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Report of the Panel

I. introduction

1.1.
On 17 August 2000, the United States requested consultations with Mexico pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the "DSU") and Article XXIII of the General Agreement on Trade in Services (the "GATS").1 This request concerned Mexico's GATS commitments and obligations on basic and value-added telecommunications services.
1.2.
The consultations took place on 10 October 2000, but the parties failed to reach a mutually satisfactory resolution. On 10 November 2000, the United States requested the Dispute Settlement Body (the "DSB") to establish a panel, in accordance with Articles 4 and 6 of the DSU, in order to examine Mexico's measures with respect to trade in basic and value-added telecommunications services.2 On the same date, the United States requested additional consultations with Mexico, pursuant to Article 4 of the DSU and Article XXIII of the GATS, regarding Mexico's measures affecting trade in telecommunications services.3 The additional consultations took place on 16 January 2001, but the parties failed again to reach a mutually satisfactory resolution. On 13 February 2002, the United States again requested the DSB to establish a panel, in accordance with Articles 4 and 6 of the DSU in order to examine Mexico's measures affecting telecommunications services.4
1.3.
At its meeting on 17 April 2002, the DSB established a Panel in accordance with Article 6 of the DSU.5 At that meeting, the parties agreed that the Panel should have standard terms of reference as follows:

"To examine, in the light of the relevant provisions of the covered agreements cited by the United States in document WT/DS204/3, the matter referred to the DSB by the United States in that document, and to make such findings as will assist the DSB in making the recommendations or in giving the rulings provided for in those agreements."6

1.4.
On 16 August 2002, the United States requested the Director-General to determine the composition of the Panel pursuant to Article 8.7 of the DSU, which provides:

"If there is no agreement on the panelists within 20 days after the date of the establishment of a panel, at the request of either party, the Director-General, in consultation with the Chairman of the DSB and the Chairman of the relevant Council or Committee, shall determine the composition of the panel by appointing the panelists whom the Director-General considers most appropriate in accordance with any relevant special or additional rules or procedures of the covered agreement or covered agreements which are at issue in the dispute, after consulting with the parties to the dispute. The Chairman of the DSB shall inform the Members of the composition of the panel thus formed no later than 10 days after the date the Chairman receives such a request."

1.5.
On 26 August 2002, the Director-General composed the Panel as follows:7

Chairman:Mr Ernst-Ulrich Petersmann

Members: Mr Raymond Tam

Mr Björn Wellenius

1.6.
Australia, Brazil, Canada, Cuba, the European Communities, Guatemala, Honduras, India, Japan and Nicaragua reserved their rights to participate in the Panel proceedings as third parties.
1.7.
The Panel met with the parties on 17 and 18 December 2002 and on 12 and 13 March 2003. The Panel met with the third parties on 18 December 2002.
1.8.
The Panel submitted its Interim Report to the parties on 21 November 2003. The Panel submitted its final report to the parties on 12 March 2004.

II. FACTUAL ASPECTS

2.1.
This dispute concerns provisions in Mexico's domestic laws and regulations on telecommunications which govern the supply of telecommunication services.

A. Mexico's telecommunication market

2.2.
Prior to 1997, long-distance and international telecommunications services in Mexico were supplied on a monopoly basis by Teléfonos de México, S.A. de C.V. ("Telme"x). Since that date, Mexico has authorized multiple Mexican carriers to provide international services over their networks. Under Mexican laws, the largest carrier of outgoing calls to a particular international market, has the exclusive right to negotiate the terms and conditions for the termination of international calls in Mexico that apply to any carrier between Mexico and that international market.8 Telmex is presently the largest carrier of outgoing calls for all markets. Currently, there are 27 carriers ("concesionarios" or "concessionaires") allowed to provide long distance services, including two United States-affiliated carriers – Avantel (WorldCom) and Alestra (AT/T).9 Of these 27 long-distance concessionaries 11 are authorized to operate international gateways, allowing them to carry incoming and outgoing international calls.10 Telmex remains the largest supplier of basic telecommunications services in Mexico, including international outbound traffic.

B. Mexico's Telecommunications Laws and Regulations

1. Federal Telecommunications Law

2.3.
The Federal Telecommunications Law (the "FTL") of Mexico provides the legal framework for the regulation of telecommunications activities in Mexico.11 Its purpose is "to govern the use, utilization and exploitation of the radio-electrical spectrum, of the telecommunications networks, and of satellite communication".12 More broadly, it is intended to "promote efficient development of telecommunications; exercise the authority of the State on these matters to ensure national sovereignty; to promote a healthy competition among the different telecommunications service providers in order to offer better services, diversity and quality for the benefit of the users and to promote an adequate social coverage".13
2.4.
The FTL establishes a Secretariat of Communications and Transportation ("Secretaría de Comunicaciones y Transportes" or "Secretariat"), which is authorized, inter alia, to grant concessions required for "installing, operating or exploiting public telecommunications networks".14 A concession may only be granted to a Mexican individual or company, and any foreign investment therein may not exceed 49 per cent15, except for cellular telephone services.16
2.5.
Special rules apply to "comercializadoras"("commercial agencies").17 A commercial agency is any entity which, "without being the owner or possessor of any transmission media, provides telecommunication services to third parties using the capacity of a public telecommunications network concessionaire."18 A concessionaire of a public telecommunications network may not, without permission of the Secretariat, have "any direct or indirect interest in the capital" of a commercial agency.19 The establishment and operation of commercial agencies is "subject, without exception, to the respective regulatory provisions".20 The Secretariat has issued regulations for commercial agencies to provide pay public telephone public telephony services (pay phones).21
2.6.
The "interconnection" of public telecommunications networks with foreign networks is carried out through agreements entered into by the interested parties.22 Should these require agreement with a foreign government, the concessionaire must request the Secretariat to enter into the appropriate agreement.23
2.7.
Several fundamental technical terms are defined in the FTL. These are:
2.8.
Telecommunications: "every broadcast, transmission or reception of signs, signals, written data, images, voice, sound or data of whatever nature carried out through wires, radio-electricity, optic or physical means or any other electromagnetic systems";
2.9.
Telecommunications network: "systems integrated by means of transmission such as channels or circuits using frequency bands of the radio-electrical spectrum, satellite links, wiring, electric transmission networks or any other transmission means, as well as when applicable, exchanges, switching devices or any other equipment required";
2.10.
Private telecommunications network: "the telecommunications network used to meet specific requirements for telecommunications services of certain people not implying commercial exploitation of services or capacity of said network";
2.11.
Public telecommunications network: "the telecommunications network through which telecommunications services are commercially exploited. The network does not include users' terminal telecommunications equipment nor telecommunications networks located beyond the terminal connection point".24

2. International Long-distance Rules

2.12.
The International Long Distance Rules ("ILD Rules") are issued by the Federal Telecommunications Commission ("Comisión Federal de Telecomunicaciones" or "Commission"), an agency of the Secretariat of Communications and Transportation.25 They serve "to regulate the provision of international long-distance service and establish the terms to be included in agreements for the interconnection of public telecommunications networks with foreign networks."26 International long-distance service is defined as the service whereby all international switched traffic is carried through long-distance exchanges authorized as international gateways.27
2.13.
Direct interconnection with foreign public telecommunications networks in order to carry international traffic may only be done by "international gateway operators".28 These are long-distance service licensees authorized by the Commission "to operate a switching exchange as an international gateway"29, that is, the exchange is "interconnected to international incoming and outgoing circuits authorised by the Commission to carry international traffic".30 Traffic is "switched" when it is "carried by means of a temporary connection between two or more circuits between two or more users, allowing the users the full and exclusive use of the connection until it is released."31
2.14.
Each international gateway operator must apply the same "uniform settlement rate" to every long-distance call to or from a given country, regardless of which operator originates or terminates the call.32 The uniform settlement rate for each country is established, through negotiations with the operators of that country, by the long-distance service licensee having the greatest percentage of outgoing long-distance market share for that country in the previous six months.33
2.15.
Each international gateway operator must also apply the principle of "proportionate return". Under this principle, incoming calls (or associated revenues) from a foreign country must be distributed among international gateway operators in proportion to each international gateway operator's market share in outgoing calls to that country.34
2.16.
Private cross-border networks must lease capacity from a long-distance licensee (concessionaire).35 Any cross-border traffic carried through dedicated infrastructure that forms part of a private network must be originated and terminated within the same private network.36

C. The Competition Laws of Mexico

1. Federal Law of Economic Competition37

2.17.
The Federal Law of Economic Competition ("Ley Federal de Competencia Económica"or "FLEC") is intended "to protect the process of competition and free market participation, through the prevention and elimination of monopolies, monopolistic practices and other restrictions that deter the efficient operation of the market for goods and services."38
2.18.
Under the law, the "relevant market" is determined by considering, inter alia, "the possibilities of substituting the goods or services in question, with others of domestic or foreign origin, bearing technological possibilities, and the extent to which substitutes are available to consumers and the time required for such substitution".39 Whether an economic agent has "substantial power" in the relevant market is determined, inter alia, on "the share of such agent in the relevant market and the possibility to fix prices unilaterally or to restrict supply in the relevant market, without competitive agents being able, presently or potentially, to offset such power".40

2. Code of Regulations (to Federal Law on Economic Competition) 41

2.19.
The Code of Regulations to the FLEC sets out in detail the rules, inter alia, for the analysis of the relevant market and substantial power.
2.20.
For the relevant market analysis, the Code states that the Commission shall "identify the goods or services which make up the relevant market, whether produced, marketed or supplied by the economic agents, and those that are or may be substituted for them, whether domestic or foreign, as well as the time required for such substitution to take place." The Commission is also to take into account "economic and normative restrictions of a local, federal or international nature which prevent access to the said substitute goods or services, or which prevent the access of users or consumers to alternative sources of supply, or the access of the suppliers to alternative customers".42
2.21.
With respect to substantial power, the Code requires the authorities to take into account the "degree of positioning of the goods or services in the relevant market"; the "lack of access to imports or the existence of high importation costs"; and the "existence of high cost differentials which could face consumers on turning to other suppliers."43

D. Mexico's Commitments under the General Agreement on Trade in Services (GATS)

2.22.
Mexico has undertaken specific commitments for telecommunications services under Articles XVI (Market Access), XVII (National Treatment), and Article XVIII (Additional Commitments). Its additional commitments consist of undertakings known as the "reference paper". These commitments are reproduced in Annex B.

III. parties' requests for findings and recommendations

3.1.
The United States requests the Panel to find that:44

(a) Mexico's failure to ensure that Telmex provides interconnection to United States basic telecom suppliers on a cross‑border basis on cost‑oriented, reasonable rates, terms and conditions is inconsistent with its obligations under Sections 2.1 and 2.2 of the Reference Paper, as inscribed in Mexico's GATS Schedule of Commitments, GATS/SC/56/Suppl.2; in particular, that:

(i) Mexico's Reference Paper obligations apply to the terms and conditions of interconnection between Telmex and United States suppliers of basic telecommunications services on a cross-border basis;

(ii) Telmex is a "major supplier" of basic telecommunications services in Mexico, as that term is used in Mexico's Reference Paper obligations;

(iii) Mexico has failed to ensure that Telmex provides interconnection to United States suppliers at rates that are "basadas en costos" and terms and conditions that are razonables because:

- Mexico has allowed Telmex to charge an interconnection rate that substantially exceeds cost,

- Mexico allows Telmex to restrict the supply of scheduled basic telecommunications services; and

- Mexico prohibits the use of any alternative to the Telmex negotiated interconnection rate through Mexico's ILD rules, specifically Rule 13 along with Rules 3, 6, 10, 22 and 23.

(iv) Mexico's ILD Rules (specifically Rule 13 along with Rules 3, 6, 10, 22 and 23) fail to ensure that Telmex provides cross‑border interconnection in accordance with Section 2.2 of the Reference Paper.

(b) Mexico's failure to maintain measures to prevent Telmex from engaging in anti-competitive practices is inconsistent with its obligations under Section 1.1 of the Reference Paper; as inscribed in Mexico's GATS Schedule of Commitments, GATS/SC/56/Suppl.2; and in particular, that Mexico's ILD Rules (specifically Rule 13 along with Rules 3, 6, 10, 22 and 23) empower Telmex to operate a cartel dominated by itself to fix rates for international interconnection and restrict the supply of scheduled basic telecommunications services;

(c) Mexico's failure to ensure United States basic telecom suppliers reasonable and non‑discriminatory access to, and use of, public telecom networks and services is inconsistent with its obligations under Sections 5(a) and (b) of the GATS Annex on Telecommunications; and in particular, Mexico failed to ensure that United States service suppliers may access and use public telecommunications networks and services through:

(i) interconnection at reasonable terms and conditions for the supply of scheduled services by facilities‑based operators and commercial agencies; and

(ii) private leased circuits for the supply of scheduled services by facilities‑based operators and commercial agencies.

3.2.
The United States also requests that the Panel recommend that Mexico bring its measures into conformity with its obligations under the GATS.
3.3.
Mexico requests that the Panel reject all of the claims of the United States, and find that:

(a) The measures being challenged by the United States are not inconsistent with Sections 2.1 and 2.2 of the Reference Paper, inscribed in Mexico's GATS Schedule of Specific Commitments;

(b) Mexico has not acted inconsistently with its obligations under Section 1.1 of the Reference Paper, inscribed in Mexico's GATS Schedule of Specific Commitments; and

(c) The measures being challenged by the United States are not inconsistent with Section 5 of the GATS Annex on Telecommunications.45

IV. main ARGUMENTS OF THE PARTIES

A. Section 2 of the reference Paper

4.1.
The United States claims that Mexico's ILD Rules fail to ensure that Telmex provides interconnection to United States basic telecom suppliers on a cross-border basis with cost-oriented, reasonable rates, terms and conditions and that this is inconsistent with its obligations under Sections 2.1 and 2.2 of the Reference Paper, as inscribed in Mexico's GATS Schedule of Commitments.46 The United States argues that the interconnection obligations in Section 2 of the Reference Paper apply: (i) as legally binding GATS commitments; (ii) because of the specific commitments Mexico has undertaken in its GATS Schedule; and (iii) to the circumstances at issue in this case, namely the interconnection between United States service suppliers and Telmex for the purpose of delivering their basic telecom services from the United States into Mexico.47
4.2.
Mexicoargues that the claims of the United States must fail because Mexico's Reference Paper obligations do not apply to the measures at issue in this dispute, namely the accounting rates set by bilateral agreements between the United States and Mexican basic telecommunications carriers.48 In the alternative, Mexico argues, if Section 2 of the Reference Paper is found to apply to the accounting rate regime as implemented between the United States and Mexico, the United States has nevertheless failed to establish a prima facie case that the accounting rates negotiated between United States and Mexican carriers are not "basadas en costos" ("cost-oriented") and "razonables" ("reasonable") pursuant to Section 2.2(b) of Mexico's Reference Paper.49 Moreover, Mexico argues, the United States has failed to establish that the ILD Rules are inconsistent with Section 2.2 of the Reference Paper.50

1. Scope of application of the Reference Paper

4.3.
The United States argues that Mexico undertook the interconnection obligations of Section 2 of the Reference Paper as additional binding commitments under Article XVIII of the GATS. According to the United States, Mexico inscribed the entire text of the Reference Paper into its Schedule as an additional commitment.51 Therefore, the United States argues, pursuant to Article XVIII of the GATS, Mexico committed to the United States (and all other WTO Members) that it would abide by the strict terms and conditions contained in Section 2 of the Reference Paper. In particular, the United States argues, Mexico committed that it would ensure that its major supplier of basic telecom services Telmex provides interconnection at rates that are based in cost and are reasonable.52
4.4.
Mexico submits that its Reference Paper does not apply to the accounting rates set by bilateral agreements between United States and Mexican basic telecommunications carriers53 since it governs matters relating to domestic regulation.54 Mexico argues that the United States fails to recognize that the Reference Paper is a statement of "definitions and principles" that have the objective of guiding domestic regulators in dealing with major telecommunications suppliers.55 According to Mexico, the Reference Paper was intended to accommodate different political and legal regimes in WTO Members, and is sufficiently flexible to accommodate differences in market structures and regulatory philosophies.56 In Mexico's view, this means that the principles and definitions in the Reference Paper must be interpreted in the light of the domestic regulatory system of the WTO Member in question.57 Mexico considers that in this case, because its domestic regulatory regime distinguishes between: (i) the accounting rate regime applicable to traffic exchange between foreign carriers and Mexican concessionaires; and (ii) the regime that is applicable to carriers within Mexico's borders, the United States' challenge under Section 2 of the Reference Paper must fail.58
4.5.
Mexico notes that Section 2 of the Reference Paper contains a number of requirements as to how a major supplier must provide interconnection, with the goal of promoting competition within domestic markets; that is, preventing a major supplier from using its position to prevent new entrant competitors from participating in the domestic market. In contrast, Mexico argues, because carriers from different countries that enter into accounting rate arrangements are not competing with each other, the requirements of the Reference Paper have no meaning for those arrangements.59
4.6.
The United States contends that there is nothing in the Reference Paper to suggest that its only goal was to promote domestic competition. In its view, there is no textual basis for concluding that the Reference Paper is limited to one mode of supply of the service, i.e. that which is solely within its territory. Instead, the United States notes, Article I of the GATS states that the Agreement covers all measures affecting trade in services, including the cross-border supply of services. While the United States asserts that it is undoubtedly true that the Reference Paper "governs matters relating to domestic regulation", it further submits that this does not mean that foreign service suppliers are "outside the scope of application of" the Reference Paper, or that the Reference Paper governs only matters relating to domestic regulation.60
4.7.
Mexico argues that the mere fact that Article I of the GATS ascribes a broad application of the general obligations of the GATS to all measures by Members affecting trade in services does not mean that Mexico's Reference Paper has a similarly broad application. Mexico submits that it is an "additional commitment" that it inscribed in its Schedule pursuant to Article XVIII of the GATS and, as such, its terms must be interpreted in accordance with the rules of treaty interpretation in Articles 31 and 32 of the Vienna Convention on the Law of the Treaties of 1969 ("Vienna Convention").61 According to Mexico, the Model Reference Paper, upon which Mexico's Reference Paper is based, develops further the principles and obligations found in Article VI of the GATS on domestic regulation and Article VIII of the GATS on monopolies and exclusive service suppliers, both of which focus on activities within the territory of the Member in question. Thus, Mexico concludes, these Articles deal with matters relating to domestic regulation, and not "the supply of a service from the territory of one Member into the territory of any other Member", which is the focus of the United States' claims in this dispute.62
4.8.
The United States contends that Section 2 applies to this case because United States suppliers of basic switched telecom services seek to link with Telmex to connect calls by their users originating in the United States to Telmex's users in Mexico. According to the United States, Telmex and United States basic telecom suppliers are proveedores de redes públicas de telecomunicaciones de transporte o de servicios ("suppliers providing public telecommunications transport networks or services") ("PTTNS") because they provide basic telecommunications services, which, pursuant to the Decision on Negotiations on Basic Telecommunications by the WTO Trade Negotiations Committee, is synonymous with "telecommunications transport networks and services"; also, it adds, such services are "public" because the Central Product Classification (CPC) codes that Mexico used to describe its commitments refer to "public" services. The United States further argues that supply on a cross-border basis of basic telecom services between the United States and Mexico requires "linking" (conexión) between United States suppliers (e.g., AT&T) and Mexican suppliers (e.g., Telmex) in order to allow users of the United States supplier to communicate with users of the Mexican supplier and to access services provided by the Mexican supplier.63 According to the United States, this is because under Mexican law, United States basic telecom suppliers may not own telecommunications facilities in Mexico and thereby extend their public telecommunications networks from the United States into Mexico. Therefore, the United States argues, when a United States basic telecom supplier provides telecommunications services from the territory of the United States into the territory of Mexico, it must link its network or a leased line to the network of a Mexican service supplier (such as Telmex) and pay that Mexican service supplier to "terminate" (i.e., deliver) the phone call to the end-user in Mexico.64 This conexión, in turn, allows the consumers of the United States basic telecom supplier ("users of one supplier") to communicate with Telmex's consumers in Mexico ("users of another supplier"), as well as the United States service supplier ("user") to access services provided by Telmex ("another supplier"), namely the services involved in delivering a call that originated in the United States to its final destination in Mexico.65
4.9.
Mexico argues that the apparently broad technical definition of "interconnection" in Section 2.1 of Mexico's Reference Paper66 is not determinative of the scope of application of Section 2 as a whole. In Mexico's view, this definition must be interpreted in its context, which substantially narrows the scope of application of Section 2. Mexico explains that interconnection occurs between two entities. With respect to one entity, the wording of Section 2.2 restricts the scope of Section 2 to interconnection with a "major supplier". With respect to both entities, the definition in Section 2.1 refers to "suppliers providing public telecommunications transport networks or services". Mexico contends that, although suppliers in Mexico provide PTTNS in Mexico, i.e. Alestra and Avantel, thus enabling both suppliers in an interconnection arrangement to meet this definition, United States-based suppliers such as AT&T and WorldCom do not provide such services in Mexico. Thus, Mexico argues, meaning must be given to the fact that Section 2.1 does not refer to "service suppliers of any other Member", a phrase which is used elsewhere in the GATS and which would have made it clear that Section 2 applies to cross-border (i.e., international) interconnection. Mexico also submits that the phrase "respecto de los cuales se contraigan compromisos específicos" in Section 2.1 of Mexico's Reference Paper further narrows the scope of application of Section 2 to the bounds of the market access inscribed in Mexico's Schedule. Thus, it argues, Section 2 applies only to services supplied in Mexico through mode 3 (commercial presence) by concessionaires with foreign direct ownership up to 49 per cent. In other words, Mexico concludes, it applies only to interconnection within Mexico.67
4.10.
The United States submits that, if Mexico had meant to limit the applicability of Section 2 to interconnection of "some" suppliers with a major supplier, it would have adopted language to that effect. In the absence of any such limitation, the United States contends, Section 2 applies to interconnection of "all" suppliers with a major supplier. For context, the United States refers to the definition in Article XXVIII(g) of the GATS, which states that "'service supplier' means any person that supplies a service." According to the United States, there is no limitation on whether the service supplier is domestic or foreign.68

2. The scope of "interconnection" within Mexico's Reference Paper

(a) The concept of interconnection

4.11.
The United States submits that interconnection consists of the linking of the networks of two different suppliers of telecommunications services for the purpose of exchanging traffic. According to the United States, interconnection is the necessary intermediary step that enables a phone call to travel from the network used by the person placing the call (the "calling party") to the network used by the person receiving the call (the "receiving party").69 The United States explains that, because no telecom supplier has a worldwide ubiquitous network, all telecommunications service suppliers rely on another service supplier to deliver (or "terminate") the phone call to the receiving party when the receiving party is not on the network of the calling party's supplier. To do so, it argues, the calling party's service supplier must link to the network of the receiving party's service supplier and hand-off the call for delivery to the receiving party. In other words, the United States submits, the calling party's service supplier interconnects its network with that of the receiving party's service supplier to enable users of both networks to communicate with each other.70
4.12.
The United States submits that, whether for the purpose of origination or termination, interconnection is generally understood as the linking between the networks of different basic telecom suppliers for the purpose of allowing users of one supplier to communicate with users of another. In support of its view, the United States refers to Section 2.1 of the Reference Paper, which defines interconnection as "linking with suppliers providing public telecommunications transport networks or services in order to allow the users of one supplier to communicate with users of another supplier and to access services provided by another supplier". The United States also notes that in its domestic regulation, Mexico defines interconnection similarly as "[p]hysical and logical connection between two public telecommunications networks, that allows the exchange of switched public traffic between the switching central offices of both networks. The interconnection allows the users of one of the networks to interconnect and exchange public switched traffic with the users of the other network and vice versa, or to use the services provided by the other network."71
4.13.
The United States also refers to the definition of "interconnection" in the European Communities' Interconnection Directive as "the physical and logical linking of telecommunications networks used by the same or a different organization in order to allow the users of one organization to communicate with users of the same or another organization, or to access services provided by another organization."72 The United States submits that the European Commission has explained that "[t]he most basic interconnection service provided is that of call termination (i.e. delivering a call which originates on one network to its destination on another network)."73
4.14.
In Mexico's view, the term "interconnection" is a broad concept that can have different meanings in different contexts. Generally, it explains, interconnection rates are charges for physically and technically linking two domestic networks for purposes of exchanging traffic. In some contexts, it indicates, interconnection is treated as distinct from commercial arrangements – such as settlement, peering, and reciprocal compensation arrangements – that involve charges for use of a network for transport and termination of traffic that originates on another network. Mexico contends that, for example, United States law makes a clear distinction between interconnection and transport and termination services: interconnection is the physical linking of two networks, while transport and termination is when one carrier routes traffic over the network of another carrier. According to Mexico, the regulation of interconnection rates is a significant issue in domestic markets for telephone service where carriers need access to other carriers' networks to provide service in competition with each other. As a result, countries seeking to encourage domestic competition must have strict requirements for incumbent providers with market power. Mexico claims that these rules generally require incumbent carriers to provide all of their competitors interconnection with rates, terms and conditions that are reasonable and non-discriminatory. Mexico argues that interconnection must be permitted at any technically feasible point within the carrier's network and at least equal in quality to that provided by the incumbent provider to itself or to its subsidiaries, affiliates, or any other competitor. Mexico adds that competitors must also have a process to resolve disputes with incumbent carriers that arise during and after the negotiation process.74
4.15.
The United States considers that Mexico's argument that United States law makes a "clear distinction" between interconnection and call termination is irrelevant. It submits that in the United States, as in the European Communities, a key purpose of the regulation of interconnection is to ensure that carriers may terminate calls on other carriers' networks at cost-oriented rates. The United States submits that the FCC (Federal Communications Commission) has made clear that "[t]he interconnection obligation of Section 251(c) (2)... allows competing carriers to choose the most efficient points at which to exchange traffic with incumbent LECs, thereby lowering the competing carriers costs of, among other things, transport and termination of traffic.75 The United States explains that United States law defines "transport and termination" separately from interconnection because United States local exchange carriers have additional obligations with respect to the transport and termination of calls, including the requirement to establish "reciprocal compensation arrangements" for the termination of calls originated on other local networks.7677

(b) The meaning of interconnection within the Reference Paper

4.16.
According to Mexico, the term "interconnection" in Section 2 of the Reference Paper is capable of many meanings including: domestic local interconnection, domestic long-distance interconnection and international interconnection.78 However, Mexico contends, when properly interpreted, "interconnection" in Section 2 of the Reference Paper does not include arrangements under the accounting rate regime.79 In Mexico's view, the term "interconnection" does not encompass the accounting rate regime.80 Mexico understands that, in the context of the Reference Paper, "interconnection" must be interpreted to refer to interconnection within a WTO Member's borders, for example, interconnection to a local exchange carrier by a domestic long-distance carrier, or by a competitive local carrier and the incumbent local carrier.81 Mexico thus submits that the United States incorrectly defines the rates for the transportation and termination of international calls as "interconnection rates".82
4.17.
Mexico further contends that this interpretation does not render the Reference Paper meaningless in the context of international trade in services as implied by the EC in its third party submission. Mexico explains that, for example, where permitted under a WTO Member's Schedule, if a foreign company establishes a commercial presence in that Member's territory, it would have to interconnect with other carriers within the domestic network. Mexico submits that this interconnection would be governed by the provisions of the Reference Paper. Mexico further submits that its ILD Rules fully implement those provisions of the Reference Paper vis-à-vis foreign carriers with a commercial presence in Mexico, among others, AT&T, WorldCom and Verizon.83
4.18.
The United States contends that the plain language of the Reference Paper simply does not support Mexico's argument. According to the United States, the definition of "interconnection" in Section 2.1 is not limited to domestic interconnection, or in other words, interconnection provided to commercially present suppliers. Rather, it argues, it is written broadly to include all means of "linking" for the purpose of enabling users to communicate – whether domestic (mode 3) or international (mode 1).84 Citing to provisions of Mexico's ILD Rules and Federal Telecommunications Law, the United States also argues that even Mexico, in almost all references in its internal laws and regulations, refers to the linking of foreign service suppliers to its international port operators as "interconnection".85
4.19.
Mexicosubmits that the United States ignores ILD Rules 2, 10, 13, 16 and 19 which define "settlement rate" and explicitly distinguish between "settlement rates", which are applicable to international traffic, and "interconnection rates, which are paid to the local operator that terminates the call.86
4.20.
The United States submits that the distinction Mexico draws between "interconnection rates" and "charges for use of a network for transport and termination of traffic that originates on another network" is irrelevant.87 In its view, even though interconnection arrangements cover a wide variety of different commercial, contractual and technical situations, all of these arrangements are "interconnection" under Section 2.1 of the Reference Paper.88 According to the United States, the requirements of Mexico's Reference Paper apply to all interconnection services, particularly call termination. The United States explains that, because call termination means allowing calls originated on the network of one supplier to be terminated on the network of another supplier, it falls squarely within Mexico's definition of "interconnection" in Section 2.1, which is "linking with suppliers providing public telecommunications transport networks or services in order to allow the users of one supplier to communicate with users of another supplier and to access services provided by another supplier."89

(i) Interpretation of the term "interconnection" in its context

4.21.
Mexico argues that the United States' interpretation arises from an improper application of the general rule of interpretation in Article 31 of the Vienna Convention90 since, in its view, the United States simply presents the "ordinary meaning" of the term "interconnection".91 Mexico submits that, under Article 31 of the Vienna Convention it is insufficient to rely solely on the ordinary meaning of a term and that the United States has therefore failed to take into account the context of the term and object and purpose of Mexico's Reference Paper.92
4.22.
As regards the context, Mexico submits that, the history of the negotiations on basic telecommunications confirms that "interconnection", "accounting rates" and "termination services" were discussed but that agreement was reached only on interconnection. Accordingly, Mexico contends, accounting rates were clearly outside the scope of what was agreed. Mexico contends that a specific draft text on accounting rates was removed from the negotiating drafts for the Model Reference Paper.93 For example, Mexico states that the following bracketed text was included in a 6 March 1996 provisional negotiating text:

"[Accounting rate is the rate per traffic unit agreed upon between administrations for a given relation, which is used for the establishment of international accounts, as per International Telecommunication Union Recommendation D. 150 New System for Accounting in International Telephony.]…

[7. Public availability of accounting rates

International accounting rates maintained by any supplier of public telecommunications transport services with foreign correspondents will be open to public review. Upon request of another Member, and [sic] essential facilities supplier will be required to justify why an international accounting rate differs significantly from domestic interconnection rates.]"

But the final version of the Reference Paper did not include any of this text. Furthermore, Mexico submits that accounting rates were consciously excluded from this text is confirmed by the fact that they are "on the table" in the Doha Round of negotiations.94

4.23.
The United States responds that Mexico's citation of an earlier draft of the Reference Paper does not support its argument that accounting rates (or international interconnection rates) were intended to be excluded from the definition of "interconnection." According to the United States, Mexico's argument ignores the rules of treaty interpretation included in the Vienna Convention. The United States submits that whatever provisions were considered during the drafting process, the Panel is charged with interpreting the final version of the Reference Paper. Mexico's final version includes, in Section 2.1, a definition of "interconnection" that broadly covers "linking... to allow the users of one supplier to communicate with users of another supplier and to access services provided by another supplier."95
4.24.
The United States also argues that the requirement in that earlier draft of the Reference Paper that "a dominant supplier explain the reasons why an international accounting rate differs significantly from domestic interconnection rates" at the request of a Member indicates that the negotiators considered accounting rates and domestic interconnection rates to be charges for two types of interconnection. According to the United States, the former is a charge for international interconnection and the latter is a charge for domestic interconnection and that the deletion of this provision merely demonstrates that Members did not undertake those specific obligations. The United States further argues that it does not affect the remaining Reference Paper obligations, including the obligation of Mexico to ensure that its major supplier Telmex charges interconnection rates, including rates for international interconnection, that are basadas en costos.96
4.25.
Mexico submits that the following factors contradict the position of the United States. First, the fact that the negotiating drafts explicitly distinguished between "accounting rates" and "interconnection/interconnection rates" confirms that the negotiators treated the accounting rate regime separately from interconnection. Second, the fact that there were transparency requirements in draft Sections 2.2(b) and 2.3 negated the need for a transparency requirement in square-bracketed Section 7 if, as the United States' argues, "interconnection" subsumed the accounting rate regime. [This fact, t]hat an explicit transparency requirement was included in Section 7 confirms that the negotiators treated the accounting rate regime separately and distinctly from "interconnection". Third, the United States is one of the few WTO Members that make their accounting rates transparent. If the interconnection transparency provisions in the Reference Papers of WTO Members applied to accounting rates, all WTO Members with such commitments would make their rates transparent. Fourth, the fact that no other provisions in the negotiating drafts, the Model Reference Paper and Mexico's Reference Paper could be interpreted to include an obligation analogous to that contained in draft Section 7, so it could not have been removed from the final version of the Reference Paper because its substance was subsumed by other Sections of it. Rather, its subject matter and substance was unique and the negotiators were unable to agree upon its inclusion.97
4.26.
Mexico further argues that the Understanding on Accounting Rates ("the Understanding"), which was outlined in the February 15, 1997 Report of the Chairman of the Group on Basic Telecommunications98, confirms that WTO Members did not intend that accounting rates would be subject to the obligations of the GATS, including the Reference Paper.99 According to Mexico, the Understanding resulted from a discussion of whether Members should take Article II of the GATS (most-favoured nation) exemptions in respect of the application of differential accounting rates, after several countries did take such exemptions. Article II of the GATS, Mexico explains, applies to "any measure covered by [the GATS]". The main debate was whether accounting rates negotiated between private entities should be considered "measures" within the meaning of Article XXVII of the GATS.100 Mexico argues that, given this uncertainty, as well as the fact that the accounting rate regime was the subject of ongoing and active study in the ITU, the Members agreed that accounting rates would be treated as a subject for further negotiation, as part of the "built-in" negotiations under the GATS. In the meantime, it explains, the Understanding imposes a moratorium on dispute settlement action relating to accounting rates in the WTO.101 In addition, Mexico argues, although the Understanding originally arose in the context of Article II exemptions, WTO Members did not contemplate that any other obligation of the Reference Paper or of the Annex on Telecommunications would apply to accounting rates. According to Mexico, it only agreed to inscribe the Reference Paper as an additional commitment in its Schedule because of the Understanding that accounting rates were not covered by it.102
4.27.
As regards the Understanding, the United States submits that it is concerned with Article II of the GATS, concerning most-favoured-nation treatment, rather than the Reference Paper. The United States points out that it did not address the issue of cost-orientation or reasonable terms.103 The United States further argues that Mexico's claim based on the Chairman's Note (the Understanding)104 is unsound for at least two reasons.105 First, the Chairman's Note is at best a non-binding statement that did not find its way into the GATS, the Reference Paper or Mexico's Schedule itself.106 In support of this, the United States cites to a report by the Group on Basic Telecommunications107, which states that "[t]he Chairman stressed that this was merely an understanding, which could not and was not intended to have binding legal force. It therefore did not take away from Members the rights they have under the Dispute Settlement Understanding..."108 Second, the United States argues that the report itself made clear that the Chairman's Note "was merely intended to give members who had not taken MFN exemptions on accounting rates some degree of reassurance." Even in that limited context, the Note has no application outside of GATS Article II - the MFN article.109 The United States argues that this is clear from the Note's text: the reference in the Chairman's Note to "such" accounting rates is a reference back to the introductory paragraph of the Note, which speaks to "differential" accounting rates and the MFN exemptions actually taken by the five countries mentioned in the Note. However, it argues, because the United States has not brought a claim under Article II of the GATS, the Note is irrelevant to this dispute.110 The United States further indicates that the fact that accounting rates are subject to discussions in the ITU has no relevance to whether they are covered by Mexico's WTO commitments; nor is it relevant that WTO Members are considering further commitments on accounting rates in the current services negotiations.111

(ii) Subsequent practice

4.28.
Mexico submits that the rule of interpretation in paragraph 3(b) of Article 31 of the Vienna Convention, which provides that "[t]here should be taken into account together with the context… any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation", is also relevant to this dispute. According to Mexico, all fifty-five of the WTO Members (including the United States) that inscribed the interconnection commitments in Section 2.2(b) of the Model Reference Paper maintain the traditional joint service accounting rate regime. Thus, Mexico argues, WTO Members, including the United States, did not intend Section 2 of their Reference Papers to apply to international interconnection under the traditional accounting rate regime.112
4.29.
Mexico further submits that, its interpretation is supported by the practice of the United States and other WTO members. According to Mexico, fifty-five WTO Members included the interconnection commitments of Section 2.2(b) of the Model Reference Paper in their individually inscribed Reference Papers and all of them, including the United States, maintain the traditional joint service accounting rate regime.113
4.30.
Mexico submits that the Benchmarks Order is relevant to this dispute in several respects. United States law, including the Benchmarks Order, is consistent with Mexico's position that WTO Members did not believe that the Fourth Protocol or the Annex on Telecommunications applied to accounting rate arrangements. In this regard, the FCC established and applied the benchmarks for the countries that inscribed the Reference Paper as well as those that did not, and did not purport to set benchmarks for the former at the same level as the domestic interconnection rates in those countries. Also, although there are United States carriers that qualify as "major suppliers" under the definition advocated by the United States, the Benchmarks Order does not require any United States carriers to base settlement rates on their own costs – to the contrary, the United States Benchmarks Order and International Settlements Policy effectively prohibit United States carriers from adopting settlement rates based on their own costs. In the event that the Panel were to conclude that the Section 2.2 of the Reference Paper applies to accounting rate arrangements and that Telmex is a major supplier within the meaning of the Reference Paper in the context of the negotiation of rates for bilateral United States-Mexican traffic exchanges, it would need to establish a methodology to determine whether the rates were "cost-based, reasonable and economically feasible." Initially, the United States seemed to suggest that the requirement for "cost-based" rates required an evaluation of the specific costs of Telmex. However, Mexico introduced evidence that it is accepted practice – both in the international and domestic contexts – to use "benchmarks" to determine whether rates are acceptable. The United States had also now agreed with Mexico that Members "can reasonably rely on competitive market dynamics to yield cost-based settlement rates." This meant that Mexico was not obliged by the Reference Paper to make calculations of the specific costs of Mexican carriers in providing transport and transmission services for incoming international calls. It also meant that the Panel reasonably could refer to the available benchmarks for accounting rates – those of the ITU Working Group 3 and the FCC – to determine whether the rates are "cost-based" and "reasonable." Mexico submits that, under the standards of both the ITU and the FCC, Mexico's settlement rates clearly are cost-based and reasonable.114
4.31.
The United States argues that Mexico errs in suggesting that the FCC's "Benchmarks Order", which requires United States carriers to negotiate lower accounting rates, is inconsistent with the United States claim in this proceeding that Mexico's WTO Reference Paper obligations apply to settlement rates. The United States submits that the FCC recognized in the Benchmarks Order that "[t]he WTO Basic Telecom Agreement reached on 15 February 1997 will have profound effects on the accounting rate system," since 69 countries had agreed to open their markets, and 59 countries had agreed to implement the Reference Paper. The United States points out that the FCC went on to state that "the WTO Basic Telecom Agreement will fundamentally change the nature of relations between international telecommunications carriers," and expected that its benchmarks would be "moot for competitive countries and carriers." However, the FCC emphasized that "[n]onetheles, the benchmarks are necessary because many countries still will not be open to competition." Thus, according to the United States, the FCC was particularly concerned by the failure to achieve meaningful accounting rate reform through the ITU, the 189-country membership of which includes the large majority of countries for which benchmark rates were established by the Benchmarks Order. The countries opening their markets and accepting the Reference Paper comprised less than 25 per cent of the nearly 250 routes for which the FCC established benchmark accounting rates. According to the United States, the Benchmarks Order was necessary to fill this gap.115
4.32.
The United States also argues that Mexico is incorrect in its argument that its accounting rates are consistent with ITU recommendations on benchmark rates. The United States submits that neither ITU recommendations nor ITU benchmarks are relevant to Mexico's WTO obligations. In addition, according to the United States Recommendation ITU D.140, included by Mexico as Exhibit MEX-11, expressly states, at paragraph E.3.2, that the benchmark levels discussed therein should not be "taken as cost-orientated levels."116
4.33.
Finally, according to Mexico, the United States has argued that its own ILD rules are consistent with Section 1 of the Reference Paper because it only applies the rules to foreign carriers that have market power. As shown above, however, the FCC continues to apply the rules to Mexico notwithstanding that, according to the FCC's own standards, there is "meaningful economic competition" within Mexico. Mexico has also submitted documents from the FCC establishing that it has waived its International Settlements Policy only for 15 countries, and that it deems virtually every major foreign carrier to have market power. According to Mexico, the conduct of the United States in maintaining uniform settlement rate, symmetrical rate and proportionate return requirements is evidence that the United States either does not believe that the Reference Paper applies to accounting rate arrangements or that such market control practices are consistent with Section 1.117

(iii) Supplementary means of interpretation

4.34.
According to Mexico, even if the United States' interpretation could be considered a proper application of Article 31 of the Vienna Convention, it "leads to a result which is manifestly absurd [and] unreasonable", thus requiring recourse to the negotiating history and to the circumstances surrounding the conclusion of the treaty.118 Mexico explains that, under Article 32 of the Vienna Convention, recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Article 31 or to determine the meaning when the interpretation according to Article 31 leaves the meaning ambiguous.119

aa) Negotiating history

4.35.
According to Mexico, a review of the negotiating history of the Reference Paper upon which Mexico's version is based confirms that the term "interconnection" in the Reference Paper was not intended by the WTO Members to encompass the accounting rate regime.120 See the parties arguments on this matter in Section IV.A.2(b) (i) above.

bb) The international scope and bilateral nature of the accounting rate regime

4.36.
Mexico further argues that the United States' expansive interpretation of Section 2 of Mexico's Reference Paper fails to take into account the international scope and bilateral nature of the accounting rate regime. In terms of the international scope, it argues, only fifty-five of the one hundred and forty-four WTO Members inscribed a version of the Reference Paper in their schedules that included the "cost-oriented" requirement in paragraph 2.2(b) of the Model Reference Paper while the remaining eighty-nine WTO Members are under no such obligation. Mexico contends that, under the United States' interpretation of Section 2.2 of Mexico's Reference Paper, those fifty-five WTO Members would be required to implement termination rates on their own national carriers using the strict "cost-oriented" standard posed by the United States, while nothing would oblige carriers from the remaining eighty-nine WTO Members and from non-Members to do the same. In its view, the result would be that the net outflows of payments from countries subject to Section 2.2(b) disciplines to countries not subject to Section 2.2(b) disciplines would rise astronomically, forcing carriers of the former countries to choose between bankruptcy and refusing to pay. It further indicates that the accounting rate regime would collapse completely without a viable replacement, possibly even leading to interruptions in international traffic.121
4.37.
Also, Mexico claims, the bilateral nature of accounting rate regimes could lead to a further absurdity. Mexico explains that the financial pressures caused by one of the parties in a bilateral accounting rate arrangement dropping its settlement rate to a very low level could pressure the other party to reduce its rates in order to sustain the economic viability of the arrangement. In such a situation, the other party would effectively be compelled to bring itself closer into compliance with a WTO standard or requirement that it did not inscribe in its Schedule. Thus, it argues, even if that WTO Member had been careful in its Schedule to ensure that its accounting rate regime was not disciplined, it would be indirectly subject to disciplines inscribed in the schedules of other WTO Members with whom it had accounting rate arrangements in place. In Mexico's view, this circumstance would undermine the overall balance of concessions that formed the basis for the agreement.122
4.38.
The United States submits that neither Mexico nor any other Member violates the Reference Paper by continuing to use "accounting rates", or violates the ITU's International Telecommunications Regulation by subjecting "accounting rates" to the obligations in the Reference Paper. According to the United States, Members that have scheduled the Reference Paper may continue to allow their carriers to charge "accounting rates" to terminate traffic. Those Members must simply ensure that those "accounting rates", when used by major suppliers, are consistent with the requirements of Section 2.2(b).123
4.39.
The United States further submits that Mexico need not worry that Telmex will be faced with "net outflows of payments." In fact, it argues, ISR or other types of interconnection arrangements have, in large part, already superseded the accounting rage regime among most of the 55 countries Mexico lists.124 Also, the United States argues that price reductions made by private parties in response to competitive pressure are not "compelled".125 In the view of the United States, Mexico's "doomsday" scenario is an invention. The United States contends that Mexico's assertion that Telmex would be forced into bankruptcy if it is forced to observe the "strict 'cost-oriented' standard posed by the United States" is not accurate. Rather, the United States submits that Telmex's current rates substantially exceed the prices charged for the very same elements of interconnection furnished domestically. Thus, it argues, cutting Telmex's rates for the interconnection of international traffic to the level of prices charged for interconnection furnished domestically would not lead to the "doomsday" scenario posed in Mexico's submissions, since under Mexican law these rates already cover costs, including a reasonable rate of return.126 Moreover, the United States notes, approximately 80 per cent of Mexico's international traffic is exchanged with the United States. Thus, it submits, if Telmex were to charge cost-based interconnection rates to terminate this traffic, given the large imbalance in traffic flows between the United States and Mexico, the result will not even approach a situation in which Telmex makes "net outflows of payments".127

cc) Circumstances of the conclusion of the treaty: Mexican legislation at the time of negotiations

4.40.
As to the circumstances of the conclusion of the treaty, Mexico turns to Mexican legislation and regulation in effect at the time of the basic telecommunications negotiations. This includes the ILD Rules. Those rules recognize that the term "interconnection" can be used to describe the technical aspects of interconnection in all contexts. However, they also explicitly distinguish between "settlement rates" for international incoming calls and "interconnection charges" for interconnection within Mexico's borders. Accordingly, Mexico submits that, under these laws, at the time of the conclusion of the negotiations, interconnection disciplines such as those in Section 2.2 of Mexico's Reference Paper applied only to domestic interconnection and points out that this is still the case today.128 As support, Mexico cites to the Appellate Body Report in EC – Computer Equipment129, where the Appellate Body found that, inter alia, a Member's legislation on customs classification at the time of conclusion of the negotiations was part of the circumstances of the conclusion of the treaty.130
4.41.
The United States argues that, while it is true that in EC – Computer Equipment, the Appellate Body found that a Member's legislation at the time of negotiations can be used as a supplementary means of interpretation, Mexico considers that its ILD rules should override the definition of "interconnection" used in Section 2.1.131 The United States submits that Mexico ignores the Appellate Body's cautionary note that "[t]he purpose of treaty interpretation is to establish the common intention of the parties to the treaty. To establish this intention, the prior practice of only one of the parties may be relevant, but it is clearly of more limited value than the practice of all parties." The Unites States submits that, according to the Appellate Body, if the prior practice of a party is not consistent, it is not relevant at all as a supplementary means of interpretation. The Unites States further submits that, while Mexico focuses on one particular provision of Mexican law which it contends distinguishes between "interconnection" and "settlement rates", it has demonstrated that elsewhere in Mexican law, the linking of foreign service suppliers to Mexican international port operators is referred to as "interconnection", and that throughout its laws and regulations, Mexico uses the term "interconnection agreement" to describe agreements with foreign operators.132

(c) Whether the Reference Paper obligations extend to accounting rate regimes

4.42.
The United States claims that the interconnection obligations in Section 2 of the Reference Paper apply to the interconnection between United States service suppliers and Telmex for the purpose of delivering their basic telecom services from the United States into Mexico.133 Because accounting rates are interconnection rates between carriers located in two different countries, the Reference Paper obligations apply to accounting rate regimes as well.134
4.43.
Mexico, on the contrary, argues that the substantive provisions in Section 2.2 of Mexico's Reference Paper can be given full meaning only in the domestic context and therefore cannot be given full meaning in the context of arrangements under the accounting rate regime.135

(i) Concept of "accounting rate"

4.44.
Mexico argues that the "accounting rate regime" refers to bilateral relationships between carriers in two countries whereby they agree to compensate one another for transporting and terminating traffic that originates in the other country.136 Based on the definition by the ITU, Mexico submits that the "accounting rate" is the price two carriers of different countries negotiate for carrying one minute of international telephone service between their countries. Mexico explains that each carrier's portion of the accounting rate is called the "settlement rate." Settlement payments between carriers result when traffic flowing in one direction exceeds traffic flowing in the opposite direction. To calculate its settlement payment, a carrier multiplies the number of minutes its outbound traffic to a particular foreign carrier exceeds its inbound traffic from that foreign carrier and then multiplies this amount by the settlement rate charged by the other carrier (also known as the "accounting rate division share"). Thus, it concludes, a carrier that originates more traffic than it terminates will make periodic settlement payments to its foreign correspondent carrier.137
4.45.
The United States notes that Mexico provides no citation for the definition of accounting rate regime, and no definition – nor any reference to accounting rates – is included in Mexico's Schedule Thus, the United States submits, Mexico's definition confirms that accounting rates are interconnection rates between carriers located in two different countries, and fails to show that these terms are mutually exclusive. The United States also points out that Mexico's ILD rules make no reference to accounting rates, and refer throughout to "interconnection" and "international interconnection" agreements.138
4.46.
The United Statessubmits that Mexico's Schedule – including its Reference Paper commitments – must be interpreted on its own terms, according to the rules of interpretation included in the Vienna Convention. According to the United States, ITU instruments, developed for a different organization, of different members, for different purposes, are not relevant for the interpretation of the requirements of Section 2 of the Reference Paper. The United States notes that Mexico cites no binding ITU resolutions that would be violated by Mexico's compliance with its WTO obligations as claimed by the United States and indeed there are none. According to the United States, Mexico principally uses ITU documents to support its argument that the accounting rate regime is not included within the scope of the Reference Paper. The United States claims that Mexico neglects to discuss the definition of "interconnection" included in Section 2.1 of its Reference Paper, or to present any justification for its view that the arrangements in question do not meet that unambiguous definition.139 Furthermore, the United States argues that the definition of "accounting rates" maintained by the ITU is in fact consistent with the definition of interconnection included in Section 2.1 of the Reference Paper. According to the United States, the ITU has recognized that competition has changed the ways that international carriers compensate one another for interconnection, and that accounting rates are one, and only one, of the alternative charging mechanisms that are available for use between carriers in different countries to interconnect their networks.140
4.47.
Mexico acknowledges that the ITU instruments do not assist in the determination of when "tarifas basadas en costos" or "cost oriented rates" are reasonable and economically feasible within the meaning of Section 2.2(b) of Mexico's Reference Paper. However, Mexico argues, they could have some relevance in the interpretation of Section 2.2(b) of Mexico's Reference Paper in the context of interconnection rates within Mexico's borders. In addition, Mexico notes, International Telecommunications Regulation ("ITR") 6.2.1, which requires that accounting rates be established by mutual agreement among administrations or recognized private operating agencies is an important element of the context in which the negotiations on basic telecommunications took place. Mexico submits that ITR 6.2.1 requires that accounting rates be determined in negotiations between carriers. As a result, accounting rates that a carrier negotiates for carrying traffic to different countries typically vary widely. Mexico further submits that other recommendations of ITU working committees, such as E.110, also help to illustrate the context in which certain terms are used within the telecommunications sector, which in turn may assist the Panel in determining the "ordinary meaning" of terms in the Reference Paper.141
4.48.
Mexico also notes that the ITRs are supplemented by a series of D-series Recommendations produced by ITU-T Study Group 3. Recommendation D.140 states that "accounting rates for international telephone services should be cost-orientated and should take into account relevant cost trends." At the same time, this same Recommendation recognizes that that "the costs incurred in providing telecommunication services, although based on the same components, may have a different impact depending on the country's development status."142 Thus, Mexico contends, as a whole, the Recommendation encouraged a transition to lower accounting rates, but did not mandate a particular methodology for calculating costs nor contemplate that countries would be able to immediately establish cost-oriented rates.143

(ii) Domestic interconnection v. accounting rates

4.49.
Comparing the two, Mexico argues that domestic interconnection is more complicated than accounting rate regimes.144 Mexico explains that, for example: international interconnection cannot occur at "any technically feasible point"; by their nature accounting rates are per se discriminatory and cannot comply with the non-discrimination requirement; and domestic regulatory bodies do not have legal authority to resolve disputes and impose solutions over carriers that are outside of their territorial jurisdiction. Mexico also points to a Note by the Secretariat on Additional Commitments under Article XVIII of the GATS, which states that the primary purpose of the interconnection provisions of the Model Reference Paper (Section 2) is to safeguard competitive situations where a dominant supplier can exert control over its competitors. Thus, Mexico argues, even assuming arguendo that Telmex is a dominant supplier, it does not "exert control over its competitors" with respect to the supply of a service from the territory of one Member (i.e., the United States) into the territory of any other Member (i.e., Mexico) because Telmex simply does not compete with United States suppliers for the supply of such services.145
4.50.
The United States argues that, under the definition included in Section 2.1 of Mexico's Reference Paper, the "linking" accomplished via the accounting rate regime is just one form of "interconnection." As a result, there is no element of an "accounting rate regime" that cannot also be an element of an "interconnection regime." Any commercial, contractual, technical or regulatory differences between various types of interconnection arrangements, including accounting rate arrangements, fall under the broad definition included in Section 2.1.146
4.51.
In response to a question by the Panel, the parties commented on the possible differences between domestic interconnection and accounting rate regimes from a commercial, contractual, technical and regulatory point of view.147

aa) Differences from a commercial point of view

4.52.
Mexico argues that domestic interconnection and accounting rate regimes are different from a commercial viewpoint. According to Mexico, a national carrier entering into an accounting rate arrangement with a national carrier of another nation is not in competition with that carrier, because the two carriers cannot compete for each other's customers. Moreover, it argues, under the accounting rate regime, carriers from different countries must come to a mutual agreement on their relationship; there is no supra-national authority that can dictate terms or rates to both parties simultaneously. On the other hand, Mexico indicates, the commercial context of domestic interconnection regimes is quite different. In the sphere of domestic interconnection, the main focus is on how new entrant ("competitive") carriers gain access to the established networks of incumbent carriers, so as to compete with the incumbents for their customers. Mexico explains that, for example, a new entrant providing a local telephone service generally will not start out with a network that reaches all of the potential customers in the region; it therefore must interconnect with the incumbent carrier to ensure its customers can be connected with all of the incumbent's customers. There is little economic incentive for the incumbent carrier to allow its competitors to interconnect, since the competitor will be trying to sell the same services to those customers as the incumbent. But if the new entrant cannot interconnect, Mexico submits, it will be unable to provide a fully competitive service.148
4.53.
Mexicosubmits that domestic interconnection arrangements vary depending upon the location as well as type of interconnection, and also involve technical and operational issues.149 In addition, unlike with the accounting regime whereby a relationship with only one carrier in the destination country enables termination throughout that country, domestic interconnection requires relationships with potentially numerous different carriers.150 Mexico explains that this is because to ensure a local carrier's customers can reach all customers in the market, a carrier must interconnect with all other local carriers in the market. Similarly, it argues, a domestic long-distance carrier (or inter-city or interexchange carrier) must interconnect with local carriers throughout a country in order to be able to reach all end-user customers. Because a long-distance carrier depends exclusively upon local carriers for access to customers, whereas the local carrier has no similar need for access to the long-distance carrier, the local carrier has the incentive and ability to set interconnection rates as high as possible.151 Thus, Mexico concludes, regulators again play an important role in setting the terms, conditions, and rates for interconnection between domestic long-distance and local carriers.152 In conclusion, Mexico submits, the accounting rate regime by its nature must be cooperative, whereas domestic interconnection involves fierce competition that must be regulated.153
4.54.
The United Statesconsiders that, from a commercial viewpoint, interconnection is a key wholesale input in supplying a basic telecommunications service because it allows suppliers to complete phone calls where the person placing the call uses a different network from the person receiving the call. Because no telecommunications supplier has a worldwide, ubiquitous network, all telecommunications suppliers must interconnect with other telecommunications suppliers to complete phone calls to receiving parties that use different networks. Similarly, it argues, telecommunications suppliers without their own local networks also must interconnect with other telecommunications suppliers to originate calls. The United States submits that all interconnection, including accounting rate arrangements between carriers in different countries, performs this key commercial function of allowing the completion of calls between the networks of different suppliers. The definition of interconnection set forth in Section 2.1 of the Reference Paper includes all such "linking" between the networks of different suppliers.154
4.55.
The United States further submits that Mexico wrongly seeks to imply that the regulation of interconnection rates is necessary only where interconnecting suppliers compete with each other. Mexico goes on to acknowledge that interconnection is also an important concern in domestic markets where the interconnecting carriers do not compete with each other, such as where "a domestic long-distance carrier (or inter-city or interexchange carrier) must interconnect with local carriers throughout a country in order to be able to reach all end-user customers. "In these circumstances, it argues, the domestic long-distance carrier must interconnect with local carriers for both call termination and call origination. The United States submits that Mexico further acknowledges that the regulation of interconnection rates is necessary in such circumstances, not because the interconnecting carriers are targeting the same customers, but because "the local carrier has the incentive and ability to set interconnection rates as high as possible." For the same reasons, it submits, the regulation of interconnection rates is necessary for the cross-border supply of international basic telecommunications services, which are also dependent on interconnection arrangements for call termination with suppliers that have "the incentive and ability to set interconnection rates as high as possible."155

bb) Differences from a contractual point of view

4.56.
In response to a question by the Panel, Mexico lists the major provisions of the standard domestic interconnection agreement in comparison with accounting rate agreements. According to Mexico, most of the provisions of one agreement are either not applicable or can never be a provision in the other agreement.156 For example, Mexico pointed to an accounting rate agreement that provided for dispute settlement through international commercial arbitration, while a US domestic interconnection agreement provided for dispute settlement in the courts, before a state public utility commission, or before the Federal Communications Commission. Mexico also highlighted that the domestic interconnection agreement contained many provisions not included in accounting rate agreements, such as with respect to audits, indemnification, insurance, discontinuation of service, intellectual property, directory and operator assistance, access to unbundled network elements, access to poles, ducts, conduits, and rights-of-way, access to databases needed to provide 911 emergency call service, and a provision that each party reserves the right to institute an appropriate proceeding with the appropriate federal or state governmental body of appropriate jurisdiction regarding the prices charges for services by the incumbent carrier.157
4.57.
The United States points out that, from a contractual viewpoint, interconnection arrangements between suppliers in the same or different countries, including accounting rate arrangements between suppliers in different countries, may include a wide variety of rates, terms and conditions concerning such matters as specific services covered by the agreement, the rates applicable to specific services, payment schedules, procedures for dispute resolution, time duration of the agreement, restrictions on assignments of rights, and various network technical considerations. The United States explains that interconnection arrangements may provide for one-way or two-way traffic flows, with the same or different rates applying in each direction, and two-way traffic flow. Interconnection arrangements may also provide for "net" payment arrangements under which the two carriers set off their interconnect payments with one carrier remitting the balance to the other carrier.
4.58.
The United Statesindicates that, under a traditional accounting rate regime, an agreed accounting rate is divided in half and applied to traffic flows in both directions. However, it argues, Mexico's ILD rules governing "interconnection agreements with foreign operators" (Rule 23) do not restrict the compensation methods that may be negotiated by the "concession holder who holds the largest outgoing long-distance market share" (Rule 13). Notably, the rates that Telmex currently charges United States suppliers differ significantly from the "accounting rate revenue division procedure" described by the informal note submitted by the ITU to the Council on Trade in Services ("a net settlement payment is made on the basis of excess traffic minutes, multiplied by half the accounting rate"). The United States explains that United States suppliers are currently charged different rates for each of three rate zones in Mexico. Additionally, under that arrangement, another rate applies to Mexico-United States traffic. Furthermore, the United States submits, negotiated interconnection rates, including accounting rates between suppliers in different countries, are normally established by the interconnecting suppliers. Mexico's ILD Rule 13 requirement that only the concession holder with the largest market share may negotiate with foreign operators rates that are then binding on its competitors does not reflect any traditional accounting rate regime and, to the knowledge of the United States, is not required by any Member other than Mexico.158

cc) Differences from a technical point of view

4.59.
Mexico argues that domestic interconnection and accounting rate regimes are different from a technical viewpoint. Mexico submits that Section 2.2 of the Reference Paper requires that interconnection be ensured at "any technically feasible point" in the major supplier's network. In contrast, under the accounting rate regime international carriers connect at a border or some international mid-way point that is decided privately between the carriers, who have a mutual interest in cooperating with each other to complete international calls. In Mexico's opinion, unless a country permits foreign carriers to establish their own facilities within its territory – which Mexico has not, and for which it has a limitation in its Schedule – foreign carriers must always connect at the border, not at any technically feasible point.159
4.60.
According to Mexico, each specific international relationship has its individual technical complexities. Nations that use ANSI standards and interconnect with those that use CEPT standards must carry out conversions of speeds and protocols for coding of voice channels or of signalling of channels, among other things. These conversions require an agreement between the parties on the installation of standard translator equipment, which can be in the country of origin, the country of destination, or even in an intermediate country. No authority regulates the required translations, and neither company has any obligation to comply with the other's requirements in any manner. Furthermore, conditions can vary from interconnection to interconnection. National interconnection arrangements, in contrast, are generally homogeneous, and the technical aspects of all agreements entered into with one local company are virtually identical. Mexico also notes that domestic interconnections are carried out between two carriers, and if they in a particular case require a third party for interconnection, in general terms it is transparent; the company that interconnects is always responsible for the whole network, whether it is owned or leased, up to the point of interconnection with the local operator. In contrast, in international relationships, the infrastructure is shared up to an intermediate point, and the concept known as HMIU, or "half-miu," applies, a term not commonly used in the domestic interconnection lexicon. In the case of border interconnections, the HMIU is limited to a virtual point or to a very short fiber optic segment; nevertheless, a point of mutual responsibility between the parties continues to exist. Mexico further submits that the special complexities of international interconnection are reflected in ITU-T Recommendation E.110, and the recommendation to concentrate international traffic in "a few international exchanges" highlights that the concept of interconnection "at any technically feasible point" is not applicable to international interconnection.160
4.61.
The United States considers that, from a technical viewpoint, interconnection, by definition, involves the "linking" of networks of different suppliers, and the technical characteristics of the networks of different suppliers vary. Consequently, it argues, there may be technical differences between interconnection arrangements depending on the technologies used by the interconnecting supplier networks, or on whether the interconnection arrangement is between two fixed line carriers; between a fixed line and a wireless carrier; between local and long-distance carriers; or between two local carriers. The United States submits that, for all interconnection arrangements, including interconnection arrangements involving cross-border suppliers, technical issues are generally resolved through the use of protocols and standards and through joint coordination and planning. Also, to the extent that interconnection at a particular point in the network of the major supplier is not "technically feasible", Section 2.2 of the Reference Paper does not apply.161
4.62.
The United States considers that since United States carriers interconnect their networks with the network of Telmex at the border, the border is clearly a "technically feasible point" of interconnection under Section 2.2. In its view, that Mexico prohibits interconnection at other technically feasible points does not change the nature of the activity encompassed by interconnection.162 The United States also observes that the international interconnection arrangements are plainly interconnection under Section 2.1 of the Reference Paper, and also are similar to the "meet-point interconnection arrangements" that incumbent local exchange carriers in the United States are required to provide to new entrants. Thus, Mexico can not exclude the accounting rate regime from interconnection on this ground.163
4.63.
The United States contends that Mexico's attempt to exclude the accounting rate regime from interconnection on the grounds that "international carriers connect at a border or some international mid-way point" is unfounded. In its view, such "linking" of networks is plainly interconnection under Section 2.1 of the Reference Paper, and also is similar to the "meet-point interconnection arrangements" that incumbent local exchange carriers in the United States are required to provide to new entrants. The United States considers that meet-point arrangements are arrangements by which each telecommunications carrier builds and maintains its network to a meet point. The FCC found in 1996 that meet-point arrangements for interconnection between carrier facilities, also known as "mid-span meets", were commonly used between neighbouring LECs (local exchange carriers) for the mutual exchange of traffic.164

dd) Differences from a regulatory point of view

4.64.
Mexico argues that domestic interconnection and accounting rate regimes are different from a regulatory viewpoint. According to Mexico, in the domestic interconnection context, countries seeking to encourage domestic competition must have strict requirements for incumbent providers with market power. These rules generally require incumbent carriers to provide all of their competitors interconnection with rates, terms and conditions that are reasonable and non-discriminatory.165 In this regard, Section 2.2(a) provides that interconnection must be provided under "non-discriminatory terms, conditions, and rates." In contrast, there is no expectation that a carrier offer the same accounting rate agreement to foreign carriers from different countries; indeed, there was specifically no agreement in the GATS negotiations to require that accounting rates be non-discriminatory.166 Interconnection must be permitted at any technically feasible point within the carrier's network and at least equal in quality to that provided by the incumbent provider to itself or to its subsidiaries, affiliates, or any other competitor.167 Mexico notes that Section 2.2(a) also provides that a major supplier must provide interconnection "of a quality no less favourable than that provided for its own like services or for like services of non-affiliated service suppliers or for its subsidiaries or other affiliates." In its view, issues of comparable quality arise only when there is concern that an incumbent carrier could provide inferior quality facilities to carriers competing with it. This issue does not arise in the context of the accounting rate regime, where the traffic is handed off at the border to a national long-distance carrier that has no interest in impeding calls or providing low quality service, but rather is responsible for all of the facilities within its country used to complete the call.168
4.65.
Mexico submits that Section 2.2(b) of the Reference Paper provides that interconnection must be provided in a "timely fashion". In its view, this issue does not arise in the context of the accounting rate regime, where national carriers have no incentive to block access; to the contrary, international calls can be completed only if the carriers from the two countries act in cooperation, and the carriers are compensated for completing the call.169 Mexico further submits that Section 2.2(b) also provides that interconnection tariffs must be "sufficiently unbundled so that the supplier need not pay for network components or facilities that it does not require for the service to be provided." In contrast, it argues, unbundling does not arise in the context of the accounting rate regime because once a carrier hands traffic off at a border, the terminating carrier is completely responsible for ensuring that the call reaches its final destination.170
4.66.
Mexiconotes that Section 2.2(c) of the Reference Paper provides that a major supplier shall provide interconnection upon request "at points in addition to the network termination points offered to the majority of users, subject to charges that reflect the cost of construction of necessary additional facilities."171 Mexico points out that, under the accounting rate regime in effect between Mexico and the United States, however, the decision of whether to construct new gateways for connecting with international carriers is left solely to the discretion of the carriers, and each carrier bears it own costs because neither has facilities within the other country.172 Mexico argues that Section 2.3 provides that procedures applicable for interconnection negotiations must be made publicly available. Because negotiation of accounting rate agreements is done privately, this requirement has no application to the accounting rate regime.173 Mexico also contends that Section 2.4 provides that a major supplier must make publicly available its interconnection agreements or a reference interconnection offer. There is, however, no expectation that accounting rates be made public.174
4.67.
Mexicorecalls that Section 2.5 requires that countries have an independent domestic regulatory body to resolve disputes regarding appropriate terms, conditions and rates for interconnection.175 Mexico points out that competitors must have a process to resolve disputes with incumbent carriers that arise during and after the negotiation process. Because both parties to the interconnection agreement are established under the laws of one country, dispute settlement mechanisms can be established giving a governmental regulator the authority to impose terms, conditions and rates on both parties. In the context of accounting rate agreements, in contrast, governments have different regulatory goals and more limited power.176 For example, a domestic regulatory body can have the authority to resolve disputes and impose solutions only over two carriers that are within its rate-setting jurisdiction. Mexico submits that a domestic regulatory agency cannot require a foreign carrier to accept its determination of an appropriate accounting rate; and, in any case, the foreign carrier would always be free to ignore the determination.177 As reflected in requirements such as those for uniform settlement rates (adopted by both the United States and Mexico), proportionate return (adopted by both the United States and Mexico), and symmetrical rates (adopted by the United States but not Mexico), governments generally seek to: (i) avoid allowing accounting rate arrangements to undermine domestic competition; and (ii) bolster the negotiating position of their national carriers vis-à-vis foreign carriers. At the same time, Mexico argues, because a government of one country lacks jurisdiction over foreign carriers, neither rates nor other terms and conditions can be enforced by that government. A government can require that its national carriers seek approval of accounting rate arrangements and in that manner try to impose various conditions, but its authority is circumscribed.178
4.68.
The United Statessubmits that, from a regulatory viewpoint, interconnection arrangements, including accounting rate arrangements, may be subject to different regulatory requirements to address different commercial, contractual and technical situations. The United States submits that any such regulatory differences, however, do not alter the status of all of these arrangements as "interconnection" under Section 2.1 of the Reference Paper.179 The fact that some of the requirements of Section 2 may not apply to interconnection provided to cross-border suppliers does not mean that other requirements of Section 2 are equally inapplicable.180 As stated by the European Communities, "from a regulatory point of view, accounting rates are just one form of interconnection."181 The United States further submits that Mexico is wrong in implying that the regulation of interconnection rates is necessary only where interconnecting suppliers compete with each other. The United States points out that Mexico also acknowledges that interconnection is an important concern in domestic markets where the interconnecting carriers do not compete with each other, such as where "a domestic long-distance carrier (or inter-city or interexchange carrier) must interconnect with local carriers throughout a country in order to be able to reach all end-user customers". The United States further notes that Mexico also acknowledges that the regulation of interconnection rates is necessary in such circumstances, not because the interconnecting carriers are targeting the same customers, but because "the local carrier has the incentive and ability to set interconnection rates as high as possible." The United States argues that, for the same reasons, the regulation of interconnection rates is necessary for the cross-border supply of international basic telecommunications services, which are also dependent on interconnection arrangements for call termination with suppliers that have "the incentive and ability to set interconnection rates as high as possible."182
4.69.
The United States further submits that Mexico is also wrong to contend that a major supplier "has no interest in impeding calls or providing inferior quality service" to cross-border suppliers because these suppliers are not competitors. In fact, major suppliers are direct competitors with cross-border suppliers that originate services in-country through home-country direct and similar call reversal services. Moreover, a major supplier has an incentive to impose a competitive disadvantage on a foreign cross-border supplier if an affiliate of the major supplier competes with the cross-border supplier – as many such affiliates were expected to do following a successful outcome of the basic telecommunications negotiations.183 The United States also notes that the requirements of non-discrimination and unbundling are equally relevant to the interconnection of international traffic as they are to the interconnection of domestic traffic.184

3. Specific Commitments of Mexico

4.70.
The United States claims that Section 2.1 of Mexico's Reference Paper defines the scope of Mexico's interconnection obligations. Section 2.1 states that "[t]his section applies, on the basis of the specific commitments undertaken, to linking with suppliers providing public telecommunications transport networks or services in order to allow the users of one supplier to communicate with users of another supplier and to access services provided by another supplier". In this regard, the United States claims that, Mexico's obligations under Section 2 of the Reference Paper apply to the interconnection between Telmex and United States suppliers of basic telecom services on a cross-border basis because such interconnection: (i) involves the specific market access; and national treatment commitments that Mexico undertook in its Schedule for basic telecommunications services; and (ii) links suppliers of public telecom networks and services (a United States supplier of basic telecom services and Telmex) to enable users of the United States supplier to communicate with users of Telmex and to access Telmex's services.185
4.71.
Mexico submits that a proper interpretation of the provisions of Mexico's Reference Paper and Schedule demonstrates that Section 2 of Mexico's Reference Paper does not apply to the terms and conditions of interconnection between United States suppliers of basic telecommunications services and Telmex, that is, to "international" interconnection.186

(a) Definition of the service and mode of supply

(i) Definition of services

4.72.
Mexico submits that the services at issue are basic telecommunication services and not "telephone calls" or any other customer-supplied information or data (e.g., voice or facsimile). Mexico argues that, the services at issue are the services related to the transportation or transmission of such data. In Mexico 's view, it is the "public telecommunications infrastructure" that permits the supply of such services. In support of its argument, Mexico cites to the CPC definitions of "voice telephony" (found in CPC codes 75211 and 75212), and "circuit-switched data transmission services" (CPC 7523).187
4.73.
Mexico deems it significant that "communications" are listed in Section 7 along with "transport" and "storage" services. Mexico contends that its view is substantiated by the fact that no Member imposes restrictions on the number of incoming or outgoing calls, whereas many of them impose restrictions on services relating to the calls. Mexico also notes the specific wording used to describe the modes for trade in services highlights this difference. Mode 1 covers cross-border "supply" of a service. Thus, Mexico argues, it cannot reasonably be established that United States carriers "supply" telephone calls; what they supply is the service that transports their customers' telephone calls.188
4.74.
The United States argues that Mexico's argument should be rejected because Mexico ignores the text of the CPC codes it inscribed. According to the United States, the CPC codes states that the services subject to Mexico's market access commitments are not simply the "transmission or transport of customer-supplied information". Contrary to Mexico's argument, the United States submits, the nature of the service and its cross-border character is not affected by the fact that the Mexican concessionaire assumes responsibility for the traffic at the border. This "hand off" is expressly contemplated in CPC 75212, which provides that the customer has access to both "the suppliers' and connecting carriers' entire telephone network". Thus, it concludes, the CPC code specifically contemplates the "joint provision" of voice services.189
4.75.
According to the United States, the CPC codes make clear that the services covered by Mexico's market access commitments include, under CPC 75212, "switching and transmission services necessary to establish and maintain communications between local calling areas." Establishing and maintaining communications requires active coordination between a supplier on each side of the border, and is not two discrete services provided by different companies. For example, the United States explains, in order to complete a call, AT&T's switch must communicate with Telmex's switch, which is located within Mexico, not on the border. Similarly, CPC 75212 states that the scheduled service "provides the customers with access to the suppliers' and connecting carrier's entire telephone network." According to the United States, what a "customer" purchases from a United States supplier is a "communication" – a telephone call – from its point of origin in the United States to its point of termination in Mexico. In other words, the United States submits, the service includes the entirety of a telephone call. Moreover, CPC 75212 covers "services necessary to establish and maintain communications between local calling areas." This includes communications between a local calling area in the United States and a local calling area in Mexico.190
4.76.
Mexico concludes that, the relevant trade in services, or the "supply of a service", at issue in this dispute, is the production, marketing, or sale of transmission or transport services of customer-supplied information or data. Mexico notes that cross-border supply occurs when a service supplier is not present within the territory of the Member where the service is delivered or consumed, but it supplies the relevant services across the border. Therefore, Mexico argues, cross-border supply under mode 1 in the GATS requires that the service at issue cross a border.191
4.77.
Accordingly, Mexico argues, in order to determine whether the market access commitments inscribed in Mexico's Schedule allow the cross-border supply of public telecommunications transport services, the Panel must determine whether Mexico's commitments permit public transmission or transport services provided by United States suppliers to cross the border into Mexico.192
4.78.
Mexico submits that what the United States fails to mention is that the joint provision of telephone services typically involves more than one "switching and transmission" service supplier. In Mexico's view, this is confirmed by the "hand-off" occurring at the border, as clearly evidenced by the accounting rate transaction, which has major implications in terms of the modes of supply under the GATS. Indeed, where a Member's Schedule requires services to be provided jointly by a foreign supplier and a locally established supplier, there can be no cross-border trade within the meaning of GATS Article I:2(a).193
4.79.
According to Mexico, this legal reasoning likewise applies to cross-border transport of other items. Mexico submits that, where a "hand-off" occurs at the border to a service supplier established in the destination country, there can be no cross-border trade in the transport of the services involved into the destination country. In the case of water, Mexico explains, if – at the border – a different supplier provides the pipeline transport service into the destination country, then the transport service supplier in the originating country cannot be said to provide cross-border service "from the territory" of the originating country "into the territory" of the destination country. Mexico further submits that the above interpretation is not only legally but also "logically" sound. According to Mexico, one of the important elements in the ability to supply cross-border services is that the foreign service supplier does not have to involve suppliers in the destination country in order to provide the services in question. This is impossible in the case of hand-off at the border and the joint provision of services.194
4.80.
The United States argues that, second, the cross-border supply of a service does not require that the service supplier operate on both sides of the border. The United States submits that Article I:2(a) of GATS defines the cross-border supply of a service as the supply of a service from the territory of one Member into the territory of any other Member. The United States argues that it is the service that crosses the border, not the supplier. According to the United States, accepting Mexico's argument would mean that the provision of basic telecommunications services on a cross-border basis would only be possible if a service supplier also operated on a commercial presence basis. The United States submits that the result would be to render meaningless Mexico's mode 1 commitments in the basic telecommunications sector. Since United States and Mexican basic telecommunications suppliers currently interconnect at the border, accepting Mexico's argument would also mean that the supply of basic telecommunications services does not fit into any of the modes of supply under GATS. The United States submits that such an interpretation would be contrary to the nature of basic telecommunications services. That basic telecommunications services can be, and indeed are, supplied on a cross-border basis is confirmed by the undisputed fact that billions of calls (i.e., signals) are actually transmitted between the United States and Mexico annually.195
4.81.
Mexico submits that at the core of the United States' argument that United States suppliers actually provide basic telecommunications services on a cross-border basis is the erroneous proposition that the "telephone calls" are the services of United States suppliers that move across the border. According to Mexico, the flaw in the United States' reasoning becomes obvious when it is applied to other transport services. For example, Mexico explains, in the case of mail, the service consists of the pick-up, transport and delivery of letters. Mexico submits that the fact that millions of letters cross the border between two countries does not necessarily mean that postal services providers in country A supply their services from its territory into the territory of country B. In order for cross-border trade in services to occur, it is the transport and delivery services of a supplier established in country A, not merely the letters, that must cross the border. There will not be any cross-border supply to the extent that the supplier established in country A provides its transport services only in its home country's territory, and delivers the letter at a border point, where it is picked-up by another supplier, which operates in country B, and arrange for the transport of the letter to its final destination. This is an example of the joint provision of a service by two suppliers. In no sense can this joint provision of a service by two suppliers on either side of the border be described as the cross-border supply of transport services by the supplier established in country A into the territory of country B. Similarly, the fact that billions of minutes of calls (i.e., signals) are transmitted between the United States and Mexico annually does not demonstrate that United States basic telecommunications service suppliers provide their transport and transmission services on a cross-border basis into Mexico. The relevant question is whether United States suppliers can transport and transmit signals from the United States into Mexico. The cross-border supply of basic telecommunications services will be possible only to the extent that calls originating in a foreign country are transported and transmitted by the foreign supplier across Mexico's border to the recipient. In the case of basic telecommunications, this requires a transport and transmission network that transcends national borders.196
4.82.
According to Mexico, the United States has not established that such cross-border supply of basic telecommunications services is at issue in this dispute. As a matter of law, it cannot make this demonstration because the transport and transmission services supplied by United States suppliers are not provided across the border, but merely to the border. At that point, traffic is handed off to a Mexican concessionaire, which receives and carries the calls to the recipient, that is, supplies telecommunications transport services into and within Mexico. Therefore, Mexico argues, the United States is mistaken when it states that "the way in which United States suppliers complete calls into Mexico is by routing through the facilities of an enterprise that has a concession". The fact is that United States suppliers do not "complete calls" and, hence, do not supply transport and transmission services across the border into and within Mexico.197
4.83.
Mexico also notes that, under the United States' interpretation, its suppliers are providing telecommunications services on a cross-border basis when the calls are routed through the facilities of another supplier. This is not tenable. "Routing" (i.e., transmitting) traffic is the service being provided by basic telecommunications suppliers. When the calls are "routed" through the facilities of a Mexican supplier, it is that supplier, not the United States supplier, that provides the transport and transmission services at issue in this dispute.198 Mexico further claims that, accepting the United States' argument that the fact that signals are transmitted across the border demonstrates that basic telecommunications services are provided on a cross-border basis would mean that market access under mode 1 would be granted as soon as a WTO Member allows calls originating in other countries to be transmitted across its borders, regardless of who is supplying that service. This is also untenable.199 There is not a single WTO Member that prohibits incoming calls to its citizens from the territories of other WTO Members. This does not mean that all WTO Members have granted market access under mode 1.200 Mexico submits that, cross-border supply does not occur under the half-circuit regime established between Mexico and the United States, as laid down in Mexico's Schedule. According to Mexico, cross-border supply unquestionably cannot occur where a commercial presence limitation is scheduled under mode 1, because the incumbent provider in the United States must either become established in Mexico or rely on another provider established in Mexico in order to transport and terminate calls into and within Mexico. In practice, the half-circuit regime requires telecommunications traffic to be handed over at the border to another provider operating inside Mexican territory, and it is the latter that carries the traffic over the Mexican half of the circuit. Under Mexico's Schedule, therefore, the incumbent provider in the United States cannot supply telecommunications transport services over the Mexican half circuit and so will never be able to provide services "from the territory" of the United States "into the territory" of Mexico.201

aa) Half-circuit v. full-circuit regimes

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

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

4.85.
According to Mexico, the clearest example of a full-circuit regime is when a foreign supplier expands its network to the territory of the destination country by its own transmission links and network nodes (i.e. "points of presence"). As to mode 1, in order for a United States-based supplier to supply services from United States territory to Mexican territory (in other words, cross-border supply) it must supply telecom transport services over the whole of the full circuit without having a commercial presence in Mexico within the meaning of GATS Article XXVIII(d). According to Mexico, this definition of "commercial presence" relates to the establishment of a particular type of legal entity, as clarified in the GATS Guidelines for Scheduling. A full-circuit regime does not require the establishment of such legal entities. This is confirmed in the ITU Document included as Exhibit MEX-59, which establishes that "international operators can avoid the half-circuit regime by establishing a switch in a foreign territory, then providing end-to-end service to that switch." Indeed, it is not even necessary to establish a commercial presence in the foreign country. Where it is possible to establish a full-circuit regime without the need for such presence, the foreign country supplier can provide services to the destination country under mode 1. For the purposes of this dispute, it is not necessary for the Panel to define all the circumstances in which a single circuit regime may be set up so as to allow telecom transport services to be supplied under mode 1. The crucial point is that Mexico's Schedule maintains the half-circuit regime and requires all telecommunications to be handed over at the border so that the transport and transmission services supplied on the Mexican side of the border are supplied by Mexican-based concessionaires. In other words, Mexico does not permit the supply of telecom transport services under mode 1.204
4.86.
Moreover, the United States argues that the one example Mexico gives of cross-border supply from the United States into Mexico is where a United States supplier "has a full circuit" and "establish[es] a switch" or a "point of presence" in Mexico.205 Mexico states that the United States supplier does not have a commercial presence on the Mexican side of the border in this example. According to the United States, however, whether or not "establishing a switch" or a "point of presence" on the Mexican side of the border is a "commercial presence," "establishing a switch" or a "point of presence" certainly involves operating in some fashion on the Mexican side of the border. This interpretation therefore adds an element that is not present in Article I:2(a) of GATS, which defines the cross-border supply of a service as the supply of a service from the territory of one Member into the territory of any other Member because Mexico's interpretation requires that to provide basic telecommunications services in the cross-border mode, a service supplier must operate on both sides of the border.206
4.87.
Mexico submits that, under the full-circuit regime, a foreign supplier carries traffic to the "interior" of the destination country. It then interconnects with the local network in the same way as does a national operator. This means that, under the full-circuit regime what is relevant for the foreign operator is the interconnection "within" the destination country.207 The United States is not contesting the interconnection regime with Mexico as it applies to operators established within the territory of Mexico. Mexico further claims this is based on Mexico's position that Section 2 of its Reference Paper applies solely to "interconnection" within its borders.208
4.88.
Mexico also submits that, the use of a satellite or any other kind of wireless technology instead of a landline does not in or of itself determine whether cross-border supply exists, since countries regulate the use of the radio frequency spectrum in their territory. Even in the case of a satellite system with a global footprint, like the one that the Iridium system uses (the only one of its type), the use of the Mexican spectrum to carry calls is subject to restrictions similar to those for landlines and other wireless services that the operator provides. Accordingly, Iridium has a Mexican affiliate with a concession to supply public telecom transport services inside Mexico and through which switched calls to Mexico must be routed in order to complete transmission to the end-user's handset when the user is in Mexico.209
4.89.
Therefore, Mexico argues, carrying calls by satellite direct to the user's telephone could potentially involve a cross-border service, for example, if there is only one supplier involved and there are no joint services with a supplier who is commercially established in the destination country. Whether a Member has made a commitment or not, and the way in which the commitment has been made to authorize such cross-border supply, can be determined only by examining the specific scope of the Member's inscription.210
4.90.
The United States argues that Mexico's explanation regarding satellite services is, again, based upon acceptance of the notion that a telephone call or signal is a separate service from the transportation of that signal. The United States reiterates that this notion ignores the CPC codes, which specifically contemplate "hand off" of the signal and the joint provision of voice services, and the purchase by a "customer" of a "communication" over the entirety of a telephone call, from its point of origin to its point of termination.211

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

4.91.
According to the United States, Mexico undertook market access and national treatment commitments in its schedule for basic telecom services supplied by "facilities-based" operators on a cross-border (mode 1) basis. The United States also notes that Mexico limited this commitment to ensure that service suppliers route international traffic through the facilities of an entity licensed in Mexico (known as a "concessionaire"), thus confirming its specific intention to include international services within the scope of these commitments.212
4.92.
The United States further submits that Mexico scheduled cross-border commitments for non-facilities-based telecom services ("commercial agencies") as well. Based on Mexico's Schedule, the United States argues that Mexico committed to accord market access and national treatment to United States suppliers, which do not themselves own facilities, but instead provide telecommunications services over capacity (such as a line) that they lease from a concessionaire.213
4.93.
Mexico argues that it did not schedule cross-border commitments for basic telecommunications services supplied by facilities-based and non-facilities-based operators.214 Mexico submits that the phrase "respecto de los cuales se contraigan compromisos específicos" in Section 2.1 of its Reference Paper limits the application of Section 2 to the precise market access allowed in Mexico's specific commitments inscribed in its Schedule. The phrase translates as "on the basis of specific commitments undertaken" or "in respect of which specific commitments are undertaken". It qualifies the entire provision and, thereby, links Section 2 of the Reference Paper to the specific commitments in Mexico's Schedule. It means that Section 2 applies only within the bounds of Mexico's inscribed market access for the supply of services.215
4.94.
Mexico submits that, in order to understand its scheduled commitments in basic telecommunications services, the first thing to consider is the circumstances in which those commitments were negotiated. Mexico started to liberalize its basic telecommunications market with the privatization of Telmex in 1990 and with the implementation of the FTL in 1995. One of the principal objectives of the FTL was to liberalize the Mexican market for basic telecommunications by granting concessions to new entrants, which could include up to 49 per cent foreign ownership. As a result of these reforms, Mexico introduced competition into the international long-distance service market. However, under Mexican law, only those carriers able to meet the conditions necessary to obtain a concession are allowed to enter the market. As to foreign enterprises, they were neither allowed to provide international services, nor to install, operate or use facilities in Mexico.216
4.95.
Mexico argues that it was within this context that Mexico agreed to the market access commitments with accompanying limitations relating to basic telecommunication services in its Schedule, which means that Mexico bound itself to the regulatory status quo as it existed in 1997 at the end of the WTO negotiations on basic telecommunications. That status quo did not permit United States suppliers to supply public telecommunications transport networks and services (PTTNS) from the territory of the United States into the territory of Mexico. Thus, Mexico did not, by inscribing this commitment, permit market access for the supply of basic telecommunications services through mode 1. However, it did permit market access for facilities-based suppliers through commercial presence in Mexico in the form of up to 49 per cent direct foreign ownership of a concessionaire.217
4.96.
Mexico also points out that, according to paragraph 1 of Article XVI of the GATS, the obligation is to accord treatment no less favourable than that provided under the terms, limitations and conditions on market access specified in a Member's Schedule.218 Thus, Mexico argues, the mere inscription of a service sector in the "sector or subsector" column of a Schedule of Specific Commitments does not imply that a Member has bound itself to grant unconditional market access for any of the modes of supply; rather, any commitment made must be read in light of the "terms, limitations and conditions" specifically inscribed under the relevant column of the Schedule.219 According to Mexico, the relevant terms, limitations and conditions on market access inscribed in Mexico's Schedule clarify that Mexico did not undertake any commitments to permit basic telecommunications service suppliers of other Members to provide "facilities-based" or "non-facilities" based basic telecommunications services on a "cross-border" basis.220
4.97.
In response to a question by the Panel, the United States contends that, once any level of commitment is undertaken, Section 2 applies fully within the modes of supply in which commitments have been taken, unless the limitation scheduled specifically limits the applicability of the Reference Paper.221
4.98.
Mexico submits that Section 2 of Mexico's Reference Paper does not apply fully to a service sector or subsector once any level of commitment is made in any mode of supply because of the following reasons:

(i) First, the specific language of Mexico's Reference Paper — i.e., the phrase "respecto de los cuales se contraigan compromisos específicos" – plainly restricts the application of the Reference Paper to the precise scope of Mexico's commitments for market access for the supply of basic telecommunication services. In order to give meaning to this restriction, it is necessary to interpret Mexico's specific commitments in totality, including the inscribed limitations.

(ii) Second, those commitments must be interpreted in the light of the relevant mode of supply and any associated limitations, because it is the positive inscriptions and the limitations read together that define Mexico's specific commitments with respect to the supply of particular services.

(iii) Third, the United States is wrong to interpret the phrase "where specific commitments are undertaken" to simply mean that where any commitments are undertaken by a WTO Member the Reference Paper applies fully. The inscription of the Reference Paper in the fourth column of a Member's Schedule is, itself, a commitment that would invoke the application of Section 2 of the Reference Paper under the United States' interpretation. Such an interpretation means that the phrase "respecto de los cuales se contraigan compromisos específicos" in Section 2.1 of the Reference Paper is unnecessary. This renders the phrase meaningless and, therefore, is an impermissible interpretation under Article 31 of the Vienna Convention.222

4.99.
Mexico further argues that its interpretation that its Reference Paper applies only within the bounds of its specific commitments and limitations on market access is consistent with the object and purpose of Section 2. According to Mexico, the primary objective of the interconnection provisions of the Reference Paper is to safeguard competitive conditions in situations where a dominant carrier can exert control over its competitors within its market. Thus, in order to benefit from the terms and conditions of interconnection provided for in Section 2, foreign suppliers must first be granted market access under the commitments inscribed in a Member's Schedule. Accordingly, suppliers that are not allowed to compete in a given market because they have not been granted access cannot benefit from the terms and conditions provided for in Section 2.223
4.100.
Mexico also argues that, independently of the meaning of the phrase "respecto de los cuales se contraigan compromisos específicos", Article 31 of the Vienna Convention requires that Mexico's Reference Paper be interpreted in a manner that gives meaning to its content and to the specific commitments and limitations inscribed in Mexico's Schedule.224 Mexico also urges the Panel to bear in mind the principle of effectiveness in the interpretation of treaties (ut res magis valeat quam pereat) which, according to the Appellate Body, requires that a treaty interpreter:

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

4.101.
According to Mexico, the United States' interpretation entails reading the sector/subsector column of Mexico's Schedule in isolation from the rest of its Schedule. Among other things, the United States' interpretation ignores the fact that a Member may inscribe "unbound" in either columns 2 (market access) or 3 (national treatment). In such circumstances, there is no specific market access commitment for the service sector or subsector and mode involved. Similarly, where the term "unbound" is not used, but limitations are inscribed under specific modes, it is only through a detailed examination of the text of those limitations that it can be determined whether or not suppliers of other WTO Members have, in fact, been granted market access under each of the modes.226
4.102.
Mexico argues that the United States interpretation of Mexico's Reference Paper would effectively grant market access to United States suppliers of basic telecommunications services that is not inscribed in Mexico's Schedule. Furthermore, it would render meaningless the limitations on market access that are specified in Mexico's Schedule. Such an interpretation is inconsistent with the principle of effective interpretation in Article 31 of the Vienna Convention and, therefore, is impermissible.227

(c) Meaning of the limitations inscribed

4.103.
Mexico also submits that the inscription in its Schedule cannot be equated with providing market access for cross-border trade. Mexico explains that, under Article XVI of the GATS, the mere fact that a Member has inscribed a commitment for a particular mode of supply in a particular sector or subsector cannot be ipso facto equated with an undertaking to grant market access to suppliers of other Members for the supply of services through that mode of supply. Rather, whether and to what extent market access has been granted to foreign suppliers depends on careful interpretation of the precise meaning of the limitations inscribed in the Member's Schedule for the relevant mode. This requires detailed analyses of all entries in a Member's Schedule in accordance with the general principles of treaty interpretation set forth in the Vienna Convention.228
4.104.
According to Mexico, the phrase "none, except the following" is an accepted drafting convention to introduce a limitation. Using its right to inscribe limitations, a WTO Member can effectively disallow market access to foreign suppliers for trade in one mode of supply, even though there is a "standstill" binding for that mode of supply. When specific commitments are undertaken under GATS Article XVI, a Member binds certain measures and commits not to accord to foreign suppliers treatment less favourable than that stipulated in these measures. It is those "terms, limitations and conditions" specified in a Schedule that determine the level of market access, if any, for each mode of supply that is bound by a Member. Thus, Mexico argues, the fact that a Member has inscribed a commitment for a particular mode of supply in a particular service sector does not necessarily mean that market access has been granted to foreign suppliers for the supply of the relevant services in that particular mode.229
4.105.
Mexico notes that, in inscribing their limitations, WTO Members can bind themselves to the status quo for the supply of a service through one of the modes of supply. It may very well be that, under the status quo as inscribed in the limitations in their Schedule, no market access is actually provided to foreign suppliers for the supply of the relevant service through that mode of supply. In such cases, the limitation has the effect of prohibiting market access for these suppliers even though the Member did not inscribe "unbound" in the relevant column. For example, certain limitations on the number of service suppliers can effectively create a "zero quota", which prohibits market access for foreign suppliers.230 In support of its argument, Mexico cites two WTO Secretariat Notes.231232 According to Mexico, the inscription of a commercial presence requirement in such a manner has the effect of prohibiting market access for the cross-border supply of such services even though the Member did not inscribe "unbound" in the relevant column and this is exactly what Mexico has done.233
4.106.
The United States argues that Mexico's reliance on the Scheduling Note is misplaced. The United States points out that the part of the Note that Mexico relies on only applies to "a residence requirement, nationality condition or commercial presence requirement." Thus, it is not applicable to the limitation in Mexico's Schedule, which is a routing requirement.234
4.107.
The United States argues that Mexico's commitment is clear and straightforward: there are no limitations on the mode 1 commitment, with the exception of a routing requirement. The United States submits that Mexico's argument that "None" should be interpreted as "Unbound" is thoroughly untenable. The requirement to route international traffic through the facilities of a Mexican concessionaire does not completely eviscerate Mexico's market access commitment for mode 1 – indeed, there would be no need for this or any other limitation if Mexico had left mode 1 unbound. The way in which United States suppliers complete calls into Mexico is by "rout[ing] through the facilities of an enterprise that has a concession" – an option specifically provided in Mexico's Schedule.235
4.108.
The United States argues that Mexico ignores this aspect of its commitment in asserting that it has made no commitment for the supply of telecommunications services on a cross-border basis. The United States submits that, even if this limitation had any effects, it would still be a limitation on a commitment that Mexico undertook and would therefore still trigger the obligations in Section 2 of the Reference Paper and Section 5 of the Annex.236
4.109.
The United States also considers that, as a legal matter, Mexico's routing requirement is not a market access limitation at all. The United States agrees with the European Communities that the limitation scheduled by Mexico is superfluous and without legal effect because a routing requirement is not one of the limitations listed in Article XVI:2 of GATS. According to the United States, a note by the Secretariat supports this position, confirming that "a Member grants full market access in a given sector and mode of supply when it does not maintain in that sector and mode any of the types of measures listed in Article XVI."237 In the United States' view, Mexico did not need to schedule the requirement that cross-border suppliers route traffic through the facilities of a concessionaire to maintain that limitation for Article XVI purposes.238
4.110.
Mexico submits that the United States' characterization of Mexico's mode 1 limitation is erroneous. As a legal matter, the concession requirement stipulated in Mexico's mode 1 limitation must be given meaning. Mexico argues that the correct interpretation is that the limitation that "international traffic must be routed to the facilities of an enterprise that has a concession" imposes commercial presence and nationality requirements for the supply of scheduled services. Thus, this limitation ensures that suppliers established in the United States cannot transport and transmit signals across Mexico's borders. Instead, they have to rely on Mexican concessionaires, which have the exclusive right to supply telecommunications transport and transmission services in Mexico.239
4.111.
For international "facilities-based" services, Mexico argues that its schedule sets forth a limitation by requiring that international traffic must be routed through the facilities of an enterprise that has a concession granted by the Ministry of Communication and Transport (SCT).240 Under Mexican law, only Mexican individuals or companies may obtain such a concession.241 Thus, the limitation in the market access column of Mexico's Schedule creates a nationality and commercial presence requirement for suppliers of scheduled services.242 Therefore, Mexico effectively froze the level of market access to that prevailing at the time of the negotiations and reserved its right to limit those enterprises authorized to supply basic telecommunications services within Mexico to service suppliers that have commercial presence in Mexico (i.e., concessionaires).243 Since United States suppliers (e.g. AT&T and WorldCom) of basic telecommunications services cannot obtain concessions, they are not allowed to supply basic telecommunications services from the territory of the United States into the territory of Mexico, that is, on a cross-border basis.244 Mexico also claims that it reserved its right to prevent foreign service suppliers from owning facilities in Mexico through the inscription of broad limitations on market access through commercial presence (mode 3) in its Schedule.245 In order to install, operate or use a facilities-based public telecommunications network in Mexico, Mexico's Schedule stipulates that a concession from the SCT is required and that direct foreign investment is limited to 49 per cent in an enterprise set up in accordance with Mexican law.246
4.112.
The United States replies that whether or not Mexico was "freezing" the level of market access prevailing at the time of the negotiations is irrelevant; the ordinary meaning of Mexico's Schedule speaks for itself and should control. In support of its argument, the United States points to the same Secretariat's Explanatory Note on Scheduling relied upon by Mexico, which emphasizes that, if a Member wished to bind the status quo, as Mexico now asserts was its intention, these so-called "standstill" commitments were to be scheduled no differently than any other market access commitments. Thus, the Panel still has to interpret the meaning of the routing requirement in Mexico's Schedule as it is written, regardless of Mexico's intention.247
4.113.
The United States counters that the requirement to route international traffic through the facilities of a Mexican concessionaire does not completely eviscerate Mexico's market access commitment for mode 1. According to the United States, Mexico's argument is untenable for two reasons. First, even if this limitation had any effect, it would still be a limitation on a commitment that Mexico undertook and would therefore still trigger the obligations in Section 2 of the Reference Paper.248 Second, the United States argues that Mexico's routing requirement is not a market access limitation at all since a routing restriction is not the type of limitation found in Article XVI:2 of the GATS.249 The United States points to a note by the Secretariat, which states that "a Member grants full market access in a given sector and mode of supply when it does not maintain in that sector and mode any of the types of measures listed in Article XVI."250 Thus, the United States argues that the routing requirement is superfluous and without legal effect because it is not one of the limitations listed in Article XVI:2 of GATS.251
4.114.
Mexico submits that the United States' interpretation is wrong. Instead, Mexico argues, the correct interpretation is that, in fact, the transport and transmission services provided by United States suppliers do not enter the territory of Mexico when United States suppliers hand over traffic to Mexican suppliers at a border point.252
4.115.
Mexico argues that the United States' interpretation is based on its mistaken belief that United States suppliers are providing basic telecommunications transport services into Mexico when they rely on other service suppliers (i.e., Mexican concessionaires) to transport and transmit signals in Mexico. To the contrary, the transport and transmission services supplied by United States carriers end at the border. There is no cross-border supply simply because United States suppliers do not supply end-to-end services. Accepting the United States argument would mean that suppliers established in United States territory have to be deemed to supply services into another Member's territory when they hand off traffic to other suppliers which then transport and transmit the signals.253
4.116.
Mexico submits that the United States' interpretation fails to give meaning to the word "concession", which is at the heart of Mexico's limitation. The terms of Mexico's Schedule make it clear that a "concession" is a title to "install, operate or use a facilities-based public telecommunications network". A concession is available only to enterprises established in accordance with Mexican law, which includes a limitation on direct foreign investment of up to 49 per cent. The concession requirement, therefore, imposes a commercial presence limitation on Mexico's mode 1 commitment to supply public telecommunications transport and transmission services in Mexico. In other words, only enterprises established in Mexico are entitled by law to transport and transmit international traffic, which is the service at issue in this dispute. This requirement prohibits the cross-border supply of telecommunications transport services by United States suppliers into Mexico and denies cross-border market access for United States suppliers, such as AT&T.254
4.117.
In response to a question from the Panel, Mexico also asserts that the "concession requirement", the "routing requirement," and the commercial agency "permit requirement" fall within the limitations listed in GATS Article XVI:2(a) and (e).255

(i) Concession requirement

4.118.
Mexico argues that the concession requirement creates commercial presence and nationality requirements to supply basic telecommunications services in Mexico. According to Mexico, these requirements fall within GATS Article XVI:2(a) which refers to "limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test". More specifically, with respect to mode 1 (cross-border) supply, by requiring a commercial presence, the "number of service suppliers" that can supply services through mode 1 is zero. The concession requirement creates commercial presence and nationality requirements because concessions can be granted only to Mexican individuals or companies. With respect to mode 3 (commercial presence), the 49 per cent maximum foreign ownership and nationality requirements similarly create a zero quota. This is confirmed by a WTO Secretariat Note, which states that "nationality requirements for suppliers of services" are "limitations on the number of service suppliers" because they are "equivalent to zero quota".256 Accordingly, the concession requirement prevents nationals and juridical persons of other Members from installing, operating or using a facilities-based public telecommunications network in Mexico.Mexico also submits that the "concession" requirement means that suppliers must assume a specific legal form. Thus, it also falls within Article XVI:2(e) which refers to "measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service". A "concessionaire" is a specific type of legal entity under Mexican law.257
4.119.
The United States argues that, because Mexico's mode 1 limitation does not use the term "commercial presence", the limitation does not impose a commercial presence requirement.258
4.120.
In addition, the United States responds that, first, Mexico's argument that a limitation scheduled under one mode of supply can be "read together" or "in combination with" another limitation listed under a different mode is without any legal support. According to the United States, to interpret Mexico's Schedule in this manner would amount to the Panel inserting a limitation on Mexico's mode 1 commitment that Mexico itself did not schedule. The United States argues that this would impermissibly diminish the rights of the United States in violation of Article 19.2 of the DSU.259
4.121.
The United Statesargues that Mexico's argument is also contrary to a Secretariat Scheduling Note, MTN.GNS/W/164 (3 September 1993), paragraph 19(a). That Note explains that "international transport, the supply of a service through telecommunications or mail, and services embodied in exported goods (e.g. a computer diskette, or drawings) are all examples of cross-border supply, since the service supplier is not present within the territory of the Member where the service is delivered."260
4.122.
Finally, the United States argues that Mexico's own Schedule does not support its argument. Mexico's Schedule specifically permits market access in mode 1 as long as traffic is routed through the facilities of "an enterprise that has a concession... ". Mexico's Schedule does not limit market access in mode 1 to only those foreign service supplier itself owns or controls. Thus, Mexico's own Schedule anticipates that a "service," within the meaning of the GATS, can be supplied on a cross- border basis as long as traffic is routed through the facilities of any Mexican concessionaire.261
4.123.
Mexico replies that this interpretation is incorrect.262 According to Mexico, a commercial presence requirement can be inscribed without the need expressly to use the words "commercial presence requirement".263 What matters is the effect of the measure inscribed in the Schedule. Mexico did not refer to "commercial presence" in the generic sense but instead used the more specific phrase "enterprise that has a concession". This entails a specific legal form of commercial presence – i.e. a "concessionaire" – as well as nationality and other requirements. The use of a more specific phrase is consistent with the GATS Guidelines for the Scheduling of Commitments, which establish that "[i]f in the context of such a commitment, a measure is maintained which is contrary to Article XVI or XVII, it must be entered as a limitation in the appropriate column (either market access or national treatment) for the relevant sector and modes of supply; the entry should describe the measure concisely, indicating the elements which make it inconsistent with Article XVI or XVII".264
4.124.
According to Mexico, the requirement that "international traffic must be routed through the facilities of an enterprise that has a concession" creates an inconsistency with Article XVI of the GATS, because it reserves the supply of services to entities commercially present in Mexico – thereby establishing a zero quota on cross-border trade which implies that no such trade can occur. More specifically, because the limitations require a commercial presence for the supply of routing services, the number of suppliers that may supply such services through mode 1 is zero. Consequently, the measure inscribed in Mexico's Schedule is a limitation on the number of service suppliers within the meaning of GATS Article XVI:2. It also compels suppliers of routing services to acquire a specific legal status under the terms of this provision.265
4.125.
Mexico submits that, under the scenarios outlined above, a United States supplier would have to "supply" telecommunications transport and transmission services "on both sides of the border" (that is, both sides of the half circuit), without any "commercial presence" in Mexico within the meaning of GATS Article XXVIII(d), in order for cross-border supply to be able to occur. This is not the case where traffic is handed over at the border to another carrier. As explained below, this can occur only under a "full-circuit" regime.266
4.126.
The United States responds that Mexico's assertion that a "half circuit regime" is "incorporated in Mexico's Schedule," requires commercial presence and therefore prevents cross-border supply is based on a misstatement of what Mexico's Schedule actually says. Mexico apparently derives this argument, and the distinction between "half circuit" and "full circuit" service, from the requirement in its Schedule that international traffic "be routed through the facilities of an enterprise that has a concession." The United States argues that this phrase, however, does not require that a foreign supplier own a concession to send international traffic into Mexico. Rather, it only requires that foreign suppliers operating in the cross-border mode route that traffic through the facilities of an entity that has a concession. According to the United States, Mexico clearly knew how to schedule a concession requirement when it meant to do so – to enjoy market access in mode 3, Mexico's Schedule states that "[a] concession from the SCT is required." The United States submits that the contrast between Mexico's mode 1 and mode 3 "limitations" demonstrates that there is no concession requirement with respect to the cross-border supply of basic telecommunications services.267

(ii) Routing requirement

4.127.
Mexico further argues that the routing requirement establishes a "zero quota" on mode 1 access for international simple resale (ISR).268 According to Mexico, the requirement that international traffic be routed "through the facilities" of a concessionaire excludes ISR traffic. Specifically, the "facilities of a concessionaire" means more than its ordinary meaning – i.e. the equipment of a concessionaire. Either by virtue of Article 31(4) or Article 32 of the Vienna Convention, this term must be interpreted in the light of its special meaning under Mexican law. Mexico notes that FTL Article 47 limits installation of telecommunications equipment for cross-border traffic to concessionaires and those otherwise specifically authorized by the SCT. ILD Rule 3 specifies that international long-distance traffic can be carried only by international gateway operators. ILD Rule 6 specifies that long-distance concessionaries may carry international long-distance traffic only through international gateways. This means that the term "through the facilities of" means through an international gateway. This excludes ISR traffic because such traffic, by its character, passes through private lines and not through an international gateway. It effectively imposes a "zero quota" on ISR traffic and, as such, is a limitation that falls within GATS Article XVI:2(a).269
4.128.
The United States further submits that Mexico's position fails to recognize that "facilities" is in fact a much broader term than "ports," and embraces a variety of means that might be used to terminate cross-border traffic, including private leased circuits. The United States argues that Mexico's own laws and regulations recognize that the term "facilities" is broader than just "international ports." Article 47 of Mexico's Federal Law on Telecommunications requires a concession to install "telecommunications equipment and transmission means," a category of facilities obviously broader than merely international ports.270 Likewise, Mexico's ILD Rule 4 clarifies that the facilities of an international concessionaire include the international port and "telecommunications equipment and means of transmission that cross the country's borders."271272
4.129.
The United States submits that these definitions are also consistent with the WTO's Telecommunications Services Glossary of Terms, which defines "networks or facilities" to include "the ensemble of equipment, sites, switches, lines, circuits, software, and other transmission apparatus used to provide telecommunications services." International switched ports are only one of the many types of telecommunications facilities embraces by this definition. According to the United States, Mexico's scheduled facilities routing requirement must therefore be interpreted to permit routing through any facilities. Nothing in Mexico's Schedule, with respect to services provided under mode 1, allows Mexico to preclude the termination of cross-border traffic using private leased circuits obtained from a Mexican concessionaire. This is the essence of International Simple Resale ("ISR").273
4.130.
The United States notes that, even if the term "facilities" is construed to mean just "international ports," this conclusion would only affect Mexico's right to prohibit the interconnection of private leased circuits at network points other than the international port, which is relevant to the United States' claim under the Annex on Telecommunications. Mexico would still be required to allow private lines to be interconnected at the international port. According to the United States, even if Mexico's Schedule were interpreted to allow Mexico to require international traffic to route through a switched port operated by a Mexican concessionaire, United States carriers would still be providing telecommunications services on a cross-border (mode 1) basis. Thus, the obligations of Section 2 of the Reference Paper would still apply.274
4.131.
Mexico argues that the term "bypass" in the United States' submission refers to means that carriers can use to avoid paying settlement rates for having their traffic terminated in a foreign country. According to Mexico, the most commonly used method is international simple resale (ISR). Mexico argues that the Reference Paper does not override Mexico's limitation on international simple resale (ISR). Unlike a traditional accounting rate arrangement whereby carriers hand off traffic at the border or another mid-point between countries, ISR entails the use of private leased lines that cross the border. The private lines are connected directly to the domestic public switched telephone network in the destination country, thus enabling direct access to end-users in that country. Private lines are normally used for closed, intracorporate networking capabilities and are usually charged on a flat-rate basis. By leasing capacity on a private line, a carrier seeking to terminate traffic in a foreign country can bypass the accounting rate regime and avoid paying per-minute settlement rates. Many nations, including the United States on certain routes, prohibit the use of ISR for carrying international traffic for the specific reason that they wish to preserve use of the accounting rate regime. According to Mexico, ISR is also prohibited in Mexico.275
4.132.
According to Mexico, the "private" character of a circuit does not stem from its technical features but from the manner in which the circuit is used. To the extent that the circuit is used for an end-to-end private service, it constitutes a private-line circuit; if it is used to carry public traffic, the circuit is public. The issue whether a supplier can do so in conformity with Mexico's Schedule, however, depends on the market access inscriptions and limitations regarding the services in question and the supply of those services. In Mexico, once a private line (end-to-end) is used to carry public traffic, it is considered to be part of the public network and consequently loses its "private" character. It is then regulated as part of the public network and may not be used, or leased, for an end-to-end service. In other words, a "private circuit" may not carry public traffic. Mexico has undertaken commitments with respect to the transport of public traffic using the public network and the transport of end-to-end private traffic using public network facilities (infraestructura de la red pública). However, nowhere in Mexico's Schedule has a market access commitment been undertaken for the transport of public traffic through private lines.276
4.133.
Mexico points out that, it is important to have a clear understanding of the nature of private-line service. The main characteristic of private-line service is that it constitutes "end-to-end" service – i.e. the consumer determines beforehand the specific location where the service will be used. Conversely, public traffic is not limited to specific points; it has access to the entire public network. ISR involves sending the traffic by means of a private-line service and then connecting such traffic to the switched public network in the foreign country. The originating carrier thus gains access to an end-to-end private-line service in the foreign country and has to rely on an entity (which has leased a domestic private line, presumably for its own use) within that foreign country in order to arrange for the traffic to be connected to the public network. In other words, the originating carrier itself is not involved in the connection to the public network in the foreign country. However, in Section 2.C(g) of its Schedule, Mexico has made clear that once the operator of a private network "resells" that network in order to connect public traffic to the public network, the private network no longer constitutes a "private" end-to-end connection. The operator becomes subject to all the rules and limitations governing public networks and no longer qualifies as a private-line carrier – which by definition precludes it from being used for ISR.277
4.134.
Therefore, Mexico argues, the United States in fact claims that Mexico should allow Mexican users of end-to-end private-line services to interconnect with the switched public network, so that United States carriers can arrange for their traffic to evade (i.e. bypass) authorized Mexican carriers.278
4.135.
Mexico submits that it has therefore made clear that once the operator of a private network "resells" that network in order to connect public traffic to the public network, the private network no longer constitutes a "private" end-to-end connection. The operator becomes subject to all the rules and limitations governing public networks and no longer qualifies as a private-line carrier – which by definition precludes it from being used for ISR.279
4.136.
The United States notes that, while Mexico continues to argue that a private circuit cannot carry public traffic, it has failed to respond to the United States observation that Telmex in fact offers such private lines to other public network operators, not just private businesses. The United States argues that this demonstrates that the inscription on "private leased circuit services" in Mexico's Schedule does not mean what Mexico now contends. The inclusion in Mexico's Schedule of "private leased circuit services" relates only to the obligation of private "network operators" in Mexico who want to exploit their networks commercially to obtain a concession, not to the ability of firms operating on a resale rather than a facilities basis in Mexico to send traffic through leased private lines obtained from a network operator that has a concession. The separate provision for "commercial agencies" under mode 3 operating on a permit, not a concession, reinforces this interpretation. Though an owner of network facilities in Mexico would need a concession in order to lease its lines to others to carry public traffic on a resale basis (i.e., become the "lessor"), the firms leasing such lines (the "lessee") would not themselves need the concession. The United States contends that ISR does not "evade" the authorized Mexican carriers' networks. Rather, commercial agencies under mode 1 would use the networks of the Mexican carriers as required by the routing restriction, but are simply not bound to send their traffic through the international switched ports subject to the cartel pricing provision of ILD Rule 13.280

(iii) Commercial agency permit requirement

4.137.
Mexico submits that the permit requirement establishes a "zero quota" on mode 3 access for commercial agencies which is a limitation under GATS Article XVI:2(a).281 According to Mexico, the permit requirement is qualified by the paragraph "[t]he establishment and operation of commercial agencies is invariably subject to the relevant regulations. The SCT will not issue permits for the establishment of a commercial agency until the corresponding regulations are issued". This paragraph means that, at the time the limitation was inscribed, permits were not being issued by the SCT. Like the limitations on market access for facilities-based suppliers, this is equivalent to a zero quota. Accordingly, the requirement falls within the category of "limitations on the number of service suppliers" in paragraph (a) of GATS Article XVI:2.282
4.138.
The United States disagrees with this classification.283 However, the United States argues that the Panel does not need to deal with this issue, for one very simple reason – the mode 1 market access column of Mexico's Schedule does not include such a "concession requirement." Mexico's Schedule simply does not require foreign suppliers sending international traffic into Mexico to themselves have a concession. Rather, it only requires that they route that traffic through the facilities of an entity that has a concession. The United States further submits that this interpretation of Mexico's routing requirement is reinforced by the contrast between Mexico's mode 1 and mode 3 market access limitations. To enjoy market access as a facilities-based operator in mode 3, Mexico's Schedule states that "[a] concession from the SCT is required." This wording shows that Mexico knew how to describe a concession requirement, where it so intended.284
4.139.
Mexico replies that it is not arguing that its limitation requires the United States-established supplier "itself" to maintain a commercial presence but that, given the nature of the half-circuit regime, routing services over the Mexican half circuit must be supplied by a concessionaire established in Mexico.285
4.140.
The United States does not agree that the routing requirement falls within the limitations listed in GATS Article XVI:2(a) and (e). According to the United States, however, even accepting Mexico's point solely for the sake of argument, classifying the routing requirement under subparagraphs (a) or (e) would not reduce Mexico's cross-border commitment to "unbound", and thus Section 2 of the Reference Paper and Section 5 of the Annex would still apply.286
4.141.
In response to a question by the Panel, the United States further claims that Mexico's argument that the cross-border supply of basic telecommunications services by a foreign supplier can take place only if that supplier terminates its cross border services on the facilities of a concessionaire owned or controlled by that same supplier is untenable for the following reasons:287

(i) Mexico's own Schedule does not limit market access in mode 1 to only those foreign service suppliers that route traffic through the facilities of a Mexican concessionaire that the foreign service supplier itself owns or controls.288

(ii) Second, accepting Mexico's argument would mean that the provision of basic telecommunications services on a cross-border basis would only be possible if a service supplier also operated on a commercial presence basis. The result would be to make mode 1 redundant, and to render meaningless Members' mode 1 commitments in the basic telecommunications sector – a result that is contrary to the rules of interpretation to be applied by the Panel.289 Such an interpretation would be contrary to the meaning of mode 1, which is defined in GATS as the supply of a service "from the territory of one Member into the territory of any other Member." The ordinary meaning of these terms is that the service moves from the territory of one Member into the territory of the other Member, not the service supplier. This reading is also supported by an explanatory scheduling note, which states that "international transport, the supply of a service through telecommunications or mail, and services embodied in exported goods (e.g. a computer diskette, or drawings) are all examples of cross-border supply, since the service supplier is not present within the territory of the Member where the service is delivered".290

4.142.
Mexico acknowledges that a concessionaire which is controlled by a foreign minority partner is a service supplier of another Member under the definitions in Article XXVIII of the GATS. Mexico notes, however, that the United States has not established that any of the concessionaires authorized to supply public telecommunications services in the territory of Mexico are "controlled" by persons of another Member. Thus, the evidence on the record does not demonstrate that these concessionaires are service suppliers of another Member.291
4.143.
Mexico further argues that, even if the United States were to demonstrate that a concessionaire is a service supplier of the United States under the definitions in Article XXVIII of the GATS, this would merely establish that United States suppliers are supplying public telecommunications transport services through commercial presence in the territory of Mexico. Thus, those market entrants would not be supplying services through mode 1 (cross-border supply).292
4.144.
Moreover, Mexico submits, other United States suppliers that "interconnect" with those concessionaires would not be supplying public telecommunications transport services on a cross-border basis from the United States into Mexico because, in that event, the transport and delivery of a telephone call to the receiving party in Mexico would still require the joint provision of services by two service suppliers and the United States supplier that originates the call would still have to hand off its traffic at the border to a supplier commercially established in Mexico. The latter supplier is a different and separate "juridical person" that supplies services under the GATS. Cross-border supply only occurs when a telecommunications service supplier established and operating in the territory of a given WTO Member transports and delivers the data supplied by its customers across a border into the territory of another WTO Member.293
4.145.
Mexico also submits that, even if the United States suppliers that "interconnect" with these concessionaires were supplying PTTNS on a "cross-border" basis from the United States into Mexico, the disciplines in Section 2 of Mexico's Reference Paper would not apply. By virtue of the chapeau to Section 2.2, the disciplines in that section apply only to interconnection with a "major supplier". These concessionaires are not "major suppliers".294
4.146.
As to non-facilities-based international services, Mexico argues that, because an identical limitation relating to mode 1 cross-border supply is inscribed under subparagraph (o) (i.e., Other – Commercial agencies) in Mexico's Schedule, United States non-facilities-based suppliers of basic telecommunications services are prevented from supplying their services on a cross-border basis as well. Also, Mexico claims that, by requiring international calls to be routed through a facilities-based licensed carrier, Mexico has not undertaken any commitment to authorize International Simple Resale (ISR).295 The effect of this limitation requires all suppliers established in the United States, including United States "resellers" or "commercial agencies", to hand of their traffic at the border for transport services on the Mexican side of the half circuit to be supplied by Mexican concessionaires established in Mexico.296
4.147.
The United States argues that this asserted prohibition does not follow from Mexico's scheduled commitments. According to the United States, Mexico's commitments for commercial agencies specifically include both the supply by a foreign supplier of scheduled basic telecommunications services from the United States into Mexico over capacity leased from a Mexican concessionaire (mode 1), and the acquisition by a foreign service supplier of a locally-established commercial agency for the purpose of supplying scheduled international basic telecommunications services from Mexico to the United States over capacity leased from a Mexican concessionaire (mode 3). Both of these situations are examples of what is typically known as international simple resale. The United States also notes that Mexico's routing requirement does not equate to a prohibition on the use of private leased circuits because a foreign service supplier that leases capacity from a concessionaire is still in compliance with the Mexican requirement to route traffic through the facilities of a concessionaire.297
4.148.
Mexico argues that Article XVIII of the GATS establishes a distinction between measures that affect market access and national treatment, which are subject to scheduling under GATS Article XVI and XVII, and other measures that affect the supply of a service within a Member's territory. Only the latter category of measures can be covered by additional commitments under Article XVIII of the GATS. This means that the terms and conditions governing market access for foreign service suppliers are determined by the commitments made under Article XVI of the GATS, and not by the commitments made pursuant to Article XVIII. Since the Reference Paper was included in Mexico's Schedule pursuant to Article XVIII, it does not relate to Mexico's Scheduled market access commitments.298

4. Whether Telmex is a major supplier within the meaning of the Reference Paper

4.149.
The United States submits that the Reference Paper defines "major supplier" as a "supplier which has the ability to materially affect the terms of participation (having regard to price and supply) in the relevant market for basic telecommunications services as a result of (a) control over essential facilities or (b) use of its position in the market". According to the United States, this definition requires the determination of the "relevant market for basic telecommunications services" and whether, in that market, the supplier in question can use either control over essential facilities or its position in the market to materially affect terms of participation. The United States further notes that, because "control over essential facilities" and "use of its position in the market" are in the disjunctive, either is sufficient to meet the definition.299
4.150.
Mexico notes first that the burden is on the United States to demonstrate that the interconnection at issue concerns a "major supplier". According to Mexico, the analysis of the United States is flawed. Mexico also claims that the United States has not presented a prima facie case that Telmex is a "major supplier" within the meaning of the Reference Paper.300

(a) The relevant market

4.151.
The United States submits that, according to well-accepted principles of market analysis deriving from competition law, which are similar in both United States antitrust and Mexican competition law, markets are defined in terms of substitution, looking at the alternatives available and acceptable to consumers. According to the United States, international telecommunications services, whether involving termination of cross-border supply or origination through a commercial presence in the country, are distinct from domestic telecommunications services and not substitutes. In support of its argument, the United States cited to decisions by the Mexican competition authority, the Comisión Federal de Competencia ("CFC"), which stated that international long-distance service is a relevant market for which there are "no close substitutes," and that such service is distinct from domestic local, access, long-distance or carrier toll services.301
4.152.
The United States further submits that, within the broad category of international services, it is necessary to distinguish the markets for originating traffic and for terminating traffic. According to the United States' substitution analysis, because a United States carrier cannot own its own facilities in Mexico and is required to hand off its cross-border telecommunications traffic into Mexico to a Mexican concessionaire at the international border, termination by Telmex (and other Mexican carriers authorized to operate international ports) is needed by United States and other foreign carriers to complete their international telecommunications traffic into Mexico. Therefore, argues the United States, the origination of international voice telephony, facsimile or circuit-switched data transmission in Mexico cannot be considered a substitute for the termination of such services supplied on a cross-border basis from the United States into Mexico.302
4.153.
The United States also argues that, because Mexican law does not permit the use of private leased circuits by either a foreign facilities-based operator or a commercial agency (either foreign or Mexican) for the purpose of carrying cross-border switched traffic, United States suppliers have no choice but to rely on Telmex (and other Mexican concessionaires authorized to operate international ports) to terminate their cross-border switched telecommunications traffic in Mexico. According to the United States, this limitation is clearly relevant for market definition analysis under the established Mexican competition law, which takes into account restrictions on using alternate sources of supply.303
4.154.
Thus, the United States argues, the "relevant market for basic telecommunications services" in this dispute is the termination of voice telephony, circuit-switched data transmission and facsimile services supplied on a cross-border basis from the United States into Mexico.304
4.155.
Mexico replies that, the United States fails to clearly define the services at issue and how they are supplied in its analysis.305
4.156.
Mexico further argues, assuming that the services at issue are the transportation and transmission of telecommunications signals and that the mode of supply at issue is mode 1 (cross-border), the United States fails to explain how the "relevant market" it defines is relevant to the cross-border supply of such services. The United States defines the "relevant market" as "the termination of voice telephony, facsimile and circuit-switched data transmission services". According to Mexico, "termination services", to the extent that they are provided by a carrier in a WTO Member, are provided on a mode 3 (commercial presence) basis and not on a cross-border basis. Mexico claims that the United States' analysis confuses two distinct modes of supply – cross-border and commercial presence. Moreover, Mexico submits, the United States relies on a relevant market resolution by the Mexican competition authority that is under review by Mexican courts306 precisely because it was based on data from 1996, that is, when the telecommunications market was not yet fully open.307
4.157.
In addition, Mexico submits, even assuming that defining the relevant market as "termination services" is relevant, it is unclear whether a carrier in Mexico, such as Telmex, is providing "termination services". According to Mexico, a technical distinction can be made between the traditional accounting rate procedure, which involves jointly provided services and a division of revenues for the provision of these jointly provided services, and a termination regime under which telecommunications services are treated as a tradable commodity rather than as jointly provided services. Mexico submits that this distinction has been recognized by the ITU. Mexico maintains a traditional accounting rate regime under which services are provided jointly and revenue is divided. It does not maintain a termination regime. In this sense, it cannot be said that any carrier operating in Mexico provides "termination services". In fact, the rates are determined by bilateral negotiations between private parties – carriers of Mexico and the United States – for traffic going in both directions. Accordingly, the "relevant market" for those negotiations must encompass that two-way traffic. Mexico also notes that, at the time of the negotiation of the current accounting rates, WorldCom had the same market share of southbound traffic that Telmex did of northbound traffic.308
4.158.
Mexico also submits that, even if a carrier in Mexico does provide "termination services" for foreign carriers wishing to terminate calls within Mexico, these services and how to schedule them were a specific topic of discussion during the negotiations on basic telecommunications. There was no agreement on these services and, even if there was, Mexico has not inscribed in its Schedule any specific commitments with respect to these services.309

(b) Whether Telmex has market power

4.159.
The United States argues that, Telmex has "market power" or "substantial power" in the relevant market for termination of voice telephony, facsimile and circuit-switched data transmission services supplied on a cross-border basis from the United States into Mexico, based on the special rights given to it by Mexico's ILD Rules as well as the findings of Mexico's own Federal Competition Commission, and the evidence of Telmex's continuing dominance in this area and persistent ability to maintain international settlement rates well above cost.310
4.160.
The United States submits that, Telmex's market power stems most directly from the special and exclusive legal right conferred on it under Mexico's ILD Rules. In particular, Rule 13 provides that "[t]he long-distance concessionaire with the greatest percentage of the outgoing long-distance market in the last six months prior to negotiation with a determined country, shall be the one to negotiate the liquidation tariffs with the operators of such country." Rule 10 also provides that this rate shall be the uniform rate charged by all Mexican carriers. Thus, the United States contends, as the largest carrier, Telmex is granted the exclusive right to determine the settlement rates for cross-border termination for all Mexican carriers. Even though there are other Mexican telecommunications carriers that have their own networks, they are prohibited from competing on the price of terminating cross-border traffic into Mexico by operation of Mexican law.311
4.161.
Mexico argues that the requirements in Rules 10 and 13 help protect and promote investment in domestic infrastructure in several ways: (i) they ensure that an incumbent carrier will not be able to use its market position to negotiate better deals than the new entrants; (ii) they prevent large carriers in the two countries from conspiring to exclude smaller carriers; and (iii) they prevent new entrants that focus on high volume, low cost end-users from triggering a "price war" that could drive the rates of all carriers too low to support infrastructure build-out. Mexico points out that, since the United States already has very substantial investments in telecommunications infrastructure, promotion of investments in facilities has not been a high priority. However, for countries such as Mexico, with low teledensity and unserved rural areas, it is vital. Mexico further notes that it implemented the ILD Rules for accounting rate agreements to mirror the pre-existing rules of the United States, which for United States-Mexico traffic require that United States carriers reflect in their accounting rate agreements the requirements of proportional return and uniform settlement rates. The United States further requires that international settlement rates be symmetrical – that is, that United States carriers charge foreign carriers the exact same rate that they pay the foreign carriers. The stated purpose of the United States policy is to prevent its carriers from being "whipsawed" by foreign carriers; that is, to prevent foreign carriers from being able to obtain unduly favourable terms and conditions from United States carriers by setting them against one another. Thus, Mexico argues, in the absence of the ILD Rules, Mexican carriers would be vulnerable to "whipsawing" by United States carriers.312
4.162.
The United States also claims that the extent of Telmex's market power has also been substantiated by Mexico's own competition authority, the Comisión Federal de Competencia ("CFC").313 According to the United States, in 2001, the CFC reaffirmed its earlier conclusion that Telmex had "poder sustancial" (substantial power) in international services in light of its "large share of the international long-distance market," "its ability to set payment charges applicable to international traffic," and its "advantages arising from its vertical integration that enable it to set prices for cross-border dedicated circuits and enjoy significant advantages from the resale of international port services."314 The United States further submits that, the CFC's conclusion regarding international services is also applicable to the market for termination of switched cross-border traffic as a subset of the broader international services market analyzed in the CFC decision. The United States explains that, Mexico's ILD Rules require the proportional allocation of terminating traffic among Mexican network operators according to each operator's share of originating traffic, rather than allowing each operator to compete freely to terminate any amount of incoming international traffic. Therefore, if an operator has "substantial power" in providing international services originating within Mexico, it will have at least a comparable position in the market for termination of cross-border switched traffic into Mexico.315
4.163.
The United Statesalso submits that, like the CFC, the United States Federal Communications Commission has also found that both Telmex and its United States affiliate are dominant in the provision of international services between the United States and Mexico. The FCC determined that Telmex continues to control "bottleneck" facilities, including the only ubiquitous local network an ubiquitous inter-city facilities that are needed for carriers to terminate international switched services into Mexico.316
4.164.
Mexico argues that it has taken a number of steps to establish a comprehensive regulatory framework for the incumbent (former monopoly) carrier, Telmex, which are designed to introduce competition while protecting and promoting the nation's telecommunications infrastructure.317 According to Mexico, Telmex's concession title was substantially modified when it was privatized.318 As a result, Telmex's concession title itself contains provisions intended to prevent anti-competitive activities.319 Mexico also points out that, under Article 63 of the Federal Economic Competition Law (FTL), a finding by the Federal Competition Commission ("COFECO") that a concessionaire possesses substantial market power does not imply that the concessionaire has abused its market power (that is, behaved in an anticompetitive manner).320 Rather, it merely allows COFETEL to impose prophylactic measures to prevent abuses of market power.321
4.165.
The United States submits that, current market evidence indicates that Telmex has exercised and continues to exercise, market power with respect to the markets for termination of cross-border voice telephony and circuit-switched data transmission services from the United States into Mexico. The United States begins by noting that Telmex's share in the international long-distance market has long been well over 50%. The United States notes that, a large market share on the order of 50% or more, particularly when sustained over time, is well recognized by competition authorities and telecommunications regulators as relevant evidence of a firm's market power, though not the sole determining factor, and the higher the market share, the more readily it will support a presumption of market power.322 Furthermore, the United States submits that Telmex's significant market power is indicated by the absence of significant new suppliers of international telecommunications services in Mexico during the past few years.323 Also, the United States argues, Telmex's market power is demonstrated by its ability to maintain prices for a sustained period of time well above the levels that could be expected to prevail in a competitive environment.324
4.166.
Mexico submits that currently there are 27 concessionaires allowed to provide long-distance services, including three United States-affiliated carriers, Avantel (WorldCom), Alestra (AT/T) and Iusatel (Verizon).325 Also, as of September 2002, 11 out of the 27 long-distance concessionaires in Mexico were authorized to operate international ports and, thus, to carry outgoing and incoming international calls.326 According to Mexico, new entrants in the Mexican domestic and international long-distance market have gained significant market share when compared with other countries that opened the sector to competition under similar conditions.327 Mexico points out that, with respect to the domestic long-distance market, using data from the year 2000, it took the new entrants only four years to capture a 29% share of the Mexican market (measured in terms of access lines served per carrier).328 In the European Union, new entrants in the domestic long-distance market had on average 20 per cent market share in 2000 after three years of competition.329 By comparison, it took new entrants in the United States more than 11 years after competition was allowed to reach a comparable market share.330 Mexico also notes that, in the case of the market for international long-distance traffic, new entrants in Mexico have performed even better in capturing market share.331 This is reflected in the market share of Telmex, which at the end of 2000 was at a 61%, whereas in European Union member countries the incumbents had an average market share of 80% in terms of minutes.332 Again, in the United States, after eleven years of competition, the incumbent (AT&T) had a market share of 59% – similar to that of Telmex today.333 Mexico further submits that that new entrant carriers have been gaining significant market share on many important routes.334 For example, from January to June of 2002, Alestra (the affiliate of AT&T) had 39% of the outgoing traffic to the United Kingdom while Telmex had 49%.335

5. Whether Telmex' interconnection rates are "basadas en costos"

4.167.
The United States argues that Section 2.2 of Mexico's Reference Paper requires Mexico to ensure that Telmex provides interconnection at rates that are "based in cost" ("basadas en costos") and "reasonable". However, according to the United States, Mexico has failed to meet this obligation because the rates that Telmex charges United States suppliers to interconnect are not based in cost or reasonable.336
4.168.
Mexico argues that, because Mexico did not make any specific commitments relating to the accounting rate regime, Section 2 of the Reference Paper does not apply to the facts of this dispute. Mexico further submits that, even if Mexico's Reference Paper could be considered to apply to the accounting rate regime, the United States has failed to present a prima facie case that the accounting rates negotiated by Mexican and United States carriers do not comply with the obligations of the Reference Paper.337

(a) Whether Telmex interconnection rates are "based in cost"

(i) The meaning of "based in cost"

4.169.
The United States submits that the term "based in cost" is not defined in the reference paper. The United States notes first that the ordinary meaning of "based in cost" suggests that the "cost" at issue must be related to the cost incurred in providing the good or service.338 Next the United States argues that, because the terms "cost-oriented" and "basadas en costos" are used in the telecommunications laws and regulations of WTO Members, this usage could be termed a "special meaning," which Article 31(4) of the Vienna Convention provides "shall be given to a term if it is established that the parties so intended."339 After surveying the laws of many WTO Members, including Mexico, the United States argues that, there appears to be consensus among many WTO Members – including Mexico – to give the term "cost-oriented" and "basadas en costos" the "special meaning" that interconnection rates should be based on the cost of providing interconnection.340 The United States also submits that this "special meaning" is in line with the meaning derived from Article 31(1) of the Vienna Convention, which states that a "treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."341 According to the United States, the interconnection obligations in Section 2 are one part of the set of pro-competitive regulatory commitments embodied in the Reference Paper, which mandates major suppliers to charge interconnection rates based on the cost that the major supplier incurs in providing interconnection.342
4.170.
Mexico claims that the United States interprets the term "basadas en costos" narrowly to mean that the rate in question must equal the bare cost of providing the service and this narrow interpretation must be rejected.343 According to Mexico, basadas en costos allows for more distance between the rate and the cost than is argued by the United States.344 In support of its argument, Mexico first notes that if the negotiators of the Model Reference Paper and Mexico's Reference Paper had intended this narrow interpretation, they would have referred to "rates that equal cost" or "rates that at most recover cost".345 Instead, they used a much more flexible term.346 Further, interpreting "cost oriented" to mean "equal to cost" would lead to an absurdity, in that the carrier supplying the service would be prohibited from making any profit at all in transactions with other carriers.347
4.171.
According to Mexico, cost-oriented rates should allow an adequate rate of return, even without the modifiers "reasonable" and "economically feasible" being taken into consideration. Determining an adequate rate of return is an extremely complex matter and one which is not necessarily restricted to the charges for carrying international calls; rather, it could quite legitimately involve overall carrier costs. Specifically, a multi-product firm (one offering a range of services) incurs different kinds of costs in providing its services, some of which can be directly allocated to specific services, given that it is provision of these particular services which gives rise to the cost incurred. However, in addition to direct costs, a multi-product firm incurs costs that are shared between groups of services and costs which are common to all services. Both common and shared costs can only be avoided if the group of services is terminated (in the case of shared costs) or if the whole firm closes down (in the case of common costs). In spite of the fact that common and shared costs cannot be directly allocated to the various services offered by a multi-product firm, they are nevertheless real economic costs which must be recovered if the firm hopes to earn a competitive return on the capital used and to continue to attract investment funds for the business. Most firms in competitive industries are multi-product and the margins referred to are necessary, as are cost increases. Such increases provide the expected revenue and recoup both common costs and any historic costs permitted by the market. The extent of the margins depends on market conditions. In short, Mexico argues, fixing a carrier's interconnection rate at direct cost level would be incorrect from an economic point of view. At the same time, an "economically correct" increase in common and shared costs is mainly a question of market conditions.348
4.172.
Mexico also submits that it does not, in any case, consider that the Reference Paper provides a basis for determining the level of rate of return appropriate for any particular circumstance. Rather, it would be more advisable to focus on whether the rate is in itself reasonable in the light of all the circumstances, for example, by way of a comparison with target rates and the rates of other countries.349
4.173.
The United States submits that Mexico's assertion is not correct. According to the United States, under Mexican law, interconnection rates for commercially-present suppliers must recover at least the total cost of all network elements. The term used for "total cost" in Mexican law is "long run average incremental cost." The United States argues that the term "long run" refers to a period long enough so that all costs become variable. As a result, when Mexican law requires that carriers recover "at least the long run average incremental cost," it already builds in the cost of capital, which includes a reasonable rate of return, or in other words a profit.350
4.174.
Mexico also submits that Mexico's Schedule is part of the GATS which, itself, is part of the WTO Agreement. As a consequence, other agreements within the WTO Agreement form part of the context of the GATS and, thereby, part of the context of Mexico's Schedule. Mexico points out that, according to Article 2.2 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade (Anti-Dumping Agreement), where a precise relationship between a price and a cost was intended, this relationship was specified explicitly. However, no such relationship is specified in the Model Reference Paper or in Mexico's Reference Paper. Mexico also submits that, even assuming that the reference papers inscribed in the Members' schedules could apply to the accounting rate regime, the practice of the WTO Members subsequent to the conclusion of the negotiations on basic telecommunications confirms that the Members do not share the United States' narrow interpretation of "cost-oriented". Of the 55 WTO Members that inscribed a version of the reference paper in their schedules that included the "cost-oriented" requirement in paragraph 2.2(b), Mexico is not aware of any that have adopted an explicit requirement that settlement rates negotiated under accounting rates arrangements be based on the costs of their own carriers, let alone equal to cost or no greater than their carriers' rates for domestic interconnection. There is good reason for this state of affairs. If the narrow interpretation posed by the United States is applied to accounting rates, it would create the absurdity identified in Mexico's response to question 7 of the Panel.351
4.175.
The United States replies that it is aware of no Member, other than Mexico, that has accepted commitments under Section 2.2(b) of the Reference Paper and that has simultaneously imposed an explicit prohibition on competition between suppliers providing interconnection to cross-border suppliers, the effect of which is to prevent competition from reducing rates. Even if other WTO Members do not have explicit requirements for settlement rates to be cost-based, they also do not have restrictions, such as those maintained by Mexico, on competition between suppliers. Those other Members therefore can reasonably rely on competitive market dynamics to yield cost-based settlement rates. The United States notes that, for numerous countries where competitive conditions are allowed to govern international interconnection rate negotiations, United States carriers have negotiated rates for traffic termination in the range of 1.5 to 4 cents per minute.352
4.176.
The United States also points to evidence showing one major operator's wholesale rates to terminate calls to various countries, including six EC member States and eighteen other WTO Members that included the interconnection commitments under Section 2.2(b) of the Reference Paper. All of those rates are lower than the current average rate Telmex charges United States suppliers, and many are below 2 cents per minute. Mexico has challenged none of this evidence. Thus, the United States argues, to the extent that any WTO Member does not fulfil its obligations under Section 2.2(b) of the Reference Paper, other WTO Members have the right to challenge that failure in dispute settlement.353
4.177.
Mexico argues that, under a "cost-based" or "cost-oriented" standard, a rate is not limited to simply recovering cost but can also recover amounts that reflect social policy and other concerns. Therefore, the narrow benchmark established in the United States' first written and oral submissions is without legal basis. By implication, the evidence used to argue that Mexico does not comply with the narrow benchmark is irrelevant and does not establish a prima faciecase of a violation of Section 2.2(b) of Mexico's Reference Paper.354
4.178.
Mexico notes that the United States' accounting rate arrangements with a number of other countries provide for much higher settlement rates than the current United States –– Mexico arrangement. Noting that accounting rate arrangements exist side-by-side with ISR even in countries where ISR is legal, Mexico argues that the United States continues to ignore those accounting rate arrangements and insists on comparing the United States-Mexico accounting rate arrangement to ISR charges purportedly available to United States' carriers to send traffic to other countries. Mexico submits that the United States refuses to acknowledge a comparison of the United States — Mexico accounting rate arrangement to United States accounting rate arrangements with other countries. Mexico further argues that the United States implicitly admits that other WTO Members "do not have explicit requirements for settlement rates to be cost-based."355
4.179.
Mexico argues that, because accounting rate arrangements provide for access to an entire country's public network, the phrase in Section 2.2(b) does not mean that the charges associated with the interconnection cannot include an amount to offset the cost of rolling out telecommunications infrastructure.356 Clearly, such charges can be allocated to any and all network components. Under the United States' argument, a WTO Member inscribing commitments analogous to Section 2.2(b) of Mexico's Reference Paper could not include any amount to offset infrastructure roll-out. Such an interpretation is absurd and is contrary to Article IV and paragraph five of the Preamble to the GATS.357
4.180.
Mexico argues further that the United States neglects to acknowledge that paragraph 2.2(b) states that interconnection is provided "on terms, conditions … and cost-oriented rates …that are … reasonable, having regard to economic feasibility."358 According to Mexico, the ordinary meaning of "economically" is "as regards the efficient use of income and wealth: economically feasible proposals"; the ordinary meaning of "feasible" includes "capable of being done, effected or accomplished" and "suitable".359 In the context of interconnection rates, the term means that the obligation to ensure that rates are cost-oriented is not absolute, but rather tempered by factors arising from economic feasibility, which can include considerations of a nation's overall policy goals for expanding its telecommunications infrastructure.360 Thus countries – especially developing countries such as Mexico – have wide latitude to allow rates that would permit the continued development of needed infrastructure and the achievement of universal service.361
4.181.
Mexico submits that the United States' claim must fail because the United States did not interpret "based in cost" in light of the entire qualifying phrase.362 Mexico argues that, in applying the "economically feasible standard," account must be taken of Mexico's clear policy goal of promoting universal access to basic telecommunications service for its population. Accounting rate revenues remain an important potential source of funds for infrastructure development. However, Mexico's net revenue from settlement rates (from all countries) has already been declining. Thus, in light of the important need of Mexico for investment in the telecommunications sector, further and immediate drastic cuts in settlement revenue are not economically feasible.363
4.182.
Mexico cites to a statement of a United States representative in the context of discussions that led to the Annex on Telecommunications.364 According to Mexico, this statement highlights that the term "cost-based" was not intended to require that the "price of a specific service on a specific route to be identified and charged on a cost-based basis"; rather, the term as used in the telecommunications sector implies considerable flexibility for regulators to take into account social policy goals, the need to balance out varying cost structures across different regions and as between local and long-distance service. Mexico also cites to two reports by the Mexican Government, which shows that Mexico has had an established policy to promote the construction of telecommunications infrastructure with a view toward broadening the availability of telephone and related services. Neither the Reference Paper, nor the GATS more generally, should be interpreted in such a way as to prevent Mexico from carrying out this policy.365
4.183.
The United States argues that the terms "basadas en costos" and "cost-oriented" require a relationship between interconnection rates and the cost incurred in providing interconnection, rather than costs incurred in connection with infrastructure development or other social policy goals. The WTO website defines "cost-based pricing" as "the general principle of charging for services in relation to the cost of providing these services." Furthermore, Section 2.2(b) of Mexico's Reference Paper requires that a supplier purchasing interconnection "need not pay for network components or facilities that it does not require for the [interconnection] service to be provided." This language provides relevant context for the interpretation of "basadas en costos", and makes clear that the scope of all interconnection charges is limited to the specific network components and facilities required for the interconnection service provided, and not other unrelated costs. By claiming that "accounting rate revenues remain an important source of potential revenue for infrastructure development," the United States argues, Mexico effectively concedes that its international interconnection rates recover more than the cost of the "network components or facilities... require[d] for service to be provided" to United States suppliers.366
4.184.
The United States submits that nothing in this definition supports consideration of the public policy factors cited by Mexico. According to the United States, Mexico's definition of "economically feasible" as requiring consideration of the "efficient" use of income and wealth in fact prohibits consideration of the non-cost-oriented factors Mexico seeks to include through this language. The efficient use of resources requires cost-oriented pricing and not subsidization. Citing an ITU statement, the United States argues that the efficient use of income and wealth must preclude the open-ended subsidization of "policy goals" such as infrastructure development and universal service. The terms "basadas en costos" and "cost-oriented" require a relationship between interconnection rates and the costs incurred in providing interconnection.367
4.185.
The United States also submits that cost-oriented pricing, as that term is used in Section 2 of the Reference Paper, does not permit Mexico so-called "flexibility" to implement the national goals that Mexico identified in its submission. According to the United States, the provisions on interconnection serve to achieve the requirement to which all Members that subscribed to the Reference Paper committed, namely to ensure that the scope of all interconnection charges is limited to the specific network components and facilities required for the interconnection service provided, and not other unrelated costs.368 Furthermore, the United States disagrees with Mexico's interpretation of its statement during the 1990 negotiations. According to the United States, it is clear from this statement, that the United States was drawing a distinction between a cost-based rate and a price that includes a universal service component. As Mexico notes, this statement was made in the context of the Annex negotiations, which did not lead to the adoption of any "cost-based" or "cost-orientation" rate requirement. In contrast, the Reference Paper separates the disciplines on interconnection rates in Section 2 from the disciplines on universal service in Section 3.369
4.186.
The United States argues that the phrase "having regard to economic feasibility" does not "temper" a Member's obligation to provide interconnection at cost-oriented rates, in light of its "overall policy goals for expanding its telecommunications infrastructure." According to the United States, Section 2.2(b) of the Reference Paper requires a relationship between interconnection rates and the cost incurred in providing interconnection, rather than costs incurred in connection with telecommunications infrastructure roll-out. Additionally, Section 3 of the Reference Paper imposes separate and particular requirements for Members wishing to impose universal service obligations to fund the requirements of Members seeking to rollout their national telecommunications infrastructure. Thus, the United States argues that Mexico seeks to avoid the requirements of Section 3 (and to read Section 3 out of the Reference Paper) by justifying its rollout costs pursuant to the phrase "having regard to economic feasibility."370
4.187.
The United States argues that taking the phrase "economically feasible" into account does not change the fact that Telmex's rates are substantially above cost and that, as a result, Mexico is not in compliance with Section 2 of the Reference Paper. The United States explains that, first this phrase must be read in the context of subparagraph 2.2(b) of the Reference Paper in its entirety. According to such reading, this phrase immediately follows the requirement for "reasonable" terms and conditions for interconnection, which prohibits the use of such terms and conditions to restrict the supply of a scheduled basic telecommunications service. Second, under the ordinary meaning of the phrase "having regard to economic feasibility," a term or condition for interconnection will not be "razonables" if it restricts the supply of a scheduled telecommunications service where such interconnection is economically practical or possible – that is, where the resulting revenues are sufficient to cover the expenses of its operation or use.371
4.188.
The United States further explains that this means that the obligation to provide interconnection is limited only where there is insufficient demand from interconnecting suppliers to generate sufficient revenue to cover the expenses of operation or use, or where a major supplier requires an additional period of time to install necessary switching capabilities or other required network components or facilities where more rapid installation would entail very high costs that could not be recovered from interconnecting suppliers. However, because the United States-Mexico route carries the world's largest one-way volume of international calls, there is no question of insufficient demand for interconnection; also, because United States suppliers are already interconnected with Telmex, such interconnection does not require additional switching capabilities or other network components or facilities. Thus, neither is the case in Mexico. Third, to the extent that the phrase "having regard to economic feasibility" limits the obligation to provide interconnection at rates that are "basadas en costos", interconnection rates should be sufficient to cover the expenses of the operation and use of interconnection, which requires no more than that interconnection rates should cover both direct costs and common costs, and should permit a reasonable return on an operator's investment. According to the United States, all of these costs are already included in the rates set out by the United States as benchmarks for the determination whether Mexico's interconnection rates are "basadas en costos".372
4.189.
The United States also notes that, Mexico may meet its other national goals, unrelated to interconnection, in a variety of ways. For example, Mexico could put in place a universal service obligation, under Section 3 of the Reference Paper. However, the recovery of universal service subsidies through inflated interconnection charges paid to the major supplier would be contrary to the Section 3 requirement that universal service obligations be "administered in a transparent, non-discriminatory and competitively-neutral manner...". Such recovery would not be transparent, because universal service obligations would be hidden in interconnection rates paid to the major supplier. Nor would it adhere to the requirements for non-discrimination and competitive neutrality, because it would burden only those suppliers purchasing interconnection with the funding of universal service obligations.373 Moreover, the United States claims that Mexico's argument is also refuted by Section 3 of the Reference Paper, which provides for separate universal service obligations to finance universal service and infrastructure development. The recovery of universal service subsidies hidden in interconnection charges would be contrary to the Section 3 requirement for transparent administration of universal service obligations.374
4.190.
Mexico argues that Section 3 of Mexico's Reference Paper merely imposes obligations for universal service, that is, requirements imposed on domestic carriers to supply universal service. It does not in any way discipline the rates charged for interconnection.375 Furthermore, Mexico has not imposed, nor can it impose, any universal service obligations on United States carriers. According to Mexico, universal service obligations involve costs for domestic carriers, which must then be able to recover them, together with a reasonable return. This is only possible by means of the rates, including the interconnection rates, which they charge. Section 2.2(b) of Mexico's Reference Paper must therefore permit rates which, inter alia, allow for the cost of rolling out infrastructure, plus a reasonable return. Mexico submits that this is particularly significant for developing country Members, such as Mexico, which require substantial investment in their telecommunications infrastructure. The objective of achieving universal access is expressly provided for in Mexican legislation. The legitimacy of such investment by developing country Members is explicitly recognized in GATS Article IV. Hence, Mexico concludes, there is no connection between Sections 2 and 3 in the context of accounting rate arrangements.376
4.191.
Citing to provisions concerning rural telephone companies in the Communications Act of the United States, Mexico also argues that an analogous concept can be found in the United States' domestic telecommunications law. Based on these provisions, Mexico claims that under United States law the concept of "economic feasibility" is a complete exception to the requirement to offer cost-based interconnection rates.377
4.192.
The United States argues that, this requirement of United States law is fully consistent with the United States' Reference Paper obligations. The United States expressly limited Section 2.2 of its Reference Paper to permit this exemption for rural carriers. Mexico made no such limitation on its Reference Paper, with respect to rural or any other carriers.378
4.193.
Mexico also argues that the term "cost-based" does not imply that governmental authorities need to set all rates. To the contrary, during the telecommunications negotiations the view was expressed that, where domestic competition in telecommunications services has been established, the market itself will ensure that rates are sufficiently "cost-based". According to Mexico, this view is also endorsed by the United States. Nonetheless, Mexico also notes that, empirical evidence indicates that there is also a high correlation between the introduction of domestic competition and decreases in international accounting rates. Mexico claims that, in a market where there is competition, market dynamics will ensure that the rates are cost-oriented. Recalling its rapid success in introducing competition in its domestic market, Mexico argues that, if the requirements of Section 2.2(b) were applied to accounting rates, Mexico's success in introducing and maintaining competition in the domestic market for long-distance services has satisfied its obligations to ensure that settlement rates are cost-based within the meaning of the Reference Paper. According to Mexico, this is supported by the fact that Mexico's settlement rates for calls from the United States have dropped since 1997 – by 85%, 78% and 69%, depending on the destination of the call.379
4.194.
The United States replies that Mexico's argument that competition in a different market, for the supply of long-distance service in Mexico, ensures cost-oriented rates in the separate market for the provision of interconnection to United States suppliers operating in the cross-border mode, is not logical. According to the United States, while competitive market dynamics could reasonably be expected to ensure cost-oriented rates in most countries, the market dynamics that would normally lead to cost-oriented rates are not allowed in Mexico. The United States points out that, Mexico imposes a naked prohibition on competition on all international routes between firms that would otherwise be competitors, Mexico's ILD rules require a horizontal price-fixing cartel among Mexican suppliers. Those rules prevent all price competition between Mexican suppliers providing interconnection to United States cross-border suppliers. Even if other WTO Members do not have explicit requirements for settlement rates to be cost-based, they also do not have restrictions on competition like Mexico, and therefore can reasonably rely on competitive market dynamics to yield cost-based rates.380
4.195.
Mexico further argues that, with respect to the unilateral reduction of settlement rates for incoming calls to domestic interconnection rate levels, Mexico would have to require that Mexican carriers unilaterally reduce their charges to foreign carriers from all GATS Members for transporting and terminating incoming international telephone traffic, but Mexico would have no assurance that the other Members would implement the same radical change in their regulatory systems, because only Mexico is the subject of the current complaint. This would expose Mexican carriers to huge financial liabilities to foreign carriers, including those of the United States. Thus, Mexico argues, the accounting rate regime cannot be changed or abandoned without a multilateral agreement on a system to replace it.381

(ii) Whether Telmex interconnection rates are "based in cost"

4.196.
The United States submits that, in August 2002, Cofetel approved a Telmex proposal to charge United States suppliers' settlement rates based on three zones within Mexico. The "settlement rate" is the interconnection rate that Telmex (and other Mexican suppliers) charge United States cross border suppliers to connect their calls to their final destination in Mexico. Telmex charges 5.5 cents per minute for traffic terminating in the three largest cities in Mexico (Mexico City, Guadalajara, and Monterrey) (Zone 1); 8.5 cents per minute for the other roughly 200 medium-sized cities in Mexico (Zone 2); and 11.75 cents for traffic terminating in all other locations in the rest of Mexico (Zone 3).382 The United States argues that these rates are not based in cost.
4.197.
The United States submits that, because Mexico declined to make Telmex's interconnection cost data available to the United States, it uses other relevant public data as proxies for measuring the cost of interconnection provided to United States cross-border suppliers. According to the United States, these include: (1) published Mexican price data on maximum rates that Telmex charges for the network components used to provide interconnection; (2) grey market rates for calls between the United States and Mexico; (3) international proxies; and (4) rates Mexican carriers charge each other for settling accounts relating to international calls.383
4.198.
Mexico notes that the European Commission allows the regulatory authorities of member states to use target rates for domestic interconnection rates to determine whether rates charged by their carriers could be deemed cost-oriented. Mexico argues that, if the use of target rates is satisfactory to comply with the obligations of Section 2.2 for domestic interconnection rates, the use of target rates is also acceptable for settlement rates. In this regard, Mexico's international settlement rates with the United States are consistent with the target rate recommended by ITU Study Group 3 for Mexico.Mexico also submits that the current accounting rate arrangement between Mexican and United States carriers even complies with the benchmark rate for Mexico unilaterally set by the FCC of the United States. Thus, Mexico argues, its rates are consistent with the cost-based obligation even if the term "cost-based" is viewed in isolation.384
4.199.
The United States questions Mexico's attempts to justify the use of this ITU target rate by citing the European Commission's use of "current best practices" domestic interconnection rates. For 2000, the EC established best practice rates of 1.5 to 1.8 Euro-cents (about 1.4 to 1.65 United States cents) for double transit (or nationwide termination) at peak (time of day) rates. Adding the Cofetel approved rate of 1.5 cents (used in the pricing methodology by the United States as an estimated charge for the additional network components (international transmission and gateway switching) required to terminate an international call) to the EC best practices rates for nationwide termination yields an international "best practices" target of only about 3 cents per minute. The current 5.5, 8.5 and 11.75 cents per minute international rates charged by Telmex exceed this target by 83%, 183% and 292%.385
4.200.
The United States replies that neither the ITU or FCC benchmark is appropriate, because both the ITU and the FCC state that their benchmarks are not cost-oriented.386
4.201.
The United States points out first that Mexico's obligation under Section 2 of its Reference Paper is to ensure that Telmex's interconnection rates are cost-oriented, not to observe that Telmex's interconnection rates are consistent with a transitional target rate that makes no claim to be "basadas en costos". The United States notes that ITU Recommendation D.140 states that its target rates are "to be used... during the transition to cost-orientation," and should not be "taken as cost-oriented levels." After ITU members have attained these target rates they "should continue to take positive steps to reduce their accounting rates to cost-oriented levels."387
4.202.
The United States also submits that Mexico incorrectly claims that it is subject to these ITU target rates. ITU Recommendation D.140 states that the target rates "are not applicable between competitive markets." Therefore, the ITU targets do not apply to the termination of United States traffic in Mexico, which has made binding commitments to open its basic telecommunications markets to competition.388
4.203.
The United States also notes that the benchmark rates established by the FCC in 1997 were not cost-oriented when issued, and are even less so in 2003. In adopting those rates, the FCC stated that its benchmarks "... still exceed foreign carriers' costs to terminate international traffic because they are based primarily on foreign carriers tariffed rates" in effect in 1996, and "include costs associated with providing retail communications services to consumers which would not be included in cost-based settlement rates." The FCC therefore emphasized that its benchmarks "continue to exceed, usually substantially, any reasonable estimate of the level of foreign carriers' relevant costs of providing international termination services."389
4.204.
Mexico submits that the United States' assertion that the FCC's "benchmarks" are not cost-oriented, ignores Mexico's point that the current United States-Mexican accounting rate is not at the level of the United States benchmark for Mexico, but well below it. The FCC's benchmark for Mexico's settlement rate is $.19, while the current rates are $.055, $.085 and $.115. Thus, the rate for calls to the three largest Mexican cities is about 71 per cent lower than the United States benchmark, and the rate for calls to rural areas is about 40 per cent lower than the benchmark. Mexico also identifies portions of the FCC's 1999 ISP Reform Order in which it established its policy that the United States international settlements policy (that is, the requirements for uniform and symmetrical settlement rates and proportionate return) could be waived for a country where the settlement rate was at least 25 per cent below the benchmark for that country, on the basis that rates at this level "are sufficiently below the benchmark level to indicate that a dominant carrier is facing competitive pressures to lower rates" and "an indication that competitive market forces exist to constrain the ability of a foreign carrier to exercise market power." Mexico argues that according to this standard of United States law, the current settlement rates for United States-Mexico traffic indicate that there is "meaningful economic competition" within Mexico.390

aa) Costs based on maximum rates charged for network components

4.205.
The United States submits that, in the absence of independent competitive negotiations on interconnection rates and in the absence of Telmex cost data, the maximum cost that Telmex could incur to provide interconnection to United States suppliers can be estimated by identifying the network components Telmex uses to terminate a call from the United States and then adding together the corresponding prices that either Cofetel or Telmex established for these components. According to the United States, because it is reasonable to assume that the component prices established by Cofetel or Telmex are sufficient to cover the component costs, the sum total of those component prices can be regarded as a "cost ceiling" for the aggregate network components. Under the United States' analysis, the maximum average cost that Telmex incurs to provide interconnection to United States suppliers is 5.2 (United States) cents per minute. The blended average rate of approximately 9.2 cents per minute that Telmex charges exceed this maximum average cost by more than 75 per cent.391 The United States further argues that, because it bases these estimates of cost on prices charged by Telmex, costs incurred by Telmex, especially for the very large volumes of traffic generated by United States carriers, would be substantially lower.392
4.206.
The United States identifies four network components Telmex uses to provide interconnection and terminate in Mexico calls that originate in the United States:

"(i) International transmission and switching: this network component includes transport from the United States-Mexico border to and through the Telmex/Telnor international gateway switch.

(ii) Local links: this network component consists of those facilities utilized to transport a call from the international gateway switch to an entry point in the Telmex/Telnor domestic network.

(iii) Subscriber line: this network component includes switching in the terminating city and transmission over facilities (such as a local loop) to the receiving telephone.

(iv) Long-distance links: this network component consists of those facilities utilized to transport traffic from the entry point in the Telmex/Telnordomestic network to the last switch in the network chain."393

4.207.
According to the United States, these network components reflect the guidelines promulgated by the ITU for identifying the costs incurred in terminating international calls. According to the ITU, the network components used to provide international telephone services are international transmission and switching facilities (component 1 above) and national extension (which incorporates components 2 through 4 above).394 As a basis for its calculation, the United States uses the published Telmex prices, which are approved by Cofetel, for these network components. The United States further argues that, because Mexican law requires these Cofetel-approved rates to recover at least the total cost of these network components, they therefore include at least the true costs of these network components, including direct and indirect costs.395 For certain network components, the United States relies on either Telmex's retail prices or on certain non-cost-oriented wholesale rates that Telmex charges. The United States argues that Telmex prices, as such, set an upward limit (cost ceiling) of cost; rates above this cost ceiling cannot be "basadas en costos".396
4.208.
The United States then discusses the specific prices of these network components, depending on the destination of a call into Mexico. According to the United States, cross-border suppliers of basic telecom services interconnect with Telmex in order to terminate calls to three "zones" in Mexico. These three zones are: (1) calls terminating in Mexico City, Guadalajara, and Monterrey; (2) calls terminating in approximately 200 medium cities in Mexico; and (3) calls terminating in all other locations in Mexico. The United States notes that each successive calling zone reflects progressively more extensive use of Telmex's network (and hence progressively higher prices, based on Telmex's current pricing practices).397
4.209.
For calls to Zone 1 cities, the United States submits that Telmex's costs can be no more than 2.5 cents per minute (1.5 cents for international transmission and switching plus 0,022 cents for local link plus 1,003 cents for subscriber line) for the network components to interconnect a call from the United States border.398 However, Telmex currently charges a Cofetel-approved rate of 5.5 cents to connect these calls. Thus, the United States asserts that Telmex charges United States suppliers an interconnection rate that is approximately 220 per cent of the maximum cost it incurs to terminate a call in Zone 1.399
4.210.
According to the United States, calls to Zone 2 cities require one additional network component, i.e., a "long-distance link" used for transport within Mexico between the international gateway switch and the switch in the destination city. For these calls, Telmex allows its competitors to purchase "on-net" interconnection. The United States submits that Telmex's costs can be no more than 3 cents per minute (1.5 cents for international transmission and switching plus 0,022 cents for local link plus 0,536 cents for long-distance link plus 1,003 cents for subscriber line) for the network components used to interconnect a call from the United States border to a Zone 2 city. However, Telmex currently charges a Cofetel-approved rate of 8.5 cents to connect these calls. Thus, the United States argues that Telmex charges United States suppliers an interconnection rate approximately 275 per cent of the maximum cost it incurs to terminate a call in Zone 2.400
4.211.
The United States further notes that, calls to Zone 3 cities are classified as "off-net", which means that Telmex has not opened to originating competition and does not allow competitors to purchase "on-net" termination. According to the United States, Telmex uses the same network components as it does for Zone 2 to terminate calls in Zone 3 cities. However, unlike the preceding two calling patterns, Telmex's rate for terminating interconnection is substantially higher than that charged by Telmex for "on-net" interconnection. In Zones 1 and 2, Telmex terminates calls in cities where competitors are allowed to purchase "on-net" termination at rates established by Cofetel and incorporated into commercial agreements between Mexican operators. However, Telmex charges highly inflated rates (known as "reventa" or "off-net" rates) to terminate calls in cities where competitors are not allowed to buy "on-net" terminating interconnection. Because unbundled pricing information for the network components used to provide reventa service is not readily available, the United States utilizes the 7.76 cent reventa rate that Telmex charges its competitors to terminate calls to off-net cities. Based on this, the United States submits that Telmex's costs can be no more than 9.28 cents per minute (1.5 cents for international transmission and switching plus 0,022 cents for local link plus 7.76 cents for terminating interconnection) for the network components used to interconnect a call from the United States border to a Zone 3 city. However, Telmex currently charges a Cofetel-approved rate of 11.75 cents to connect these calls. Thus, the United States argues that Telmex charges United States suppliers an interconnection rate approximately 127 per cent of the maximum cost it incurs to terminate a call in Zone 3.401
4.212.
In conclusion, the United States argues that the 9.2 cents per minute blended average of the three zone rates that Telmex charges United States suppliers for interconnection exceeds Telmex's published price for the network components used to provide such interconnection, and hence, Telmex's maximum blended average costs, by 77 per cent. As to each of the three zones, the United States argues that the rates that Telmex charges United States suppliers for interconnection exceeds Telmex's published price for the network components used to provide such interconnection, and hence, Telmex's maximum costs by 27 to 183 per cent. The United States also emphasizes that the data it is using – including Telmex's retail rates for private lines and Telmex's rates for off-net interconnection – yields the maximum cost that Telmex could possibly incur to provide interconnection to United States suppliers. According to the United States, the real cost that Telmex incurs is likely far lower than the maximum cost ceilings identified in this section, and is likely in line with the 1 to 2 cent per minute rate in effect with carriers in countries with WTO-compliant competitive conditions. Even so, the United States argues, the rates that Telmex charges United States suppliers for interconnection far exceed even this inflated cost ceiling.402
4.213.
Mexico submits that the proposed United States methodology for determining whether rates are cost-oriented is not found in the agreement. According to Mexico, even though the United States agrees that the Reference Paper does not define the terms "cost based" or "cost oriented", it still attempts to imply that there is universal agreement on the meaning of those terms, as well as universal agreement that the costs of providing national access through accounting rate agreements must be determined in the same manner as the costs of domestic interconnection.403 Mexico argues that under the United States' methodology, accounting rates negotiated between Mexican and United States carriers must be set no greater than domestic interconnection rates.404 Citing to publications by the ITU, Mexico claims that there is no common understanding of what the terms "cost-based" and "cost-oriented" mean, either in the domestic or international contexts, and there is no consensus that it means that the costs of transporting and terminating international calls should be deemed the same as the costs of domestic interconnection.405
4.214.
The United States replies that it is not arguing that the costs of mode 1 interconnection must be equal to the costs for domestic interconnection for commercially-present suppliers. Instead the United States submits that the point of its estimated cost model is to show that the rates currently charged by Telmex substantially exceed the prices charged for the same elements domestically. Since Mexican law requires that interconnection rates for commercially-present suppliers must recover at least the total cost of all network elements, interconnection rates for cross-border suppliers that exceed rates for commercially-present suppliers are by definition not based in cost. The United States further clarifies that it is not asking that the Panel determine a rate that would be considered basadas en costos; instead it is only asking that the Panel determine that the rates currently charged by Telmex for interconnection provided to cross-border suppliers are not based in cost. According to the United States, Mexico has not contested that rates for international interconnection exceed rates for domestic interconnection by 127 to 283 per cent (using the exact same network elements) and that rates for domestic interconnection are required by Mexican law to be based in cost. Thus, whatever the definition of "basadas en costos," under these circumstances Mexico's international interconnection rates cannot be considered cost-based.406
4.215.
Mexico further argues that the United States is wrong in arguing that the type of cost analysis used for domestic interconnection can be applied to settlement rates for international calls. Mexico's GATS commitments preserved the current system under which termination of international long-distance traffic in Mexico is conducted under a joint provision regime (half circuit regime), not under a whole provision regime (full circuit regime). The accounting rate system is widely, if not universally, used for settlements under the half circuit regime. The cost analysis demanded by the United States is used only for interconnection under a whole circuit regime, in particular domestic interconnection. According to Mexico, proposals have been made (such as by Australia) to replace the accounting rate systems with a cost-oriented "termination rate" regime, which could be implemented using half circuit or full circuit criteria. However, there is not yet an agreed methodology on how to determine costs under a termination rate regime, either at the bilateral or multilateral levels. Thus, the issue remains unresolved.407
4.216.
The United States replies that the various methodologies proposed by the United States should not be regarded as estimates of the cost of terminating incoming international calls in Mexico. Rather, the United States argues that, the methodologies presented show a maximum cost or a ceiling on the costs incurred and, as such, exceed the actual cost.408

bb) "Grey market" rates for calls between the United States and Mexico

4.217.
Another proxy the United States uses for identifying costs of interconnection are grey market rates for transport and termination of international minutes into Mexico, sold in London, Los Angeles and New York. The United States recognizes that such arrangements bypass the uniform settlement rates required by regulations in Mexico and therefore are technically illegal in Mexico. However, the United States argues that these rates provide another estimate of what some operators are currently paying for the network components used to terminate such calls, even given the constraints of Mexico's regulations. According to the United States, these rates also provide insight as to the relevant costs incurred to complete calls into Mexico, given that a grey market for such calls would not exist unless operators were making a profit over the cost of the network components required to complete the calls. Based on its comparison of the rates, the United States submits that the grey market rates are far lower than the rates charged by Telmex and even the maximum costs shown in the above United States pricing surrogate, and thus confirm the conservative nature of the assumptions underlying that methodology.409
4.218.
The United States also notes several factors which suggest that the grey market rates include costs in addition to the costs of the network components used by Telmex to terminate United States calls into Mexico. First, the United States argues that the grey market rates include