RESTRICTED
WORLD TRADE G/PSI/WP/W/2
16May1997
ORGANIZATION(97-2042)
Working Party onPreshipment Inspection
ISSUES FOR CONSIDERATION INTHE
ARTICLE 6REVIEW OFTHE AGREEMENT ONPRESHIPMENT INSPECTION
Textfrom theChairman
TheWorking Party onPreshipment Inspection wasestablished bytheGeneral Council atits
meeting of7,8,and13November 1996. Working under theCouncil forTrade inGoods, ithasthe
terms ofreference asfollows:
"toconduct thereview provided forunder Article 6oftheAgreement onPreshipment Inspection
andtoreporttotheGeneralCouncilthroughtheCouncilforTradeinGoodsinDecember1997".
Thefirstmeeting oftheWorking Party washeldon28February 1997. Atthatmeeting, it
wasagreed, interalia,thatachecklist ofissues wasnecessary toguide thereview process. Following
themeeting andsubsequent informal consultations, several issues haveemerged which provide abasis
forthereview process. Tothisend,alistofissues, which isnon-exhaustive, ispresented hereunder:
(i) Price verification
(ii) Confidentiality ofbusiness information
(iii) Non-discriminatory application ofinspection criteria
(iv) Transparency
(v) Delays
(vi) On-site representation ofPSIentities
(vii) Operation oftheIndependent Entity (hereafter: IE)
Theparagraphs thatfollow elaborate ontheissues thathavebeenidentified byproviding a
background, defining thepolicy problem, summarizing theviews expressed, andsuggesting options
fortheconsideration oftheWorking Party. IntheConclusion (Section VIII), theoverall picture is
assessed andbased onthereasons ofthehorizontal andinstitutional implications andeffects ofthe
issues, arecommendation ismade fortheestablishment ofaCommittee onPreshipment Inspection.G/PSI/WP/W/2
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I. PRICE VERIFICATION
(a) Background -Price verification isacorefunction ofPSIentities andthefunction that
distinguishes government-mandated, comprehensive preshipment inspection, ontheonehand, from
generic quantity andquality inspection, ontheother. Theunderlying rationale forprice verification
isbased onseveral objectives. These include valuation ofimported products forcustoms purposes
(revenue collection), invoicing forexchange andpayment purposes, etc.Thelatter isrelated tothe
flowofforeignexchangeandalsotothecollectionoftaxrevenuewhichhasstrongeconomicimplications
foruserMembers. Thefundamental issue regarding price verification forcustoms purposes isthe
difference between, ontheonehand, theactual value1oftheimported product agreed between the
buyer andseller, andontheother hand, thenormative value2oftheimported product determined
bycustoms authorities.
Currently, under theAgreement onPreshipment Inspection (hereafter, theAgreement),
Article 2.20provides guidelines onhowpriceverification should beconducted byPSIentities. These
guidelines forprice verification canbesummarized asfollows:
i) comparability ofprices ofidentical goods from thesame country;
ii) acceptance ofthetransaction value onlywhen andifappropriate ;
iii) verified transportation charges forthemode oftransport fromtheexporting country;
and
iv) exclusions frompriceverification suchastheselling priceinthecountry ofimportation,
exportpricefromacountryotherthanthecountryofexportation,thecostofproduction,
andarbitrary/fictitious prices orvalues.
Also, according tofootnote 4inArticle 2.20oftheAgreement, userMembers areobliged
toensure thatPSIentities adhere touserMembers 'obligations inGATT 1994andinrelated Agreements
under Annex 1AoftheWTO Agreement (such astheAgreement onCustoms Valuation).
(b) Problem definition -Fourconcerns havebeenidentified based oncustoms, trade policy, and
userMembers concerns. Three keycustoms-related concerns havebeenidentified. Thefirstconcern
istheexistence oftwoconceptually different methods ofpriceverification forcustoms purposes which
havesometimes resulted inuncertainty, unpredictability, variance inpricing andhence disputes over
pricingforcustomspurposes.Thesecondconcernistheimplementationofpriceverificationforcustoms
valuation andrevenue collection (insome cases) bynon-governmental PSIentities. These areareas
thateither should beexclusively reserved forsovereign, economic andtrade policy authorities ofthe
government and/or reserved foranegotiated, multilateral WTO agreement. Athirdrelated concern
isthesensitivity ofseveral userMembers whoarerequired byinternational financial institutions to
employ theservices ofPSIentities inorder tomeet revenue collection targets which theyconsider
theycanachieve without PSIentities.
Thefourth, atrade policy concern, isthatdual/multiple pricing systems should notbecome
abarrier totrade norrestrict access tomarkets thereby impeding thefreeflowoftrade andreducing
thegains oftrade liberalization.
1Thisisassociated tothetransaction value provided forintheWTO Customs Valuation Agreement. Itisdefined astheprice paid
orpayable oftheimported product.
2Thisisassociated withtheBrussels Definition ofValue which isabenchmark price based onassumption sthatintegrate coefficients
ofprice, time, place, quantity andcommercial level.G/PSI/WP/W/2
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(c) Views expressed -There isconsensus intheWorking Party thattheimplementation ofthe
Agreement should notlimit market access norimpose newbarriers, butrather promote trade
liberalization, thefreeflowofgoods, andauniform system forpriceverification which doesnotallow
theuseofarbitrarily determined prices. While itisaccepted thatpriceverification forcustoms purposes
conducted byPSIentities should beharmonized, further consultations arenecessary todetermine the
bestwayfortheeventual realization ofthisobjective, noting thetransitional periods ofsome countries
toimplement theCustoms Valuation Agreement.
(d) Options -There aretwooptions. First, thebestoption could betorevise theAgreement to
oblige PSIentities tousetheactual value oftheimported product agreed between thebuyer andthe
seller, consistent withtheWTO Agreement onCustoms Valuation.3Thesecond bestoption would
betoelaborateaclearerandsimplifiedsetofguidelinesgoverningpriceverificationforcustomspurposes
based ontheactual price oftheimported product, pursuant toArticle 2.20(c) oftheAgreement on
PSI.
II. CONFIDENTIALITY OFBUSINESS INFORMATION
(a) Background -There isaconsensus thatinadequate protection ofclassified business information
presents commercial risksfortheglobal trading community. Thetypeofinformation considered could
include imports andexports ofpatented goods, technology, prices andvolumes ofimports andexports,
etc.Theimperativefordegreesofconfidentialityofbusinessinformationrelatetocommercialadvantage
andcompetition between andamongst businesses.
Article 2.9oftheAgreement provides fortheprotection ofconfidential business information.
Furthermore, Article 2.12obliges userMembers toensure thatpreshipment inspection entities donot
request exporters todivulge business information classified asconfidential.
(b) Problem definition -Deep andwide-spread concern hasbeenraised thatthereisanincreasing
breach oftheprotection ofconfidential business information byPSIentities. Those breaches have
caused difficulties andconflicts insome partsofthetrading community andhaveproduced, insome
cases, unfair competition suchasinpricing, andbreak-down oftrustbetween exporters andimporters,
andhence lesspredictability intrading relations inareas ofPSIcoverage.
(c) Views expressed -Differences inviews havearisen overthemagnitude oftheproblem. While
there isageneral agreement thatunjustified disclosure ofconfidential business information hastaken
place, inbreach oftheAgreement, differences existastothescale oftheproblem andwhether this
would require arevision ofArticle 2,paragraphs 9-13oftheAgreement, andifso,how.
(d) Options -There iswide-spread support onthenecessity ofstrengthening theprovision on
protecting confidential business information, iftrading relations aretoproceed onthebasis offair
competition, predictability andtransparency. Toaddress theproblem ofunjustified disclosure ofsuch
information thatisincontravention oftheAgreement, andthusharmful totrading relations, twooptions
exist. Consideration could begiven fortheWTO under Article 2.12oftheAgreement toestablish
adirect obligation onPSIentities toprovide declarations indicating measures theyhavetaken toensure
theintegrity ofconfidential business information. Thecurrent practice intheAgreement requires user
Members toensure thatPSIentities donotdivulge suchinformation. Furthermore, provision could
bemade that, intheevent ofbreaches ofthisproposed obligation, PSIentities would provide
compensation tocover thedegree oflosstoacompetitor thatdemonstrates material loss/injury. Further
consultations arenecessary.
3Theapplicability ofthisoption foreachMember would depend onthestatus ofcompliance ofeachMember withtheappropriate
provisions oftheWTO Agreement onCustoms Valuation.G/PSI/WP/W/2
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III. NON-DISCRIMINATION: DISCRIMINATORY APPLICATION OFINSPECTION CRITERIA
(a) Background -Oneofthetwofundamental principles oftheinternational trading system is
non-discrimination, ascontained inArticle IofGATT 1994. IntheWTO, theareaofPSIoperations
isunique inthatitprovides fordirect interaction between Members andtheprivate sector. Thisdirect
form ofinteraction should neither weaken norundermine thediscipline ofnon-discrimination which
isessential tothesmooth functioning oftheglobal trading system.
Article 2.1requires userMembers onlytoensure thatPSIoperators discharge theirduties in
anon-discriminatory manner. TheAgreement places noobligation oneither exporters orPSIoperators
toensure non-discrimination.
(b) Problem definition -Theissueofnon-discrimination ishorizontal. Twoparticular problems
areevident. Thefirstistheexpressed concerns regarding discriminatory application ofinspection
criteria, procedures, andmethodologies byPSIoperators across andwithin exporter countries which
effect theircompetitiveness. Thesecond istheinfeasibility ofperformance byuserMembers ofthe
provision intheAgreement requiring them toensure non-discrimination intheinspection
criteria/procedures byPSIoperators fromexporter points ofshipment. Thecombined effects ofthese
twoproblems have resulted inuncertainty regarding theresponsibility fortheimplementation of
Article2.1,lackofpredictability,andthusaweakeningoftheprincipleofnon-discrimination,restrictions
tothefreeflowofgoods, aswellashaving implications forfaircompetition amongst Members.
(c) Views expressed -Members haveunderscored theimportance ofupholding theprinciple of
non-discrimination.ExporterMembershaveexpresseddeepconcernsontheimplicationsforcompetition
arising from thediscriminatory application ofinspection criteria andprocedures.
(d) Options -Inlightoftheproblems identified, consideration should begiven toi)revising the
current provision intheAgreement toestablish adirect obligation onPSIentities toensure the
non-discrimination application ofinspection criteria andprocedures; ii)underscoring thenecessity
ofdesigning standardized, uniform formats ofinspection criteria andprocedures tobeconsistently
applied byPSIentities. Further consideration could begiven torecommending totheWorking Group
onTrade andCompetition Policy examination oftheprobable consequences ofthediscriminatory
application ofPSIinspection criteria andprocedures fortrade andcompetition policy.
IV. TRANSPARENCY
(a) Background -There aretwoaspects totheissue oftransparency. Oneaspect refers tothe
transparency surrounding Members 'lawsandregulations relating totheAgreement, andtheother
refers tothecriteria, procedures andmethodologies usedbyPSIentities inconducting theirinspection
activities. Only thelatter aspect hasbeen raised byMembers asasubject forthereview ofthe
Agreement.
Article 2,paragraphs 5-8contains transparency provisions. Itallows exporters theopportunity
torequest userMembers tooblige PSIentities toprovide relevant information, including lawsand
regulations relating toPSIactivities, theprocedures andcriteria usedforinspection andprice and
currency exchange-rate verification purposes, andtheappeals procedure provided forinparagraph 2.21
oftheAgreement.
(b) Problem definition -Twotechnical problems exist. First, therequirement forPSIentities
toprovide information toexporters onrelevant inspection requirements, assetoutinArticle 2.6,is
based onanindirect obligation thatuserMembers areresponsible forimplementing. Second, inspection
requirements areneither standardized norautomatic, andonlyprovided byPSIentities attherequestG/PSI/WP/W/2
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ofexporters. Theshifting areas ofresponsibility between userMembers andPSIentities aswellas
uncertainty ofperformance regarding theimplementation oftheobligations inArticle 2.6create
ambiguity, severely weaken theprinciple andpractice oftransparency embodied intheGATT/WTO,
andhaveoften resulted intransparency failures which impede thefreeflowofgoods.
(c) Views expressed -There isaconsensus thatadherence totheGATT/WTO principle andpractice
oftransparency isvitalandessential tothefunctioning ofthetrading order, particularly tothefree
flows ofgoods andcapital.
(d) Options -Inorder toconform toGATT/WTO transparency provisions, theWorking Party
should givestrong consideration torevising theAgreement asfollows: i)theestablishment ofastandard
format forinspection requirements; andii)adirect obligation onPSIentities toensure the
communication ofnecessary information.
V. DELAYS
(a) Background -Delays intheoperation ofpreshipment inspection arerelated to:i)shipping
delays; ii)payment delays; iii)issuance ofclean report offindings (CRF). These issues arerelated
tothefreeflowofgoods, andthetimely exchange ofgoods andpayments forsuchgoods, aswell
astoconfidence andtrustbybothexporters andimporters inPSIentities.
Article 2,paragraphs 15-19oftheAgreement require PSIentities toavoid "unreasonable
delays" ininspection ofshipments and"expeditious" conduct intheissuance ofCRFs (infiveworking
days).
(b) Problem definition -Theconcern expressed byexporters withdelays ortheabence ofthe
issuance oftheCRFtothemisbased onlosses theysuffer because oflatepayments ontheirshipments.
Thisconcern isinaddition toconstraints imposed bydelays tothefreeandtimely flowofgoods.
Currently, under theAgreement, theobligation toavoid delays intheissuance oftheCRFs andby
consequence theavoidance ofdelays onpayments toexporters, isplaced onuserMembers thatcontract
PSIentities. Itisfeltthatthecurrent focus oftheobligation onuserMembers doesnottakeintoaccount
theircapacities andtherefore allows PSIentities toremain insufficiently accountable.4
(c) Views expressed -Exporter Members haveemphasized thenecessity foratimely/immediate
issuance ofCRFtothem; forspecific explanations byPSIentities incases ofnon-issuance ofCRF;
andforgreater accountability ofPSIentities regarding theprompt/immediate issuance ofCRF. Several
userMembers haveconcurred withtheseviews inorder toreduce exporter pressures onthemtoenforce
theircurrent obligations under theAgreement.
(d) Options -There isaconsensus onthenecessity toensure theprompt/immediate issuance of
theCRFtotheexporter, andstrong support fortheideathatPSIentities should bedirectly responsible
forensuring thisrequirement.
VI. ON-SITE REPRESENTATION OFPSIENTITIES
AconcernwasraisedinthefirstmeetingoftheWorkingPartyonPSIregardingthenon-physical
representationofPSIoperatorsineveryexportingcountryinwhichtheyconductpreshipmentinspection.
Inrendering thisview, itwasfeltthatresident, on-site PSIrepresentation inevery exporting country
would enhance theefficiency, authenticity, andaccuracy ofinspection results. However, thisisnot
4Theobligation onuserMembers toensure theconduct ofPSIentities, inrespect oftheAgreement, hasbeenraised asahorizontal
issue thatneeds tobefurther addressed.G/PSI/WP/W/2
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anissuerelated toeither theprovisions ortheimplementation oftheAgreement and,thecontrary view
hasbeenexpressed thattheAgreement doesnotimpose anyobligations onPSIoperators inthisrespect.
Furthermore, theestablishment ofsubsidiary offices isdiscretionary, andbased onprofit calculations
byprivate sector operators
Intheabsence ofresident, on-site PSIoffices inanexporting country, theWorking Party could
consider recommending thatPSIoperators establish localfocalpoints toprovide allrelevant information
inrespect ofinspection criteria andprocedures.
VII. OPERATION OFTHEINDEPENDENT ENTITY (IE)
(a) Background -TheIEisthemechanism fordispute resolution between exporters andPSIentities
forcases involving analleged violation oftheAgreement, where theinternal appeals procedure of
thePSIentity hasfailed toresolve thedispute. Itwasestablished through anAgreement among the
WTO, theInternational Chamber ofCommerce andtheInternational Federation ofInspection Agencies
(IFIA) inDecember 1995.
TheGeneral Council, initsDecision of13December 1995, contained indocument
WT/L/125/Rev.1, created theIEandadopted itsStructure andFunctions andRules ofProcedure, as
provided forinArticle 4oftheAgreement. TheIEcommenced operations inMay, 1996(G/PSI/IE/2).
(b) Problem definition -Inspiteofstrongly expressed concerns andproblems surrounding various
areas ofPSIoperations, nosingle application fordispute resolution hasbeen filed withtheIE.
Furthermore, inspiteofpersistent concerns, nodataisavailable ofcases thatcould havebeenfiled
under theinternal appeals procedures, established under Article 2.21oftheAgreement.
(c) Views expressed -Against thisbackground, twopossible explanations havebeenoffered.
Ontheonehand, theviewhasbeenexpressed thatnoapplications fordispute resolution havebeen
filedwiththeIEbecause theproblems donotexistatsignificant levels ofseverity thatwarrant formal
dispute. Ontheother hand, thecontrary viewhasbeenexpressed thatcases havenotbeenfiledbecause
theIEisaninadequate mechanism todealwiththepeculiarities, namely: thesensitivities ofprivate
sector operators andpressures feltbyMembers arising fromthewebofcomplex economic andtrading
relationships amongst exporters, PSIoperators, userMembers andimporters. Consequently, adifferent
approach toaddressing disputes arising from theoperation ofpreshipment inspection isrequired.
(d) Options -Consultations reveal thatprivate sector operators areaverse totheutilization ofthe
IEasadispute resolution mechanism intheWTO intheabsence ofgovernmental backing andcover.
Thismayberelated toconcerns about potential commercial consequences ofandbacklash fromformally
fileddisputes and,alsouncertainty regarding thefullimplications oftheIEprocess. Inthelightof
these circumstances, theWorking Party could consider thefollowing: i)disestablishment oftheIE;
andii)thatMemberswhoseprivatesectoroperatorsexperiencesignificantcommercialproblemsresulting
inmaterial injury fromPSIactivities should rather bring suchcases before theDispute Settlement Body
oftheWTO, asprovided inArticle 8oftheAgreement.
VIII. CONCLUSION
(a) Severaloftheissuesraisedarehorizontalintheirimplicationsandeffects,bothfortheAgreement
aswellasfortherulesanddisciplines ofthemultilateral trading system asawhole. These issues include
non-discrimination, transparency, andtheoperation oftheIE.
(b) Theissues raised alsohave institutional implications andconsequences fortheprinciples,
disciplines, andaccumulating practices ofthetrading system. Several oftheconcerns raised andtheG/PSI/WP/W/2
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issues identified areresolvable. Nonetheless, itistobeexpected thatother issues willrequire constant
monitor, review, andon-going consultations andnegotiations. Furthermore, itisnecessary torecall
thattheAgreement onPreshipment Inspection exists. Forthesereasons itissuggested thatconsideration
should beaccorded totheestablishment ofaCommittee onPreshipment Inspection tooversee the
Agreement.