According to the basic principle of Chicago Convention

According to the basic principle of Chicago Convention, every State has complete and exclusive sovereignty over the airspace above its territory. Some States had proposed that each member State of Chicago Convention to grant the other States of the Chicago Convention full commercial traffic rights, while leaving the sovereignty principle unaffected, but majority favoured in regulation and international co-ordination for air, rather than unrestricted freedom. Therefore, the Freedoms of the Air was formulated as a result of the disagreements over the extent of aviation liberalisation in the Chicago Convention.

Instead of multilateral agreement like Chicago Convention or other rules and regulations imposed by ICAO. Most of the States preferred to conclude bilateral air services agreements reciprocity. Under the framework of Chicago Convention, more than 10,000 bilateral air services agreements entered between States.

The bilateral air services agreements regulate wide ranges of provision of international air services, included in the seven features identified by the World Trade Organisation (“WTO”) Secretary in the air services agreement relevant to the market condition in 2006. One of the features is the withholding clause, that is the contracting States have retained the right to withhold, revoke, suspend or impose additional conditions on the operating authorisation of a foreign airline that is not “substantially owned” or “effectively controlled” by the contracting States or the States’ nationals. This is well known as “nationality restriction clause” in the international aviation industry.

Airlines had important strategic, economic and developmental roles within the region, and leaded to the encouragement of the growth of the national. However, aviation industry required huge capital investment and subjected to a high operation risk, the airlines could not be sustainable without the government support. Thus, most airline are State-owned enterprise or having substantial subsidy from its government. In order to eliminate the unfair or destructive competitive practice, additional protection and restriction rules in aviation industry applied. The nationality restrictions are one of the protectionism tools for aviation industry, which can provide the designating State to implement a “balance of benefits” policy for the airlines involved and to ensure the exchange of traffic and other rights would go to airline only of the States with which they were negotiated to prevent non-party State’s airline from gaining the unreciprocated benefit.

Moreover, the nationality restrictions can avoid the problem that exists in the maritime trade of “flags of convenience” vessels with lax safety, labour, and environmental restrictions. And some States’ consideration of the National defence can be one of the factors for the nationality restrictions as well.