4.70 The United States claims that Section 2.1 of Mexico's Reference Paper defines the scope of Mexico's interconnection obligations. Section 2.1 states that "[t]his section applies, on the basis of the specific commitments undertaken, to linking with suppliers providing public telecommunications transport networks or services in order to allow the users of one supplier to communicate with users of another supplier and to access services provided by another supplier". In this regard, the United States claims that, Mexico's obligations under Section 2 of the Reference Paper apply to the interconnection between Telmex and United States suppliers of basic telecom services on a cross-border basis because such interconnection: (i) involves the specific market access; and national treatment commitments that Mexico undertook in its Schedule for basic telecommunications services; and (ii) links suppliers of public telecom networks and services (a United States supplier of basic telecom services and Telmex) to enable users of the United States supplier to communicate with users of Telmex and to access Telmex's services.¹⁸⁵

4.71 Mexico submits that a proper interpretation of the provisions of Mexico's Reference Paper and Schedule demonstrates that Section 2 of Mexico's Reference Paper does not apply to the terms and conditions of interconnection between United States suppliers of basic telecommunications services and Telmex, that is, to "international" interconnection.¹⁸⁶

(a) Definition of the service and mode of supply

(i) Definition of services

4.72 Mexico submits that the services at issue are basic telecommunication services and not "telephone calls" or any other customer-supplied information or data (e.g., voice or facsimile). Mexico argues that, the services at issue are the services related to the transportation or transmission of such data. In Mexico 's view, it is the "public telecommunications infrastructure" that permits the supply of such services. In support of its argument, Mexico cites to the CPC definitions of "voice telephony" (found in CPC codes 75211 and 75212), and "circuit-switched data transmission services" (CPC 7523).¹⁸⁷

4.73 Mexico deems it significant that "communications" are listed in Section 7 along with "transport" and "storage" services. Mexico contends that its view is substantiated by the fact that no Member imposes restrictions on the number of incoming or outgoing calls, whereas many of them impose restrictions on services relating to the calls. Mexico also notes the specific wording used to describe the modes for trade in services highlights this difference. Mode 1 covers cross-border "supply" of a service. Thus, Mexico argues, it cannot reasonably be established that United States carriers "supply" telephone calls; what they supply is the service that transports their customers' telephone calls.¹⁸⁸

4.74 The United States argues that Mexico's argument should be rejected because Mexico ignores the text of the CPC codes it inscribed. According to the United States, the CPC codes states that the services subject to Mexico's market access commitments are not simply the "transmission or transport of customer-supplied information". Contrary to Mexico's argument, the United States submits, the nature of the service and its cross-border character is not affected by the fact that the Mexican concessionaire assumes responsibility for the traffic at the border. This "hand off" is expressly contemplated in CPC 75212, which provides that the customer has access to both "the suppliers' and connecting carriers' entire telephone network". Thus, it concludes, the CPC code specifically contemplates the "joint provision" of voice services.¹⁸⁹

4.75 According to the United States, the CPC codes make clear that the services covered by Mexico's market access commitments include, under CPC 75212, "switching and transmission services necessary to establish and maintain communications between local calling areas." Establishing and maintaining communications requires active coordination between a supplier on each side of the border, and is not two discrete services provided by different companies. For example, the United States explains, in order to complete a call, AT&T's switch must communicate with Telmex's switch, which is located within Mexico, not on the border. Similarly, CPC 75212 states that the scheduled service "provides the customers with access to the suppliers' and connecting carrier's entire telephone network." According to the United States, what a "customer" purchases from a United States supplier is a "communication" – a telephone call – from its point of origin in the United States to its point of termination in Mexico. In other words, the United States submits, the service includes the entirety of a telephone call. Moreover, CPC 75212 covers "services necessary to establish and maintain communications between local calling areas." This includes communications between a local calling area in the United States and a local calling area in Mexico.¹⁹⁰

4.76 Mexico concludes that, the relevant trade in services, or the "supply of a service", at issue in this dispute, is the production, marketing, or sale of transmission or transport services of customer-supplied information or data. Mexico notes that cross-border supply occurs when a service supplier is not present within the territory of the Member where the service is delivered or consumed, but it supplies the relevant services across the border. Therefore, Mexico argues, cross-border supply under mode 1 in the GATS requires that the service at issue cross a border.¹⁹¹

4.77 Accordingly, Mexico argues, in order to determine whether the market access commitments inscribed in Mexico's Schedule allow the cross-border supply of public telecommunications transport services, the Panel must determine whether Mexico's commitments permit public transmission or transport services provided by United States suppliers to cross the border into Mexico.¹⁹²

4.78 Mexico submits that what the United States fails to mention is that the joint provision of telephone services typically involves more than one "switching and transmission" service supplier. In Mexico's view, this is confirmed by the "hand-off" occurring at the border, as clearly evidenced by the accounting rate transaction, which has major implications in terms of the modes of supply under the GATS. Indeed, where a Member's Schedule requires services to be provided jointly by a foreign supplier and a locally established supplier, there can be no cross-border trade within the meaning of GATS Article I:2(a).¹⁹³

4.79 According to Mexico, this legal reasoning likewise applies to cross-border transport of other items. Mexico submits that, where a "hand-off" occurs at the border to a service supplier established in the destination country, there can be no cross-border trade in the transport of the services involved into the destination country. In the case of water, Mexico explains, if – at the border – a different supplier provides the pipeline transport service into the destination country, then the transport service supplier in the originating country cannot be said to provide cross-border service "from the territory" of the originating country "into the territory" of the destination country. Mexico further submits that the above interpretation is not only legally but also "logically" sound. According to Mexico, one of the important elements in the ability to supply cross-border services is that the foreign service supplier does not have to involve suppliers in the destination country in order to provide the services in question. This is impossible in the case of hand-off at the border and the joint provision of services.¹⁹⁴

4.80 The United States argues that, second, the cross-border supply of a service does not require that the service supplier operate on both sides of the border. The United States submits that Article I:2(a) of GATS defines the cross-border supply of a service as the supply of a service from the territory of one Member into the territory of any other Member. The United States argues that it is the service that crosses the border, not the supplier. According to the United States, accepting Mexico's argument would mean that the provision of basic telecommunications services on a cross-border basis would only be possible if a service supplier also operated on a commercial presence basis. The United States submits that the result would be to render meaningless Mexico's mode 1 commitments in the basic telecommunications sector. Since United States and Mexican basic telecommunications suppliers currently interconnect at the border, accepting Mexico's argument would also mean that the supply of basic telecommunications services does not fit into any of the modes of supply under GATS. The United States submits that such an interpretation would be contrary to the nature of basic telecommunications services. That basic telecommunications services can be, and indeed are, supplied on a cross-border basis is confirmed by the undisputed fact that billions of calls (i.e., signals) are actually transmitted between the United States and Mexico annually.¹⁹⁵

4.81 Mexico submits that at the core of the United States' argument that United States suppliers actually provide basic telecommunications services on a cross-border basis is the erroneous proposition that the "telephone calls" are the services of United States suppliers that move across the border. According to Mexico, the flaw in the United States' reasoning becomes obvious when it is applied to other transport services. For example, Mexico explains, in the case of mail, the service consists of the pick-up, transport and delivery of letters. Mexico submits that the fact that millions of letters cross the border between two countries does not necessarily mean that postal services providers in country A supply their services from its territory into the territory of country B. In order for cross-border trade in services to occur, it is the transport and delivery services of a supplier established in country A, not merely the letters, that must cross the border. There will not be any cross-border supply to the extent that the supplier established in country A provides its transport services only in its home country's territory, and delivers the letter at a border point, where it is picked-up by another supplier, which operates in country B, and arrange for the transport of the letter to its final destination. This is an example of the joint provision of a service by two suppliers. In no sense can this joint provision of a service by two suppliers on either side of the border be described as the cross-border supply of transport services by the supplier established in country A into the territory of country B. Similarly, the fact that billions of minutes of calls (i.e., signals) are transmitted between the United States and Mexico annually does not demonstrate that United States basic telecommunications service suppliers provide their transport and transmission services on a cross-border basis into Mexico. The relevant question is whether United States suppliers can transport and transmit signals from the United States into Mexico. The cross-border supply of basic telecommunications services will be possible only to the extent that calls originating in a foreign country are transported and transmitted by the foreign supplier across Mexico's border to the recipient. In the case of basic telecommunications, this requires a transport and transmission network that transcends national borders.¹⁹⁶

4.82 According to Mexico, the United States has not established that such cross-border supply of basic telecommunications services is at issue in this dispute. As a matter of law, it cannot make this demonstration because the transport and transmission services supplied by United States suppliers are not provided across the border, but merely to the border. At that point, traffic is handed off to a Mexican concessionaire, which receives and carries the calls to the recipient, that is, supplies telecommunications transport services into and within Mexico. Therefore, Mexico argues, the United States is mistaken when it states that "the way in which United States suppliers complete calls into Mexico is by routing through the facilities of an enterprise that has a concession". The fact is that United States suppliers do not "complete calls" and, hence, do not supply transport and transmission services across the border into and within Mexico.¹⁹⁷

4.83 Mexico also notes that, under the United States' interpretation, its suppliers are providing telecommunications services on a cross-border basis when the calls are routed through the facilities of another supplier. This is not tenable. "Routing" (i.e., transmitting) traffic is the service being provided by basic telecommunications suppliers. When the calls are "routed" through the facilities of a Mexican supplier, it is that supplier, not the United States supplier, that provides the transport and transmission services at issue in this dispute.¹⁹⁸ Mexico further claims that, accepting the United States' argument that the fact that signals are transmitted across the border demonstrates that basic telecommunications services are provided on a cross-border basis would mean that market access under mode 1 would be granted as soon as a WTO Member allows calls originating in other countries to be transmitted across its borders, regardless of who is supplying that service. This is also untenable.¹⁹⁹ There is not a single WTO Member that prohibits incoming calls to its citizens from the territories of other WTO Members. This does not mean that all WTO Members have granted market access under mode 1.²⁰⁰ Mexico submits that, cross-border supply does not occur under the half-circuit regime established between Mexico and the United States, as laid down in Mexico's Schedule. According to Mexico, cross-border supply unquestionably cannot occur where a commercial presence limitation is scheduled under mode 1, because the incumbent provider in the United States must either become established in Mexico or rely on another provider established in Mexico in order to transport and terminate calls into and within Mexico. In practice, the half-circuit regime requires telecommunications traffic to be handed over at the border to another provider operating inside Mexican territory, and it is the latter that carries the traffic over the Mexican half of the circuit. Under Mexico's Schedule, therefore, the incumbent provider in the United States cannot supply telecommunications transport services over the Mexican half circuit and so will never be able to provide services "from the territory" of the United States "into the territory" of Mexico.²⁰¹

aa) Half-circuit v. full-circuit regimes

4.84 In response to a question by the Panel, Mexico describes the difference between the half-circuit and full-circuit regimes. Mexico first submits that, the "half-circuit" regime does not allow foreign suppliers to supply their services on the opposite side of the circuit. Because of the inherent "hand off", all services in the destination country are supplied by incumbent suppliers in that country and, therefore, the supply is provided under mode 3.²⁰² In contrast, Mexico claims, under the full-circuit regime:

"Foreign operators can, if they wish, carry their international calls into the interior of the destination country and terminate them there via interconnect arrangements similar to, or even identical to, those used for domestic traffic. They are no longer compelled to hand off their traffic to a correspondent operator before it reaches the destination country".²⁰³

4.85 According to Mexico, the clearest example of a full-circuit regime is when a foreign supplier expands its network to the territory of the destination country by its own transmission links and network nodes (i.e. "points of presence"). As to mode 1, in order for a United States-based supplier to supply services from United States territory to Mexican territory (in other words, cross-border supply) it must supply telecom transport services over the whole of the full circuit without having a commercial presence in Mexico within the meaning of GATS Article XXVIII(d). According to Mexico, this definition of "commercial presence" relates to the establishment of a particular type of legal entity, as clarified in the GATS Guidelines for Scheduling. A full-circuit regime does not require the establishment of such legal entities. This is confirmed in the ITU Document included as Exhibit MEX-59, which establishes that "international operators can avoid the half-circuit regime by establishing a switch in a foreign territory, then providing end-to-end service to that switch." Indeed, it is not even necessary to establish a commercial presence in the foreign country. Where it is possible to establish a full-circuit regime without the need for such presence, the foreign country supplier can provide services to the destination country under mode 1. For the purposes of this dispute, it is not necessary for the Panel to define all the circumstances in which a single circuit regime may be set up so as to allow telecom transport services to be supplied under mode 1. The crucial point is that Mexico's Schedule maintains the half-circuit regime and requires all telecommunications to be handed over at the border so that the transport and transmission services supplied on the Mexican side of the border are supplied by Mexican-based concessionaires. In other words, Mexico does not permit the supply of telecom transport services under mode 1.²⁰⁴

4.86 Moreover, the United States argues that the one example Mexico gives of cross-border supply from the United States into Mexico is where a United States supplier "has a full circuit" and "establish[es] a switch" or a "point of presence" in Mexico.²⁰⁵ Mexico states that the United States supplier does not have a commercial presence on the Mexican side of the border in this example. According to the United States, however, whether or not "establishing a switch" or a "point of presence" on the Mexican side of the border is a "commercial presence," "establishing a switch" or a "point of presence" certainly involves operating in some fashion on the Mexican side of the border. This interpretation therefore adds an element that is not present in Article I:2(a) of GATS, which defines the cross-border supply of a service as the supply of a service from the territory of one Member into the territory of any other Member because Mexico's interpretation requires that to provide basic telecommunications services in the cross-border mode, a service supplier must operate on both sides of the border.²⁰⁶

4.87 Mexico submits that, under the full-circuit regime, a foreign supplier carries traffic to the "interior" of the destination country. It then interconnects with the local network in the same way as does a national operator. This means that, under the full-circuit regime what is relevant for the foreign operator is the interconnection "within" the destination country.²⁰⁷ The United States is not contesting the interconnection regime with Mexico as it applies to operators established within the territory of Mexico. Mexico further claims this is based on Mexico's position that Section 2 of its Reference Paper applies solely to "interconnection" within its borders.²⁰⁸

4.88 Mexico also submits that, the use of a satellite or any other kind of wireless technology instead of a landline does not in or of itself determine whether cross-border supply exists, since countries regulate the use of the radio frequency spectrum in their territory. Even in the case of a satellite system with a global footprint, like the one that the Iridium system uses (the only one of its type), the use of the Mexican spectrum to carry calls is subject to restrictions similar to those for landlines and other wireless services that the operator provides. Accordingly, Iridium has a Mexican affiliate with a concession to supply public telecom transport services inside Mexico and through which switched calls to Mexico must be routed in order to complete transmission to the end-user's handset when the user is in Mexico.²⁰⁹

4.89 Therefore, Mexico argues, carrying calls by satellite direct to the user's telephone could potentially involve a cross-border service, for example, if there is only one supplier involved and there are no joint services with a supplier who is commercially established in the destination country. Whether a Member has made a commitment or not, and the way in which the commitment has been made to authorize such cross-border supply, can be determined only by examining the specific scope of the Member's inscription.²¹⁰

4.90 The United States argues that Mexico's explanation regarding satellite services is, again, based upon acceptance of the notion that a telephone call or signal is a separate service from the transportation of that signal. The United States reiterates that this notion ignores the CPC codes, which specifically contemplate "hand off" of the signal and the joint provision of voice services, and the purchase by a "customer" of a "communication" over the entirety of a telephone call, from its point of origin to its point of termination.²¹¹

(b) Mexico's commitment on cross-border supply

4.91 According to the United States, Mexico undertook market access and national treatment commitments in its schedule for basic telecom services supplied by "facilities-based" operators on a cross-border (mode 1) basis. The United States also notes that Mexico limited this commitment to ensure that service suppliers route international traffic through the facilities of an entity licensed in Mexico (known as a "concessionaire"), thus confirming its specific intention to include international services within the scope of these commitments.²¹²

4.92 The United States further submits that Mexico scheduled cross-border commitments for non-facilities-based telecom services ("commercial agencies") as well. Based on Mexico's Schedule, the United States argues that Mexico committed to accord market access and national treatment to United States suppliers, which do not themselves own facilities, but instead provide telecommunications services over capacity (such as a line) that they lease from a concessionaire.²¹³

4.93 Mexico argues that it did not schedule cross-border commitments for basic telecommunications services supplied by facilities-based and non-facilities-based operators.²¹⁴ Mexico submits that the phrase "respecto de los cuales se contraigan compromisos específicos" in Section 2.1 of its Reference Paper limits the application of Section 2 to the precise market access allowed in Mexico's specific commitments inscribed in its Schedule. The phrase translates as "on the basis of specific commitments undertaken" or "in respect of which specific commitments are undertaken". It qualifies the entire provision and, thereby, links Section 2 of the Reference Paper to the specific commitments in Mexico's Schedule. It means that Section 2 applies only within the bounds of Mexico's inscribed market access for the supply of services.²¹⁵

4.94 Mexico submits that, in order to understand its scheduled commitments in basic telecommunications services, the first thing to consider is the circumstances in which those commitments were negotiated. Mexico started to liberalize its basic telecommunications market with the privatization of Telmex in 1990 and with the implementation of the FTL in 1995. One of the principal objectives of the FTL was to liberalize the Mexican market for basic telecommunications by granting concessions to new entrants, which could include up to 49 per cent foreign ownership. As a result of these reforms, Mexico introduced competition into the international long-distance service market. However, under Mexican law, only those carriers able to meet the conditions necessary to obtain a concession are allowed to enter the market. As to foreign enterprises, they were neither allowed to provide international services, nor to install, operate or use facilities in Mexico.²¹⁶

4.99 Mexico further argues that its interpretation that its Reference Paper applies only within the bounds of its specific commitments and limitations on market access is consistent with the object and purpose of Section 2. According to Mexico, the primary objective of the interconnection provisions of the Reference Paper is to safeguard competitive conditions in situations where a dominant carrier can exert control over its competitors within its market. Thus, in order to benefit from the terms and conditions of interconnection provided for in Section 2, foreign suppliers must first be granted market access under the commitments inscribed in a Member's Schedule. Accordingly, suppliers that are not allowed to compete in a given market because they have not been granted access cannot benefit from the terms and conditions provided for in Section 2.²²³

4.100 Mexico also argues that, independently of the meaning of the phrase "respecto de los cuales se contraigan compromisos específicos", Article 31 of the Vienna Convention requires that Mexico's Reference Paper be interpreted in a manner that gives meaning to its content and to the specific commitments and limitations inscribed in Mexico's Schedule.²²⁴ Mexico also urges the Panel to bear in mind the principle of effectiveness in the interpretation of treaties (ut res magis valeat quam pereat) which, according to the Appellate Body, requires that a treaty interpreter:

"… must give meaning and effect to all the terms of the treaty. An interpreter is not free to adopt a reading that would result in reducing whole clauses or paragraphs of a treaty to redundancy or inutility."²²⁵

4.101 According to Mexico, the United States' interpretation entails reading the sector/subsector column of Mexico's Schedule in isolation from the rest of its Schedule. Among other things, the United States' interpretation ignores the fact that a Member may inscribe "unbound" in either columns 2 (market access) or 3 (national treatment). In such circumstances, there is no specific market access commitment for the service sector or subsector and mode involved. Similarly, where the term "unbound" is not used, but limitations are inscribed under specific modes, it is only through a detailed examination of the text of those limitations that it can be determined whether or not suppliers of other WTO Members have, in fact, been granted market access under each of the modes.²²⁶

4.102 Mexico argues that the United States interpretation of Mexico's Reference Paper would effectively grant market access to United States suppliers of basic telecommunications services that is not inscribed in Mexico's Schedule. Furthermore, it would render meaningless the limitations on market access that are specified in Mexico's Schedule. Such an interpretation is inconsistent with the principle of effective interpretation in Article 31 of the Vienna Convention and, therefore, is impermissible.²²⁷

(c) Meaning of the limitations inscribed

4.103 Mexico also submits that the inscription in its Schedule cannot be equated with providing market access for cross-border trade. Mexico explains that, under Article XVI of the GATS, the mere fact that a Member has inscribed a commitment for a particular mode of supply in a particular sector or subsector cannot be ipso facto equated with an undertaking to grant market access to suppliers of other Members for the supply of services through that mode of supply. Rather, whether and to what extent market access has been granted to foreign suppliers depends on careful interpretation of the precise meaning of the limitations inscribed in the Member's Schedule for the relevant mode. This requires detailed analyses of all entries in a Member's Schedule in accordance with the general principles of treaty interpretation set forth in the Vienna Convention.²²⁸

4.104 According to Mexico, the phrase "none, except the following" is an accepted drafting convention to introduce a limitation. Using its right to inscribe limitations, a WTO Member can effectively disallow market access to foreign suppliers for trade in one mode of supply, even though there is a "standstill" binding for that mode of supply. When specific commitments are undertaken under GATS Article XVI, a Member binds certain measures and commits not to accord to foreign suppliers treatment less favourable than that stipulated in these measures. It is those "terms, limitations and conditions" specified in a Schedule that determine the level of market access, if any, for each mode of supply that is bound by a Member. Thus, Mexico argues, the fact that a Member has inscribed a commitment for a particular mode of supply in a particular service sector does not necessarily mean that market access has been granted to foreign suppliers for the supply of the relevant services in that particular mode.²²⁹

4.105 Mexico notes that, in inscribing their limitations, WTO Members can bind themselves to the status quo for the supply of a service through one of the modes of supply. It may very well be that, under the status quo as inscribed in the limitations in their Schedule, no market access is actually provided to foreign suppliers for the supply of the relevant service through that mode of supply. In such cases, the limitation has the effect of prohibiting market access for these suppliers even though the Member did not inscribe "unbound" in the relevant column. For example, certain limitations on the number of service suppliers can effectively create a "zero quota", which prohibits market access for foreign suppliers.²³⁰ In support of its argument, Mexico cites two WTO Secretariat Notes.^{231 232} According to Mexico, the inscription of a commercial presence requirement in such a manner has the effect of prohibiting market access for the cross-border supply of such services even though the Member did not inscribe "unbound" in the relevant column and this is exactly what Mexico has done.²³³

4.106 The United States argues that Mexico's reliance on the Scheduling Note is misplaced. The United States points out that the part of the Note that Mexico relies on only applies to "a residence requirement, nationality condition or commercial presence requirement." Thus, it is not applicable to the limitation in Mexico's Schedule, which is a routing requirement.²³⁴

4.107 The United States argues that Mexico's commitment is clear and straightforward: there are no limitations on the mode 1 commitment, with the exception of a routing requirement. The United States submits that Mexico's argument that "None" should be interpreted as "Unbound" is thoroughly untenable. The requirement to route international traffic through the facilities of a Mexican concessionaire does not completely eviscerate Mexico's market access commitment for mode 1 – indeed, there would be no need for this or any other limitation if Mexico had left mode 1 unbound. The way in which United States suppliers complete calls into Mexico is by "rout[ing] through the facilities of an enterprise that has a concession" – an option specifically provided in Mexico's Schedule.²³⁵

4.108 The United States argues that Mexico ignores this aspect of its commitment in asserting that it has made no commitment for the supply of telecommunications services on a cross-border basis. The United States submits that, even if this limitation had any effects, it would still be a limitation on a commitment that Mexico undertook and would therefore still trigger the obligations in Section 2 of the Reference Paper and Section 5 of the Annex.²³⁶

4.109 The United States also considers that, as a legal matter, Mexico's routing requirement is not a market access limitation at all. The United States agrees with the European Communities that the limitation scheduled by Mexico is superfluous and without legal effect because a routing requirement is not one of the limitations listed in Article XVI:2 of GATS. According to the United States, a note by the Secretariat supports this position, confirming that "a Member grants full market access in a given sector and mode of supply when it does not maintain in that sector and mode any of the types of measures listed in Article XVI."²³⁷ In the United States' view, Mexico did not need to schedule the requirement that cross-border suppliers route traffic through the facilities of a concessionaire to maintain that limitation for Article XVI purposes.²³⁸

4.110 Mexico submits that the United States' characterization of Mexico's mode 1 limitation is erroneous. As a legal matter, the concession requirement stipulated in Mexico's mode 1 limitation must be given meaning. Mexico argues that the correct interpretation is that the limitation that "international traffic must be routed to the facilities of an enterprise that has a concession" imposes commercial presence and nationality requirements for the supply of scheduled services. Thus, this limitation ensures that suppliers established in the United States cannot transport and transmit signals across Mexico's borders. Instead, they have to rely on Mexican concessionaires, which have the exclusive right to supply telecommunications transport and transmission services in Mexico.²³⁹

4.111 For international "facilities-based" services, Mexico argues that its schedule sets forth a limitation by requiring that international traffic must be routed through the facilities of an enterprise that has a concession granted by the Ministry of Communication and Transport (SCT).²⁴⁰ Under Mexican law, only Mexican individuals or companies may obtain such a concession.²⁴¹ Thus, the limitation in the market access column of Mexico's Schedule creates a nationality and commercial presence requirement for suppliers of scheduled services.²⁴² Therefore, Mexico effectively froze the level of market access to that prevailing at the time of the negotiations and reserved its right to limit those enterprises authorized to supply basic telecommunications services within Mexico to service suppliers that have commercial presence in Mexico (i.e., concessionaires).²⁴³ Since United States suppliers (e.g. AT&T and WorldCom) of basic telecommunications services cannot obtain concessions, they are not allowed to supply basic telecommunications services from the territory of the United States into the territory of Mexico, that is, on a cross-border basis.²⁴⁴ Mexico also claims that it reserved its right to prevent foreign service suppliers from owning facilities in Mexico through the inscription of broad limitations on market access through commercial presence (mode 3) in its Schedule.²⁴⁵ In order to install, operate or use a facilities-based public telecommunications network in Mexico, Mexico's Schedule stipulates that a concession from the SCT is required and that direct foreign investment is limited to 49 per cent in an enterprise set up in accordance with Mexican law.²⁴⁶

4.112 The United States replies that whether or not Mexico was "freezing" the level of market access prevailing at the time of the negotiations is irrelevant; the ordinary meaning of Mexico's Schedule speaks for itself and should control. In support of its argument, the United States points to the same Secretariat's Explanatory Note on Scheduling relied upon by Mexico, which emphasizes that, if a Member wished to bind the status quo, as Mexico now asserts was its intention, these so-called "standstill" commitments were to be scheduled no differently than any other market access commitments. Thus, the Panel still has to interpret the meaning of the routing requirement in Mexico's Schedule as it is written, regardless of Mexico's intention.²⁴⁷

4.113 The United States counters that the requirement to route international traffic through the facilities of a Mexican concessionaire does not completely eviscerate Mexico's market access commitment for mode 1. According to the United States, Mexico's argument is untenable for two reasons. First, even if this limitation had any effect, it would still be a limitation on a commitment that Mexico undertook and would therefore still trigger the obligations in Section 2 of the Reference Paper.²⁴⁸ Second, the United States argues that Mexico's routing requirement is not a market access limitation at all since a routing restriction is not the type of limitation found in Article XVI:2 of the GATS.²⁴⁹ The United States points to a note by the Secretariat, which states that "a Member grants full market access in a given sector and mode of supply when it does not maintain in that sector and mode any of the types of measures listed in Article XVI."²⁵⁰ Thus, the United States argues that the routing requirement is superfluous and without legal effect because it is not one of the limitations listed in Article XVI:2 of GATS.²⁵¹

4.114 Mexico submits that the United States' interpretation is wrong. Instead, Mexico argues, the correct interpretation is that, in fact, the transport and transmission services provided by United States suppliers do not enter the territory of Mexico when United States suppliers hand over traffic to Mexican suppliers at a border point.²⁵²

4.115 Mexico argues that the United States' interpretation is based on its mistaken belief that United States suppliers are providing basic telecommunications transport services into Mexico when they rely on other service suppliers (i.e., Mexican concessionaires) to transport and transmit signals in Mexico. To the contrary, the transport and transmission services supplied by United States carriers end at the border. There is no cross-border supply simply because United States suppliers do not supply end-to-end services. Accepting the United States argument would mean that suppliers established in United States territory have to be deemed to supply services into another Member's territory when they hand off traffic to other suppliers which then transport and transmit the signals.²⁵³

4.116 Mexico submits that the United States' interpretation fails to give meaning to the word "concession", which is at the heart of Mexico's limitation. The terms of Mexico's Schedule make it clear that a "concession" is a title to "install, operate or use a facilities-based public telecommunications network". A concession is available only to enterprises established in accordance with Mexican law, which includes a limitation on direct foreign investment of up to 49 per cent. The concession requirement, therefore, imposes a commercial presence limitation on Mexico's mode 1 commitment to supply public telecommunications transport and transmission services in Mexico. In other words, only enterprises established in Mexico are entitled by law to transport and transmit international traffic, which is the service at issue in this dispute. This requirement prohibits the cross-border supply of telecommunications transport services by United States suppliers into Mexico and denies cross-border market access for United States suppliers, such as AT&T.²⁵⁴

4.117 In response to a question from the Panel, Mexico also asserts that the "concession requirement", the "routing requirement," and the commercial agency "permit requirement" fall within the limitations listed in GATS Article XVI:2(a) and (e).²⁵⁵

(i) Concession requirement

4.118 Mexico argues that the concession requirement creates commercial presence and nationality requirements to supply basic telecommunications services in Mexico. According to Mexico, these requirements fall within GATS Article XVI:2(a) which refers to "limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test". More specifically, with respect to mode 1 (cross-border) supply, by requiring a commercial presence, the "number of service suppliers" that can supply services through mode 1 is zero. The concession requirement creates commercial presence and nationality requirements because concessions can be granted only to Mexican individuals or companies. With respect to mode 3 (commercial presence), the 49 per cent maximum foreign ownership and nationality requirements similarly create a zero quota. This is confirmed by a WTO Secretariat Note, which states that "nationality requirements for suppliers of services" are "limitations on the number of service suppliers" because they are "equivalent to zero quota".²⁵⁶ Accordingly, the concession requirement prevents nationals and juridical persons of other Members from installing, operating or using a facilities-based public telecommunications network in Mexico. Mexico also submits that the "concession" requirement means that suppliers must assume a specific legal form. Thus, it also falls within Article XVI:2(e) which refers to "measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service". A "concessionaire" is a specific type of legal entity under Mexican law.²⁵⁷

4.119 The United States argues that, because Mexico's mode 1 limitation does not use the term "commercial presence", the limitation does not impose a commercial presence requirement.²⁵⁸

4.120 In addition, the United States responds that, first, Mexico's argument that a limitation scheduled under one mode of supply can be "read together" or "in combination with" another limitation listed under a different mode is without any legal support. According to the United States, to interpret Mexico's Schedule in this manner would amount to the Panel inserting a limitation on Mexico's mode 1 commitment that Mexico itself did not schedule. The United States argues that this would impermissibly diminish the rights of the United States in violation of Article 19.2 of the DSU.²⁵⁹

4.121 The United States argues that Mexico's argument is also contrary to a Secretariat Scheduling Note, MTN.GNS/W/164 (3 September 1993), paragraph 19(a). That Note explains that "international transport, the supply of a service through telecommunications or mail, and services embodied in exported goods (e.g. a computer diskette, or drawings) are all examples of cross-border supply, since the service supplier is not present within the territory of the Member where the service is delivered."²⁶⁰

4.122 Finally, the United States argues that Mexico's own Schedule does not support its argument. Mexico's Schedule specifically permits market access in mode 1 as long as traffic is routed through the facilities of "an enterprise that has a concession ... ". Mexico's Schedule does not limit market access in mode 1 to only those foreign service supplier itself owns or controls. Thus, Mexico's own Schedule anticipates that a "service," within the meaning of the GATS, can be supplied on a cross- border basis as long as traffic is routed through the facilities of any Mexican concessionaire.²⁶¹

4.123 Mexico replies that this interpretation is incorrect.²⁶² According to Mexico, a commercial presence requirement can be inscribed without the need expressly to use the words "commercial presence requirement".²⁶³ What matters is the effect of the measure inscribed in the Schedule. Mexico did not refer to "commercial presence" in the generic sense but instead used the more specific phrase "enterprise that has a concession". This entails a specific legal form of commercial presence – i.e. a "concessionaire" – as well as nationality and other requirements. The use of a more specific phrase is consistent with the GATS Guidelines for the Scheduling of Commitments, which establish that "[i]f in the context of such a commitment, a measure is maintained which is contrary to Article XVI or XVII, it must be entered as a limitation in the appropriate column (either market access or national treatment) for the relevant sector and modes of supply; the entry should describe the measure concisely, indicating the elements which make it inconsistent with Article XVI or XVII".²⁶⁴

4.124 According to Mexico, the requirement that "international traffic must be routed through the facilities of an enterprise that has a concession" creates an inconsistency with Article XVI of the GATS, because it reserves the supply of services to entities commercially present in Mexico – thereby establishing a zero quota on cross-border trade which implies that no such trade can occur. More specifically, because the limitations require a commercial presence for the supply of routing services, the number of suppliers that may supply such services through mode 1 is zero. Consequently, the measure inscribed in Mexico's Schedule is a limitation on the number of service suppliers within the meaning of GATS Article XVI:2. It also compels suppliers of routing services to acquire a specific legal status under the terms of this provision.²⁶⁵

4.125 Mexico submits that, under the scenarios outlined above, a United States supplier would have to "supply" telecommunications transport and transmission services "on both sides of the border" (that is, both sides of the half circuit), without any "commercial presence" in Mexico within the meaning of GATS Article XXVIII(d), in order for cross-border supply to be able to occur. This is not the case where traffic is handed over at the border to another carrier. As explained below, this can occur only under a "full-circuit" regime.²⁶⁶

4.126 The United States responds that Mexico's assertion that a "half circuit regime" is "incorporated in Mexico's Schedule," requires commercial presence and therefore prevents cross-border supply is based on a misstatement of what Mexico's Schedule actually says. Mexico apparently derives this argument, and the distinction between "half circuit" and "full circuit" service, from the requirement in its Schedule that international traffic "be routed through the facilities of an enterprise that has a concession." The United States argues that this phrase, however, does not require that a foreign supplier own a concession to send international traffic into Mexico. Rather, it only requires that foreign suppliers operating in the cross-border mode route that traffic through the facilities of an entity that has a concession. According to the United States, Mexico clearly knew how to schedule a concession requirement when it meant to do so – to enjoy market access in mode 3, Mexico's Schedule states that "[a] concession from the SCT is required." The United States submits that the contrast between Mexico's mode 1 and mode 3 "limitations" demonstrates that there is no concession requirement with respect to the cross-border supply of basic telecommunications services.²⁶⁷

(ii) Routing requirement

4.127 Mexico further argues that the routing requirement establishes a "zero quota" on mode 1 access for international simple resale (ISR).²⁶⁸ According to Mexico, the requirement that international traffic be routed "through the facilities" of a concessionaire excludes ISR traffic. Specifically, the "facilities of a concessionaire" means more than its ordinary meaning – i.e. the equipment of a concessionaire. Either by virtue of Article 31(4) or Article 32 of the Vienna Convention, this term must be interpreted in the light of its special meaning under Mexican law. Mexico notes that FTL Article 47 limits installation of telecommunications equipment for cross-border traffic to concessionaires and those otherwise specifically authorized by the SCT. ILD Rule 3 specifies that international long-distance traffic can be carried only by international gateway operators. ILD Rule 6 specifies that long-distance concessionaries may carry international long-distance traffic only through international gateways. This means that the term "through the facilities of" means through an international gateway. This excludes ISR traffic because such traffic, by its character, passes through private lines and not through an international gateway. It effectively imposes a "zero quota" on ISR traffic and, as such, is a limitation that falls within GATS Article XVI:2(a).²⁶⁹

4.128 The United States further submits that Mexico's position fails to recognize that "facilities" is in fact a much broader term than "ports," and embraces a variety of means that might be used to terminate cross-border traffic, including private leased circuits. The United States argues that Mexico's own laws and regulations recognize that the term "facilities" is broader than just "international ports." Article 47 of Mexico's Federal Law on Telecommunications requires a concession to install "telecommunications equipment and transmission means," a category of facilities obviously broader than merely international ports.²⁷⁰ Likewise, Mexico's ILD Rule 4 clarifies that the facilities of an international concessionaire include the international port and "telecommunications equipment and means of transmission that cross the country's borders."^{271 272}

4.129 The United States submits that these definitions are also consistent with the WTO's Telecommunications Services Glossary of Terms, which defines "networks or facilities" to include "the ensemble of equipment, sites, switches, lines, circuits, software, and other transmission apparatus used to provide telecommunications services." International switched ports are only one of the many types of telecommunications facilities embraces by this definition. According to the United States, Mexico's scheduled facilities routing requirement must therefore be interpreted to permit routing through any facilities. Nothing in Mexico's Schedule, with respect to services provided under mode 1, allows Mexico to preclude the termination of cross-border traffic using private leased circuits obtained from a Mexican concessionaire. This is the essence of International Simple Resale ("ISR").²⁷³

4.130 The United States notes that, even if the term "facilities" is construed to mean just "international ports," this conclusion would only affect Mexico's right to prohibit the interconnection of private leased circuits at network points other than the international port, which is relevant to the United States' claim under the Annex on Telecommunications. Mexico would still be required to allow private lines to be interconnected at the international port. According to the United States, even if Mexico's Schedule were interpreted to allow Mexico to require international traffic to route through a switched port operated by a Mexican concessionaire, United States carriers would still be providing telecommunications services on a cross-border (mode 1) basis. Thus, the obligations of Section 2 of the Reference Paper would still apply.²⁷⁴

4.131 Mexico argues that the term "bypass" in the United States' submission refers to means that carriers can use to avoid paying settlement rates for having their traffic terminated in a foreign country. According to Mexico, the most commonly used method is international simple resale (ISR). Mexico argues that the Reference Paper does not override Mexico's limitation on international simple resale (ISR). Unlike a traditional accounting rate arrangement whereby carriers hand off traffic at the border or another mid-point between countries, ISR entails the use of private leased lines that cross the border. The private lines are connected directly to the domestic public switched telephone network in the destination country, thus enabling direct access to end-users in that country. Private lines are normally used for closed, intracorporate networking capabilities and are usually charged on a flat-rate basis. By leasing capacity on a private line, a carrier seeking to terminate traffic in a foreign country can bypass the accounting rate regime and avoid paying per-minute settlement rates. Many nations, including the United States on certain routes, prohibit the use of ISR for carrying international traffic for the specific reason that they wish to preserve use of the accounting rate regime. According to Mexico, ISR is also prohibited in Mexico.²⁷⁵

4.132 According to Mexico, the "private" character of a circuit does not stem from its technical features but from the manner in which the circuit is used. To the extent that the circuit is used for an end-to-end private service, it constitutes a private-line circuit; if it is used to carry public traffic, the circuit is public. The issue whether a supplier can do so in conformity with Mexico's Schedule, however, depends on the market access inscriptions and limitations regarding the services in question and the supply of those services. In Mexico, once a private line (end-to-end) is used to carry public traffic, it is considered to be part of the public network and consequently loses its "private" character. It is then regulated as part of the public network and may not be used, or leased, for an end-to-end service. In other words, a "private circuit" may not carry public traffic. Mexico has undertaken commitments with respect to the transport of public traffic using the public network and the transport of end-to-end private traffic using public network facilities (infraestructura de la red pública). However, nowhere in Mexico's Schedule has a market access commitment been undertaken for the transport of public traffic through private lines.²⁷⁶

4.133 Mexico points out that, it is important to have a clear understanding of the nature of private-line service. The main characteristic of private-line service is that it constitutes "end-to-end" service – i.e. the consumer determines beforehand the specific location where the service will be used. Conversely, public traffic is not limited to specific points; it has access to the entire public network. ISR involves sending the traffic by means of a private-line service and then connecting such traffic to the switched public network in the foreign country. The originating carrier thus gains access to an end-to-end private-line service in the foreign country and has to rely on an entity (which has leased a domestic private line, presumably for its own use) within that foreign country in order to arrange for the traffic to be connected to the public network. In other words, the originating carrier itself is not involved in the connection to the public network in the foreign country. However, in Section 2.C(g) of its Schedule, Mexico has made clear that once the operator of a private network "resells" that network in order to connect public traffic to the public network, the private network no longer constitutes a "private" end-to-end connection. The operator becomes subject to all the rules and limitations governing public networks and no longer qualifies as a private-line carrier – which by definition precludes it from being used for ISR.²⁷⁷

4.134 Therefore, Mexico argues, the United States in fact claims that Mexico should allow Mexican users of end-to-end private-line services to interconnect with the switched public network, so that United States carriers can arrange for their traffic to evade (i.e. bypass) authorized Mexican carriers.²⁷⁸

4.135 Mexico submits that it has therefore made clear that once the operator of a private network "resells" that network in order to connect public traffic to the public network, the private network no longer constitutes a "private" end-to-end connection. The operator becomes subject to all the rules and limitations governing public networks and no longer qualifies as a private-line carrier – which by definition precludes it from being used for ISR.²⁷⁹

4.136 The United States notes that, while Mexico continues to argue that a private circuit cannot carry public traffic, it has failed to respond to the United States observation that Telmex in fact offers such private lines to other public network operators, not just private businesses. The United States argues that this demonstrates that the inscription on "private leased circuit services" in Mexico's Schedule does not mean what Mexico now contends. The inclusion in Mexico's Schedule of "private leased circuit services" relates only to the obligation of private "network operators" in Mexico who want to exploit their networks commercially to obtain a concession, not to the ability of firms operating on a resale rather than a facilities basis in Mexico to send traffic through leased private lines obtained from a network operator that has a concession. The separate provision for "commercial agencies" under mode 3 operating on a permit, not a concession, reinforces this interpretation. Though an owner of network facilities in Mexico would need a concession in order to lease its lines to others to carry public traffic on a resale basis (i.e., become the "lessor"), the firms leasing such lines (the "lessee") would not themselves need the concession. The United States contends that ISR does not "evade" the authorized Mexican carriers' networks. Rather, commercial agencies under mode 1 would use the networks of the Mexican carriers as required by the routing restriction, but are simply not bound to send their traffic through the international switched ports subject to the cartel pricing provision of ILD Rule 13.²⁸⁰

(iii) Commercial agency permit requirement