NAFTA's Approach to Public Services

Abstract

Public services are treated differently in the North American Free Trade Agreement (NAFTA) compared to the WTO General Agreement on Trade in Services (GATS) and European Union (EU) trade treaties. The approach in NAFTA, which is followed in many bilateral and regional agreements worldwide, has three main distinctive characteristics: 1. NAFTA is a negative list agreement – meaning that all of the obligations in the treaty, including those related to services and investment, apply to all state actions except to the extent specifically carved out through reservations or exceptions. GATS and EU trade treaties to date are positive list agreements in which many obligations only apply to sectors listed by each party. 2. NAFTA contains no general exception from all treaty obligations for public services. There is no exception for services delivered in the exercise of governmental authority as is found in the GATS and many EU trade treaties, nor is there any unifying concept of public services in the treaty. Instead, there are a variety of limited exceptions and country-specific reservations that exclude the application of certain treaty obligations to some identified kinds public services and to specific measures that may be related to public services, like subsidies. 3. NAFTA contains comprehensive obligations relating to investment, which are not found in the GATS or EU trade treaties. These obligations are similar to those found in the bilateral investment treaties of EU member states.

Because it relies on reservations for lists of services instead of a general exception that excludes all services that have the character of public services, NAFTA’s protection of state regulatory freedom in relation to public services is arguably more certain but over-inclusive for public services that are named in reservations and under-inclusive for public services that are not specifically named. Some public service activities, like waste removal, are not the subject of any special rules. All NAFTA’s investment and services obligations apply to these services. Others, like postal services, are subject to reservations from some obligations but some of these apply to only one country. Some NAFTA obligations, notably the Parties’ obligations not to expropriate investments without compensation and to provide fair and equitable treatment to investments, apply to all public services. No reservations are permitted.

The broad scope of NAFTA’s investment obligations and their ability to constrain the public service policy choices of NAFTA countries render their application to public services a particular concern. NAFTA has not be updated to adopt some of the limitations on investment obligations that that Canada and the US now routinely incorporate in their treaties, such as a specification of when an indirect expropriation occurs and, in Canada’s case, the application of GATT Article XX-like exceptions to investment obligations.

Keywords: cross-border trade, international trade, North American Free Trade Agreement (NAFTA), General Agreement on Trade in Services (GATS)