Customs classification and reclassification of information technology products under the WTO law

Transcription

1 Customs classification and reclassification of information technology products under the WTO law written by Štěpán Stehlíček Author: Štěpán Stehlíček Supervisor: Olia S. Kanevskaia Program: EU Economic and Competition law Date: 15/06/2017 1

2 2

3 Acknowledgments I would like to thank to my thesis supervisor Olia Kanevskaia for being helpful during the process of writing and composing the concept of the thesis. Additionally, I would like to thank to my parents for being tolerant, calm and helpful when I told them that I had decided to quit my job and study again. Last but not least, I would like to thank to my friends and most notably to my amazing house-mates. 3

4 4

5 Abstract The thesis deals with a question of classification and reclassification of information technology products. Those products are described in the Information Technology Agreement which is providing a duty-free treatment to products that meet certain criterias. Fortunately for us, those criterias, as well as the nature of the agreement has been dealt before the WTO adjudicating body in case EC IT products. Based on this case, I was trying to deduct general rules from both literature and jurisprudence of WTO adjudicating bodies, and alternatively set up a test that might be used in order to find a proper tariff class or a proper tariff subheading (which is a process called classification). In particular, I have found out that there are two types of problems connected to the whole reclassification procedure: First one is a product that has functionalities that might justify classification under two subheadings. In this case, proper tariff class can be deducted from a 4-step test invented in the fourth chapter of the thesis. Second case is a distinction between an original product and new product that has been made due to additional functions and innovations. Though, such distinction leads to the same problem as described in the first case deciding upon a proper tariff class under which a product will be classified for customs reason. Before I was able to conclude these findings, I had had to deal with the character and applicability of the Harmonized system and schedules of WTO members since they are providing subheadings and tariff class for classification of products and goods. I have found out that the Harmonized system is used on the global level and that schedules of commitments of each member states are binded to all states since they are an integral part of the General Agreement on Tariffs and Trade as it is stated in the agreement itself and jurisprudence. Another issue to deal with is definition of a product under the EU and WTO law. Such definition is important in order to find out what is its character and whether it differs significantly since most cases on classification and reclassification of goods were litigated against the European Union. Though, we have not found out that EU law differs dramatically from the WTO one. Later in the chapter, definition of an information technology product is provided, mainly from the perspective of the Information Technology Agreement. Third part of the thesis is dealing with the jurisprudence on classification and reclassification of information technology products. Such jurisprudence, although very broad and general, shows some conclusions that can be used for modeling a classification test that can be used for problematic cases of classification. 5

6 6

7 List of abbreviations CJEU EC EU FDPs GATS GATT GATT 1994 HS HS XXXX IT ITA ITO MFMs STBCs TEU TFEU WTO Court of Justice of the European Union European Communities = synonym with EU European Union = synonym with EC Flat panel display devices General Agreement on Tariffs and Services General Agreement on Tariffs and Trade General Agreement on Tariffs and Trade from 1994 (as a legal instrument within the WTO) Harmonized system where XXXX stands for year of update of the Harmonized system Information technology Information Technology Agreements International Trade Organization Multi-functional digital machines Set-top boxes which have a communication functions Treaty on the European Union Treaty on the functioning of the European Union World Trade Organization 7

8 8

9 Table of Contents 1. Introduction Trade, tariffs and harmonized system Introduction to the chapter Trade and WTO Tariffs, tariff negotiations and systematization Harmonized system Legal clarification of Harmonized system and schedules of commitments Harmonized system Schedules of commitments Digital goods Goods and digital goods Goods and services Goods under the WTO and EU law EU as a part of the WTO system Defining goods under the EU law Goods within the WTO system Reasons for the EU position Information technology products Defining an IT product IT products definition under the Information Technology Agreement Classification and reclassification of IT products Introduction Classification and reclassification according to EC IT products Classification of monitors Classification of set-top boxes Classification of multi-function digital machines Modeling a classification and reclassification test Classifying a product falling under two definitions Classifying and reclassifying a product with additional properties Is there any general solution? General test Discussion on a different approach Conclusion...36 Bibliography

10 1. Introduction In September , the Dispute Settlement Body of the World Trade Organization adopted a Panel report in case EC IT products. The report should have ended up some uncertainty and questioning with regards to classification of certain information technology products 1 that had been treated by the European Union differently from the Information Technology Agreement. This agreement was signed by all major member of the WTO with an aim in eliminating customs duties and other duties and charges of any kind with respect to certain IT good. 2 However, European Communities, or today European Union, declared that not all high-tech products shall be subordinated under one of categories in the Annex to the ITA and by several regulations 3 literally reclassified them and imposed ordinary customs duties contrary to the agreement. Those measures were found inconsistent with articles II:1(a) and II:1(b) of the General Agreement on Tariffs and Trade as the Panel rejected argument of the European Communities claiming that if the bound products will later acquire additional functions of other products, it (the EC) would be entitled to reclassify products in question. The case obviously brought up an interesting question with regards to computer products under the Information Technology Agreement. Shall all information technology products be treated more favorable compared to other products, or does the ITA cover only products specified in the agreement? The latter approach propped by the European Union was not successful before the Panel, instead, the WTO judicial body went for a theological interpretation of the agreement and said that all IT products shall be provided with a duty-free treatment in accordance to the ITA. Though, the case did not end up uncertainty with regards to computer products and their additional characteristic. Instead of that, the report provided two relatively contradictory statements. Firstly, the Panel stated that EU can not reclassify a product only because it previously acquired additional functions. At the same time, the Panel also said that if an overall character of a product would be so transformed by additional functions, it might justify a reclassification. These statements therefore led to an interesting question what type of additional characteristic can lead to reclassification, or alternatively what additional functionality of an IT product holds the product in original class? As a conclusion these two questions also lead to perhaps also another interesting one: what is a characteristic of an IT product under the Information Technology Agreement? This thesis has an ambition to solve the missing link in the definition of IT products what additional characteristic predetermine that certain goods will be classified under one class and not under another one. Such ambition is expressed in three subquestions connected to that: 1) What is a definition of an IT product in accordance to the ITA and to the case law of the WTO adjudicating bodies? Is it even possible to define these goods in general terms, or shall we use definition case-bycase?; 2) What special characteristic leads to a classification of certain computer equipment under certain class of the harmonized system?; 3) What are the basic conditions for the reclassification and what are the limits of it? 1 The thesis uses words products and goods as synonyms. Term computer products is used as a synonym for IT products, IT goods, although it is not entirely precise. The discussion and clarification of the term is provided in third chapter. 2 Information Technology Agreement (13 December 1996). Retrieved from 3 Council regulation no. 493/2005 of 16 March 2005 on the tariff and statistical nomenclature and on the Common Customs Tariff [2005] OJ L 82; Commission regulations no. 634/2005 of 26 April 2005 concerning the classification of certain goods in the Combined Nomenclature [2005] OJ L 106; Commission regulation no. 2171/2005 of 23 December 2005 concerning the classification of certain goods in the Combined Nomenclature [2005] OJ L

11 Answering to these questions is definitely not easy and a general introduction to the system of trade, to the harmonized system and to the main characteristic of tariffs is needed. After the historical and theoretical excursion to these topics, the thesis will deal with the definition of the harmonized system. This system, described by Mavroidis (2012, p. 90) as a common language for WTO members 4, de facto allows expression of the same idea. In other words, the harmonized system assigns certain digit to a certain goods in order to ensure that any given good will be classified [and treated] under the same tariff line (heading) across national jurisdictions 5. The Harmonized system and schedules of commitments of member states have been clarified in the case law and today they are an inseparable part of the WTO system. Clarification of the legal status of the Harmonized system and schedules of commitments in connection to the relevant provisions of international law is therefore main aim of this part. The focal point of the thesis is however a definition of information technology products and special character of it. Relatively big importance of information technology goods or goods under the ITA can be shown on a fact that these products now account for 12 per cent of total world exports and the share of products within the world trade exceeded dairy products 6. We will not go through the economical statistics and definition of world trade market in this particular case but we will aim at certain characteristic under the WTO and EU law. Such characteristic should also cover dynamics of the information technology sector that leads to classical problem of technology and law that is due to its rigidity and consistency contrasting and is often described as a branch that is often few steps behind. This dynamics causes problems that are connected not only to legal definition, but also to legal classification and reclassification of digital goods which is a problem that we will be dealing with in the next chapter built on the previous definition of information technology goods. One of the most interesting questions is connected to the edge outlined in the Panel report in EC IT products, where Panel says that mere acquisition of an additional function does not automatically means that the product shall be reclassified on one hand; on the other hand it has also admitted that if the final product will be so transformed by additional functions, reclassification would be needed. The aim of this part is therefore to find out what is a correct classification and what could be additional function or additional change that would justify reclassification. By answering to these questions, we should be able to define an IT product in its wholeness under the WTO and EU law provisions and to define it in order to correctly classify the goods. Additionally, from the definition of digital goods and classification principles, we shall also be able to stress out the main point of certain digital goods, consider possible additional functions and relevant circumstances and their role in justification of reclassification so it complies with the applicable law. 4 Mavroidis, C. P. Trade in goods (second edition, Oxford University Press 2012). 5 Mavroidis (2012, p. 90) 6 Mavroidis (2012, p. 102) 11

12 2.1 Introduction to the chapter 2.Trade, tariffs and harmonized system In this chapter a broader overview of problematics of international trade and tariffs will be discussed. Firstly, we will go through economic theories that led states to the idea of improving of conditions for the international trade. This term will be also described from the historical perspective and additional definitions and explanations will be made. Later in the chapter, we will be discussing legal clarification and interpretation of the harmonized system and schedules of commitments. 2.2 Trade and WTO The Merriam-Webster dictionary describes trade as dealings between persons or group; or as a business of buying and selling or bartering commodities. 7 Such definition is two-folded. First, the trade is a dealing between two or more subjects. Those subjects are either natural or legal persons realizing trade in order to fulfill their needs. Second, the trade between subjects is realized through the system of buying, selling or bartering commodities. One might say that trade is a simple act between two subjects where demand meets offer. That is true, the act itself is simple, however the whole is more complicated if we take into account additional properties and additional facts (such as fact that there are boarders between countries) are added. This is obvious existence of different countries, each having a different attitude towards trade, different needs of their economies and different opinions on how the trade should be regulated. 8 In past, various economists claimed and proved that trade between two countries is beneficial for both importing and exporting country even though one country is weaker in all industries than the other. Smith (2007, p. 350) wrote that trading countries might benefit from each other s cheaper goods 9, Ricardo later followed and broadened Smith s thoughts with an idea of theory of comparative advantages that is to a large extent a base for modern understanding of the international trade as writes Mavroidis (2012, p. 14). In the end, according to Smith (2007, p. 347), existence of barriers, boarders and restrictions in general is therefore not very beneficial for international trade as such. 10 Throughout the history, there have been a lot of attempts to protect domestic markets or to strengthen a country s economy at the expense of other countries such as French mercantilism or American protectionism. These attempts were connected to manipulation with tariff rates and other duties payable due to the transfer of goods. 11 Countries that were trying to protect domestic market typically logically had higher tariff rates on imported goods. Recently, however, the attitude 7 Trade. (n.d.). In Merriam-Webster s online dictionary. Retrieved from 8 All of these characteristics might be complemented with different economic conditions and different geographical location that is also an important factor. 9 Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Edited by S. M. Soares. MetaLibri Digital Library, 29th May Retrieved from 10 Smith connected high duties or absolute prohibitions on the import with bad consequences for domestic market such as monopoly. Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. Edited by S. M. Soares. MetaLibri Digital Library, 29th May Retrieved from 11 Existence of high tariff duties was not criticized by many. Cordell Hull was among people who saw beneficial effects of trade liberalization to global peace at very early stage: When the war came in 1914, I was very soon impressed with two points. The first was its terrific commercial impact on the United States. I saw that you could not separate the idea of commerce from the idea of war and peace. You could not have serious war anywhere in the world and expect commerce to go on as before. And the second was that wars were often largely caused by economic rivalry conducted unfairly. in Hull, C. The memoirs of Cordell Hull. New York: Macmillan Co Page 84. Retrieved from: 12

13 towards regulation and trade constrains became more relaxed. Instead of building barriers and focusing on domestic markets, countries started to pay attention to international cooperation through various organizations such as United Nations, or through international agreements proposing liberalization of world markets GATT 12. The Agreement, that was dealt after the Bretton-Woods conference in 1946 and signed in 1947, was a major turnover in global trade relations since it was signed by 23 countries including countries that soon after that became nonmarket economies. 13 As it is proclaimed in the preamble of the GATT, the objectives (raising standards of living, ensuring full employment, effective demand, ) shall be attained by entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce 14. This preamble says a lot about the way of reduction of trade barriers: first, the reduction shall be reciprocal, in other words all signatories shall mutually agree on tariff arrangements, all countries shall respect each other s tariff rates. This is ensured by substantive provisions of GATT by the principle of most-favorite nation 15 and by the national treatment principle 16 ; second, the reduction is not a single act, instead the wording entering into reciprocal and mutually advantageous arrangements... points at the fact that tariff concessions will be committed continuously, in rounds. 17 It has been said that the GATT is an agreement between states. Typically, such agreement is nothing without effective judicial system and effective administration behind it. Certain structure was proposed by the time of negotiation of GATT; in fact this Agreement was meant to be a chapter designed to address state barriers to trade liberalization 18 under the organization called International Trade Organization (ITO). Although this organization was definitely designed to be a far-reaching agreement dealing with both state and private barriers to trade liberalization and opening up for discussion issues such as social dumping and domestic employment policies 19, the project has never been realized. Mavroidis 20 brings two main arguments that led to the unsuccessful attempt of setting up the new organization. Firstly, during the negotiation, countries were becoming more aware of the amount of sovereignty transferred to a global organization. This resulted to a split of the one project into two agendas and the GATT was negotiated separately from the International Trade Organization (ITO) 21. Secondly, some negotiators were afraid of more restrictions that could not be revoked. 22 To conclude the topic of institutional progress at the international level, ITO never came into force because of a simple fact it had not been approved by states. However, a new global tradegoverning body in the end emerged occurred during the Uruguay and Marrakesh round respectively. 12 Article II:4 of the Agreement establishing the World Trade Organization says that ever since the GATT was incorporated into the WTO Agreement, the previous GATT is legally distinct from the new one. This distinction will be provided in the thesis as well, the GATT annexed to the WTO Agreement will be marked as GATT 1994, The GATT, provisional agreement valid from 1948 to 1994, will be marked as GATT or GATT Both agreements together will be marked as GATT Agreements. 13 The Czechoslovak Republic in particular. This was contrary to the nucleus approach supported by Canada. Such approach meant that only open market economies would participate in the Agreement. Mavroidis (2012, p. 5) 14 General Agreement on Tariffs and Trade 1994, Preamble (GATT 1994) 15 GATT 1994, art. I 16 GATT 1994, art. III 17 Tariff concessions are negotiated in multilateral trade negotiations (rounds) in accordance to art. XXVIII bis of GATT Alternatively, they are negotiated bilaterally, the lower concessions are later provided to other nations as well on the basis of article I:1 GATT Mavroidis (2012, p. 6) 19 Mavroidis (2012, p. 6), page 6 (citing Charnovitz 1995 and Drache 2003) 20 Mavroidis (2012, p. 6-7) 21 As a consequence of this, the GATT was applied provisionally for 47 years. 22 Mavroidis (2012, p. 7) 13

14 In 1994, the Agreement on establishing the World Trade Organization entered into force. Apart from having a substantive law codified in the GATT 2324, the world of trade now has an institution for disputes and administration. 2.2 Tariffs, tariff negotiations and systematization Tariff is a monetary burden on import. 25 The definition itself is connected to two main aspects it is a monetary duty and it is a duty connected to import from one country to another. As the former aspect is obviously connected to the amount payable in one currency to customs officers of importing country, the latter aspect describes the basic rule it is a charge payable due to the transfer of goods from one country to another. Indeed, there are various reasons for having a custom duty imposed on goods such as a higher income to a state s treasure, protection of domestic market or protection of domestic producers. These reasons, however, are not taken into account under the WTO law tariff either does or does not exist. What matters is the tariff rate. Contrary to the pre-gatt era when countries were imposing tariffs randomly 26, the advent of GATT meant that tariff duties were not imposed incidentally and with an unexpected rate. Stability and the ceiling of tariffs are secured by various instruments throughout the whole system of trade law. According to the preamble 27 parties are entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs.... From the previous subchapter we know that tariffs are negotiated within the so called multilateral negotiations rounds. The wwording of article XXVIII bis of GATT 1994 provides that negotiations on a reciprocal and mutually advantageous basis are beneficial to the international trade 28. These negotiations took place throughout the second half of the twentieth century and still continue. So far, eight rounds have been closed and one Doha Round is currently in the process. Negotiation of tariffs is a process where all WTO members are participating. GATT 1994 contains certain procedural rules connected to negotiation 29, members are binded bound by them but they are free to use the most convenient strategy for this negotiation. Mavroidis (2012, p. 89)describes five strategies that are used at most 30 : 1) Request-offer practice: is a strategy enjoying the mostfavoured-nation treatment, simply, two member states are cutting tariff rates between each other, after the conclusion is reached and after the round is done, lower tariffs are simply applied to other members as well; 2) Linear reduction of all bound duties: parties agree on certain reduction of all duties; 3) Harmonized formula: also known as a Swiss formula, is a reduction of specific tariffs among members that already have lower tariff rates and at the same time, the formula significantly 23 Article II:4 of the WTO Agreement says that ever since the GATT was incorporated into the WTO Agreement, the previous GATT is legally distinct from the new one. This distinction will be provided in the thesis as well, the GATT annexed to the WTO Agreement will be marked as GATT 1994, The GATT, provisional agreement valid from 1948 to 1994, will be marked as GATT or GATT Both agreements together will be marked as GATT Agreements. 24 GATT and international trade in goods is not the only area of co-operation within the WTO. The organization deals with trade in services, common rules for intellectual property, public procurement, subsidies, standards and other areas that are worth of a global regulation. 25 Mavroidis (2012, p. 87) 26 From time and rate perspective the tariff rate and its stability was unpredictable 27 GATT, preamble 28 GATT 1994, Art. XXVIII bis 29 GATT 1994, Art. XXVIII. The negotiation is on a basis of single undertaking which literally means that no contract is agreed until all the contracts are agreed. 30 Mavroidis (2012, p. 89) 14

15 reduces tariff of nations that had higher tariffs; ) Tiered cuts approach: is an approach that leads to a lower tariff rates in average 33 ; 5) Sectoral approach: ttariff bounds are simply lowered in certain sectors of goods only Harmonized system Tariff rates of each member state of the WTO are stated in schedules of concessions (commitments). Those schedules are unique for each state 35. Unique is also description and perception of each good. 36 Obviously, situation where different states have different ideas on the perception of the same good is not very welcomed. As a consequence nations use the Harmonized Commodity Description and Coding System that is commonly know as the Harmonized system. 37 Although previously labeled as a general language, the Harmonized system is in fact a logicallystructured database: The Harmonized system provides a coding system that is based on a hierarchical structure, starting with the section at the higher level and getting more specific at Chapter, heading and subheading levels. Chapters, headings and subheadings are coded according to their positions in the hierarchy. 38 The system unified different nomenclatures such as Brussels Tariff Nomenclature or Customs Cooperation Council Nomenclature and simplified negotiation of tariff rates 39. Has the harmonized system also simplified customs classification? A positive answer seems to be the right one: Although some might think that classification is purely an internal process of subordinating imported goods under a certain tariff line, there are two main reasons for having unified international system for products classification. First one is a network effect 40 connected to global usage of one system (the Harmonized system). Put simply, if there is a tool used by all nations, it has additional value. Throughout the time, more and more nations have learned how to use the system, they have gained experience and the usage of it becomes more smooth. Second reason lies in strong bounds of the system. All trading nations agreed to use the system instead of relying on different systemization, this is underlined by unifying effect of WTO adjudicative bodies. For a better understanding of the system and two reasons mentioned above, we can use an example. We can imagine a publisher who is exporting children s books about animals. Books are made of paper, paper is made of wood; according to the Harmonized system, the product might be 31 Swiss formula is a real formula where new tariff rate is equal to multiplication of agreed tariff coefficient and original tariff rate altogether divided by sum of the agreed tariff coefficient and original tariff rate. Mavroidis (2012, p. 99) describes the formula as T*=CxT/C+T, this is however wrong, instead the formula should look like T*=(CxT)/(C+T) or T*=CxT/(C+T). 32 The Swiss Formula got its name because it was proposed by Switzerland during the Tokyo Round. In European Union. NAMA: what is a Swiss Formula? (2005). Retrieved from 33 Mavroidis (2012, p. 99) says that this approach can have different forms, however in all schemes described in para 88 the average is taken into account. 34 This is a case of Information Technology Agreement that will be discussed later in the thesis. 35 Eventually they are unique for each customs union. 36 Mavroidis (2012, p. 90): Possibility that exists to express the same item in different ways, and the fact that various languages are being used by WTO members to express the same idea: these are complicating factors that need to be set aside. 37 The Harmonized system has been introduced by the World Customs Organization in 1980s. Since entering into force on 1 January 1988, many countries have became a party to the agreement. According to Yu (2008) about 98 per cent of world trade good was classified in accordance to the Harmonized system (Yu, D., The Harmonized System Amendments and their impact on WTO member s schedules. WTO working paper (2008) Retrieved from 38 Yu (2008, p. 1) 39 Yu (2008, p. 8) 40 The Oxford dictionary describes it as an economic term: A phenomenon whereby a product or service gains additional value as more people use it. Network effect. (n.d.). In English oxford dictionary. Retrieved from: 15

16 subordinated under the section 8 Wood & Wood Products, chapter 49 Printed books, newspapers, pictures and other products of the printing industry; manuscripts, typescripts and plans 41. Publisher produces the product in Country A and exports it to Country B, both countries use the Harmonized System, classification is therefore quite easy (network effect). Problem might lie in different interpretation of the product by importing country 42. Instead of classifying the book for children as a printed book book under the heading 4901, country B classifies the book under heading 4903 where the tariff rate is higher. The country of export (Country A) might try to change an opinion on that particular product and discuss possible reclassification of it with Country B, alternatively they might seek a help at the WTO level through adjudicative bodies (Panel or Appellate Body eventually). Regardless of the result of a potential dispute, the example showed that both reasons (network effect and boundary of the system) have a beneficial effect and bring legal certainty to all involved subjects. Network effect is a business term for describing a situation, on the other hand legal bounds of the harmonized system and schedules need to be examined. The clarification of both Harmonized system and schedules of commitments, tools for setting tariff rates, will be subject for next subchapter. 2.3 Legal clarification of Harmonized system and schedules of commitments Harmonized system Both the Harmonized system and schedules of commitments of each individual member state play a key role in the question of classification and reclassification. The former (Harmonized system) plays an important role from the perspective of global governance simply, the system is widespread all over the world. Moreover, its unique codes for goods was a pointer for certain international agreements regulating tariff rates it was used for a definition of the product coverage in agreements such as the Agreement of Agriculture, the Agreement on trade in civil aircraft and most notably the Information Technology Agreement that will be discussed in chapter connected to IT products. In this subchapter we will discuss its legal validity. Clarification of the latter (schedules of commitments ) might also have interesting consequences since they play an important role in GATT systematization 43. Legal clarification evaluating legal validity of members schedules under WTO law is a subject of this subchapter as well. Let s have a look at the Harmonized System first. We have said that the Harmonized System had ended uncertainty by inducing a unilateral system. However, the system itself was not used automatically due to a simple fact that the Harmonized system had been developed under an international organization called Customs Co-operation Council (later renamed to World Customs Organization), whereas GATT was an agreement between single nations that had to decide on a form of introducing the Harmonized system. Yu (2008, p. 8) wrote that the decision of contracting parties to GATT was adopted shortly after the adoption of the Harmonized system by the Customs Co-operation Council. The wording of the sentence cited from the Harmonized system convention looks like the Harmonized system was simply so good and revolutionary that GATT contracting parties decided to introduce it right away. Though, according to the decision no. L/5470/Rev. 1 adopted in July at its meeting on 28 February 1983, the Committee on Tariff Concessions adopted a document containing procedures 41 World Customs Organization. HS Nomenclature Established under the International Convention on the Harmonized Commodity Description and Coding System. Retrieved from 42 This is a subject of many disputes on the WTO level. Namely dispute between the United States and the European Union in computer equipment in EC Computer Equipment. Report of the Appellate Body (5 June 1998) 43 In fact Article II of GATT 1994 is connected to the schedules of concessions 16

17 for the rectification and re-negotiation of GATT schedules which will become necessary in connexion with the introduction of the Harmonized Commodity Description and Coding System elaborated in the Customs Co-operation Council 44. From this point of view, it looks like the adoption of the Harmonized system had been prepared before actual publication of it by the Customs Co-operation Council in June According to the International Convention on the Harmonized System, it shall enter into force on the earliest first of January which falls at least three months after a minimum of seventeen states or customs or economic unions [ ] have signed it without reservation of ratification 45. The system entered into force on 1 January 1988, today not all members of WTO are signatories de iure, de facto it is used globally regardless whether it is adopted or not. Now (middle of June 2017), there are 207 countries or economic unions applying the Harmonized system and 155 of them are also contracting parties. 46 Although there was a common intention to adopt the Harmonized system by all WTO countries, it is far away from being adopted in every member country. However, since GATT parties and later WTO members intention was to be binded bound by the HS, it is used as a road map within the WTO members. Additionally, WTO members use the system for defining goods in their international agreements, we can clearly state that schedules based on the Harmonized system are an integral part of WTO law and member states are obliged by it. 47 The Harmonized system itself has not stayed untouched since it was introduced. There have been plenty amendments to it. The first one amendment from 1992 was simple so the implementation and decision on the implementation went relatively smoothly 48. However later amendments were more complex and voluminous in the amount of changes and work related to them. This caused certain problems that led to the introduction of a new procedure for adopting new amendments within the WTO. In this procedure, the secretariat should play a more prominent role: According to this new procedure, the Secretariat would transpose Members commitments included in the CTS database to the HS2002 nomenclature following a standard methodology. The Members concerned are given a certain period of time to review the Secretariat s work and to provide comments. 49 In other words, secretariat reviews all the changes to schedules based on amendments, these changes go to the multilateral review and if there are no objections to them, they are approved. Due to this success, the WTO chose to use the same procedure for adopting later improvements Schedules of commitments The whole WTO system is complemented by schedules of commitments. These are made on the basis of the Harmonized system 51 and according to the International convention on the Harmonized 44 GATT concessions under the harmonized commodity description and coding system, revision. L/5470/Rev.1. June Retrieved from: (hereinafter as L/5470/Rev. 1) 45 International Convention on the Harmonized Commodity Description and Coding System (24 June 1986). Art. 13 (Convention on the HS) 46 World Customs Organization. List of 207 Countries, Economic Unions applying the Harmonized System (18 January 2017). Retrieved from: 47 As concluded in EC Computer Equipment., par Yu (2008, p. 9) 49 Yu (2008, p. 9-10) 50 WTO. A procedure for the introduction of harmonized system 2007 changes to schedules of concessions using the consolidated tariff schedules (CTS) database. Decision of 15 December no. WT/L/ Term schedules of commitments is used by many authors including most well-known WTO scholars including Mavroidis and Van Damme. GATT is describing it as a schedules of concessions, the International Convention on the Harmonized System talks about the nomenclature. All terms used are basically synonyms which will be taken into account in the text of the thesis. 17

18 system: Each Contracting Party undertakes, except as provided in subparagraph (c) of this paragraph that from the date on which this Convention enters into force in respect of it, its Customs tariff and statistical nomenclatures shall be in conformity with the Harmonized System. 52 Adoption of the rule to WTO law is made through the means of article. II GATT that sets also main rules for schedules and their appearance. Question of the legal status of schedules of commitments is immense. We have already described the process of concluding these commitments tariff concessions can be either negotiated through multilateral or dual negotiation depending on number of negotiating states. Thanks Due to the mostfavored nation principle, negotiated concessions are applied to parties that were not originally participating in the process of bilateral negotiations. Even though the system, where benefits are automatically granted to its subjects, is very practical, it might be a bit tricky from the perspective of public international law and obligation. Vienna Convention on the Law of Treaties, that sets rules for treaties and international agreements concluded between states as well as for their negotiation, describes treaty as an international agreement concluded between States in a written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation. 53 In other words, shall be schedules interpreted as a treaty? What consequences are connected to that? The question has been dealt discussed by the WTO adjudicative bodies in EC Computer Equipment. Both Panel and Appellate Body were assessing customs classification of LAN equipment and personal computers with multimedia capacity. One of the questions raised in the first stage was question connected to the burden of proof who shall bear it in cases of schedules. Is it a state that exports goods, or is it the importing state that sets each tariff in its schedules of commitments? Panel s view of the question was purely aimed at the burden of proof: the onus of clarifying tariff commitment is generally placed on the importing Member 54. This would lead to a conclusion that schedules are negotiated independently on other states; such a conclusion does not respect the fact that schedules of commitments are concluded multilaterally or bilaterally which is contrary to article II:1 GATT, most-favored nation principle and article XXVIII bis GATT. On the other hand, the Appellate Body clearly stated that this (Panel s view) is not a case Tariff negotiations are a process of reciprocal demands and concessions, of give and take. 55 In the very same paragraph they the Appellate Body also claimed that member s schedules are an integral part of GATT 1994 and that this fact indicates that it represents a common agreement among all members. Earlier in the decision 56, the Appellate Body also claimed that tariff concessions can not be seen in the light of legitimate expectations 57 of exporting members as such attitude would seriously undermine security and predictability. The decision does not discuss the integration of the schedules into GATT 1994 as well as their character properly as noticed by Van Damme (2007, p. 10) 58, who concluded that schedules are treaty language and can meet definition of a treaty under the Vienna Convention on the Law of Treaties, however they might be more accurately described as a multilateral acts of a special character that could later influence the interpretation of schedules. 52 Convention on the HS, Art. 3 (1) (a). 53 Vienna Convention on the Law of Treaties (adopted on 23 May 1969). Art. 2 (1) (a). 54 WTO, EC Computer Equipment. Report of the Appellate Body (5 June 1998), par EC Computer Equipment, par EC Computer Equipment, par And de facto based it on subjective view of exporting members alone. 58 V. Damme, I. The interpretation of schedules of commitments. Journal of World Trade 41 (1) (2007): The Appellate Body in EC Computer Equipment did not question whether the character of tariff schedules and their negotiation may require in general a different focus than the one articulated in Article 31 (1) VCLT, and whether it would be useful to examine how tariff concessions in schedules of goods and services were negotiated, drafted, and concluded. 18

19 Negotiation of the schedules is also important and decisive for their subordination under the term treaty. In order to interpret the schedules, we have to confront them in the light of general rule of interpretation stated in article 31 VCLT. Before it, negotiated tariffs shall be defined and assigned to one of two groupssituations?: one is a group of situations connected to concessions negotiated between two states -, thanks due to the most-favored nation principle these tariffs are given to other member states as well; the other one is a situation where all tariffs are negotiated at once by all members in a round in accordance to article XXVIII bis of GATT For the purpose of confrontation, only the former one will be taken into account. Additionally, the confrontation will not discuss the problem of authentication of languages used in schedules of commitments under article 33 VCLT as it was adjudicated in the US Gambling case 59. According to article 31(1) VCLT, the treaty shall be interpreted primary in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context (I) and in the light of its object and purpose (II). What is exactly context of a schedule? To answer that, we do not have to dig it deeply it is the GATT 1994 that says that schedules are negotiated in rounds (articles II and XXVIII bis of GATT 1994). Moreover, it is also the an intention of all members to participate on the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations 60. These two agreements might be the desired context of the schedules 61. In other words, it is an intention or lust of a member to be binded bound by better tariff concessions agreed between two other states in order to fulfill its obligations. From the perspective of object and purpose, we have to use previous rules as well. Can the mostfavored nation principle exist s without previous bilateral agreement between two countries? Can the tariff-reduction approach works without schedules of commitments that are applied to others as well? Schedules are in fact complemented by rules from international treaties and altogether they form a whole system. The object and purpose of schedules is to assure that rights and obligations coming up from other international treaties are fulfilled. To conclude this chapter, schedules are a tool used to ensure that obligations from WTO treaties are fulfilled, in fact schedules are complementing the whole system of international trade and they are also treaties as defined in article 1 (1) VCLT. Such attitude is clarified by the highest adjudicating instance in the system of WTO in article II:7 of GATT 1994 and confirmed by the Appellate Body in decision on EC Computer Equipments. Thus, if schedules of commitments are negotiated, they are binding to all other members as it was a treaty. The interpretation of them is therefore not purely granted to two parties of a bilateral treaty (schedule of commitments), or to multiple parties in the case of a multilateral conclusion of schedule of commitments, but it is granted to all WTO members. In connection to that, last remark goes to the selection of a subject that is allowed to interpret the schedule. It was mentioned that schedules are integral part of the GATT 1994, therefore they should be interpreted by adjudicative bodies of WTO. Considering that the Convention on the harmonized commodity description and coding system might meet criteria under article 31(3)(c) VCLT 62, question is whether the Harmonized system shall be a part of the legal evaluation, the World Customs Organization, or its members, can also play some role. However, such a consideration is purely virtual because we have to distinguish between actual convention on the harmonized system and its systematization that has been incorporated into the legal system of WTO. The former one is an object of interpretation of states to that convention, whereas the latter one is an object of 59 WTO, US Measures Affecting the cross-border supply of gambling and betting services (7 April 2005) 60 Agreement on establishing the World Trade Organization (15 April 1994) (WTO Agreement). Retrieved from: 61 Other agreements or instruments, as well as other subsequent agreement between parties, concluded between parties shall be taken into account when considering context as it is stipulated in article 31 (2) and article 31 (3) VCLT. 62 WTO, EC Chicken cuts, Report of the Appellate Body (12 September 2005). Par

20 interpretation by WTO members as the relevant rule of international law pursuant to article 31(1) (c) VCLT. 20

21 3.1. Goods and digital goods 3. Digital goods Definition of goods and products is very important for dealing with classification and reclassification issues under the WTO law. This chapter will define the goods from the perspective of WTO and EU law as well as from the perspective of comparison of goods to services. Definition will be done on the basis of legislation at first and on the basis of jurisprudence as second. Moreover, most of the cases dealing with information technology products are connected to one defendant which is the European Union. We will discuss what is the main reason for that and if a different definition of goods in jurisprudence and legislation could give us the answer. In the end of the chapter, we will discuss definition of IT products as they are defined in the Information Technology Agreement Goods and services Both services and goods can be defined as a certain fulfillment in exchange for money. In modern trade, money is a key factor that distinguish between classical trade in goods and barter that is a simple exchange of goods for another goods or services. Deardorffs Glossary of International Economics says that a good is a product that can be produced, bought, and sold, and that has a physical identity. 63 There are two parts to this definition it can be a subject of a trade and it is expressed in physical form, unlike a service which is defines as a product that is not embodied in a physical good Moreover, the first part of the definition does not apply to services either since the usage of services is not that wide (you can not simply buy, sold or produce a service and own it). Principle of a service is that a right, which differs from ownership, is transferred. Difference between the trade in goods and service can be shown on an example of a car. Car as a good can be a subject of legal relationships connected to the ownership: it can be sold, bought and produced. On the other hand in case of a car as a service, we are simply paying for its functions: we can rent it (rental services), we are paying for traveling with it from point A to point B (bus and traveling services), or we are paying for transferring a good from point A to point B (transport services). This difference altogether with relaxation of national monopolies in services led nations during the Uruguay round to come up with a new system preventing discriminatory conduct in services that resulted into a brand new agreement General Agreement on Trade in Services (GATS). This agreement in its article I:2 identifies four covered means of a service: i) cross-border service defined by a provision of services from one state to another; ii) consumption abroad defined by movement of nationals to another country to receive a service; iii) commercial presence defined by moving of a supplier of a service from one state to another; iv) movement of natural persons defined by their movement from one state to another. As we can see above, services are connected to provision of activities on behalf of other subjects whereas trade in goods is connected to a transfer of ownership from one subject to another. For the purpose of this thesis it is important that the evaluated classification and reclassification is connected purely to goods in terms of the GATT and the Harmonized system that has been discussed in the previous chapter, even though services have their own nomenclature and classification and reclassification in services is an issue too. 63 Good. (n.d.). Deardorffs Glossary of International Economics. Retrieved from 64 Service. (n.d.). Deardorffs Glossary of International Economics. Retrieved from 65 Oxford online dictionary is describing good as a merchandise or possessions. Good. (n.d.). Oxford online dictionary. Retrieved from 21