The relationship between WTO law and foreign direct investment Paul Kruger

Multilateral rules Submission will focus on the relationship between the access and treatment of foreign suppliers and the WTO obligations of South Africa. South Africa was an original contracting party to the General Agreement on Tariffs and Trade (GATT) and a founding member of the WTO – South Africa remains an active participant in the WTO. General Agreement on Tariffs and Trade (GATT) deals with trade in goods while the General Agreement on Trade in Services (GATS) deals with the trade in services - both can have an impact on the treatment of foreign investment, but this submission focus on the GATS. GATS was the first multilateral agreement to cover trade in services. It includes general obligations and specific obligations in the form of ‘schedules of specific commitments’. These schedules represent the liberalisation commitments and limitations countries have undertaken to maintain with respect to foreign suppliers and foreign services – but it only binds governments to the extent and in the areas indicated in the schedules. South Africa committed 91 (out of a possible 160) sub-sectors in the area of business services, communication services, construction and related engineering services, distribution services, environmental services, financial services, tourism and travel related services and transport services.

South Africa’s schedule in the distribution sector

How the GATS relates to foreign investment The GATS and its schedules were approved by Parliament under the Interim Constitution on 6 April The ‘Services Sectoral Classification List’ also known as the W/120 classification system sets out the categorisation of international services activities in 12 core services sectors: 1) Business; 2) Communication;3) Construction and Engineering; 4) Distribution; 5) Education; 6) Environment; 7) Financial; 8) Health; 9) Tourism and Travel; 10) Recreation, Cultural, and Sporting; 11) Transport; and 12) Other services. Distribution is defined as “Distributive trade services consisting in selling merchandise to retailers, to industrial, commercial, institutional or other professional business users, or to other wholesalers, or acting as agent or broker (wholesaling services) or selling merchandise for personal or household consumption including services incidental to the sale of the goods (retailing services). The principal services rendered by wholesalers and retailers may be characterized as reselling merchandise, accompanied by a variety of related, subordinated services, such as: maintaining inventories of goods; physically assembling, sorting and grading goods in large lots; breaking bulk and redistribution in smaller lots; delivery services; refrigeration services; sales promotion services rendered by wholesalers; and services associated with retailers' business, e.g. processing subordinated to selling, warehousing and garage services” NB: Distribution services relates to the distribution of physical goods – also the view held by the WTO Appellate Body

Interpreting the schedule of commitments Market access: concerns the entry of foreign services suppliers and foreign services into the domestic market. Each member states must “accord services and services suppliers of any other member treatment no less favourable than that provided under the terms, limitations and conditions specified in its schedule”. National treatment: concerns the treatment of the foreign supplier or service after entry into the jurisdiction of another member state - member state must treat foreign suppliers and foreign services no less favourably than it treats its own suppliers and services. None: Full liberalisation – countries undertake not to maintain or impose any restrictions on foreign suppliers / services Unbound: No liberalisation – countries remain free to maintain or introduce restrictions Mode 3: Commercial presence of foreign suppliers - definition includes the acquisition and maintenance of a juridical person.

Commitments of Malaysia in the distribution sector

Conclusion These are commitments by South Africa at the multilateral level – must ensure that the current and future domestic regulatory framework is in line with its GATS commitments. If for instances the government imposes a preferential procurement quota, such measure will be directly in conflict with what SA has agreed in its schedules – aggrieved WTO member states has the capacity to submit a claim under the WTO dispute settlement system. The dispute settlement system is compulsory for South Africa because it has signed and ratified the WTO agreements as single undertaking, of which the Dispute Settlement Understanding (DSU) is part. WTO practice relies on the presumption that member states comply with international obligations in good faith and avoid behaviour that violates international law. South Africa can not deny market access or discriminate against foreign suppliers in the committed areas – which can ultimately lead to dispute settlement under the WTO. Solutions: Modification of schedules in line with international rules or designing investment measures in compliance with international rules.