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NORTH AMERICAN FREE TRADE AGREEMENT ARBITRAL PANEL
ESTABLISHED PURSUANT TO CHAPTER TWENTY



IN THE MATTER OF 
CROSS-BORDER TRUCKING SERVICES
(Secretariat File No. USA-MEX-98-2008-01)

Continuation


B.
Reservations for Existing Measures and Liberalization Commitments - Annex I

    1. Positions of the Parties

  1. In its initial submission, Mexico presented its view that "the Phase-out elements of the U.S. reservations override the reservations themselves.247 In that section, Mexico concluded, "The Phase-Out elements of the U.S. reservations for motor carrier services do not contemplate any other type of exceptions."248 During the Oral Hearing, in responding to a Panelist's question concerning the legal interpretation of Annex I, the Mexican representative stated that AWe have already included reference on interpretation of Annex I. In fact, in light of the introductory note that describes the various components and how the relationship between one and the other should be interpreted, in effect, it states that the phase-out calendar does have a preponderance over the other elements or components."249 In its Post-Hearing Submission, Mexico stated that: "Annex I contains no qualifications of these commitments."250 

  2. During the Oral Hearing, a Panelist said to the representative of the United States, "I'm wondering about what you said, that your interpretation of Annex I doesn't establish an obligation, is what I understood."251 To this remark, the representative of the United States responded, Acorrect,"252 and added, "I think I said there's a legal view. The phase-out didn't, per se, obligate us to do anything. . . . So a phase-out of national treatment just means that you lose your right as of that day not to follow certain obligations."253 

  3. In Canada's Submission, under the heading of "The Obligations of the United States," Canada asserted:

    The United States reservation from certain obligations in Chapters 11 and 12 for non-conforming measures in the land transportation sub-sector, set out in NAFTA Annex I at pages I-U-18 to I-U-20, provides for a phase-out of these non-conforming measures. . . . At the end of the phase-out period, the obligations reserved against apply to the United States, subject only to any reservations that have not yet been phased out or any other applicable exceptions. 254 


    2. The Panel's Analysis
  4. The Panel begins its inquiry by looking at the interpretative Note ("the Note") that precedes the Parties' Schedules at pages I-1, I-2 and I-3 of Annex I. The drafters provided the interpretative Note of Annex I to assist in the reading and understanding of the Reservations contained in Annex I. Specifically, the Note provides rules and otherwise acts as guidance for the Panel in interpreting the Annex I Schedules of Canada, Mexico and the United States, including the reservations and phase-out provisions applicable to cross-border trucking services and investment.

  5. The text of the Note is set out below: 

    1. The Schedule of a Party sets out, pursuant to Articles 1108(1) (Investment), 1206(1) (Cross-Border Trade in Services) and 1409(4) (Financial Services), the reservations taken by that Party with respect to existing measures that do not conform with obligations imposed by:

      1. Article 1102, 1202 or 1405 (National Treatment),

      2. Article 1103, 1203 or 1406 (Most-Favored-Nation Treatment),

      3. Article 1205 (Local Presence),

      4. Article 1106 (Performance Requirements), or 

      5. Article 1107 (Senior Management and Boards of Directors), and, in certain cases, sets out commitments for immediate or future liberalization. 

    2. Each reservation sets out the following elements:

      1. Sector refers to the general sector in which the reservation is taken; 

      2. Sub-Sector refers to the specific sector in which the reservation is taken;

      3. Industry Classification refers, where applicable, to the activity covered by the reservation according to domestic industry classification codes;

      4. Type of Reservation specifies the obligation referred to in paragraph 1 for which a reservation is taken; 

      5. Level of Government indicates the level of government maintaining the measure for which a reservation is taken; 

      6. Measures identify the laws, regulations or other measures, as qualified, where indicated, by the Description element, for which the reservation is taken. A measure cited in the Measures element (i) means the measure as amended, continued or renewed as of the date of entry into force of this Agreement, and (ii) includes any subordinate measure adopted or maintained under the authority of and consistent with the measure; 

      7. Description sets out commitments, if any, for liberalization on the date of entry into force of this Agreement, and the remaining non-conforming aspects of the existing measures for which the reservation is taken; and 

      8. Phase-Out sets out commitments, if any, for liberalization after the date of entry into force of this Agreement.

    3. In the interpretation of a reservation, all elements of the reservation shall be considered. A reservation shall be interpreted in the light of the relevant provisions of the Chapters against which the reservation is taken. To the extent that:

      1. the Phase-Out element provides for the phasing out of non-conforming aspects of measures, the Phase-Out element shall prevail over all other elements;

      2. the Measures element is qualified by a liberalization commitment from the Description element, the Measures element as so qualified shall prevail over all other elements;255  

      3. the Measures element is not so qualified, the Measures element shall prevail over all other elements, unless any discrepancy between the Measures element and the other elements considered in their totality is so substantial and material that it would be unreasonable to conclude that the Measures element should prevail, in which case the other elements shall prevail to the extent of that discrepancy.

    4. Where a Party maintains a measure that requires that a service provider be a citizen, permanent resident or resident of its territory as a condition to the provision of a service in its territory, a reservation for that measure taken with respect to Article 1202, 1203 or 1205 or Article 1404, 1405 or 1406 shall operate as a reservation with respect to Article 1102, 1103 or 1106 to the extent of that measure.

  6. Significantly, the Note indicates that in interpreting liberalization commitments regarding Phase-Out elements in Annex I, the elements of the reservation must be considered in the light of the relevant provisions of the Chapters against which the reservation is taken,256 and that the Phase-Out element of a reservation shall prevail over all other elements of the reservation.257 

  7. Because of its importance to this case, the reservation at issue in the Schedule of the United States Sector: Transportation, Sub-Sector: Land Transportation, Phase-Out: Cross-Border Services, Investment, pages I-U-18 to I-U-20 is quoted in full:

     
    Sector: Transportation
    Sub-Sector: Land Transportation
    Industry Classification: SIC 4213 Trucking, except Local
    SIC 4215 Courier Services, Except by Air
    SIC 4131 Intercity and Rural Bus Transportation
    SIC 4142 Bus Charter Service, Except Local
    SIC 4151 School Buses (limited to interstate transportation not related to school activity)

    Type of Reservation: National Treatment (Articles 1102, 1202) Most-Favored-Nation Treatment (Articles 1103, 1203) Local Presence (Article 1205)


    Level of Government: Federal

    Measures: 49 U.S.C.§10922(l)(1) and (2); 49 U.S.C.§10530(3); 49 U.S.C.§§ 10329,10330 and 1170519; 19 U.S.C. §1202; 49 C.F.R. §1044
    Memorandum of Understanding Between the United States of America and the United Mexican States on Facilitation of Charter/Tour Bus Service, December 3, 1990 
    As qualified by paragraph 2 of the Description element

    Description: Cross-Border Services

    1. Operating authority from the Interstate Commerce Commission (ICC) is required to provide interstate or cross-border bus or truck services in the territory of the United States. A moratorium remains in place on new grants of operating authority for persons of Mexico. 

    2. The moratorium does not apply to the provision of Cross-Border charter or tour bus services.

    3. Under the moratorium, persons of Mexico without operating authority may operate only within ICC Border Commercial Zones, for which ICC operating authority is not required. Persons of Mexico providing truck services, including for hire, private, and exempt services, without operating authority are required to obtain a certificate of registration from the ICC to enter the United States and operate to or from the ICC Border Commercial Zones. Persons of Mexico providing bus services are not required to obtain an ICC certificate of registration to provide these services to or from the ICC Border Commercial Zones. 

    4. Only persons of the United States, using U.S. registered and either U.S. built or duty paid trucks or buses, may provide truck or bus service between points in the territory of the United States. 


      Investment
    5. The moratorium has the effect of being an investment restriction because enterprises of the United States providing bus or truck services that are owned or controlled by persons of Mexico may not obtain ICC operating authority.


      Phase-out: Cross-Border Services 

      A person of Mexico will be permitted to obtain operating authority to provide: 

      1. three years after the date of signature of this Agreement, cross-border truck services to or from border states (California, Arizona, New Mexico and Texas), and such persons will be permitted to enter and depart the territory of United States through different ports of entry; 

      2. three years after the date of entry into force of this Agreement, cross-border scheduled bus services; and 

      3. six years after the date of entry into force of this Agreement, cross-border truck services.
    Investment

    A person of Mexico will be permitted to establish an enterprise in the United States to provide: 

    1. three years after the date of signature of this Agreement, truck services for the transportation of international cargo between points in the United States; and 

    2. seven years after the date of entry into force of this Agreement, bus services between points in the United States.

    The moratorium will remain in place on grants of authority for the provision of truck services by persons of Mexico between points in the United States for the transportation of goods other than international cargo.

  8. According to Annex I, the relevant Chapter provisions against which the Reservations were taken are Articles 1102 (national treatment in investment), 1202 (national treatment in cross-border trade in services), 1103 (most-favored-nation treatment in investment), 1203 (most-favored-nation treatment in cross-border trade in services) and 1205 (local presence in cross-border trade in services).

  9. The Panel emphasizes that the very texts of Articles 1108(1) (investment), and 1206(1) (cross-border trade in services) explicitly allow the Parties to make Reservations respectively in investment and in cross-border services in Annex I. The Note explicitly confirms that the Reservations in Annex I constitute existing measures that do not conform to obligations imposed by: (a) Article 1102 and 1202 (national treatment), or to (b) Article 1103 and 1203 (most-favored-nation treatment). In addition, the Note also permits the Parties in Annex I to set out commitments for immediate or future liberalization.258 

  10. The Note stipulates that in Annex I, the "Measures" element identifies the laws, regulations or other measures, as qualified, where indicated, by the "Description" element, for which the reservation is taken. Most significantly, the Note explicitly develops a hierarchy of rules for the interpretation of the agreed reservations. Paragraph 3 (b) states that if the Measures element is qualified by a liberalization commitment from the Description element, the Measures element as so qualified shall prevail over all other elements.259 

  11. In light of the Note, the text of the Phase-Out elements in Annex I concerning both the liberalization of cross-border truck services and the investment in truck services is unambiguous, based on the ordinary meaning of the words. The relevant clauses establish specific dates in Annex I for the Party to liberalize barriers to services (December 18, 1995) and investment (December 18, 1995) in land transportation cross-border trade services. The Phase-Out clauses and their context in the Annex I do not suggest that the commitment to phase-out reservations on December 18, 1995 is dependent upon any other element of the Reservation or the Note. The Panel is unaware of any agreement related to NAFTA, or any subsequent practice or legal principle, that could accommodate the perception that there is a conditional element for the execution of the liberalization commitments. Thus, it follows that the liberalization commitments were unconditional within Annex I. Any other interpretation would be contrary to what is written in NAFTA.

  12. Furthermore, the negotiators of NAFTA apparently considered very carefully the character, purpose, mode of preparation and adoption of reservations and their Phase-Out liberalization commitments. The very title of Annex I conveys the will of the Parties: "Reservations for Existing Measures and Liberalization Commitments." The Reservations under analysis included a Sector, Sub-Sector, Industry Classification, Type of Reservation, Level of Government, Measures, Description, Phase-Out.260  There are no ambiguities. The reservations and their liberalization are very well identified. The Parties agreed not only which reservations were acceptable for them but also Phase-Out commitments concerning the reservations. The wording is lucid and comprehensive.

  13. Moreover, the Panel is aware that the reservations in Land Transportation included in Annex I are contrary to the principal objective of NAFTA as established in its Preamble, and are also obstacles to achieving the concrete objectives agreed upon in Article 102(1). Presumably, such reservations were intended as a necessary structural element that was essential to assist in establishing a Free Trade Area, the ultimate goal of NAFTA.261 In this context, the Panel recalls an old legal principle expressed in Latin as exceptio est strictissimae applicationis that has been utilized to signify that reservations to treaty obligations are to be construed restrictively.262 

  14. The Panel recognizes that the Phase-Out provisions concerning the reservations must be given full legal force over all other elements of Annex I. This legal rule is firmly grounded in international law.263 The Permanent Court of International Justice declared that a treaty provision must take precedence over a general rule of international law. More recently, this principle has been adopted by the WTO Appellate Body, which upheld the Panel's decision that the precautionary principle could not be used to override the explicit wording of treaty obligations.264 

  15. Thus, the Panel finds that implementation of the very concrete Phase-Out provisions of the Reservations in this case is not conditioned by any other element.265 If the Parties had wished to establish any mode of subsequent acceptance or condition to the liberalization commitments agreed on in the Phase-Out elements of Annex I, they would have or could have used other wording. It is the opinion of the Panel that the Phase-Out provisions in Annex I must prevail over all other elements of Annex I. The United States has failed to demonstrate the existence of any valid legal ground for its non-compliance with NAFTA Liberalization Commitments regarding Land Transportation Services and Investment in Annex I.

  16. Under these circumstances, the phase-out obligations of the United States under Annex I with regard to cross-border trucking services and investment prevail unless there is some other provision of NAFTA that could supersede these obligations. It is to those other provisions that the Panel now turns.

C. Services

  1. The key issue in services, in the view of the Panel, is whether the United States was in breach of Articles 1202 (national treatment for cross-border services) and 1203 (most-favored-nation treatment for cross-border services) of NAFTA by failing to lift its moratorium on the processing of applications by Mexican owned trucking firms for authority to operate in the U.S. border states. Given the expiration on December 17, 1995 of the Annex I reservation that the United States took to allowing cross-border trucking, the maintenance of the moratorium must be justified either under the language of Articles 1202 and 1203, or by some other provision of NAFTA, such as those found in Chapter Nine (standards) or by Article 2101 (general exceptions). As neither Party asserts that Annex I itself contains an exception that would otherwise justify U.S. actions, and as the United States has declined to rely on Chapter Nine as a defense, as stated earlier, the Parties rest their positions in large part on their interpretation of Articles 1202, 1203 and 2101.


    1. Positions of the Parties

  2. The United States argues that Mexico's truck transportation regulatory system does not maintain the same rigorous standards as the systems in the United States and Canada, and that therefore the "in like circumstances" language in Article 1202 means that "service providers [in Mexico] may be treated differently in order to address a legitimate regulatory objective."266 Further, since the Canadian regulatory system is "equivalent" to that of the United States, it is not a violation of most-favored-nation treatment under Article 1203 for the United States to treat Canadian trucking firms which are "in like circumstances" vis-a-vis U.S. trucking firms in a more favorable manner than Mexican trucking firms.267 The United States also suggests the applicability of Article 2101, which provides a general exception to other NAFTA obligations and may be invoked for "measures necessary to secure compliance with laws or regulations . . . relating to health and safety and consumer protection."268 The United States has not sought to justify its actions under Chapter Nine, but both Mexico and Canada have raised issues under that Chapter, which as a result is addressed briefly, infra.

  3. Mexico vigorously contests the U.S. interpretation of Articles 1202 and 1203, without contending that the Mexican regulatory system is equivalent to that of the United States and Canada.269  According to Mexico, Mexican trucking firms are entitled to the same rights as U.S. carriers under U.S. law, that is "consideration on their individual merits and a full opportunity to contest the denial of operating authority."270 Any other approach is a violation of Articles 1202 and 1203. During NAFTA negotiations, both governments understood that motor carriers would have to comply fully with the standards of the country in which they were providing service. However, the obligations of the Parties were not made contingent upon completion of the standards-capability work program271 or the adoption of an identical regulatory system in Mexico.272  Anticipating a U.S. defense that did not materialize, Mexico explained that the United States cannot rely on Chapter Nine, because the United States failed to justify its moratorium under the procedural requirements of that chapter.273 Nor can the United States rely on Article 2101, because the Article 2101 exception applies only to measures that are necessary to secure compliance with laws or regulations that are otherwise consistent with NAFTA, and no such laws or regulations exist here.274 Thus, the blanket denial of access is not justified under any provision of NAFTA.

  4. Canada, which exercised its right to participate in accordance with Article 2013, essentially agrees with Mexico, insisting that the major issue in interpreting Article 1202 is a comparison between a foreign service provider providing services cross-border (here, from Mexico into the United States), and a service provider providing services domestically. Canada also contends that a "blanket" refusal by the United States to permit Mexican carriers to obtain operating authority to provide cross-border truck services would necessarily be less favorable than the treatment accorded to U.S. truck services providers in like circumstances.275 Canada also asserts that the United States is precluded from relying on Chapter Nine because levels of protection established under Chapter Nine must still be consistent with the national treatment requirements of Article 1202 and other NAFTA provisions.276 

  5. The Panel notes that despite suggestions to the contrary,277 no significant disagreement exists as to the facts as they relate to the truck regulatory systems in the United States, Canada and Mexico. The United States has spent a considerable portion of its submissions explaining the nature of the U.S. regulatory system, the similarities of the Canadian regulatory system, and the differences (and perceived deficiencies) in the Mexican system.278 The United States argues that the Mexican regulatory system is far less effective in assuring safe drivers and equipment through mandatory inspections, driver licensing, logbooks and other procedures, than the systems currently in use in the United States and Canada: "adequate procedures are not yet in place [in Mexico] to ensure U.S. highway safety."279 However, the Parties differ regarding the implications of the differences in regulatory standards. The United States and Mexico have engaged in extensive consultations concerning truck transportation services and compliance with regulatory objectives. This fact is amply demonstrated in the record of this case.280 This, of course, is not the issue. The issue is whether the decision by the United States not to consider applications from Mexican service providers as a group is consistent with the applicable NAFTA obligations of the United States.
2. The Panel's Analysis
  1. Article 1202 provides in pertinent part: "1. Each Party shall accord to service providers of another Party treatment no less favorable than it accords, in like circumstances, to its own service providers."281 Similarly, Article 1203 states: "Each Party shall accord to service providers of another Party treatment no less favorable than it accords, in like circumstances, to service providers of any other Party or of a non-Party."282 

  2. Articles 1202 and 1203 represent the obligations of national treatment (equality of treatment between foreigners and nationals) and most-favored-nation treatment (equality of treatment among foreign nationals of different states). The United States and Mexico do not question the legal force of these obligations. In its most succinct terms, the disagreement between the United States on the one hand, and Mexico and Canada on the other, is over whether the "in like circumstances" language (or some other limitation on or exception to national treatment and most-favored-nation treatment) permits the United States to deny access to all Mexican trucking firms on a blanket basis, regardless of the individual qualifications of particular members of the Mexican industry, unless and until Mexico's own domestic regulatory system meets U.S. approval. Alternatively, the issue can be stated as whether or not the United States is required to examine Mexican carriers seeking operating authority in the United States on an individual basis to determine whether each individual applicant meets (or fails to meet) the standards for carriers operating in the United States. This disagreement in turn rests on the interpretation and scope of the "in like circumstances" language, that is, whether the comparison may be applied to "service providers" on a blanket country-by-country basis or instead must be applied to individual service provider applicants. 

  3. Article 1202 requires each Party to accord to service providers of another Party treatment that is no less favorable than it accords, in like circumstances, to its own service providers. Given that under U.S. law the United States treats operating authority applications received from U.S. (and Canadian) -owned and -domiciled carriers on an individual basis, the blanket refusal of the United States to review applications for operating authority from Mexican trucking service providers on an individual basis suggests inconsistency with the U.S. national treatment obligation (and from most-favored-nation treatment, given that Canadian carriers are also treated on an individual basis).

  4. The Panel, in interpreting the phrase "in like circumstances" in Articles 1202 and 1203, has sought guidance in other agreements that use similar language. The Parties do not dispute that the use of the phrase "in like circumstances" was intended to have a meaning that was similar to the phrase "like services and service providers," as proposed by Canada and Mexico during NAFTA negotiations.283 Also, the United States contends, and Mexico does not dispute, that the phrase "in like circumstances" is not substantively different from the phrase "in like situations," as used in bilateral investment treaties.284 Most significantly, no Party asserts that the use of the phrase "in like circumstances" in NAFTA Chapter Twelve was intended to have a different meaning than it did in the United States-Canada Free Trade Agreement (FTA). Mexico notes that the "immediate source" of the "in like circumstances" language in Articles 1202 and 1203 of NAFTA was the FTA.285 The United States has referred to elaborating language in the FTA on the national treatment obligation to support the interpretation of the phrase used in NAFTA to permit differential treatment where appropriate to meet legitimate regulatory objectives.286  Again, the Parties do not differ on the general principle that differential treatment may be appropriate and consistent with a Party's national treatment obligations.

  5. FTA Article 1402 is thus instructive. It provides a more detailed elaboration of the national treatment requirement for services than is found in NAFTA:

    1. Subject to paragraph 3, each Party shall accord to persons of the other Party treatment no less favourable [sic] than that accorded in like circumstances to its persons with respect to the measures covered by this Chapter [services, investment and temporary entry].
      ...

    1. Notwithstanding paragraphs 1 and 2, the treatment a Party accords to persons of the other Party may be different from the treatment the Party accords its persons provided that:

      1. the difference in treatment is no greater than that necessary for prudential, fiduciary, health and safety, or consumer protection reasons;

      2. such different treatment is equivalent in effect to the treatment accorded by the Party to its persons for such reasons; and 

      3. prior notification of the proposed treatment has been given in accordance with Article 1803.


        The provision in the FTA also imposed the burden of establishing the consistency of the differential treatment with the above requirements on the party proposing or according different treatment. 287 

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Continue with  Paragraph 251




247 MIS at 85-86.
248 MIS at 86.
249 TR at 175.
250 MPHS at 33-34.
251 TR at 230.
252 TR at 230. 
253 TR at 230-231.
254 CS at 2.
255 Emphasis supplied.
256 Head of Paragraph 3.
257 Paragraph 3.a
258 Paragraph 2.h
259 Section (c) sets forth other rules if the Measures element is not so qualified, but is not controlling here.
260 See complete text in paragraph 230.
261 NAFTA Article 101 provides: The Parties to this Agreement, consistent with Article XXIV of the General Agreement on Tariffs and Trade, hereby establish a free trade area.
262 See Interpretation of Article 79 of the 1947 Peace Treaty (French/Italian Conciliation Commission) XIII, UNRIAA 397; Case Concerning Certain German Interests in Upper Silesia PCIJ, Series A, No. 7, 56 and Free City of Danzig case, PCIJ Series A/B, No. 65, 71.
263 Wimbledon (1923), P.C.I.J. Rep., Ser. A, No.1.
264 EC Measures Concerning Meat and Meat Products (Hormones), WTO Appellate Body AB-1997-4, WT/DS26/AB/R/WT/DS48/AB/R, at 253 (January 16, 1998).
265 "Conditions should be implied only with great circumspection; for if they are implied too readily, they would become a serious threat to the sanctity of a treaty." McNair, op.cit. 436.
266 USCS at 2.
267 USCS at 2-3.
268 USCS at 40.
269 Mexico also argues that adoption of an identical motor carrier regulatory system cannot properly be made a condition of NAFTA implementation. MIS at 64.
270 MIS at 75.
271 MIS at 74-75; emphasis added.
272 MIS at 64.
273 MPHS at 3, 9-12.
274 MIS at 87-89.

275

CS at 3.
276 CS at 4..
277 On May 16, 2000, the United States requested the Panel to seek the written report of a scientific review board under NAFTA, Article 2015. After providing both Parties an opportunity to submit additional comments, the Panel, on July 10, 2000, declined to request a scientific review board.
278 USCS at 8-19.
279 USCS at 2.
280 MIS at 33-38.
281 Emphasis supplied.
282 Emphasis supplied.
283 MRS at 12.
284 USSS at 6-8.
285 MRS at 10.
286 USSS at 9-10.
287 FTA, Art. 1402.4.