The Good and the Bad News for Local Governments
by Ellen Gould

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

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

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

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

1. The revelation through leaked documents that Europe is asking for unrestricted access to the Canadian water supply “market”.
2. The placement of “zoning and hours of operation” on a list of regulations that will have to be limited to only what is “necessary”.

Councillors and Canadians generally may find the following report of developments in the GATS negotiations alarming. However, it is not a question of debate or interpretation - readers can verify what is stated below by looking up the sources listed and reading the words in context in the original WTO documents. Where the WTO has not made key documents public, they are posted on this site in order to promote democratic transparency.

Are Municipal Services Covered by the GATS?

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

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

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

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

New Threats to Local Government Services

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

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

• services provided by municipalities are exempt as “services supplied in the exercise of governmental authority” if they are neither supplied on a commercial basis nor in competition with other service suppliers.
• services contracted out by municipalities are exempt as government procurement.

Although the federal responses may seem to provide local governments with categoric guarantees, they cannot for the simple reason that all the terms involved in these exemptions remain undefined. Trade officials, if asked, will be unable to point to any passage in an official WTO document where negotiators have given clear direction to dispute panels the interpretation of these terms.

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

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

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

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

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

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

Imposing WTO-Defined Regulatory “Reform”

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

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

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

Likelihood of a WTO Challenge to Local Government Regulation

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

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

Impacts of Necessity Tests on Local Government Decision-Making

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

1. Have an objective that a trade dispute panel would accept as “legitimate”.
2. Choose the least burdensome or the least trade restrictive means of achieving their objective that is “reasonably available” to them.
   This could mean that rather than curtailing new retail development, municipalities might be restricted to assisting small shops by improving shopping area features, like park benches or landscaped medians. Rather than being able to require fixed amounts of green space, they might be obligated to accept alternatives like payment from developers towards recreational facilities. Rather than ruling out high-traffic generating land uses, they might have to allow development if noise abatement measures were taken. Rather than requiring high density development for efficient transit, they might have to consider transit options designed to serve low density development.
3. Ensure the measures taken and the objectives they are supposed to meet are an appropriate fit.

If a dispute panel considered measures were not an inefficient way of meeting the objective, they would not pass the necessity test.

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

• whether measures were not the least trade restrictive option
• whether other less burdensome options were “reasonably available”, and
• whether more effective measures could have been taken to meet the objective.

A municipality being challenged would have no right to present to the panel its reasons for passing a particular regulation nor could it comment on the practicality of “less burdensome” options.

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

Regulatory Objectives Are At Risk

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

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

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

The Preamble Does Not Guarantee the Right To Regulate

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

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

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

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

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

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

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

Other Threats to Regulatory Authority

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

• to allow foreign interests the right of prior comment on regulations and to have their comments given due consideration
• to state clearly the underlying objectives for their regulations, and then
• to justify why regulation was the best way to proceed.

This goes far beyond the traditional understanding of transparency as just making sure regulations and procedures are made public. It would significantly add to the administrative burden on governments, but also impinge on their regulatory authority as well. It would create rights of prior consultation normally reserved for citizens. The increased transparency obligations being talked about at the GATS negotiations go far beyond what Canadian local governments currently do.

Conclusion

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

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

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

Footnotes

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

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

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

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

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

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

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

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

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

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

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

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

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