Denial of Benefit Provisions in FTAs Accompanying the Liberalization of Trade in Services: Does the "Backdoor" Open for Signatory Countries Faced with FTA Inflexibility?

This paper analyzes the denial of benefit provisions, one of the exception provisions to the obligations stipulated with regard to trade in services under free trade agreements (FTAs).



In order to conclude the FTAs relating to trade in services, FTA signatory countries are required to eliminate "substantially all discrimination" with "substantial sectoral coverage." However, in the FTAs for trade in services the menu of the exception provisions that apply to all service sectors are more limited than that in the FTAs for trade in goods, which limits the means available for the FTA signatory countries in order to deal with unforeseeable situations. The denial of benefit provisions could be described as "backdoor" provisions for addressing the restrictive nature of the exception provisions in such FTAs, or the inflexibility in the FTAs. In addition, there are striking differences of the denial of benefit provisions among the FTAs.



Based on the above, this paper analyzes the composition of provisions that define "juridical person of the other party" and the denial of benefit provisions of the FTAs for trade in services, and categorizes FTAs into three types: GATS-type, EC-type, and NAFTA-type. Types of the denial of benefit provisions are categorized as either "nationality-type" or "diplomatic relations and measures-type."



In addition, referring to the precedents of arbitration awards in relevant investment arbitration cases, this paper analyzes the burden of proof in the event that acts that deny benefits are disputed among FTA signatory countries. This analysis finds that, depending on the types adopted by the relevant FTAs, the burden of proof for countries that seek to deny benefits differs. In the cases of the GATS-type and NAFTA-type FTAs, in particular, countries seeking to deny benefits bear the burden of proof with regard to the requirements of the denial of benefits provisions, and as an result they may encounter difficulties in proving such requirements. In other words, the "backdoor" exists but in practice it cannot be opened.



As yet there is an insufficient body of discussion on the interpretation of Article V of the GATS, which must be respected by the FTAs for trade in services among WTO member countries. However, the denial of benefit provisions is affected by the requirement for consistency with Article V of the GATS, and may carry a certain degree of legal risk. This risk is particularly high in the "diplomatic relations and measures-type" provisions that deny benefits of the kind, which are commonly found in the NAFTA-type FTAs, and in the event of the dispute settlement, the "backdoor" may be judged as violating the GATS.



Finally, this paper includes a brief discussion concerning the choices of the denial of benefit provisions in Japan's future FTA negotiations.