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FOREIGN DIRECT INVESTMENT IN AIRUNES: OOES

TELECOMMUNICATIONS PROVIDE ASOLUTION?
By
HENDRIK A.O. LIEBENBERG
Thesis submitted in as a partial fulfillment for the degree ofMasters of Law.
[nstitute of Air and Space Law
McGill University
Montreal, Quebec
August.. 1997
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CONTENTS
ACKNOWLEDGMENTS vi
ABSTRACT vii
RSUM viii
INTRODUCTION 1
PART 1: PROBLEMS WITH FOREIGN DIRECT INVESTMENT 4
Defining FDI- - u _nunn - 4
CHAPTER 1: FDI in AlRLINES 6
1. lnternatiollal Air Transport Regulation 6
2. Unled States Regulations 9
2.1 Background OH ... ... ..9
2.2 The Federal Aviation Act of 1958 11
2.3 Current DOT Policy and Future Legislation 12
2.4 Reasons ta Lower Foreign Ownership Restrictions in the US.... 14
2.5 Reasons for Protecting against FDI 15
2.5.1 National Securlty .... ... ..15
2.5.2 Financial Protection.. --......... _17
2.5.3 Cabotage through Control.... 18
2.5.4 Reciprocity ..._._.............. 18
2.5.5 Competition and Bilaterallncentives-.. ....... ....20
2.5.6 Labor .. . . -22
2.6 Conclusion 23
ii

3. European Union Policy 24

3.1 Background 25
3.2 Community Law- 26
3.3 Problems for Aviation 28
3.4 Reasons to Protect against FOI 32
4. Conclusion 34
CHAPTER 2: FDI in TELECOMMUNICATIONS 35
1. Introduction 35
2. Regulatory Barriers to FDJ. J6
2.1 Limitations ta Market Aceess 36
2.2 Foreign Ownership and Control Restrictions 37
2.3 Operational Controls ... . .... 39
J. Reasons to Proteet tl.e Telecommunications Indllstry 40
3.1 The Theories of FOI 40
3.2 Reasons for Proteeting Against FDI 42
3.2.1 National Security and Sovereignty.- ..... .... .. 42
3.2.2. Telecommunications as National Asset- 43
3.2.3. Economie Ressons . . . 45
4. Advantages ofFDJ. 46
4.1 General 46
4.2 Oeveloping States .. 47
iii

5. US Regulations 51
5.1 The 1996 Telecommunications Act 53
5.2 Effective Competitive Opportunities Test 53
5.3 Public Interest Test 57
6. EURegulations 57
6.1 Background
. 57
6.2 The Green Paper on Telecommunications 59
6.3 EU Competition Law 61
6.4 Global Lessons from EU Competition Law. 65
PART II: MULTILATERAL SOLUTIONS 67
CHAPTER 3: REGIONAL AGREEMENTS 67
1.NAFTA 68
2. Tlle Andean Pact 69
3. Tlle OECD 72
CHAPTER 4: MULTILATERAL SOLUTIONS 74

1. Tlle History ofMultilateral Agreements on Investment---------74

2. FD/ as Trade under tl,e GATT- 77
3. FDl under the GA TS 79
4. Air Transport in tl,e GATS 80
4.1 The Structure of the GATS 80
4.2 Choosing a Regulatory System ..83
4.3ICAO and Economie Regulation 87
4.4 The GArs and Aviation 91
iv

5. Telecommunications alld the GATS 97

5.1 Background 97
5.2 The GATS Negotiations 98
5.3 The February 1997 Agreement 101
PART III: CONCLUSIONS 104
1. Unilateral Actioll 105
2. Regionalism 106
3. Multilateralism and tl,e GATS J07
4. A ProposedAnne:cfor Air Transport J08
4.1 Competition Laws 109
4.2Interconnection 110
4.3 Universal Service . 110
4.4 Market Access 111
BIBLIOGRAPHY 114

ACKNOWLEDGMENTS
As 1 finish this thesis 1 knaw [ am indebted to a great many people. Firstly 1
would like to thank my supervisar, Dr. Michael Milde, for his assistance, attention and
guidance. [ would aIso like ta thank Prof. Richard Janda for his assistance in the field of
telecommunication regulation and for getting me involved in the telecommunications
tield. The topic of this thesis came mainly from discussions with him.
[ would particularly like ta thank my parents. Their support.. bath emotionally and
fi nancial1y.. is what made this thesis possible. Thank YOll tor YOUf unfailing love and
encouragement. Finally [ must thank Gad who makes ail things possible.
Ail ofthese people have my deepest respect and gratitude.
vi

ABSTRACT
The field of international air transport is one of complex regulation. When it
cornes to foreign direct investment (FDI) in this area regulators have long sought to
protect the industry from outside control and ownership. Recently, a more
liberal attitude is emerging towards FDI as one which embraces this source of
The questions that this dissertation will try to answer are why FDI in air transport is still
so stricy controlled in air transport and how it could be regulated in the future.
FDI in basic telecommunications has experienced the sarne development as
international air transport. As in aviation, basic telecommunications providers have been
prevented from acquiring excessive foreign controlling capital. This however, basic
telecommunications was brought under the General Agreement on Trade and Services
(GATS). This has resulted in a decrease in the regulatory restraints against FDI.
It is the contention of this dissertation that as in international basic
FDI in international air transport should be regulated through the
GATS. The paper examines the history of FDI regulation in both fields as well as recent
trends to liberalize FOI flow. It concludes with a proposed GATS annex for air transport
based on the lessons learned from basic telecommunications.
vii

RSUM
Le transport arien international est un domaine dont la rglementation est trs complexe;
plus particulirement en ce qui concerne les investissements directs l'tranger. les
autorits ont longtemps veill protger leur industrie de prises de contrle ou de
proprit trangres. Toutefois. un changement d'attitude gnraL. dans le sens d'une
libralisation. est rcemment intervenu rgard des investissements directs l'tranger.
Ce mmoire dveloppe les raisons pour lesquelles le secteur du transport arien demeure
malgr tout strictement contrl et propose un nouveau schma de rglementation.
L'volution de la rglementation des investissements directs l'tranger dans le secteur
des tlcommunications de base est similaire celle existant dans le secteur du transport
arien international. En effet., les tournisseurs de tlcommunications de base ne
pouvaient pas oprer une prise de contrle excessive au sein du capital d'une socit
trangre. Toutefois. le fait que le secteur des tlcommunications de base relve depuis
cette anne de l'accord gnral sur le commerce des services. a conduit une rduction
des barrires rglementaires l'encontre des investissements directs 1"tranger.
Ce menloire soutient qu' rimage des dveloppements intervenus dams le secteur des
telecommunications internationales de base, les investissements directs l'tranger dans
le secteur du transport arien international devraient tre rglements par les dispositions
du GATS. Je dveloppe tout d'abord un historique de la rglementation des
investissements directs l'tranger dans les deux secteurs sus-mentionns et analyse les
viii

rcentes tendances encourageant une libralisation de cette rglementation. Puis, je

prsente une proposition d'annexe au GATS qui s'appliquerait au secteur du transport
a r i e n ~ inspire de l'exprience dveloppe dans le secteur des tlcommunications de
base.
ix

INTRODUCTION
At the start of its regulation early in this century. international air transport was
seen as a " u n i q u e ~ ' industry with particular national security problems. As a result Foreign
ownership and control of national airlines were prohibited in most countries. Recently.
however. there has been a shift in attitude reguarding the regulation of air. The previous
protectionist view has moved towards one of liberalization and privatization. However.
this evolution has yet to reach the regulatory field of treign direct investment (FOl) in
airlines.
This market driven attitude has let! airlines short of State funds and in desperate
need of new capital. Such capital is not readily available in any one State. Therefore
airlines are now pressuring their governments to lower restraints on FDI in order ta utilize
this form of capital.
The need tor capital is not the only reason why airlines are pushing tor a lowering
ofFDI barriers. To survive in the new competitive environment airlines will have achieve
superior econornies of scale (i.e. larger route structures and a large source of feeder
airlines). Even though an airline could do this itselt: the amount aftime and capital would

make 5uch a venture too-Iong term for the fast-paced air transport industry.
mergers or strategic alliances could be torged ta obtain nearly the same result. However
ownership and control restrictions prohibit many of these activities.
That FOI is needed is clear. The question of how it should be regulated in the
future however. still uncertain. Currently regulation is performed unilaterally by
yet recent times have seen movements towards agreements between like-minded
States such as regionaJ agreements. [t the submission of this thesis that a
global multilateral agreement will he needed in the future and that that agreement should
be the General Agreement on Trade in Services (GATS). This argument is supported by
comparing air transport with another service industry, that of basic telecommunications.
International basic telecommunications has tollowed roughly the same regulatory
road as international air transport. As in toreign ownership and control of a
national carrier was strict1y forbidden in most countries. National security and tinancial
concerns were the main reasons tor the protection afforded to this industry. In 1997.
there was a change in the regulatory structure when basic telecommunications
regulations (the "hard in telecommunications) were incorporated into the GATS.
2

The inclusion of this industry should break the perception that air transport is a
unique industry. The same arguments that are now used to sustain ownership and control
restrictions in airlines were once used basic telecommunications. These same arguments
have been used to expIain why they should be excluded from the GATS. lf these
arguments failed in one industry then they should fail in a similar industry as weil.
The tirst part of this thesis will.. therefare. compare the development of FDI
restrictions.. the regulatory regimes. and the reasons tor such protection. The tocus will
be mainly on the measures and history in the US and the EU. The second part will
examine the possibilities for a multilateral agreement tor FOl in the two industries and
the third part will then propose a GATS annex for air transport based on the lessons
learned from negotiations of basic telecommunications.
J

PART 1: PROBLEMS WITH FOREIGN DIRECT INVESTMENT

Defining Foreign Direct Investment
Foreign investment involves two components.. namely portfolio investments and
foreign direct investment (FDI). Portfolio investments retr to stocks.. bonds and other
privately and publicly held securities
l
while FDI refers ta investments in rea! estate and
industry2 {that means investment in the facilities that produce or market products).3
1 Le. investments by individuals. trms. privait: or governmenl entities in foreign tinancial instruments. See C. Hill.
International Business: Competing in the Global Jfarket Place. 2d ed. (London: Times Mirror Higher Education
Group. [nc. 1997) at 176.
2 Sec: 1. Ondrich and M. Wasylenko. Foreign Directlnvestment in the United States: Issues.Uagnitudes and Location
Chorees ofNew J/anufucturing Plants (Michigan: W.E. Uplohn Institute trEmployment Research. (993) at213.

Although no unifonn definition of FDI the one given by the lnternational

Monetary Fund (IMF) is gaining wide acceptance. According to the IMF. FDI can be
defined as an: "Investment that is made to acquire a lasting interest in an enterprise
operating in an economy other than that of the investor, the s purpose being to
have an effective voice in the management of the
FOl cao take the form of strategic alliances such as joint ventures and franchising
agreements or mergers with and acquisitions of foreign entities.
5
The advantage of FOl is
that the new entrant becomes knO\vn in the hast State in a relatively short timeo.
FOl must also be distinguished from pure toreign investment. The difference
between the t\VO is that in a "direct" investrnent the investors require sorne fonn of
control the running of the invested company. This explains why FDl is more scrutinized
than pure toreign investment. The regulatory restrictions are. as this thesis will show.
especially strict when sensitive industries Iike telecommunications and airlines are
involved.
7
3 Hill . supra note 1ut 176.
4 International Monetary Fund. Balance ofPaymenls .Hanua/ 108. 4th c:d.. (New York: Intemalional Monclar}' Fund.
1977) al 136.
5 See Y. Kurisaki. G/obali=aiion or Regiona/i=ation: An Observation ofCurrent PTO Activi/ies ( 1993) 17: 12
Tdecammunications Palicy at 701.
6 ibid
7 G.M.F. Kaa. Foreign Equity Participation in United States Air/ine (Montreal: McGilI University. 1989) at 10.
s

CHAPTER 1: FDI in AVIATION

1. International Aviation Regulations
The need for a uniform international regulatory structure was recognized early in
the history of aviation. After aircraft sho\ved their potential for destruction in \Vorld War
t the Allied Nations included a multilateral agreement on aviation in the 1919 peace
treaty. The agreement.. known as the Paris ConventionS, recognized that every country
had exclusive sovereign rights over the airspace above its territory.
This concept was reaffirmed in the 1944 Convention on International Civil
Aviation. The US initiated the conference in the hope that it could gain unrestricted
access ta foreign territories for its strong, young airlines.
9
These hopes.. however.. were
dashed by the United Kingdoms refusai to open its markets and its insistence instead that
an international goveming body regulate traffle rights (the so-called "''freedoms of the air....
as eoined by the Americans
1
0).[[ The rationaie behind the UK"s stand was that its own
aviation had suffered severely as a result of the war and was aIl but destroyed. Opening
its markets would almost certainly have meant a takeover by the stranger American
aidines.
8 Convention Relating co the Regulation ofAerial.Vavigation. 13 Oetaber 1919. Il LN.T.S. t73. 1922 U.K.T.S. 2
[hereinafier Paris Conventionl.
9 A. Edwards. Foreign Investment in the US Airline Industry: Friend or Foe? ( 1995) 9 Emory InCl L Rev. 598.
lO For an s;:xplanation orthe freedoms orthe air. set: Edwards. supra note 9. note l4.
1t B. Stocktish. Opening Closed Skies: The Prospects ofFurther Liberali=ation o/Trode in International Air
Transport Services (1992) 57 J. Air L & Corn. 602.
6

The Chicago Convention did not adopt either view. Instead.. it opted for a
compromise between the two. The Convention did establish an international regulatory
body.. the International Civil Aviation Organization (ICAO).. but it was given only limited
power over economic issues. Instead ICAO was charged with safety and security as weB
as the operational issues of civil aviation.
Two further agreements were accepted along with the Chicago Convention. Both
of these were multiIateral a t t \ ~ m p t s at exchanging traftic rights. Neither of them were
completely successtl. The International Air Transport Agreement
l
:! played an important
raIe in shaping the restrictions on foreign ownership and control even though it never
entered into force. Section 6 of the Agreement reads:
Each Contractillg State reserves the right ta withhold or revoke a
certiticate of permit to an air transport enterprise of anather state in any
case where it is not satisfied that substantiai ownership and effective
i d
. . al f . 13
contro are veste ln nation s 0 a contracting state...
The rationale for this section is to be understood against the background of the ongoing
Second World War. States were athd that tarmer enemies might take control of an
airline flying into its territory and thereby jeopardize its national security. Even though
12 S InternationaL Air Transport Agreement. Dec. 7. [944. U.S. Dept. ofState Publication 2282 (English text).
13 ibid. s. 6 (ltalics added.).
7

the Agreement failed to come into effect'l Section 6 later became part 0 f most bilateral
14
agreements.
As a direct result of the Chicago reaffirming of the sovereignty
principle. states are considered to be the owners of the traffic rights in their territories and
any agreement on traffle rights for airlines have to be negotiated through bilateral
agreements. In many if not aIl of these bilateral agreements, the Transport Agreement' s
Section 6 has been inserted as a special clause. This has effectively meant that FOI in an
airline of another country had to be limited to leve1s where other States cannat interpret it
as foreign ownership and control. Even though the original reason for this clause was lost
soon after the the clause is still used today. mainly as an economic bargaining chip.
However. regulation of air transport by bilateral agreements is losing favor. [n 1993
President Clinton' s National Commission to Ensure a Strong Competitive Airline
lndustry found that bilateral agreements restrict the growth of airlines in the global trade
15
envlronment.
Prohibition of FDI is found not only in bilateral agreements, but also in the
regulations and statutes of States. An IATA report revealed that 32 member
governments have policies against toreign ownership and control of airlines.
1b
This is
14 Sc:e T.L. Masson-Zwaan & P.M.G. Mc:ndes de Lc:on. c:ds. Air and Space Law: De Lege Ferenda. (De Hage:
Kluwer Academie Publisher. 1992) at 27 [hereinafter Air and Space Lawl.
1S Sc:e Unitc:d States National Commission to Ensure a Strong Competitive Airline Industry. Change. ChaJ/enge and
Competllion (Washington. OC: The Commission. 1993) at 20.
16 Sc:e APAG Sludy on National Ownership and Effcrive Control. supplcmentary documentation tor APAG/29
(Montreal: APAG. 1991).
8

evident through either specifie legislation or through practice. Many countries give
percentages of the maximum amollilt of foreign ownership that is allowed. Effective
on the other is mostly regulated through practice rather than legislation.
17
Where it is the concept of control is expressed by requiring that the
chairman/president must he a national and/or by specifying the percentage of board
members which must be nationals.
The tollowing parts of this thesis 'A'ill focus on two parts of the world and their
specitie regulations eonceming FOI: the US and the EU. Sinee many eountries have
tollowed their example in the it seems probable that there regulations will be capied
again. It is therefore appropriate to examine their courses of action and solutions.
2. The United States Regulations
2.1 Background:
[n arder ta better understand the nuances that drive the regulatars of States, one
has to understand the two main theories behind regulation. They are the free trade theory
vs. national objectives. The tirst supposes that econamic grawth cornes from limiting
government involvement, lowering trade barriers and introducing competition. Through
[7 ibid; Sc:e also Air andSpace Law. supra note 14 at 29.
9

these measures the economy is detennined by market forces.

18
National objectives..
instead.. is the belief that certain industries should be protected by the govemment in
arder to promote economic growth. [n other words to promote national objectives such as
a strong airline industry for instance. 19
The Air Commerce Acr of 1926
10
stemmed directly from the latter theory. The
purpose of it was to support the young US air torce by keeping civil aircraft available in
cases of need.
21
With the war still fresh in the US"s mind.. national security became a
main concem. At that time it was reasonable ta fear that an oid enemy could take over a
new airline and use its aircraft directly against the country since aircraffs were easy to
. 1'"
convert lnto warp anes.-
With the advent of the [930' s and the Great Depression the reasons tor
protections changed. Congress had to step in ta further proteet this growing industry
during diftieult tinaneiaI times.
23
This was done thraugh the Civil Aeronautics Act vf
193f
4
which redueed the amount of voting stoek allawed ta toreign owners trom 490/0 ta
18 Sec: J.E. Gjc:rsc:t. Crippling Umted States .-lirUnes: Archalc Interpretattons ofthe Federal AVIatIOn Ace 's
Restrictions on Foreign Capital Inwstments. (1991) 7 Am. U. 1. (nfl L. & Policy 176.
19 Sc:c: ibid al 177.
20 Air Commerce Act of 1926. Pub. L. No. 69-254. 44 Stat. 568 (fonnally 49 U.S.c. SS. 171-8-1 (West 1951)) (repc:aled
1958).
11 s ~ c : [nqutry inlo Operations ofthe United Slates Air Services. 68th Cong.. 1st Sc:ss. 519 at 524 - 27 ( 1925)
(Slatc:mc:nt by Major Gcnc:ral Mason M. Patrie).
21 Sec: S.M. Warnc:r. Liberali=e Open Skies: Foreign [nvestment and Cabotage Restrictions Keep .Vonciti=ens in
Second Class. ( 1993) ..3 Am. U. L. Rev. 305.
23 Sc:c: Aviation Hearing on H.R. 4652 Befon the Comm. on Interslate and Foreign Commerce. 75th Cong. Ist Sc:ss.
72 (1931). Sc:e also Gjc:rsc:t supra note 18 at 182
24 Sc:c: Civil Aeronaulics ..leI of1938. Pub. L. No. 75-706. 52 Stat. 973 (1938).
10

. , ~
25%.-- It was a giant step away from the free trade theory towards a reliance on
government intervention. As further protection" the Act also set up the Civil Aeronautics
Board (CAB) charged with protecting the interests of aviation.
lb
2.2 The Federal Aviation Act of 1958:
The current act regulating foreign ownership.. the Federal Aviation Act of 1958..!7
left the Civil Aeronaurics Act practically untouched. One of the tw moditications was the
provision that an Airline must be an American citizen.!8 Two important criteria \vere set
to determine whether this provision was satisfied: 1. An American entity had ta own 750/0
of the voting stock of the airline (the so-called "numbers test"): and 2. American citizens
had to be in etfective control of the airline (the control tesf,,).:!9
The detinition of control was never detined by the Legislator. most likely on
purpose. [nstead it was left for the CAB and its successor since 1985. the Department of
Transport (DOT)" to interpret. Bath bodies interpreted it as actual control by US
citizens.
JO
Even though neither of the two departments gave a definition" it was explained
25 S ~ e ibid. ch. 601 s. I( 13).
26 S ~ e ibid at 980. s. 2.
27 Sc=e Federal AVlClllon Act of 1958. Pub. L. No. 85-726. Star- 131 (coditied al 49 U.S.c. app. Ss. 13DI-15-l2 (1988 &
Supp. 1. 1989 & Supp. li. (990)) [hereinafter the FideraJ Aviation Actl.
28 See Ibid. s. 1301( 16).
29 rbid
30 So: J. Donner Brown. Foreign Investment in CS Airlines. What Limit Should be Placed on ForeIgn Ownership of
us. Carriers? ( 1990) -ll Syracuse L. Rev. 1269. ln order to determine who has actual control. the DOT lookal at
i.e.. personal relationships. ownership ofnon-voling equity and debr- Sec: ln re: Infera Arclic Services. lnc.. D.O.T.
Il

by the DOT in ln Re: Acquisition ofNorthwest Airlines by Wing Holdings, Inc.

31
that the
control:
...standard is a de facto one we seek ta discover whether a foreign
interest might be in the position ta exercise actual control over the
i.e., whether it will have a substantial ability to influence
the carrier' s activities.
32
Since the control test is done on a case-by-case de facto basis with no tixed
it is hard for a toreign carrier ta circumvent the spirit of the Act.
J3
Unfortunately it also causes uncertainty tr toreign investors. The Act further limits the
possibility of toreign control by requiring the president and two-thirds of the members of
the board of directors be US citizens.
34
2.3 The Current DOT Policy and Future Legislation:
Order 878-43 (1987) (Personal relationships); ln re: Page Avjer Corp. C.A.a. Order 84-8-12 (1984). Even though
the DOT lost its ability to mergers and airline antitrust matters. it tbllows the examplc set in Telemundo. Inc.
\0' Federai Communications Commission (802 F.2d 5(3) [hereinatier Telemundol where the court held that the spirit
of the law against foreign owm:rship companies shouJd be loJ[owed and not the pure letter. Sec: aJso
GjersC:L supra note 18 at 187. (The DOT recognized two types of foreign control: control through persona!
relationships and control through equity and debt owncrship.).
31 See D.D.T. Order No. 89951 (1989) at -1-5.
32 Ibid. Olt 8.
33 Sec Daerwyierldlb/a Inreramerican Airfreight Co. 58 C.A.B. at 120-21 (Noting that C.A.B. must analyze substance
over form in ownership detennination. They must seek the intent behind the statue); Sec Warner. supra note 21. at
note 229.
34 The Federal Aviation Act. supra note 27. s. 1309.
12

In the 1991 decision of In re: Acquisition by Northwest Airlines by Wing

Holdings. Ine. (KL1\;/-Northwest Il)35 the DOT altered its previous strict interpretation of
t
. h 36
orelgn owners Ip. Stating the of today' s investment and tinancial

environment as the reason. the DOT distinguished voting from non-voting equity and
debt. While voting equity still remained limited by the Act ta 25
0
/0 toreign ownership,
\Ving Holdings were no\\' aIlo\ved ta o\\n up to of non-voting stock provided that
American citizens still controlled the airline. This was done in return tor the Netherlands
signing an open skies agreement with the US govemment the following year.
37
In the
dicta the DOT went further by stating that debt does oot give a controlling interest
provided that no Ioan default is present.
38
It is clear that despite the US's stand on freedom of the skies and lowering of
barriers to trade in service. it is still pursuing a projectionist view in the arena of FDI in
its airlines. However. in retum tor more liberal bilaterai treaties with the US.. the DOT has
started to interpreted '''contror'' [ess strictly.39 Still the numbers test set by the Act is
unchanged and not negotiabie.
3S S(C o.o:r. Ord(r No. 91-141( 1991) at l.
36 Wing Holdings were allowed to increase its in Northwest to 49% .
37 S(C Ord(r Issuing Foreign Carrier Pennit D.O.T. Order93-7-14. Docket No. 48 (June 24. 1993) at 493 [hereinatier
DOTOrder of19931-
38 See Warner. supra note 22 at 309.
39 DOTOrder of 1993. supra note 37 al 493. also H.E. Kass. Cabotage and Comrol: Bringing 1938lI.S. Aviation
Paliey inca the Jet Age ( 1994) 26 Case Western Reserve 1. InCl L 170.
13

Ne\v legislatian is expected to be introduced to Cangress saon that wauld allaw

fareign entities to own up to 490/0 of the voting stock of an US Even though the
response to this proposai has been less than enthusiastic.. it is still to be intraduced and
will have to ga through extensive hearings.
2.4 Reasons to lower Ownership Restrictions in the US:
American carriers have accumulated huge debts due ta mergers and acquisitions
in the 1980's'-u As a result. it is hard tor an airline to tind institutions willing to extend
more credit to them due ta their low debtJequity ratio. FDI is.. therefore.. a way for
companies ta obtain capital. Furthermore.. it is a better option tor airlines seeking capital
than debt. With FDI the airline receives the equity without the obligation to repay it or the
threat of foreclosure. If the investor is a foreign airline.. FDI has the added advantage of
allowing the carrier ta expand its route structures through the investing airline and take
advantage of the resulting greater economy of scale. Foreign ownership restrictions.
however.. keep airlines from freely drawing on investment
Lowering FDI restrictions is also of importance for those American airlines
wishing ta enter new markets. If aviation was left ta normal market torces.. the bigger
SIX Author unknown. Status of:Vational Air/ine Commission Rec:ommendations. AVIation Dai(v (August 25. 1994)
all.
See lB. Wilson. The Lessons OfAirline Deregulation and the Challenge ofForeign D\fmership aflIS Air
Carrters (1990) Geo. Wash. J. [n1'[ L. & Econ. 141 .
See GjerseL supra note 18 Olt 193.
14

airlines would simply enter another lucrative market as it sees fit. Due to FOI restrictions,
h o w e v e r ~ this is prohibited. American carriers especially suffer from these restrictions.
With the liberalization in Europe. a vast new market could be opening up tr Arnerican
carriers
43
and the danger exists that the EU Member States could etTectively exclude US
carriers from their market once they form a unified aviation market.
44
American carriers,
therefore4 need ta act saon in arder to capitalize on this opportunity but again due to the
existing restriction on nationality and cabotage they are unable to do SO.45
2.5 Reasons for Protecting Against FDI:
2.5./. National Security:
The threat to national security is the most widely quoted and outdated reason [0
protect against treign ownership in airlines. The rationale behind the argument is the tct
chat the US government draws on civil aviation as a reserve fieet to support the US Air
Force in times of national crisis. It was especially needed in the early days of aviation
when aircraft was limited and those available could quite easily be transformed tr
military use. Today with its huge fleet of military transport aircraft and purpose built
bombers.. the US Government is unlikely to utilize the civil aviation to a large extent.
43 Sec ibid at 140 (The US market consists of 242 million people compared ta me 320 mil!ian in Europe.).
.w S ~ e Wilson. supra note 41 at 145.
45 S ~ Heavy Debtfrom Dea/s Cou/d Hurt Safry. Service. Law Fares. USA Today (October6. 1989) col. l.
15

Even sa. the Civil Reserve Air Fleet (CRAF) was fonned by the DOO after the
Korean War to supplement the military airlift capacity in cases of need.J6 both in rimes of
war and times of peace. CRAF was used for the tirst time in Operation Desert Shield and
Storm in 1991...
7
[n that time the civil fieet flew in 63% of the soldiers and 25% of the
suppliesol8. Keeping CRAF in operation appears theretore to be the prudent choice. The
questions is. ho\vever. \vhether this should remuin a reason for protecting against foreign
o\vnership in airlines. The tear is that the foreign owners. unsympathetic towards the US.
could withdraw their planes in crisis times...
9
This fear appears overstated. First of ail the
caB on aircraft are based on registration in the US and not on the nationalitv of the
- -
airline. so Withdrawing them from use would be illegal. Furthermore. crews whose
loyaIties are questioned can easily replaced. [n any case. aircraft could be simply
commandeered if and when they are needed.
51
h seems. therefare. that even though there
are good reasons ta keep CRAF gaing. it is not a compelling reason tor protecting US
airIines against toreign ownershi p.
46 s ~ ~ L. Reingold. CRAF ..... Qualifie"" Sucr:ess: Ci,,i/ Resen:e Air Fleet [August 19911 Air Transpon World 24.
47 S C : ~ Donner Brown. supra note 30 at 1272
48 Sc:e Edwards. supra note 9 at 641 .
..9 S ~ e S.K. Skinner. Set.-n:tary ofTransponation (Address to International Aviation Club. September 19. 1989) in
Donner Brown. supra note 30 at 1272. note 23.
50 S:e Leveraged BuyoU/s and Foreign Ownership ofUnited States .-I.ir/ines: Hearings on H.R. 3-1-13 Before the
Subcomm. On Aviation ofthe House Comm. On Public Works and Transportation. 101st Cong. 1st Sess. 8 ( 1989)
al [ loi [hereinatler Hearings}.
51 S e ~ Transport Department Considers Standards for Regulating LBO's (September Il. 1989) Av. Wk. & Sp. Tech.
al [28.
16

2.5.2 Financial Protection:

Due to the high start-up costs and competition from suhsidized toreign
American carriers needed tinancial protection in arder for the industry ta mature and
become intemationally competitive (The "intnt argument).;:! As mentioned
during the Great Depression the government stepped in to protect airlines against
critical financiaI problems.
The danger of the infant industry argument is that such protection must end when
the industry has matured. If not it will Iead to inefficiency in the operation of airlines.
However. it is not always easy ta tell when this has happened. In 1978 the US airline
industry was deregulated. A sign may be that the maturing process was seen as being
complete. Saon after the deregulation airlines suffered severe losses but the effeet of the
deregulation and the harsh financial climate made American carriers leaner and more cost
efficient than their toreign competitors. This proofs that if the industry has already
matured. protection could lead ta an industry that laeks the incentive ta beeome more
[eading to higher eosts tor the consumer. The US airline industry has indeed
matured. It has outgrown regulation and protection and financial protection is therefore
no longer an excuse ta proteet against FDI.
52 Sc:e supra note: 18 at 185.
17

Today the need for protection has shifted. It is no longer the airlines that need the
protection.. but rather the markets in which they operate. The US has the largest domestic
airline industry.. on which foreign carriers are quite anxious to capitalize. [f the
restrictions of foreign ownership are loosened or abolished.. there could be dire
consequences for the American carriers.
2.5.3 Cabotage through Control:
Even though cabotage is currently not allowed under the Federal Aviation Act.
53
it
wouid seem to be possible were there no restrictions of toreign ownership. Where a
foreign airline owns or controis a US airline.. it could in fact run cabotage operations. [n
this way it would gain access to the US domestic market and circumvent the Act. Total
ownership of an airline is not necessary tor this to happen. It can be argued that even if
the Act 's prohibition was relaxed to the said 49%. etfective control of the airline would be
aImost impossible to prevent. Even with the current 25% limitation it is sometimes hard
for the DOT to determine who has actuaI
2.5.4 Reciprocity:
53 Si:e Federal Avrulion Act. supra note 27. s. II08(b) (1988) (-Foreign civil aircrnft....shall not take on at any point
within the United States. persons. property. or mail carried for compensation or hire and destined for another point
within the United States.',.
54 Sc:e Edwards. supra note 9 at 627.
18

Giving foreign carriers access to the US domestic market through cabotage could
cripple the local carriers as the market become too crowded. This could be cured if
foreign markets gave equal opportunities to US carriers but this is aImost impossible for
two reasons:
First. there are few cauotnes with an equal geographical size and domestic
market. 55 Many commentators feel that the US is simply ""giving away'" its market in
retum for next [0 nothing.
56
Many open skies bilateral agreements have been concluded
with smaIl countries such as Singapore.. the Netheriands and Pero in which the US market
was equally exchanged.
57
Opponents of this poliey believe that the US market is worth
much more and that US carriers should be getting more rights in the foreign market. Even
though this might be true. it needs to be remembered that this trade-otTwas done with the
larger goal of opening up the markets bordering these countries. In the case of the
Netherlands this philosophy has paid otT as more and more European countries conclude
open skies agreements with the US. Most of these are a direct result of the neighboring
States' fear that they would be left behind in the race for a competitive airline as
European Iiberalization draw nearer.
55 Sel: Federico Penil. S ~ t a r y Address at the 50th Anniversary Commemoration. International Civil Aviation
Organization (Nov. 1. 1994) at -l (on tile with the Departrncnt of Transponation. Public AtTairs Dept.).
56 P.S. Dempsey. The Disintegrution ofthe US ..Urline Industry (1991) 20 Trnnsp. L. J. at 8.
S7 S ~ Hearings on International Aviation Policy Before the Subcomm. on Aviation ofthe House a/Public Works and
Transportarion Comm. 103d Cong. 2d Sess. (May 5. (994) [hereinatier 5th May HearingsJ (Starement of Elliott
M. Seiden. Vice President. Law and Govemment Affaies. Northwest Airlines. Ine.).
19

many countries are simply not willing ta give reciprocal rights ta the US
because they fear that the American carriers could take over their market. Compared ta
for instance, the major American carriers are much more efficient with 480/0
lower costS.
58
This makes countries nervous and they react by protecting their markets.
2.5.5 Competition and Bilateral lncentives:
Two other problems are related to these unequal investment opportunities.
US carriers could tce untir competition if they have to compete with foreign owned
airlines that are state subsidized. Once a foreign State-owned airline contraIs a US carrier.
it could use its aimost unlimited governmental economic resources ta drive other
American carriers out of the market with techniques like cross-subsidization for instance.
Even though economic manipulation should be prevented by application of the Sherman
Act (which will apply irrespective of this is by no means a certainty. The
extra territoriality of US competition laws have long been a bone of especially
in Europe and reliance on the Acl therefore. no sure way ta prevent unfair competition
in overseas markets.
58 See Edwards. supra note 9 at 615.
59 See Sherman ..leI. 15 U.S.c. s. 8 (1988) (The Sherman ..Ici applies to any person or corporation -authorized by the
laws of eithcr the United States. the laws of any of the Territory. the Iaws ofany State or the laws of any foreign
country.- See Wilson. supra note .J 1 a[ 146.).
20

Second. and more important., is that if the US did allow unrestricted foreign
ownership in their airlines without receiving similar freedoms., other States would simply
have no incentive to negotiate liberal bilateral agreements with the US.
60
By investing
and even fully owning a US airline aU the freedoms of the air would be available to the
foreign states and its entities. There would therefore be nothing left to negotiate.
b1
Since
the US would have given away aIl its traffle rights by allo\ving FDt in return it would
have received nothing.
Pro-liberalists argue. in turn. that countries would rather act to the contrary. In
their opinion the chance of establishing more alliances would render the bilateral system
obsolete since airlines would be able to move passengers anywhere in the world by using
their partners
b2
There is no evidence. however. that countries would suddenly stop
protecting their markets. This would mean that any Foreign airline could freely own (or
substantially invest in) a US airline while the same would not be true of American
carriers.
60 Sec: 5th May Hearmgs. supra note 57 at 276-77.
61 Sec: Edwards. supra note 9 at 63233 (The British AinvaysiUSAir proposed merger serves as an illustration. BA
had the chance to enter the US market without the UK lowering its stringent protections. The main US air carriers
petitioned the DOT not to grant the merger. Thdr argument was based on the faet that the merger wpuld give USAir
an untir competitive ~ d g e due to the uncompetitive regulation the resl of the US carriers were tced with in the
UK.). See aise genernIly D.T. Arlington. -Liheralization of Restrietions on Foreign Ownership in U.S. Air Carriers.-
(1993) 59 J. of Air L. & Corn. 133.
62 Sec: Warner. supra note 22 al313: Sec: Donner Brown. supra note 29 at 1287 (Even though Brown is pro-
liberalization ofFDI. he admits mal the lowering ofbarriers eould reduce pressure on foreign air carriers to open
their markets to the US.).
11

2.5.6 LaboT:
The last argument that this thesis addresses is the threat ta the US labor market.
There is a fear that new awners would out source certain parts of its operations in arder to
benefit its own nationals. resulting in lost jobs for the US.
The Economie Strategy Institute (ESI) in Washington reported that the impact of
opening the local market in aviation would jeopardize sorne 40.000 American jobs.
Furthermore. US carriers would lose approximately $4 billion in revenue to European.
Arrican and Asian Pacitic carriers.
63
This is a staggering amaunt considering the already
low protit margins of American carriers.
The counter-argument to this is that new investments wauld ereate even more
jobs. By expanding earriers through alliances. the earriers wauld be strengthened through
eeonomies of seale. thus creating new employment opportunities. This argument is.
however. tlawed by the very nature of the airline industry. As the Ameriean carriers tced
hard times after deregulation. they had to reduce the number of workers. This less-is-
better attitude has been eopied in most other countries where mergers and alliances are
sometimes the best way of cutting access labor. Furthermore, alliances combine two
infrastructures where only one would be needed (e.g. where the two airlines both have
63 S:c: Stratc:gie Economie Insttute. The Future aftlre Airline lndustry (Washington. OC: Strategie Economie
[nstilute. (993) al 36.
22

catering services or maintenance station.). This would mean that one of the services
would be redundant leading ta more layotTs. Finally there is no certainty that the new
jobs would be given to US workers. As mentioned before, the new owners could rather
try ta benetit their own nationals.
2.6 Conclusion:
Since the US aviation market is the largest and mas! lucrative (about 40% of the
w o r l d ~ s aviation).04 it stands to loose the mast by the intlux of toreign airlines. It does
not. therefore, seem unreasonable to use extreme caution on the issue of allowing foreign
ownership and control into their airlines at tirst glance.
However. in spite of aIl the arguments tor national security. air transport is no
more unique than the US steel industry.65 For instance. when talks began in the 1960's
and 70' s about the possibility of importing steel tram abroad, the industry also raised the
issue of national security. As with the aviation industry steeL was cIosely regulated by the
Govemment and. in addition, it al50 support many other industries. Losing control of
steel manutcturng could therefore also have been seen as a threat to national security.
The argument \-vas brought by the industry that:
64 Sec Edwards. supra note 9 al 596.
65 See R.D. Lehner. Protectonism. Prestige. and National Security: The Alliance Against Multilateral Trade in
International Air Transport (1995) olS Duke L J. 449.
23

[Ilf the United States would rely more and more on importing steel, it
would gamble with the national welfare and the national security by
assuming that these imports would always be available in the future. We
can probably afford to take this risk on Scotch Whisky ... but we cannot
allowa basic industry like the steel industry to decay.66
Lawmakers agreed with the argument and thereby raised the status of the steel
industry to that of a industry. But the daims that it was the "comerstone of
...national greatness,,,67 were not true on closer examination. Instead of focusing on
security risks, the industry asked for an outright import quota in etTect showing that the
main reason behind it ail was keeping the financial protection it had for 50 long.
68
The arguments about labor and other economic concems are aIso not unique to the
aviation tield. US car manutcturers used the same arguments ta try and proteet against
Japanese toreign investment in the US car industry. [n hindsight it has to be admitted that
the US industry is no worse off today than it was before. ln tct improvements on
management techniques and productivity resulted.
3. The European Union Policy
66 Foreign Trade and TariffProposuls: Hearings be/ore the House Commillee on Ways tlnd ...,Jeans. 90th Cong. 2d
1867 (1968) by T.F. Chairman.. Steel Corp.).
67 Ibid. of Rc:p. EJ. .
68 supra 65 at 450.
24

3.1 Background:
Europe has always been characterized by the protection it provided to its airlines.
Each state owned its flag carrier and protected its monopoly status.
69
This was equally
evident in the protection against FOI in national airlines. Here.. as in the US. a ditference
was drawn between ownership and control. Even in European States \vhere the local
carrier privatized.. the state would keep a so-called '''golden share" which allowed the
State ta buy back shares if foreigners owned more than the majority shares.
70
Even though Article 3(e) of the Rome Treaty provides for the establishment of a
common transport policy71 air transport was specifically omitted. [nstead the creation ofa
common aviation policy was left to the discretion of the Council.12 Due ta States'
different views on aviation.. however. the Council was oever able to draw up the comman
aviation policy.73 [n 1983 the European Parliament tinally became tired with the
CounciI"s procrastinating and took them ta the European Court of Justice (ECJ). The
Court ruled that the Council had indeed neglected its duty.74 Holding them to the threat of
69 Sc:t: D.A. Duchent:. Thl! Third Package o/Libera/cation in the European Air Transport Sector: Shying Awayfrom
Full Libera/catron (1995) 23 Trans. L 1. 123.
70 Se;:c tor instanct:. the: Option Agreement betwec:n KLM and the: Ne:the:rlands gove:mment allowing the govemmenr
to buy back a prefrential shares in arder to gain majority ownership again. Through the: Articles of Association of
British Airways non--citizens could be: torced to dispose: ofshares or bt: restrictt:d in thc:ir disposai in order ta prott:ct
against unwantt:d toreign ownt:rship. See .-lir and Space Law. supra note l3 at 29.
71 Treaty Establishing the European Economie Community. Jan. 1. 1958.2998 U.N.T.S. II [ht:rcinatie:r Rome Treatyl.
72 Sc:t: ibid. an. 84(2).
73 Set: Duchene. supra note 69 at 124.
74 See European Parliament v Tire Council ofEuropean Communities. Case 13/83. 1985 E.C.R. 1513.
25

the C o u r t ~ s ruling, the European Commission proposed the implementation of a graduai

liberation scheme. This was to be done through three "packages" over a ten year period.
The progressive nature of the implementation was to avoid the negative results that the
US market experienced after the over night deregulation in 1978.
75
The signing of the Single European Act in 1986
76
(SE-\) accelerated the process
ofadoption of the packages. Where unanimity was previously required in the CounciI.. the
SEA changed the voting requirements to a qualified majority in decisions conceming the
establishment of an unified aviation market. 77 The tirst of the packages was accepted the
next year and the third package came into etfect on the tirst of April 1997. As
Carnmunity Law in the aviation tield became mare pranounced. States were therefore
torced ta change their attitude towards FDl.
3.2 Community Law:
The European Union (EU) completed its Single Market in 1992 after the signing
of the Single l\t/arket Act in 1986. This single market provides so-called tour freedoms
within the EU member states. These are the treedoms of movement of people. goods.
services and capital. [n the White Paper "Completing the Internai Market.'" almast three
75 See Duchene. supra note 69 at 121.
76 See Single European Act. February 28. 1986.0.1. Legislation (1987) No. L169 (Effective July [st. (987).
77 Sc:e ibid. art. [3.
26

hundred barriers to trade are set out to be eliminated.

18
Further directives such as
Directive also caU for the abolishment of barriers to the movement of
capital. In its detinition of capital it includes a wide variety of direct investments
80
It is
therefore, that within the region of the EU no restrictions on FOI are allowed.
Important is the tct that the Commission has proposed that Europe supports the OECO
and WT in making an early star! in their investment negotiations. Drahos and Joseph
argue that if both the EU and the US were ta support these negotiations. it would only be
a matter oftime before the rest of the world followS.
81
AIt is not as simple as it seems. Presently, legal uncertainty exists as to
the EU s authority to negotiate on toreign investment since they are not c1assitied as
matters. The problem stems tram the doctrine of '''subsidiary'' raised by Article
3(b) of the Maastricht Treaty of 1993. According to this principle, authority should lie at
the lowest level of government unless it is demonstrated that a higher authority would be
more etfective. This means that it is up to the EU to demonstrate that it would be more
efficient ta negotiate on FOI matters than the national govemments.
82
A prablem that
78 St:e B. van Aarde. The impact of/he single market program on lrade andforeign direct investmenr in the European
Union. (1995)J. World Trade 121.
79 Directive: 88/361/EEC. June 24. 1988.
80 S:e M. Gc:ist. Towards a General Agreement on the Regulation o/Foreign Direct [nves/ment. (1995) L. & Policy in
(nn bus. 681.
81Sc:e P. Drahos& R. Joseph. Telecommllnicationsand Investmenr in the Great Supranational RegulatoryGame
(1995) 19: 8 Policy 619 al 630.
82 St:e T. Brewer. lnternalional investmenr dispule selliement procedures: The t!Volving regime far foreign direct
investment ( 1995) 26 L. & Policy in [nt'I bus. 652.
27

enhances this uncertainty is the fact that only national governments can negotiate in the
oECD in foreign investment issues.
83
3.3 Problems for Aviation:
Article 7 of the Rome Treaty prohibits discrimination between Memher States on
grounds of nationality and Article 52 gives freedom of establishment to nationals in aIl
other EU States. 80th of these provisions are violated by the said restrictions on FDI in
airlines.
A trther problem came with the signing of the Single European Act. Once the
Single Market was in place nationals of Member States would have the treedom ta move
capital treely within the Community without discrimination. Since restrictions on
ownership and control would have violated these provisions. the second package of
liheralization established the concept of a "Community Carrier
84
which it defines as:
an air carrier which has its ... registered office and principle place of
business in the Community. the majority of whose shares are...owned
by Memher States and/or nationals of Member States and which is ...
effectively controlled by such States or persons.. :,,85
83 See ibid
801 Council Regulation on Licensing afCommun;r}' Air Ca"iers. 0.1. Legislation (1992) No. L240.
8S Ibid.. an. 4( 1).
28

(t further provides that the majority of the board of management of a carrier as

weIl as the supervisory board must be nationals of EU Member States. In this way actual
control is given ta EU citizens.
86
The Commission however. to convince Mernber States to re-negotiate
bilateral agreements with third countries 50 as to include the Community c1ause.
87
Their
unwillingness stemmed from the Commission"s inability to issue a clear extemal policy
on aviation. Nationality clauses however. replaced by the Community clauses in ail
intra-European treaties.
lC8
(n the case of Germany.. the standard transport agreement since
1992 has deleted the substantial ownership clause aH together.. 89 but it is not clear whether
this applies to the third countries as weil.
Since the introduction of the Community Carrier EU airlines are free to
merge and torm alliances provided these are in conforrnity of EU competition laws and
merger controis. Two problems. tce new mergers and joint ventures due to
ownership and control limitations.
86 Ibid.. art -t(2) which gives the detinition of'''etfective control.-
87 See Letter by the Directorate General tor Transport (DG VII) orthe EC Comm. to Member States. (September 26.
(989).
88 Sec: Air & Space Law. supra note (-t al 3(.
89 See ibid al 32.
29

First., in the case of a merger between two EU airlines, the question of nationality
might ereate problems with existing bilaterai agreements them and a non-European
country since the third country can object to the fact that the new entity is not
substantially owned by either State. The Chicago Convention does provide for the
possibility of joint operations
90
with Scandinavian Air Services (SAS) Norway
and Denmark's joint airline) serving as the best example. The ditTerence is, however. that
the these three countries still negotiates ail their air services agreements separately and
then designates SAS as their airline. No third country has so tr objected to the SAS on
grolmds of ownership. but this does not mean that the fonnula of SAS did not have its
tinanciai costS.
91
Many countries will overlook the ownership and control problems only
if they receive more from the negotiations. A trther factor to keep in mind is that the
three countries trming SAS are necessarily politically radical towards any other country.
Should a merger occur between t\\to countries of which one has a litT with the third
country. the problem of ownership would aimost certainly be
A last problem with such a merger is that it would require a State ta re-negatiate
its bilateral agreements with third countries in order ta change its designated airline.
Negatiating bilateral agreements are not easy or quick under the best of circumstances. If
the country has to further enter inta joint negotiations with its new il is elear that
90 Chicago Convention. supra note 8 ch. XVI: Joint Operating Organizations and Pooling Services. arts. 77-79.
91 See Air &Space Law. supra note 14 al 35.
92 Sec: ibid (Other complicating factors incIude the tact that panners operate different agreements with other airlines
e.g. pooling agreemc:nts or code-sharing and the tact thut one partm:r might have local competition which would
make designarion difficult.).
JO

the practical problems in negotiations wouid aImost certainly increasing the aeropolitical
t: h S 93
costs Lor t e JOint tates.
Joint ventures between EU airIines will aise suffer under the ownership and
control clauses in biIateral agreements. Here it wouId be a problem of contro1.
94
\Vhere
one partner invests more equity in the venture then the other it might be seen as the
controlling entity. The joint venture would then have to tce the same barriers as any
merger. Again this is a weakness that can to be exploited by third States in negotiations.
It is clear.. however.. that in extra-European negotiations the Community clause
has no etTect. Each State in the Union has control over the amount of foreign ownership
and control it will allow into its airlines. There is currently very littIe incentive of
Member States to give the Commission a mandate to negotiate on their behalf with third
countnesqs even though the Commission is of the opinion that third countries (especially
the US) are in a bener position due to individual negotiations. [n a statement by the
Association of European Airlines (AEA).Q6 however. the Commission was criticized for
being tao restricted in their views of aviation negotiations. In particular the AEA cIaimed
that the Commission did not place enough emphasis on the differences between the US
and the European markets in its policies.
97
These incIuded the size difference between the
93 S ~ e ibid. at 36.
94 See ibid at 39.
95 See ibid.
96 See AEA Policy Statemc:nl. EU Eclernal Aviation Relations (Brussels. Oct. 1995) [hereinafier AEA Slalemenrj.
97 See ibid at 13.
31

two markets. In Europe the market is much smaller and the competition from ground
based mass transport much higher. European carriers therefore have to concentrate their
efforts on lucrative trans-Atlantic routes where they face stiff competition from American
carriers. The European market on the other h a n d ~ benefits US airlines. They are able to
serve the market etTectively from only a few hubs due to the \-vide networks of railways
and the shorter distances.
3.4 Reasons to Protect against FDI:
The reasons mentioned constitute anly sorne of problems tcing European
carriers. While the US are concemed about European carriers gaining a part of their
market through control of US airlines. EU States are more concemed about the
competitive advantages that American carriers enjoy. These include the shear size of the
main trans-Atlantic carriers as weB as the barriers to market entry in the US.
European airlines are extremely concemed about these limited entry opportunities.
Their argument is that. while the US carriers have extensive tifth freedom tratnc rights to
many EU States. European carriers have no direct access to the US domestic market. To
correct the inequality would require nat fifth freedom rights. but rather cabotage rights
98
due to the differences in geographical size of the regions.
32

The carriers are also concemed about the size and cost advantages that trans-
Atlantic American carriers have. And rightly so. As mentioned the cost structures
of US airlines are much lower than their European counterparts. After the Gulf War
European airlines also suffered severe tinancial difficulties leading to overcapacity.l}9
making the situation \vorse. Furthermore. the merger and acquisition spree in the US
market in the 1980's had led to a concentrated market with only a tw very large carriers
operating. Their size and low cast structures make them a real threat ta the European
carriers.
lnterestingly enough through. the AEA in its statement indicted that it is in tct
against ownership restrictions in airlines. According to the Association these limitations
are hindering global aviation opportunities 100 and should he lowered or be done away
with. There is no rationale anymore for regulating the economic atTairs of aidines. The
view of the European carriers is logical since they are still in a stronger tinancial position.
Even thought they want ta use this as an advantage ta gain access ta the US market.. they
do however fear competition from the more cast efficient. larger US carriers. 101 This
99 Commission orthe European The Way FOM'Iardfor Civil Aviation in Europe Com(94) 218 tinal
(1994) at 3.
100 See ..lE'" Statement. supra note 96 at 16.
101 The US carriers are doing wdl in intemational markets. Fifty-four percent ofintemational tratlic in 1993 were on
US carriers. The biggest concem tor European airlines. however. is the ti"equency that Europeans are tlying on US
carriers. Over the (ast live years this percentage increased from 24% [0 40%. See A. Edwards. supra note 9 at 614.
33

caused EU Member States to shy away from the full liheralization of foreign ownership
.. . th th' d k lO"
restnctions ln e Ir pac age. -
4. Conclusion
Sentiments against restrictions of FD1 in airi ines are becoming more pronounced
and more and more they are seen as obstructing the naturai growth of the airlines
industry. With the competition in aviation rising, airlines need to take advantage of
economies of scale and increase their route structures. Due ta the high cast involved in
this expansion.. it is mostly not possible for any one airline ta do on its own. lnstead they
expand by torming strategie alliance such as joint ventures or even outright mergers. This
necessarily requires the abandonment of airline nationality and the ownership and control
restrictions that go along with il.
101 St:e Duchene. supra note 69 Olt 121.
34

CHAPTER 2: FDI in TELECOMMUNICATIONS

1. Introduction
In the past basic telecommunication service providers (called Post.. Telephone and
Telegraph Providers (PTTs)) were predominantly owned and operated by Governments.
Driven by economic and national security concems they vigorously
protected this industry From outside ownership and control. The result was multiple
national communications networks that had to interconnect ta each other. This resulted in
higher costs than a system by which one phone caU is handled by only one
carrier thraugh its entire cannection.
This however. is seeing a movement towards a more globaL market
driven telecommunication industry.l03 Large carriers are trying to enter foreign markets
due to the saturation oftheir own or to satisfy multinational corporations' (MNC's) needs
tor a seamless. cheap and reliable international telecommunications network. This has
helped to boast the growth in FDI stocks throughout the world ta appoint where it now
surpasses even trade as an economic driving farce.
104
Many States are trying to attract
foreign investment by otTering tax havens. guarantees of the repatriation of protits or
103 See G.W. Brock. e. Towards a Competitive Telecommunication Industry: Selected Papers l'rom the 1994
Telecommunications Policy Research Contrence (New Jersey: Lawrence Erlbaum Associates. (995) at l79-l80
[hereinatler Competitive Telecom Indusr'Yl .
104 See Drobos &Joseph. supra note 81 at629.
35

allowing the use toreign labor.

105
Pressure is also put on reluctant States to open their
markets to foreign capital. Despite these efforts, however, most States have remained
selective about the type of industries into which they would allow FDI and
telecommunications is one generally shielded from il.
Barriers to FDI have been neglected by poliey makers in the past. but toda)' the
very future of global telecommunications seems ta depends on the type of solution they
106
choose.
2. Regulatory Barriers to FDI.
2.1 Limitations to Market Access:
Control over market entry in basic telecommunications generally prohibits any
tirrn l'rom otTering basic services. either within that country or from that country to the
rest of the world:,lo7 The providing of services can be restricted by either preventing the
foreign carrier the right of establishing new infrastructures. or by preventing the resale of
capacity.
105 Sc:e ibid.
106 Sc:e R. Joseph. Direct Foreign Inveslment ln Telecommunications: A Review a/Attitudes in Austrafia. New
Zea/and. France. Germany and the UK (1995) 19:5 Tc:lc:com. Policy ... 14.
107 Competitive Telecom lndustry. supra note 103 at 140.
36

The right of a States to prevent FDI to enter their territory is justified in

International Law by its recognition of State sovereignty. Furthermore. the Articles of
Agreement of the International Monetary Fund specifically allow States to maintain
capital controls.
los
There are different policies that cauntries adopt ta market access in
telecommunications. Countries could. for instmlce" adopt a monopolistic approach to
basic telecommunications while allowing tree entry in other telecommunication services
such as cable television. mobile or satellite communications (e.g. France and
Germany).109 Another strategy could be to allaw a graduai opening of the market ta
competition (lndia and Australia).
2.2 Foreign Ownership and Control Restrictions:
Arguably the most important way to restrict foreign intluence in the market is by
restricting the amount of foreign ownership and control in local telecommunications
companies. As in air transport. many countries use a percentage method in their
regulations to set limits on foreign ownership. [n the US the ne\v Telecommunications Act
of /996
110
sets the limit at 25% of ownership of capital stock by a tbreign tirm in the
broadcasting sector. Above this limit the American firm is seen to be an affiliate" of the
108 See 1. Salacuse. Tawards a .Vew Treatyfor Foreign Direct lnvestment (1985) 50 1. of L. & Comm. at 980 & at
note 33.
109 See Joseph. supra note 106 at 419.
110 Tt!/ecommunications Act af 1996 (see at http:!www.fcc.gov/tdecom).
37

foreign firm. This is, h o w e v e r ~ not a absolute limit since the FeC eau allow the
investrnent if it is in the public interest ta do 50.
111
Dther eountries tao have also adopted a percentage model. In 1995 the limit for
foreign ownership of French companies was 33.330/0 with Community Members treated a
bit more leniently.ll! Germany by comparison is more liberal. There are. in fact.. no
specifie limitations set for treign ownership and. even though Deutsche Telekom {OBP}
is still a monopoly in telephony and infrastructure provision.. privatization is ta come
saon to come.
IU
The UK. however. has arguably the mas! liberal attitude towards treign
ownership and control. In tct there seem be no restrictions on treign ownership.
Interestingly. however. is that a 150/0 limit has been set on ownership of British Telecom
(an and Cable and Wireless stocks by any one entity. This makes it impossible for a
toreign tirm to acquire a controlling share in these two major English
1
. 114
te ecommunlcatlons companles.
It seems clear that restrictions on toreign ownership and control is applied more
often than nota The reasons for the control ditTers however. [n the case of the US and
mas! likely the UK.. the restrictions are now used as a bargaining tool to open toreign
III See S. Hastings. Foreign Ownership ofBroadcasting: The Telecommunications Act of 1996 and Beyond ( (997) 29
Vand. 1. Trnnsnafl L. at 7. S ~ e below al S.J Public Interest.
112 S ~ e Joseph. supra note 106 at 421.
113 S ~ e ibid at 423.
114 S ~ e ibid
38

markets to local carriers while in countries such as France and Australia it is still used to
protect the incumbents.
2.3 Operational Controls:
Operational controls do not aim to prevent or limit amounts ofFDllike ownership
or market entry restrictions. Instead it tries to prevent companies trom becoming too
strong for the local carrier. [t is also a way to extract the maximum benetit trom the
treign capital. [n both these ways it can act as a deterrent tor companies 100king to
invest in a new market. Since the cost of entry for telecommunication providers is already
very high. any restrictions such as these may render a venture completely unprotitable.
For the host country. however.. these kind of restrictions create many social benetits and
50. especially in developing countries. States readily apply them. Typical operational
contrais are joint venture and universal service requirements.
Joint venture reguirements torces a foreign tirm to enter into a joint venture with a
local company thereby transferring skills and technology to local market. The aim is ta
-integrate the investment project with the economy of the country:'
1
15 Here again there
are restrictions put on the amount of foreign ownership. A country such as Ethiopia, for
Ils SaJacuse. supra note 108 at 983.
39

instance. is capping foreign ownership in these ventures at 490/0.

116
The local entity must
therefore remain in control.
The requirement to provide universai service requirements means that a foreign
firm will have to set up infrastructures and serve certain remote or poorer areas in the hast
country. While this provides much needed services to those areas and so improve the hast
country s position. it may also be necessary in the light of competition with the local
carrier. The local carrier is forced by regulation to provide these services and by torcing
the new entrant to do its share.. the '''playing t i e l d ' ~ is Ieveled.
The problem with operational contraIs is that they do not always serve the greater
good of the consumer. Since many of the domestic carriers are still State owned
monopalies. it could be argued that these barriers exist to give them an untir advantage
over the new entrant. The competing interest of the State is even worse in countries where
the local company also acts as the regulator.
3. Reasons to Protect the Telecommunications Industry.
3.1 The Theories of FDI:
116 So: EthiopiaJoinc Ven/ure Establishment Proclamation. No. 235/1983 (1983).
40

There are three basie views to FDI:

117
The radical view. linked with Marxist
theory, is that MNCs (and therefor FOr) are inherently evil and that it keeps developing
countries dependent on the capitalist. industrial States' investment. jobs and
technology.118 This shifts the economic imbalance even further towards the developed
warld.
119
This theory is.. however.losing its support almast globally.120
The free market approach is the exact opposite ta the radical view. It promulgates
that FDI stimulates the eeonomic growth of countries and should he allowed treely
without any restrictions. In practice.. however. no country has a totally free market tor
FDl. National security issues and politieal policy still causes govemments to intervene in
111
certaIn transactIons.
countries. therefore.. choose a compromise between these (wo radical
theories. The pragmatic. nationalistic approach views FDI as having both costs and
advantages to the hast State and 50 tries to extract the most advantages out of these
investments while at the same lime trying to limit the potential damage. 121
117 See also Drahos & Joseph. supra note 81 at 631 (They caU their theorics the market accc:ss model and the
protectionist mode!. ln the market access theory states an: seen to benelit l'rom the intlux of loreign investrnents and
new technology. Funhermorc nationality becomc:s im:levant in the search for the most cost efficient way of
providing services.).
118 Sec: Hill. supra note 1at 200.
119 See Drahos & Joseph. supra note 81 at 631.
120 See Hill. supra note 1at 201 (This is due to the collapse orthe block. the strong economic
perlormances by developing nations that embraced FDl and the generalleling that FDl does economic
growth through technology translrs and job supplying.).
121 Sec: ibid. (A good example is the US govemmen(s policy ofrefusing to allow FDI l'rom or to Cuba. 50. even
though it promulgates the free market approach. FDI movement is never totally unregulated.).
122 See ibid.
41

Even though this approach seems ta be universat there are still differences in the
ease with which FOI is allawed to flow. As a general mIe it can be said that industrialized
States have mostly liberal views tawards FOI since they are the capital exporters.
Developing states, by comparison, are more projective of their markets. This rule appears
to he changing. Due to the benetits of FDI many developing countries are actively trying
.. d 12J
to anract It Instea .
3.2 Reasons for Protecting Against FOI:
3.2.1 National Security and Sovereignty:
National securitv, as in air transport, i5 the traditional reason cited tor protecting
telecommunications against FOI. Governments tind it vital to he in control of its own
telecommunications network either via its own carrier or at least through one that is
patriotic to il. In case ofwar or a State ofemergency the government must be able to have
free and total access to capacity and must be able to control the contents if it is necessary.
After the deregulation of the US telecommunications market tor instance, the
government was concemed about he loss of AT&T as the state's own carrier. A program
123 ln the lelecommunications industry. for instance. Malaysia launched its so-caJled tc:lecommunicatians super
corridor lhrough which it hapes ta attract Foreign investrnent in order ta became a in
lelecommunications in Asia.
42

had to be thought up in arder to compensate for this loss and the impact it had on national
security.
Sovereigntv is one of any States" most guarded assets. There is still a fear that too
much foreign dominated assets could mean that the host State can be held at ""economic
ransom"'t by foreign MNC. Even States such as the US, and Europe are concemed about
tao many ~ C s entering their markets. The US especially seem to regards Japanese
companies with a deep suspicion. Most economists today" however. dismiss these
concems as being outdated. According to Robert Reich.. the growing interdependence of
the world economy means that a foreign State cannat hold another at ....economic ransom'"
without thereby hurting itself as w e 1 1 . 1 2 ~
[n spite of 5uch reassurances.. however.. governments have to consider the most
unlikely scenarios in order to proteet itself in the future. Especially in a sector as vital ta a
State as telecommunications. national security and sovereignty issues are still the
predominant reasons tor limiting foreign ownership in local telecommunication carriers.
3.2.2 Telecommunications as National Asset:
124 R. Reich. The Work afNations: Preparing Ourselvesforthe 2/st Gmtury (New York.: Alfred A. Knot:. 1991) al
211.
43

Another reason for protecting against FDI is the protection of the national carrier
(with its status similar to that of the flag carrier in airlines) trom being taken over by
foreign companies. The fear is that this national asset might he lost. The fear is not only
based on nationalistic reasons. but also economic. Local carriers are large earners of
foreign incorne through international accounting rates.
125
By staying independent national
systems. they can take charge higher tanffs for completing a cal1 in their territory. The
tet that they are able to do this is directly due to the International Consultative
Committee tor Telephones and Telegraphs' (CCIR) roles goveming rates and tariffs. The
rules basically cornes down to three things: 12b
Rates between countries are set bilaterally. The two countries then split the earnings
of these single naccounting rates" equally between them.
The accounting rate remains the same no matter what route is used. This means that
the caller can never receive any benetit by passing the eaH through cauntries with a
[ower accounting rate (exactly the type of price tixing that competition laws try to
prevent).
PTT s are obligated to keep their accounting rates as low as possible. This would
ideally mean keeping them at cost. [n reality. however. PTT' s accounting rates are
much higher. This is partly due to the tct that they use the extra earnings to cross-
subsidize routes that are considered a necessary public utility and therefore not very
125 See Drobos & slIpra note 81 at 634.
126 J.D. Aronson & P.F. Cowley. When COlin/ries Talle: International Trade in Tt!lecommunicalions Services
(Washington. OC: American Enterprise InstituteiBallinger Publication. 1988) al 88.
44

profitable. Since the international routes are the most lucrative.. these are used for the
cross-subsidization which keeps the international rates above cost.
These mies allow States to make a huge profit
l27
on their international
telecommunication services to the detriment of the consumer. This is the reason \vhy the
US considers a system of open competition a better solution. Many countries are..
however.. reluctant to lose this extra source of incarne. Even though these countries are
mainly developing countries. industrialized States in Europe aise benetit from the higher
accounting rates. Here the profits are also much higher and there are therefore more at
PK
stake to proteet - .
3.2.3 Economie Reasons:
Lastly there are the economic reasons for restricting FD[ into the country which
go wider than just telecommunications. FDI has the potentiaI to hurt the eeonomy of a
country. The US espeeially have to consider the negative etTeets of allowing in tao many
toreign investors. Recently the influx of foreign investment has been linked to the US
trade deticit.
119
Aecording to sorne economists this import imbalance is due to the
117 K. Propp. The Erading Structure o[lnternational. Telecommunications Regulation: The ChaJ/enge ofCaJl-
back ServIces (Spring 1996) 36:2 Spring Harvard lnt'! L 1. Furthennore. these protits are then sometimes re-
routed towards non-teiecommunicOltions uses. See K. Stanley. -BOllance of POlymenIs. Deticits. and Subsidies in
IntemOltionaJ Communications Scrvices.- (1991) 43 Admin. L. Rev. at 411 &
128 See Competitive Telecom lndustry. supra note 103 Olt 140.... 1.
129 See Department L'nited States Trade Performance in 1985 and out/ook (1986) al 58-59 in C.
Vrountas. The Necessity and Efficllveness ofBarriers to Foreign Direct lnvestment ( (990) XUI: 1 B.e. [nt' 1L. Rev.
170.
4S

tremendous economic growth of the 1980' S.130 Although economic concems are not, as
mentioned befare, restricted solely to telecommunications, the shear size of this industry..
especially in the US.. makes it one sector where considerable cancern lies.
4. Advantages of FDI
4.1 General:
Not everyone is 50 strongly oppased to FDI though. Pro-fareign investors point
out. and rightly 50. that FDI brings along with it many positive attributes. For the
consumer it has the advantage that carriers are able to expand their telecommunication
network due ta the extra capital. In this way they cao take advantage of economies of
scale. This in tum makes them more efficient which in theory would lead to lower priees.
The hast State cao aIso benetit from FDI. The entrants will establish and maintain
new infrastructures tor hi-cost industries such as basic telecommunication. This has the
added advantage of transferring the technalogy of the foreign carrier ta the hast State.
[30 Sc:e ibid.
46

The new FDI can also create new job opportunities (both direct and indirectly)1J1 and
introduce new and better management techniques to the local market.
132
In spite of aIl ilS good developed States are still concerned
about the possible negative effects that FDI could have of their economy. This fear is
enhanced in the case of developing States.
4.2 Developing States:
lt is the view of this thesis that none of the two radical models of FDI are exactly
suited tor developing countries. Drahos and Joseph133 aiso argues for a middle way. They
argue that even though barriers should be Iowered. this process should not be rushed.
There are both advantages and disadvantages to allowing FDI and countries should take
bath into account.
The problem with FDI is that the nvestment is done with the iotent ta gain long-
term tinancial benefits. In the search tor these benefits developed countries have not had a
history of considering the needs and problems of developing States. For the US
IJI Direct reti:rs to the hired by the company whereas indirect employment is whc:n local
manutactures and arc: used to supply the company or the jobs that are crc:nted due to the spending of the
employees ofthe company. See Hill. supra note: 1at 207.
132 See ibid (Hill argues that this benetit is reduced if the tbreign tirm is tbrced to use tao many local hi-skilled labor
and management. The reason tor this is that they arc: already trained for these jobs. The spin.otTetTect cao only
succeed if the tbreign subsidiary trains them in its management techniques.).
133 See ibid
47

model bilateral investment treatyl34 concluded with many developing nations Ce.g. Egypt,
Panama and Senegal) adopts a capitalist view and an "open market''' approach with very
little concern for the problems tcing the other State.
l35
The main concem for developing countnes is, however, not the developed State
itself, but the MNC's to who's benefit the developed State concludes these treaties.
Telecommunication tirms \vanting to enter into developing markets are, for instance,
almast without exception large MNC' s. The problem for the developing States is that
MNC's are hard.. if not impossible to regulate. They can restructure their operations with
relative ease as to avoid the national regulatory system.
Ub
Unlike local firms that are
tixed within the borders of the country. MNC's cau freely move part.. or aIl of its
operations out of the territory when tced with untvorable ta" or labor laws tor
137 Th' . d h 1 1 Dl'
Instance. 15 cao cause senous amage to t e oca economy. eve oplng states,
therefore, still tar the that tvfNC' s might hold them tor "economic ransom" and demand
more tvorable treatment.
[n 1976 the Organization for Economie Cooperation and Development (DECD)
adopted sorne guidelines for the MNC' s of its Members.
138
Two of the problems
134 Concerning the Trearment and Protection aflnvestment reprinted in (1982) 21 l.LM. 1227.
135 Salacuse. supra note 108 al 993.
136 Sec ibid, supra note 108 Olt 99394.
137 See ibid.
138 Organization tor Economie Cooperation and Dcvefopment. Declaration on International Investment and
l/u/tinationa/ Enterprises. 0 ECD Doc. C(76)99 (Final) (1976) [hereinatler OECD DeclarationJ.
48

addressed in these Guidelines were the problem of liability of the parent corporation for
debts and obligations of its subsidiaries't and second" the question whether a subsidiary
my close down even if it is still profitable. For the latter the Guidelines never attempted
to restriet a corporation's right ta disinvest.
139
The only recommendation was that it
should "take fully into account established general poliey objectives of the [host
As for parent company liability. the question is still open. Many Western nations
do not recognize a general responsibility of the parent company for tinancial
commitments of their subsidiaries. Courts would "pierce this corporate veil" only under
exceptional circumstanees. In the Badger-case
l41
this question had to be decided by the
DECD Committee on [nvestment and Multinational Enterprises (CIME). Even though the
problem was resolved and the parent company indemnified the workers of its subsidiary.
it was stressed that this was a voluntary settlement. It did by no means lead to a
recognition of a legal obligation. It is. therefore. still to be seen whether the Guidelines
can give rise ta a fixed rule on parent company liability.I*2
[39 See N. Hom. International Rules for JluJtinationaJ Enlerprises: The ICC. OECD. and fLD Initiatives ( 1981 ) 30
Am. University L. Rev. 933.
140 OECD Declaration. supra nole [38. para. 45.
[41 The Badger Company Inc. was an engineering and construction company with subsidiaries in other countries. It
dedded ta dose its unprotitabh: subsidiary in Belgium and refused to pay the debts of the subsidiary. These debts
included the tennination indemnities of the staff. The lrade unions requested the OECD to review the case and
ensure that the Guidelines were tollowed. See Horn. supra note 139 at 931-932.
142 See ibid al 934.
49

It is clear from what is said above that even though sorne guidelines on MNC
behavior do exist.. they are nothing more than recommendations with no legal force under
either International Law or under international agreements. The DECO Guidelines
furthermare bind only its Member States.
The Guidelines do show. however. that there are signiticant concem about the
operation of MNC's This has prompted sorne authors to argue that States sometimes have
ta use trade related investment measures (TRIM's)143 to counter the advantages that
MNC's have over local tirms. According to Hawkins and Walter,144 for example. MNC
activities sometimes deviate from the normal supply and demand principles
1
.J5 and
therefore the use of TRIM"s are justitied to rectify the situation. A good example is the
adverse ~ t f e c t s that MNC"s cao have on competition. Subsidiaries of these companies can
draw from funds generated e1sewhere in the world by its parent company. These funds
cao then be used cross-subsidize the activities in the host State giving it a competitive
d 1 1
. 146
avantage over oca companles.
Ali these factors cause a deep-routed suspicion towards ~ C and bilateral
agreements such as that of the US have not done much to allay these fears. It is theretore
In TRIM's takes the samc lbnn as the barriers mcntioned abovc. This tcrm is used when the locus is on tradc and the
distortions it causes to trade. For the purposes of this paper the term is used synonymous with FD[ barriers.
144 S(e E. Kwaw. Trade Relaled Inveslment J/easures in the l.iroguay round: Towards Cl GAITfor /nveslmenl
(1991) (6 N.C1. [mO( L. & Cam. Reg. 330.
145 For instance, MNCs can us( their market power a.'i a barrierto new entrants. They are also prone to using bundling
and centralized and integration control methods. See ibid. supra note (44 at 330.
146 S Hill. supra note 1at 210 (According to him this concem is more predominant in countries with lw large
finns oftheir own. Therefore this is a concem that is unique in most cases to Icss developed countries.).
50

clear that even though cauntries should move towards liberalizing their markets, it would
be unwise ta do 50 without first puning in place proper regulatory precaution. [f a MNC
could monopolize a local market (not so far fetched considering the inadequacies of sorne
States' competition laws), aState could be facing a unregulated monopoly. This is more
dangerous than even a government regulated one.
5. US Regulation
The USA has the largest telecommunication market in the world. It alone accounts for
29.70/0 of aIl caUs made in the world.
147
Since its local market is based on open
competition. it would be relatively easy tor foreign companies to compete in this
lucrative market ~ i t h o u t necessarily aUowing US campanies ta have an equal toothold in
their territories. A Foreign subsidiary which has gained access to the US market could
aIso be supported by its own State. This could be done with more tvorable tinancial
arrangements such as lower connecting rates to that State's networks. An example could
be where the Foreign country charges its entity in the US less for caUs made via ilS home
base (E.g. Charging a Hong Kong owned carrier less tor a calI l'rom the US to Singapore
via Hong Kong than its US counterpart. ).148 In the context of goods this type of behavior
would be considered dumping," (i.e. the is flooding the foreign market with unjustifiably
147 Data on TelecDmmunications Jfarkets cDvered by the JfTO .Vegolialions on Basic Telecommunications. On the
Internet sec: WTO. http://www.wto.org (This is an infonnal document).
148 See R. Eward. The Deregulation ofInternalional Telecommunication (1985) Deregul. lnt'1. Telecom. 401.
51

low cost items).149 Even though dumping is commonly accepted as unfair trade practice,
it does not yet extend to services. This Ieaves a country such as the US without any
international legal redress.
Arrother problem for the US is the excessive seulement rates charged by other
States. This is estimated to be casting the US $2 billion dollars annually (relative ta cost)
. 1 ISO
In unnecessary sett ement ees.
For these reasons US businesses started asking the govemment ta protect their
interest by only allowing entry ta companies l'rom countries which have similar open
markets. This is the idea behind the US unilateral strategy of requiring reciprocitv.
The idea of reciprocity is not new in the US. The Lands Leasing Act of
1920
151
contains similar protection. It provides that no alien can be granted excavating
leases unless their countries give nsimilar of like privileges" ta American entities. As
shawn before., the notion of reciprocity is also used in US air transport policy. The idea is
also not exclusive to the US. Already the UK has expressed concern about the closedness
of foreign markets. They too will be looking at the US action ta see the results.
1.J9lbid
ISO Sc:e Competitive Tl!lecom Industry. supra note 103 at 139-141.
151 The .\finera/s Lancls Learmg Act. JO U.S.c. ss. 181-287 (1988) (as amended).
52

5.1 The Telecommunications Act of1996:

Pan of the new Telecommunications Act of 1996 incorporates the idea of
reciprocity even though Congress decided against using the tenu due to tar of
l
, 15"
reta latlon. -
The purpose of the new aet is two-fold. Domestically it seeks to encourage more
competition by lowering foreign ownership limitations. The added competition would
secure lower priees and higher quality services tor American and encourage
the rapid deployment of new telecommunication technologies:-
IS3
Intemationally its aims
is to secure equaI benefits for US international carriers by forcing States to lower their
FOI restrictions. The Telecommunications Act tries to accomplish this by aIIowing the
Fee to lower or even wave the foreign ownership restrictions if it found that equaI
competitive opportunities do exist in the applicant's State.
5.2 Effective competitive opportunities test:
152 Sc:e Y. PaladinL Forergn ownership reslrictions under section 310(8) oflhe Telecommunicalions ..lei of /996
(1996) lof B.U.lnn L. J. 357.
153 Ibid al 344.
53

Even before the Act. the Fee issued an order describing the test it would apply to
Foreign applicants.
154
Under the effective competitive opportunities test the
Fee will examine 5 elements to determine whether a US corporation would reeeive the
same treatment as the Foreign firm when it enters the that market:
1. Legal barriers for entering the market: 155
2. Whether interconnections are provided '-reasonable charges_ terms and
conditions;..,
3. The availability of competitive satguards (for instance roIes against cross..
subsidization):
4. Whether there is a regulatory body [0 proteet the US tirm tram untir competition
and
5. If tbere is an obligation for the timely and nondiscriminatory disc10sure of
technicai information needed to use or nterconnect with carriers facilities:-
156
Apart trom these_ the FCe will also consider any other additional evidence that
the markets are becoming competitive.
151
In this regard the FCC has moved away trom
154 See Fee lB Dockct No. 95-22. 30. 1995 [hereaftcr Fee Orderl.
155 Additional public imcrest factors will he taken inta accuunt when judging the market accessibility. These are the
state of Iiberalization orthe the status orthe carrier as a state-owned entity. the signitif."ance that the enuy
would have on local competition. whether accounting rates are set at cost and other national security issues. See
ibid.. para 56.
156/bid.. para -tO.
157 See Paladini. supra note 152 at 362.
54

. b . d' b 158 b
preVIOUS case- y-case scrutlny to a more ynanllc route- y-route or country- y-
country evaluation.
The goals of the ECO test is to encourage toreign countries to open their markets
to US to promote etTective competition in the global market tor
communication and to prevent anti-competitive behavior in the world
markets.
159
According to the Fee this will result in better rates and services for US
160
consumers
The joint venture between the US company Sprint.. Deutsche Telekom (DBP) and
France Telecom. in which the two European carriers proposed to jointly buy 200/0 of
shares in Sprint.. provided the Fee with its tirst opportunity to apply the ECO test. Even
theugh the shares were less than the statutory 250/0 limit.. the proposai was still
investigated. More however.. is that the proposai was accepted in spite of the
tinding that the German and French markets were in tct not open enough. Upen
approval of this venture the Fee said that allowing the venture would encourage these
European countries to trther liberalize their markets. The Fee aIso required a written
commitment by the two countries that they will liberalize their markets by 1998 in
accordance with EU Directives. Finally the Fee noted that by allowing the
158 Sc:e Fee Order. supra note [54. para 21.
159 Ibid.. para. 3.
160 Set: ibid.
55

Sprint would become more competitive in the local market.

161
This satisfies the first goal
of the new Act.
The mast signiticant test for the Fee and its ECO test is the proposed merger
between British Telecommunication PLC (Sn and MCI Communications Company
(Mel). BT has already acquired a 20;'0 share in MCI ta fonn a new entity called
'''Concert:'' It is incarporated in the UK and will trade on the UK stock exchange while
MCI shares will disappear. In return investors will receive Concert American
d
. 162
eposltory recelpts.
Even though the UK market is extremely liberaL even compared to the US
market.. the US government would likely scrutinize this proposaI very caretlly since it is
likely to become an important precedent for certain legal issues. It will.. tor instance. have
provide a detinition tor '''reciprocity'' (whether.. tor example, market openness has to he
exactly similar or just comparable to that of the US). It would also prove the efficiency
of the ECO test and it will prave the efficiency of the two-tier system between the Trade
Representative and Fee.
lb3
161 ibid.. para. 12
162 See A. Field. The JICI/BT J/erger and Foreign Direct Investmenr Issues (1994) 25 L. & Policy Int1 Bus. 1153-
1154.
163 PaJadini. supra note 152 nt 367.
56

5.3 Public Interest:

The entry of a toreign entity will still be dependent on the public interest test. This
test overrides the ECO test which means that a foreign firm can still be allowed to enter
the US market in spite of failing the FCC s competition test. Likewise it might he refused
entry if it is found to he against public interest.
1tH
The public interest test scrutinizes a
wide range of tapies trom national seeurity to international relations and trade strategy. [n
applying this test the Fee will work in cooperation with the US Trade Representative.
The Fee will limit itself to the technical aspects of the serutiny while the Trade
Representative will consider trade strategy and policy issues. lbS
6. European Union Regulations.
6.1 Background:
Until the late European telecommunications fell outside the jurisdiction of
the European Union and its Commission.
166
Even though the Rome Treaty set fonh to
164 Sec Fee supra note 154. para. 3.
165 Sec: Paladini. supra note 152 at 365.
166 See E. Noam. Telecommunications in Europe (New York: Oxford University Press. (992) at 305 [hereinatter
Telecommunications in Europe1.
57

gradually liberalize the internaI market in trade of goods and some industries
were excluded from EEC control. Telecommunications was one ofthese industries.
167
Before 1987 the structure of Europe's telecommunications sector was structured
not unlike that of the International Telecommunications Union (ITU).16g Each State had
its own carrier which handled both the operation and the regulation of
telecommunications. Unlike the US policy which seemed in disarray with its multitude of
institutions.. the European regulatory system appears neat and organized. The problem
with this system. was that it was resistant to change. Since the regulatory body
as weIl as the operation of the organizations was contained in the same entity. very little
intormation was ever given to the general public.
lb9
High costs tor caUs as weil as the realization that the EU was tlling behind in
acquiring technology finally torced the rvlember States to consider liberalization.
170
The
change came in the Green Paper on Telecommunications published by the Commission in
1987.
171
Two ways of liberalization were considered betre the proposaIs made in the
167 See c.c. Butche;:r. Telecommunications in the European L'nion ( (996) 48 Admin. L. Rev. 452.
168 Se;:e P. Holmes. et al.. International Competition Policy and Telecommunications: Lessons /rom Ihe EUand
Prospects for Ihe U70 ( (996) 20: lOTdecom. Policy 759.
169 See Telecommunications in Europe. supra note ]66 at 323.
170 Sc:e H. Ungc:rer et a/. Telecommunications for Ew-ope 1992: The CECSources. Volume 2. (Amsterdam: lOS
Press. 1991) al 1: See aJso Butcher. supra note 167 at 452.
171 Green Paper on the Development ofthe Common Market for Telecommunications Services and Equipmenr.
COM(81)290 tinaJ. 06/87 ( 1987).
58

Paper. The first option was the so-called big-bang" liberalization whereby the markets
would be opened instantly and ail at once. This approach was eventuaIly discarded since
it was tlt that Europe' slang history of monopolies and protectionism have put the local
PTT is tao strong a position. If the markets were to be opened without tirst putting in
place safety measures, these PTT' s could easily restructure and fonn strong monapolies
in the EU that would make the market incontestable for newcomers.
1n
As in aviation the
Green Paper opted instead tor a step-by-step approach where different telecommunication
services would be liberalized over time.
6.2 The Green Paper on Telecommunications:
The purpose of the Green Paper was to '''improve variety, quality, and cast
efficiency of telecomrnunications in the European Union. thereby strengthening the
telecommunications sector:,173 Sorne of the recommendations made by it were the
division of the regulatory and operating arms of the telecommunications sector and the
creation of an European Telecommunications Standards Institute (ETSI) (the European
equivalent of the Fee) in arder to stimulate the competitiveness of the European
1
... d 174
te ecommunlcauons ln ustry.
172 See O. Shmann .Vetwork Competitionfor European Telecommunications (New York. Oxford University Press.
1995) at 307-308.
173 Butchc:r. supra note 167 at ~ 5 2 .
174 For a more complete discussion on the Green Paper. see Ungerer. et al.. supra note 174 al ~ .
59

Ta implement the Green Paper the Council and Commission of the EU legislated
four Directives in 1989 and 1990. The mast important Directives ta the service industry
D
" 0 N k P .. (ONP)175 d .. 176
are lrectLves on pen etwar rOVlslon an on campetition.
According to the Commission Directive of 28 June 1990 on Competition in the
lv/arkels for Telecommunications Services (90/388/EEC)(Services Directive) competition
was to be introduced ta the telecommunicatians sector (ail sectars except basic telephany)
by 1992 to coincide with the completion of the Single Market. Furthermore ail sectors are
ta be completely liberalized by January 1. 1998.
Originally vaice telephony (basic telecammunications) was not included in the
liheralization package. [t was felt that this wauld threaten the tinancial stability of local
telecornmunications operators. With the adoption of the 1992 Services Directive Review
this sector again received exemption (although the detinition afbasic telephony was more
limited) but the Commission launched into a wide-ranging debate into the question
whether this sector should not be liberalized as well.
l77
On April 1993 the Commission
issued the Communication to the Council and the European Par/iament on the
t75 Council Directive 90/387/EEC.
176 Commission Directive 90/388/EEC [hereinatler Services Directive).
177 Sec: W. Stewart. Satellite Communication in Europe: Lawand Regulation (London: l o n g m a n ~ (994) at 168.
60

Consultation on the Review of the Situation in Telecommunications Service Sector.

(COM(93) Final 28/04/93). In the 1993 Council Resolution 9.J/C of7 Febroary 199-1
on Universal Services Principles in the Telecommunications Sector
l78
The Councii gave
its support to the Commission to amend EU regulations to include voice telephony. As a
resuIt this monopoly will also have to be dismantied by the beginning of 1998. Spain.
Portugal. Greece and Ireland are the exceptions. They \Vere granted an extension until
"00" 17Q _ .J.
6.3 EU Competition Law:
As the telecommunications sector are progressively pressure will be
increasingly placed on competition law to protect the internaI market from distortions.
The rules of EU competition are round in articles 85 to 94 of the Rome Treaty.180 With 85
and 86 being the two principle articles.
Article 85( 1) prohibits aIl agreements aimed at diminishing competition within
the common market. Article 85(3) then allows for certain exceptions to this where the
agreement "contributes to improving the production and distribution of goods or to
l78 Sec: Universal Services Principles in the Telecommunications Sector. February 16. 1994.0.1. Council Resolution
(1994) No.
179 Sc:e T. Cordrey. Battle Lines ( 1994) Int'I Mgmt 30.
180 Rome Trealy. supra note 71. arts. 85-94.
61

promoting technical or economic while allowing consumers a fair share of the

benefit." Even though the second part set sorne limits on this exempon,181
telecommunication joint ventures and cooperation agreements caught by Article 85( 1)
might successfully use the Article 85(3) exemption where it results in technological
progress which outweighs the necessity for competition. 182
The Commission, it seems have used a lenient approach to joint ventures in the
tield of telecommunications. [n the Concert joint venture between BT and MCI, for
instance. the Commission allowed the agreement in spite of the tct that it contains
provisions that the [WO companies are not allowed to enter inta each ethers territory.183
Doing 50 would be sanctioned by the loss of substantial right under the agreement. The
Commission based its decision on the tct that Concert only operated international
enhanced services and not basic telephony. According to the Commission this is a tield
where the international community requires seamless communications. Two companies
providing this service independently would never achieve the same resuIt due to the
know-how involved and the tremendous investments costs. Furthermore.. companies
would tce stilT competition in this tield trom the big American tirms such and AT&T
and other joint ventures. It is, therefore, essential for companies like BT and Mer ta torm
181 The Agrec:ments can on1y be cxempted if they improve or promotes technical or c:conomic advances that are in the
interest of the consumer. ifthey do not resu1t on the dimination ofcompetition in that market and if the agreement"s
l'l.'Strictions are ncccssary to obtain the said objectives. Sec M. Styliadou. App(ving EC Competition Law 10 Alliances
ln the Telecommunications SeclOr ( 1997) 21: 1Tdecom. Policy 49.
182 See S.L. Harkness. International Parrnerships in the European Union Telephone Service Jlarlt: Towards a Nt!w
Jfonopo(v (1996) XIX:[ College [nCI & Comp. L. Re\'. 189.
183 See Commission Decision. August 27. 0.1. Legislation ( (994) No. Ln3. 94/S79/EC.
62

a strong alliance in arder to remain competitive. Of course this does not explain why the
two companies should not be forced to compete with each other in other fields such as in
b
1 .. 184
aslC te ecommunlcatlons.
Article 86 deals with the misuse of a dominant position (or a substantial share of
the market) in the common market that distorts trade between Members. While
addressing the same examples as article 85. this article mainly focuses more on the
etTects to the consumers.
185
Since PTTs could use their strong position to gain a
competitive advantage. the detinition of "'dominant position' 1S an important one in EU
. . dl' 1 l ~ h
competItion an te ecommunlcatlons aw.
Article 90 makes it clear that public undertakings. especially thase that are given
special rights by Member States. are subject to the competition rules of articles 85 and 86.
This article also empowers the Commission to Iegisiate Directives to ensure that article
90 ts complied with.
184 See Styliadou. supra note ISI at 51.
18S See Stewart. supra. note 177 at 179.
186 See Harkness. supra note 182 at 191-192 (The ECJ have extended the concept of dominant position. In Cl!nlre
Belge D'Etudl!s de J/arche-Tl!/e-Marlceting .s:.. v. Compangnie Luxembourgeoise de Telediffusion SA and
InfOrmation Publicite 8eneilL'C SA (311/84 E.C.R.3261. (985) the Court stated [hat market shan: was an important
tctor in determining if a company has a dominant position. Although the Court did not detine "market share" it did
declare that a company' s market share did not have ta encompass the whole EU market ln Uniled Brands Co. and
United Brands Continental B. J': v. Commission (Case 27176 E.C.R.(978) the court focused on the competition-
surpressing dTects of the act and not the geographical size of the undertaking.).
63

The Commission used this power to legislate the Services Directive in which it
specifically provided that telecommunications fall under the provisions of article 86.
187
The Services Directive also created more safeguards for the prevention of another
monopoly. An avenue through which entities might launch complaints about alleged anti-
competitive behavior was opened for instance
1
88 This was used by BT to initiate an
investigation into the proposed joint venture bet\veen Deutche Telekom. France Telecom
and AT&T about the possible consequences to competition. Once a venture such as this
one is allowed. DG IV (Competition) and Articles 85. 86 have to prevent ex post
abuses. 189
From the start the Rome Treatys competition mIes were c1early not sufficient to
deal with mergers. The Council finally rectitied this in 1989 by legislating Merger
Regulations. l'JO These Regulations gave the Commission the po\\'-er to monitor aIl mergers
and acquisitions above a certain financiaJ threshold.
191
The Regulations also applies to
"concentrative joint ventures:' In both cases activities that are likely to ereate or
strengthen a dominant position or lead to anti-competitive results can be prohibited by the
Commission. In the telecommunications sector. however. Merger Regulations were
187 Sec: Services DireClive. supra note 176. para. 13.
188 See Harkness. supra note 182 at 194_
189 See Holmes. el al.. supra note 168 at 760.
190 Council Directive. December 21. 0.1. Legislation (1989) No. L39S. .
191 See Styliadou. supra note 181 at49.
64

mainly used for the investigation of vertical mergers while article 85 was used in cases of
horizontal mergers and joint ventures. 192
6.4 Global Lessons from EU Competition Law:
The effectiveness of EU competition regulations are important to the rest of the
world for two reasons. First.. Member States" PTT are increasingly joining forces with
strong US teleeommunications tinn and torming powerful joint ventures. The rest of the
world will be interested ta see if competition ruIes alone (as opposed to outright
protection against foreign tirms) ean proteet the weaker carriers within Europe.
Second. the EU is a perfect test bed where countries in different levels of
liberalization have to compete under the same competition regulations. The etTect of this
was demonstrated in the case of France and Sweden. A dispute arouse over accounting
rates. Since Sweden was the more liberai of the two countries, France couId easily secure
cheap access ta the S\vedish market by bypassing the international gateway. Sweden did
not have this option and as a result had ta pay higher accounting rates. [n reply Sweden
(92 See genc:ra11y ibid.
65

refused ta pay France the full amount knawing that the EU competition rules were in its
t
, 193
avor.
Articles 85 and 86 can therefore be used as a Dispute Settlement System.
Sometbing that is as yet unknawn at global level.
l94
The global community should..
therefore. take note of the fact that one common competition regulation structure could
result in a dispute settlement procedure that works even in cases where countries are at
different Ievels of liberalization.
193 Sc:e ibid
194 Sce Holmes.. el al. supra note 168 at 760.
66

PART Il: MULfiLATERAL SOLUTIONS

CHAPTER 3: REGIONAL AGREEMENTS
Apart torm the E U ~ ather regions and organizations have concluded regionaI
agreements in recent years to liberaIize FD1 restrictions in their telecommunications and
air transport industries. [n the absence of a truly multilateral agreement these regional
agreements reflect the changing global view to liberalize economic sectors. This thesis
will examine just three such agreements, nameIy The North American Free Trade
Agreement (NAFTA), the Andean Pact (or Andean Community) and the OECD
initiatives.
67

1. NAFTA
The North American Free Trade Agreement
195
between the US.. Canada and
Mexico signed on December 17. 1992. contains in Chapter Il an agreement on the
liberalization of investment. Accordingly Members have to provide the better of either
national or MFN treatment ta foreign investors.
196
It aIso prohibits performance
requirements such as local content requirements. export performance, domestic sourcing
and technology transtr requirements:
97
Members are. however. allowed to exempt
certain sectors of the economy from MFN treatrnent in their schedules. Mexico. tor
instance. has excluded its satellite and telegraphic communications sectar due to
constitutional requirements that certain commercial activities must remain in the
exclusive damain of the government.
19K
Another way to exclude telecommunications
would he through Article 21 02( 1)(B) which aIIows States to take any action it considers
necessary ta protect an essential security interest.
195 Sec: .Vorlh American Free Trade Agreement (NAFTA). rc:printc:d in 32 ILM 289. For discussions on various aspects
ofNAITA. sec: Annua/ The .Vvrth American Free Trade Agreemenl f."iAFTA.). published in InCl L.
589-770 (hereinafter VAF'f.'(}.
196 Sec: G. Santrino. The .VAFfA Investment Chapler and Foreign Direcllnvestment in J/e.'tico: A Third Worfd
Perspective ( 1994) 27 [CSID Rev.- Foreign [nvestment L. 1. al 60: NAFrA. supra note 199. art. 1104 .
197 Ibid. art. 1106( 1)
198 See 1. Shihata. Recent Trends Re/ating co the Entry ofForeign Direct [mestment ( 1994) 9: 1 ICSID Re". - Foreign
Invc:stment L. J. at 61 (& note 71 ).
68

Chapter 12 deals with services, including aviation. Air transport rights"

were, however. excluded and the Chapter only addresses aircraft maintenance and repar
and specialty air services.
199
Chapter 13 on telecommunications also failed to include
basic telecommunications and only addresses value-added or enhanced services and
private networks.
100
The Agreement theretore does not provide a complete liberalizing of
FDI in these t\\'o industries.
2. The Andean Pact:
On May 26. 1969 Colombia.. Ecuador. Bolivia., Chile and Pero signed the
Cartagena Agreement in Sogota establishing the Andean Pact.
lOI
Venezuela joined in
1973 but Chile withdrew again. Aimed at the economic integration of Latin America the
Pact followed their disappointment with the Latin American Free Trade Area.
202
The Cartagena Agreement was solidly tounded upon the Calvo Doctrine
203
and
the strategies taken in the early period of the Pact' s history was therefore tainted with
199 NAFrA. supra note 1959. an. 1201(2)(c).
:!OO See ibid.. ch. 13.
201 See Agreement on Andean Subregiona/ Integration, May 26, 1969. 8 LL.M. 910 [hereinafter Cartagena
Agreement).
202 Sec T.F. O'Keete. How Andean Pact Transformed ltseifinto a Friend ofForeign Enterprise (1996) 30:4 [nfl
Lawyer812.
203 After extensive of Latin American countries Dr. Calvos Doctrine was aimed at protccting the region
against further negative etTects oftbrcign economic involvement. [n the late 19th and early 20th century the
69

protectionism and discrimination against foreign investors. Decision 24 of 1976 is a good

example. The Common Regime for Treatment of Foreign Capital on Trademarks.
Licenses. Patents and Royalties
204
(Decision 24) maintained a view that nationals should
own the countries' wealth and receive the revenues. Decision 14 also forbade foreign
investment in certain sectors and restricted them in others.
205
Sixteen years after Decision 24 it became clear that this attitude against foreign
investment was seriously hurting the region. Driven to a large extent by the Latin
American debt crisis in the Decision 220
207
in 1987 tried to liberalize the
previous position but without significant etfect. 208 [t was not until Decision 291
209
four
years later that the States started to embrace foreign investment. This Decision allowed
FDl to tlow freely across the borders of Pact States and granted the same rights and
obligations to other foreign investors
21O
as that of nationaIs.
countries making up the Andean Pact view foreign investment as a potential threat and as a result the Calvo
Doctrine's two basic principles were develope:d. These: arc firstly. that forcigners should not have: more rights then
nationals and therefore should not he allowed to seek legal redress in any other coun except for thc: domestic
tribunals. The second principlc: states that loreign States arc: not allowed to enforce their citizen's rights through
diplomatie intervention or through military torce. Sec: generally A.V. freeman. Recent Aspects ofthe Calvo
Doctrine and the Challenge 10 International Law. (946) -40 Am. 1. Infl L. 121.
204 Sec: Common RegIme ofTreatment ofForeign Capital on Trademarks. Licenses. Patents and Royalties. November
30. 1976. 16 I.L.M. 130 (1977).
205 Sec S.P. Areta. Andean Paer Developmenrs (1992) Florida J. Int"! L 113.
206 See E. W. Weisner. ANCOM: A .YewAuitude Towards Foreign /nvestment (1993) 2-4:3 Inter-Am. L. Re\'. -t38.
207 Sec: The Common Foreign fnvestmem and Technology Licensing Code. Decision 220 of May ( 1. 1987.
Commission ofthc: Cartagena Agreement. reprinted in 27 LL.M. 974.
208 See 0 Keefe. supra notc: 202 at 818.
209 Sec: Common Code for the Trealment o/Foreign Capital on Trademarks. Palents. Licenses and Royallies.
Decision 291. March 21. 1991. reprinted in LL.M. 1283 [hereinafter Decision 29/}.
210 See Areta. supra note 205 al 115.
70

In the field of air transport the Pact implemented a joint air transport liberalization
poliey in 1991. Aimed at liberalizing the region' s air transport, Decision 297, Integration
ofAir Transport in the Andean Subregion. allowed for the exchange of f i v ~ freedoms of
the air (the fifth freedom being gradually implemented) and covers scheduled, non-
scheduled and cargo. ft also set up the Andean Committee of Aeronautical Agencies ta
oversee the Hberalization process. In addition Decision 320, l'v/ultiple Designation in the
Air Transport in the Andean Subregion, allows for the multiple designation of airlines
between Member States.
The Decisions relating to air transport have made the Bloek stronger and have
given them more leverage in air traffic negotiations.
211
Another advantage of the
Iiberalization is that it had led to increased route structures through the temtories ta
include also secondary cities. This, coupled with lower airfares due to inereased
competition, have led to a 400
%
increase in passengers since 1989.
212
The Andean Pact is
therefore to be a good example to the world of how the Iiberalization of aviation might
d
. "13
a vance aIr transport.-
21 [ See Le:hner. supra note: 65 at 475.
212 Se:e Andean Pact ..lirUnes From New Association to Integrate Air Travet (Sc:ptember 20. 1993) World Airlim:
News al 1.
213 Sec Le:hner. supra note 6S at 473.
71

3. The OECO:
While not technically a region.. the Organization for Economie Coordination and
Development (DECD) is a Organization with pawerful members and has therefore the
potential of making a signifieant impact in the seareh for a multilateral investment
agreement (MIA). The DECO started their work on an multinational agreement in 1994
and the Organization's Capital Liberalization Code
11
-J is already one of the more
signiticant works in the area of liberalization of FOI restrictions.
llS
The Code abolishes
aU restrictions on FDI and caUs tor the free movement of capital between Members. It
has.. however. two shortcomings. First.. Member States can again lodge exceptions in their
schedules. and second there are no penal provisions in the agreement on FDI.
l16
Here the
EU"s European Court of Justice and NAFTA"s dispute seulement system gives them an
advantage.
Recently the Drganization has also become involved in the field of aviation. An
OECO Forum in 1992 urged the OECD to conduet studies into the economic regulation
of air transport. This study covered tapies ranging trom infrastructure development and
the impact on other economic sectors to ownership and control issues. As a direct result
214 S(e OECO. Code o!Libera/i=ation o/Capital Jlovement (Gc:neva: OECO. 1993) [hereinafter OECD Capital
Cade1.
215 S(e Gdst. supra nole 80 at 681 .
216 S(C ibid at 682.
72

of the study the DECD now gives its support tor freer trade in air services and in
the lifting of ownership restrictions.
217
Even though the Organization cannot by itself initiate new agreements" its support
could give a powerful impetus to the adoption of a new policy.
217 World Travel & Tourism Council. Air Transport and Free!T Wor/d rrade! (Brussels. wnC. 1996) at 10
[Hereinatler JVlTe Report1.
73

CHAPTER 4: MULTILATERAL SOLUTIONS

In the case Belgium v the International Court of Justice noted that it seems
strange that no general international rules for FDI have yet been established.
218
As of late..
however.. there have been strong pressure by certain countries for an international
agreement to Iiberalize FDI. This is due mainly ta the growth of FOI. Over the last two
decades leveIs have increased to where it now out paces international trade four tald. The
advances in transport and communication technology has funher resulted in a growth of
s which in tum pressurized their governments to address international FOI
restrictions.
1. The History of Multilateral Agreements on Investment
The tirst attempt at an multilateral agreement on investment (MAI) was the post-
World War II Havana Charter
119
establishing the International Trade Organization (ITO).
The Charter specifically gave States the right to determine and regulate aIl toreign
investment in their territory.120 However.. it never received enough ratifications ta enter
inta force.
218 Sec: Bdgium v Spain. I.e.1. Rc:p. 3 (1970) at.J7-t8.
219 See Havana Charter[oran International Trade Organi:ation. United States Department ofState Pub. 3206
[hereinafter Havana CharterJ.
220 Sec: ibid.. an.12( 1).
74

In the absence of any international agreement, Bilateral Investment Treaties (BIT)

where used by capital exporting countries ta secure entry into Foreign markets. Bath
Europe and the US used BIT"s but they were not very successful in establishing entry. In
the treaties cancluded mainly by European States, for instance. entry was ta be made in
accordance with the legislatian" of the host State.ll
1
Since no limitation is set on the
legislative measures. the host State was free to introduce any restrictions.
Even though the treaties concluded by the US were more "aggressive in terms of
demanding mast tavorite nations treatment (MFN) or national treatrnent.. the treaties did
pravide that the host State could judge what is not in its national security interest or
against public order.
122
The State was therefare allowed to sereen the investments before
it entered into its markets. As a result the stop-gap approaeh of the BIT"s was not a
permanent answer.
Bath the United Nations and the World Bank Group recognized the need tor an
international agreement on standards for Trade Related Investment Measures
(TRIM"S).213 In 1974 the United Nations passed the Charter of Economie Rights and
DUlies of States.
124
In Article 2(a) it again recognized that eountries have the right to
221 Shihata. supra 198 at 55.
222 Ibid at 57.
223 TRIMs are those measures used by a sta(e ta regulate FOI. TypicaI ofthese are the -screc:ning" ofproposed
investrnents belore they are granted ente)' or openlling barriers such as the joint venture clauses or local content
requirements.
224 Sec: Chaner ofEconomie Rights and DUlies ofSlates. GA Res. 3281. UN GAOR. Doc. XXIX. 1974
art.2(a).
75

regulate FDI in their territories in conformity to their own national objectives. It also
provide that no State shaH be forced to grant preferential treatment to toreign investment.
Even though this Resolution received aimost universal acceptance from developing
States, the reluctance of developed countries to agree prevented it from attaining any
practical relevance. It was., therefore., aIso not successfui in addressing the liberalization
of FOI restrictions.
The World Bank has always been involved in the liberalization of
telecommunications. Through advice and lending strategies it has institutionalized
regulatory structures in countries in order to promote market access for FDI.
115
In 1992
the Development Committee of the of the International Monetary Fund and the World
Bank Group drew up guidelines tor the handling of foreign investments. Although not
legally binding.. the World Bank is hoping that they will change international law to a
notable extent. The guidelines caBs tor MFN and national treatment
216
in FDL Chapter II.
dealing with admission.. stilt however. recognizes the right of States to govem the
admission of private foreign invesunent:
227
Furthermore. Article 4 also leaves it up to
the State's discretion to refuse entry based on considerations of national security or
economic development objectives.
1
:!8
225 See Drahos & Joseph. supra note 81 at 624.
226 Guide/ines on lire lrealmenl offoreign direct investment (Chapter ([( 3(a) and -1) (1992) 7:2 rCSID Rc:v. Foreign
[nvestment L. J. 300.
227 Ibid. ch. 1I(3).
228 See Ibid.. ch. 1I(4l(a)&(b).
76

2. FDI as Trade under the GATT

In September 1986 the States party to the General Agreement on Tariffs and
Trade (GATT) started the eighth round of trade negotiations in Uruguay. These
discussions included two new agreements. One was the General Agreement on Trade in
Services (GATS) and the second was the discussion on the liheralization of trade related
investment rneasures (the TRlM agreement). One objective with the Uruguay Round was
to link the GA with investment.!:!9
The prohlem is that GATT is a trade related agreement and ta bring investment
issues into its regulation requires sorne consideration. It can be argued that the
liberalization of intemational trade is so intimately linked with investment that free trade
presupposes the liheralization of In tct such a correlation has been tound in the
past.
1J1
The reason for this might be the tct that 50
%
of trade takes place between
affiliated companies. This so-called intra-tirm trade is due to the dependency on
imports.:!J2 In this way FOI increases the trade of the new hast country.
There are also practical problems when separating trade and FOI agreements. This
was illustrated in the dispute between Canada and the US over Foreign
229 See Kwu\\'. supra note 144 at 31 1.
230 See Drahos & Joseph. supra note 81 at 629.
231 See Van Aarde. supra nme 78 at 137. Sec: aiso Gc:ist. supra note 80 at 678. See generally Kwaw. supra note 144
al 320.
232 Sec: Van Aarde. supra note 78 at 137.
77

Investment Review Agency (FlRA). The US claimed that FlRA had violated Canada's
obligation of non-discrimination under the GATI.
n3
This dispute s!lowed that keeping
investment and trade matters separate might lead to the circumvention of obligations
under either of the (WO separate agreements.
In spite of strong support from especially developing countries that G.'\TT should
remain restricted to trade issues.
234
the US pursued the issue of combining trade and FDI.
The result was the inclusion of an agreement on TRIM's in the Uruguay round of GATT
negotiations. However. at the conclusion of the Uruguay Round in 1994. only a meager
result was achieved on an agreement on TRIM's.
Under this Agreement States must refrain from using TRIM's that are inconsistent
with Article [II and Article XI of the GATT.
ns
Unfortunately the GATT and the TRIM
Agreement only apply to trade and FO[ in the trade in goods.:!36 Service industries such as
air transport and telecommunication services. Furthermore. it does not give strong rights
of establishment and entry so the right of national and MFN treatment cannot be tied to
237
these.
233 S.:e generally R.K. Paterson. The GATTand Res/rictions on Foreign Investment: The United Stares Chalfenge co
Canada's Foreign Im:estment Law (1982) 1UCLA Pacifie Basin L.J. 224.
234 Sec: Kwaw. ~ ' U p r a note 144 at 319.
235 Anicl.: 1II dt:als with national treatment in internaI ta.xation and regulation. Anicle XI conc.:rns quantitative
restrictions on imports and .:.xports.
236 See Drahos & Joseph. supra note 81 ar 629.
231 Sec: ibid
78

For services industries in particular. the TRIM agreement was not a success.
Negotiations dead-locked in Brussels in 1990 and in the end gave States the freedom to
regulate restrictive measures in much the same way as before.
3. FDI under the GATS
More promising to FDI in service sectors is the inclusion of an Agreement on
Trade in Services (GATS) in the Uruguay Round. The GATS was another US Ied
initiative seeing it partly as a way to make up for the lacking agreement on foreign
. '38
mvestment.-
Foreign investment is deait with in the GATS through Article l(2)(c). This Article
defines trade in services as. "the supply of a service...by a service supplier of one
Member. through its commercial presence in the territory of any another Member:
Z39
Commercial presence" includes the creation and maintenance of a juridical persan and
the creation and maintenance of an establishment for the purpose of delivering a
FDI is theretbre one of the modes of supplying service and is thereby brought
under the GATS. The inclusion of FOI also subjects it to MFN and National treatment
238 Sc:e Kwaw. supra note 144 at 320.
239 Gl!neraJ Agreement on Trade in Services. Dec. 15. 1993. WTO. on the [memc:t.
http://www.wto.orglserviceslGATS. [hereinatler GATS).
240 Ibid.
79

principles, the obligation to liberalize market access, transparency, limitations on

subsidies and foreign exchange restrictions.
4. Air Transport in the GATS
If investment \vere to he brought under the auspices of the GATS, it would be
desirable ta include international air transport as weil. It would [ead ta more uniformity
and less confusion if only one set of rules applied to both aviation and investment. The
question that this thesis will attempt to answer is whether aviation can indeed fit into the
GATS framework. In order ta do this it ts necessary to tirst analyze the structure of the
GATS. The tollowing part will then examine the problems in the classifying international
air transport as a trade in service under the WTO.
4.1 The Structure of the GATS:
The GATS is a binding contract between all the signatory governments with the
abject to create a predictable trading environment where trade. job creation and
investment can thrive. This tS done through a progressive liheralization of trade harriers.
The GATS agreement consists of three pillars namely:
the Articles of Agreement,
the "Sectoraf' Annexes and
80

the Sehedules of Specifie Commitments.

The Artic1es of Agreement again eonsists oftwo partS:!41 namely:
a) General obligation whieh are applicable to aIl parties in accordance with the
annexes and
b) Specifie negotiated obligation \vhich are negotiated bilaterally and specified in the
States~ national schedules.
142
The mast imponant of the general obligations is the principle of the Most
Favored Nations (MFN) treatment. This principle.. applying to all service sectors.. means a
pany State is obligated to extend ta each other pany State the same terms of conditions or
freedoms that it extends to another State. The MFN principle underlies the basic principle
of the GATL namely that of non-discrimination. Nonetheless.. countries can file
exceptions to this principle.
243
Other general oblig,uions include provisions on transparency (Anic1e III).. mies
on monopolies and exclusive service providers {Article VIII),244 increased panicipation
241 Sec Kluwer Law International. GA 17and the Global Trade In Serv:es (Wintcr 1996) 1(: 1InCl Contmet Advisor
at http://www.ljcxtra.cOmlpraeticeJinternatiGATIserv.htmJ.
242 See ibid.
143 See GATS. supra note 239. art. II(2) states: "a Party may maintain a measure ofinconsistent with paragraph 1
provided that it is listed in. and mects the conditions ot: The Anncx on Article Il Exceptions." These exceptions are.
aceording to the Annex. to be reviewed after 5 years. Anicle 11(3) allows a smte to aecord adjacent countries more
advantages. This is pOlentially important in aviation.
244 Ibid.. art. VIII: .....~ a c h Pany shaH ensure that any monopoly provider in its lerritory does noL in the supply ofthat
monopoly service. act in a manner inconsistent with mat Party's obligation under Article II and specifie
commitments under Pan III orthe AgreemenL"
81

of developing countries and business practices (Article IX). Two other important
Article X on emergency safeguards and Article XV on has referraIs to
subsequent negotiations.
Specifie provisions are principles that the GATS aspires to
145
and inc1ude market
access U\rticle XVI) and national treatment (Article XVII) provisions. These rights are to
be negotiated bilaterally benveen countries and the specifie commitments to or conditions
for liheraIization' s made during these negotiations are then specified in the State' s
national schedule 0/ specifie commitments. The commitments are then extended ta aIl
other party States according to the MFN principle. Important tor investment is Article
XVI on market access which mentions six measures for restricting market access that are
prohibited. One of these prohibitions is the setting of a lirnit on the amount of foreign
share holding or individual foreign investment unless it is speeificaIly specified in the
"46
schedule.-
The second pillar is the annexes dealing with specitie service sectors. These
include annexes on telecommunication. financial services and an annex on
article II (MFN) exceptions. The role of the annexes is to "clarlfy, interpret and/or qualify
the applications of the GeneraI Agreement in the light of "Sectora!" pecuIiarities. i.e. the
245 Sc:e R. Janda. Passing tlte Torelt: Wlty fCIO Shauld Leave Economie Regulation a/International Air Transport to
tlte Jn"O (1995) XX:I Ann. Air & Sp. L. "11.
246 Sc:e GATS. supra note 239. art. XVICt).
82

specifie economic or regulatory features of the particular sector,,,247 and form an integral
part of the General Agreement (Article XXXV).
The third and last pillar of the GATS is the lVationa/ Schedules or schedules of
specifie commitments. As said above. these contain the bilaterally negotiated
commitments between party states to tiberalize their markets and the specitie sectors. The
commitments entered into force along with the GATS. Further negotiations between
party States will lead to a progressive lessening of trade barriers until eventually. it is
hoped.. ail barriers to trade will be dismantled.
4.2 Choosing a Regulatory System:
The question arises whether international air transport needs to be regulated by a
multilaterai agreement. As mentioned betore. the fiIure of the Chicago Convention to
establish any signiticant mIes on economic regulation resulted in a plethora of bilaterai
agreements. This bilaterai system has been vigorously defended ever since due to its
apparent ability to accommodate the different socio-economic development of countries
and their unique air transport policies.
2
..
s
At the 1992 [CAO Colloquium on International
Air Transport it was also clear that regulation by bilateral agreements was preferred due
247 ICAO. World-Wide :lir Transport Colloquium WATC92. (Montreal: ICAO. (992) at 3. s. 3.l1[hc:reinaftc:r 1992
Colloquium1.
248 Sec: Lehnc:r. supra note 65 at 446. See also V. Poonoosamy's statement in 1992 Colloquium. supra note 247.
83

to the way in which they treat aviation as special among services and their ability to
provide protection for the national airlines, especially protection against stronger
competitive airlines.
1
.J9
Developing countries, especially. fear that the disappearance of their national
carriers would leave them at the mercy of foreign carriers operating into the territory.
Without its own carrier, the foreign carriers might just t1y the lucrative routes leaving the
rest of the country without universal service.
150
Even if this could be remedied by an
agreement on universal service. these countries would still run the risk that the airline
could stop its service leaving the country stranded. Developing countries want therefore
to protect their airlines torm disappearing in a competitive environment. This is the one
legitimate argument tor eountnes ta proteet their airlines and one that was left for [CAO
ta solve by developing a "satty net. ..151
It however. not ooly developing countnes that question the replacement of the
bilateral system. In the words of Susumu YamajL the chairman of Japan Airlines: "Most
Asian countries, including are not prepared to accept the sort of 'law of the jungle'
competition in which, 1 am sure. the strong mega-carriers will be the only survivors in
control orthe market and the consumer:,252
249 (CAO. C-WP 5-1 (April 6. 1992) at ( {ColO WP 5-/1.
250 Janda. note 245 at 0157.
251 infra al note 277 for more about the
252 1992 CQ({oquium. supra note 247 at.J. s. 5.1.13 (Stntement by Mr. Yamaji. Chainnan.Japan Airlines).
84

despite the favor towards a bilateral agreements.. the world seems to be moving
more towards a multilateral system.:!53 As in telecommunications.. regional agreements
have grown in numbers. The Single Market 0 f the EU~ the Andean Pact Australia and
New Zealand"s common aviation arena are just sorne examples. Through these
agreements like-minded States are looking to join their aviation policies in arder to create
easier and more predictable regulation amongst themselves. The almost two thousand
bilateral agreements registered at [CAO means that airlines are subjected to not only
domestic regulation.. but aiso to a different set of regulations everywhere they tly. This
causes confusion and expenses in trying to keep up with the proper regulations. Of
course.. regionai agreements makes the situation worse.. especially for carriers outside the
region. Now they aiso have to consider the regional regulations in addition to that of each
individual country.154
The main support tor a multilateral system cornes.. however.. l'rom the economic
advantages it would give to the airlines. An advantage that in turn could be passed on the
consumer. Airlines neecl to take advantage of economies of scale in arder ta lower there
cast structures and this is hard ta achieve under the current biIateral system
255
The
bilateral system is tao protective of the local market. With traffic rights and investment
253 Set: [CAO WP 5-/. supra note 249 at 2 ([t was recognized that one ofthe advantages of a multilateraI agreement
was exactly the: fact that it is current growing popularity in an era oftransnationalization ofairlines.).
254 (CAO. World-Wide Air Transport Confrence on International Air Transport Regula/ion: Presenl and Future
(Montreal: [CAO. 1994) at 3 [hereinaftc:r /99-1 Conjrencel.
255 Sec: Lehner. supra note 65 at -lS9.
85

being exchanged on a multilateral and Iiberal basis" airlines would be able ta optimize
their route structures. tariffs and schedules leading to better efficiency and lower prices.
ultimately" theretore benefiting the consumer.
[t is the view in this note that the two main concems when determining the future
regulatory structure is the benefit of the consumer and the need for uniformity in
regulatian.
For the consumer lower prices are anly one of the goals. the need tor dependable
universal service is just as important. Furthermore. airlines are the backbone of the many
other industries such as tourism and exports. Having an efficient airline help support
these industries. Leaving the transport ta toreign carriers could ultimately mean a
movement of capital away from the country. This is a seriaus consideration tor
developing countries who have seen capital continuously tlowing away from their
markets to that of the developed world. The need. however" is tor an efficient airline. An
airline that continues to lose money and need excessive subsidies ta continue is defeating
its econamic purpose and another solution should be sought. Any multilateral agreement
will have to consider the problem of protecting universal services.
Uniformity willlead to a more predictable and less confusing regulatory system.
Airlines would be able to structure themselves more efficiently and problems with traffie
rights would be solved more quickly. Under bilateral agreements States are able to use
86

canflicts as an excuse ta force a re-negotiation of the agreement. This was demonstrated

when the US carriers TWA and Pan Am sold their North Atlantic routes to American and
United Airlines. The UK refused to accept the new designations and forced the US to re-
negotiate the UK/US bilateral agreement.
Such re-negotiations lead ooly to time-consuming discussions that ultimately hurts
the consumer and the airlines. With a multilateral agreement the mIes would he
transparent and unifarmity willleave less room for nit-picking.
4.3 ICAO and Economie Regulation:
(CAO does not have an impressive track record in the tield of the economic
regulation of air transport.
256
Even though the Chicago Convention did bestow sorne
competency on it
157
[CAO never really actively entered the economic arena. Instead it
limited itself to areas of security, safety and technical regulation.
258
This was due to the
aidines themselves taking the initiative in setting up an economic regulatory structure for
air taritTs through lATA.s tariff setting conterences. Another reason was the wide-spread
256 See H.A. Wasse:nbe:rgh. World Air Transport Regulation Reform ( 1994) XIX:I Ann. Air & Sp. L 503.
257 According to Article: 44 of the: Chicago Comention [CAO must: -prc:ve:nt waste: caused by unreasonable
competition' (Article: 44(e). that every State has a fair opportunity to participate in international air transport
(Article 44(0) and ensure the growth of international civil aviation (Article 44(a)). Article 44(1) also gives ICAO a
general mandate to devc:lop aIl aspects <including economic developmc:m) ofintemationai civil ac:ronautics. See
Chicago Convention. supra note art.-I4.
258 See P.e. Haanappel Pricing and Capaciry Determination in International Air Transport (Deventer: Kluwer.
(984) at 167.
87

following that the USIUK's Bermuda [ agreement received causing countries to regulate
their own econamic affairs bilaterally?59
[n the 1970s. hawever. the USs new policy of open competition led ta a
deliberate undermining of [ATA's mechanisms.
260
The evidence of the deterioratian of
[ATA was seen c1early on major routes. Dresner16
1
reported that in 1977 there \Vere no
carrier-specitic fares on this route. By 1981. however. 24 routes had carrier-specific
regular tres and 30 of the 37 had carrier-specifie discount fares. Many States were
against this liberal approach and developing countries especially turned to [CAO to set
stricter controls on taritTS.
162
As the EU mayes into its single market. rATAs tariff sening will become even
more eroded and it seems doubtful whether the developed world will let themselves be
bound by new. strict [CAO rules against the stream of liberalization.
1b3
Recognizing this.
259 Ss:e: Dre:she:r & Te:theway./CAO and the Economie Regulation oflncernationalAir Transport (1992) XVll:l Ann.
Air & Sp. L. 200 (The: authors state a third reason for (CAO's abse:nce to economic regulation namely the US's
position against a central goveming body for cconomic regulation. See R.I.R. Abeyratne. Would Competition in
Commerdal ... viation Ever Fit into the Wor/d Trade Organi:ation? ( 1996) 61 J. Air L. & Corn. 797 lor a discussion
on the: US. UK and India's position at the Chicago Convention regarding and intergovemmental body in charge of
economic regulation ).
260 Sec: Stocktish. note Il at 617 (The CAB launched the attnck against lATA for its canel-like l'are setting
cont=rences. [n 1979 it issued a show cause order to lATAdemanding them to show cause why the fre-sening
procedures should receive immunity from antitrust law in the US. Even though the order was later retracted. lATA
did examine and restructure its procedures and as a result the scope for their fare-setting has becn signiticantly
reduced.).
261 See Dresner& Tretheway. The Changmg Role ofIATA: Pyospectsfoythe Future (1988) XlII Ann. Air& Sp. L. 3.
262 ln a Special Air Transpon he1d by ICAO in 1977. the Organization recommended that Stntc:s should
make the: violation ofapproved taritTs punishable by deterrem penalties. See Special .-tir Transport Confrence. 3-26
April 19':"- Report. [CAO Doc. 9199 (Montreal: lCAO. (977): See alsa Dresner& Tretheway. supra note 259 at
204-205 tor reasans why (CAO \Vas a bener vehic1e ta carry developing countries grudges.
263 Sec Dresner & Tretheway. supya note 259 at 210.
88

ICAO called a World-Wide Conference in 1994 to discuss future regulatory structures

including the possibility of a multilateral agreement on the economic regulation of
international air transport.
Under the topics discussed at the Contrence was the lowering or removal of
limitations on FDI. For foreign airline aperating inta the territory of another State. it \Vas
proposed that the airline must be either substantially owned and controlled by the
nationals of aState that is party to the agreement OR the airline must have ilS
headquarters. principle place of business or central administration in the territory of the
State into which it operates, regardless of ownership and control.
264
As for treign airlines investing in the national carrier it was proposed that parties
would work towards lowering the limitation on FOI and create a right of establishment
tor foreign air carriers. Both of these aims would be based on reciprocity and the need to
265
malntaln competItIon.
Bath proposaIs tiled to attract much support. It was pointed out that FDI are
better and more flexibly handled in a case-by-case way under current bilateral
agreements.
266
Even though it was acknowledged that airIines are capital starved and
wouid need a broader investment base to draw from, countries were against proposaIs for
264 Sec: 199-1 World-Wide Conjrence. AT Con174-WP/99. supra note 254. hem 2.3.3.
265 Sec: ibid. s. 2.3.4.
266 See ibid. s. 2.3.5.1.
89

radical change. They stated their obligation under the Chicago Convention ta proteet
against ''''flags of convenience' and ta ensure the safety of airlines operating under their
flag as a reason.
267
There were, however. wide support for the broadening the ownership
and control criteria ta inciude a groups of like-minded States such as is done with the
EU' s community ownership?68 Accordingly these States would form a '''community of
tnterest" and that these State' s airlines would be accepted as long as they are substantially
owned and controlled by nationais of the community.
The idea that an establishment would nullit)r the ownership and control criteria
received sorne support. but the majority rejected the idea. ft was seen as an unaceeptable
means of gaining market access and due ta the lack of a uniform definition of
establishment it might lead to abuses and "t1ags of convenience.
269
The conclusion of the conference was that the traditional ownership and control
measures must be reviewed in order for air carriers to broaden potential sources of
investment. However. a11 investments should be done in a responsible partnership with
the national carrier that '''respect the economic and social goals as well as the sovereignty
of the State concemed:
270
A distinction was also drawn between investment by foreign
267 Ibid.. s. 2.3.5.3.
268 See ibid.. s.2.3.6.1(b){c).
269 Ibid.. s. 2.3.6.1 (d).
270 Ibid.. s. 2.3.5.4.
90

entities and that of foreign carriers. In the latter case reciprocity and competition must be
ensured.
The Conference itself was a failure. Over a third of ICAO member States refused
ta liberalize their aviation markets or lower foreign investment barriers. [nstead they
detnded State subsidies and called on [CAO to play a greater raie in the economic
regulation of air transport. The overall tel of the Conference was that bilateral and
multilateral systems can and do operate together and that due ta the differences in
aviation policies_ economic development and social goals_ a truly multilateral agreement
was not viable in the toreseeable future.
[CAO was_ however_ given a mandate to develop a "safety nef- through with
countries might feel more secure to liberalize.
171
Since the Contrence [CAO has decided
that.. apart tram investigating the possibility of a "safety neC. it will also review the
ownership and control criteria. The Air Transport Regulation Panel is being reactivated
for this purpose but no decision is trthcoming as yet.
4.4 The GATS and Aviation:
271 The proposed salty net" entails that Qch country has the right to impose a time limited capacity freeze as
extraordinary me-JSure and in response to a rapid and significant decline in mat partys participation in the ~ o u n t r y
pair market." See Liberali=ation ofMarket Access wilh a "Safety Net" and Full or Progressive Introduclion.
World-Wide Air Transport Conference. supra note 254. AT Con174-WPI7 18/4/94.
91

As [CAO lacks the political will to create a multilateral aviation could

be left free to join the ranks of other service sectors under international trade. One of the
annexes in the GATS as mentioned, is the Annex On International Air Transport
Services. Currently. '''hard (i.e. traffic rights) are specifically excluded
and only ....soft or the so-called ....doing business rights" are covered. Paragraph 2 of
the .umex states that:
[E]xcept as set out in paragraph 3, no provisions of the agreement shall apply to
measures affecting:
(a) The five freedoms of the and by bilateral air services agreements
(b) Directly related activities which would limit or affect the ability of Parties
to negotiate, to grant or to receive traffic rights. or which would have the effect of
limiting their exercise.
The Annex only deals with maintenance and repair services. CRS and selling or
marketing of air transport services.' A new draft proposaI circulated to members at the
end of 1992 aI10ws however, to include any liberalization of traffle rights in their
schedule of commitrnents.!72. Even though the legal status of this new document is
unclear.!73. it is a positive step towards the inclusion oftraffic rights within the Annex.
272 Sec: Annex to Air Tmnspon Services.
273 See A.M. von Zebinsky. Tire General Agreement on Trade in Services: Ils Implications for Air Transporl ( 1993)
XVIU:I Ann. Air & Sp. L. 380 (It is not clear that the new proposai was negotiated by aU the necessary Parties. but
the new draft does correct sorne poor draftsmanship in the original Annex.).
92

There are clear advantages to placing air transport completely under the GATS.
As international air transport is already partially included in the GATS. it might be easier
to expand the agreement than drawing up an entirely new document. By progressive
liberalization (a GATS principle that is widely accepted by States) the annex of air
transport might progressively be extended to traffic right.
274
Arguments persist. however. that air transport does not fit iuto the GATS
framework. It would appear that international air transport cloes indeed have some unique
properties that would need to be addressed. The main problem with aviation and the
GATS is the non-discrimination principle of MFN treatment. Whereas international air
transport has been built on a idea of reciprocity. it is a principle for which the GATS have
liule place.
Many commentators believe that applying the MFN concept unconditionally
would impede rather that stimulate liberalization.
275
If one country would liberalize its
market. for instance. other cauntnes wauld naturally take advantage of this and enter iota
il. There would. however. not be any incentive ta give reciprocal treatment. Protective
States would indeed have no reasan (0 open their markets at all. These States are the 50-
called .... free riders.,,276
274 Sec: R.I.R. Abc:yratnc. The Economie Relevance ofthe Chicago Convention -.-l Retrospective Study ( 1994) XIX: II
Ann. Air & Sp. L. 32.
275 See Slocktish. supra note II al 641 .
216 See Janda. supra noie 245 al 459.
93

The opposite eould also mast likely happen. Under the MFN principle States
would be obligated ta grant each other Member State the most liberal terms that they are
prepared to extend to a State. Liberal countries might therefore be reluctant to make too
liberal eommitments in their national schedules beeause they know they will not get
reciprocaI treatment from most other countries.
277
Progressive Iiberalization would again
be hampered as even the most liberal eountries start again to proteet their markets.
This tct is not unique to the aviation seetor. The same argument ean no doubt be
advanced for teleeommunications. The uniqueness of aviation lies. however. in the tct
that. according ta Janda.
278
the route between two eountries represent one market.
Airlines that tly between two countries are in direct competition with one another. This is
ta sharp contrast to telecommunications. for instance. where the carriers of the two States
are not competing with each other. State l's carrier will provide the service From that
country and State 2's carrier will do the same to customers that phone into State one. [1'
State 1 states would liberalize and allow in a third competitor. the other state would not
lase its market. It will still serve the same customers.
[f the carriers were air carners. however. State 2 would gain an unfair advantage
on the route due ta. tor instance. unrestricted capacity, liberal market access or unlimited
277 1992 Co//oquium. supra note 247 (Statement by D.M. Kasper. Author. Deregu/alion and G/obali=alion:
Liberali=ing International Trade in Air Service).
278 Sec: Janda. supra note 245 al 421-422 (1anda uses the e,xample of Gennany and Canada liberalizing their markets
in bath aviation and telecommuniC"dlions.).
94

investment opportunities in State 1. As the carriers are competitors.. State 2 ~ s carrier can
thrive.. but at the cast of the State l 's carrier. This is not what the non-discriminatory
MFN principle had in rnind and is further aiso anti-competitive.
It is also true that sorne States like the US for instance.. have a large aviation
market and would never receive reciprocity under any circumstances.
279
In bilateral
agreements as this was corrected by insisting on more rights in the other market. under
MFN rules this would.. of course. not be possible. This argument is not as eompelling.
The US in its new open skies'" policy has already been eritieized intemally for giving
away" the US market in retum for very liule. Yet it has continued ta do so and the fruit of
this seemingly good Samaritan gesture has begun ta show. Already the US policy has
manage to open many European markets. The same taetie is currently being employed in
South East Asian markets.
Having said that it is c1ear ta even the most pro-GATS authors that the MFN mIe
cannat be left unaltered if aviation are to be included. One solution might be a
conditional ).\;fFN treatment. This would mean that groups of like-minded States negotiate
plurilateral agreements.
280
These group of liberal states would then be allowed not to
279 Sec Stockfish. supra note Il at 642.
280 Sec ibid. at 64344 (Plurilatc::rnJ agreements retrs to agreements that an: less than universal multilateral
agreement. It is negotiated bc:tween regions or other organization tor instance the OECD. The idea is not new to
[CAO. In 1946 and 1953 the idea was brought before the [CAO Assembly but dismissed. 5uch agreements have the
advantage of overcoming the [owest.common-denominator problem \Vith multilateral agreements while still
incorporating sorne of the advantages. Prime examples of such agreements are the EUscommon aviation market.
the Andean Pact. the Austrnlia and New Zealand arrangement and the possibility ofan ASEAN regional air
transport agreement)
95

extend the same liberal terms to other States that aspires to the same level. In this way the
many plurilateral agreements might be progressively liberaJized much in the same way as
the national schedules currently negatiated and reviewed.!81 Apart fram the individual
black liberalization' s" plurilateralism poses the prospect that the different trading blacks
could eventually link together to fonn a multilaterai agreement accepted by all.!82 A
Further advantage this system is that many developing countries might look and copy 10
sorne extent any agreements made by the US and EU as was the case with Bermuda 1.
Since agreements between these powers wauld most likely be very liberal. the copies
might improve on the protectionate models used by many.
A variation on conditianal MFN treatment is for countries ta extend ta each other
the most liberal terms that they can in return tor the same treatment. In other words
reciprocity in allowed. but State' s would have to extend the terms ta the applying State
withaut chaice and without insisting on more than is given.!83 This would naturally not
appeal to the large aviation nations. but since many of the lucrative markets are tram
developed countries it could be an argument that this is one way ta uplift the develaping
warld as was pleaded tor in rCAO!s Warld-Wide Conference in 1994.
281 Sec: 1992 Co/loquium. supra note 247 (Statc:mc:nt by D.M. Kasper).
282 Sec: Stocktish. supra note 11at 646.
283 Sec: Janda. supra note 2-l5 al -l25 (His argument is that ovc:r lime: this mc:thod would h:ad to plurilateralism and
eventually to a multilate:ral agreement. The end result and the path taken ta gc:t there thus set:m ID be the same as for
conditional MFN treatment.).
96

5. Telecommunication and the GATS

5.1 Background:
Ta the Telecommunication industry the GATS to the most signiticant
multilateral agreement reached.
184
Until the telecommunications and trade
"vere seen as separate tields.
285
Telecommunications was regulated on govemmentallevel
by bilateral agreements while taritT coordination and standard sening was done by the
International Telecommunications Union (lTU)186 on an international level. The
structures seem to mirror those of international air but unlike aviation States
were against an international goveming body to regulate the economic regulation of
telecommunications. Instead they preferred to jointly provide the service and share the
protits. The [TU was theretore just to harmonize tariff sening and universal service
obligations with no mandate on economic regulation.
During the however.. the US's policy of open competitions followed by
the movement towards international trade organizations such and the WTO and the EU,
threatened the ITU' s functions.
188
As markets opened up telecommunications moved
284 See Drahos & Joseph. supra note 81 at 623.
285 See 1. Arlandis. Trading Telecommunications: Challenges to European Regulation Po/icies ( 1993) 11:4 Telecom.
Policy 171.
286 Sec: Holmes. 'u al. supra note 168 at 755.
287 Sec: ibid
288 Sec: ibid. at 758.
97

towards a trade system and as a result market forces were relied upon to determined
priees rather then fixed tariff setting procedures of the [TU.
4.2 The GATS Negotiations:
Telecommunications was one of the first areas in which negotiations in the GATS
were held. At the end of the Uruguay Round of talks it appeared twice in the final
agreement. Firstly in an Annex for Telecommunications and secondly as a commitment
on further negotiations tor the liheralization ofbasic telecommunications.
h was decided to place telecommunications in a separate annex due to bath the
complexity of domestic regulation and because of the treat of monopoly abuses.
2K9
Even
though article VIII of the GATS deals with monopolies and article IX with restrictive
business practices_ these were not seen as adequate to prevent behavior
in a tield sa long dominated by monopoly operators.
190
The annex theretore had the
purpose of strengthening the disciplines set in the GATS.
The core' of the annex deals with the "access to and use of public
telecommunications transport networks and services at reasonable and
289 Sc:e S. Trade in Telecommunications Services - Towards Open Markets (Address at the
ICASL Conference on Air and Space Law Challenges for the XXst Century. Montreal. 1996) at 4.
290 See L. Tuthill. l.Isers RighlS? The J/u/ti/ateral Rules on Access to Telecommunications (199fl) 20:2 Telecom.
Policy 92.
98

terms and conditions.. for the supply of a service included in [the Party State's]
S h d 1
,,291
C eue.
[n a footnote to this article it is stated that refers ta bath
MFN treaunent as weil as national treatment. It is important ta remember that States cau
exclude services from national treatment. 292 The annex therefore refers to access and use
of a service and not to the access ta a market. Market access and the selling of services
are theretore still regulated by the National Schedules.
293
The annex, however. only applied to enhanced telecommunications services and
not ta basic telecommunications.!94 Through a set of decisions taken at the Marrakesh
Ministerial Meeting at the end of the Uruguay Round of talks in 1994. it was decided to
extend the negotiations on basic telecommunications in order ta include it tao in the
GATS. The negotiations began in April 1994 under the auspices of the Negotiation
Group on Basic Telecommunications (NGBn but deadlacked at the deadline.
The deadlock was due mainly ta the USs view that the affers made by States
were not liberaI enough. Fram the outset the US was asking tor reciprocity. ft was against
the idea that a non-liberalized country could take advantage of the lower accounting rate
291 Anne:x on Tdecommunications. para. 5(a).
292 Sec: Tuthill. supra note: 290 at 92.
293 Sec WTa. The Jvro :Vegoliutions on Basic Telecommunications (6 March (997). hnp:J/www.wto.org at 5
[hereinafter The WTO Negociations) .
294 See: supra note 290 ai
99

of a liberalized State while not lowering its rates in retum.

295
This concept is comparable
to the '''free rider"" concept in the air transport field and much like the principle of
""dumping
n
in trade in goods.
296
Unfortunately.. as mentioned before.. anti-dumping
principles do not apply to services which made many States such as those of the EU caB
for the introduction of a similar concept in the GATS.
297
Another problem that the US
had with a MFN system \vas the fact that non-liberalized States could indulge in cross-
subsidization or predatory pricing.
298
In other words they might lower their rates on
routes sa as to drive out competition by subsidizing that route l'rom the profits of more
expensive local routes.
The requirement of reciprocity is.. however.. against the nature the MFN treatment
which in turn is the backbone of the GATS and the WTO.
299
Recognizing this the US
instead opted for a so-called "critical mass.... of States with sufficiently liberal markets
30o

The idea was that it would not matter if many markets were still to closed ta FDI as long
as there were sufficient and.. no doubt. influential markets to enter into. At the end of the
April 1994 negotiations the US felt that there was no such "critical mass.'" Many States
still had too high FDI restrictions and many influential markets such as JapanJOland
295 SIl:( lb,,/. at 7.
296 Holmes. r!t al.. supra n01( 168 at 762.
297 Sll:e Ibid. at 766.
298 Sll:e ibid. at 762.
299 See ibid at 763.
300 Se( B. PetnlLZini. Global Telecom Talks: A Trillion Dollar Df!al (Washington. OC: [nstitut( for International
Economies. t9(6) at 7.
301 Sc:c: Lessard. supra note 289 at 6 (Main Japanese Telecommunication suppliers lik( KDD and NIT are still subject
to a 20% limitation of toreign Il:quity.).
100

Singapore still retained the barriers. In Europe Belgium, France. Spain and Portugal also
rcfused to lower there FOI restrictions. When the USA aIso retracted its offer to open its
satellite communications market (under pressure trom Motorola and Iridium), the deal
collapsed.
302
WTO Direetor-General Ruggiero wanted to salvage the etTorts made and
suggested a new deadline of February 1997.
303
This would give States a chance ta review
their otfers. On the 15th of February 1997 an agreement on basic telecommunications
was finally reached.
304
It \vas annexed ta the furth protocol to the GATS and is ta
supplement or replace States' national schedules. The agreement would be open for
signature until November 30th 1997 and will come into force on January 1998.
30S
S.3 The February 1997 Agreement:
From the outset delegate in the negotiations agreed not to quibble about a
detinition of basic telecommunications. Instead it was decided that a11 types of
telecornmunications would be included in the negotiations.
306
Both public and private
302 Sec: Pc:trazzini. supra note: 300 al 7.
J03 The WTO Negotiations. supra noIe 293 al 3.
J04 For a repon on the progress ofnegotiations see WTG. The Report ofthe Group on Basic Telecommunications
http://www.wto.orglslo:rvices al 1 [hereinafter The Reparti.
30S Sec: P.A. Salin. Regulatory Changes Affecting Salel/ile Communications in tlte Late 90 's: For the Benefit and in
the IntereSls a/Ail Counlries? (D.L.e. Thesis. Montreal: (nstitute tor Air and Space Law. McGiII University. 1997)
[Unpublished} al 97.
306 See The HrrO ;\jegotiations. supra nOIe 293 at 2.
101

services relaying consumer provided voice or data from consumers from point-to-point
were covered whether delivered through resale or over an own network.
307
As a result not only cross-border supply of services was but also services
supplied by a commercial presence or through establishment of a foreign owned tinn.
JOS
Even thought FDI restrictions \vas never specifically mentioned in the agreements final
draft it is brought in indirectly by these modus of supply.
Considering the final otIers it would appear that many countries are not yet
willing ta totally abandon foreign equity restrictions. The final offers.. however, are
encouraging in that it is significantly more liberal then previously. It appears that.. at least
in the case of industrialized countnes.. there is a movement ta lower or dismantle aIl such
restrictions. Canada.. for instance.. has upped its limitation on FDI to 46.. 70/0 and at the
same time dispensed with Teleglabe"s international manopoly.309 The US are allowing
free access ta ail indirectly foreign awned common carriers except in satellite
communication.
310
[n Europe Belgium.. Spain and France (except for radio combinations)
have aIl agreed ta remove their 25% fareign equity restrictions.
311
Only Portugal still has
307 St:e The Repore. supra nole 304 at 3. St:e also the WTO Background Note on WTO Negotiations on Basic
Tdecommunications. Fl:bruary 1996 (Basic Tl:lecommunications \\las simply detinc:d as "any and ail
telecommunications services that involve simple transmission (i.e. without adding vaJUl:.)./.
308 See The .Vegotiations. supra note 293 at 2.
309 See Salin. supra note 30S at 99.
3[0 See ibid
3[[ On the Internet see The WTO Negotiations on Basic Telecommunications. Informai Summery ofCommitments
and Jifn. Exceptions (6 March 1997). http://www.wto.orglservices.
102

a 25% limit but has offered to move its date of liheralization forward to July 1999.
312
Finally the EU is going ahead with ilS plan to completely liberalize ilS basic
telecommunications by January 1998.
313
312 See ibid
313 See ibid.
103

PART III: CONCLUSIONS

[t appears that there is no reason why aviation should retain its status as an unique
industry. 80th the risks of tlying as weIl as the awe of air travel have been reduced to the
level of most other industries. [n retum the air transport sector is in desperate need for
investment in arder to survive in the global marketplaee. As aireraft priees soar there is
simply not enough capital in any one country to cover aU the finaneial requirements of an
airline. FOI is one very important way for airlines ta acquire this capital. Hawever.
sometimes alliances or even mergers with foreign entities are the ouly way ta get it. This
leads ta ownership and cantrol problems. Therefre. as long as this type of investment is
disallowed by regulatars. airlines will not be able to expand iota a global structure.
Liheralizatioo of the air transport industry is. hawever. is becoming a trend that is
as unmistakable as it is unstoppable. The question is not sa much whether liheralization
104

should take place. but how it should take place. This thesis has examined three
possibilities: unilateral State action., regional or like-minded States joining forces or one
global multilateral agreement.
1. Unilateral Action
The "open skies"t poliey adopted by the US sinee May 1995 is one way of
liberalizing trade in air transport. By concluding a multitude of liberal bilateral
agreements a web can be formed which will eventually jon more and more countries.
Aiready this approach appears to be bearing fruit for the US. It has concluded open skies
agreements \vith ten European cauntries and recently aiso with Singapore. It has aiso
begun negotiation with other States in South East Asia. Even small countries like Pern
have seen advantages in joining this new"web''',
Unfortunately this approaeh has its negative sicle too. First. the new bilateral
agreements still do not address the issue ofhow much foreign ownership will be aliowed.
Even though the DOT has raised the amount aliowed in cases like the NorthwestlKLM
venture. it has still not come clean as to how much exactly will be tolerated. Part of the
reason might be that the US is still not ready to let go fully of the ownership and control
requirements because it fears the economic consequences.
105

A second and more important problem is that the new bilateral system does not
allow smaller States the negotiating power that they now have under ICAO. The bilateral
agreements are drawn up by one State and do not take into account the fears of
States
31
.J. The old bilaterai investment treaties of the US and Europe did littie
except perpetuate the deep suspicion against FOI in the developing world.
2. Regionalism
It would appear from the proceedings orthe 1994 World-Wide ICAO Conference
that States did agree that the appropriate process towards a multilateral agreement on air
transport would be concluding agreements between like-minded States. The end result
could be a so-called "regionalateral agreement:,JI5 i.e.. agreements made between t\"'O or
more blacks or regions. In June tr instance. the European Commission was given
a mandate to open talks with the US on a "Common Aviation Area:' The negotiations are
to take place in two phases. The tirst phase would involve "soft rights" and the second
"hard'" or traffic rights. Issues that are to be discussed include the elimination of State aid,
competition laws, free market access. cabotage and 5th freedom rights and ownership and
control provisions. Eventually similar talks might be entered iota between NAFTA and
314 St:e Report. supra nOle 217 at 6.
315 St:e ibid A lenn coined by the WTfC in the ibid. al 6.
106

the EU. An agreement between these two super powers would provide impetus needed
f
' th S . . c. 316
or er tates to jOl0 lorees.
Reeently. many regional agreements on not only aviation. but also FDI and
teleeommunications have been reached. Many times ail three areas were grouped together
under a single regional trade agreement. Not only regions. but also organizations sueh as
the OECO. have also take initiatives to investigate problems in these fields. Although not
able to conclude agreements itselt: these organizations are powerful in intluencing
decisions at the intemationallevel.
An advantage of regionalism is that weaker States could join forces to increase
their negotiating power when concluding air transport agreements. There is. however.
also a danger that a powerful regional black such as the EU could become tao strong for
any one single State. Care should aiso he taken that protectionism within the regions does
not substitute the protectionism of current bilateral agreements.
3. Multilateralism and the GATS
316 See ibid. at 7.
107

Even though regionalism appears to be a way of coping with the unfaimess of the
bilateral a truly global, multilateral solution might be closer at hand. Even though
States are lacking the poiitical will to engage in talks conceming an independent
agreement on air transport. a strong multilateral structure already exists under the GATS.
As this thesis has shawn that an industry suffering the under the
same regulatory system as international air was successfully incorporated into
the GATS.
As with aviation. only the "soft of namely enhanced
services was at tirst included in the GATS. Through a deliberate agreement ta
however. an agreement on basic telephony was finally reached. in a11
regional agreements.. telecommunications, air transport and investment found a place in a
multilateral agreement on trade. It is incomprehensible why the same should not be true
at a global level. Apart tram the lack of will by States there appears to he no barrier tor
including air transport nhard rights'" together with telecommunications and investment
under the GATS.
4. A Proposed Annex on Air Transport
108

The February 1997 Agreement on Basic Telecommunications

317
(the Agreement)
contains sorne vital provisions that might be adapted to aviation as weil. It is therefore
useful ta analyze the Agreement.
4.1 Competition Laws:
Competition laws will govem in a fully liberalized environment. It is therefore
one of the most important provisions in the Agreement. Paragraph 1.1 provides a general
obligation on States ta prevent their industries from cantinuing anti-competitive behavior.
Paragraph 1.2 goes on to prahibit specifie behavior that is likely to oeeur in the
telecommunications industry.
From this Agreement it appears that it would nat be necessary for States to tind a
comman competition poliey. Paragraph 1.1 is broad enough to allow States ta apply their
own judgment and laws to any eireumstance which might be regarded as anti-competitive
behavior. On the other h a n d ~ Paragraph 1.2 identifies certain aets that aH States must
prevent. Of course. the aviation industry would have to tind its own provisions to proteet
itself.
317 B. Pc:trazzini. Final Draft ofthe JVfO Telecom Regulatory Principles: Negoliating Group on Basic
Telecommunications Refrrence Paper. supra note 300. app. C [hereinafter Final Draft on Basic Telecom.].
109

4.2 Interconnection:
Paragraph 2 of the Agreement deals with interconnection and Paragraph 6 with
allocation of searce resources. These articles can be translated ioto access ta airport
tcilities and allocation of slot5 in an annex on air transport.
Paragraph 2 on interconnection ensures that interconnection agreements are
transparent and that the procedures tar interconnection negotiations are publicly
available. Paragraph 2.5 establishes a dispute settlement procedure in interconnection
cases. Ali of these requirements are also essential in the allocation of airport slots tar
airlines.
4.3 Universal Service:
The Agreement allows States to make any universal service requirements. These
will not be seen as anti-competitive as long as they are administered in a transparent way,
non-discriminatory manner and are not more burdensome on any one State.
JIS
Other
J 18 Sec: ibid.. para. 3.
110

important provisions for aviation that are found in the Agreement are the requirement for
independent regulators and transparent criteria for lieensing.
319
4.4 Market Access:
For aviation the most important provision would be an agreement on the traffie
rights or the freedoms of the air." The liberalization of market access in international air
transport will have to grant at least the tirst four freedoms to Member States. With the
other three freedoms could include an option that could be negotiated bilaterally and be
placed in the national schedules.
Market access would also mean the dismantling or lowering of o\vuership and
control restrictions and restrictions on investment. An agreement will aise have to grant
the right of establishment for Member States.
As with the telecommunications agreement. States should he aIIowed to submit
schedules of commirmt:rits on the liberalization of these issues. These schedules should
then be further liberalized through negotiation and reviewed every few years. AlI
commitments would be extended to ail Member States through the MFN principle.
319 See ibid.. paras. 4 & S.
III

Lastly. a '''safety net'.. eould be introdueed to help proteet developing States during the
liberalization process. The binding nature of the GATS could force States to stick to their
commitments. In this way progressive liberalization could be achieved, as is intended by
the GATS.
1t cao be reasonabl y expected by looking at the Agreement on Basic
Telecommunications that States will make an effort to submit a liberal proposaI. In the
case of basic telephony the US. for instance.. dispensed with its '''effective competitive
opportunities'" test and proposed unlimited foreign investment in most sectors of
telecommunications. In tct.. the Agreement eventually did liberalize much more then was
expected. History might just repeat itself if negotiations were to be opened on air
transport traffie rights.
There is every indication that FDI will play an increasingly important role in the
telecommunications and aviation industries in the future.
320
The OECD's figures showed
an inereasing growth in FDI in services in the 1980'S32I. Furthermore.. in light orthe tact
that telecommunications and aviation serves as a integral part of bath the delivery of
d Il
. 3"''') th
gao s as we as servIces - lt would seem at the grawth should be even greater. Lastly.
the growth 0 f new strategie alliances in the 1980' s proves that campanies in the these two
320 See Joseph. supra note 106 alUS.
321 See DECO. International Direct Investment: Policies and trends in the 1980's (Paris: OECO. 1992).
322 See Joseph. supra note 106 al4lS.
112

industries were actively involved in FDI activity and that the trend is continuing in the
1990'5.
323
The GATS framework already exists tor air transport. The basic
telecommunications industry has shown that States can step away from their protectionist
views \\ith proper negotiation and in a setting of progressive liberalization. There is no
reason why the same cannat be true for hard rights in international air transportation.
323 Sec OECD. supra nOle 321 al 22. Sc:e also Joseph. supra note 106 al US. note 12.
113

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Flight International
Financial Times
Telecommunication Daily
World Airline News
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