Demarcating the boundary between Goods and Services: an analysis GATT and GATS
By Abhay
Shankar Babu & Nupur Nayak
4th
Year BA LLB, Hidayatullah National Law University, Raipur
Goods and products have always been approached
differently with different set of rules. But the main issue has been as to how
to demarcate the line between goods and services. This question can be answered
by referring to the characteristics of the products, or perusing over the
economic characteristics, the legal context, or use of the product. This
process of determination is not problematic at the national level as it may
reflect the national interests of the imposing state but problems of legitimacy
may arise under international regulatory regimes. International regulatory
structures must be perceived as “legitimate” by those participating in them.
Interpretation of international rules is not only driven by the underlying
rationale of the rule drafters, but also by the need to ensure the continued
legitimacy of the rules themselves. In particular, questions arise over who
should make the boundary decision in the international context.
In the context of the WTO, the demarcating line
between the goods and services is still blurred but help can be taken from European
Union (EU), where such questions have also been faced. The researcher in this
paper has first tried to analyze the WTO’s categorization of products as goods
and/or services. Then she has tried her to highlight the mode of distinguishing
between goods and services as adopted by the European Union. In the end attempt
has been to interpret the dictionary meaning of goods and services which would
assist in defining objectively the boundary between goods and services, serving
the interests of legal certainty and, crucially, reinforcing the legitimacy of
the WTO and the European Union and their respective decision-making processes.
History
Before 1995 (creation of WTO) i.e. during
the period of GATT 1947 multilateral trade rules as formulated be GATT only
covered trade within its limits. The trade was liberalized by GATT with the
help of reduction of trade barriers and removing restrictions on the import and
export of goods by the government. GATT essentially followed the two non-discriminating
provisions i.e., MFN[1]
and the NT.[2]
But there were also few exceptions
followed by GATT which made imposition of trade barriers in limited
circumstances valid.[3]
But it was not until 1995 i.e. with the formation of WTO that trade in services
was included within multilateral trade rules with the making of GATS. It helped
in reducing barriers to trade in services in two ways.
1.It
eliminated restrictions in domestic regulations.
2.GATS
addressed particular service sectors through subject specific annexes.[4]
The GATS has essentially been formed by
the help of GATT and features many of its rules including the MFN[5]
and national treatment provisions,[6]
as well as the general exceptions clause[7]
in Article XIV. However, GATS also includes a separate market access commitment
based heavily on a combination of the wording of the MFN and national treatment
rules in Article XVI.[8]
Article XVI requires any member
undertaking full liberalization commitments without restrictions in one service
sector in their schedule to give MFN treatment to all services and service
suppliers in that sector from other members.[9]
GATS rules also only affect those sectors which members have agreed to liberalize
in their schedules annexed to the main agreement.[10]
Structure of GATT and GATS
Perusal of provision of the GATT and GATS also
supports the existence of a boundary between goods and services. GATS includes
a definition of “trade in services” in Article I (1), implying a distinction
between trade in goods and trade in services.[11]
Moving further while GATS incorporates within itself different types of
commitment, the same has not been done in GATT. Finally, the wordings of the obligations
in the two agreements are drafted differently.
Under GATT the principal of MFN and NT are followed
in every case but the same is not the case with GATS. GATS obligations have been
classified as (1) general obligations in Part II and (2) specific commitments
in Part III. Under GATS, the MFN clause is included in the general commitments,
meaning it will apply to all trade in services, unless the member has notified
an MFN exemption.[12]
In contrast, the national treatment and market access rules are present in Part
III of GATS meaning that members need only comply with the rules to the extent
that they have elected to do so in those service sectors specifically listed in
their schedules of commitments annexed to the GATS.
In Bananas,[13]
the Appellate Body argued that as Article II of GATS was an MFN commitment, it
was more appropriate to use the corresponding MFN jurisprudence in GATT as a
guide rather than that on national treatment. The Appellate Body dismissed the
importance of the type of trade in order to achieve a homogenous interpretation
of the substantive scope of the MFN clause in GATT and GATS.
In Canada—Autos,[14]
the panel found a violation of Article II(1) of GATS by focusing on the
question of whether the Canadian measure provided less favorable treatment to a
“limited and identifiable group of manufacturers/wholesalers of motor vehicles
of some Members,” allowing some manufactures/wholesalers to import vehicles
duty-free whereas others were specifically excluded from this exemption. The
Appellate Body rejected this approach, arguing that by equating the treatment
of wholesalers with that of manufacturers, the panel was applying a “goods”
analysis rather than one applicable to GATS. It argued that the wording of GATS
meant that the effect on both the manufacturers and the wholesalers had to be
considered separately and it was not possible to merely extrapolate the
analysis from one sector to the other, as would be the case for the MFN
analysis in GATT.
While Bananas removes the importance of the
categorization of the product from the scope of the MFN clause by homogenizing
the GATT and GATS rules, Canada—Autos re-introduces it.
Demarcating
The Line Between GATT And GATS
The definition of Goods is missing in GATT while GATS
provides a restricted definition of “services” and “defines “trade in services”
in terms of mode of supply of the product: either products are traded across
borders, the consumer travels to another member’s territory to receive the
product, products are supplied by the “commercial presence” of the service
supplier within the member’s territory, or there is movement of “natural
persons” to another member in order to supply the product.[15]
The panel in Mexico—Telecommunications[16]
was of the view that the definition
of “trade in services” in Article I (2) of GATS was “defined comprehensively.”
This view lays emphasis on the method of transfer without specifying the
essential characteristics of the product itself. But in Canada—Autos case it was stated that the inherent
economic characteristics of the product were relevant to the scope of the MFN obligation
in GATT and GATS, as both agreements covered different subject matters. Thus GATS
definition is alone not enough to determine the boundary. Scheduling is a way
to find out the boundary between goods and services even though classification
for scheduling purposes is complex, though being similar for both GATT and
GATS. Numerical categorization systems is adopted in both, where products are
allocated distinct codes, which are then listed in the members’ schedule. Once
a product fits within a code, it is classed as either goods or services purely
based on the code allocated by the relevant nomenclature.
Classification of Goods and
Services Under the european union
The European Union established by the Treaty of Rome
had an essentially trade-based purpose. The main aim of the European Union even
after various amendments is to achieve its objectives through the establishment
and proper functioning of a common market.[17]
One of the essential elements of the common market is the four freedoms[18]
i.e., free movement of goods,[19]
services,[20] people,[21]
and capital,[22] thus
distinguishing between goods and services. Three issues arise from this. First,
what is the significance of this distinction in the European Union? Second, the
manner in which the European Union dealt with this matter? Finally, is the
difference between goods and services institutionalized within the European Union
in the same way as it is in the WTO?
Analysing the EC Treaty
Freedom to provide services has been dealt in Article
49, while freedom of movement of goods has been dealt in several articles.[23]
There is a difference in the type of action which the two organizations may
take, the European Union having legislative powers that the WTO lacks.[24]
Article 14 (2) of the TEC states that the internal market includes free movement
of both goods and services and lays emphasis on the harmonizing measures. The
incorporation of Article 95 is for achieving the objectives set out in Article
14 but does not apply to fiscal provisions, to those relating to the free
movement of persons nor to those relating to the rights and interests of
employed persons.[25]
The involvement of the European Parliament depends upon procedure used as its
involvement is different for different levels. Under Articles 95 and 47(2), its
consent to a proposal is required, whereas under Article 52(1), the Parliament
need only be consulted. Further, under Article 47(2) unanimity in the Council will
be required, but Article 52(1) and Article 95, it will not be. Thus decision
making is the ultimate way which decides whether the particular issue falls
within goods and services and has a particular impact on the freedom of the
Member States to maintain their own national position. Whereas in the case of
unanimity requirement in council, each state effectively has a veto, a state
may have an interest in compromise, where qualified majority voting is
required. The Council in general may have to compromise when the European
Parliament effectively vetoes a legislative proposal (co-decision procedure). The
reason for difficulties in this area is due to unclear nature of scope of each
of the provisions thus creating potential for overlap. For example, the
relationship between the services harmonization provisions and Article 95 is
unclear.[26] The fact
that separate treaty provisions deal with the free movement of goods and
services, suggests that a distinction should be made between the two
provisions, an assumption which is supported by decisions of the European Court
of Justice (ECJ) that indicate that the four freedoms are mutually exclusive.[27]
The WTO also faces the similar questions regarding distinction in treatment of
goods on the basis of structural difference. The crucial difference relates to
scope of Article 28 as opposed to Article 49. The original scope of Article 28
of the TEC was uncertain. The central question was whether it only operated to
catch those measures that were overtly discriminatory. The cases of Dassonville[28]
and Cassis de Dijon[29]
made clear that the scope of Article 28 would not be so limited; it could
apply to “indistinctly applicable” rules which nonetheless might affect trade. In
Sunday Trading cases[30]
where an English rule which prohibited trading on a Sunday, irrespective of the
origin of goods, was found to fall within Article 28. In that case, there had
been no proof of an actual effect on inter-state trade. The ECJ limited the
scope of article 28 on account of criticism regarding over-extension of Article
28, whereby virtually any rule which had a potential impact on trading goods
could fall within Article 28. It sought to distinguish between those
indistinctly applicable rules which did have an impact on intra-Community trade
and those which did not. The case in which this change occurred was Keck[31]
where “Requirements to be met” or “product requirements,” which are rules relating
to the content of a product such as recipe or packaging rules fell within
Article 28. The ECJ distinguished between those rules which impose an
additional burden on imported products and those rules which, although they may
affect access to the market; did not impose a specific additional burden on
imports. But, in Alpine Investments,[32]
the court rejected the argument that the distinction between “selling arrangements”
and “product requirements” should apply in the context of services as well thus
narrowing the scope of Article 28 with respect to Article 49, thereby stressing
the need within the European Community of making a distinction between goods
and services.
Goods
While the TEC gives provides a fractional definition
of services in Article 50 of TEC, it is silent on the meaning of goods. Despite
vital importance of the free movement of goods in the European Union, the
reference of goods is minimal. In the context of various articles, the approach
adopted by ECJ as regards to meaning of goods is a common one. The ECJ faced
the questions regarding the scope of goods since long[33]
and defined goods as products which have a monetary value ascribed to them and
as such can then form the basis of a commercial transaction thus must be
capable of being the subject matter of trade. The Public Interest and the non
trade issues are protected by the European Union legal order by specific
provisions derogating from the Treaty freedoms. Although the Art Treasures
case[34] provides a starting point, it does
leave some questions unanswered, notably whether items which have no “value in
money” should be considered goods. This issue came before the ECJ in the Belgian
Waste[35]
case which concerned, amongst other types of waste, waste that was neither reusable
nor a recyclable. According to the ECJ, “objects which are shipped across
borders for the purposes of commercial transactions are subject to Article 28
of the Treaty, including non-recyclable waste.”[36]
Thus the central notion in determining the applicability of the goods
provisions is whether there is an object which is likely to be the subject of a
commercial transaction, even where the transaction may involve the provision of
a service such as the disposal of waste.
Services
Article 50 states that services for the purposes of
the Treaty are those that are provided for remuneration insofar as they are not
governed by the provisions relating to the other treaty freedoms on goods, capital,
and persons. No sector is excluded in principle from the scope of the TEC, widening
the category of services.
Article 49 covers the situation in which both service
provider, service and recipients move to a third Member State. The definition
of services which specifies that services should be provided “for remuneration
raises an important question as to whether this requirement mean, that we are
looking for services of that type that are generally provided for remuneration
or for those which are provided for remuneration in a given set of
circumstances? When this question was addressed to the ECJ in the context of education,
The Advocate General noted that, “[s]tate education, is largely financed
from State taxes”[37]
and thus it was decided that state education fell outside the scope of Article
49 of the TEC, implying that it will be necessary to look at each individual
case to determine whether remuneration existed. With passage of time, it was
felt that for determining whether a service falls within Article 49, the type
of service as a general issue should be looked at rather than the individual
case.[38]
An approach based on the type of services has now been adopted rather
than looking to see if there is a commercial transaction in a given case.
Drawing
the line between Goods and Services
In the Dundalk Water Case, [39]
it was held that, “the fact that a public works contract relates to the
provision of services cannot remove a clause in an invitation to tender
restricting the materials that may be used from the scope of the prohibitions
set out in Article 28.” By contrast, in Läärä,[40]
the ECJ found that gaming machines were goods with a capital value in addition
to being necessary for the provision of gambling services. The question of the
boundary between goods and services in relation to the import of gaming
machines arose again in Anomar[41] where the same view was applied. Although
Anomar and Läärä may be consistent in identifying the independent
existence of gaming machines as key in determining the boundary between goods
and services, in the light of cases such as de Coster, it is hard to
discover a consistent rule within the cases applied by the ECJ.
In the case of Sacchi, the Court had to
determine whether broadcasting should be viewed as falling within the goods or
services provisions. It adopted the position[42]
that trade in material sound recordings and other products used for the
diffusion of television signals fall under freedom of movement for goods[43]
and surveyed the product’s physical nature and the mechanism of transmission to
distinguish between the same products in a different medium. However in de
Coster in which satellite dishes were at issue, the Court did not
even consider the question of whether the matter should be viewed as goods.
Even if this is justified by reference to the fact that the satellite box is
clearly tied to the provision of a service and has no function outside of that,
de Coster is inconsistent with the wording of Sacchi which
specifies that items for transmission or reception of signals constitute goods.
De Coster reflects the better position. The emphasis on the form of a
product has been criticized since it may give rise to difficulties with the development
of digital products and artificial distinctions between the same products
delivered via different mechanisms. Thus WTO and the EU suffer similar problems
when determining where the boundary lies between goods and services.
Defining
The Boundary In A General Context
Article 3(2) of the Understanding on
Rules and Procedures Governing the Settlement of Disputes (the “DSU”) states
that the WTO rules can be interpreted “in accordance with customary rules of
public international law.” Article 31(1) of the Vienna Convention 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.” These approach emphasize that the “ordinary
meaning” of the language should be used and, the “context” of the language should
be used.[44] The Oxford
English Dictionary effects a distinction between both products, defining
“goods” as “saleable commodities; merchandise or wares.”[45]
Merchandise is the commodities of commerce
or goods to be bought or sold, with commodities as “a thing of use or value; .
. . a thing that is an object of trade.”
In contrast, services are the sector of
the economy that supplies the needs of the consumer but produces no tangible goods.
This reflects that dissimilarity between services and goods can be determined
by deciding whether the product falls into the category of goods, as the incapability
to meet the “goods” test moves the product into the “services” category. It is
clear that in the Oxford Dictionary the definition of “goods” is derived from the
value of a tangible product measured in monetary terms which then allows that
product to be traded. Thus tangibility and tradability is cornerstone to
establish the product as goods. The product must have an inherent physical
existence and should be capable of being stored. The
producer can allow periods of time to elapse before the goods are disposed of, thus
not requiring proximity between the manufacturer and ultimate consumer. In
contrast, services are intangible and must be consumed immediately on
production and cannot be stored in the same way as goods. Thus, a certain
degree of proximity between the service provider and consumer is necessary, increasing
the likelihood of interaction between them both.
In order to incorporate a product within
the definition of goods, the product must be categorized as saleable. While the
dictionary definition explicitly refers to a product’s tradability in relation
to goods only, it is arguable that even products designated as services must
exhibit this tradability characteristic. The precondition for tradability is
that, it should be capable of being transferred from one party to another[46]
and also be capable of being the subject of a commercial transaction. Thus tangibility
paves the way to differentiate between goods and services, whereas tradability,
distinguishes between those products which fall under goods or services and all
other products which do not fall into either the goods or services definition
at all. Thus tradability test makes it possible to exclude products from any
regulatory framework when it is not possible to transfer ownership from the
producer to the consumer.
Although the WTO is primarily a trading
agreement where products are exchanged for their market value, there have been
questions regarding the extent to which it should enlarge its ambit to include
non-trade issues such as environmental concerns, cultural concerns, and human rights
defined broadly.[47] A shift in
the WTO debate means that the classification of products as non-trade issues
may move them beyond the competence of the WTO completely. The European Union
argued during the Uruguay Round of multilateral trade discussions that
audiovisual products should be classified as trade in services rather than
goods. The European Union and Canada are now arguing that the cultural content
or value of audiovisual means that they fall outside the scope of the
multilateral trade rules completely.[48]
Clearly, the classification decision in this case is taken on the basis of
non-economic considerations, which feeds directly into the role that non-trade
concerns play in the WTO.
It is assumed that because a product is
intangible it cannot be stored and, therefore, production and consumption occur
simultaneously. As a consequence, the trade method differs from tangible
products because the method must accommodate such instantaneous use. On this
interpretation, separate rules regulating goods and services are necessary on pragmatic
grounds solely due to the different ways in which products are traded.
Implicit in the transfer element of
“tradability” is the transfer of products from the producer to the consumer in
a way which allows the consumer to enjoy the product freely without
interference from the producer. Therefore, to fulfill the transfer element it
must be possible for property in the product to move from the producer to the
consumer as a prerequisite or concurrent requirement of the product’s physical transfer.
Although services’ intangibility means it
is difficult to possess the service per se, the consumer can still have
physical evidence of the existence of the service or legal evidence of their
right to receive it. Physical existence can occur in three ways. First, after
the provision of the service, physical evidence may exist demonstrating that
the service has been received. For example, when a consumer receives a haircut,
the receipt of the service is evident as the hair is shorter. Second, physical
evidence of the service may be available before it is provided to indicate that
the consumer has the right to receive that service. A legal document, such as a
contract or receipt, may fulfill this function. A third, more complex situation
may arise as in the case of pay television where the consumer must subscribe to
a package first and obtain a decoder card and box before they are able to
access the television signal sent by the broadcaster. For example, should pay
television be viewed as services, goods, or a combination of goods and
services? In these difficult situations, the key to classification of products
as goods or services could lie in the notion of ownership and, more
specifically, possession. In the case of goods, control is the right to enjoy
the physical product itself, whereas in services, it is control over the
right to receive the product. To ascertain the answer to this question in
borderline cases the starting point must be the function of the product or how it
is perceived by the parties to the transaction. Where the product’s function is
to form the subject matter of the transaction, the product will be goods
because its possession is enough to transfer ownership from the producer to the
consumer.
Using the definitions in the dictionary
and economics literature provide a coherent starting point for distinguishing
between goods and services, but problems arise from relying solely on this material.
Both definitions assume that the distinction is intuitive, flowing directly
from the economic characteristics inherent in all products. They also assume
there is a single economic criterion that places products into one category or
another, so all goods of the same type are always placed in the same category.
Conclusion
Although the Appellate Body and the panel
in a number of cases suggest that there may be some significance in the
distinction, the same is not clear. Inconsistencies may also arise in the
context of who is making the decision and what is the basis of decision in the context
of the formal ascription to the category of either goods or services.
Based on the natural language and
economic literature, there are two concepts underpinning the products captured by
the WTO: tradability and tangibility. Tradability first acts to distinguish
between products that are bought and sold and which therefore fall within the economic
sphere addressed by the rules in WTO and EU. In practice, few transactions fall
outside the scope of these treaties. Then comes in to picture the concept of tangibility,
which constitutes a rebuttable presumption that intangible items are services
while tangible items constitute goods. Thus the determining factor is the product’s
function, in combination with tradability. To form the subject matter of a
trade transaction, ownership must be transferred from the producer to the
consumer followed by the consumer gaining possession of the product thus exercising
control over it. Whether a product is a good or a service depends on whether
the consumer needs the product per se or whether they need it to gain access to
the product which forms the subject matter of the transaction. While these
criteria form a framework for making decisions, it is clear that in some cases
the boundary will remain contested. On a broader level, it is clear that if a
supra-national body like the WTO or European Union substitutes a different
boundary from that drawn by its members, then that institution is interfering
directly with the members’ national policies, raising legitimacy questions as
to its competency to intervene in all subject areas without specific
acquiescence by the member. The drawing of the boundaries again even though
within the competence of institution is subject to acceptability to its members
who can be said to give consent or be likely to accept interference with their
national policies if the goods/services boundary is re-drawn according to rationally
established principles.
[1] GATT art. I.
[2] Id. art. III.
[3] Id. art. XX; see also GATT art. XIX.
[4] See, e.g., Annex on Air Transport; Annex on
Financial Services; Annex on Basic Communications.
[5] See GATT art. I
[6] GATT art. III; GATS art. XVII.
[7] GATT art. XX.
[8] GATS art. XVI.
[9]Id. art.
XVI(1).
[10] GATS art. XX.
[11] GATS defines trade in a service in terms of its supply, either between
members across borders, by the presence of the consumer in another member’s
territory, the commercial presence of an entity within the member’s territory,
or by the presence of a natural person within the territory of another member.
[12] See GATS Annex on Article II Exemptions.
[13] WT/DS27/AB/R (May, 22, 1997).
[14] WT/DS139/AB/R & WT/DS142/AB/R (May 31, 2000)
[15] GATS art. I(2)(a)-(d).
[16] WT/DS204/R (Apr. 2, 2004)
[17] Treaty Establishing a Constitution for Europe, article I-3(2) specifies
that the Union is to “offer its citizens an area of freedom, security and
justice without internal frontiers, and an internal market where competition is
free and undistorted.”
[18] TEC art. 3(1)(c).
[19] TEC arts. 23–31.
[20] TEC art. 49.
[21] TEC art. 39.
[22] TEC arts. 56–60.
[23] Although TEC article 3(1)(c) refers to all four freedoms together, TEC
article 3(1)(a) also refers separately to “the prohibition, as between Member
States, of customs duties and quantitative restrictions on the import and
export of goods, and of all other measures having equivalent effect.”
[24] Community legislation takes direct effect in the legal systems of the
Member States. The terms of the WTO treaties will not necessarily have such
effect, depending on the terms of each state’s constitution.
[25] TEC art. 95(2).
[26] ex parte Imperial Tobacco Ltd., 2000 E.C.R. I-8419, ¶ 63.
[27] See Commission
v. Italy (Re: Export Tax on Art Treasures), 1968 E.C.R. 423.
[28]Case
8/74, Procureur du Roi v. Dassonville et
al., 1974 E.C.R. 837.
[29] Case 120/78, Rewe-Zentral v.
Bundesmonopolverwaltung fur Branntwein (Cassis de Dijon), 1979 E.C.R. 649.
[30] Case 145/88, Torfaen BC v. B &
Q plc, 1989 E.C.R. 3851.
[31] C-267, Keck and Mithouard,
1993 E.C.R. I-6097.
[32] Case C-384/93, Alpine Investments
BV v. Minister van Financiën, 1995 E.C.R. I-
[33] Case 7/68, Commission v. Italy
(Re: Export Tax on Art Treasures), 1968 E.C.R. 423 [referred to in authors’
discussion as Art Treasures].
[34] Case 7/68, Commission v. Italy,
1968 E.C.R. 423 [Art Treasures].
[35] Case C-2/90, Commission v. Belgium
(Walloon Waste), 1992 E.C.R. I-4431 [referred to in authors’ discussion as Belgian
Waste].
[36] Case C-2/90, Commission v. Belgium
(Walloon Waste), 1992 E.C.R. I-4431, ¶ 26.
[37] Case 263/86, Belgian v. René
Humble and Marie-Thérèse Edel, 1988 E.C.R. 5365, 5379.
[38] Case 186/87, Cowan v. Trésor public, 1989 E.C.R. 195.
[39]Case 45/87, Commission v. Ireland, 1988 E.C.R. 4929, ¶ 17.
[40] Case C-124/97, Läärä and Others,
1999 E.C.R. I-6067.
[41] Case C-6/01, Associação Nacional
de Operadores de Máquinas Recreativas (Anomar) and Others v. Estado português,
2003 E.C.R. I-8621.
[42] See, e.g.,
Case 52/79, Procureur du Roi v. Debauve,
1980 E.C.R. 833. In more recent cases, it has often not considered the question
of whether goods or services provisions are relevant.
[43] Case 155/78, Sacchi, 1974
E.C.R. 409, ¶ 7.
[44] Vienna Convention, supra note 9, art. 31(1).
[45] Concise Oxford
English Dictionary (Oxford University Press, 10th Edn, 1999).
[46] The panel did point to “ownership” transfer in Mexico—Telecommunications
although it did not give a detailed explanation on this point.
[47] This has been an issue for the European Union as well. See Ernst-Ulrich
Petersmann, Human Rights and the Law of the World Trade Organization, 37
J. WORLD . TRADE 241 (2003)
[48] See Council
for Trade in Services Special Session, Communication from Switzerland: GATS
2000: Audio-visual services, ¶ 6 , S/CSS/W/74 (May 4, 2001).