WORLD TRADE
ORGANIZATIONWT/GC/W/497
9 May 2003
(03-2480)
Original:  English
WORK PROGRAMME ON ELECTRONIC COMMERCE
Classification Issue
Submission from the European Communities
The following submission, dated 8 May 2003, has been received from the European
Communities with the request that it be circulated to Members.
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1. Under the Work programme on electronic commerce launched in 1998, WTO Members have
been discussing a number of issues prompted by the development of e-commerce.  The EuropeanCommunities made a number of submissions on various issues raised
1 and will endeavour to continue
to contribute to the debate on those various issues.
2. One of the issues has attracted much of the attention, including in the informal sessions of the
General Council dedicated to “horizontal issues”, that is the so-called issue of classification.  To be
precise, the issue at stake has not been how to classify all electronic deliveries but how to classify
some deliveries involving so-called “digitised produc ts”.  Indeed, delegations agreed that services
constituted the majority of what is delivered electronically.  For example, the delivery of a bank
account report by e-mail is clearly part of the supply of a banking service, or the electronic delivery of
a consultant report is clearly part of the supply of a consulting service.
3. Several Members have made valuable contributions to the debate.  The WTO secretariat has
also submitted several useful documents.  A number of Members have clearly expressed their
understanding that everything delivered electronically were services and that therefore the GATSrules and commitments applied to electronic deliveries.  Others have not stated their position so far.
4. At this juncture, the European Communities would like here to recall key points and address
the main arguments made in the debate.
1. The GATT has been designed for and has only addressed trade in physical products
5. As explained by the WTO secretariat in its note to the GATT council of November 1998
(G/C/W/128), the GATT is based on customs classification principles.
6. “The classification of goods for international trade purposes generally follows the
Harmonized Commodity Description and Coding Syst em (HS), created under the auspices of the
                                                     
1 The EC would like in particular to refer here to communications S/C/W/183 and IP/C/W/224 of
November 2000 and to JOB(01)/(85) of June 2001 on Information Society and Development.WT/GC/W/497
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World Customs Organization (WCO).  The HS provides a common nomenclature for the
identification of products, to assist the collection of customs duties, and the collection and comparison
of trade statistics.  It is comprised of 97 chapters, which generally distinguish products according to
their physical characteristics, as opposed to end-use criteria….  As conceived by the drafters of the
HS, anything that qualifies as a good would be classifiable under the HS nomenclature and would beclassified according to their physical characteristics.”
7. In effect, the HS and WTO Members’ schedule s generally only list physical goods according
to their physical characteristics.  The fact that so me intangibles such as electricity are classified as
goods is the exception that proves the rule: where intangible products were intended to be subject to
the GATT 1994, this was expressly provided for in the schedules.  And the GATT schedules have
never covered any information digitised into bits and sent across a border through a
telecommunications network, directly from the supplier to the customer.
8. The HS and GATT schedules contain headings for the physical supports of many services,
such as architectural designs covered by HS 490600.  However, WTO Members have refrained from
applying them to telecommunications crossing the border even if the telecommunications network was
carrying the same information , by fax for instance.  This shows again that WTO Members have never
wished to treat transmission of digitised info rmation under the GATT, and the GATT schedules
indeed do not cover it.
9. The fact that the customer may later put this digitised information on a physical support is
irrelevant as the transaction only addresses the transmission of the content, as explained in several
submissions so far2.  What Members need to discuss here is thus only the transmission of digitised
information and how to classify the transmission of digitised information.
2. The notion of “digitised products” is misleading, and its interpretation has led to ideas
that would wreak havoc in the WTO architecture
10. Despite the situation described above, some WTO Members still wonder whether products
that have been “digitised” and can be sent electronically across borders should be covered by the
GATT.  As a matter of fact, this notion of “digitised products” is misleading.
11. The notion of “digitised products” stems from the idea that some information (including data,
sound and images) and instructions can be digitised, stored and transmitted electronically for later
processing by a machine.  The problem with that notion is that it encompasses a very large number of
economic activities, in particular many long-recognised services, thanks to the development of
technology.  An architectural design, a health check report (including x-rays or scanner images) or a
fashion design can be digitised.  It is a custom of the past that the corresponding services
(architectural services, health services, design services) needed to use physical supports to betransmitted to the customer.  Now, increasingly, such services can be transmitted directly to the
customer without going through the cumbersome process of putting their results on physical supports
to allow transmission to the customers.
12. Faced with this pervasive notion, some have then wondered whether the issue is only about
digitised information with a physical equivalent.  Indeed, many thought of computer software that
used to be put on a disk or CD, and can now be se nt electronically directly from the seller to the
buyer, without using a physical support.  To talk of  the remit of a “digitised good” for the electronic
delivery of a computer software would however be totally misleading.  Any information and
instructions that can be stored electronically can also be put on a similar physical support: looking
                                                     
2  On that issue, see page 10 of the WTO Secretariat Note S/C/W/68 of 16 November 1998, as well as
the communication of Singapore of 26 April 2001 under JOB(01)/55)WT/GC/W/497
Page 3
again at the examples here-above, an architectural de sign or a health report can be recorded on a disk.
While the disk itself is seen as a good, and, is therefore subject to GATT rules, the provision of the
corresponding service remained subject to the GATS : there is no reason to artificially turn the
electronic delivery of a service into a good so as to bring it under the scope of the GATT 1994.  As
clarified by the Appellate Body already way back in the European Communities – Bananas  case, only
where a service is supplied in conjunction with a particular good, the respective scopes of the GATS
and the GATT 1994 may overlap.  The underlying reason is that a trade measure can sometimes
hinder both the importation of the good and the provision of the related service.  But now that the
service can be delivered without the handling of a good, the application of the GATT is not necessary
any more.
13. The notion of digitised information with physical equivalents is further misleading because it
misses the systemic consequences of such artificial construction.  As explained above, WTOMembers tariff systems attempt to grasp everything that may physically cross the border.  Indeed, the
HS for goods includes lines even for architectural designs and industrial designs (HS 490600), which
are unmistakably part of the supply of services (architectural services, engineering services).  If WTO
Members started to classify under the GATT electronic deliveries with a physical equivalent, it would
bring under the GATT many services (architectural services, engineering services, consultingservices, health services… etc) that have physical outcomes.  The WTO secretariat explained this in
its note S/C/W/68 of November 1998 and recalled this in its background note of May 2002 under
JOB(02)/37.
14. Some WTO Members have also invoked a certain principle of “technological neutrality”,
which they have described as the need for a similar treatment of economically comparable transactionindependently from the technology used
3.  This is a desirable policy goal which we will address in
part 4.  However, it is not a WTO principle requiring the classification of digitised products as goods
covered by the GATT 1994.  Instead, WTO Members should draw the logical conclusion that the
development of computers and telecommunications ne tworks now allow service suppliers to provide
directly their service to their customer, even if located abroad.  Those suppliers do not need any moreto put the outcome of their service on a physical support that, under the legacy of trade agreements,
would be treated under the GATT if it crossed a border.
3. The GATS already applies to the electronic delivery of services, including so-called
“digitised products”
15. Many “digitised products” are explicitly covered by the GATS.  For example, it has already
been clarified that the GATS applies to digitised health check reports or bank account reports.  There
is currently a discussion on how precisely to classify certain “digitised products”.
16. The European Communities notes that the case of “software” has been raised in a number of
submissions (see the communications from Singapore,  Japan and Canada).  The notion of software is
again a potentially misleading one so long as it is not defined.  The non-paper submitted by Canada
provides a definition: the provisional UN-CPC classi fication used for GATS purposes in fact defines,
under its category CPC 842, "software" as “the sets of instructions required to make computers workand communicate”.  CPC 842 also explains that  “the customer may have a choice of using
ready-made programmes off the shelf (packaged software), developing specific programmes for
particular requirements (customised software) or using a combination of the two”.
                                                     
3 Note that the notion of technological neutrality described here is different from what was discussed in
the Council for Trade in Services under the Work pr ogramme on electronic commerce: during discussion on
trade in services, it was simply meant that, where a rule or a specific commitment was written in a manner thatdid not distinguish between technologies, then that rule or specific commitment would apply for any sort of
technology used.WT/GC/W/497
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17. The CPC category 842 covers “Software implementation services”.  This is defined as “all
services involving consultancy on, development and implementation of software”.  When delivered
physically, GATT applies to the import of the physical support (e.g. the CD-Rom) when it crosses the
border.  However, such software is increasingly delivered electronically.  The GATS rules as well as
Members’ commitments apply to the supply of services, as defined by Article XXVIII of the GATS asthe “production, distribution, marketing, sale and delivery of a service”.  The electronic transmission
of, e.g., customised software, simply forms the delivery part of the development of software and istherefore subject to the GATS and commitments on the services of CPC 842.
18. Some have wondered however whether the above result is compatible with the fact that
consumption of such digitised information does not occur during transmission, which would bring it
under the scope of the GATT 1994.  However, the notion of consumption is not determinative for the
scope of application of the GATT 1994.  The concept of goods is not defined by reference to howsomething is consumed, but in relation to tangibil ity.  And consumption of services can occur after
transmission or completion of the transaction, as is the case for the provision of construction services
for instance.
4. The debate on the classification issue canno t be used to meet market access objectives
but merely points to issues of possible inconsistency in market access
19. A number of papers have compared the merits of the GATT and the GATS in terms of market
access.  No conclusion could be drawn notably because there are trade-liberalising rules that exist in
one but do not exist in the other agreement: for instance, some submissions highlight that the GATT
prohibits quantitative restrictions while they are up for negotiation under the GATS, and at the same
time some submissions recall that the GATS covers four modes of supply while the GATT coversonly cross-border supply.
20. This discussion is interesting but anyway not relevant for the issue at stake.  In the course of
trade discussions, parties have always identified items first and then negotiated market access for
them.  Today there are two agreements setting out market access frameworks: the GATT and the
GATS.  Parties with interest in certain items must identify them in the relevant field (as a given goodor service) and negotiate accordingly.  They cannot pick and choose the rules that please them most.
21. We explained above that logic and consistency lead to a GATS approach.  However, as
explained before, the legacy of trade agreements m eans that anything physically crossing a border has
to be treated under the GATT.  This includes the outcome of services, such as architectural or
industrial designs.  In such cases, where WTO Members have to apply both the GATS (to the supply
of the service) and the GATT (to the physical outcome), it is important to ensure consistency between
the national treatment commitments made under the GATS for such services and the possible tariffscollected on the good delivered.  As noted by the WTO Secretariat : « In the context of the GATS
what really matters is whether or not a Member has made a national treatment commitment ruling out
recourse to discriminatory taxes.  If a Member has made such a commitment in a particular sector,
then all discriminatory taxes (including customs duties by definition) are in any case prohibited.
4
However, some WTO Members have made commitments for national treatment for example on the
supply of architectural services but still collect cust oms duties on architectural designs delivered
physically.
22. Some have also wished to grant similar trea tment to economically comparable transactions.
For instance, there may be a consistency problem where market access for a digitised product covered
under the GATS is not granted at the same level as for its physical counterpart, where such acounterpart exists and where the transactions are economically comparable.
                                                     
4 Note of the WTO Secretariat (SC/W/68) dated 16 November 1998, p. 10 .WT/GC/W/497
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23. It would then be necessary for WTO Members to address those consistency problems on a
case by case basis.
5. Conclusion
24. In short, the GATT rules cannot apply to “dig itised products”, but only to the importation of
their physical counterparts.  Digitised products, as any electronic delivery, are services, and for manyof them it has already been recognised that they are covered by the GATS.  However, it is necessary
for WTO Members to address possible consistency problems raised by the legacy of market access
negotiated in the past for “digitised products” and their physical counterparts.
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