The WTO Outlaws the Privileges of the Chinese Payment Services Giant
On August 31, 2012, in the absence of an appeal, the WTOâs Dispute Settlement Body adopted the Panel Report in ChinaâElectronic Payment Services. In a long-awaited decision, the Panel upheld certain claims brought by the United States under the General Agreement on Trade in Services (âGATSâ) against a series of Chinese measures imposed on suppliers of electronic payment services (âEPSâ).
Benefiting from these measures, the Chinese EPS supplier, China UnionPay Co., Ltd (âCUPâ), has built a unique position in the Chinese EPS market, recently becoming the third biggest EPS network globally, along with Visa and MasterCard, and supplanting American Express. With EPS transactions processed in China accounting for over $1 trillion, restoring fair competition in the Chinese payment market (and access to more than one billion customers) was of particular importance for the major American EPS suppliers. China, on the other hand, argued emphatically that its measures aim to establish the first national inter-bank network for Renminbi (âRMBâ) payment card transactions, relying on uniform technical and commercial standards.
The United States may claim overall victory, as the Panel found that certain Chinese measures violated its GATS obligations by restricting foreign EPS suppliers from providing domestic RMB payment card transactions in China under conditions similar to CUP. The Panel examined a series of Chinese measures requiring that: 1) payment cards issued in China bear the CUP logo and issuers comply with technical standards imposed by CUP (issuer requirements); 2) all ATMs, merchant card processing equipment, and POS terminals in China accept CUP cards (terminal equipment requirements); 3) acquiring institutions post the CUP logo, become members of the CUP network, and accept all payment cards with the CUP logo (acquirer requirements); and 4) CUP alone be responsible for the clearing of certain RMB bank card transactions in China, Macao, and Hong Kong (Hong Kong/Macao requirements). The Panel agreed with the United States that these requirements accord more favorable treatment to CUP, violating Chinaâs national treatment obligations. The Panel found that China did not violate its market access obligations, as China undertook no market access commitments in its Schedule of Specific Commitments (âUnboundâ in GATS parlance), with one exception: Whereas China had promised to provide full market access for EPS suppliers established in the Chinese market, the Hong Kong/Macao requirements gave CUP monopoly power to conduct the relevant transactions.
Despite being one of the three main pillars of the WTO system, case law under GATS remains scarce. This decision is therefore a welcome development in an underdeveloped area of WTO case law, demonstrating the âbiteâ of GATS in opening services markets globally. Crucially, this is also the first case to interpret provisions of the Financial Services Annex (âFSAâ).
The Significance of GATS Schedules of Specific Commitments
Compared to the other WTO Agreements, GATS is a flexible contract whereby the main liberalizing provisionsâthat is, the obligation to accord national treatment under GATS Article XVII and the elimination of limitations on market access under GATS Article XVIâapply only if a Member decides to open a given sector (e.g., financial services) or subsector (e.g., payment services) by inscribing a commitment in its Schedule. As GATS defines services through the identification of four modes of supply, any limitations to the commitments made are classified per mode of supply. For instance, in Figure 1 below, a Member would be obliged to fully liberalize the provision of legal services through commercial presence of foreign suppliers (with â(3) Noneâ indicating no limitations on market access or national treatment in Mode 3), but it would retain the power to impose any limitations on the cross-border supply of legal services (with â(1) Unboundâ indicating no liberalization on market access or national treatment in mode 1).
Figure 1: A simplified Schedule of Specific Commitments Under GATS
|Sector||Limitations on Market Access||Limitations on National Treatment|
Thus, a Memberâs Schedule determines the applicability of key GATS rules to that Member. When inscribing a sector in its Schedule, a Member typically qualifies the access granted to its domestic market or lists limitations on national treatment. Sometimes, as in this case, interpretation of a Schedule becomes more difficult because of the unique terms used by a Member. Pursuant to GATS Article XX:3, Schedules form an integral part of the GATS; the customary rules of interpretation of the Vienna Convention on the Law of the Treaties therefore apply.
This decision underscores the significance of WTO Members carefully entering concessions in their GATS Schedules. In earlier GATS cases, WTO adjudicators rejected assertions by China and the United States as to the true ambit of their Schedules. In this case, however, China partly succeeded in establishing that the scope of its commitments was narrower than that suggested by the complainant.
Electronic Payment Services: The Panelâs Findings Relating to the Sector and the Measures at Issue
As a threshold issue, the Panel determined that EPS for payment card transactions is an integrated service, despite possible disaggregation. The Panel went on to interpret the scope of subsector 7.B(d) of Chinaâs Schedule, headed âBanking and Other Financial Services.â Following the analytical method used in USâGambling, the Panel found that all services that are essential to the processing and completion of transactions using payment cards are âpayment and money transmission servicesâ within the meaning of Chinaâs Schedule, including EPS.
The Panel agreed with the United States that the four sets of requirements described above create a unique position for CUP in the Chinese EPS market. With respect to the Hong Kong/Macao requirements, the Panel regarded CUP as the monopoly EPS supplier regarding the relevant transactions. However, the Panel dismissed the United Statesâ claim that the measures at issue, alone or in combination, establish CUP as the sole supplier of EPS for all domestic transactions denominated and paid in RMB. In addition, the Panel found no broad prohibitions on the use of non-CUP cards for cross-region or inter-bank transactions. The Panel suggested that additional evidenceâsuch as economic analyses of profitability, price-cost margins, or demand elasticityâor evidence relating to the conduct of CUP could have helped the United States to substantiate its claims.
Market Access and National Treatment Under GATS
Limitations on Market Access to EPS in China
In this case, China clearly inscribed in its Schedule the sub-sector âall payment and money transmission servicesâ as described in the GATS Financial Services Annex. Less clear was the scope of the market access commitment, as China argued that it had inscribed no liberalizing commitments (âUnboundâ) for EPS under the market access column of its commitments for cross-border supply (mode 1) and commercial presence (mode 3). After thorough analysis, the Panel concluded that China made no market access commitments to liberalize cross-border supply of EPS, and thus it could restrict such supply.
Nevertheless, the Panel found that China undertook market access commitments to liberalize commercial presence (mode 3) for âforeign financial institutions.â In Chinaâs view, EPS suppliers fall outside this category of financial service suppliers. Absent any definition of foreign financial institutions in Chinaâs Schedule, GATS, or the FSA, the Panel examined the ordinary meaning and context of the term to conclude that a foreign financial institution is any foreign institution providing financial services classified under subsectors (a) to (f) of Chinaâs Schedule, including foreign EPS suppliers (i.e., non-bank financial institutions). In the Panelâs view, the only reasonable meaning of Chinaâs mode 3 commitment was that all foreign financial institutions established in China, including foreign EPS suppliers, would have unfettered access to engage in local currency business with all Chinese enterprises and natural persons, subject to certain qualifications described in Chinaâs Schedule.
Having established the scope of the market access commitment, the Panel went on to examine whether the four requirements fall within that scope. The Panel found that the first three requirements (the issuer, acquirer, and terminal requirements) do not limit the number of service suppliers within the meaning of GATS Article XVI:2(a)d, under modes 1 and 3. However, the Panel found that the Hong Kong/Macao requirements constitute a limitation on the number of EPS suppliers in violation of Chinaâs mode 3 commitments, as they establish a monopoly on the processing of RMB bank card transactions for the CUP, contrary to GATS Art. XVI:2(a).
Discriminatory Treatment to the Detriment of Foreign EPS Suppliers
Turning to the national treatment claim, the Panel first addressed the scope of Chinaâs commitments under mode 1 (cross-border supply). A systemic issue arises when a Member inscribes (as did China in this case) no liberalizing commitments (âUnboundâ) under the market access column of its Schedule, but promises equal treatment (âNoneâ) under the national treatment column. The Panel referred to GATS Article XX:2, which states:
Measures inconsistent with both Articles XVI [market access] and XVII [national treatment] shall be inscribed in the column relating to Article XVI. In this case the inscription will be considered to provide a condition or qualification to Article XVII as well.
That Panel indicated that the GATS drafters did not intend to create a hierarchy between GATS Articles XVI and XVII; rather, Article XX:2 is a scheduling guideline. Nevertheless, the Panel relied on this provision to find that an âUnboundâ inscription under the market access column can only be interpreted as limiting the scope of a promise of national treatment. Thus, the Panel concluded that, despite inscribing âNoneâ under the national treatment column of its Schedule, Chinaâs âUnboundâ market access entry means China is free to maintain the full range of limitations set out in Article XVI:2 for mode 1, even if they are discriminatory.
Accordingly, the Panel found that the Hong Kong/Macao requirements are consistent with Chinaâs national treatment commitments under mode 1 due to the âUnboundâ inscription under the market access column. However, the Panel suggested that the âUnboundâ inscription does not cover the other three requirements because the Panel had earlier found that they do not come within the ambit of GATS Article XVI:2(a). Therefore, the Panel proceeded to examine whether these three requirements come under the national treatment obligation. The Panel found that they are measures affecting the supply of services pursuant to GATS Article XVII and provide less favorable treatment to like service suppliers of foreign origin. Thus, the Panel agreed with the United States that the issuer, terminal, and acquirer requirements, by establishing a privileged position for CUP within the Chinese EPS market to the exclusion of foreign EPS suppliers, accord less favorable treatment to foreign EPS suppliers in contravention of the Chinese national treatment commitments under modes 1 and 3.
This case follows landmark decisions on the scope of GATS in USâGambling and ChinaâPublications and Audiovisual Products and is expected to further open Chinaâs financial services market, benefiting American EPS suppliers in particular. Nevertheless, China will likely have several months to implement the Panel ruling. The Panel decision offered additional clarifications for the interpretation of Membersâ Schedules of Specific Commitments under GATS. More importantly, as this case was not appealed, the Panel Report represents the only WTO dispute settlement ruling on the overlap in a Schedule of an âUnboundâ commitment (i.e., no liberalization) and a âNoneâ commitment (i.e., full liberalization). The case confirms that the flexibility attributed to Members in drafting GATS Schedules can be a double-edged sword. At present, no clear solution exists to ensure predictability and security in the interpretation of GATS Schedules.
Panagiotis Delimatsis is Associate Professor of Law and Director of the Tilburg Law and Economics Center (TILEC), Tilburg University, the Netherlands.