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Source(s) of the information:
Source(s) of the information:

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 – in addition to termination – the cost of transporting calls from different points abroad (Los Angeles, New York, or London) to the Mexican border. Second, the United States asserts, because such calls are technically illegal in Mexico, they necessarily involve a regulatory risk premium to cover the possibility that these grey market operations can be shut down at any time. Furthermore, to avoid detection, such operators typically do not use efficient, high-capacity links for their networks (but instead rely on commercially available low capacity links), thereby incurring network inefficiencies and higher costs. Third, according to the United States, given the price ceiling set by Telmex (i.e., the cross-border interconnection rate) which still governs the overwhelming majority of calls, and the limited capacity of the grey market to meet demand for alternative termination, market pressure to drive grey market rates to cost is limited – such operators can meet demand by offering a limited discount to the Telmex-set price umbrella, which likely results in such grey market rates being well above cost.410
4.219.
In conclusion, the United States argues that, even though these grey market rates themselves are above Telmex's maximum costs, the Telmex interconnection rates still exceed these grey market rates.411 Thus, Telmex's interconnection rates are substantially above Telmex's costs.
4.220.
Mexico argues that, by asserting that rates for illegal bypass traffic into Mexico should be used as the benchmark for determining whether the accounting rates negotiated between United States and Mexican carriers comply with the Reference Paper, the United States is tantamount to stating that international access must be priced as though Mexico had authorized the United States' carriers to provide service into Mexico through ISR, so that the United States' carriers could interconnect with the domestic network within Mexico without routing their traffic through an authorized facilities based carrier. But Mexico does not allow ISR, and scheduled a reservation to the GATS allowing it to maintain that prohibition. Accordingly, Mexico argues, the United States reliance on the rates charged for illegal ISR traffic into Mexico as a benchmark is completely inappropriate, just as illegally downloaded music can not be used as a measure of the true cost of producing the music.412
4.221.
The United States counters that Mexico's analogy is flawed. According to the United States, in the case of illegally downloaded music, no one pays for the use of the downloaded music; on the other hand, in the case of illegal bypass, the users of bypass are paying for the use of those network elements. Mexico does not assert that bypass rates do not cover the costs of the various components involved in providing bypass service. Nor does it identify any cost that is not recovered by bypass rates.413
4.222.
Mexico also submits that the United States makes "apples to oranges" comparisons. According to Mexico, the United States compares ISR rates from the United States to various countries with the United States-Mexico accounting rates, rather than comparing the United States accounting rates with those countries to the United States-Mexico accounting rates. Mexico also points out that, in the same submissions in which it complains about the unavailability of ISR into Mexico, the United States presents detailed information about the rates United States carriers are currently paying for ISR into Mexico. This contradiction serves to highlight that the United States has not presented the complete factual picture.414

cc) International proxies

4.223.
The United States also shows that Telmex termination rates exceed wholesale rates established by a major operator to terminate calls to various countries that, like Mexico, have more than one long-distance provider. The United States notes that these rates include transport from points of interconnection in Los Angeles, New York or London and thus include network components and costs in addition to those used and incurred by Telmex in terminating a call from the Mexican border to the final destination in Mexico. The United States also points out that none of these countries match the volume of international traffic and corresponding economies of scale for traffic between the United States and Mexico. Nevertheless, the United States argues, these international rates provide a useful, but highly conservative, benchmark further supporting the United States claim that Mexico has failed to ensure that Telmex provides interconnection to cross border suppliers at rates that are basadas en costos.415

dd) Financial compensation among Mexican operators relating to international calls

4.224.
The United States also argues that financial compensation procedures among Mexican operators demonstrate that the interconnection rates charged to United States suppliers are not cost-oriented.416 According to the United States, the ILD Rules require Mexican international operators to allocate incoming international calls among themselves under a "proportionate return" system that reflects each operators' share of outgoing calls. Because the Mexican international operators do not necessarily receive traffic (and the associated payments by United States carriers) in accordance with this proportionate return requirement, the ILD Rules also establish redistribution and compensation procedures to ensure that each operator either receives the correct amount of traffic or receives appropriate financial compensation.417
4.225.
The United States explains that the "proportionate return" system works in two ways: first, under the traffic redistribution procedures established by ILD Rule 16, the operator receiving the excess traffic at its international port is required to transfer the excess traffic to another operator entitled to receive the traffic under the allocation formula. The initial operator is allowed to deduct from the settlement rate for its own international port services (authorized by Cofetel at 1.5 cents per minute), with the remainder of the settlement rate going to the operator to which the traffic is transferred.418 Alternatively, the United States argues, ILD Rule 17 allows the Mexican international operators to "mutually negotiate financial compensation agreements in consideration of the rights generated for each of them in accordance with the proportionate return system." This allows operators that are unable to identify and transfer excess traffic in accordance with Rule 16 to terminate that traffic and then negotiate financial compensation agreements (or "true-up" payments) with the operator entitled to receive the traffic under the allocation formula.419
4.226.
The United States argues that, the mere existence of Rule 17 should be regarded as an admission by Mexico that the interconnection rate charged to cross-border suppliers is not basadas en costos.420 The United States claims that, if the settlement rate was basadas en costos, no Rule 17 "financial compensation" would be available for any "entitled" operator to receive, because the settlement rate received by the operator actually receiving and terminating the "excess" traffic would merely be sufficient to cover those termination costs.421 The United States further explains that, under Rule 17 financial compensation procedures, operators terminate excess traffic with their own network arrangements, deduct the "cost" incurred in such termination from the settlement payments received for that traffic, and distribute the residual amount to the operator entitled to additional traffic under the ILD Rules. According to the United States, implementing this financial transfer, however, requires operators to agree on the cost of terminating a call, since what they transfer between themselves is only the "premium" on such calls, or the amount in excess of the costs incurred for terminating such calls.422 Thus, the United States argues that Rule 17 payments are required solely because cross-border interconnection rates are not basadas en costos.423
4.227.
Mexico argues that the requirement for proportionate return allows new entrants in the domestic market to preserve and gain market share by allowing them to terminate incoming traffic in the same proportion as their share of outgoing traffic. According to Mexico, a carrier that has gained more customers in the domestic market, and thereby carries these customers' outgoing traffic to a particular country, is ensured that it will be able to terminate a proportionate share of the country's incoming traffic, which otherwise might be carried by larger carriers.424

(b) Whether Telmex interconnection rates are "reasonable"

(i) The meaning of "reasonable"

4.228.
The United States submits that the Reference Paper does not define "razonable" or "reasonable." Thus, the United States argues, the term should be interpreted according to the customary rules of treaty interpretation reflected in Article 31(1) of the Vienna Convention. According to the United States, such an analysis considers the ordinary meaning of "reasonable" (a word that has a very broad meaning) in its context and in light of the object and purpose of the agreement.425
4.229.
The United States argues that, the commitments that resulted from the negotiations on basic telecommunications should be interpreted in light of both that particular object and purpose of the agreement as a whole and of those negotiations in particular: the liberalization of trade in basic telecom services. The United States asserts that the Reference Paper is an integral part of these basic telecom commitments. These additional commitments recognize that major suppliers of basic telecommunications services have the potential to use their dominant position to undermine market access and national treatment commitments. Thus, the United States claims, Section 2 of the Reference Paper establishes disciplines to prevent major suppliers from using interconnection to restrict other suppliers from offering a scheduled service.426
4.230.
In terms of the context, the United States argues that the interconnection obligations of Section 2 are especially important for the cross-border supply of basic telecom services – particularly in markets like Mexico, which legally bar foreign service suppliers from owning facilities and therefore force foreign suppliers to rely on the major supplier to deliver their services to the end-user. In such cases, foreign suppliers have no choice but to pay a domestic service supplier (such as Telmex) an interconnection rate to terminate their calls. As a result, the major supplier has the power and incentive to price this input at levels which extract as much revenue as possible from cross-border suppliers. Thus, by raising the wholesale price of cross-border interconnection, the major supplier has the power to raise the retail price, reduce demand for the retail service, and thereby restrict the cross-border supply of services into Mexico. The United States further claims that, under Section 2, it is not enough for a WTO Member like Mexico to ensure that its major supplier's cross border interconnection rate is cost-based. Mexico must also ensure that the terms and conditions are reasonable – providing additional security that a major supplier may not use its bottleneck control of interconnection to restrict a foreign supplier availing itself of scheduled cross-border market access and national treatment commitments.427
4.231.
The United States concludes that, Section 2.2 of the Reference Paper is designed to ensure that a major supplier cannot restrict the supply of a scheduled basic telecom service through the terms and condition for interconnection. Therefore, interconnection terms and conditions are not "reasonable" if they would permit a major supplier to restrict the supply of a scheduled basic telecom service.428
4.232.
Mexico submits that the United States' interpretation of "reasonable" is based on its assumption that Mexico has allowed United States suppliers to provide their services on a cross-border basis. However, Mexico argues, its commitments do not permit United States suppliers of basic telecommunications services to provide their transmission or transport services across the border into Mexico. It is not the rates negotiated by Telmex that restrict the supply of telecommunications transmission and transport services, but rather, the limitations inscribed in Mexico's Schedule. Pursuant to Article XVI of the GATS, Mexico is entitled to restrict the rights of service suppliers of other Members to supply basic telecommunications services into and within its territory.429
4.233.
According to Mexico, the United States' argument on this issue also results from its apparent misunderstanding of the meaning of cross-border supply in the context of telecommunications transport services. Specifically, the United States consistently confuses the "telephone call" or other data that is transported by the service suppliers with the actual transport and transmission services that are at issue in this dispute.430
4.234.
Mexico argues that the United States' interpretation of the word "reasonable" is overly and blatantly simplistic.431 According to Mexico, the ordinary meaning of "reasonable" is "in accordance with reason; not absurd; within the limits of reason; not greatly more or less than might be expected". Mexico argues that the reasonableness of "tarifas basadas en costos" or cost-oriented rates can be judged only within the context of all relevant facts and circumstances because it is those facts and circumstances that provide a basis for reason and expectation.432 In this light, Mexico argues, it cannot be said, categorically, that an action or a measure that restricts the supply of a scheduled service is "unreasonable". In the broad sense, all forms of government regulation related to the terms and conditions of supply of a service have some impact on the level of supply of that service. However, merely because they have that effect, it cannot be said that they are "unreasonable" under any interpretation of the term "reasonable".433
4.235.
Mexico further argues that the fact that other major telecommunications markets, especially the United States, maintain virtually identical rules to preserve the negotiating position of their carriers vis-à-vis Mexican carriers must be taken into account in determining whether Mexico's ILD rules are "reasonable," and whether it would be "economically feasible" for Mexico to eliminate them unilaterally.434
4.236.
Mexico argues that the United States' interpretation of "reasonable" does not allow for rates that simply recover bare costs, let alone rates that are "economically feasible" to Mexico. The fact that the same settlement rate applies to other Mexican carriers is irrelevant to the application of the "reasonableness" requirement in Section 2.2(b) because that requirement applies only to interconnection with major suppliers. Accordingly, the interpretation presented by the United States is manifestly absurd and should be rejected by this Panel.435
4.237.
According to Mexico, a multitude of facts and circumstances are relevant to the determination of whether "tarifas basadas en costos" are reasonable. These include the state of a WTO Member's telecommunications industry, the coverage and quality of its telecommunications network, the return on investment, and the nature of the rates at issue.436
4.238.
Mexico argues that, in determining the reasonableness of Mexico's accounting rates, the bilateral nature of accounting rates must be taken into account. Bilateral accounting rate arrangements continue to be prevalent and many of the countries with which Mexico has such arrangements are under no obligation to reduce the rates they negotiate. Thus, Mexico submits, it would not be reasonable to expect Mexico to unilaterally reduce its accounting rates to domestic interconnection levels and yet face high accounting rates for outgoing calls.437
4.239.
Mexico also deems it pertinent to compare Mexico's settlement rates with the United States with those of other countries with the United States. According to Mexico, because the current accounting rate arrangement between United States and Mexican carriers provides for lower settlement rates than the accounting rate arrangements of United States carriers with a number of other countries, Mexico's rates must be deemed reasonable.438
4.240.
Mexico also submits that reasonableness must be judged in the light of all relevant circumstances which could include the technology used. Mexico notes that technology reduces costs, especially in the long run. However, in the telecommunications sector technological change has been very rapid, so much so that fixed asset obsolescence has led to high depreciation rates and, consequently, higher costs. Currently there is an excess of transmission capacity that must be depreciated very quickly, but with a very low capacity utilization and profitability. Mexico submits that it is not an exception to this global problem.439
4.241.
According to Mexico, another consideration to be taken into account is that technological change does not take place instantly and obsolete equipment cannot be immediately discarded. This factor results in cost reductions that are less dramatic than desired.440
4.242.
Mexico also points out that developing countries are usually technology consumers, not producers, and thus have to pay a higher price for technology than developed countries. Relative to developed countries, this drives costs for developing countries up, not down. In addition, a technology consumer country must spend extra monies to adapt and make compatible different vendors' technologies.441
4.243.
Mexico further submits that, contrary to recent inflated expectations, the bulk of telecommunications revenues (around 80%) still come from voice (or voice-related) services, where new technology does not yet represent a perfect substitute for the traditional (circuit-based) one.442
4.244.
Thus, Mexico concludes, technology, in the present circumstances, for a developing country such as Mexico, does not reduce but rather increases costs, especially with respect to its counterparts.443
4.245.
Mexico claims that the United States has ignored the following statements in the preamble of the GATS:

"Desiring the early achievement of progressively higher levels of liberalization in trade in services … while giving due respect to national policy objectives; Recognizing the right of Members to regulate, and to introduce new regulations, on the supply of services within their territories in order to meet national policy objectives and, given asymmetries existing with respect to the degree of development of services regulations in different countries, the particular need of developing countries to exercise this right; Desiring to facilitate the increasing participation of developing countries in trade in services and the expansion of their service exports including, inter alia, through the strengthening of their domestic services capacity and its efficiency and competitiveness …"444I

4.246.
In Mexico's view, from the statements above, along with the Schedules themselves, it is obvious that the overall goal of liberalization does not provide a justification for the United States interpretation. Neither the GATS in general nor the Fourth Protocol in particular were intended to eliminate immediately all restrictions and charges on trade in services.445
4.247.
Mexico further asserts that the United States interpretation leads to an absurd result. If carried to its logical conclusion, the United States argument implies that any charge for access is unreasonable, because any fee higher than zero conceivably "restricts" supply.446
4.248.
The United States replies that it is not arguing that any charge for interconnection or that any term or condition imposed upon interconnection is unreasonable. Rather, the determination of reasonableness must be made on a case-by-case basis. In this case, the facts clearly show that Mexico has failed to ensure that the terms and conditions for interconnection with Telmex are reasonable - that is, Mexico has failed to ensure that those terms and conditions reign in Telmex's ability to abuse its market power and restrict the supply of basic telecommunications services. The result of Mexico's failure to ensure interconnection on reasonable terms and conditions is that Telmex has indeed restricted the supply of scheduled services.447
4.249.
Mexico replies that the United States' qualification highlights a fundamental flaw in the United States' claim. According to Mexico, what the United States is now arguing is that whether or not the rate is reasonable depends on how much it restricts the supply rather than the fact that it restricts supply in the first place. Under this new legal test posited by the United States, a multitude of facts could have a bearing on "how much is too much". Accordingly, the fact that a measure "restricts the supply of a scheduled service" is no longer determinative of "reasonableness" and the entire basis for this claim is eviscerated.448

(ii) Whether Telmex interconnection rates are "reasonable"

4.250.
The United States argues that, because Mexico has given Telmex de jure monopoly power to set and maintain interconnection rates with foreign operators enabling it to restrict the supply of scheduled services, it has failed to ensure that Telmex provides interconnection at reasonable rates. According to the United States, Mexico has enabled, through its ILD Rules, its major supplier to affect the supply of scheduled basic telecom services through its exclusive negotiating authority and power to set interconnection rates for all Mexican carriers. The United States alleges that, on their face, the ILD Rules prevent Telmex from providing interconnection as required by Section 2.2 of the Reference Paper. Instead, the rules establish a structure and process that allow Telmex to set inflated interconnection rates and insulate Telmex from any competitive pressures that would otherwise lead to rates that are reasonable. The United States explains that Rule 13 grants Telmex alone the exclusive authority to negotiate the interconnection rate with cross-border suppliers, while Rules 3, 6, 10, 22, and 23 prohibit any alternatives to this Telmex-negotiated rate. As a result, the United States argues, these particular ILD Rules prevent Mexico from fulfilling its obligations under Section 2.2 and, for that reason, are inconsistent with that provision.449
4.251.
The United States further contends that Mexico has failed to honour its commitments under Section 2.2(b) by rejecting proposals from United States and Mexican suppliers to approve alternative interconnection agreements that would exert competitive pressure on the Telmex-negotiated rate. According to the United States, since 1998, United States and Mexican suppliers have tried to convince Mexican authorities to permit competitive alternatives to the Telmex-negotiated cross-border interconnection rates. However, Mexican authorities either rejected or ignored each request. The United States alleges that, these examples reinforce the conclusion that Mexico has taken affirmative steps to prevent any competition to the Telmex-negotiated interconnection rate.450
4.252.
The United States argues that Mexico has failed to ensure that Telmex provides interconnection on reasonable terms and conditions and therefore has not honoured its commitments under Section 2.2(b) of the Reference Paper.451

B. Section 1.1 of the Reference Paper: Prevention of anti-competitive practices in telecommunications

4.253.
TheUnited States claims that Mexico's ILD Rules operate to prevent competition in the termination of cross-border switched traffic, hold international interconnection rates artificially high, and allow foreign suppliers no choice but to pay Telmex-negotiated rate if they want to supply services on a cross-border basis. According to the United States, Mexico's ILD rules empower Telmex to engage in monopolistic practices with respect to interconnection rates for basic telecom services supplied on a cross-border basis and to create an effective cartel dominated by Telmex to set rates for such interconnection.452 The United States therefore claims that Mexico has failed to honour its commitments under Section 1.1 of the Reference Paper453, which provides that "[a]ppropriate measures shall be maintained for the purpose of preventing suppliers who, alone or together, are a major supplier from engaging in or continuing anti-competitive practices."454
4.254.
Mexico replies that its ILD Rules are not subject to the obligations of the Reference Paper, and therefore, cannot be inconsistent with its Section 1.1.455456 Mexico further points out that, even if its ILD Rules were subject to the obligations of the Reference Paper, the United States, in order to succeed in its claim, must present a prima facie case that Mexico has not maintained "appropriate measures... for the purpose of preventing suppliers who... are major supplier from engaging in or continuing anti-competitive practices". According to Mexico, the United States has not done so.457Mexico also submits that the United States has misinterpreted the obligations of Section 1.1.458 Mexico also points out that, although its ILD Rules are not subject to the obligations of the Reference Paper, it has maintained appropriate measures for the purpose of preventing Telmex from engaging in anti-competitive practices.459 According to Mexico its measures meet the standards of Section 1.1 of the Reference Paper and the Mexican regulatory framework contains the requisite of "Competitive Safeguards".460

1. Panel's standard of review

4.255.
Mexico submits that the fact that the United States may have different goals centered on promoting the interest of its own carriers should not influence the manner in which the Panel interprets Section 1 in the light of the objectives of the GATS, which include:

"Desiring the early achievement of progressively higher levels of liberalization in trade in services … while giving due respect to national policy objectives;

Recognizing the right of Members to regulate … the supply of services within their territories in order to meet national policy objectives and, given wide asymmetries existing with respect to the degree of development of services regulations in different countries, the particular need of developing countries to exercise this right;

Desiring to facilitate the increasing participation of developing countries in trade in services and the expansion of their service exports including, inter alia, through the strengthening of their domestic services capacity and its efficiency and competitiveness …"461

4.256.
Mexicoalso submits that Section 1.1 does not require a Panel to act as a domestic anti-trust authority, as, Mexico indicates, the United States implicitly argues. In Mexico's view, Section 1.1 sets out "principles and definitions" for regulatory authorities and does not mean that a single and common regulatory system should be imposed in the territory of all WTO Members.462

2. Section 1.1 of Mexico's Reference Paper

(a) Purpose of Section 1.1

4.257.
According totheUnited States, Section 1.1 of Mexico's Reference Paper provides for the maintenance of appropriate measures to prevent major suppliers from engaging in or continuing anti-competitive practices.463 The United States recalls that those appropriate measures are intended to prevent anti-competitive conduct by suppliers who "alone or together" are a major supplier. The United Sates submits that the "or together" language in Section 1.1 indicates that the negotiators attached relevance to horizontal coordination between suppliers. The United States also points out that, although this phrase has direct relevance to the definition of "major supplier," it also lends context to the interpretation of the term "anti-competitive practices," which the United States contends includes, at the very least, horizontal price-fixing agreements.464
4.258.
According to Mexico, the obligation in Section 1.1 is to maintain "suitable or proper" measures with the object or the intention of preventing Telmex from engaging in anti-competitive practices.465 Mexico claims that Section 1.1 is drafted in such manner that it allows Mexico a large measure of discretion in deciding what measures would be suitable or proper to accomplish the intended objectives and cannot be interpreted to mean that Mexico is required to prevent all suppliers from even engaging in or continuing anti-competitive practices, as suggested by the United States.466 Mexico further submits that, Section 1.1 creates an obligation of means, not an obligation of result.467

(b) Extent of the requirement under Section 1.1

4.259.
Mexicomaintains that Section 1 of the Reference Paper does not require markets to be opened to competition. According to Mexico, the opening of markets is a market access issue that is dealt with in Mexico's Schedule of Specific Commitments. Mexico submits that Section 1 requires only that appropriate measures be maintained for the purpose of preventing major suppliers from engaging in or continuing anti-competitive practices.468
4.260.
TheUnited States submits that it is not arguing that Section 1 requires a guaranteed result and agrees that it is the maintenance of appropriate measures that is required.469 According to the United States, what matters is that a Party maintain measures of some sort to prevent, not stimulate or condone, anti‑competitive marketplace conduct.470 The United States further submits that it does not claim that Section 1 of the Reference Paper contains language requiring a market to be opened to competition or that the requirement of the Reference Paper can only be met by opening a market to competition. According to the United States, Mexico's obligation to open various markets derives from the broad range of market access commitments on basic telecommunications contained in its Schedule.471

(i) "Appropriate measures"

aa) Whether the ILD Rules are "appropriate measures" under Section 1.1

4.261.
The United States asserts that the FCC has identified Rule 13 as restricting competition, limiting the ability to achieve cost-based cross-border interconnection rates.472 According to the United States, Rules 13 and 23 prevent Mexican and foreign suppliers from agreeing to alternative rates that could exert competitive pressures on the rate exclusively negotiated by Telmex.473 The United States submits that Mexico's ILD Rules are the opposite of "appropriate" measures to prevent anti-competitive practices, as required by Section 1.1 of the Reference Paper.474
4.262.
Mexicocontends that Section 1.1 does not require Mexico to ensure that Telmex does not act in an anti-competitive manner. Mexico submits that it is obliged to put in place "appropriate measures" aimed at preventing anti-competitive practices475 and that it has maintained appropriate measures for the purpose of preventing Telmex from engaging in anti-competitive practices.476 According to Mexico, it must be recognized that the ILD Rules pursue legitimate policy development objectives, and, in fact, constitute appropriate measures to encourage and ensure competition among domestic long-distance carriers.477 In Mexico's view, the United States' claim under Section 1 fails, even under its incorrect interpretation of the obligation in Section 1.1, since the ILD rules do not require anti-competitive practices.478
4.263.
Mexicosubmits that Rule 13 grants to the largest carrier of outgoing international traffic to a particular country the right to negotiate the rate for terminating incoming international calls from that country. Mexico indicates that the uniform settlement rate policy ensures that all Mexican international service providers that terminate international calls are paid the same negotiated rate. Mexico further points out that the proportional return policy, ensures that each Mexican provider receives fees proportionate to the number of calls it actually handles.479 According to Mexico, the combination of these policies prevents a large carrier taking advantage of that authority by retaining an unfair share of the revenue from incoming international traffic, or otherwise undercutting new entrants.480
4.264.
According to theUnited States, preventing price competition by new entrants to protect a major supplier's high price cannot possibly be understood as promoting competition.481 The United States submits that Mexico has offered no evidence that the new entrant carriers at issue need to be protected from a competitive market or from Telmex. In its view, their best prospects of building market share and challenging Telmex’s dominance in fact lie in the freedom to compete with Telmex. The United States argues that Mexico’s general competition law and its competition authority, the CFC, can address any attempts by Telmex, alone or in collusion with others, to engage in exclusionary or predatory conduct, once the constraints of the ILD rules are lifted.482 TheUnited States argues that although Mexico maintains a general competition statute, it also maintains measures that require its telecommunications carriers to adhere to a Telmex-led horizontal price-fixing cartel, restrict competition for the termination of international switched telecommunications traffic and otherwise restrict the supply of scheduled telecommunications services.483 The United States claims that these measures stifle market challengers and allow Telmex to maintain artificially high prices.484
4.265.
TheUnited Statesrecalls Mexico's report to the OECD's Committee on Competition Law and Policy in which Mexico stated that its own ILD Rules may not be the most favourable for competition.485 The United States claims Telmex is exactly the sort of former official monopoly that the Reference Paper meant to be restrained in order to allow a competitive basic telecom services trade to develop.486 TheUnited States also claims that the OECD's Report on Regulatory Reform in Mexico has recognized that Mexico's ILD Rules prevent competition in the termination of international traffic and prevents prices from decreasing for consumers, to the benefit of the Mexican telecommunications operators. The United States further points out that the OECD Secretariat concluded that an immediate price reduction on international calls would follow the elimination of the Mexican system.487
4.266.
Mexico submits that its ILD Rules are not per se anti-competitive, they just form part of Mexico's regulatory framework, which is aimed at increasing competition in its domestic telecommunications market.488 Mexico claims that Rule 13 of the ILD in combination with its uniform settlement policy and the requirements of proportional return, serves to preserve competition among domestic carriers and to promote investment in the domestic telecommunications infrastructure, and cannot be evaluated in isolation.489
4.267.
TheUnited Statesconsiders that Mexican ILD Rules, which contain an explicit restriction on price competition together with the division of supply among market participants, have the classic features of a cartel. The United States says that Mexico admits that the effect of its ILD Rules is to prevent smaller carriers from undercutting Telmex on price.490 TheUnited States submits that ILD Rule 13, in combination with other provisions of the ILD rules, affirmatively requires and promotes per se anti-competitive conduct. According to the United States, the effect of Mexico's rules is to maintain rates for international interconnection that are well in excess of cost, eliminating any competitive incentive to lower international interconnection rates. The United States further points out that the reduction of international interconnection rates, as have occurred, cannot be attributed to this anti-competitive scheme.491
4.268.
According tothe United States,the impact of ILD Rule 13 is to prevent new entrant international carriers in Mexico, some of which are affiliated with United States or other foreign providers, from undercutting the above‑cost prices charged by Telmex, thereby attracting more traffic for themselves. The United States claims that Mexico has acknowledged its concern about new entrant carriers engaging in a "price war" with Telmex.492 The United States submits that Mexico's maintenance of ILD Rule 13, in other words, is not directed at preventing harm to competition but rather is directed at preventing the natural results of competition. The United States further points out that Mexico prohibits price competition in the market for interconnection provided to United States suppliers operating on a cross‑border basis, and justifies this prohibition as necessary to prevent such competition from reducing rates. In the United States' view, this can only be regarded as anti‑competitive.493
4.269.
Mexico alleges that its ILD rules governing settlement rates and proportionate return are not only appropriate, but necessary to prevent a major supplier from engaging in anti-competitive practices in the Mexican domestic market for long-distance services, and to promote the development of the nation's telecommunications infrastructure to meet fundamental goals such as broader consumer access to service.494 According to Mexico, the requirements for uniform settlement rates and proportionate return in ILD Rule 13 are crucial: (i) to preserve competition in Mexico's domestic market for long-distance services; and (ii) to promote infrastructure development by ensuring that carriers' shares of the settlement rate revenue from incoming calls are proportionate to their success in penetrating the domestic market for outgoing international calls. This is why, in Mexico's view, the ILD rules must be evaluated in their totality.495
4.270.
TheUnited Statessubmits that its concern that Telmex is engaging in anti-competitive behaviour in its accounting rate negotiations with United States carriers is exacerbated by the fact that, under Rule 13 of the regulations issued by Mexico's Secretariat of Communications and Transport, Telmex negotiates accounting rates for all Mexican carriers.496 As a result, the United States contends, Telmex has de jure monopoly power in its negotiations with United States carriers. The United States submits that its suppliers have no choice but to interconnect with the Mexican public network at the border, since under Mexico's ILD Rule 3, only "international port operators" may interconnect with the public networks of foreign operators. The United States recalls that Mexican law permits only Mexican facilities-based operators to hold a concession to supply long-distance services.497 The United States further points out that Mexico leaves no choice but to pay the Telmex-negotiated interconnection rates, to suppliers from the United States willing to provide scheduled services on a cross-border basis. The United States claims that Mexico does not allow "resale" which requires the use of private lease circuits for the purpose of providing circuit switched telecommunication traffic.498
4.271.
Mexicoargues that the United States' arguments are an attempt to force Mexico to permit ISR.499 According to Mexico, its commitments were limited to allow international traffic only "through the facilities of an enterprise that has a concession granted by the Secretaría de Comunicaciones y Transportes". Mexico argues that Section 1.1 cannot be construed to indirectly grant carriers, from the United States, access to ISR when Mexico has an express limitation that allows it to prohibit ISR.500 According to Mexico, the end result of the United States approach would be to affect competitive long-distance carriers in Mexico and thereby cut down domestic market competition with the argument of reducing costs for AT&T and Worldcom. It further argues that the United States, incidentally, has not offered any information whatsoever on how elimination of the ILD Rules would promote competition in the United States, where WorldCom and AT&T together control more than 90 per cent of United States traffic to Mexico. In its view, even with Rule 13, the negotiating power of the duopsony (exclusive market power of two buyers on a market) on the United States side has been so dominant, and the volume of traffic southwards so great, that historically the settlement rate has been drastically reduced.501
4.272.
In response to a question by the Panel, Mexico indicated that it is not aware of any other WTO Member that has a de jure Rule 13. However, it argues, most Members, including the United States, have a de facto Rule 13, since the carrier with the highest market share is the one that negotiates the corresponding accounting rates (and therefore the settlement rates) with its counterpart, which also has the highest corresponding market share, and the remaining carriers on both sides follow their leaders. Mexico explains that, in the United States, for example, the ISP establishes uniform settlement rates and proportional return rules that result in a de facto Rule 13 for all United States carriers. However, if one of the economic effects of Rule 13 could be said to prove "anti-competitive", most, if not all, WTO Members have regulatory measures producing that effect. As is the case with ILD Rule 13, there are legitimate grounds for such measures and the measures should not be prohibited simply because one of the effects might be "anti-competitive" according to a particular criterion or measure.502
4.273.
The United States submits that Mexico finally admits that no other WTO Member maintains a measure similar to Rule 13, and fails to identify any WTO Members, other than purportedly the United States, which it claims "have a de facto Rule 13." The United States submits that Mexico then repeats its false charges that United States rules and policies are similar to those of Mexico, and again makes no attempt to rebut the evidence put forward by the United States showing that the United StatesInternational Settlements Policy requires nondiscriminatory rather than uniform rates, that ISP non-discrimination and proportionate requirements apply only to arrangements with dominant carriers that maintain high rates, and that all United States carriers negotiate rates independently.503

bb) Whether a proportionate return system could be an anti-competitive measure

4.274.
Mexicoclaims that Rule 13 prevents international anti-competitive activities. According to Mexico, the United States fails to mention that the two other major Mexican long distance carriers are affiliates of carriers from the United States and also fails to explain how allowing those carriers to dictate rates to their Mexican affiliates would serve any anti-competitive purpose. Mexico submits that its ILD Rules were adopted to mirror those of the United States, which otherwise would give carriers from the United States an unbalanced negotiating advantage over Mexican carriers.504 Mexico contends that its rules have prevented large foreign carriers from pressuring their own affiliated Mexican companies to agree to predatory, uneconomic prices that would serve only the interest of companies from the United States to the detriment of the Mexican market, undermining the opportunity to expand access to basic telecommunications services to those who now lack such services, and who comprise two-thirds of Mexican households.505
4.275.
The United States replies that its international regulatory scheme upon which Mexico's ILD Rules were allegedly based is qualitatively different from Mexico's rules. According to the United States, its rules are designed to prevent monopolistic abuses where the potential for them still exists, not to authorize and mandate such abuses like Mexico's ILD Rules. According to the United States its uniform or nondiscriminatory settlement rate and proportionate return requirements only apply to foreign carriers with market power, whereas Mexico's rules apply to all foreign carriers regardless of their market power. The United States claims that its rules encourage all its carriers to negotiate cost-oriented rates. The United States further points out that Mexico's rules prohibit all carriers, except Telmex, from negotiating rates and thus encourage artificially high rates, the exact opposite of cost-based.506 The United States submits that it has not at any time given one carrier the exclusive authority to negotiate international interconnection rates for itself and other competitive carriers.507
4.276.
Mexico contends that, despite the United States claim that it applies its International Settlements Policy in a narrowly targeted fashion, it has waived the policy only for 15 countries, and it deems virtually every major foreign carrier to have market power, including all local exchange carriers in the countries to which the Policy applies.508
4.277.
In the United States' view, the use of a proportionate return system is not an anti-competitive practice where it is used solely to prevent the abuse of market power. The United States claims that it applies proportionate return requirements only to cross border suppliers that both (1) possess market power at the foreign end of the international route, and (2) maintain high settlement rates.509 According to the United States, proportionate return is applied to dominant suppliers with high rates in order to prevent those dominant suppliers from using their control of return traffic to obtain additional concessions from competing suppliers in the United States. The United States claims that, except for dominant suppliers with high rates, cross-border suppliers into the United States are not subject to proportionate return. The United States refers that all suppliers, from all countries, that do not possess market power at the foreign end of the relevant international route, including all Mexican suppliers except Telmex, are not subject to proportionate return, and may terminate unlimited amounts of bound traffic in the Unite States with any supplier.510
4.278.
TheUnited Statesclaims that it is pro-competitive rather than anti-competitive to apply a proportionate return system narrowly in order to prevent dominant suppliers with high settlement rates from using their market power to receive increased above-cost subsidies. TheUnited States points outthat Mexico has established a "proportional return" system under which Mexican carriers receive a share of the above cost payments associated with inbound international traffic in relation to their outbound international traffic.511 In the Unites States' view, Mexico does not apply proportionate return to prevent the abuse of market power, but just requires all suppliers to comply with proportionate return, irrespective of whether they possess market power. The United States submits that Mexico's proportionate return requirement operates "in combination with" the Telmex monopoly on rate negotiations and the requirement for uniform rates to prevent one Mexican supplier "undercutting" any other Mexican supplier, or otherwise competing to increase its share of traffic received from cross-border suppliers from the United States.512 The United States contends that Mexico applies proportionate return broadly to all suppliers with the purpose of maintaining payment of above-cost subsidies resulting from the abuse of market power by Telmex.513
4.279.
The United States submits that Mexico has failed to explain why a Mexican carrier, even if minority owned (but not controlled) by a United States. carrier, would ignore its responsibility to its majority shareholders and agree to predatory, uneconomic prices for international interconnection. In its view, the impact of ILD Rule 13 is to prevent new entrant international carriers in Mexico, some of which are affiliated with United States or other foreign providers, from undercutting the above‑cost prices charged by Telmex, thereby attracting more traffic for themselves. Mexico has acknowledged its concern about new entrant carriers engaging in a "price war" with Telmex. Mexico’s maintenance of ILD Rule 13, in other words, is not directed at preventing harm to competition but rather is directed at preventing the natural results of competition. Mexico prohibits price competition in the market for interconnection provided to United States suppliers operating on a cross‑border basis, and justifies this prohibition as necessary to prevent such competition from reducing rates. This can only be regarded as anti‑competitive.514
4.280.
In Mexico's view, the proportional return system is a pro-competitive practice, directed at Mexico's legitimate policy objectives.515 According to Mexico, its ILD Rules promote competition in the Mexican domestic market, while protecting Mexican carriers from being played off each other by foreign carriers. Mexico submits that among other pro-competitive features, ILD Rules prevent negotiation by one supplier of a settlement rate that could undercut other suppliers because it would be unprofitable for them (i.e., a predatory settlement rate) . Mexico points out that the United States tries to dismiss the pro-competitive goals of the ILD rules as irrelevant, persisting in its claim that Mexico's Reference Paper requires competition in the negotiation of accounting rates regardless of the negative impact on competition that this would bring to the domestic market, including the impact on international calling services to consumers.516

(ii) "Major supplier"

4.281.
The United Statesexplains that Mexico's ILD Rule 13 provides that the carrier with the greatest share of outgoing international calls in the last six months is given the exclusive authority to negotiate the interconnection rates with foreign carriers. The United States points out that Telmex has always been the carrier with the largest outgoing international calls, holding the exclusive negotiating authority. The United States further points out that ILD Rules require all Mexican long-distance basic telecom suppliers to charge foreign suppliers only the Telmex-negotiated cross-border interconnection rate, even if Telmex is not a party to that agreement.517 The United States therefore contends that Mexico's rules empower and require Telmex to operate a cartel dominated by itself to fix rates for international interconnection and mandate that all Mexican carriers must adhere to those rates.518
4.282.
The United States submits that Section 1.2 of 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 market519 for basic telecommunications services as a result of: (a) control over essential facilities; or (b) use of its position in the market."520 According to the United States, Telmex satisfies this definition of "major supplier" because it has the ability, in the Mexican market, to use its position to materially affect the prices charged and the supply of services.521 The United States further submits that Mexican competition law, in determining whether an economic agent has "substantial power in the relevant market", considers "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", and other factors including "existence of entry barriers", existence and power of … competitors", and possibility of access … for sources of inputs.522 The United States defines the relevant market as the termination of voice telephony, facsimile and circuit‑switched data transmission services supplied on a cross‑border (i.e., international) basis from the United States into Mexico, which, in its view, is demonstrated by well‑accepted principles of market analysis which derive from competition law.523 The United States recalls that Mexican competition law provides that in order to determine a relevant market, it is necessary to evaluate "[t]he possibilities of substituting the goods or services in question, with others of domestic or foreign origin, considering technological possibilities, and the extent to which substitutes are available to consumers and the time required for such substitution".524
4.283.
Mexico argues that the United States has not demonstrated that the interconnection at issue concerns a "major supplier"525 and has not presented a prima facie case that Telmex is a "major supplier" within the meaning of the Reference Paper.526 In Mexico's view, the United States' analysis527 in which it sets out its argument that Telmex is a "major supplier" is flawed.528 In this regard, Mexico submits that the United States has failed to clearly define the services at issue and how they are supplied.529 It further contends that, even if 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 has failed to explain how the "relevant market" it defines is relevant to the cross-border supply of such services.
4.284.
As regards the United States' definition of "relevant market" as "the termination of voice telephony, facsimile and circuit-switched data transmission services", Mexico submits that "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. Mexico further claims that the United States relies on a relevant market resolution by the Mexican competition authority that is under review by Mexican courts precisely because the data it was based upon.530 Mexico also argues that, 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" in the light of the technical distinction between the traditional accounting rate procedure and a termination regime. It further argues that, even if a carrier in Mexico does provide termination services for foreign carriers wishing to terminate calls within Mexico, "termination services" and how to schedule those services was 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, for example, by using the approach proposed by Australia during the negotiations.531
4.285.
The United States responds that Mexico's assertion that termination services are not interconnection is refuted by the plain language in Section 2.1 of Mexico's Reference Paper definition of "interconnection". Additionally, the United States submits that the European Commission has described call termination as "the most basic interconnection service provided" and that in its submissions during the negotiations, Australia stated that termination of international traffic is interconnection, and there is no indication that any other Member objected to this characterization.532
4.286.
Mexico submits that, basically, Mexico and the United States differ on what constitutes the relevant market in which competition must be promoted and protected. Mexican policy, as shown by the ILD Rules, is that domestic carriers should share in and split agreements for incoming calls in terms of their success in securing a share on the domestic market and generating outbound calls. The United States sees it differently (apparently, solely for the purposes of its argument in this case), i.e. the only "market" worth protecting is the one for terminating United States traffic to Mexico.Mexico contends that the United States is acting as if new operators should compete to carry incoming international traffic calls instead of competing for end-customers in Mexico. According to the criterion set by the United States, it argues, an operator who has made a minimal investment in Mexican infrastructure should be allowed to do so on an unlimited basis, taking all the revenue for international calls from the operators who have made such investments and have obtained successful results in acquiring a share of the market.533
4.287.
The United States claims that Mexico is attempting to justify its anti-competitive ILD rules by alleging that the United States "is acting as if new operators should compete in order to carry incoming international traffic calls instead of competing for end-customers in Mexico." The United States submits that Mexico misstates the United States position. In the view of the United States, Mexico’s WTO obligations require it to allow new carriers to compete both to carry inbound international calls and for customers in Mexico. Likewise, it argues, Mexico implies that it is wrong for the United States to assert that carriers that have made "minimal" investments in Mexican infrastructure should be allowed to engage in "unlimited" competition. The United States maintains that a carrier’s ability to compete, either for inbound international calls, Mexican customers or in any other area, is limited only by the limitations, if any, in Mexico’s Schedule. Mexico cites no requirement in its Schedule that links a supplier’s ability to compete for inbound international calls to that supplier’s level of investment in Mexican facilities. Additionally, Mexico does not restrict competition for inbound international traffic merely for those suppliers with an undefined level of "minimal investment." Instead, Mexico's ILD rules restrict competition for inbound international traffic for all commercially present suppliers, irrespective of their level of investment in Mexican facilities.534

(iii) "Anti-competitive practices"

aa) Definition of anti-competitive practices

4.288.
The United States explains that apart from three illustrative practices included in Section 1, the Reference Paper does not define the term "anti-competitive practices". The United States considers that this term encompasses, at a minimum, what are usually characterized as "abuses of dominant position" and/or "monopolization" offences as well as "cartelization", which, according to the United States, are common antitrust concepts generally included within the universe of business practices usually found to be anti-competitive under national regulatory schemes and competition laws and policies. The United States claims that Mexico's antitrust law generally prohibits behaviour of this sort.535 TheUnited Statesfurther indicates that the 1999 Report of the WTO Working Group on the Interaction Between Trade and Competition Policy describes the nature and consequences of "horizontal" agreements which are likely to have a direct, negative impact on competition and to give rise to the exercise of market power.536
4.289.
Mexicoindicates that a definition of "anti-competitive practices" is provided in Section 1.2, which states that:

"The anti-competitive practices referred to in the above paragraph shall include in particular:

(a) Engaging in anti-competitive cross-subsidization;

(b) using information obtained from competitors with anti-competitive results; and

(c) not making available to other services suppliers on a timely basis technical information about essential facilities and commercially relevant information which are necessary for them to provide service." (emphasis added)537

4.290.
Mexico argues that the term "shall include" indicates that the list is non-exhaustive and that the addition of the words "in particular" demonstrate a focus on certain types of activities – namely, actions taken by private companies to gain an advantage over their competitors. Mexico claims that carriers from the United States are not competing with Mexican carriers when they enter into bilateral accounting rate arrangements since they do not offer service to Mexican customers. Mexico submits that, even if the legal requirement that all Mexican carriers charge the same settlement rate somehow could be construed as a "horizontal price fixing agreement" by private companies, such an agreement would not be encompassed by Section 1 because all Mexican carriers would be participating in the conspiracy and none would be harmed by it.538

bb) Government intervention

4.291.
According to the United States, the fact that anti-competitive conduct is compelled by the government does not change the underlying nature of the conduct as anti-competitive.539 In its view, even if an activity engaged in by Mexico's major supplier, Telmex, is immunised from domestic enforcement action under Mexican law, or is in some sense the act of the Mexican State itself, that does not alter the anti-competitive character of the activity at issue. The United States notes that it is Mexico's failure to observe the obligations of Section 1 that is at issue in this dispute, not Telmex 's failure to observe those obligations. According to the United States, if a WTO Member were able to immunize itself from the obligation incumbent upon it under Section 1 to take measures to prevent anti-competitive conduct by major suppliers by simply requiring anti-competitive conduct by major suppliers, the entire purpose of Section 1 would be undermined. The United States says that such an interpretation of Section 1 would encourage Members affirmatively to maintain measures requiring anti-competitive conduct, rather than put in place measures to prevent anti-competitive conduct.540
4.292.
Mexico submits that the United States has failed to establish that Section 1 disciplines regulatory "measures" of a WTO Member that have an anti-competitive effect.541 In Mexico's view, "anti-competitive practices" refer to the practices of a major supplier and not to governmental measures that may have an anti-competitive effect.542 Mexico recognizes that all regulation of economic activity, by definition, interferes with the operation of a freely competitive marketplace, including rate-setting by governmental authorities, but claims that such government regulation itself is not typically understood to be capable of violating competition rules.543 According to Mexico, if the United States' interpretation is to be accepted, all government regulatory measures in the telecommunications sector that restrain the actions of a major supplier in a manner that interferes with the operation of a freely competitive marketplace would be prohibited. Mexico claims that this is not what was intended by Section 1 of its Reference Paper. Mexico submits that there is no basis in the text of Section 1 to judge the legitimacy of a WTO Member's internal regulatory policies in circumstances where no multilaterally agreed-upon benchmarks exist. Mexico further contends that in order to justify its own anti-competitive measures, the United States essentially distinguishes between anti-competitive measures that, in its view, have legitimate policy objectives and those that, in its view, do not. In Mexico's view, if the drafters of Section 1 meant to include government regulatory measures, surely they would have included text to take into account such important distinctions and to provide objective benchmarks for assessing the legitimacy of such measures.544

cc) Price fixing as an anti-competitive practice

4.293.
Answering a Panel's question545, the United States submits that, if price-fixing is anti-competitive, then it is anti-competitive even if required by law. According to the United States, even if an activity engaged in by Mexico's major supplier, Telmex, is immunized from domestic enforcement action under Mexican law, or is in some sense the act of the Mexican state itself, that does not alter the anti-competitive character of the activity at issue.546 The United States further submits that Telmex's ability to negotiate uniform settlement rates is per se anti-competitive. In its view, this is, by definition, a horizontal price-fixing cartel that fits within virtually any definition of anti-competitive practice. The United States notes that horizontal price fixing is condemned both as a per se violation of its own law under Section 1 of the Sherman Act and as an absolute monopolistic practice under Article 9 of Mexico's FLEC.547 The United States affirms that it is the setting of the rate by a monopolist (since Telmex is given the exclusive authority, it is acting as a monopolist in this context) and the use of this rate by all other suppliers (horizontal price-fixing) that comprise the anti-competitive practices that form the basis for the United States' claim under Section 1 of the Reference Paper. It submits that the fact that the government requires the anti-competitive practice does not change the nature of the practice as anti-competitive.548
4.294.
Also in answer to a Panel's question, Mexico submits that the fixing of a uniform price cannot be an anti-competitive practice in violation of the obligations under the Reference Paper if uniform prices are required by law.549 Mexico further submits that Telmex's ability to negotiate uniform settlement rates is not per se anti-competitive since Mexican law does not give Telmex the authority to negotiate the rate. According to Mexico, Rule 13 provides the carrier having the greatest share of outgoing traffic to a particular country is authorized to negotiate the rate. Mexico claims that new entrant carriers have been gaining important shares of outgoing traffic on certain routes, and therefore may soon have the right to negotiate the rates for those routes.550
4.295.
Mexico further submits that, in the economic sense, monopolies may be "anti-competitive". However, it cannot be said that a domestic regulatory regime that establishes and permits a monopoly or small number of exclusive service suppliers to exist is equivalent to requiring an "anti-competitive practice" within the meaning of Section 1 of Mexico's Reference Paper. GATS Article VIII explicitly contemplates that WTO Members can maintain monopolies and exclusive service suppliers. Moreover, many WTO Members who have inscribed a Reference Paper maintain monopolies or exclusive service suppliers under their domestic law. Section 1 of Mexico's Reference Paper and the equivalent provisions in the Reference Papers of other WTO Members cannot be interpreted to nullify a right that exists under GATS Article VIII. Mexico submits that the obligations in the Reference Paper were negotiated specifically to prevent major carriers in regulated markets from abusing their market positions by engaging in anti-competitive "private" actions. With respect to "the use of the [Telmex] rate by all other suppliers", such action is not the result of anti-competitive practices of a major supplier – the focus of Section 1 of Mexico's Reference Paper – rather, it is the result of a legitimate government regulatory scheme.551
4.296.
The United States responds that there is no basis for Mexico's assertion that GATS Article VIII contemplates Mexico's restrictions on competition through the ILD rules, and therefore somehow precludes any challenge to such measures under Article 1 of the Reference Paper.552 Article VIII only applies to monopolists and "exclusive service suppliers, where a Member, formally or in effect, (a) authorizes or establishes a small number of suppliers and (b) substantially prevents competition among those suppliers in its territory." Mexico has placed no limitation on the number of concessionaires, either formally or in effect, and Article VIII therefore does not apply. Mexico's Schedule contains no Article XVI:2(a) limitation on the number of service suppliers, and as of September 2002 Mexico had granted no fewer than 27 concessions for domestic long-distance service, 11 of which are authorized to operate international ports.553

(c) Relationship between Section 1.1 and Section 2.2(b) of the Reference Paper

4.297.
The United States submits that a Member that scheduled the Reference Paper as an additional commitment is required by Section 1 of the Reference Paper to maintain appropriate measures to prevent its major supplier from engaging in or continuing anti-competitive practices, and is also obliged under Section 2.2(b) to ensure interconnection with that major suppliers on reasonable terms, conditions and rates. The United States considers that depending on the facts at issue, a conduct could be both anti-competitive and restrict the supply of basic telecommunication services, leading to a violation of both Sections 1 and 2.2(b).554 TheUnited States also submits that the purpose of Section 1 of the Reference Paper is to support the parallel goals of de-monopolization and market access by protecting and fostering competition among basic telecom competitors, and that it complements the more specific interconnection rules for major suppliers found in Section 2.555
4.298.
Mexico submits that Sections 1 and 2 of Mexico's Reference paper do not cover the same subject matter. In Mexico's view, independent meaning must be given to each provision and overlapping interpretations must be avoided.556 According to Mexico, what is "not reasonable" under Section 2.2 and what is "anti-competitive" under Section 1.1 are measured against different standards, there being no relationship between the two.557

(d) Relationship between Sections 1.1 and 3 of Mexico's Reference Paper

4.299.
In response to question No. 23(b) of the Panel meeting of 13 March 2003558, Mexico explains that there is no legal relationship between Sections 1.1 and 3 of its Reference Paper. According to Mexico, those Sections relate to different subjects and lay down different obligations. Mexico submits that Section 3 has not been the subject of this dispute. In Mexico's view, Section 1.1 does not regulate measures by a Member with a side-effect that may prove anti-competitive from a particular standpoint. Mexico contends that Section 3 relates to the maintenance of a type of specific governmental measure for the universal service obligation, which includes laying down obligations on domestic carriers to provide universal service coverage over a Member's territory and that such measure be, inter alia, administered in a "transparent, non-discriminatory and competitively neutral" manner.
4.300.
Mexico submits that, for the purposes of this dispute, it is notable that when a governmental measure must be regulated in accordance with Mexico's Reference Paper, it is done explicitly as in Section 3, so that it identifies the exact governmental measure in question (i.e. a "universal service" measure and not a general governmental regulatory measure, which would be the outcome of the United States interpretation of Section 1.1 of Mexico's Reference Paper) and the specific disciplines that apply (i.e., "competitively neutral", contrary to "anti-competitive practices", which are more subjective and general). According to Mexico, this confirms its position that Section 1.1 of its Reference Paper does not regulate a Member's measures, but the "practices" of a "major supplier".559
4.301.
The United States replies noting that Mexico's ILD Rules are not "legislative requirement[s]," but regulatory requirements imposed by Cofetel. According to the United States, Mexico's ILD Rules 13 and 23 implement per se anti-competitive practices under Section 1.1 of the Reference Paper, which are not mitigated by any application of Section 3.560
4.302.
The United States submits that Section 3 allows a Member to "define the kind of universal service obligation it wishes to maintain". The United States claims it is aware of no universal service obligation implemented or defined by the Mexican authorities, and no such obligation is defined by the ILD rules. The United States further submits that Mexico has not even identified or defined a universal service obligation that would, were it identified or defined, "not be regarded as anti‑competitive per se," pursuant to Section 3. In the United States view, since Mexico has not identified or defined a universal service obligation, it is not entitled to the presumption against per‑se anti‑competitiveness included in Section 3.561
4.303.
The United States further submits that even if Mexico had defined a universal service obligation and Section 3 were to apply, Mexico would not be entitled to this presumption, since its ILD rules also breach the additional requirements that the defined obligation be "administered in a transparent, non‑discriminatory and competitively neutral manner and ¼ not [be] more burdensome than necessary for the kind of universal service defined by the Member."562 Specifically, the United States argues that, at present, any alleged universal service obligations levied against foreign suppliers are apparently hidden in interconnection rates paid to Telmex. There is no transparency when universal service obligations are hidden in interconnection rates paid to the major supplier. The United States submits that a transparent process must, at a minimum, identify the level of charges associated with the universal service obligation. The ILD rules also fail to provide the "non‑discriminatory and competitively neutral" administration of the defined universal service obligation that is required by Section 3. Because the ILD rules only address interconnection rates paid by cross‑border suppliers, they ensure that the entire burden of any universal service obligation implemented in this way falls upon cross‑border suppliers. Finally, the United States notes that the ILD rules fail to identify the monetary level of the obligation and ensure that the charges are commensurate with that obligation. Because Mexico has not defined a universal service obligation, it cannot determine what level of charges would be "necessary" to meet that obligation. Similarly, levying charges allegedly associated with that obligation are by definition more burdensome than necessary.563

C. Section 5 of the GATS Annex on Telecommunications

4.304.
The United States claims that Mexico has failed to honour its commitments under the GATS Annex on Telecommunications. According to the United States, the Annex requires Mexico to ensure that service suppliers of other Members can access and use public telecommunications transport networks and services on reasonable and non‑discriminatory terms and conditions to provide a scheduled service.564 In the United States' view, Mexico has not fulfilled its obligations under either Section 5(a) or 5(b) of the Annex for the provision of the scheduled services.565
4.305.
Mexico submits that the scheduled services - i.e. the market-access commitments - that the United States alleges that Mexico has made and which are the basis for the claim under the Annex do not exist. In Mexico's view, the United States is incorrectly arguing that the Annex confers rights to supply basic telecommunications services when the Annex applies only to access to and use of those services. Therefore, Mexico submits that the provisions of the Annex cited by the United States566 do not apply to the facts of this dispute. Mexico further submits that even if Sections 5(a) and 5(b) applied, the United States has failed to present a prima facie case that these provisions have been violated. According to Mexico, the measures the United States is challenging are consistent with paragraphs 5(e), 5(f) and 5(g) of the Annex.567

1. Application of the Annex

4.306.
The United States submits that the GATS Annex on Telecommunications addresses telecommunications as a means of transporting scheduled services. In its view, the Annex requires Members to ensure that users of telecommunications (e.g., service suppliers) have access to, or use of, telecommunications – free from obstacles – to deliver their services.568 It further submits that the Annex grew out of a recognition that telecommunications represent the primary delivery mechanism for many services, particularly those offered on a cross‑border basis. Without telecommunications, it would be impossible for many service suppliers to deliver their services.569 The United States claims that access to telecommunications as a transport mechanism depends on those entities which control telecommunications networks and offer telecommunications services. Such entities – principally monopolies or former monopoly providers – have represented the principal obstacle to access and use of telecommunications as a transport mechanism.570 Like the Reference Paper, the Annex represents an effort to prevent dominant telecom providers from using their control over public telecom networks and services to undermine the supply of a scheduled service and to ensure that dominant telecom suppliers cannot nullify the services commitments that their home country undertakes.571
4.307.
Mexico contends that enhanced services and suppliers of services in sectors other than the telecommunications sector rely on "access to and use of" the existing public telecommunication network. According to Mexico, the Annex establishes general obligations to ensure that such services have access to and use of the public network on non-discriminatory and reasonable terms and conditions. Mexico claims that the Annex does not confer any right to supply telecommunications transport networks and services (i.e. basic telecommunications services) other than as provided in a Member's Schedule. It further submits that market access rights for the supply of basic telecommunication services were the subject of the later negotiations that led to the Fourth Protocol.572
4.308.
The United States maintains that the Annex requires each WTO Member to ensure that foreign service suppliers have reasonable and non‑discriminatory access to and use of public telecommunications networks and services to supply a scheduled service. According to Section 5 of the Annex:

"(a) Each Member shall ensure that any service supplier of any other Member is accorded access to and use of public telecommunications transport networks and service on reasonable and non‑discriminatory terms and conditions for the supply of a service included in its Schedule. This obligation shall be applied, inter alia, through paragraphs (b) through (f) [footnote omitted].

(b) Each Member shall ensure that service suppliers of any other Member have access to and use of any public telecommunications transport network or service offered within or across the border of that Member, including private leased circuits."573

4.309.
The United States submits that for each service inscribed in its Schedule, including basic telecom services, each WTO Member must ensure that foreign service suppliers may access or use public telecommunications networks and services – whether through interconnection or any other form of access and use – to transport their service.574 According to the United States the scope of this obligation is wide and extends to any public telecom network and service offered within or across the border of that Member. The definition of such networks and services is broad enough to encompass all types of public networks and services that a telecom provider may offer.575
4.310.
Mexicosubmits that the focus of the Annex on Telecommunications services is as a transport means for other economic activities, and not the supply of basic telecommunications services.576 The term "access to and use of" is not defined in the Annex, but paragraphs (b) and (c) of Section 3 of the Annex define the terms "public telecommunications transport service"577 and public telecommunications transport networks"578. In Mexico's view, the Annex applies to access to and use of a Member's available basic telecommunications services. The services for which "access to and use of" is provided are something other than basic telecommunication services.579Mexico contends that the United States' claims under the Annex must be assessed within the context of these definitions. Mexico points out that the United States is arguing that the Annex grants to its suppliers of basic telecommunications services the right to "supply" basic telecommunications services cross-border into Mexico by interconnecting with the public network or by interconnecting with private leased or owned circuits in Mexico. It further points out that the United States is also arguing that the Annex grants foreign companies the right to own 100 per cent of operators established in Mexico who will be entitled to supply such services cross-border into the United States.580
4.311.
The United States claims that Mexican law prevents foreign suppliers from owning public telecom networks and services in Mexico, leaving them no choice but to rely on Mexican operators to provide the access to and use of the public networks and services they need to deliver scheduled basic telecom services from abroad into Mexico. Because of Telmex's monopoly over the negotiation of settlement rates and the requirement that all other Mexican carriers must charge the rate negotiated by Telmex, all Mexican operators are required to charge rates that exceed cost.581 According to the United States, the entire purpose of Section 5 of the Annex is to require WTO Members to prevent this very form of behavior. The United States claims that Members drafted the Annex to ensure that their suppliers of public networks and services – whether they are monopolies, major suppliers, or competitive suppliers – do not hold access to, and use of, their networks and services hostage to monopoly rates, or any other form of unfair or anti‑competitive conduct that would undermine the supply of scheduled services.582
4.312.
In Mexico's view, the purpose of the Annex is not to allow facilities-based and non-facilities-based basic telecommunications suppliers to supply their services cross-border, but to provide supplementary or additional obligations to allow "access to" and "use of" Mexico's existing public telecommunications transport network and services583. It submits that the terms "access to" and "use of" have different meanings from the term "supply", which is frequently used in the text of the GATS. The term "supply" is defined as meaning "provide or furnish a thing needed". Mexico claims that the Annex applies only to measures which affect "access to or use of public telecommunications transport networks or services, and it does not apply to measures that affect "supply" of telecommunications transport services cross-border.584 According to Mexico, the United States is confusing "market access" with "access to and use of" existing public telecommunications transport networks operated by domestic concessionaires. Mexico contends that "market access" is dealt with in the market-access commitments made under Article XVI of the GATS inscribed in Mexico's Schedule, whereas "access to and use of" public telecommunications networks is dealt with in the Annex.585
4.313.
In Mexico's view, the Annex was not drafted to provide "market access" to foreign suppliers of basic telecommunications services586. According to Mexico, paragraph (c) of Section 2 of the Annex provides important exemptions from the application of the Annex:

"Nothing in this Annex shall be construed:

(i) to require a Member to authorize a service supplier of any other Member to establish, construct, acquire, lease, operate, or supply telecommunications transport networks or services, other than as provided in its Schedule; or

(ii) to require a Member (or to require a Member to oblige service suppliers under its jurisdiction) to establish, construct, acquire, lease, operate or supply telecommunications transport networks or services not offered to the public generally."587

4.314.
According to Mexico, the services at issue in this dispute are "telecommunications transport … services", governed by Mexico's Schedule. In Mexico's view, pursuant to Section 2(c) (i), nothing in the Annex can be construed to require Mexico to authorize service suppliers from the United States to supply these services beyond the terms and conditions inscribed in its schedule.588 The United States submits that Section 1 of the Annex states that telecommunications has a "dual role as a distinct sector of economic activity and as the underlying transport means for other economic activities." It further submits that Section 2(a) states that the Annex applies to "all measures" affecting access to and use of public telecommunications transport networks and services, which would include measures regulating telecommunications "as a distinct sector of economic activity..." The United States also recalls Section 5(a), which imposes obligations "for the supply of a service included in [a Member's] Schedule," without imposing any limits on the type of service that would be relevant, including basic telecommunications services scheduled by Mexico.589
4.315.
Mexico maintains that the fact that Section 1 (entitled "Objectives") of the Annex on Telecommunications refers to a "dual" role of the telecommunications services sector does not mean that the Annex covers both aspects of this "dual" role. In Mexico's view, Section 1 simply confirms that the Annex is based on the recognition that, beyond constituting a service sector of their own, telecommunications services and networks are essential tools for other economic activities, such as banking, insurance, etc. According to Mexico the fact that these other activities rely heavily on telecommunications services as an underlying transport means that is the raison d'être of the Annex, supporting Mexico's view that the Annex is aimed at addressing the second aspect of the dual role. The first aspect – the supply of basic telecommunications services – was dealt with under the basic telecommunications negotiations that led to the Fourth Protocol to the GATS in 1997.590 Although Section 1 refers to a "dual" role of the telecommunications services sector, it also stipulates that the Annex was agreed to "with the objective of elaborating upon the provisions of the Agreement with respect to measures affecting access to and use of public telecommunications transport networks and services".591 The reference in Section 1 of the Annex to "measures affecting access to and use of" PTTNS must be contrasted with the scope of the provisions of the GATS Annex on Financial Services. Section 1(a) of that Annex states "[t]his Annex applies to measures affecting the supply of financial services. Reference to the supply of a financial service shall mean the supply of a service as defined in paragraph 2 of Article I of the Agreement". Thus, where the negotiators of the GATS intended that an annex apply to the "supply" of a service within the broader meaning of the GATS, they did so explicitly.592
4.316.
According to Mexico the Annex distinguishes between access to and use of public telecommunications transport networks and services, which is relevant to telecommunications services as an underlying transport means for other economic activities, and the supply of such services, which is relevant to trade in telecommunications services as a distinct sector of economic activity.593 In Mexico's view, Section 2 of the Annex makes clear that the Annex is devoted solely to the guarantees of access and use. It explains that Paragraph (a) of Section 2 stipulates that the Annex "shall apply to all measures of a Member that affect access to and use of public telecommunications transport networks and services". In Mexico's view, the Annex is limited in scope and deals only with the right to access and use public telecommunications transport networks and services and not the right to provide and supply them.594 Mexico contends that the services at issue in this dispute are the transport of customer-supplied information or data between two or more points, being themselves "public telecommunications transport networks and services", which cannot be supplied through access to and use of another Member's PTTNS.595 It further submits that, by definition, Mexico's suppliers of "public telecommunications transport networks and services" cannot transport public telecommunications transport services supplied by other suppliers. It explains that, in the circumstances of this dispute, when suppliers from the United States hand off traffic to a Mexican supplier at the border, they rely on the PTTNS provided by that supplier and do not supply their services into Mexico. Mexico contends that basic telecommunications services are the underlying transport means for other economic activities and Mexico fails to see how they could be viewed as a transport means for the same economic activity, which is the implication of the United States' position in this dispute.596
4.317.
Answering a question by the Panel597, Mexico submits that Section 5 of the Annex refers to access to and use of a Member's PTTNS "for the supply of a service included in its schedule", that applies only until the services scheduled by a Member can be supplied by access to and use of another Member's PTTNS.598 According to Mexico, the services that are the subject of this dispute are telecommunications transport and transmission services, which cannot ipso facto be supplied through access to and use of another Member's PTTNS since the latter are, in themselves, "public telecommunications transport networks and services".599 Mexico contends that the United States interpretation would lead to the conclusion that the Mexican postal authority would be transporting United States postal services by delivering mail sent from the United States and handed over at the border, that a pipeline within Mexican territory would be transporting United States pipeline services when it transports oil received from a United States pipeline that stops at the border, and that a Mexican transport company would be performing United States transport services when it delivers the freight that was transferred to it at the border. In Mexico's view, Mexican service suppliers – including public telecommunications transport suppliers – only supply their own transport service.600
4.318.
The United States contends that Mexico's assertion that the services at issue are "transport and transmission" services, is erroneous, as it ignores the text of the CPC codes Mexico has inscribed in its Schedule. In the view of the United States, Mexico's Schedule does not limit its cross-border commitment to only a portion of the service defined in the CPC codes, but the entirety of a telephone call's path, from its point of origin to its point of termination.601 The United States further disagrees with the analogy that Mexico draws with regard to the transport of oil or of goods sent via mail. In case of the transport of goods, the goods are separate products, while a basic telecommunications service – a telephone call or a "communication" is an inseparable part of the service itself. Section 1 of the Annex draws an explicit distinction between telecommunications services as a distinct sector of economic activity and as the underlying transport means for other economic activities.602

2. Application of Sections 5(a) and 5(b) of the Annex

4.319.
The United States submits that, its claims are related to five distinct situations for which, in the United States' view, Mexico has made specific commitments, and for which Mexico must comply with its Annex obligations. According to the United States, under the first two situations, in accordance with Section 5(a) of the Annex, Mexico must ensure that foreign facilities-based and non-facilities based suppliers of cross border telecommunications services are accorded access to and use of public telecommunications transport networks and services (PTTNS) on reasonable and non-discriminatory terms and conditions.603 Under the third and fourth situations, the United States claims that, according to Section 5(b) of the Annex, Mexico must ensure that these suppliers have access to and use of private leased circuits.604 The United States further points out that locally established non-facilities based operators (commercial agencies) must likewise be afforded access to and use of private leased circuits to supply international telephone services.605

(a) Claims under Section 5(a) of the Annex

4.320.
According to the United States, pursuant to the Annex, services suppliers from the United States are entitled to access and use of public telecommunications networks and services. The United States claims that interconnection is the means by which service suppliers from the United States access and use Mexico's public telecommunications networks and services. The United States asserts that its service suppliers must interconnect with the Mexican network in order to ensure they can transport their scheduled service to its final destination in Mexico. The United States further points out that without such access, a service supplier from the United States could never supply a scheduled facilities‑based or non‑facilities‑based basic telecom service.606
4.321.
United States submits that Section 5 of the Annex requires Mexico to ensure that for the supply of a service included in its Schedule, any service supplier of any other Member is accorded access to and use of public telecom transport networks and services on reasonable terms and conditions.607
4.322.
The United States claims that Mexico undertook market access and national treatment commitments for public basic telecom services supplied by facilities‑based operators and non‑facilities‑based operators ("commercial agencies"). In the United States' view, Mexico undertook these obligations on a cross‑border basis, with few limitations, applying to the supply of cross-border public basic telecom services supplied by facilities‑based operators and commercial agencies.608
4.323.
The United States also claims that Mexico's Annex obligations apply to any service supplier from the United States (whether facilities‑based or non‑facilities‑based) wishing to supply the scheduled basic telecom services.609
4.324.
The United States submits that the Annex imposes a broad obligation upon Members to ensure - by whatever measures necessary610 – that service suppliers have broad access to and use of public telecom networks and services to transport their services.611 In the United States' view, interconnection, as defined by Section 2.1 of the Reference Paper612, is the principal method for suppliers from the United States to obtain access and use of Mexican public telecommunications networks and services for the cross-border supply of scheduled basic telecom services.613
4.325.
The United States claims that Mexican law prohibits foreign suppliers from owning public telecom networks and services in Mexico614, preventing such suppliers of scheduled basic telecom services to originate and terminate services over their own networks. The United States submits that its suppliers have no choice but to rely on Mexican suppliers of public telecom networks and services – such as Telmex and others – to transport their service to its final destination.615 According to the United States, this interconnection of its suppliers can take two principal forms: (1) a facilities-based supplier of the scheduled basic telecom services who links its network with that of a Mexican supplier616; or (2) a supplier who does not own facilities and interconnects by leasing circuits from other operators with Mexican public networks and services.617
4.326.
Mexico contends that in its Schedule, for the subsector of "Telecommunications services supplied by a facilities based public telecommunications network through any existing technological medium …", it specifically inscribed in the column "Limitations on Market Access" the following limitations on the modes of supply of (1) cross border-supply and (3) commercial presence:

"(1) None, except the following:

International traffic must be routed through the facilities of an enterprise that has a concession granted by the Ministry of Communications and Transport (SCT).

(3) A concession from the SCT is required. Only enterprises established in conformity with Mexican law may obtain such a concession.

Footnote 1 – Concession: The granting of title to install, operate or use a facilities-based public telecommunications network."618

4.327.
The United States submits that unlike the term "non-discriminatory", the Annex does not define "reasonable". In the United States view, to determine the scope of "reasonable" terms and conditions, a treaty interpreter should look to the ordinary meaning of "reasonable" in its context and in light of the object and purpose of the Annex and the GATS.619 According to the United States, the terms and conditions that Mexico has imposed are unreasonable under the object and purpose of the Annex and the GATS.620
4.328.
Mexico contends that the term "reasonable" set out in Section 5(a) of the Annex does not have the same meaning as the term "reasonable" set out in Section 2.2 of the Reference Paper.621 In Mexico's view, although the ordinary meaning is applicable to the term "reasonable" in both provisions, Section 5(a) of the Annex and Section 2.2(b) of Mexico's Reference Paper provide different contexts for interpreting its meaning.622
4.329.
Mexico submits that in US – Definitive Safeguard Measures on Imports of Wheat Gluten from the European Communities, the Appellate Body stated that "[i]n view of the identity of the language in the two provisions, and in the absence of any contrary indication in the context, we believe that it is appropriate to ascribe the same meaning to this phrase in both Articles 2.1 and 2.2".623 In Mexico's view, where identical language is used in two provisions, it is only appropriate to ascribe the same meaning to the language where there is an "absence of any contrary indication in the context". Mexico contends that the different context of the term "reasonable" in the two provisions necessitates that a different meaning be ascribed to the term. According to Mexico, Section 5(a) of the Annex applies to "access to and use of public telecommunications transport networks" on terms and conditions that are inter alia, "reasonable", while Section 2.2(b) applies to interconnection with a major supplier on, inter alia, cost-oriented rates that are "reasonable". In its view, the two provisions address different subject matters. Mexico claims that these different contexts are important, particularly when interpreting the meaning of a word like "reasonable". Mexico further submits that reasonableness can be judged only within the context of all relevant facts and circumstances because it is those facts and circumstances that provide a basis for reason and expectation.624 Mexico further points out that, in determining whether a service supplier of another Member is accorded "access to and use of public telecommunications transport networks" on terms and conditions that are inter alia, "reasonable", the Panel must examine all relevant facts and circumstances related to access to and use of PTTN.625

(b) Claims under Section 5(b) of the Annex

4.330.
The United States submits that Section 5(a) of the Annex requires Mexico to ensure that service suppliers of other Members can access and use public telecom networks and services on reasonable terms and conditions to provide a scheduled service.626 The United States further submits that, to this end, Section 5(b) of the Annex requires Mexico to ensure that foreign suppliers can access and use private leased circuits offered within and across Mexico's border and interconnect those circuits with public networks and services.627 Consequently, both facilities and non-facilities based suppliers of cross-border telecom services must have access to and use of private leased circuits. Further, established non-facilities based operators (commercial agencies) must likewise be afforded access to and use of private leased circuits under reasonable terms and conditions,to supply scheduled basic telecom services. In the United States' view, Mexico's measures preclude foreign suppliers from offering scheduled basic telecom services over private leased circuits; and are therefore violating the basic obligation to provide access to and use of private leased circuits for the provision of a scheduled service by Mexico.628
4.331.
Mexicocontends that under Mexican law, only companies established in Mexico and qualifying for a "concession" may "install, operate or use a facilities-based public telecommunications network". It contends that under Mexican law, suppliers of facilities-based telecommunications services from the United States are not permitted to provide facilities-based telecommunications services in Mexico. Mexico further submits that it made clear, by specifically inscribing limitations in its Schedule, that suppliers of facilities-based telecommunications services from the United States would not be permitted to supply basic telecommunications services cross-border.629
4.332.
The United States submits that Section 5(b) contemplates both principal forms of interconnection, as follows:

"Each Member shall ensure that service suppliers of any other Member have access to and use of any public telecommunications transport network and service offered within or across the border of that Member, including private leased circuits, and to this end shall ensure, subject to paragraphs (e) and (f), that such suppliers are permitted... (ii) to interconnect private leased or owned circuits with public telecommunications transport networks or with circuits leased or owned by another service supplier."630

4.333.
Mexico claims that there is no basis for the allegation from the United States that Mexico committed itself to cross-border access for facilities-based suppliers of basic telecommunications.631 According to Mexico, the language of Section 5(b) explicitly demonstrates that WTO Members intended and expected that "access to and use of any public telecommunications transport network or service" was something that could be "offered" or not "offered", within or across the border of a particular Member. Mexico claims that it did not "offer" or commit itself to "access to or use of" a public telecommunications transport network or service either within Mexico or across its border. In Mexico's view, two provisions of a treaty - Sections 2(c) (i) and 5(b) - should not be interpreted in a manner which renders one of them ineffective or inutile.632
4.334.
According to the United States, Section 5(b) specifically guarantees that foreign service suppliers may obtain access to and use of Mexican public telecom networks and services through interconnection of private leased or owned circuits.633 The United States maintain that, in both cases, its service suppliers must rely on interconnection with a Mexican supplier of public telecom networks and services – such as Telmex – in order to access and use Mexican public telecom networks and services for the supply of a scheduled basic telecom service between the United States and Mexico. In the United States' view, Mexico must therefore ensure – under Section 5 of the Annex – that suppliers of scheduled basic telecom services from the United States may interconnect with Mexican suppliers on reasonable terms and conditions.634
4.335.
In Mexico's view, Section 2(c) (i) of the Annex exempts Mexico from allowing non-facilities-based suppliers of basic telecommunications services to supply their services cross-border over capacity that they lease from operators in Mexico. Mexico claims that to interpret the Annex otherwise would not only be inconsistent with the provisions of Section 2(c) (i) of the Annex, but would also undermine and render ineffective the express language of the limitations on Market Access inscribed in Mexico's GATS Schedule.635
4.336.
According to the United States, private leased circuits are essentially lines that a user leases from a public telecom operator over which it transports (or supplies) its service. As an example, the United States explains that a bank might lease a line from a public telecom operator over which it sends financial information from its branch in Mexico City to its home office in New York, or a telecommunications company may lease a line from a public telecom operator over which its sends a phone call from its customer in Los Angeles to the end-user in Montreal. In the United States' view, in both cases the service supplier (the bank or the phone company) needs access to a line (a public telecom network or service) to provide a scheduled service (a financial service or a basic telecom service).636 Itclaims that Mexico has not ensured that suppliers from the United States have access to and use of any public telecommunications network and service for the supply of the basic telecom services inscribed in Mexico's Schedule637, failing to honour its commitments under the Annex.638
4.337.
Mexico submits that, even if the Annex were to apply to this dispute, the terms and conditions that Mexico applies on access to and use of PTTNS would have to be considered reasonable. According to Mexico, the Annex allows WTO Members great latitude to regulate access to and use of PTTNS. In Mexico's view the word "reasonable" in Section 5(b) would have to be interpreted broadly to include all relevant facts and circumstances related to interconnection, including the economic feasibility of the terms of access to the Mexican carrier and Mexico.639
4.338.
According to the United States, Section 5(b) of the Annex requires Mexico to ensure that service suppliers of any other Member. "(ii) interconnect private leased or owned circuits with public telecommunications transport networks and services or with circuits leased or owned by another supplier". In the United States view, because the obligation in Section 5(a) of the Annex apply to paragraph (b), Mexico must ensure that foreign suppliers have access to and use of such private leased circuits on reasonable terms and conditions for the supply of scheduled services. The United States further points out that in this case, the analysis need not to extend to whether the "terms and conditions" are reasonable and non‑discriminatory, because Mexico has failed to ensure any access to and use of private leased circuits for the supply of scheduled services640, acting inconsistently with its obligations under Section 5(a) and (b) of the Annex.641
4.339.
The United States claims that Mexico has failed to comply with Section 5 of the Annex with respect to the market access and national treatment commitments it undertook for the: (1) cross‑border (mode 1) supply of facilities‑based basic telecom services; and (2) the cross‑border (mode 1) and domestic (mode 3) supply of non‑facilities‑based basic telecom services. The United States submits that, to avoid any confusion, the claims it makes related to private leased circuits address the delivery of scheduled public basic telecom service using private leased circuits.642
4.340.
The United States contends that Mexico scheduled market access and national commitments to allow non‑facilities‑based suppliers ("commercial agencies") to provide basic circuit‑switched telecom services to third parties over a private (i.e., dedicated) circuit that it leases from a concessionaire.643 The United States recalls that according to Mexico's Schedule, commercial agencies do not supply basic telecom services over their owned facilities but over capacity they lease from a licensed facilities-based telecom operator.644 The United States points out that the supply of telecommunications over leased capacity is typically known as "resale", but Mexico's Schedule uses the phrase "commercial agencies".645 The United States recalls that "leased capacity" is essential to the supply of this scheduled service, because without access to such capacity, a commercial agency cannot, according to Mexico's definition, supply its service. The United States submits that private leased circuits – not defined in the Annex – are generally understood to mean telephone lines leased from a phone company that are specifically dedicated to a customer's use.646
4.341.
The United States submits that Mexico undertook these commitments for the cross‑border supply of services (mode 1) over leased capacity from the territory of one Member (e.g., the United States) into the territory of any other Member (i.e., Mexico). According to the United States, Mexico limited this mode 1 commitment to ensure that foreign commercial agencies route international traffic through the facilities of a "concessionaire". The United States claims that Mexico committed to allow a foreign, non‑facilities‑based supplier to offer telecom services from the territory of the United States into the territory of Mexico over capacity leased from a public network concessionaire (i.e., private leased circuits). The United States points out that the cross‑border supply of a basic telecom service over leased capacity is typically known as International Simple Resale (ISR).647
4.342.
The United States recalls that Mexico also undertook commitments for locally-established (mode 3) commercial agencies, with certain limitations. The United States points out that a foreign service supplier should be able to own 100 per cent of a locally established commercial agency, because Mexico did not schedule a foreign ownership limitation for such services. The United States argues that, because Mexico did not indicate otherwise, this mode 3 commitment allows a locally established commercial agency to provide international basic telecom services over leased capacity.648
4.343.
The United States contends that Mexico undertook mode 1 and mode 3 commitments for services, which require access to and use of private leased circuits for their supply. The United States claims that its suppliers cannot supply basic telecom services over leased capacity on a cross-border basis if they cannot lease private leased circuits from a Mexican supplier. The United States further points out that its suppliers can not establish a commercial presence to supply international basic telecom services over leased capacity if they cannot lease private leased circuits from a Mexican supplier. The United States recalls that Mexico does not permit its basic telecom service suppliers to lease such circuits for these services and therefore precludes the supply of mode 1 and mode 3 commercial agency services.649
4.344.
Mexico submits that with respect to access through commercial presence for non-facilities based suppliers, the United States argues that Mexico committed to the establishment of commercial agencies and to the provisions of services by such agencies through private leased circuits, i.e. ISR.650 Mexico claims that its mode 3 (commercial presence) commitment for commercial agencies is subject to the following limitations:

"A permit issued by the SCT is required. Only enterprises set up in accordance with Mexican law may obtain such permit.

Foreign governments may not participate in an enterprise set up in accordance with Mexican law nor obtain any authorization to provide telecommunication services.

Except where specifically approved by the SCT, public telecommunications network concessionaires may not participate, directly or indirectly, in the capital of a commercial agency.

The 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."651

4.345.
Mexico submits that the permit requirement is central to the limitation. According to Mexico, because at the time the limitation was inscribed, permits were not issued by the SCT, then it is equivalent to a zero quota, falling the requirement within the category of "limitations on the number of service suppliers" in paragraph (a) of GATS Article XVI:2.652
4.346.
Answering a Panel's question653, the United Statescontends that Mexico's refusal to adopt regulations necessary to issue commercial agency permits violates Mexico's obligation under Section 5(b) of the Annex on Telecommunications to ensure that service suppliers have access to and use of private leased circuits.654 The United States further submits that Telmex, through its subsidiary in the United States, assured the FCC that Mexico's WTO commitments requires Mexico "promptly" to adopt the relevant regulations and issue reseller permits.655
4.347.
The United States submits that Mexico also undertook cross‑border market access and national treatment commitments for specific public basic telecom services supplied by a facilities‑based operator. According to the United States, Mexico limited this commitment to ensure that foreign service suppliers route international traffic through the facilities of a Mexican concessionaire. The United States contends that, for the supply of these public facilities‑based services from the territory of the United States into the territory of Mexico, Mexico promised to accord market access and national treatment to suppliers of these services provided that the service supplier, from the United States, routes international traffic through the facilities of a Mexican concessionaire.656
4.348.
According to the United States, access to and use of private leased circuits is essential to the supply of the following services inscribed in Mexico's Schedule: (a) facilities‑based services (i.e., voice telephone, circuit‑switched data, facsimile services by a facilities‑based operator from the United States into Mexico) supplied on a cross‑border basis; (b) commercial agencies (i.e., basic telecom services by a non‑facilities‑based operator over leased capacity from the United States into Mexico) supplied on a cross‑border basis; and (c) locally established commercial agencies (i.e., basic telecom services by a non‑facilities‑based operator over leased capacity from Mexico into the United States). The United States claims that Mexico has failed to ensure that private leased circuits are available for the supply of these scheduled services.657
4.349.
The United States submits that Mexico committed under Section 5(a) and (b) to ensure that foreign facilities-based suppliers, foreign commercial agencies and locally established commercial agencies have access to and use of private leased circuits to supply scheduled international basic telecom services over such circuits and can interconnect such circuits with public telecom networks and services. The United States contends that because Mexican suppliers offer private leased circuits to their customers, then Mexico must ensure that these circuits are available to all suppliers of scheduled basic telecom services.658 The United States claims that foreign suppliers do not have access to and use of private leased circuits to supply scheduled basic telecom services. The United States further submits that Mexican suppliers have refused to provide these circuits, Mexican law prevents foreign basic telecom service suppliers from using such circuits, and Mexican authorities continue to refuse to permit the supply of scheduled services over leased capacity. According to the United States, these restrictions prevent foreign service suppliers from accessing and using private leased circuits to supply scheduled basic telecom services.659
4.350.
The United States submits that its suppliers based in the United States have no access to private leased circuits for the supply of scheduled basic telecom services and even if they did, Mexican ILD Rules prevent foreign suppliers from interconnecting private leased circuits with public telecom network services, violating the obligation to provide access to and use of private leased circuits.660 It claims that Telmex has refused to make private leased circuits available for the cross-border supply of scheduled voice telephone services661, and that Mexican authorities have done nothing to ensure that Telmex or any other supplier provides these leased circuits to suppliers from the United States for the cross-border supply of scheduled basic telecom services.662
4.351.
The United Statescontends that Mexico not only has failed to ensure that its suppliers provide private leased circuits to foreign suppliers for the cross‑border supply of scheduled basic telecom services but has also maintained measures that preclude foreign suppliers from ever using these circuits to supply such services.663 The United States recalls that under Mexico's ILD Rule 3664, a foreign supplier cannot interconnect a private circuit leased in Mexico with foreign public networks and services for the provision of scheduled basic telecom services.665 The United States submits that according to this Rule, only "international port operators" may interconnect with the public telecommunications networks of foreign operators in order to supply basic telecom services, but Mexican ILD Rules require an international port operator to be a supplier with a concession to supply long-distance services and Mexican law prohibits non‑Mexican entities from holding such a concession, since Mexico inscribed this nationality restriction for concessionaires in its Schedule.666
4.352.
The United States contends that the interconnection of a private circuit leased in Mexico with the public telecom network in the United States is essential to the cross-border provision of public basic telecom services over private leased circuits, which is a commitment included in Mexico's Schedule. Because a non facilities-based service supplier cannot be a long-distance concessionaire, it cannot interconnect a private circuit leased in Mexico with the public telecom network in the United States, as it is unable to supply the scheduled public telecom service.667
4.353.
The United States submits that Mexico undertook cross‑border commitments for "commercial agencies", which Mexico defined as the supply by non‑facilities‑based providers of telecommunications services to third parties over capacity leased from a Mexican concessionaire. According to the United States, by Mexico's definition, the supply of this international "resale" service requires a Mexican concessionaire to provide a foreign service supplier access to and use of private leased circuits. The United States claims that without such circuits, foreign suppliers cannot provide cross‑border telecom services as commercial agencies.668 The United States recalls that Sections 5(a) and (b) of the Annex ensure that foreign commercial agencies have access to and use of these circuits and can interconnect these circuits with public telecom networks and services on reasonable terms and conditions to provide "resale" services on a cross‑border basis – services that cannot be supplied without such circuits. In the United States' view, Mexico has failed to comply with these commitments, prohibiting foreign service suppliers from offering this "resale" service that it scheduled. The United States further points out that even if Mexico permitted foreign suppliers to offer this "resale" service, ILD Rule 3 precludes the supply of this service by preventing all commercial agencies (domestic and foreign) from interconnecting private leased circuits with foreign telecom networks.669
4.354.
The United States submits that the policy of the Mexican Government – since undertaking commitments for commercial agencies – has been to refuse to permit any foreign carrier from supplying international "resale" services (i.e., international telecom services supplied over private leased circuits). Eight months after finalizing its "commercial agencies" commitments, the then‑Secretary of Mexico's Secretariat of Communications and Transportation (SCT) wrote a letter to the then‑Chairman of the FCC stating that the policy of his Government was to forbid the resale of "long‑distance public network capacity in Mexico".670 The United States claims that, in other words, although Mexico had committed to its WTO partners that it would permit commercial agencies to provide all forms of telecommunications services to third parties over resold capacity, Secretary Ruiz Sacristán affirmed that Government of Mexico had no intention of allowing telecom operators to do so.671 The United States further submits that Secretary Ruiz Sacristán reaffirmed this position in a 8 May 1998 letter to then‑USTR Charlene Barshefsky. According to the United States, Ambassador Barshefsky wrote to both Secretary Ruiz Sacristán and Secretary Herminio Blanco Mendoza (then‑Secretary of Commerce and Industrial Development) on 4 April 1998 to express her deep concern over Mexico's implementation of its GATS basic telecom commitments, including "Mexico's failure to permit unrestricted domestic and international resale of telecommunications services (including international simple resale) ".672 The United States recalls that Secretary Ruiz Sacristán responded that Mexico's WTO commitments did not include these services.673
4.355.
The United States contends that, by expressing his Government's refusal to permit the domestic and international resale of telecommunication services, Secretary Ruiz Sacristán acknowledged Mexico's failure to honour its scheduled commitment to allow "commercial agencies" to supply cross‑border telecommunications services to third parties over leased capacity (i.e., private leased circuits).674
4.356.
According to the United States, Mexico undertook a mode 3 commitment for commercial agencies promising to permit foreign suppliers to acquire a 100 per cent interest in a local non-facilities-based supplier and offer international telecommunications services to third parties over capacity leased from a Mexican concessionaire. The United States points out that the supply of this international "resale" service requires a Mexican concessionaire to provide a foreign service supplier access to and use of private leased circuits.675 The United States further submits that Sections 5(b) of the Annex obliges Mexico to ensure that foreign service suppliers: (1) have access to and use of the private leased circuits they need to supply this scheduled resale service; and (2) can interconnect such circuits with public telecom networks and services. The United States claims that Mexico has failed to comply with these obligations by not permitting non‑facilities‑based service suppliers (commercial agencies) to establish locally and supply international telecom services from Mexico over private leased circuits. The United States further points out that ILD Rule 3 prevents all commercial agencies from interconnecting private leased circuits with foreign telecom networks, preventing Mexico from complying with its commitments under the Annex.676
4.357.
The United States submits that to its knowledge, Mexico does not permit foreign non‑facilities‑based suppliers to establish locally and supply third parties international telecommunications services over private leased circuits.677 The United States recognizes that Mexico conditioned the mode 3 supply of "commercial agencies" on the issuance of the relevance regulations, but claims that over five years have elapsed since Mexico finalized this commitment in February 1997 (and four years have elapsed since this commitment entered into force in February 1998), and Mexico still has not issued – and has indicated no intention to issue – the relevant regulations. According to the United States, the refusal to issue such regulations raises questions about whether Mexico ever intends to implement this scheduled mode 3 commitment for commercial agencies.678
4.358.
Mexico replies that there is nothing in the wording of the limitations that indicates that Mexico has made a commitment to issue the corresponding regulation within a certain time-frame. According to Mexico, the issuance of the regulation is at the discretion of the Mexican authorities taking into account the transition occurring in the Mexican telecommunications market. Mexico claims that the fact that the regulation has not yet been issued does not nullify the limitation.679 Furthermore, Mexico has issued regulations for the establishment and operation of commercial agencies for pay-telephone public services. Based on those regulations, Mexico has granted 59 permits for public pay phone commercial agencies. 35 of those agencies have begun operations and five of them have foreign capital.680
4.359.
The United Statessubmits that it is not inconsistent with the obligation under Section 5(b) of the Annex to require that cross-border service suppliers route traffic through the facilities of a Mexican concessionaire. According to the United States, the routing requirement is one way in which a member may satisfy the obligation in Section 5(b). In its view, the routing requirement included in Mexico's Schedule, interpreted according to the rules of interpretation in the Vienna Convention, permit service suppliers from the United States to provide basic telecommunications services into Mexico over capacity leased from a Mexican concessionaire.681
4.360.
In response to question No. 27 of the Panel on 19 December 2002, Mexico submits that Section 5(b) relates to "access to and use of" private leased circuits and the interconnection of those circuits with the PTTNS or with other leased circuits. Mexico notes that, in the context of the claims being raised by the United States, this provision does not entitle service suppliers of any other Member to supply public telecommunications services over private leased circuits. In Mexico's view, Section 5(b) does not entitle service suppliers of the United States to offer ISR into Mexico. According to Mexico, this interpretation is confirmed by Section 2(c) (i) which: (i) refers to Schedule limitations; and (ii) which refers to available services and networks. Mexico submits that its Schedule, which includes the routing restriction, denies any market access for service suppliers from the United States to provide ISR into Mexico.682 In the same line, Mexico submits that ISR services are prohibited under Mexican law as manifested in its Schedule. Therefore, ISR was "not offered to the public generally" within the meaning of Section 2(c) (i) of the Annex.683

3. Application of Sections 5(e), 5(f) and 5(g) of the Annex

4.361.
Mexico contends that, even if the Annex were to apply to this dispute, the United States has failed to present a prima facie case under Section 5 of the Annex, because it has not attempted to establish the requisite elements for a challenge under that provision.684 Mexico submits that although the United States acknowledges that the obligation in Section 5(a) must be applied through paragraphs 5(b) through 5(f)685, it interprets Sections 5(a) and 5(b) in isolation. Mexico claims that one cannot demonstrate a violation of Section 5 without adducing evidence sufficient to raise a presumption that the measures at issue are inconsistent with paragraphs (e) and (f) of Section 5, as follows:

"(e) Each Member shall ensure that no condition is imposed on access to and use of public telecommunications transport networks and services other than as necessary:

(i) to safeguard the public service responsibilities of the suppliers of public telecommunications transport networks and services, in particular their ability to make their networks or services available to the public generally;

(ii) to protect the technical integrity of public telecommunications transport networks or services: or

(iii) to ensure that services suppliers of any other Member do not supply services unless permitted pursuant to commitments in the Member's Schedule.

(f) Provided that they satisfy the criteria set out in paragraph (e), conditions for access to and use of public telecommunications transport networks and services may include:

(i) restrictions on resale or shared use of such services;

(ii) a requirement to use specified technical interfaces, including interface protocols, for inter-connection with such networks and services;

(iii) requirements, where necessary, for the inter-operability of such services and to encourage the achievement of the goals set out in paragraph 7(a);

(iv) type approval of terminal or other equipment with interfaces with the network and technical requirements relating to the attachment of such equipment to such networks;

(v) restrictions on inter-connection of private leased or owned circuits with such networks or services or with circuits leased or owned by another service supplier; or

(vi) notification, registration and licensing."686

4.362.
Mexico submits that since the general obligation in Section 5(a) is required to be applied through paragraphs (e) and (f), the United States cannot establish a violation of paragraphs (a) and (b) of Section 5 without also demonstrating that Mexico's measures are not permitted by paragraphs (e) and (f). According to Mexico, these paragraphs are part of the same provision and must be read together to determine the meaning of a Member's obligation under Section 5.687 Mexico contends that in EC – Hormones688, the Appellate Body found that a general rule-exception relationship between Articles 3.1 and 3.3 of the Agreement on the Application of Sanitary and Phytosanitary Measures did not exist, bringing to the complainant the burden of proof to establish a case of inconsistency with both Articles 3.1 and 3.3. In Mexico's view, since there is no general rule-exception relationship between Section 5(a) and 5(b) of the Annex, the United States, as complaining party, has the burden of establishing a case of inconsistency with all four provisions.689 Mexico claims that even if the obligations in Section 5(a) and (b) of the Annex were found to apply to the measures at issue, those measures are consistent with Mexico's rights and obligations under paragraph (e), (f) and (g) of Section 5 of the Annex.690 Mexico further submits that its restrictions on access to and use of public telecommunication transport networks and services are no more than necessary to ensure that foreign suppliers of facilities-based and non-facilities-based telecommunications transport services do not illegally bypass the accounting rate regime contrary to the clear intention of the limitations on market access set forth in Mexico's Schedule. Mexico recalls the definition of "necessary" as interpreted by the Appellate Body in the context of paragraph (d) of Article XX of the GATT 1994.691
4.363.
The United States contends that it does not consider Sections 5(e) and 5(f) necessary to establish a claim under Section 5(a) and 5(b) of the Annex and considers that Mexico's conditions on access and use are not justified by Section 5(e) and 5(f). As an example, the United States refers to Mexico's argument that its restriction on resale are consistent with Section 5(e) as necessary to enforce the limitations on market access inscribed in its Schedule692, which, according to the United States is not accurate, since Mexico's Schedule authorizes cross-border suppliers to provide basic telecommunications services, subject only to the limitation that they route traffic through the facilities of a concessionaire.693
4.364.
According to the United States, Sections 5(e) and 5(f) are not elements of a prima facie claim under Sections 5(a) or (b) of the Annex. It disagrees with the analogy to Articles 3.1 and 3.3 of the Agreement on the Application of Sanitary and Phytosanitary Measures. In the United States' view, the Mexican assertion that "there is no general rule-exception relationship" between Sections 5(a) -(b) and 5(e) -(f) of the Annex694, has no support. The United States points out that, like Section 5(f), Article XX of the GATT includes a list of measures that may fall within the scope of the provision (Articles XX(a) -(j)). It further points out that like Section 5(e), Article XX(d) requires that to fall within the scope of the provision, a measure must be deemed "necessary" to achieve a particular goal. The United States claims that, in the context of Article XX(d), the Appellate Body has expressly found that the burden of satisfying the "necessity" test falls on the Member invoking the provision.695
4.365.
Mexico submits that the obligations in Section 5(a) and 5(b) are qualified in an important manner by Section 5(e) and 5(f), constraining the rights of users under Section 5(a) and (b). According to Mexico, it is incorrect to argue that it has to provide unconditional access to and use of Mexico's PTTNS and to allow the use, and interconnection with the public networks, of private leased lines facilities-based and non-facilities-based suppliers from the United States. It further submits that paragraphs 5(e) and 5(f) are not of the nature of exceptions or affirmative defences, but key substantive provisions that define the rights of regulators to restrict the access to and use of public telecommunications transport networks and services. In Mexico's view, the United States has the burden of establishing that the terms and conditions on access and use maintained by Mexico exceed or go beyond Mexico's rights as a regulator.696
4.366.
The United States submits that in any event, while Mexico may have imposed conditions on access to and use of public telecommunications transport networks and services that fall within the meaning of Section 5(f), those conditions are "other than as necessary" to satisfy the criteria in Sections 5(e) (i) -(iii). According to the United States, since the conditions do not "satisfy the criteria set out in Section 5(e) ", Mexico is not permitted to maintain those conditions, pursuant to Section 5(f).697
4.367.
According to the United States, three conditions are inconsistent with Sections 5(a) or 5(b) of the Annex and not necessary to achieve the goals listed in Section 5(e) (i) -(iii); first, under ILD Rule 13, Mexico conditions United States suppliers' access to and use of public telecommunications networks and services on negotiating exclusively with Telmex698; second, the refusal to make private leased circuits available to United States facilities-based suppliers, United States non-facilities-based suppliers ("commercial agencies") and locally-established commercial agencies for the supply of scheduled voice telephone services699; and third, to limit the authority to interconnect private leased circuits to international port operators. The United States claims that even if United States facilities-based suppliers, United States non-facilities-based suppliers ("commercial agencies") and locally-established commercial agencies were granted access to and use of private leased circuits from Mexican suppliers, ILD Rule 3 prohibits them from interconnecting those leased circuits with foreign public networks and services. The United States recalls that Rule 3 limits the authority to interconnect private leased circuits to an international port operator, which must be a Mexican entity.700In the United States' view, each of these three conditions is "other than as necessary" to satisfy the criteria of Section 5(e) (i) -(iii). The United States considers that the Panel does not need to define precisely what degree of "necessity" is required here.701
4.368.
Mexico contends that even if the obligations in Sections 5(a) and (b) of the Annex were found to apply to the measures at issue, those measures are consistent with Mexico's rights and obligations under paragraph (g) of Section 5.702
4.369.
The conditions or restrictions applied by Mexico on access to or use of public telecommunications networks and services by foreign suppliers of facilities-based and non-facilities-based basic telecommunications are "necessary" to enforcing the limitations on market access specifically inscribed in Mexico's Schedule. Mexico's ban of ISR is consistent with Mexico's level of development and "place[s] reasonable conditions on access to and use of public telecommunications transport networks and services necessary to strengthen its domestic telecommunications infrastructure and service capability and to increase its participation in international trade telecommunications services" within the meaning of paragraph (g) of Section 5 of the Annex. These measures are integral conditions to the limitations specified in Mexico's Schedule.703
4.370.
The United States contends that Section 5(g) explicitly requires that any conditions restricting access to and use of private leased circuits, as in Mexico, "shall be specified in the Member' s Schedule." However, Mexico specified no such condition prohibiting the use of private lines in its Schedule. Mexico's inclusion of a routing restriction under mode 1 does not provide a basis for Mexico to prohibit the use of private leased circuits. As long as the circuit is leased from a concessionaire, it is consistent with the requirement to route international traffic through the facilities of a concessionaire. For this reason alone, Mexico cannot rely on Section 5(g). Even if Mexico had included such a condition in its Schedule, there is no basis to conclude that the prohibition on the use of private leased circuits in Mexico otherwise satisfies the criteria of Section 5(g). Mexico's assertion that this restriction is "necessary to strengthen its domestic telecommunications infrastructure and service capacity and to increase its participation in international trade in telecommunications services" is unsupported, and cannot substitute for evidence and cannot form the basis for the factual findings that would be necessary to justify Mexico's invocation of this subparagraph.704

V. ARGUMENTS OF THE THIRD PARTIES

5.1.
From the third parties in these proceedings, i.e. Australia, Brazil, Canada, Cuba, the European Communities, Guatemala, Honduras, India, Japan and Nicaragua, only Australia, Brazil, the European Communities and Japan filed their comments within the deadline and presented Oral Statements during the third party session.

A. AUSTRALIA

1. Informal Understanding on Accounting Rates

5.2.
Australia recalls that this dispute raises the issue of the informal Understanding on Accounting Rates (informal Understanding) which has been in place since the 1996 Negotiations on Basic Telecommunications, and is reflected in the Report of the Group on Basic Telecommunications of 15 February 1997.705
5.3.
In Australia's view, as the informal Understanding was never affirmed by the Council for Trade in Services or the General Council, and so did not become a formal Understanding, it therefore does not present a legal barrier to disputes being taken by WTO Members in respect of the application of accounting rates.706
5.4.
Furthermore, Australia contends that even if the moratorium did at any time present a legal barrier to such disputes, then that legal barrier no longer exists as it expired on 1 January 2000, in accordance with the clear intention of the WTO Members as reflected in the informal Understanding.707

2. Scope of "interconnection" in Section 2 of the Reference Paper

5.5.
Australia submits that this dispute raises the issue of the scope of the term "interconnection" as used in section 2 of the Reference Paper.708Australia recalls that the scope of "interconnection" has important implications for the application of the obligations in the mentioned section of the Reference Paper.709
5.6.
In view of the above, Australia contends that the issue at stake is whether the term "interconnection" should be understood as applying only to interconnection within the borders of a Member that has inscribed the Reference Paper in its Schedule of Commitments (in-country interconnection), or whether it also applies to the interconnection of public telecommunications networks within such a Member's borders with telecommunications networks external to that Member's borders (international interconnection)710; and whether "interconnection" as used in section 2 of the Reference Paper covers accounting rates.711
5.7.
Australia states that, as the Reference Paper does not explicitly restrict interconnection to in-country interconnection then, in principle, the Reference Paper obligations relating to interconnection apply to international interconnection.712

3. Interconnection and accounting rates

5.8.
Australia notes that in its view, "accounting rates" are specific sets of arrangements for the pricing of a subset of interconnection arrangements. Australia considers that, as the Reference Paper applies to international interconnection, these pricing arrangements must be consistent with the Reference Paper obligations with respect to interconnection.713
5.9.
Australia notes that underpinning the informal Understanding on Accounting Rates is the assumption of Members that interconnection obligations under the Reference Paper would apply to international interconnection and, in the absence of the Understanding, give rise to disputes.714

4. Meaning of "cost-oriented" rates in section 2.2(b) of the Reference Paper

5.10.
Australia considers that the Reference Paper provides a framework for the competitive supply of telecommunications services in markets where there is a major supplier that can affect the terms of participation through control over essential facilities or by use of its market position.715
5.11.
In Australia's view, a main concern is to develop greater clarity concerning, and acceptance of, interconnection obligations, and particularly in relation to the requirement stated in paragraph 2.2 of the Reference Paper.716
5.12.
Australia further points out that the Reference Paper does not elaborate on what is meant by "cost-oriented rates". Australia submits that any interpretation of "cost-oriented rates" should be consistent with these criteria of transparency, reasonableness, economic feasibility and unbundled elements. Australia submits that the Panel must form a view of the meaning of "cost-oriented rates" that is consistent with these criteria so that the Reference Paper promotes telecommunications competition (and through that, trade in telecommunications services). Australia's view is that an interpretation of "cost-oriented rates" that is too broad would undermine the effect of the Reference Paper as a whole, and is clearly contrary to its intent.717
5.13.
According to Australia, recommendations of the ITU provide some guidance on relevant cost components in the development of cost-based rates. In addition, Australia submits that the Panel should, in its interpretation of "cost-oriented rates", consider the application of dynamic costing models for interconnection in GATS Member countries that are encouraging the competitive supply of telecommunications networks and services.718

B. BRAZIL

1. Introduction

5.14.
According to Brazil, to analyse this dispute the Panel should take into account the scope and reach of the specific commitments of market access and national treatment undertaken by Mexico. Brazil considers that, for that purpose, the Panel should analyse Mexico's commitments in light of the national treatment discipline of the GATS as set out in its Article XVII and as qualified by footnote 15 of the GATS. Brazil submits that in conducting this analysis the Panel should take into account the applicability of the national treatment discipline in relation to the four modes of supply of services, as defined in GATS Article I:2(a) to (d), particularly as regards "mode 1".719720
5.15.
Brazil states that the Panel should consider whether the national treatment discipline applies individually to each mode of supply or whether it applies across all modes noting that, for the purposes of the application of the GATS Annex on Basic Telecommunications, the disciplines of "non-discrimination" contained in Article II (Most-Favoured Nation) and Article XVII (National Treatment) of the Agreement are qualified by the concept of "like circumstances", as set out in footnote 15 of the GATS.721
5.16.
Brazil submits that it can be inferred from Article XVII.1 and footnote 15 that the meaning and the scope of the national treatment obligation lies in the definition of likeness. Brazil considers that this determination can only be made in relation to each mode of supply and not "across modes". Under Brazil's view, the scope of the national treatment obligation is given much more legal certainty by the interpretation that it applies for and within each mode of supply individually, with likeness being defined on the basis of the concept of "like circumstances".722
5.17.
According to Brazil it seems inconsistent to compare with the same common reference different categories of service suppliers and the services they supply, because in that thinking a full National Treatment in mode 3 would be necessary to grant full national treatment in modes 1, 2 and 4, since they would be "like" services suppliers.723

2. Scope and reach of specific commitments

5.18.
Brazil submits that, in the first column of its Schedule of Specific Commitments, Mexico, confined the definition of "Telecommunication Services" to those services "supplied by a facilities-based public telecommunications network (wire-based and radioelectric) through any existing technological medium". Accordingly, Brazil states that one could conclude that Mexico has not committed to ensure the rights and obligations established in the GATS to suppliers that are not "facilities-based".724
5.19.
However, Brazil argues that under subsector "o – Other" of its Schedule of Specific Commitments, Mexico undertook commitments regarding "commercial agencies", which according to Mexico's are those "which, without owning transmission means, provide third parties with telecommunication services by using capacity leased from a public network concessionaire". According to Brazil this definition seems equal to the one provided by the United States in paragraph 24 of its submission. Brazil submits that the supply of basic telecom services over leased capacity is referred to in the industry as "resale".725
5.20.
According to Brazil, although Mexico's definition of "Telecommunications services" would suggest that its commitments were applicable exclusively to "facilities-based suppliers", Mexico undertook specific commitments for "commercial agencies/resale". In this regard, Brazil notes that commitments under mode 1 for "facilities based suppliers" are the same as those undertaken for "private-leased circuits".726
5.21.
Brazil contends that Mexico's specific commitments regarding "commercial agencies" read, for mode 1, in the market access column "none, except as indicated in 2.C.1".Brazil recalls that in 2.C.1, for mode 1, the Schedule reads: "none, except the following: international traffic must be routed through the facilities of an enterprise that has a concession granted by the "Ministry of Communications and Transport (SCT) ". Therefore, under Brazil's point of view, the limitation inscribed in 2.C.1 is equally valid for the market access column in mode 1 for "commercial agencies".Brazil recalls that in the National Treatment column, for mode 1, is written "none" for "commercial agencies".727

3. Non-discrimination and the concept of "like circumstances"

5.22.
Brazil submits that one of the main objectives of the GATS is the achievement of progressively higher levels of liberalization and one of the main ways of accomplishing that goal is the elimination of all discrimination between services and services suppliers of the Parties to the Agreement. According to Brazil, that seems to be the basic rationale behind Articles II ("Most-Favoured Nation") and XVII ("National Treatment").728
5.23.
According to Brazil, footnote 15 of the GATS goes one step further and establishes that: the term "non-discriminatory" is understood to refer to most-favoured-nation and national treatment as defined in the Agreement, as well as to reflect sector-specific usage of the term to mean "terms and conditions no less favourable than those accorded to any other user of like public telecommunications transport networks or services under like circumstances".729
5.24.
In Brazil's view, it can be inferred from Article XVII.1 and footnote 15 that the meaning and the scope of the national treatment obligation lies in the definition of "like services and service suppliers" and "under like circumstances". According to Brazil, there is nothing in the language of Article XVII and of footnote 15 suggesting that the mode of supply is a consideration in defining the "likeness" of a service or of a service supplier. However,Brazil recalls that GATS' commitments are inscribed in national schedules by mode of supply, which allows for the perception that the whole architecture of the Agreement stems from the clear separation between the four modes, as defined in Article I of the GATS. Brazil submits that even when full commitments are entered in all four modes in a given sector or subsector, the extent to which services and services suppliers operating in different modes can be considered "like" remains unclear. Therefore it is not evident, for Brazil, how national treatment should apply to them. According to Brazil, the same situation arises in regard to the interpretation of Mexico's commitments.730
5.25.
In view of the above, Brazil contend that two possible interpretations should be considered. The first interpretation borrows from one of the approaches identified in the "jurisprudence" on trade in goods, which is to define likeness in terms of the essential characteristics of the products. In a services context this would perhaps mean that services and/or service suppliers would be considered "like" on the basis of the nature of the economic activity being performed regardless of the territorial presence of the supplier and the consumer. Under this point of view all service suppliers operating in the same sector would be considered "like service suppliers" and all the services supplied in the same sector would be considered "like services". In this case, if all services suppliers are "like" services suppliers, the only possible way of defining the national treatment obligation is to compare the treatment granted to all foreign services suppliers altogether regarding the treatment granted to national services suppliers based in their home country. Brazil states that, if the determination of likeness is independent of the mode of supply, it follows that national treatment applies across modes in relation to a same common reference: national services suppliers in their home country.731
5.26.
Brazil further points out that in the second possible interpretation, the definition of "like services and service suppliers" would be based on a comparison of the service suppliers that operate under like circumstances, as mentioned in footnote 15 of GATS. Brazil considers that this logic follows the other approach to likeness identified in jurisprudence on trade in goods, which is to define it on the basis of the "aims and effects" or of the regulatory objective being pursued by a certain measure affecting the product or its producers. Brazil notes that in this connection, services and/or service suppliers would be considered "like" only if they are subject to the same regulatory framework. According to Brazil, in this interpretation, likeness becomes a function of the mode of supply, being defined only within each mode individually. Brazil states that in this possible interpretation, if one assumes that there are four categories of services suppliers, it seems inconsistent to compare those services suppliers and the services they supply with the same common reference.732
5.27.
Brazil submits that the question to be answered seems to be: is Mexico under the obligation of granting foreign services and service suppliers the same treatment it accords Mexican services and services suppliers in mode 1 ‑ for instance, the same treatment Mexico would grant to Mexican service suppliers based outside the territory of Mexico ‑ or is Mexico under the obligation of granting foreign services and service suppliers the same treatment it accords to Mexican services and service suppliers based in the Mexican territory? According to Brazil, if this question is not given an answer, it seems to be impossible to judge any claimed violation of Mexican commitments, including as regards, for instance, Mexico's obligations under paragraphs 5(a) and 5(b) of the Annex on Telecommunications in relation to the supply of scheduled telecommunication services in mode 1.733
5.28.
Brazil contends that the legal uncertainty regarding the scope of the national treatment obligation seems to be greatly reduced by the interpretation that this basic obligation applies for and within each mode of supply individually, with "likeness" being defined on the basis of the concept of "like" circumstances. Brazil submits that this interpretation would be much more in conformity with the four-mode logic that constitutes the very foundation of the GATS. Brazil considers that this logic implies that services and services suppliers operating through different modes cannot always be treated as "perfect substitutes" because, in reality, they will be subject to different regulatory frameworks. Brazil recalls that this approach is in keeping with the "principle of equality" (from which flows the concept of like circumstances), according to which the same treatment must be accorded to persons under the same condition and similarly situated.734

C. EUROPEAN COMMUNITIES

5.29.
The European Communities recalls that the United States' claims, in its first written submission to this Panel, are based exclusively on alleged violations of Mexico's additional commitments on Telecommunications under Article XVIII of the GATS as incorporated via the Fourth Protocol to the GATS and based on the Reference Paper (Sections 1.1, 2.1 and 2.2); and alleged violations of the Sections 5(a) and 5(b) of the GATS Annex on Telecommunications.735
5.30.
The European Communities notes that the request for the establishment of the Panel and therefore the Panel's terms of reference also include Article XVII of the GATS. The European Communities recall that the original request for the establishment of a panel in this case also alleged violation of Article VI:1, VI:5, XVI:1, XVI:2, XVII:1, XVII:2 and XVII:3 of the GATS as well as many other provisions of the Reference Paper and the Annex on Telecommunications. Under the European Communities point of view these additional claims now seem to have been abandoned.736
5.31.
Under the European Communities' view, a correct analysis of Mexico's obligations has to start by considering the relevant specific commitments of Mexico.737

1. Interpretation of Mexico's specific commitment under mode 1

5.32.
The European Communities recalls that the relevant commitment in telecommunications services under mode 1 and the limitations column contains the following:

"(1) None, except the following:

International traffic must be routed through the facilities of an enterprise that has a concession granted by the Ministry of Communications and Transport."738

5.33.
According to the European Communities, this commitment is rendered obligatory and must therefore be read in the light of Article XVI of the GATS.739
5.34.
The European Communities further points out that the basic obligation expressed in Article XVI:1 is to "accord services and service suppliers of any other Member treatment no less favourable than that provided for under the terms, limitations and conditions agreed and specified in its Schedule", and that Article XVI:2 provides an exhaustive list of measures that Members shall not maintain or adopt unless otherwise specified in its schedule. The European Communities submits that these are various kinds of quantitative limitations and restrictions on the types of legal entity or joint venture (and foreign participation therein) that may be used to supply the service. According to the European Communities a Member is not restricted under Article XVI:1 from regulating the supply of services on its territory in any way other than through the measures specified in Article XVI:2. The European Communities clearly states that there are other obligations under the GATS that the Member has to respect.740
5.35.
The European Communities submits that the "exception" to the commitment on telecommunication services under mode 1 inscribed by Mexico in its Schedule is pointless since the measure that is specified (an obligation to route international traffic through the facilities of an enterprise that has a concession granted by the Ministry of Communications and Transport) is not a measure of the kind listed in Article XVI:2.741
5.36.
The European Communities recalls that the measure mentioned in the "exception" is regulatory in nature and is expressed to apply to all international traffic (whether foreign service supply or a foreign service supplier is involved or not).742
5.37.
The European Communities notes that it is in fact precisely because the supply of telecommunication services is so susceptible to being affected, and even rendered impossible, by regulatory measures that the adoption of additional commitments concerning telecommunications services was so important and that the Reference Paper was a central element in the negotiations on basic telecommunications.743
5.38.
According to the European Communities, Mexico relies to a great extent in its first written submission on the contention that additional commitments under Article XVIII of the GATS can only cover measures that are not subject to scheduling under Articles XVI and XVII of the GATS. The European Communities agree with this approach.744
5.39.
However, under the European Communities' point of view the correct conclusion for this case is the opposite of that which Mexico submits. According to the European Communities the "exception" on which Mexico seeks to rely should be included as a limitation to any additional commitments made on regulatory measures.745
5.40.
In the European Communities' view the "exception" to the commitment in Mexico's Schedule has no legal effect since it was not necessary for the purpose of allowing Mexico to maintain the measure described. According to the European Communities the "exception" to the specific commitment can only be read as an additional information to the reader about the legal situation in Mexico. The European Communities contends that the United States is correct in basing its claim only on the additional commitments of Mexico, which do not include the exception on which Mexico relies.746
5.41.
The European Communities note that the "exception" inserted by Mexico in its Schedule of Commitments refers to the obligation to route traffic through the facilities of an enterprise that has a concession granted by the Ministry of Communications and Transport. According to the European Communities this obligation does not exclude foreign telecommunications suppliers from supplying services in a cross-border manner provided that those suppliers reach an agreement with a Mexican enterprise, which has been granted a concession, to terminate its traffic within Mexico.747
5.42.
With regard to Brazil's concern based on the interpretation of Mexico's Schedule of Specific Commitments,748 the European Communities contends that the condition in the Spanish language is that the service has to be provided "por", which in context means through or over a public telecommunication network, not limiting the concession to facilities based suppliers.749

2. Mexico's commitments under mode 3

5.43.
In the European Communities' view, the two sentences of the statement in Mexico's Schedule referring to permits for the establishment of commercial agencies under mode 3 cannot be read in combination as making the coming into effect of the entire commitment subject to the discretion of Mexico.750 According to the European Communities a consistent reading is that the regulations will be issued before permits are granted so as to ensure that no commercial agencies will be allowed to have "acquired rights" to operate without respecting the regulations.751
5.44.
The European Communities considers that this position is supported by the explanatory note containing Guidelines for the Scheduling of Commitments (MTN.GNS/W/164/Add.1) which specifies under Point 8 that "according to the agreed scheduling procedures, schedules should not contain general references to laws and regulations as it is understood that such references would not have legal implications under the GATS". Thus, limitations to scheduled commitments must be set out explicitly in the schedule and not incorporated by reference to national regulations.752
5.45.
The European Communities considers that Mexico's commitments for market access for commercial agencies are in force subject to the limitations legitimately included in the Schedule.753
5.46.
The European Communities recalls that, on the relationship between specific commitments and additional commitments, there is no basis for holding that additional commitments cannot prevail over specific commitments, as argued by Mexico in paragraphs 211 and 212 of its first written submission. According to the European Communities there is no limitation of this kind in Article XVIII of the GATS.754
5.47.
The European Communities contends that the Annex on Telecommunications is an integral part of the GATS (Article XXIX) and as such, restrictions listed as "limitations" to specific commitments cannot derogate from GATS obligations except as specifically provided. In the European Communities' view this is why the Annex on Telecommunications contains language expressly stating that it does not require the authorization of services other than as provided for in its Schedule.755

3. Application of the interconnection rules contained in the Reference Paper

5.48.
The European Communities disagrees with Mexico's view that the obligations on interconnection contained in the Reference Paper do not apply to termination of international calls under the accounting rate system.756
5.49.
According to the European Communities the term "interconnection", as used in Section 2 of the Reference Paper, interpreted in accordance to Article 31 of the Vienna Convention appears to relate to all modes of linking two operators. In the European Communities view the wording of Section 2.1 of the Reference Paper which defines "interconnection" supports this idea.757
5.50.
The European Communities contends that the very object and purpose of the GATS is the liberalisation of international trade in services. In the European Communities view it is difficult to maintain that an interpretation of the Reference Paper should be limited to enhancement of "national" competition to the detriment of "international" one.758
5.51.
The European Communities contends that the negotiations which led to the final Reference Paper were conducted on the assumption that termination of international calls under the accounting rate system is not fundamentally different from domestic interconnection, and it tends to suggest that accounting rates may indeed be considered as a form of "international interconnection".759
5.52.
In this regard, the European Communities believes that the ordinary meaning of the term "interconnection" covers both national and international linking.760
5.53.
The European Communities adds in reply to a question from the Panel that the opening words of Section 2.1 of the Reference Paper ("This section applies, on the basis of the specific commitments undertaken... ") means that Section 2 of the Reference Paper only applies to the extent that there are specific commitments and cannot be used to require market access where this does not result from the specific commitments. According to the European Communities, the additional commitment is intended to facilitate the effective exploitation of market access to which a Member has committed itself in its Schedule. The European Communities is of the view that Mexico has committed to provide market access under mode 1 and must therefore ensure that the major supplier provides interconnection in accordance with Section 2.761

4. Rates relating to termination of international calls

5.54.
In the European Communities' view, Telmex should be obliged to provide cost-oriented interconnection, taking into consideration Mexico's commitments. Due to the ample divergence between "costs" and "rates", the European Communities considers that it is upon Mexico to provide the Panel with proof of those costs that would justify Mexico's rates.762
5.55.
As regard Japan's argument that the Spanish term "basadas en costos", which has been included in Mexico's additional commitments, requires a stricter adherence to costs than the term "cost oriented", the European Communities submits that the additional commitments introduced through the Fourth Protocol to GATS, were based on a common Reference Paper to ensure that identical obligations were undertaken by all except where expressly intended otherwise.763 The European Communities submits that the term "cost-oriented" in English and "basadas en el costo" in Spanish were intended to be equivalent. It points out that the European Communities' additional commitments which are authentic in all three WTO languages uses the term "cost-oriented" in English and "basadas en el costo" in Spanish.764 Since the additional commitments of the European Communities are an integral part of the GATS and were accepted by all parties to the Fourth Protocol, it is clear that the two terms were intended to be equivalent. According to the European Communities a different interpretation would vary the scope of WTO Members' obligations depending on the choice of authentic language for additional commitments.765
5.56.
The European Communities further points out the fact that cost-orientation has been discussed extensively in the ITU, and some guidance can be found in ITU-T Recommendation D.140, entitled "Accounting Rate Principles for the International Telephone Service", and ITU-T Recommendation D.150 entitled "New System for Accounting in International telephony".766 It notes that commercially, contractually and technically, both accounting rates and interconnection can cover many different situations: where two operators' networks connect physically at a given point that they own together, where two operators' network connect physically at a given point that is owned by either of them of by a third party, where two operators own jointly a link between their respective networks.767
5.57.
The European Communities notes that the Reference Paper does not contain the detail of the ITU Recommendations and does not specify which cost standard should be applied. In the European Communities view, national authorities have discretion as to the choice of cost standard, provided that it properly reflects the cost of interconnection and is applied in a transparent, consistent and non-discriminatory way.768

5. The meaning of "reasonable"

5.58.
The European Communities contends that the interpretation of the term "reasonable" as linked to conditions of competition is not appropriate. According to the European Communities the interpretation should be in line with the negotiating history of the Reference Paper, according to which this term it is normally used to refer to "a reasonable rate of return of the capital employed".769
5.59.
In answer to a question from the Panel, the European Communities added that the requirement of reasonableness is to be understood as a discipline on the model used by national authorities to calculate the 'real' cost of interconnection. It recalls that there are several models (bottom-up or top-down models, looking at historical or current costs, in a fully-distributed or stand alone manner, among other). The European Communities considers that the Reference Paper does not mandate the use of one particular model, but the model chosen must reflect economic reality so that if the model fails to reflect reality, the resulting interconnection prices cannot be regarded as reasonable.770
5.60.
In the European Communities' view, the expression 'having regard to economic feasibility' must be understood as a general qualification of (or limitation on) the obligation for major suppliers to provide interconnection on: (1) terms; (2) conditions; and (3) cost-oriented rates which are (a) transparent and (b) reasonable. It confirms that rates must be oriented towards, not 'equal to' or 'identical to', actual cost and that operators are allowed a reasonable rate of return on investment and provides a safeguard to ensure that major suppliers do not have to meet demands that could be excessively expensive, bearing in mind the revenues to be generated by the interconnection agreement. The European Communities submits that the ambiguity in the drafting of the different language versions of the text should be resolved in a manner that makes them consistent with one another, and which acknowledges that economic feasibility is a general qualification of (or limitation on) the obligation for major suppliers to provide interconnection on reasonable and transparent terms, conditions and rates.771

6. Requirements of Section 1

5.61.
According to the European Communities, Mexico is clearly right that Section 1 imposes an obligation of means, not of result.772 Section 1 requires Mexico to maintain appropriate measures for the purpose of preventing major suppliers from engaging in or continuing anti-competitive practices and does not require Mexico to open all its telecommunication markets. In view of the above, the European Communities contends that if Mexico chooses not to allow competition between telecommunication operators on a certain matter, there is no scope for anti-competitive practices relating to that matter. In that regard, the European Communities points out that it is not possible to restrict competition where competition is not allowed.773
5.62.
In view of the above, the European Communities contends that one matter that could constitute an anti-competitive practice would be the negotiation by the major supplier of an accounting rate that restricts competition by other suppliers, because it would be unprofitable for them and this must be the subject of competitive safeguards.774
5.63.
The European Communities submits that one anti-competitive practice that the United States seems to be complaining of is the fixing of pricing and the high level thereof. However, it argues the fixing of a uniform price cannot be an anti‑competitive practice since uniform prices are required by law. In its view, the same goes for the revenue sharing system ("proportional return") since this is also mandated by law.775
5.64.
The European Communities submits that Section 1 of the reference paper does create obligations in sectors that are not covered by specific commitments.776

7. Applicability of the Annex on Telecommunications

5.65.
The European Communities recalls it shares the United States view that the GATS Annex on Telecommunications was meant to benefit not only non-telecom providers, and providers of value-added telecommunications, but also providers of basic telecommunications. The European Communities considers that to restrict the scope of the Annex to non-telecom providers would fail to give effect to one of the two distinct roles of the telecommunications sector.777
5.66.
The European Communities furthers point out that the GATS Annex on Telecommunications was never meant to provide wider market access obligations for WTO Members than those established in their Schedules as regards basic telecommunications.778
5.67.
According to the European Communities even though the Annex on Telecommunications does not create market access commitments that are not contained in the Schedules, it is intended to facilitate the exploitation of market access commitments that are contained in the Schedules.779 The European Communities also recalled that the obligations contained in the Annex only relate to "public telecommunications transport networks and services", which means "any telecommunications transport service required, explicitly or in effect, by a Member to be offered to the public generally".780

8. The notion of likeness

5.68.
With respect of the notion of likeness, the European Communities asserts that footnote 15 relates only to the meaning of the term non-discriminatory in the Annex on Telecommunications and is not relevant to the interpretation of "like services and service suppliers" as they appear in Articles II and XVII of the GATS. In the European Communities' view, footnote 15 cannot in the absence of a clear textual indication to the contrary, be relevant to the interpretation of "like services and service suppliers," especially since this must have the same meaning for all service sectors. The European Communities further points out that the existing case-law (Canada – Autos781) clearly suggests that the notion of "like services and service suppliers" requires a comparison of the activity involved and that the mode of supply is irrelevant.782

D. JAPAN

1. Validity for an action by the United States

5.69.
Japan contends that the Panel should first determine whether it is proper for the United States to use the dispute settlement procedure under the DSU to object to "interconnection" rates charged by Telmex based on the accounting rate system.783
5.70.
Japan submits that the "Group" addressed the subject of matters that may not give rise to an action before a panel in its report dated 15 February 1997, which includes the application of the accounting rate system.784
5.71.
Japan further points out that the position of the "Group" as to whether accounting rates could give rise to an action by Members under the DSU is further addressed in the report dated 10 March 1997, where the Chairman stressed that the report was merely an understanding, which could not and was not intended to have binding legal force and did not take away from Members the rights they have under the DSU.785
5.72.
Japan considers that the "understanding" of the "Group" concerning the proper scope and treatment of "accounting rates" is not entirely clear. In Japan's view it is not clear whether the "rates" described in Section 2.2(b) of the Reference Paper in fact cover accounting rates, and are thus capable of being disputed under the DSU mechanism.786
5.73.
According to Japan, given the lack of clarity concerning the proper scope and treatment of accounting rates, the panel needs to determine whether it is proper for the United States to bring before the panel its objections concerning the accounting rates negotiated by Telmex.787

2. The term "cost oriented"

5.74.
According to Japan, the meaning of the term "basadas en costos", as used in Mexico's Reference Paper, does not automatically apply to the term "cost-oriented"that appears in the Reference Paper of other Members. Japan asserts that in its submission the United States provides its interpretation of the term "basadas en costos", as used in the context of Mexico's Reference Paper. Japan further points out that in the course of its submission, the United States at times appears to use the terms "basadas en costos", "cost based" and "cost-oriented" interchangeably, and implies that these terms have equivalent meanings.788
5.75.
Japan submits that if the meaning of "basadas en costos" is based uponthe term's alleged English language equivalent, "based in cost", such meaning in Japan's view cannot automatically be applied to the term "cost oriented" that appears in the Reference Papers which are attached to the Schedules of specific commitments of other Members, which chose English to be authentic.789

3. The term "cost-based"

5.76.
Japan submits that in the English language Reference Paper of many Members, the English language equivalent of the term "basadas en costos" appears as "cost-oriented". Japan points out that the term "cost-oriented" is not defined in any Member's Reference Paper, and its meaning is not addressed in any other part of the WTO Agreement or in the report of any panel or Appellate Body. Japan considers that "cost-oriented" rates has an ordinary meaning that is less specific, and therefore less constraining, than "cost-based" rates, "cost-equivalent" rates, or rates calculated by application of the total element long run incremental costs adopted in the United States.790
5.77.
In Japan's view the term "cost-oriented" must basically be interpreted in accordance with its ordinary meaning as stipulated under Article 31(1) of the Vienna Convention. Japan further points out that the determination of whether interconnection rates are "cost-oriented" cannot be limited to an examination of only the specific manner in which interconnection rates are established.791
5.78.
According to Japan the implementation of an interconnection rate system that meets the general principles of the Reference Paper is left to the discretion of each Member's government.792
5.79.
Japan notes that, according to the negotiating history of the Reference Paper, Members were not only unable to agree on an exact definition of "cost", but also avoided closely binding themselves to the term by using the expression "cost-oriented" rather than "cost-based".793
5.80.
Japan considers that Members adopted the term "cost-oriented" during the Negotiations on Basic Telecommunications ("NBT") on account of its ambiguity.794

4. Election of a uniform accounting rate and proportionate return system

5.81.
Japan submits that the Spanish term "razonables, económicamente factibles" grants Mexico additional flexibility in determining interconnection rates. According to Japan, in the absence of any argument concerning the inapplicability of the qualification created by the term "económicamente factibles", the panel has insufficient information before it to find that the interconnection rates imposed by Mexico are not "razonables".795
5.82.
Japan recalls that following the conclusion of the negotiations on basic telecommunications, a number of Members liberalized aspects of their accounting rate systems. However, many Members (including Japan and the United States), continue to maintain pre-existing accounting rate systems for settling interconnection rates with carriers from certain countries. Japan points out that it applies such pre-existing system only to non-WTO Member carriers while the United States applies it to carriers with market power, either WTO-Member or non-Member. According to Japan, these systems are similar to Mexico's accounting rate system presently under discussion.796
5.83.
In Japan's view it is hard to determine that Mexico is acting unreasonably per se insofar as it elects to maintain a uniform accounting rate and proportionate return system similar to that which continues to be used by many Members (including the United States) to settle rates with certain countries. According to Japan, the United States has to provide a compelling argument that the mere maintenance of a uniform accounting rate and proportionate return system triggers a violation of Section 2.2(b) of the Reference Paper. Nevertheless, Japan notes its strong concern with Mexico's indiscriminate practice of applying uniform accounting rate and proportionate return system in determining accounting rates with carriers from every country, regardless of whether the country in question possesses multiple carriers or has a competitive environment.797

VI. interim review

6.1.
On 10 July 2003, pursuant to Article 15.1 of the DSU, the Panel issued the draft descriptive part of its Report. As agreed, on 25 July 2003 both parties commented on the draft descriptive part. The Panel issued its Interim Report on 21 November 2003. On 15 December 2003, pursuant to Article 15.2 of the DSU, the United States and Mexico provided comments and requested the revision and clarification of certain aspects of the Interim Report. None of the parties requested that the Panel hold a further meeting with the parties. In the absence of a meeting and further to paragraph 16 of the Panel's Working Procedures798, the parties were given until 15 January 2004 to submit further written comments on the other party's Interim Review comments. Only the United States filed further comments on that date.
6.2.
Following the comments of the parties, the Panel has reviewed the claims, arguments and evidence submitted by the parties during the panel process. Where it considered it appropriate to ensure clarity and avoid misunderstandings, the Panel has revised the findings section of its Report, including the correction of typographical and editorial mistakes. It is important to note that in the findings section of a Report, a panel cannot be expected to refer to all the statements and arguments of the parties. Failure to do so does not therefore imply that the Panel has ignored statements or arguments of the parties. Taking into consideration this last statement, the Panel has addressed the following comments raised by the parties.
6.3.
Generally, the United States' comments concern some additions or deletions to the text of the findings as a matter of clarity. The United States notes that it disagrees with the Panel's conclusion that Mexico's Schedule allows Mexico to prohibit market access for the cross-border supply of the services at issue into Mexico over capacity leased by the supplier (i.e., on a non-facilities basis) in Mexico. However, the United States states that it would not repeat its arguments in this respect in the comments provided to the Panel on the Interim Report.
6.4.
On the other side, Mexico's comments refer to precise aspects of the Interim Report, including the identification of some evidence, the clarification of some definitions and the identification of the services at issue. Mexico submits that the review of all these aspects will help to clarify its position on certain issues.
6.5.
Mexico notes in its submission dated 15 December 2003 that in paragraph 7.6 of the Interim Report (which has been deleted in this Report) and corresponding footnote the Panel identifies the services at issue in this dispute as "certain basic public telecommunications services" referring to a definition contained in paragraph 7.32 of the Interim Report to describe them. According to Mexico, the text quoted in paragraph 7.32 is from the definition of "Public telecommunications transport services" in Article 3(b) of the Annex on Telecommunications. Mexico further states that it understands that the Ministerial Decision on Negotiations on Basic Telecommunications refers to "basic telecommunications" as "telecommunications transport networks and services", but states that the latter term is not defined in the GATS Annex on Telecommunications. According to Mexico, Article 3 of the Annex on Telecommunications sets out two distinct definitions for the terms "Public telecommunications transport service" and "Public telecommunications transport network". Mexico states that it has argued that the services at issue in this dispute are transmission or transport services of customer-supplied information or data. In particular, Mexico requests that the Panel clarifies its definition of "basic public telecommunications services" and its description of the nature of the services at issue. The United States alleges in its submission dated 15 January 2004 that it is not necessary for the Panel to provide a precise definition of the broad term "basic public telecommunications services." According to the United States, in order to resolve the dispute, the Panel needs only define the specific services to which the claims relate and the services subject to Mexico's commitments. In consideration of these comments, the Panel modified footnotes 745 and 753 (footnotes 829 and 840 of this Report) to clarify the link between "basic public telecommunications services" and the definition of the term "public telecommunications transport services".
6.6.
With regard to paragraph 7.11 (paragraph 7.10 of this Report) Mexico disagrees with the translation of ILD Rule 2:XI and requests it to be modified. It also requests to add a sentence at the end of paragraph 7.11 (paragraph 7.10 of this Report) in order to include a reference to ILD Rule 2:VIII according to its own translation. The United States asserts that Mexico has not previously disputed the English-language copy of the ILD Rules provided to the Panel by the United States in Exhibit US-1 and that the same translation of ILD Rule 2:XI was provided in paragraph 2.8 of the draft descriptive part and was not contested by Mexico. The United States submits that it considers accurate its own translation of the ILD Rules and that it does not consider accurate the translation offered by Mexico. The Panel declines to amend the translation of ILD Rule 2:XI as requested by Mexico because the text conforms with the translation provided by the WTO Secretariat of the ILD Rules (annexed to the Report) and does not appear, in substance, to differ from the modification proposed by Mexico. As regards Mexico's request to add a sentence at the end of paragraph 7.11 (paragraph 7.10 of this Report), the Panel considers the additional language suggested by Mexico to refer to a matter already addressed in paragraph 7.12 (paragraph 7.11 of this Report).
6.7.
Mexico considers that in paragraphs 7.23-7.25 (paragraphs 7.22-7.23 and 7.26 of this Report), the Panel has summarised the arguments of the United States on what constitutes the service at issue and the manner in which they are provided, but has not summarised the arguments of Mexico. Mexico requests the Panel to summarise in paragraphs 7.23 to 7.25 (paragraphs 7.22-7.23 and 7.26 of this Report), its description of the precise nature of the services at issue and the manner in which those services are supplied. Mexico also requests the Panel to clarify its description of the nature of the services at issue and to make a finding on whether the services at issue constitute transport and transmission services. The United States submits that beyond identifying the service sectors at issue as including voice telephony, circuit-switched data transmission and facsimile services, the Panel also engaged in a detailed review of the definition of those services sectors according to, among other things, the Central Product Classification codes included in the sector column of Mexico's Schedule. According to the United States it is incorrect to suggest that the Panel has not directly addressed Mexico's argument that the services at issue were only transmission and transport as it is rejected in paragraph 7.36 of the Interim Report. In the United States' view, the Panel's discussion extends beyond paragraphs 7.23-7.25 (paragraph 7.22-7.23 and 7.26 of this Report) to include the discussion culminating in paragraph 7.46 (paragraph 7.45 of this Report). The United States also submits that although paragraph 7.46 (paragraph 7.45 of this Report) already provides a concise description of the services at issue, the Panel may consider providing a precise definition of the "services at issue", at the end of that section. In view of Mexico's concerns, the Panel has modified the discussion of "services at issue" to clarify that this term on its own focuses on the service sectors, and not on the modes of supply raised in the United States' claim.
6.8.
Mexico submits that it did not make the argument referred by the Panel in paragraph 7.27 of the Interim Report. According to Mexico, it argued that in order for a United States-based supplier to supply services from the United States territory into the Mexican territory, it must supply telecom transport services over the whole of the "full circuit" without having a commercial presence within the meaning of GATS Article XXVIII(d). Mexico further submits that it also explained how a full circuit regime does not require commercial presence within the meaning of the GATS. Mexico requests the Panel to replace the fourth sentence of paragraph 7.27 of the Interim Report and to add a new sentence after the third sentence of the same paragraph. As regards Mexico's allegation, the United States considers that it is entirely reasonable for the Panel to have understood that under Mexico's interpretation, a foreign service supplier must "operate" in some sense in a foreign territory to provide scheduled services viathe cross-border mode of supply. According to the United States, the Panel may clarify this by moving the fourth sentence of paragraph 7.27 of the Interim Report and making it the first sentence of paragraph 7.28 of the Interim Report, including some new editing. The United States suggests that it may be helpful for the Panel to adopt a uniform formulation such as "operates in some fashion, or is located" when it uses the word "present", "presence", "operate" or "located" in diverse paragraphs of the Interim Report. The United States submits that Mexico's assertion that the Panel did not address the argument made by Mexico is not accurate, since the Panel did in fact address and reject the relevance of Mexico's argument at paragraph 7.39 of the Interim Report. For all these reasons the United States asks the Panel to reject Mexico's request to add an additional sentence to paragraph 7.27 of the Interim Report. The Panel has amended the text of paragraphs 7.27 and 7.28 of the Interim Report to clarify Mexico's argument and adopted a uniform formulation regarding the word "present", "presence" etc., accompanied by an explanatory footnote, to clarify that the terms were not intended to refer to "commercial presence".
6.9.
In relation to paragraph 7.28 of the Interim Report, Mexico submits that the issue before the Panel was whether the services provided by United States-based suppliers in the circumstances of this dispute cross the border into Mexico, and not whether cross-border "occurs only if the supplier itself operates, or is present, in the territory of both Members". Mexico requests that paragraph 7.28 of the Interim Report be accordingly replaced. In reference to the Mexico's comments, the United States submits that the reason the Panel addressed the question of whether "cross‑border 'occurs only if the supplier itself operates, or is present, in the territory of both Members'" is because Mexico made that argument. The United States requests that the Panel rejects the replacement text proposed by Mexico for paragraph 7.28 of the Interim Report. In consideration of Mexico's comments, the Panel modified the wording of paragraph 7.28 of the Interim Report to define in more precise wording the "issue before the Panel" referred to in the paragraph.
6.10.
Mexico, for the same reasons explained in its comments on paragraph 7.27 of the Interim Report, requests that the Panel clarifies whether by using the word "present" in paragraphs 7.28, 7.32, and 7.35 of the Interim Report, and the word "presence" in paragraphs 7.39, 7.40 and 7.88 of the Interim Report (paragraphs 7.39, 7.40 and 7.90 of this Report), it meant "commercially present" and "commercial presence" within the meaning of the GATS. Regarding the use of these terms, the United States refers the Panel to its discussion regarding Mexico's comments on paragraph 7.27 of the Interim Report. The approach taken by the Panel to address the question posed by Mexico is described above in the paragraph dealing with Mexico's initial comment regarding the use of these terms in paragraph 7.27 of the Interim Report.
6.11.
As regards paragraph 7.36 of the Interim Report, the United States requests the Panel to rectify a typographical error when referring to "telephony services". The Panel notes that the term "telephony" does not appear in W/120 or the CPC. However, it is used in the translation of Mexico's scheduled service commitments, in the ITU contexts, and by the parties to this dispute. The Panel considers appropriate the suggested modification. For clarification, the Panel also added a footnote to paragraph 7.45 (paragraph 7.43 of this Report) stating that it considers the terms "telephony" and "voice telephony" (as used in the English translations of Mexico's Schedule and the claims by the United States) to be equivalent to the terms "telephone services" and "voice telephone services" (as used in the GATS sectoral classification the CPC).
6.12.
Mexico submits that the Panel refers to "communications services supplied between Members" in paragraph 7.38 of the Interim Report. Since, according to Mexico, the United States has limited its challenge to "certain basic public telecommunications services", Mexico requests that the Panel clarifies what is meant by the terms "communications services" and make additional findings on whether and how such services are supplied by United States-based suppliers on a cross-border basis from the United States into Mexico. According to the United States, the Panel's reference to "communications services" is equivalent to "telecommunications services," but suggests that the Panel may clarify it. With respect to Mexico's comments on the interpretation of the services at issue in this dispute, the United States recalls its discussion regarding Mexico's comments on paragraphs 7.23-7.25 (paragraphs 7.22-7.23 and 7.26 of this Report). To address Mexico's concern, the Panel modified the first sentence of paragraph 7.38 of the Interim Report, replacing the word "communications" with "basic telecommunications".
6.13.
Mexico also notes that in paragraph 7.39 of the Interim Report the Panel states that "the CPC definition of the basic telecommunications services at issue provides for an especially high degree of interaction between operators on each side of the border". Mexico requests that the Panel identifies the specific definition to which it refers. Mexico requests that the Panel clarifies its statement in the fourth sentence of the paragraph and explain the legal basis for that statement. With respect to Mexico's comment that it "fails to see which CPC definition provides for interaction between operators 'on each side of the border'," the United States finds entirely clear that the CPC definition to which the Panel refers is CPC 75212 and that the Panel is applying the definition to the specific facts of the dispute. The Panel addressed Mexico's concern by amending paragraph 7.39 of the Interim Report to specify more precisely the reasoning that leads us to consider that the CPC definition foresees an especially high degree of interaction also between operators located in different Members.
6.14.
As regards paragraph 7.41 of the Interim Report (paragraph 7.41 of this Report), Mexico recalls that the Panel states that "…all telecommunications traffic currently crossing borders would then fall outside the scope of the GATS". Mexico understands from this statement that the Panel is of the view that "telecommunications traffic currently crossing borders" is within the scope of the GATS. Mexico requests that the Panel clarifies what is meant by "traffic" and the legal basis for referring to that term. The United States considers that Mexico's comments speak to its arguments about the interpretation of the services at issue in this dispute. Therefore, the United States refers the Panel to its discussion regarding Mexico's comments on paragraphs 7.23-7.25 (paragraphs 7.22-7.23 and 7.26 of this Report). Regarding Mexico's comment on the term "traffic", the United States maintains that the Panel's reference to "telecommunications traffic currently crossing borders" is clear but suggests that the Panel could amend it to refer to "telecommunications services currently crossing borders." To address Mexico's concern the Panel had modified the third sentence of paragraph 7.41 of the Interim Report (paragraph 7.41 of this Report) to refer telecommunications "services".
6.15.
Mexico contends that paragraph 7.44 of the Interim Report implies that under Mexico's arguments, the cross-border supply of basic telecommunications services would not be technically feasible. According to Mexico this is not the argument it made. Mexico states that it did not argue that the cross-border supply of basic telecommunications services required commercial presence, but rather explained how cross-border supply could occur in a "full-circuit" regime. Under Mexico's arguments, cross-border trade in telecommunications transport service is technically feasible and does not require "commercial presence" within the meaning of the GATS. For these reasons, Mexico requests that the Panel modifies paragraph 7.44. In the United States' view, the first sentence of this paragraph expresses the Panel's conclusion that the examples and definition of "cross-border" supply asserted by Mexico would virtually exclude from the cross‑border supply of facilities-based services all situations in which the supplier does not have a commercial presence. According to the United States, it was quite reasonable for the Panel to conclude that the examples of a "full-circuit" regime cited by Mexico usually would only occur through commercial presence and suggests that the Panel rejects Mexico's proposed modifications. In view of Mexico's comments, the Panel deleted paragraph 7.44, since the reasoning in that paragraph relied to a large extent on a supposition that Mexico's argument did imply that commercial presence was virtually necessary to conduct cross-border supply on a facilities basis.
6.16.
As regards paragraph 7.45 (paragraph 7.43 of this Report) Mexico requests the Panel to add a sentence at the beginning, in order to better reflect its position. The United States notes that Mexico provides no citation to an earlier submission in which it raised the argument "that there is a relevant distinction between services supplied 'through' the use of telecommunications transport service and telecommunications transport service itself," and believes that Mexico has not previously made this argument. Moreover, despite Mexico's attempt to introduce the argument, the purported distinction is not relevant to the purpose of the quotation, which is to explain that the Explanatory Note supports the view that cross‑border supply does not imply the presence of the service supplier in the market where the service is delivered. For these two reasons, the United States asks the Panel to reject Mexico's comment and proposed text. The Panel declined Mexico's request because it considers that the proposed addition is not directly related to the rest of paragraph 7.45 (paragraph 7.43 of this Report).
6.17.
Mexico claims that the Panel refers to the "services at issue" in paragraph 7.46 of this Report without further explanation and concludes that they are supplied cross-border within the meaning of the GATS. Mexico requests that the Panel clarify what is the precise nature of the services at issue and explain how they are supplied cross-border. According to the United States, Mexico's comments reiterate its arguments about the interpretation of the services at issue in this dispute and therefore refers the Panel to its discussion regarding Mexico's comments on paragraphs 7.23-7.25 (paragraphs 7.22-7.23 and 7.26 of this Report). Regarding Mexico's comments, the Panel notes that it has already clarified what is meant by the "services at issue". And that paragraph 7.46 of this Report is a conclusion intended to summarise the preceding analysis rather than to repeat it.
6.18.
Mexico submits that the Panel statement in paragraph 7.48 (paragraph 7.47 of this Report) does not accurately reflect Mexico's arguments. Mexico refers to its arguments summarized at paragraphs 63 to 76 of its second written submission, where it explained its view that in order to ascertain the nature of Mexico's mode 1 commitments, it is first necessary to define the services at issue. According to Mexico, in order to determine whether its market access commitments allow the cross-border supply of such services into Mexico, the Panel had to determine whether Mexico's Schedule permits public transmission or transport services provided by United States suppliers to cross the border into Mexico.Mexico argues that it has not inscribed specific commitments that allow such trade, because of the limitations inscribed in its Schedule. Mexico recalls that it argued that by inscribing commercial presence and nationality requirements in its mode 1 column, Mexico has prevented the suppliers of other WTO Members (both facilities-based and non-facilities-based) from supplying telecommunications transport services cross-border into Mexico. Referring the Panel to its discussion regarding Mexico's comments on paragraphs 7.23-7.25 (paragraphs 7.22-7.23 and 7.26 of this Report), the United States states that, in paragraphs 7.48-7.49 (paragraphs 7.47-7.48 of this Report), the Panel has accurately summarised Mexico's arguments on the definition of the services at issue and whether those services can be provided on a cross-border basis. The Panel declined to amend the paragraph on the basis of Mexico's comment because it considered that paragraphs 7.48-7.49 (paragraphs 7.47-7.48 of this Report) together do reflect, in summary, the points that Mexico explains above.
6.19.
Mexico submits that the Panel's statement in paragraph 7.49 (paragraph 7.48 of this Report) does not accurately reflect Mexico's arguments. According to Mexico, its argument that the limitations inscribed in its Schedule make it impossible for cross-border supply to take place must be read in conjunction with its submissions on the nature of the services at issue. Mexico also notes that, as drafted, the first sentence of paragraph 7.49 (paragraph 7.48 of this Report) suggests that Mexico has argued that it did not undertake any commitment in respect of basic telecommunications. Mexico submits that, on the contrary, it has argued that it has scheduled a "standstill" under mode 1. In Mexico's view, this constituted a commitment, but did not accord market access to suppliers for cross-border supply. Mexico further submits that it inscribed commitments under mode 3. Mexico requests that the first and second sentence of paragraph 7.49 (paragraph 7.48 of this Report) be appropriately modified. According to the United States, Mexico asserts that the Panel has mischaracterized Mexico's argument by stating that it "did not undertake any commitment in respect of basic telecommunications." The United States notes that Mexico did in fact make this argument and considers that the Panel has accurately summarised Mexico's arguments. In view of Mexico's concern, the Panel modified the first sentence of paragraph 7.49 (paragraph 7.48 of this Report) to more clearly state the Panel's understanding of Mexico's arguments.
6.20.
As regards paragraphs 7.51-7.61 (paragraphs 7.58-7.68 of this Report), the United States submits that in several places in this section the reader could be left with the mistaken impression that the Panel has used the Model Schedule and Chairman's Note in a manner other than to confirm the ordinary meaning of a term, as provided for in the customary rules of interpretation of public international law reflected in the Vienna Convention on the Law of Treaties. The United States particularly recalls that the use of the words "interpret" and "interpretative" in paragraphs 7.51, 7.57, and 7.61 of the Interim Report may lead to this mistaken impression. The United States further submits that the Panel has correctly stated its approach in paragraphs 7.15-7.17 (paragraphs 7.14-7.16 of this Report). In order to avoid any potential mistaken impressions, the United States suggests that the Panel more precisely indicates that these documents are simply being used to confirm the ordinary meaning of the terms employed. In view of the United States' comments, the Panel considered it appropriate to modify the section concerned to identify more clearly its application of the rules of interpretation of the Vienna Convention on the Law of Treaties to the Model Schedule and the Chairman's Note with regard to Mexico's commitments on the services at issue.
6.21.
The United States, in connection with the preceding comment, suggests modifications to the first sentence of paragraph 7.61 (paragraph 7.67 of this Report). According to the United States, the second sentence of paragraph 7.61 (paragraph 7.68 of this Report) appears to address exclusively the interpretation of schedules which are not at issue in this dispute. Accordingly, it suggests that the sentence be omitted from the final report. As regards the first sentence of paragraph 7.61, the Panel changed the wording but did not use the formulation specified by the United States. On the second suggestion, the Panel disagrees with the United Sates. The Panel declined the modification requested by the United States because it considers it to be sufficiently clear that, in citing an example of a schedule without categories, the Panel is simply illustrating the importance of the implications of the Model Schedule and the Chairman's Note, and not indicating how the Panel would rule with respect to such a schedule.
6.22.
With regard to paragraph 7.77 (paragraph 7.79 of this Report) Mexico requests that the Panel clarifies whether it is the "international traffic" or the transportation or transmission of such traffic that is supplied cross-border. According to the United States, Mexico's comment essentially repeats its arguments about the interpretation of the services at issue in this dispute, and its insistence that those services are not provided on a cross‑border basis. The United States refers the Panel to its responses to Mexico's comments on paragraphs 7.23-7.25 (paragraphs 7.22-7.23 and 7.26 of this Report) and 7.27 of the Interim Report. According to the United States, further clarification of those issues is neither required nor appropriate in this paragraph. The Panel declines Mexico's request because it considers the relevance of Mexico's requested clarification to be unclear but believes that it appears to make a link with Mexico's previously rejected definition of cross-border supply.
6.23.
Mexico also requests that the Panel clarifies what is meant by the term "cross-border service suppliers" in the last sentence of paragraph 7.77 (paragraph 7.79 of this Report). The United States believes the meaning of the quoted phrase in the final sentence is sufficiently clear, but suggests the Panel to consider changing the term to "suppliers of scheduled services on a cross-border basis". Although the Panel considers the meaning of the phrase to be clear, the Panel accepts the suggestion made by the United States to modify this term in paragraph 7.77 (paragraph 7.79 of this Report).
6.24.
Mexico requests that in paragraph 7.88 (paragraph 7.90 of this Report) the Panel clarifies what is meant by the terms "potential cross-border supplier" and the "supply of services by [the cross-border] mode". The Panel considers the meaning of the phrases concerned to be sufficiently clear in their context and, thus, declines Mexico's request for clarification. However, the Panel notes that the word "potential", was meant simply to indicate that no cross-border supply into Mexico is actually permitted. To avoid any misunderstanding, the Panel has deleted the word "potential".
6.25.
Mexico requests the Panel to add a new sentence to paragraph 7,108 (paragraph 7,110 of this Report) in order to fully reflect Mexico's position on the use of ILD Rules to define "interconnection". The United States considers Mexico's suggested text misplaced in a paragraph that describes the conclusions of the Panel rather than the arguments of the Parties. The United States therefore requests that the Panel rejects Mexico's proposed text. The Panel considers the paragraph concerned to contain the reasoning of the Panel, not the arguments of the parties and, therefore, declines the modification requested by Mexico.
6.26.
With regard to paragraph 7,111 (paragraph 7,113 of this Report) Mexico requests the Panel to clarify how competition occurs in the context of an international setting and to explain what constitutes the "services offered in each others' market". The United States believes that the meaning of the quoted sentences is sufficiently clear. The Panel does not consider the point referred to by Mexico to be unclear and, thus, declines to amend the paragraph concerned.
6.27.
Mexico notes that its comment on paragraph 4.54 of the descriptive part of the Report released on 6 June 2003 (paragraph 4.56 of this Report) pointed out that, in response to a specific request from the Panel for a list of the differences between accounting rate agreements and domestic interconnection agreements, Mexico had submitted copies of standard agreements and asked the Panel to reproduce the list of the important differences identified by Mexico. Mexico claims that this comment is not reflected in the Interim Report. Mexico further notes that at paragraph 7,112 (paragraph 7,114 of this Report), the Panel states that, "[a]fter reviewing the evidence," it agrees with the United States that there are no significant differences between accounting rate and domestic interconnection agreements. However, Mexico submits that it is not aware that the United States submitted any evidence in response to the pertinent question of the Panel. For these reasons, Mexico requests that the Panel identifies the evidence on which it relied in making the finding in paragraph 7,112 (paragraph 7,114 of this Report), and that it modifies paragraph 7,112 (paragraph 7,114 of this Report) to accurately reflect Mexico's position by listing the differences between the two types of contracts identified by Mexico. With respect to Mexico's request regarding the phrase "[a]fter reviewing the evidence," the United States observes that it is within the Panel's discretion to have found that arguments raised by the United States demonstrated that Mexico's arguments and evidence lacked relevance and probative value. As regards the descriptive part, the Panel had not accepted Mexico's suggestion made earlier because it considered that the paragraph concerned adequately summarised Mexico's submission. However, in view of the importance Mexico has attached to this point, the Panel has included a new sentence to paragraph 4.56 of this Report listing the differences between accounting rate agreements and domestic interconnection agreements described by Mexico. With regard to the contested phrase the Panel agrees to clarify it, in its own language, to avoid any misinterpretation. The Panel also accepted a United States' suggestion to insert a citation of the specific source of the United States' statements in paragraph 7,112 (paragraph 7,114 of this Report).
6.28.
With regard to paragraph 7,114 (paragraph 7,116 of this Report) Mexico submits that the Panel considers only the evidence provided by the United States. Mexico suggests this paragraph to be amended to fully reflect Mexico's position by adding a new sentence after the first one. The United States considers Mexico's suggested text to be misplaced since the paragraph provides the findings of the Panel rather than a recitation of arguments of the parties. The Panel declines Mexico's request because paragraph 7,114 (paragraph 7,116 of this Report) contains the Panel's reasoning, and sets out what the Panel considers are the relevant arguments for arriving at its conclusion.
6.29.
According to Mexico, in paragraph 7,117 (paragraph 7,119 of this Report) the Panel does not deal with the evidence submitted by Mexico that the current contractual arrangements lowering the accounting rate have been implemented by Mexican and United States' carriers notwithstanding that the United States' FCC has refused to approve them and still officially lists the United States-Mexico accounting rate as US$0.38 (equating to a US$0.19 settlement rate). In Mexico's view, this evidence verifies that, to enforce an accounting rate arrangement, a domestic body would need jurisdiction over parties beyond its border. Mexico requests that the Panel adds a new sentence at the end of paragraph 4.67 of the Interim Report. According to the United States, Mexico raises an argument, with respect to the position of the United States' FCC on United States-Mexico accounting rates, that Mexico did not make during the Panel proceedings. The United States considers Mexico's suggested text misplaced in a paragraph that describes the conclusions of the Panel rather than the arguments of the parties. The United States therefore urges the Panel to reject Mexico's proposed text. The Panel declines Mexico's request to insert Mexico's proposed sentence, because paragraph 7,117 (paragraph 7,119 of this Report) contains the Panel's reasoning, and sets out what the Panel considers are relevant arguments for arriving at its conclusion.
6.30.
As regards paragraph 7,118 (paragraph 7,120 of this Report), the United States requests the Panel to add a footnote referencing the paragraphs to which the final sentence of the paragraph refers. In view of the United States' request, the Panel decided to delete "as discussed later in this section", since the subsequent discussions do not address the issue alluded to in exactly the same context as in this paragraph and because it considers that the conclusion in this paragraph stands on its own.
6.31.
Mexico requests that the Panel clarifies, in paragraph 7,119 (paragraph 7,121 of this Report), how telecommunications transport services are actually supplied cross border and explain what is the nature of the services that cross the border. According to the United States, Mexico's comments again speak to its arguments about the interpretation of the services at issue, and its insistence that those services are not provided on a cross-border basis. The United States sees no justification for further discussion of those issues in this paragraph. The Panel declines the clarification requested by Mexico with respect to this paragraph and notes that it has already dealt with the matter regarding the "services at issue", above.
6.32.
With regard to paragraph 7,138 (paragraph 7,140 of this Report), Mexico submits that in paragraph 170 of its first written submission, it did argue that accounting rates and termination services were consciously excluded from the Reference Paper which is confirmed by the fact that they are "on the table" in the Doha Round of negotiations. Mexico requests that the Panel clarify how this argument was taken into account or respond to this argument. The United States notes that the argument cited by Mexico is only one of many put before the Panel on this issue, and as such, it would not be appropriate to single it out in this paragraph. The Panel reviewed the arguments and decided to insert additional text at the end of paragraph 7,138 (paragraph 7,140 of this Report) to reflect Mexico's argument and how it was taken into account.
6.33.
Mexico requests that the Panel identifies the evidence on which it relied in reaching the conclusion in paragraph 7,140 (paragraph 7,142 of this Report) that "many of the 55 WTO Members which have committed to cost-oriented interconnection are unlikely to apply traditional accounting rate arrangements to a significant portion of their international traffic….". According to Mexico, it submitted reports from the United States' FCC that establish that United States' carriers have accounting rate arrangements with virtually every country, and that in 2001 a majority of international calls to and from the United States were made through "traditional settlement". The United States notes that support for the Panel's conclusion may be found in paragraph 38 and footnote 25 of the United States' oral statement of 13 March 2003 and paragraph 48 and footnote 51 of the United States' submission of 30 April 2003. The Panel's findings already demonstrate that it does not agree with Mexico regarding the significance of the submissions it cites. However, to accommodate Mexico's concerns, the second sentence of paragraph 7,140 (paragraph 7,142 of this Report) is modified and a footnote is added to identify the evidence on which we relied to reach our conclusion.
6.34.
Mexico submits that paragraph 7,149 (paragraph 7,151 of this Report), is ambiguous in that it does not clearly define what is the service supplied by the United States suppliers and under what mode. Mexico requests that the Panel clarifies: the definition of the "services at issue" and the relevant mode of supply; whether the "Mexican operators" referred to in the paragraph are also "suppliers" of such "service" or "services"; what is meant by the term "termination of the service"; whether the United States suppliers "terminate" the "service" or "services" in question; and what is meant by the term "outgoing services". According to the United States, Mexico's comments repeat its arguments about the interpretation of the services at issue in this dispute and its insistence that those services are not provided on a cross‑border basis. Regarding Mexico's references to the Panel's use of the terms "termination of the service" and "outgoing services", the United States submits that the Panel is not employing those terms to further define the services at issue in this dispute. The United States further submits that the Panel is properly using those terms to define the relevant market, for the purpose of determining whether Telmex is a "major supplier". With respect to the definition of the "services at issue" the Panel notes that it has already addressed the matter, above. As to whether the "Mexican operators" referred to in the paragraph are also "suppliers" of such "service" or "services", the Panel does not consider this distinction to be relevant. With regard to what is meant by the term "termination of the service", the Panel considers it appropriate to add a footnote to paragraph 7.23 (paragraph 7.22 of this Report) to clarify that the term is used in our findings to refer to forms of "linking" that falls within the scope of "interconnection". As to whether the United States suppliers "terminate" the "service" or "services", the Panel considers its reasoning makes clear that suppliers do not need to "terminate" services to be "supplying" them. As regards what is meant by the term "outgoing services" the Panel has changed the term to "outgoing traffic".
6.35.
Mexico argues that, in paragraph 7,150 (paragraph 7,152 of this Report), the Panel refers to the market for "termination services" and to domestic and international "communication". In the light of Mexico's arguments on the meaning of "termination services" Mexico requests that the Panel clarifies and makes additional findings on what it means when it refers to "termination services", whether "termination services" are "basic telecommunications services" or a service sector at issue in this dispute, the mode of supply of such services, and whether United States or Mexican suppliers provide such services. Mexico also requests that the Panel clarifies whether a "communication" is a service at issue in this dispute. The United States submits that with respect to Mexico's comments regarding the Panel's use of the term "termination services," the Panel is not employing this term to further define the services at issue in this dispute – that is, the services to which the United States' claims relate and the services subject to Mexico's commitments. Rather, the United States reads the paragraph as using that term to properly define the relevant market for the purposes of determining whether Telmex is a "major supplier." The Panel does not accept the inferences made by Mexico with respect to the Panel's use of the term "termination services". However for clarification, the Panel is replacing "termination services" with "termination", to emphasise that the Panel is not using that term to refer in any way to services at issue in this dispute, but rather to define the relevant market for the purposes of determining whether Telmex is a "major supplier". To address the second concern, the Panel is replacing the term "communication" with "telecommunications service".
6.36.
With regard to paragraph 7,154 (paragraph 7,156 of this Report), Mexico requests a new sentence to be added to the paragraph in order to reflect Mexico's position. The United States submits that Mexico's request is not necessary or accurate. According to the United States, the decisions by the CFC were provided by the United States at Exhibits US-20 and US-21. The United States notes that the CFC's decisions relied in part on the restrictive provisions in the ILD Rules discussed at length by the Panel. The Panel accepts Mexico's point and has added the suggested sentence to the paragraph in order to reflect Mexico's argument on these points.
6.37.
Mexico submits that the Panel concludes in paragraph 7,157 (paragraph 7,159 of this Report) that Telmex is a "major supplier", with respect to the "services at issue" in that it has the ability to materially affect the price of termination of calls from the United States into Mexico. Mexico requests that the Panel clarify what is meant by the "services at issue" and whether the "termination of calls" is a service at issue in this dispute. The United States submits that the Panel has already adequately described the services at issue in this dispute, as well as the "relevant market" in which Telmex is a major supplier. The Panel's conclusion in paragraph 7,157 (paragraph 7,159 of this Report) speaks to the definition of the relevant market and whether Telmex is a major supplier in that market. To clarify this point, the United States suggests that the Panel amends paragraph 7,157 (paragraph 7,159 of this Report) by adding in the first sentence the phrase "termination of". The Panel accepts the suggestion made by the United States.
6.38.
With regard to paragraph 7,200 (paragraph 7,202 of this Report) the United States asks the Panel to note that it has presented evidence of the difference between the aggregated component prices and the rates charged to United States suppliers for each of the three individual "zones" in Mexico. The Panel amended the text to make clear that it is aware that the United States presented evidence of the difference between the aggregated component prices and the rates charged to United States suppliers for each of the three individual zones.
6.39.
Mexico refers to paragraphs 7,206-7.208 (paragraphs 7,208-7.210 of this Report) and 7,324-7.326 (paragraphs 7,326-7.328 of this Report) and claims that the Panel has adopted the United States characterisation of settlement rates as "access charges" or "termination rates." Therefore, Mexico considers that it is especially important that the Panel set forth the factual nature of settlement charges as described by Mexico in paragraph 29 of its first written submission. Mexico also requests an addition at the end of paragraph 7,206 (paragraph 7,208 of this Report) to ensure that Mexico's arguments are fully and accurately presented. The United States submits that Mexico's suggested text is misplaced and inappropriate in paragraphs 7,206-7.208 (paragraphs 7,208-7.210 of this Report). Therefore the United States urges the Panel to reject Mexico's proposed text. The Panel considers that the arguments of the parties on differences between settlement rates and termination rates do not belong to this section and makes no change to the text of the paragraph.
6.40.
With regard to paragraph 7,210 (paragraph 7,212 of this Report), the United States submits that the paragraph contains a lengthy statement from the United States, but does not provide the specific source of the statement. The Panel accepts the United States request and inserts the indicated reference in a footnote.
6.41.
According to Mexico, in paragraph 7,214 (paragraph 7,216 of this Report), in arriving at its finding that "interconnection rates charged by Telmex to United States suppliers of the services at issue are not cost-oriented", the Panel did not address facts and arguments presented by Mexico. According to Mexico there is a widespread practice, both in domestic and international contexts, of using target rates to determine whether rates are acceptable, and the United States stated that "WTO Members do not have explicit requirements for settlement rates to be cost-based." Mexico also contends that the United States agreed with it that Members "can reasonably rely on competitive market dynamics to yield cost-based settlement rates". The United States submits that Mexico is inaccurately quoting the United States. According to the United States, it did not state that "WTO Members do not have explicit requirements for settlement rates to be cost-based." Nor did it agree that currently in Mexico, Members "can reasonably rely on competitive market dynamics to yield cost-based settlement rates," which is what Mexico is presumably implying. The Panel declines to make any amendments on the basis of Mexico's comments because the quotes appear to be inaccurate or out of context; even if true, they are not relevant to argument presented in this paragraph.
6.42.
According to Mexico its settlement rates with the United States are consistent with the target rate recommended by ITU Study Group 3 for Mexico. According to the United States, Mexico incorrectly states that the Panel did not address Mexico's argument that its settlement rates with the United States are consistent with the target rate recommended by ITU Study Group 3 for Mexico. The Panel believes that is has adequately addressed Mexico's arguments and notes that, in any case, ITU "target rates" are just that, and are not, themselves, cost oriented rates.
6.43.
Mexico submits that its settlement rates are also sufficiently below the benchmark rate for Mexico set by the United States' FCC to establish, under the FCC's own guidelines, that there is "meaningful economic competition" in Mexico. Moreover, the application by the United States of its benchmarks policy to WTO Members is inconsistent with a belief that the Fourth Protocol applies to accounting rates. The United States submits that relevant United States' arguments are included at paragraph 36 of the United States' answers of 27 March 2003, and at footnote 42 of its second written submission of 5 February 2003. The Panel notes that it does not accept the implications of Mexico's arguments and notes, further, that the FCC benchmark rates are not, and are not claimed to be, "cost oriented" rates.
6.44.
Mexico claims that the United States compares ISR rates from the United States to various countries with the United States-Mexico accounting rates, rather than comparing the United States accounting rates with those countries to the United States-Mexico accounting rates. The United States submits that relevant United States' arguments in this regard are included at paragraph 34 of the United States' answers of 27 March 2003, and at paragraph 121 of its first written submission and at Exhibit US‑5. The Panel considers that Mexico's argument is not relevant since the United States' accounting rates are not subject to any claims in this dispute. Furthermore, the Panel is of the view that the United States uses ISR rates not as a substitute for accounting rates, but as a proxy for illustrating what costs may be.
6.45.
With regard to paragraph 7,225 (paragraph 7,227 of this Report), Mexico requests that the Panel clarifies what is meant by the "services at issue" and whether the "termination … of the services at issue" means the "termination of calls". The United States submits that, as noted above in the United States' responses to Mexico's comments concerning paragraphs 7,149, 7,150 and 7,157 (paragraphs 7,151, 7,152 and 7,159 of this Report), the Panel's statements at paragraph 7,225 (paragraph 7,227 of this Report) speak to the definition of the relevant market, and whether Telmex is a "major supplier" in that market. To clarify this point, the United States suggests that the Panel amend the first sentence of paragraph 7,225 (paragraph 7,227 of this Report). The Panel declines Mexico's request because it notes that the issue of "services at issue" and "termination" have already been adequately addressed in response Mexico's comments above.
6.46.
Mexico requests the Panel to clarify in paragraph 7,226 (paragraph 7,228 of this Report) of the Interim Report that under the Panel's finding, individual gateway operators other than Telmex are not, themselves, "major supplier[s]" within the meaning of Section 1 of Mexico's Reference Paper. The United States submits that the additional language requested is inappropriate and requests that the Panel reject the modification requested by Mexic