Act 2008 (Cth); Banking Amendment
Regulations 2008 (No. 1) (Cth).

O‘ ö29 Gemma Daley, ¶Australia Refuses Deposit Guarantee for

Foreign Banks·, )
(21 October 2008) <www.bloomberg.com>
accessed 18 November 2008,
<http://www.bloomberg.com/apps/news?pid=20601081&sid=au5F5blO
7B88> accessed 21 November 2009.

O‘ ö30 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.

O‘ ö31 Public Law 110²343.

O‘ ö32 See ¶Beneficiary Banks· £
‘ , (‘ !
 (October 2008)

<http://www.nytimes.com/imagepages/2008/10/14/business/14bailou
t.graphic2.html> accessed 4 September 2009.

O‘ ö33 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
 aX

as a proxy for refinancing costs, crucial for competitive conditions in the

market.

O‘ ö34 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 ²
covering both the quantity and the type of lending made available to
people and businesses across the country « .·

O‘ ö35 S 10 para 2 (1) of the Financial Market Stabilization Act.

O‘ ö36 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.

O‘ ö37 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).

O‘ ö38 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 (13²14 March 2009), and
World Bank News Release No. 2009/245/EXC; WTO, Report to the TPRB
(n 8). See also Anthony Faiola and Mary Jordan, ¶British Bank to the
World Takes Its Cash Back Home: Battered RBS Caught in Protectionist
Storm· !
‘-   ‘ (<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).

O‘ ö39 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/in
dex.html> accessed 4 September 2009.

O‘ ö40 Energy Independence and Security Act of 2007; s 136:

¶ADVANCED TECHNOLOGY VEHICLES MANUFACTURING: INCENTIVE
 D

PROGRAM. (g) PRIORITY.³The 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.·

O‘ ö41 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.

O‘ ö42 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, º

 2008, EU Might Complain to WTO over US Car Plan³
Barroso
<http://www.reuters.com/articlePrint?articleId=USLE47953820081114>
accessed 30 April 2009.

O‘ ö43 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.

O‘ ö44 Public Law 111-5, signed into law by President Obama 17

February 2009.

O‘ ö45 BUY AMERICAN: s 1605. ¶Use of American Iron, Steel and

Manufactured Goods. (a)£
‘ ‘ 
‘  ‘   
‘  ‘ 

‘

‘
‘
‘ ‘#‘
‘
‘
‘  ‘‘ .
‘ ‘
‘   ‘

 ‘ 
 
‘ ‘
 ‘‘‘‘ ‘ ‘‘ (‘ 
‘
‘ ‘ 
‘   ‘ 

‘  ‘  
‘ ‘ 
‘  ‘ 
‘  .
‘ 
‘
 
‘  ‘ 
‘  
‘ 
& (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 that³(1) applying subsection (a) would be
inconsistent with 
‘ ‘  

; (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)
 Dc

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) ! ‘
 ‘ ‘
‘
‘ ‘‘
‘
 
‘  ‘  
‘ 
‘  ‘  
‘  
 ‘ 


.·
(emphasis added).

O‘ ö46 Ibid.

O‘ ö47 Elliot J Feldman, ¶ ´Buy Americanµ Gets a Hot Reception:

Despite Obama Visit, Stimulus Provisions Force Canada to Re-Examine
Its Relationship with U.S.· O
‘ !
 (23 February 2009)
<www.law.com/jsp/nlj/legaltimes/index.jsp> accessed 23 November
2009.

O‘ ö48 SS 1605(d) and 604(k).

O‘ ö49 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.·

O‘ ö50 See Evenett (n 43).

O‘ ö51 See ¶China·s Turn to Buy National·, ) 
‘   

‘ ! 
‘
£
‘ 
‘ £&‘ / (July²August 2009) <www.ictsd.net> accessed 9
September 2009.

O‘ ö52 Hypo Real Estate. Steinbrück bemitleidet Flowers. —‘

$ 
(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
 Da

der HRE. 
‘ 0
 (3 June 2009), from Zeit online,

<http://www.zeit.de/online/2009/23/hypo-real-estate-
hauptversammlung> accessed 21 November 2009.

O‘ ö53 Chrysler and General Motors American carmakers in the end

game. !
‘ % (30 April 2009),
<http://www.economist.com/businessfinance/displayStory.cfm?story_id
=E1_TPVSJDRJ>, accessed 21 November 2009.

O‘ ö54 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.

O‘ ö55 There may also be pertinent issues that arise under the WTO
Agreement on Trade-Related Investment Measures.

O‘ ö56 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.

O‘ ö57 GATS, Art I(2)(c).

O‘ ö58 Mamiko Yokoi-Arai, ¶ ´GATSµ Prudential Carve Out in Financial

Services and its Relation with Prudential Regulation·(2008) 57 ICLQ 613,
621.

O‘ ö59 See Art XXVIII (d) GATS: ¶ ´commercial presenceµ 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 presenceµ means an enterprise within a
Member·s territory for the supply of financial services and includes
wholly-or partly-owned subsidiaries, joint ventures, partnerships, sole
proprietorships, franchising operations, branches, agencies,
representative offices or other organizations.·

O‘ ö60 Art XVII(3) of the GATS.

 DD

O‘ ö61 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.

O‘ ö62 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.

O‘ ö63 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.·

O‘ ö64 Pierre Sauvé, ¶Completing the GATS Framework: Addressing

Uruguay Round Leftovers· (2002) 57 Aussenwirtschaft 301, 326.

O‘ ö65 Cf n 32, above.

O‘ ö66 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.

O‘ ö67 Art XIV(1) and Footnote 5 of the GATS.

 D[

O‘ ö68 WTO Panel Report,  
‘
1

‘#
 ‘
‘ 
) 
‘ 
‘ ‘  ‘  ‘ )
 ‘ 

 WT/DS285/R, adopted
10 November 2004, para 6.461.

O‘ ö69 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).

O‘ ö70 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.

O‘ ö71 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).

O‘ ö72 Para 2(a), Annex on Financial Services, GATS.

O‘ ö73 WTO, Background Note by the Secretariat, Financial Services,

Council for Trade in Services, S/C/W/72, 2 December 1998, para 33.

O‘ ö74 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

O‘ ö75 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
 Dr

XX. On this latter point, see Eric Leroux, ¶Trade in Financial Services
under the World Trade Organisation· (2002) 36 JWT 413²42, 430ff.

O‘ ö76 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.

O‘ ö77 Yokoi-Arai (n 58) 639.

O‘ ö78 Cornford (n 76) 15.

O‘ ö79 Ibid.

O‘ ö80 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).

O‘ ö81 Cornford (n 76) 15.

O‘ ö82 See —
 ‘—  (n 5) para 162.

O‘ ö83 See also Leroux (n 75) 430ff.

O‘ ö84 Aaditya Mattoo and Sascha Wunsch-Vincent, ¶Pre-Empting

Protectionism in Services: The GATS and Outsourcing· (2004) 7 JIEL
765, 795.

O‘ ö85 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.

O‘ ö86 These include grants, loans, equity infusions, loan guarantees,

fiscal incentives, the provision of goods or services, the purchase of
goods.

O‘ ö87 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
 D 

Agreement distinguishes between direct and indirect subsidies. In the

latter the funds are channeled through private institutions, thus a link to
a government agency needs to be found. Type 2 measures could
constitute indirect subsidies.

O‘ ö88 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,  1

‘#
 ‘
‘%" ‘‘ ‘
#  , 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.

O‘ ö89 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.

O‘ ö90 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).

O‘ ö91 A detailed list of export subsidies is annexed to the SCM

Agreement.

O‘ ö92 Art 5-6 SCM Agreement.

O‘ ö93 Report to the TPRB (n 8) para 8.

O‘ ö94 Those forms of relief may not be used simultaneously. See

footnote 35 to the SCM Agreement.

O‘ ö95 See Art 15 of the SCM Agreement; WTO Appellate Body

Report,  
‘
— ‘ 
 ‘
‘

  ‘ ‘º

‘
‘ 
 ‘ ‘ O
‘  ‘  , WT/DS257/AB/R of 19
January 2004.

O‘ ö96 Hufbauer and Schott (n 2) 6, Table 3. Other estimates go from

7²14 %, see Simon Lester and Bryan Mercurio, - ‘ ! 
‘ O (Hart,
Oxford 2008) 665.
 D*

O‘ ö97 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.

O‘ ö98 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.

O‘ ö99 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.

O‘ ö100 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.·

O‘ ö101 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
 D

fall under the federal-level procurement. On this point, see Hufbauer and
Schott (n 2) 7.

O‘ ö102 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.

O‘ ö103 Art III(1)(b) of the GPA.

O‘ ö104 Lester and Mercurio (n 96) 680.

O‘ ö105 Art XIX(1) of the GPA.

O‘ ö106 Art XXII(1) of the GPA.

O‘ ö107 Art XXII(3), (5²7) of the GPA.

O‘ ö108 For a detailed overview, including implementing decisions and

guidelines issued so far, see Evenett (n 43).

O‘ ö109 Panel Report, 
1

‘ #
 ‘ 

‘

 

, adopted 19 June 2000, WT7DS163/R, para 7.59.

O‘ ö110 Lester and Mercurio (n 96) 676.

O‘ ö111 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).

O‘ ö112 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.
 DX

O‘ ö113 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.

O‘ ö114 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.

O‘ ö115 In 1988, an unanimous pledge of all adhering countries to

refrain from introducing new exceptions (¶standstill pledge·).

O‘ ö116 For example, see ‘ 

‘ ' &‘ ‘  , UNCITRAL Award
under the NAFTA (13 November 2000) para 248; 
‘ ‘ !‘ ' ‘ ‘
 , UNCITRAL Award under the NAFTA (10 April 2001) para 78
(and footnote 73).

O‘ ö117 While this is a commonly accepted strategy within the

jurisprudence, it has occasionally elicited criticism by arbitral tribunals.
For example, see  
"‘ # ‘ O&‘ ‘ +
 ‘ º
, ICSID Case No.
ARB/06/5, Award (15 April 2009).

O‘ ö118 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), "‘  (‘
% 

‘ ‘ ‘ ' 
 ‘ O <www.mpepil.com> accessed 4
September 2009.

O‘ ö119 Signed at Washington D.C., 29 October 1954, entered into

force 14 July
1956<http://tcc.export.gov/Trade_Agreements/All_Trade_Agreements/e
xp_005539.asp.>.

O‘ ö120 Signed at Tokyo 9 April 1953, entered into force 30 October

1953.

O‘ ö121 As, eg 
‘  
 ‘ %
  ‘ ‘ # (%O') ( 
‘


‘‘#
‘‘'
) [1989] ICJ Rep 15.

O‘ ö122 See #( ‘ ‘ 

‘ ‘ 

, 265 US 332 (1924), 
‘ ‘ &‘
' ‘ ‘& (America), Inc. United States Court of Appeals Fifth Circuit [24
April 1981] 356; 
 ‘ 2)$‘ ' &‘ ‘ '‘ º
‘ ‘ '   United
States Court of Appeals for the District of Columbia Circuit [16 November
2001] 1107²8.
 [

O‘ ö123 For example, Art XVII of the Japan²US 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 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.

O‘ ö124 UNCTAD, Recent Developments in International Investment

Agreements, IIA Monitor No. 32, 6²7 (2007).

O‘ ö125 North American Free Trade Agreement, 17 December 1992,

Can-Mex-US, 32 ILM 289, 605, Art 1108(7)(b).

O‘ ö126 See, for example, the model German and UK BITs extracted in
Campbell McLachlan, Laurence Shore and Matthew
Weiniger, ' 
 ‘ ' 

‘ #   3‘  
‘
  
 (Oxford University Press, Oxford 2007) 379²85 and 417²22.

O‘ ö127 On this point, see N Jansen Calamita, ¶The British Bank

Nationalizations: An International Law Perspective· (2009) 58 ICLQ 119.

O‘ ö128 For a review of NT clauses in BITs, see Rudolf Dolzer and

Margrete Stevens, )
‘' 

‘!

 (Nijhoff, The Hague 1995)
63²5 and for a short survey on the meaning and jurisprudence of NT, see
Rudolf Dolzer and Christoph Schreuer,   
‘ ‘ ' 
 ‘
' 

‘ O (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
 [c

to ¶investors· rather than to ¶investments of investors·; under Art 1102(3),

the obligation applies to state/provincial governments as well.

O‘ ö129 $
‘ %"  ‘  ‘   ‘ 

‘ ‘ % ,
Award, LCIA Case No UN 3467, IIC 202 (1 July 2004) para 173.

O‘ ö130 

‘ #‘ ‘ # 
 , Award and Separate Opinion, ICSID

Case No ARB/02/8 (6 February 2007) paras 320²1.

O‘ ö131 
 
"‘    ‘ ‘ #, UNCITRAL, Final Award (3

August 2008) pt IV, ch B, para 17.

O‘ ö132 For example,  ‘  ‘ ' 
 ‘ ' &‘ ‘ 
", ICSID
Case No. ARB(AF)/04/01, Decision on Responsibility (15 January
2008)paras 120²2.

O‘ ö133 For example, s 2 of the German Financial Market Stabilization

Act.

O‘ ö134 For example, the NAFTA Tribunal in —
 ‘ ‘ 
" ruled

clearly that ¶de facto difference in treatment is sufficient to establish a
denial of national treatment under Article 1102.·   ‘ —
 ‘ ‘

", ICSID Case No. ARB(AF)/99/1, Award (16 December 2002) para
169.

O‘ ö135 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, ' 
 ‘ ! 
‘ º
 3‘ O‘  ‘

‘  ‘ 
‘ -!$‘ 
‘ % 
 ‘   ‘  ‘ +
  (Stämpfli, Bern
2005) 383.

O‘ ö136 
‘ ‘!‘‘  (n 116) paras 39²42.

O‘ ö137 
 
"‘‘& (n 131) paras 20²1.

O‘ ö138 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.·  
‘ ‘


‘ ‘ #
‘ ' &‘ ‘  , ICSID und the NAFTA, Award on the
Merits (24 May 2007), Separate Opinion of Arbitrator Cass, para 60.

O‘ ö139 # 
‘  
‘  ‘ 

‘  ‘ !
‘ ‘ O

‘ ' 

‘
#
‘ ' &‘ ‘ 
", ICSID Case No. ARB(AF)/04/05, Award (21
November 2007) para 205.
 [a

O‘ ö140 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  , 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),!
‘—
‘
#
‘‘ 
 3‘!( ‘(‘ ‘
‘4 (CEPR, London 2009) 59²
62, 65 <http://www.voxeu.org/index.php?q=node/3728> accessed 4
September 2009.

O‘ ö141 For example, $
 (n 129) para 177: ¶In the present
dispute the fact is that OEPC has received treatment less favorable than
that accorded to national companies. The Tribunal is convinced that this
has not been done with the intent of discriminating against foreign²
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.·

O‘ ö142 

‘ #‘ ‘ # 
  (n 130) para 321. Similarly, the

NAFTA Tribunal in!  
 ‘ ‘ 
" (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.·

O‘ ö143 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.

O‘ ö144 
‘ ‘! (n 116) para 78.

 [D

O‘ ö145 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·).

O‘ ö146 #'‘‘
", NAFTA under UNCITRAL, Award (15 November

2004) para 114.

O‘ ö147 (‘‘+
 Լ
 (n 5).

O‘ ö148 Ibid para 327ff.

O‘ ö149 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.

O‘ ö150 See also Separate Opinion Wälde in ' 
 ‘ !  
 ‘

 ‘  &‘ ‘ 
", NAFTA under UNCITRAL, Award (26 January
2006) para 103.

O‘ ö151 See for example 

‘#‘‘# 
  (n 130) paras 318²21

(drawing on NAFTA national treatment jurisprudence in interpreting the
treaty prohibition of ¶arbitrary or discriminatory measures·).

O‘ ö152 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 in%O'& See %O' (n 121).

O‘ ö153 
‘  &‘ ‘ 
", 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), $" ‘ 2 (‘ ‘ ' 
 ‘ ' 

‘ O(Oxford
University Press, Oxford 2008) 617²36. 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.
 [[

O‘ ö154 
‘ &‘‘
" (n 153) para 99.

O‘ ö155 !
 ‘


‘!%%‘&#&‘‘
", 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.·

O‘ ö156 Public Law 110²343, 12 USC 5202, s 3: ¶Financial

institution³The term ´financial institutionµ 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 of Columbia, [«] and having
significant operations in the United States, but excluding any central
bank of, or institution owned by, a foreign government.·

O‘ ö157 SS 15 and 16 of the Financial Market Stabilization Act.

O‘ ö158 12 USC 5229, s 119.

O‘ ö159 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
 [r

stability of a Party·s financial system.· Almost identical also Art 12.10 of

the Chilean-US FTA (n 100).

O‘ ö160 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.

O‘ ö161 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 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).

O‘ ö162 See 2004 U.S Model BIT, Art 13

<http://www.ustr.gov/Trade_Sectors/Investment/Model_BIT/Section_In
dex.html> accessed 21 November 2009.

O‘ ö163 See eg Art XI of 1991 U.S-Argentine BIT.

O‘ ö164 For extended analysis on this point, see Kurtz (n 5).

O‘ ö165  
‘ 

‘ 
‘ ‘ # 
 , ICSID Case No.
ARB/03/9 (5 September 2008) paras 78²9.

O‘ ö166 Ibid 87²8.

O‘ ö167 For a contract theory approach to international trade law, see

Simon Schropp,! 
‘ 
‘ —
"
‘  ‘ %  

‘  ‘ 
‘ -!$&‘ #‘
O‘  ‘ % ‘ # 
(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.

«««««««««««««««««««««««««««««..

& ,

&'!!%
-

&
.

‘  (
i

1.‘ i 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.

î


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 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.


 
 

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.

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).

 &/* (*
 '))

 î 0' î  *î
* 
* î
 î1
'

 ',()*

 

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 ¶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
 [X

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 
‘
.
discriminatory. However, even if a scheme is not
‘ .
discriminatory,
10

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

 &/* (*
 '))
  
2* î 0 & '*
 ('
 *
î''*''*  *
2*&î
'î 
'î *3*'

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
 r

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  
 (‘


, 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 #
"‘‘
‘#!‘ ‘# 
‘''‘%"
 18 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, the#!‘
#
"‘ ‘—  ‘

19 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-specific

‘ ‘ 
‘ 
 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  
  ‘  ‘ 
‘  ‘ —  ‘ 

.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
 rc

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 %1)  ‘ ''' has stated that there is no ‘    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
"
 services supplied in the exercise of governmental
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).
 ra

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.

/ 1&î
 '  
2* &î
'
 î *''
î *4 '

/*
&/* (*
'))


î 
!



!
&î

'

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 [ « ] 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
 rD

successful challenge of government support to banks particularly difficult.

However, that does not mean that it is entirely unimaginable.

 


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·.

c ! "   

#$


""   
 % 


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.

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.

#$


"" &  '"
 % 


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
 r[

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.

#$    "



     

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 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.
 rr

#$ !  "  
   (
    
    
! % 


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 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 ‘ 
‘

" ‘ the provisions in Part III of the GATS.51 Therefore, official funding
and refinancing facilities that are  in the normal course of ordinary business
(excluded from the scope of Section C(1) of the Understanding) would  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
 r 

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  ¶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
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·
 r*

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.

a &

"%
   '"& )'"  *)



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 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 o(

 in services trade.58

The Panel in  1# indicated with regard to ¶likeness· of service

providers that ¶to the extent that service suppliers concerned supply the same
services, they should be considered ´likeµ ·.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
 r

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·.

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 %1#
 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.
 rX

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· testµ 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 
  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 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.

#$

"%
   

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, 
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, 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 .

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 
‘ .
distinction between
  c

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 
‘  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 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 
‘  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 
‘ .
discriminates between foreign-owned and domestic banks violates
Article XVII, it is much more difficult to establish that a scheme is 
‘
 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.

#$&+  *'

 

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
  a

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
¶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
  D

Even if it is unlikely that a  
¶tailor-made· support measure will be found

to violate Article XVII, it is still possible that 

 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-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.

D ,
- %    
 

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   

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 does  cover a situation where,  ‘ 
‘   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 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 
‘

‘ ‘
‘ ‘ 
‘‘

‘ ‘ ‘‘ ‘ ‘
 ‘‘‘

‘ 

(a specific, ¶tailor-made· rescue measure for a
particular domestic bank) does not fall within the scope of Article VI(1).
However, the  ‘  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
  r

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

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  
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,  ‘‘

‘
‘ 
 
‘
 ‘
‘‘
‘  ‘

 [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.

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 


measures to ensure financial integrity and stability (eg capital
requirements, ¶fit and proper· tests of bank managers etc) or
also  

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 .

pursued 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 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  ‘   
‘ 
  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)  
that 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 of this general principle, the
application widely known as the doctrine of ‘
‘ , 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 


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  ‘
   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
  X

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 ¶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, 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

O‘ ö1 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.

O‘ ö2 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, - ‘ ! 
‘ º
 ‘
5667&‘! 
‘
‘
‘ ‘  

‘

(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, º
 ‘ ‘56‘
! 
‘  ‘ ' 

‘ 

 (14 September 2009),
<http://www.wto.org/english/news_e/news09_e/trdev_dg_report_14sep
09_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.
 *c

O‘ ö3 Article 19(1) of the Dispute Settlement Understanding indicates

that a panel or the Appellate Body can only recommend a losing Member
to ¶bring the measure into conformity· with the applicable WTO
agreement. It should be noted that, nonetheless, the Implementation
Panel in # 1#
‘O

‘''‘8# 
‘59&:1; 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, # 1
‘
 
‘ ‘  
‘  ‘ %" 
‘ ‘ #
‘ O

‘ º
 
‘ ‘
# 
‘59&:‘‘
‘‘
‘
‘ 
‘
, 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 547²8 and 551²61 and P
Grane, ¶Remedies under WTO Law· (2001) 4 JIEL 755 at 767²9.) The
Panel in  1#  ‘ 
‘  ‘   

 stated (referring
to # 1#
‘ O

‘ ''‘ 8# 
‘ 59&:1;): ¶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,  1%" ‘ 
‘  ‘
O ‘  

‘ ‘º
 ‘#  , WT/DS222/R and Corr.1, adopted
19 February 2002, para 7.170.) Finally, it is interesting to note that the
Panel in ‘<‘ ‘8# 
‘59&:;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
guarantees. This point was not
appealed before the Appellate Body. (See WTO Panel Report, 
‘

1
‘ ‘ ‘ ‘º
 
‘‘# 
‘59&:‘‘
‘‘
‘
) +, WT/DS267/RW and Corr.1, adopted 20 June 2009, as modified
by Appellate Body Report, WT/DS267/AB/RW, para 14.38.)
 *a

O‘ ö4 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.

O‘ ö5 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 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.

O‘ ö6 The support measures of specific States are described in the

reports mentioned above in n 2.

O‘ ö7 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 4²5 and OECD, 
 ‘ ‘—  ‘
 (
3‘

‘—   (OECD, Paris 2009) at 7.

O‘ ö8 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,  
‘ ‘ ) ( ‘ O (OUP, Oxford 1997) at 72;
M Dewatripont and J Tirole, !
‘  
‘ º
 ‘ ‘ ) ( (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, ‘ 
 
‘ ‘ —  ‘


 (OUP, Oxford 2006) at 23²6.)

O‘ ö9 WTO, OECD and UNCTAD, º
 ‘ ‘56‘! 
‘ ‘' 

‘


, above n 2, at 15.

O‘ ö10 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
 *D

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 branchµ 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 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.)

O‘ ö11 WTO, OECD and UNCTAD, º
 ‘ ‘56‘! 
‘ ‘' 

‘


, above n 2, at 17.

O‘ ö12 Ibid 16.

O‘ ö13 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 [&
&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,  
‘ 
1 
 ‘ 
‘ ' 
 ‘  ‘ 
‘
º ‘ #
‘ 

‘ 
  ‘ 8º#;‘  ‘ 
 (¶1
 
 ‘
‘' 
 ‘ ‘º#·), WT/DS296/AB/R, adopted
20 July 2005, para 116.

O‘ ö14 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 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.)

O‘ ö15 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).)

O‘ ö16 Agreement Establishing the World Trade Organization, done in

Marrakesh on 15 April 1994, UNTS no. 31874, published in WTO, !
‘
O
‘ !
"&‘ !
‘ º
‘ ‘ 
‘  
‘ º ‘ ‘ 
‘ ! 
‘
£
  (CUP, Cambridge 2007) 4.

O‘ ö17 See WTO, !
‘O
‘!
", above n 16, at 284.

O‘ ö18 Ibid 308.

O‘ ö19 Ibid 311.

 *r

O‘ ö20 Ibid 418.

O‘ ö21 SJ Key, ¶Financial Services· in P Macrory, A Appleton and M

Plummer (eds), !
‘ - ‘ ! 
‘ $  + &‘ O
‘ % ‘  ‘
‘# 
, vol 1 (Springer, New York 2005), 955²88, at 985.

O‘ ö22 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.

O‘ ö23 Article XXIX GATS.

O‘ ö24 Article I(1) GATS.

O‘ ö25 Article I(3)(a) GATS.

O‘ ö26 Appellate Body Report, % 
 ‘  
1º

‘  ‘ 
‘

'  ‘ 
‘  ‘   ‘ ‘ )   (¶%1)  ‘ '''·),
WT/DS27/AB/R, adopted 25 September 1997, para 220.

O‘ ö27 Services supplied in the exercise of governmental authority are

services which are supplied

on a commercial basis  in
competition with one or more service suppliers (Article I(3)(b) and (c)
GATS).

O‘ ö28 Para 5(a) GATS Annex on Financial Services.

O‘ ö29 Para 1(d) GATS Annex on Financial Services.

O‘ ö30 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.)

O‘ ö31 WTO, !
‘O
‘!
", above n 16, at 231.

O‘ ö32 More specifically: export subsidies and local content subsidies.

(See Article 3 SCM Agreement.)

O‘ ö33 Article 5 SCM Agreement.

O‘ ö34 Article XV(1) GATS.

O‘ ö35 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), #!‘  ‘ 
‘ º
 ‘ ‘
 * 

' 
 ‘ ! 
‘  ‘ 

 (CUP, Cambridge 2008) 466²88 and P

Sauvé, ¶Completing the GATS Framework: Safeguards, Subsidies and
Government Procurement·, in B Hoekman and A Mattoo
(eds) 


‘ ! 
‘  ‘ 
‘ -!$&‘ #‘ 2 ( (World Bank,
Washington, DC 2002) 326²35.

O‘ ö36 Article XV(2) GATS.

O‘ ö37 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 situation would occur, the
¶discrimination analysis· explained for National Treatment (see Section
IVB2) will need to be applied ‘   for analyzing
discrimination between banks from different trading partners.

O‘ ö38 See WTO, O
‘!
", above n 16, at 423.

O‘ ö39 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).  Article 2 SCM Agreement.)

O‘ ö40 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 [«]·.

O‘ ö41 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 individual Schedules of those two
countries need to be consulted (in combination with the EC Schedule).

O‘ ö42 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   or   the
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
" 
 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.)

O‘ ö43 Article I(2)(a) GATS.

O‘ ö44 Article I(2)(b) GATS.

O‘ ö45 Article I(2)(c) GATS.

O‘ ö46 Article XXVIII(d) GATS.

 *

O‘ ö47 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.

O‘ ö48 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 1  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:  
‘ 
1


‘ #
 ‘ 
‘  ) 
‘ 
‘ ‘  ‘  ‘ )
 ‘


, WT/DS285/AB/R (7 April 2005) (1 ) at para 195.)

O‘ ö49 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 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.µ

O‘ ö50 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), -!$‘ <‘ ! 
‘  ‘ 

(Martinus Nijhoff
Publishers, Leiden 2008) 647²66 at 662²3.

O‘ ö51 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.)

O‘ ö52 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 
‘  ‘ 
‘  ‘  
‘ ‘   
‘ 
,
such WTO Member may be quite surprised to find that crisis funding is
nevertheless covered by the National Treatment obligation in Article XVII
GATS.

O‘ ö53 The crucial issue is then of course to define the exact meaning
of ¶official funding and refinancing facilities·. A facility should be
 *X

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 a

‘  

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·.

O‘ ö54 The Understanding emerged from the difficult negotiations in

the Uruguay Round with regard to financial services. Issues relating to
specific 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 65²71.)

O‘ ö55 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.), % 

‘‘
O‘  ‘ % &‘ *
‘ '''&‘ !
‘ º
 ‘ ‘    (Edward
Elgar, Cheltenham 2000), 950²86 at 961. See also R Lastra, ¶Lender of
Last Resort, An International Perspective· 48 (1999) ICLQ 340 at 347²50.)
 

O‘ ö56 J Barth, G Caprio and R Levine, º
  ( ‘ ) (‘ º
 &‘

!‘# 
‘
(CUP, Cambridge 2006) 57.

O‘ ö57 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.·

O‘ ö58 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), #‘  
 ‘ ‘ -!$‘
O (Cameron, London 2000) 15²56; WM Choi, oO(
‘  ‘  ‘
' 
 ‘ ! 
‘ O3‘ ! ‘ ‘  
‘ #!!=-!$‘
>  

(OUP, Oxford 2003) xxi+265pp; L Ehring, ¶
‘
— Discrimination in World Trade Law. National and Most-Favoured-
Nation Treatment ² or Equal Treatment?· (2002) 36 JWT 921; R Howse
and E Türk, ¶The WTO Impact on Internal Regulations ² A Case Study of
the Canada-EC Asbestos Dispute·, in J Scott and G De Búrca (eds), !
‘
%‘  ‘ 
‘ -!$3‘ O
‘  ‘   ‘ '
 (Hart, Oxford 2001)
283²328; R Hudec, ¶GATT/WTO Constraints on National Regulation:
Requiem for an ´Aim and Effectsµ 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, £ ‘ !

‘  ‘ -!$‘ 
‘ 


&‘ #. ‘

‘ )  
‘ ‘ º

‘ # 
(Hart, Oxford 2002) at 19²49.)
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
 c

(eds), #!‘  ‘ 
‘ º
 ‘ ‘ ' 
 ‘ ! 
‘  ‘ 

 (CUP,

Cambridge 2008) 327²57; A Mattoo, ¶National Treatment in the GATS ²
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), #!‘  ‘ 
‘ º
 ‘ ‘ ' 
 ‘ ! 
‘  ‘


 (CUP, Cambridge 2008) 327²57.)

O‘ ö59 WTO Panel Report,  1
 ‘ 

‘ #
 ‘ 
‘

#
‘ ' 
( 1#), 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.

O‘ ö60 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.

O‘ ö61 See GATT Panel Report:  
‘ 
1

‘ #
 ‘

# ‘  ‘ ‘ )


, DS23/R (19 June 1992), BISD 39S/206,
paras 5.73²5.74 and GATT Panel Report: 
‘ 
‘ <‘ !"
‘  ‘
#
, DS31/R (29 September 1994, unadopted), paras 5.9²5.10.

O‘ ö62 See WTO Appellate Body Report, > 1!"
‘  ‘ # ‘
)


 (> 1# ‘ )


‘ ''), WT/DS8, 10 and 11/AB/R,
adopted 1 November 1996, 18²19. Also with regard to trade in services,
the Appellate Body saw ¶no specific authority either in Article II or in
Article XVII 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, %1
)  ‘ ''', 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.

O‘ ö63 See WTO Appellate Body Report, % 
 ‘  
1



‘ #
 ‘ #
‘  ‘ #
   ‘  ‘ 8o%1
#
;, WT/DS135/AB/R, adopted 5 April 2001, paras 114²7.

O‘ ö64 It should be noted that there was a concurring opinion in %1

#
, in which one Appellate Body member noted that it agreed with
the ¶likeness· conclusion but did not agree with the fundamentally
 a

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.µ See
Appellate Body Report, %1#
, above n 63, paras 149²54.

O‘ ö65 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 
are guaranteed. The question is rather
whether competitive   
 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, > 1# ‘)


‘'', above n 62, 15.)

O‘ ö66 WTO Appellate Body Report,  
1!"
‘  ‘ # ‘

)


 (¶ 
1# ‘ )


), WT/DS87 and 110/AB/R,
adopted 12 January 2000, para 71.

O‘ ö67 The Appellate Body in %1#
 has noted: ¶The term ´less
favourable treatmentµ expresses the general principle, in Article III:1
[GATT], that internal regulations ´should not be applied « so as to afford
protection to domestic productionµ.· (See Appellate Body Report, %1
#
, 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 %1)  ‘'''.
(See Appellate Body Report, %1)  ‘ ''', 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).

O‘ ö68 See also Appellate Body Report, > 1!"
‘  ‘ # ‘
)


‘ '', above n 62, 29 and Appellate Body Report, 
1


‘ #
 ‘ ' ‘ ‘ —
 ‘  
‘  ‘ — +
‘ )

,
 D

WT/DS161/AB/R, WT/DS169/AB/R, adopted 10 January 2001, para

150.

O‘ ö69 See Appellate Body in WTO Appellate Body Report,  1


 ‘ 

‘  
 ‘ 
 (¶ 1
·),
WT/DS31/AB/R, adopted 30 July 1997, 30 and WTO Panel
Report, 
"1!"‘ 

‘  ‘ ‘   (‘  ‘ $
‘
)


 (¶
"1!"
‘  ‘ ‘   (·), WT/DS308/R, adopted 24
March 2006, as modified by Appellate Body Report, WT/DS308/AB/R,
para 8.91.

O‘ ö70 In   ‘ º
1

, 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,   ‘ º
1

‘ #
 ‘ 
‘ '  ‘  ‘
' 
‘ 
‘ ‘ 

 (¶  ‘ º
1' ‘  ‘ 
‘ ‘


·), WT/DS302/AB/R, adopted 19 May 2005, para 96. See also
WTO Panel Report, % 
 ‘  
1

‘ #
 ‘ 
‘
# ‘ ‘ (
 ‘‘)
 ‘  (¶%1# ‘ ‘ (
 ‘
‘)
 ‘ ·), 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 biotech products and novel non-
biotech products in terms of the required care in their safety assessment,
risk for the consumer, etc.·

O‘ ö71 See Appellate Body Report, %1#
, 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   of services or service suppliers is asymmetric to the impact on
another group, there would be a violation. (Ehring (n 58) 924²5.)

O‘ ö72 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  1—'º# 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,  1#   ‘ ‘ 
‘ —
 ‘
' 

‘ º

‘ # ( 1—'º#), 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 1526²32.)

O‘ ö73 See Appellate Body Report, %1#
, above n 63, para

117.

O‘ ö74 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 and if such individual case would arise,
a violation may only be found if there is clear trade protectionism at
stake.

O‘ ö75 The Appellate Body in 10
 ‘ 8%; 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,  
‘
1OԼ
 ‘ ‘

 
‘  ‘  ‘  ‘   ‘ 8o0
 ; (¶10
 ‘
8%;), WT/DS294/AB/R, adopted 9 May 2006, para 193.) According to
 r

the Appellate Body in 10
 ‘ 8%; 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, 10
 ‘8%;, 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.

O‘ ö76 Since Article VI(1) refers to the administration of 

‘ ‘


‘  , it does not apply to the previously mentioned
situation of an individual support scheme that is tailor-made for a
specific bank.

O‘ ö77 WTO Panel Report,  
‘ 
1#  ‘  ‘

 
 ‘ 

‘  ‘ 

‘ 
‘  ‘ '  (¶1

‘ 
),
WT/DS206/R and Corr.1, adopted 29 July 2002, para 7.22; repeated in
WTO Panel Report,  
‘ 
1 
‘ º

‘ ‘ #  ‘ 
‘
 ‘   º
 ‘   ‘ 

‘ —‘  ‘  ‘ > (¶1
  º
 ‘ 

‘  
‘ º

), WT/DS244/R, adopted 9
January 2004, as modified by Appellate Body Report, WT/DS244/AB/R,
para 7.131.

O‘ ö78 In 1  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,  
‘ 
1

‘ #
 ‘ 
‘  ) 
‘

‘‘ ‘ ‘)
 ‘

 (¶‘<‘ ), WT/DS285/R,
adopted 20 April 2005, as modified by Appellate Body Report,
WT/DS285/AB/R, paras 6.191²6.192.) In ) +1!

 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, ) +1

‘ #
 ‘ ' ‘ ‘ º


‘
!

 (¶) +1º


‘ !

), WT/DS332/R, adopted 17 December
2007, as modified by Appellate Body Report, WT/DS332/AB/R, para
7.107.)

O‘ ö79 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.

O‘ ö80 Article VI(1) GATS was invoked by Antigua in the 1

  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, 1 , above n
78, paras 6.434 and 6.437.)

O‘ ö81 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.· ' 
 ‘! 
‘ ‘

‘
 ‘ 
‘ º
 (OUP, Oxford 2007) 96²103 and P Delimatsis,
¶Due Process and ¶Good· Regulation Embedded in the GATS ² Disciplining
Regulatory Behaviour in Services through Article VI of the GATS· (2007)
10 JIEL 13 at 19²28. Delimatsis refers to the %1)  ‘ ''' 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, %1)  ‘''',
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 ¶  , impartial and reasonable· [emphasis added]
administration, Article VI(1) requires administration to be
¶reasonable, .

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), -!$‘
<‘! 
‘ ‘

 (Martinus Nijhoff Publishers, Leiden 2008) 165²96 at
171²2.)

O‘ ö82 WTO Panel Report, % 
 ‘  
1


‘ ‘


 (¶%1


‘ ‘ 
), WT/DS315/R, adopted 11
December 2006, as modified by Appellate Body Report,
WT/DS315/AB/R, para 7.108.

O‘ ö83 WTO Panel Report,  
‘ 
1#  ‘ 

‘  ‘


 ‘ 2º
‘ 

‘  ‘  ‘ > (¶12º
‘ 

·),
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.

O‘ ö84 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 applicationµ im Zusammenhand mit
dem Tatsbestandsmerkmal ´administeredµ zu lesen.' (See T Sunde,
¶Möglichkeiten und Grenzen innerstaatlicher Regulierung nach Art. VI
GATS·, in C Tietje, G Kraft and R Sethe (eds) )
 ?
‘ +‘
!    
‘ -  
  (Halle-Wittenberg, Martin-Luther-
Universität, Juli 2006) Part 59, at 13²4.) 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.

O‘ ö85 Note that 

 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.

O‘ ö86 Compare: WTO Panel Report, # 
 1

‘#
 ‘
‘

%" ‘ ‘ )
‘ 2
‘  ‘ ' ‘ ‘ — 
‘ O

(¶# 
 12
‘
 ‘O

·), WT/DS155/R and Corr.1, adopted 16 February 2001, para
11.94.

O‘ ö87 The Appellate Body in 1  º
 ‘ 

‘  
‘

º

 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,  
‘ 
1 
‘ º

‘ ‘ #  ‘

‘ ‘  º
 ‘  ‘

‘—‘ ‘ ‘> (¶1
  º
 ‘ 

‘  
‘ º

·), WT/DS244/AB/R, adopted 9
January 2004, para 217.

O‘ ö88 Para 2(a) GATS Annex on Financial Services.

 

O‘ ö89 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 902²3;
Key (n 21) 964²6; E Leroux, ¶Trade in Financial Services under the World
Trade Organization· (2002) 36 JWT 413 at 430²1; L Panourgias, ) ( ‘
º
 ‘  ‘ - ‘ ! 
‘ O (Hart, Oxford 2006) at 11²5; Von
Bogdandy and Windsor (n 50) 634²6; W Wang, ¶The Prudential Carve-
Out·, in K Alexander and M Andenas (eds), !
‘- ‘! 
‘$  + ‘
 ‘ ! 
‘  ‘ 

(Martinus Nijhoff, Leiden 2008) 601²14 and M
Yokoi-Arai, ¶GATS· Prudential Carve Out in Financial Services and Its
Relation with Prudential Regulation· (2008) 57 ICLQ 613.

O‘ ö90 See Working Group on Financial Services Including Insurance,

Note on the Meeting of 11²13 June 1990, MTN.GNS/FIN/1, 5 July 1990,
paras 48²95. 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 13²15 September 1990, MTN.GNS/FIN/3, 16 October 1990,
paras 12 and 15.)

O‘ ö91 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 21²34.) 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 3²6
December 2001, S/CSS/M/13, 26 February 2002, at para 267.)

O‘ ö92 See above, text accompanying n 7.

O‘ ö93 See for instance G Benston, º
 ‘ —  ‘  (
3‘ #‘

 @
‘ ‘
‘  (Institute of Economic Affairs, London 1998)
45. See also F Mishkin, ¶Prudential Supervision: Why is it Important and
 X

What Are the Issues?·, in F Mishkin (ed),  
‘ 
 3‘ - ‘
- (‘ ‘- ‘
 A, (University of Chicago Press, Chicago 2001) 1²
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 8²9.) See also T.
Padoa-Schioppa, º
 ‘ —  
&‘ )  ‘ —

‘  ‘ º( (OUP,
Oxford 2004) at 99²102.

O‘ ö94 Article 3.2 of the Dispute Settlement Understanding (Annex 2

to the Agreement establishing the WTO. See WTO, !
‘O
‘!
", 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,  
‘ 
1  ‘  ‘ º
 
‘  ‘
 
 ‘ 
(¶1
), WT/DS2/AB/R, adopted 20 May
1996, 15 and, with regard to services, Appellate Body Report, 1
 , 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·.

O‘ ö95 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.

O‘ ö96 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 normally exempted from
 X

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.

O‘ ö97 See Article XX GATT and Article XIV GATS.

O‘ ö98 See Appellate Body Report, 1 , 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, 1

, above n 94, at 22.

O‘ ö99 See WTO Appellate Body Report,  
‘ 
1' ‘

   ‘ ‘ 
 ‘  ‘  ‘  ‘   (¶1 ),
WT/DS58/AB/R, adopted 6 November 1998, para 158. See also Leroux
(n 89) 431.

O‘ ö100 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
"

 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 12²13 July 1990,
 Xc

MTN.GNS/FIN/2, 10 August 1990, at para 18.) The focus was thus

rather on compliance with the GATS obligations in the
"

of the
right to adopt prudential measures rather than on compliance in the
measures 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.

O‘ ö101 See J Trachtman, ¶Transatlantic Regulatory Cooperation from

a Trade Perspective: A Case Study in Accounting Standards·, in G
Bermann (ed), !   ‘ º

‘ 
 3‘ O
‘  
‘  ‘
‘  
 (OUP, Oxford 2000) 223²42 at 237. See also Von
Bogdandy and Windsor (n 50) 635²6, who state that the carve-out cannot
permit ¶measures that are purely or primarily protectionist  ‘

·.

O‘ ö102 Note that there is therefore a difference with a test that

examines whether the discriminatory measure is


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.

O‘ ö103 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·.