RESTRICTEDWORLD TRADE
ORGANIZATIONG/C/W/128
5 November 1998
(98-4330)
Council for Trade in Goods
WORK PROGRAMME ON ELECTRONIC COMMERCE
Background Note by the Secretariat
A. CONSIDERATIONS CONCERNING THE RELATIONSHIP BETWEEN WTO PROVISIONS AND THE
SUBJECTS LISTED FOR DISCUSSION UNDER PARAGRAPH 3.1 OF THE WORK PROGRAMME .
1. Introduction
1.1 The work programme on electronic commerce (WT/L/274) directs the Council for Trade in
Goods to “examine and report on aspects of electronic commerce relevant to the provisions of
GATT 1994, the multilateral trade agreements cove red under Annex 1A of the WTO Agreement, and
the approved work programme.”  The work programme contains an illustrative list of issues to beexamined by the CTG.  The following considerations of the relationship between WTO provision and
the subjects listed for discussion seek to be as factual as possible, while suggesting issues with
possible WTO relevance.
1.2 An important question which touches on all subjects discussed in the subsequent paragraphs
relates to the characterization of electronic transmissions.  As the terms “goods” and “services” are
not explicitly defined under the GATT and the GAT S, the question arises under what circumstances,
if any, can digitized products be characterized as goods?  It appears that an answer to this question lies
at the core of the work programme on electronic commerce, and will require further debate among
Members.  The subsequent discussion will attempt to raise some considerations for the case that
certain digitized products would be characterized as goods.
1.3 For reasons of convenience for the reader, the discussion of the subjects of the illustrative list
does not follow the order that is laid out under paragraph 3.1 of the work programme.
2. Classification Issues
2.1 The classification of goods for international trade purposes generally follows the Harmonized
Commodity Description and Coding System (HS), cr eated under the auspices of the 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.  The 97 chapters are further divided by headings, sub-headings, and finally the 6-digit HS code number.  As conceived by the drafters of the HS, anything
that qualifies as a good would be classifiable under the HS nomenclature and would be classified
according to their physical characteristics.
2.2 However, the HS may fall short in its ability to classify electronically tradable digitized
information if certain forms of such data were to be characterized as goods. While the HS
distinguishes between empty carrier media and carrier media with content, it does not have a
classification for the content itself.  This can be illustrated by the case of computer software tradedG/C/W/128
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over the internet.  The HS does not have a classification for software because software is not a
physical entity.  Rather, software is classified under the type of carrier media it is contained on.  The
software could be contained on laser discs, magnetic tapes, or magnetic discs, and therefore it could
be classified under three different HS codes. For example, one classification could be "Discs for laser
reading systems for reproducing phenomena other than sound or image".
2.3 In summary, the currently existing classification system for goods may not be adequate to use
for the purpose of classification of tradable non-physical data over the internet.
3. Market access for and access to products related to electronic commerce
3.1 Market access for goods under the WTO is generally provided for under GATT 1994.  As part
of GATT 1994, the Ministerial Declaration on Trade in Information Technology Products (ITA)
foresees duty-free market access for information technology products in certain markets.  Electroniccommerce cannot be conducted without access to the essential infrastructure components.  The
necessary hardware and software must be in place to allow information to flow.  The ITA seeks to
eliminate, by certain deadlines, tariffs on a range of information technology products essential to the
infrastructure for electronic commerce.
3.2 On 13 December 1996, on the occasion of the Singapore Ministerial Conference, 28 WTO
Members and States or separate customs territories in the process of acceding to the WTO signed the
Ministerial Declaration on Trade in Information Technology Products.  Acknowledging the
importance of technology products to the development of information industries and the dynamic
expansion of the world economy, the Declaration' s intention was to achieve maximum freedom of
world trade in information technology products and to encourage continued technological
development on a world-wide basis.  Signatories agreed to bind and eliminate customs duties and
other duties and charges on a wide range of products.  For the majority of products and participants,
duties will be eliminated by 2000, with some extended staging lasting up to 2005.  Subsequent to the
Singapore meeting, a further 16 countries have become part of the ITA.  This total of 44 Members andStates or separate customs territories in the process of acceding to the WTO accounts for
approximately 93 percent of world trade in information technology products.
3.3 The products covered by the ITA include computers, semiconductors, telecommunication
products, scientific instruments, computer software, and semiconductors manufacturing and testingequipment.  With respect to the products specifically related to electronic commerce infrastructure,
there are a variety of computer, telecommunications , software, and component products contained in
the ITA.  Telecommunication products include telephone sets, radio-broadcasting and television
transmission and reception apparatus, pagers, videophones, fax machines, switching apparatus, and
modems.  Computers include processing units, keyboards, printers, monitors, scanners, and hard disk
drives.  Software refers to the carrier media which contains the software, such as diskettes, magnetic
tapes, and CDs, in accordance with the way software is classified under the Harmonized Systemnomenclature.  Other products that are used as components or inputs include capacitors, resistors,
printed circuits, conductors, optical fiber cables, computer network equipment, and flat panel displays.
4. Customs duties and other duties and charge s as defined under Article II of GATT 1994
4.1 Article II of GATT 1994 provides for schedules of concessions which contain the specific
tariff commitments on tradable goods.  With respect to electronic commerce, the important customs
duty issues arise from paragraph 1 of this Article, specifically subparagraphs 1(a) and 1(b).
Subparagraph 1(a) provides that:G/C/W/128
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"Each contracting party shall accord to th e commerce of the other contracting parties
treatment no less favorable than that provided for in the appropriate Part of the
appropriate Schedule annexed to this Agreement."
Subparagraph 1(b) provides that:
"The products described in Part I of the Schedule relating to any contracting party, which
are the products of territories of other contracting parties, shall, on their importation into
the territory to which the Schedule relates, and subject to the terms, conditions or
qualification set forth in that Schedule, be exempt from ordinary customs duties in excess
of those set forth and provided for therein.  Such products shall also be exempt from all
other duties or charges of any kind imposed on the date of this Agreement or those
directly and mandatorily required to be imposed thereafter by legislation in force in theimporting territory."
4.2 In addition, during the Uruguay Round the “Understanding on the Interpretation of
Article II:1(b) of GATT 1994” was incorporated into the WTO Agreements and provided that other
duties and charges levied on bound tariff items shall be recorded in the Schedules of concessions.
4.3 Subparagraph 1(b) of Article II provides that customs duties shall not exceed those outlined in
the schedule of the WTO Member.  Goods passing physically through traditional customs borders
were therefore subject to the customs duties provisions of the above articles.  However, for “goods”
transferred over the internet, there is no physical border with customs officials to assign and collectduties.  If it were decided that the customs duties provision of Article II was to apply to certain
electronic transmissions, then the duties collected should not exceed those outlined in the schedule of
the WTO Member.  The same would apply for other duties and charges, whereby the duties collected
should not exceed those recorded in the Schedules of concessions.  If, on the other hand, electronic
transmissions were not to be considered goods, and were to be accorded duty-free treatment, anincentive would exist for electronic delivery of certain products as opposed to physical delivery on a
carrier medium.  The scope of this incentive would, of course, depend case by case on the respective
tariff rates applied to the physical delivery of the goods.
4.4 On 20 May 1998, Members adopted the Ministerial Declaration on Global Electronic
Commerce (WT/MIN(98)/DEC/2), in which Members declared that, without prejudice to the outcome
of the work programme or the rights and obligat ions of Members under the WTO Agreements, they
would continue their current practice of not imposing customs duties on electronic transmissions.  The
General Council will review this declaration when reporting to the Third Session of the Ministerial
Conference and decide by consensus on its possible extension, taking into account the progress of the
work programme on electronic commerce.
5. Valuation issues arising from the application of the Agreement on Implementation of
Article VII of the GATT 1994
5.1 With respect to customs valuation, the only reference to electronic commerce is found in the
Decision on the Valuation of Carrier Media Bearing Software for Data Processing Equipment.  This
Decision was originally adopted by the To kyo Round Committee on 24 September 1984 (VAL/M/10,
paragraph 7) and was subsequently adopted by the WTO Committee on Customs Valuation at its first
meeting on 12 May 1995 (VAL/8).
The Decision reads:
"1. It is reaffirmed that transaction value is the primary basis of valuation under the
Agreement on Implementation of Article VII of the General Agreement on Tariffs and TradeG/C/W/128
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(the Agreement) and that its application with rega rd to data or instructions (software) recorded
on carrier media for data processing equipmen t is fully consistent with the Agreement.
2. Given the unique situation1 with regard to data or inst ructions (software) recorded on
carrier media for data processing equipment, and that some Parties have sought a different
approach, it would also be consistent with the Agreement for those Parties which wish to do so
to adopt the following practice:
In determining the customs value of imported carrier media bearing data or instructions,
only the cost or value of the carrier medi um itself shall be taken into account.  The
customs value shall not, therefore, include the cost or value of the data or instructions,
provided that this is distinguished from th e cost or the value of the carrier medium.
For the purpose of this Decision, the expressi on "carrier medium" shall not be taken to
include integrated circuits, semiconductors and similar devices or articles incorporating
such circuits or devices; the expression "data or instructions" shall not be taken to
include sound, cinematic or video recordings.
3. Those Parties adopting the practice referred to in paragraph 2 of this Decision shall
notify the Committee of the date of its application.
4. Those Parties adopting the practice in paragraph 2 of this Decision will do so on a
most-favoured-nation (m.f.n.) basi s, without prejudice to the cont inued use by any Party of the
transaction value practice."
23 Members have notified that they  are applying the above Decision.
5.2 Following a request by the United States, "for a general discussion for purposes of a Committee
assessment of overall implementation and coverage  of this decision,”(G/VALM/2), the item was placed
on the agenda for the third meeting of the Committee on Customs Valuation.  At this meeting, the
representative of the United States referred to the discussion on the issue of software imported by
satellite held at the meeting in March 1996 of the WCO Technical Committee on Customs Valuation.
He noted that the WCO Secretariat had issu ed a report, contained in WCO document 40.116,
paragraph 5.A (viii), in which it made the following statement:
"The Secretariat believes, subject to the application of GATT decision 4.12, that there may be
circumstances under the WTO Agreement where the co st of such software may form part of the
customs value of imported goods."
5.3 The Committee agreed to request the Technical Committee on Customs Valuation to provide
further explanation and elaboration of th e view described in the above paragraph.
5.4 The reply of the the Director of the Valuation Directorate of the WCO, who was asked by the
Chairman of the Tec hnical Committee to respond on behalf of the Technical Committee, was
circulated under G/VAL/W/12. The substance of the reply reads as follows:
“As you are aware, under Article 1 of the Ag reement, the transaction value of imported
goods is the price actually paid or payable for those goods when they were sold for export.  The
                                                     
1See paragraph 5 of VAL/M/10 .
2This is the Decision adopted by the Committee on Customs Valuation in May 1995 which is referred
to above.G/C/W/128
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Interpretative Note to Article 1 explains that the price actually paid or payable is the total
payment made or to be made by the buyer to or for the benefit of the seller for the imported
goods.  The WCO believes that there may be situations, perhaps limited in number, where the
payment for software imported by satellite could fall within the total payment made or to be
made by the buyer in respect of an imported good.
I would provide the example of robotic ma nufacturing machinery to  explain the point.
In the case of such equipment, the sales agreement may involve the supply of robotic equipment
as well as operating software to make the equipment perform a particular operation or function.
While the equipment itself is imported, the operating software may be transmitted via telephone
line or satellite after the equipment has been installed in the factory.  Depending, of course, on
the precise circumstances of the sale, the cost of the software may be included in the total
payment made by the buyer to or for the benefit of the seller.  Hence, the value of the software
transmitted by satellite or telephone line may form  part of the customs value of the imported
goods.
Software transmitted by satellite may also be included in the customs value of imported
goods as an "assist" under Article 8.1(b)(iv).  If the software constitutes engineering,development, artwork, design work and plans and sketches undertaken elsewhere than in the
country of importation and it is necessary for the production of the imported goods and it is
supplied free of charge or at a reduced cost, Article 8 requires that its value be added to the price
actually paid or payable.
I would also point out that the determinati on of customs value in the above cases would
not differ between countries that choose to a pply paragraph 2 of GA TT Decision 4.1 and those
that do not.  Paragraph 2 of the Decision rela tes to carrier media only.  Thus, where the
imported goods are not carrier media, there is no authority, in the Agreement, that would allow
the deduction of the cost of software from the price actually paid or payable."
5.5 The representative of the United States questioned the relevance of the opinions of the WCO
Secretariat on the interpretation of the WTO Agr eement on Customs Valuation and did not agree with
those opinions.
5.6 At the fifth meeting, the representative of the United States noted that this issue had been
raised at the last WCO Technical Committee meeting where it had been noted that the problempresented by software down-loaded  from a satellite invol ved considerations outside the realm of
customs valuation.  It was in fact questionable whether an importation had even taken place.  In viewof the referral of this question to appropriate experts, the United States considered that the matter hadbeen satisfactorily resolved.
5.7 At this meeting, the observer from the WCO clarified that the Technical Committee had
reviewed the matter and noted that this particular issue raised by the correspondence between the twoCommittees related to very limited circumstances.  The point that had been made was that the deliveryof information or software via satellite did not conform to the traditional definition of importation ofgoods upon which customs duty might be payable.  The WCO Secretariat had suggested that therecould be circumstances where the delivery of information was closely associated to the importation ofgoods and, in this case, the software could be taken into account in the determination of the value ofthe imported goods.  The examples given related to a dditions that would be ma de to the price actually
paid or payable under the provisions of Article 8(b)  of the Agreement, if the value of these elements
were to be included in the price of the goods.  The Committee did not consider that it needed to
comment further on these situations and that they did not fall within the area concerned that had beenG/C/W/128
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raised.  The Technical Committee had deferred to the outcome of discussions of these questions in
other fora.
5.8 While the WTO Committee on Customs Valuation has had no further discussions on this
issue, the WCO Technical Committee issued Commentary 13.1 on this subject which is reproducedbelow:
"This commentary examines the question of the valuation of carrier media bearing
software for data processing equipment in the sp ecific context of the application of paragraph 2
of the decision adopted by the Committee on Customs Valuation.
The principle to be taken into consideration in this respect is th at in determining the
customs value of imported carrier media bearing da ta or instructions, only the cost of value of
the carrier medium itself shall be taken into account.  The customs value shall not, therefore
include the cost or value of the data or instruc tions, provided that this is distinguished from the
cost or the value of the carrier medium.
A problem encountered in applying this deci sion relates to the provision to distinguish
the cost or value of the data or instructions  from the cost or value of the carrier medium;
sometimes, only one price of the software and th e carrier medium is available; at other times,
only the price of the carrier medium is invoiced or  only cost or value of the data or instructions
is known.
As there is an option to apply or not to apply paragraph 2 of the decision, countries
which choose to apply that decision should interpre t this paragraph in the widest possible terms
so as not to negate the intention of the decisi on.  Therefore, the expression "distinguish" should
be interpreted in such a manner that if only the cost or value of the carrier medium is known the
cost or value of the data or instructi ons should be considered as distinguished.
If for any reason an administration considers th at a separate declaration of the two costs
or values is necessary and only one of the two is available, the second one could be determined
by estimation, using reasonable means consistent with the principles and general provisions of
the Agreement and of Article VII of the General Agreement.  Similar estimation for arriving at
separate values could be done in cases wher e only the total price of the two elements is
available.  Customs administrations that choos e to follow the practice of estimation may find
that consultation with the importer is necessary in arriving at a reasonable solution.
When at the time of importation the importer is not in a position to furnish sufficient
information for this purpose, the provisions of Article 13 may apply.
The practice recommended in this commenta ry is applicable to the valuation for
customs purposes of carrier media bearing so ftware and does not take into account other
requirements such as the collection of statistics."
6. Rules of origin issues
6.1 Rules of origin are the criteria for determining the nationality of goods.  A good normally
originates in the country where it has been “wholly obtained” or, when more than one country isconcerned in its production the country where the “last substantial transformation” has been carried
out.  For the determination of the principle of last substantial transformation, the criteria of (i) change
in tariff classification; or (ii) ad valorem  percentage added in the transformation are applied.G/C/W/128
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6.2 The application of the Agreement on Rules of Origin on certain electronic transmissions
would depend on the characterization of these products as goods.
6.3 The most obvious case where origin questions could arise is the case where data is sent
electronically between two countries and is subsequently stored in a physical carrier medium or used
for the production of a physical good.  For example, sound or images can be transmitted electronicallyand stored on carrier media, or text can be used as input in the production of books.  If the origin
assessment of these physical goods is based on the criterion of change in tariff classification, the
origin of the data would not be taken into consid eration, and the CD or book would originate in the
country where it was physically produced.  However, in case the origin is being determined under use
of ad valorem  criteria, the value of the data, which arguably would be significant compared to the
value of the carrier medium, would be considered.  If the value of the data exceeds a ceiling of value
content required for conferring origin, the origin of the goods would follow the origin of the data.  Tothe knowledge of the Secretariat, currently no Member is taking the value of the data into account
when determining the origin of products stored on or used for the production of a physical good.  The
issue has not yet been discussed in the context of the harmonization work programme on non-
preferential rules of origin.
7. Issues arising from the application of the Agreement on Import Licensing
7.1 The Agreement on Import Licensing Procedures contains provisions relating to automatic and
non-automatic licensing applicable to importation of goods.  If and as far as electronically transmitted
information could be characterized as trade in goods, the disciplines of the Licensing Agreement
would apply, with the consequence that “importers” of such electronically transmitted informationcould be required to obtain prior approval in the form of import licenses from Members’ authorities.
As electronically transmitted products do not cross physical borders in the traditional sense, a range of
control and compliance issues may arise.
8. Standards in relation to electronic commerce
8.1 The question of standards in relation to electronic commerce has not yet been discussed in the
Committee on Technical Barriers to Trade.  Issues which may arise under the TBT Agreement in
relation to electronic commerce could include the following:  (1) the extent to which new or existing
technical regulations, standards and conformity assessment procedures can be enforced on electronic
transmissions which were to be considered goods; and (2) the extent to which standards willthemselves be traded electronically - particularly when they require periodic updating.  In the
standardizing community, attention has been drawn to the benefits of selling standards over the
internet, as compared to sending copies to consumers by mail.  The former allows for cost savings to
be made, and for greater convenience in the periodic updating of standards.
8.2 A link between the TBT Agreement and electronic commerce exists insofar, as the
Agreement encourages the use of international standards when these exist, or when their completion isimminent.  While the Agreement does not include a list of international standardizing bodies
recognized by WTO Members, it defines the terms “standard” and “international body or system” in
its Annex 1, which together set out the requirements that standardizing bodies would have to meet to
be considered international.  Therefore, Members would be encouraged by the TBT Agreement to use
international standards in relation to electronic co mmerce, provided they are satisfied that the body
that has developed them meets the requirements of being international.G/C/W/128
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B. OVERVIEW OF THE ACTIVITIES OF OTHER INTERGOVERNMENTAL ORGANIZATIONS IN THE
AREA OF ELECTRONIC COMMERCE
1.1 At the informal meeting of the CTG on 8 Octobe r 1998, it was also agreed that the Secretariat
provide a brief background note on the activities of other intergovernmental organizations in the area
of Electronic Commerce, in order to facilitate the discussion on possible invitation of
intergovernmental organizations to participate in  the work programme of the Council for Trade in
Goods.
1.2 The following note does not seek to account for a complete picture of the work under way in
other bodies, but attempts to provide a concise overview on the main activities of the organizations
listed below relevant to the work programme of the Council for Trade in Goods:
Organization for Economic Cooperation and Development (OECD)
2.1 The OECD is addressing issues related to Electronic Commerce through several of its
Committees and Working Parties.  Issues covered include among others taxation, consumer and
privacy protection, cryptography, authentication and certification of transactions, as well as access
and infrastructure questions.  Of particular interest is the work undertaken in the OECD TradeCommittee which is analyzing several trade policy aspects of e-commerce with a view to
complementing and supporting the wider OECD work program and the Electronic Commerce work
programme of the WTO.  In this context, the Trade Committee is examining several underlying
concepts which are relevant to the WTO work programme, such as the question of the extent to which
products delivered wholly on-line may be said to be new or different, including the question ofcustomization.  Other themes analyzed include jurisdiction issues in international trade; the role of
consensus-based international industry standards in e-commerce; and tariff and customs duty issues.
2.2 At the Ottawa Conference on 7 – 9 Octobe r 1998, ministers from 29 OECD countries reached
agreement on several principles to guide the taxation of electronic commerce.  Inter alia, it was agreedthat digitized products would not be treated as goods for tax purposes, and would thus not be subject
to taxes. Three Ministerial Declarations were adopted on (i) the protection of privacy on global
networks, (ii) consumer protection in the context of electronic commerce, and (iii) authentication for
electronic commerce.
United Nations Commission on International Trade Law (UNCITRAL)
3.1 UNCITRAL’s mandate is to further the progressive harmonization and unification of
international trade law and remove unnecessary obstacles to international trade caused by
inadequacies and divergence in national legislation affecting trade. Through its Working Group on
Electronic Commerce, UNCITRAL has developed a “Model Law on Electronic Commerce,” (1996)
which aims at enhancing the role of paperless communication through provision of rules by which thelegal value of electronic messages can be assessed, and legal obstacles to the communication of
legally significant data can be removed. The Model Law addresses questions of requirements of data
messages for contracts such as the terms like “writing,” “signature,” or “original”.
International Electrotechnical Commission (IEC)
4.1 The IEC prepares and publishes international standards for all electrical, electronic and
related technologies.  It promotes international cooperation on all questions of electrotechnical
standardization and related matters, such as the assessment of conformity to standards, in the fields of
electrotechnologies including electronics, magnetics, and electromagnetics.  Standards developed byIEC include computer hardware standards. A joint technical Committee (JCT1) between IEC and the
International Organization for Standardization (I SO) addresses standards issues in the field ofG/C/W/128
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information technology, and sets standards in electronic commerce including on items such as
electronic signatures, identification cards, security, data capture, data management, cryptography,
authentication and certification forming part of the infrastructure
International Telecommunication Union (ITU)
5.1 The ITU adopts treaties and regulations governing all terrestrial and space uses of the
frequency spectrum within which countries adopt their national legislations.  It develops standards to
facilitate the interconnection of telecommunication systems worldwide independent of the type of
technology used.  Specifically on Electronic Commerce, it has developed standards on privacy and
communication system security for multimedia terminals as well as digital certificate and certification
authority issues.  Moreover, the ITU provides technical assistance to national administrations of
developing countries to foster the expansion of telecommunications services and infrastructure.
UN Economic Commission  for Europe (UN/ECE)
6.1 UN/ECE developed and maintains UN/EDIFACT, the UN standard for electronic data
interchange (EDI), to facilitate computer to computer messaging.  Through its Centre for theFacilitation of Procedures and Practices for Administration, Commerce and Transport
(UN/CEFACT), it analyses the use of electronic commerce and information technologies in order to
develop recommendations on best business practices in this area and, where appropriate, to develop
methodologies and tools.
United Nations Conference on Trade and Development (UNCTAD)
7.1 Various UNCTAD bodies have been seeking to stimulate interest and awareness of electronic
commerce in developing countries.  For exam ple, the Commission on Enterprise, Business
Facilitation, and Development, through regular and expert meetings, has been discussing issues suchas human resource development, participation of developing and least developed countries in e-
commerce, its potential for growth, etc. UNCTAD’s Trade Point programme seeks to connect
participants in foreign trade transactions (e.g . customs, foreign trade institutes, Chambers of
Commerce, freight forwarders, transport companies, banks, insurance companies) under a single
physical or virtual roof in order to provide all required services for trade transactions, such as dataabout business and market opportunities, potential clients and suppliers, trade regulations and
requirements, etc. and aims to establish a world-wide electronic network among the participants in
trade.  As regards human resource development, UNCTAD is seeking to develop training modules
through its TRAINMAR and TRAINFORTRADE netw orks in the field of electronic commerce.
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