Todd Tucker has more to say on prudential regulation:
Say a policy is non-prudential, like banning Internet gambling. In a WTO challenge of that ban, the first part of the dispute settlement hearing would be dedicated to figuring whether a country violated its GATS Article XVI commitments. (This article sets a ban on bans, even if they're non-discriminatory.)
If the panel decided that the country had indeed violated their GATS commitments, then the respondent country would likely invoke Article XIV as a defense.
...
As the opening paragraph [of XIV] ("chapeau") makes clear, the respondent country could argue that the measure that violated their GATS commitments (a ban on Internet gambling) was also a policy "necessary to protect public morals" and was also "not applied" in a protectionist manner or a "disguised restriction on trade". Assuming these (steep) hurdles could be met, the WTO challenge to the non-prudential Internet gambling ban would survive (even though the record would show that GATS Article XVI was violated).
Contrast this with a ban on a risky financial service under the PMD. Assume that this was deemed an Article XVI violation. Assume also that the measure met the threshold requirement of being deemed prudential (i.e. the hurdle posed by the PMD's first sentence). A respondent country would then have to meet the hurdle posed by the second sentence: "Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement."
How can this hurdle be cleared? Article XVI is not a list of principles that should be followed, it is a list of policies to be avoided. The means by which a country accomplishes its policy is the same means by which it avoids its GATS commitments. But under the Article XIV analysis, that can be allowed, provided its not arbitrary, unjustifiable, applied in a protectionist way, or a "disguised restriction on trade."
But under the PMD analysis, the measure would have to be a "a means of avoiding the Member’s commitments or obligations under the Agreement" for sake of establishing the violation of XVI, while at the same time not be " a means of avoiding the Member’s commitments or obligations under the Agreement" for sake of the 2nd sentence PMD analysis. This is not logically possible. The commitment the country undertook was to avoid bans - now it has bans.
If I understand Todd correctly, he seems to think that a measure -- such as a "ban on a risky financial service" -- which violates Article XVI is necessarily (and by virtue of the violation) being "used as a means of avoiding the Member’s commitments or obligations under the Agreement." As a result, if the measure violates XVI, it can't possibly be justified under the prudential measures defense (PMD), as it would also be inconsistent with the second sentence of the PMD (which says: "Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement.")
I think he's wrong about this. In my view, it is possible for a prudential measure to violate XVI but still satisfy the PMD. First of all, it's important to understand that XVI is a set of obligations Members must comply with. Todd says that it is "a list of policies to be avoided," which I suppose is true in some general sense, but I don't think that's the best way to characterize it. Violating XVI doesn't mean you are "avoiding your obligations." It means you are violating those obligations. There's a difference there.
Second, XVI is purely about the impact of the measure at issue, and doesn't take into account the policy goals. So, conceivably, a "ban on a risky financial service" could violate XVI, although I don't think it necessarily would (in fact, I would say that in most cases it should not). But assuming it did, such a ban would be in violation of XVI regardless of the underlying policy goal of the measure, which doesn't come up there. The policy goal does come up under the PMD, though. If the policy goal is legitimately about prudential regulation, and there was no hidden goal of "avoiding" the XVI obligations, the measure is justified.
