Outstanding WTO Issues and Deliverables with Respect to the

Electronic Cross-border Trade of Digital Products

For discussion during the International Workshop on

“Competition, Cultural Variety and Global Governance: The Case of the Global
Audio-Visual System”, Prof. Guerrieri and Prof. Scharrer

- Thesis: Draft of Chapter 2 -

The WTO and the Liberalization of Cross-border Electronic Services: a

transatlantic perspective

Sacha Wunsch-Vincent (MSc)

Institute for International Economics, Washington D.C.

Department of Economics, University of St. Gallen
Supervisor: Prof. Dr. Heinz Hauser (University of St. Gallen)

Comments are welcome under swunsch@iie.com

Washington D.C., October 19, 2002

CHAPTER 2: OUTSTANDING WTO ISSUES AND DELIVERABLES WITH
RESPECT TO THE ELECTRONIC CROSS-BORDER TRADE OF DIGITAL
PRODUCTS 3

2.1 Unresolved Horizontal Questions Relating to the Cross-border Electronic Delivery of

Services 5
2.1.1 The Duty- free Moratorium on Electronic Transmissions 9
2.1.2 Open Classification Questions concerning the Electronic Trade of Services 13

2.2 Sector-specific Analysis of Necessary Liberalization: The Case of Digital Products 44

2.2.1 The GATS Liberalization Process for Audiovisual Services and the Resulting
Commitment Structure 46
2.2.2 Analysis of the GATS Commitment Structure for the Other Service Sectors Relevant
to Digital Products 56
2.2.3 Requirements for Further Cross-border Audiovisual Service Liberalization 60

2.3 Summary of Deliverables and State of Play 66

Literature 69

2
Chapter 2: Outstanding WTO Issues and Deliverables with
respect to the electronic cross-border trade of digital
products1

Any serious debate about the future of audiovisual services in the WTO context has to take
the new electronic delivery modes (Internet, video-on-demand via satellite, etc.) and ensuing
new trade policy issues into consideration. Although the link between the WTO E-commerce
Work Program established in 1998 and the audiovisual service negotiations has not been
officially established, the two are very interrelated. In fact, even before the official GATS
2000 negotiations were launched both the US and the EC – the traditional adversaries when it
comes to audiovisual trade liberalization – have already disagreed over issues that will be
very relevant to the audiovisual debate. While the US is now ready to accept traditional
European policy measures in the broadcasting and cinema sector (quotas and subsidies), it
wants to make sure that the new delivery modes remain free from new trade restrictions 2 . To
the contrary, the EC is very aware that the US desire to guard new content delivery modes
would weaken their policy autonomy with respect to audiovisual services 3 . All in all, a
discussion of audiovisual service negotiations must also advance solutions on the horizontal
questions raised in the WTO E-Commerce Work Program and deal with necessary new mode
1 commitments in the audiovis ual sector.

1
For the willingness to provide inputs during interviews or feedback loops thanks cause to various DG TRADE
and DG EDUCATION AND CULTURE officials of the European Commission and to USTR officials, RUDOLF
A DLUNG and LEE TUTHILL (Trade in Services Division, WTO), CATHERINE M ANN (Institute for International
Economics), HEINZ HAUSER (University of St. Gallen), LINDA SCHMID (Coalition of Services Industries) and
BONNIE RICHARDSON (Motion Picture Association). The WTO conference "Telecommunications and Audio-
visual Services in the Context of the WTO: Today and Tomorrow" (papers can be found on
http://www.ulg.ac.be/ieje/nip/) held on November 21-22, 2001 provided valuable input. The responsibility
for any incorrect statements rests with the author of this thesis. Statements concerning different country
positions taken in the GATS negotiations or the WTO e-commerce work program cannot be attributed to the
interviews with WTO negotiators. Only the written Communications of the WTO members to the various
Councils are binding.
2
Personal interviews with industry representatives (software and motion picture associations) and S/C/W/78,
Decemer 8, 1998, Communication of the USA and S/CSS/W/21, December 18, 2000, Communication of the
USA.
3
The French actually perceive it as a new lever for the US to work their way around the cultural exception
they believe to have established with the Uruguay Round. CATHERINE TRAUTMAN, « La diversité, mise en
oeuvre de l'exception culturelle », November 2, 1999 , web humanité, OMC Entretien downloaded from
http://www.humanite.presse.fr/journal/1999/1999-11/1999-11-02/1999-11-02-012.html in August 2002.
3
This chapter is divided into two parts and identifies two main threads of action in the WTO
forum that are necessary for the efficient development of cross-border trade in electronic
services4 . The first action to create a trade-barrier free environment for the cross-border trade
in (electronic) services deals with the clarification of the open horizontal questions that are
raised in the WTO E-commerce Program (Part 2.1). In solving these questions, it is desirable
that a liberal trade framework be created for the hitherto untapped electronic trade potential.
Particular attention is devoted to the different US and EU viewpoints taken with respect to the
open horizontal questions. The second action addressed in this chapter refers tothe necessity
for further GATS liberalization measures for digital products (Part 2.2). Again, the analysis
concentrates on the necessary liberalization steps that the USA and the EC need to take.

As will be seen the problems raised by the WTO E-Commerce Work Program have much
more horizontal implications for the GATS than suggested by their isolated treatment in the
E-commerce working groups. In fact, most questions raised (tariffs on electronic services,
distinction problems between goods and services, boundaries between different service
sectors, mode 1 vs mode 2 distinctions) do not only directly relate to the audiovisual service
discussion. Rather they even address very generic uncertainties of the legal GATS framework.
Thus it is argued that these unresolved issues are of overaching relevance to the whole legal
framework for trade in services rather than being worth only a marginalized e-commerce
discussion.

4
Work pioneered by BACCHETTA ET AL (1998), TINAWI & BERKEY (1999), M ANN, ECKERT , ET AL . (2000),
PANAGARIYA (2000) and HAUSER & W UNSCH (2001).
4
 2.1 Unresolved Horizontal Questions Relating to the Cross-border Electronic
Delivery of Services

In May 1998 the WTO launched a work program to identify all trade-relevant questions raised
by electronic commerce. All "Councils" (Council for Trade in Goods, Council for Trade in
Services, Council for Trade Related Aspects of Intellectual Property5 ) and the Committee on
Trade and Development were instructed to complete reports before July 1999 analyzing the
influence of electronic commerce on their field of operations. In the course of these reports
the Councils considered how existing WTO agreements influenced e-commerce, what gaps in
the existing trade agreements had to be rectified and whether there were any new questions
that WTO member states needed to address by means of new agreements. The working
group’s results act as a precursor in identifying generic horizontal GATS problems.

Each relevant Council addressed the following detailed questions:

Relevant Council Areas of responsibility of the WTO Work Program

GATT Council Applicability of the following GATT rules and past liberalization commitments to e-
commerce:
Market accesss, customs valuation questions, import license procedures, customs
duties, technical standards, country of origin rules and questions on classification
GATS Council Applicability of the GATS rules to e-commerce:
with regard to the Most Favored Nation Clause, the transparency requirements,
integration endeavors vis-à-vis the developing states, technical standards, mutual
recognition of qualification requirements, elements of competition, issues relating to
privacy and public morals, and the prevention of fraud
Review of the GATS liberalization commitments:
Granting of market access and national treatment to the electronic delivery of
services
TRIPS Council Review of the protection of intellectual property rights in the context of the new
technological environment
Committee for Trade The influence of electronic networks on trade and the opportunities for development.
and Development
Source: WT/L/274, October 30, 1998 for the distribution of responsibilities and HAUSER & WUNSCH (2001), p.
for this table.

5
Hereafter described as the GATT, GATS und TRIPS Councils respectively.
5
The General Council was accorded a central role in this process. In particular it has to be
vigilant regarding themes that go wider than the responsibility of individual Councils 6 .
Decisions that affected any imposition of customs duties on e-commerce are the General
Council’s direct responsibility.

In July 1999 the interim reports of the work sessions were presented. The most important
results were the following: The generic principles of the WTO – such as free market access,
non-discrimination, transparency and technological neutrality– seem extremely well suited to
e-commerce 7 . Consequently, the WTO rules and all existing liberalization commitments made
under the WTO Treaties should be applicable to e-commerce transactions. This can be
ascribed to the fact that the level of existing concessions and the treaty obligations
differentiate between types of traded products but not between the forms of their delivery.
Regarding electronically delivered services this means that all general GATS obligations
(Most Favored Nation clause, transparency, etc.) and all specific commitments on the relevant
services (market access and national treatment) are applicable 8 .

Despite these general conclusions the work program also brought to the fore a whole range of
open horizontal questions 9 . A solution to these questions is not simple, because fundamental
concepts of the WTO agreements need to be revisited 10 . It is true that interesting proposals
were made during the work program. But all in all the majority of horizontal questions have
not yet been solved. When the General Council requested the relevant Councils in July 2000
to continue with their work as it stood in July 1999, and to make recommendations as to how
the General Council should best consider matters relating to e-commerce, no progress was
made. In December 2000 the work groups had to report to the General Council on their
results. Even this occasion in reality boiled down to a repeat of the work progress made in

6
WTO Document WT/L/274, October 30, 1998. It also has to pay attention to questions that may fall under
the mandate of other international organizations.
7
WTO Document S/C/W/183, November 30, 2000, Communication from the EC
8
WTO Document S/C/8, March 31, 1999.
9
See S/C/8, March 31, 1999 for an interim report of the Council for Trade in Services to the General Council
where common understandings and issues that require further examination are discussed. G/C/W/158, July
26, 1999 provides the same information with respect to the results of the Council for Trade in Goods.
10
DRAKE & NICOLAIDIS (2000), p. 7 comment that states are now confronted with equally difficult and new
conceptual questions than during the time when the agreements on trade in goods had to be complemented by
an agreement on trade in services. (GATS).
6
199911 . Since then – four years after the launch of the WTO e-commerce work program –
agreements on the open issues are pending. The recent fourth Doha WTO Ministerial
Conference again put the ball in the General Council's court by only mandating procedural
issues while instructinging the General Council to consider the most appropriate institutional
arrangements for handling the work program and to report on further progress to the Fifth
Session of the Ministerial Conference (September 2003, Mexico) 12 .

The most pressing questions of the work program seem to revolve around the duty- free
moratorium on electronic transactions, the dilemma of the classification of digital trade
products and regulatory trade barriers 13 . So far no consensus could be reached between the
USA and the EU on the following questions:

(i) Should the temporary 1998 duty- free moratorium on electronic transactions be
made permanent?
(ii) Should digital products (online films and software) be classified as goods (GATT)
or as services (GATS)14 ?
(iii) If classified under GATS, in what service category do digital products fit
(telecommunication, audiovisual, computer or entertainment services)?

11
"Members reaffirmed the continuing relevance of the earlier contribution of the Council for Trade in Goods
to the General Council which was submitted by the Chairman of the CTG in July 1999 (G/C/W/158).
According to the mandate contained in Document WT/L/274 (Work Program on Electronic Commerce), that
contribution provides an overview on the discussion of the following issues..." cited from WTO Document:
"Chairman's factual progress report to the General Council on the Work Programme on Electronic
Commerce", G/L/421, November 24, 2000.
Or
"The Council's discussion on the 6th October took as its starting-point the progress report which it had made
to the General Council on 27 July 1999 (S/L/74). It was the general view that this report was still an accurate
reflection of the thinking of Members on the subject, and that there was no need to re-open or repeat what
was said in it." WTO Document: "WTO Programme on Electronic Commerce: Oral Report by the Chairman
of the Council for Trade in Services to the General Council on Electronic Commerce", S/C/13, December 6,
2000.
12
That is six months later than the tabling of the initial offers in March 2002. The mandate can be found in
WT/MIN(01)/DEC/W/1, November 14, 2001, p. 7.
13
The other questions that need to be addressed at a later stage include development-related issues
(participation of developing countries in e-commerce, technology transfer, movement of natural persons,
etc.), fiscal implications of e-commerce, competition elements, jurisdiction and applicable law. It is most
likely that these issues – except maybe the development-related ones - will not be dealt with during the Doha
Round.
14
This question needs to be understood against the background of the politically very sensitive area of
audiovisual or cultural products that would now be subject to either the wide-ranging free trade rules of the
GATT or to the less limiting and incomplete trade rules of the GATS.
7
 (iv) Should electronically delivered service transactions be classified as cross-border
transactions (GATS Mode 1) or as consumption abroad (GATS Mode 2)?
(v) What WTO instruments should be implemented with respect to domestic
regulations that constitute barriers to trade in services (regulatory discipline, data
protection clauses, etc.)?

Throughout the work it needs to be kept in mind that both trade partners share the basic drive
to liberalise e-commerce 15 . However, it is evident that both approach the solutions to the open
questions with their individual trade policy interests that often diverge 16 . The USA and the
major IT industry coalitions want to impose the most liberal interpretation (“the most trade-
liberalizing approach”) 17 , whereas other WTO members states, above all the EC, want to
ensure that they can preserve their space for audiovisual policy intervention. In that process,
the US has been accused of trying to classify against legal principles and in favor of their
industry interests18 . Moreover, the developing countries have not yet been convinced that a
sound WTO e-commerce framework is important to them.

In the next section these unresolved questions and the potential solutions are discussed.

15
This point has been reiterated by both the officials of the DG Trade and the USTR. Despite many problems to
find common positions on the pending open questions, the negotiators were assertive of the fact that, in
principle, they shared a strong interest in designing a trade policy beneficial to the e-commerce environment.
16
“U.S. looks for WTO Guidelines on E-Commerce by Cancun Ministerial”, Inside U.S. Trade, Vol. 20, No.
38, September 20, 2002.
17
See WT/TPR/M/88/Add.1, communication from the United States and GLOBAL BUSINESS DIALOGUE ON E-
COMMERCE GBDe(2001) for an Industry position on all following points. These views reflect the views of
most other major IT industry councils, such as the ITIC and the ITAA. Interestingly, the GBDe also
represents the European IT industry.
18
Personal interviews and TIETJE (XXX), para. 69.
8
2.1.1 The Duty-free Moratorium on Electronic Transmissions

In May 1998 the Ministers of the WTO member states agreed on a temporary duty- free
moratorium on all electronic transactions that would be valid until the next Ministerial
Conference in Seattle (1999) 19 . Although the declaration was not very explicit, they hereby
opened the way to customs freedom on electronically delivered products. The moratorium
only applies to trade transactions that are entirely electronic. If a good is ordered
electronically, but physically delivered, then this general duty- free status does not come into
play, but the existing GATT commitments. The majority of the developing states were not
sure whether this temporary moratorium would be in their favor, but nevertheless agreed to it.

The argument can be put forward that the extension of the moratorium is not really an
overarching practical important matter or that it even contradicts WTO principles.

(i) Only a very small percentage of tradable products can be digitized. The income from
customs duties that may be derived from electronically transmitted goods is thus very
small in volume, namely less than one percent of the worldwide income from customs
duties 20 .

(ii) In the future most of the electronic transactions will relate to services. Traditionally,
service transactions are not hampered by customs duties, but are subject to market
access restrictions, discriminatory tax levies, etc. Besides, taxes are not synonymous
with customs duties. Despite the moratorium, WTO Member States remain free to
decide what taxes they impose on electronic transactions 21 . Hence, the moratorium
only has very limited applicability22 .

19
"We also declare that Members will continue their current practice of not imposing customs duties on
electronic transmissions. When reporting to our third session, the General Council will review this
declaration, the extension of which will be decided by consensus, taking account the progress of the work
program.", from WTO (1998).
20
M ATTOO, PEREZ -ESTEVE , ET AL (2001), pp. 10-11: "According to our estimates, tariff revenue currently
collected from these products represents on average less than 1 per cent of total tariff revenue and a meager
0.03 per cent of total fiscal revenue. Even if such trade were to grow strongly and all such trade moved
online, the revenue loss would be small. It would also have to be counted against revenue gains from any
positive (and revenue generating) productivity effects." Also see the original study in SCHUKNECHT & PÉREZ-
ESTEVE (1999).
21
DRAKE & NICOLAIDIS (2000), p. 45.
22
PANAGARIYA (2000), p. 10.
9
(iii) The moratorium only offers a stopgap measure to governments that cannot levy tariffs
on e-commerce anyway. Even if there were some willingness to impose customs
duties on electronic transmissions, technically speaking this is not feasible today23 .
Customs authorities would need to be able to trace and establish the value of
commercial electronic transactions. Even if this is possible, it is highly doubtful
whether the levies would outweigh the costs of this process 24 .

(iv) The principle of technological neutrality is endangered by the duty-free moratorium.

Whereas products that are physically delivered, continue to be subject to customs
duties the same products that can now be delivered completely by electronic means
(music, etc.) do not face customs duties 25 .

Although these four points put the necessity of the moratorium into question, it should be
borne in mind that this agreement was a strong political signal in favor of barrier- free
electronic trade. The fact that the moratorium in its present form can be improved does not
justify its abolition. Tariffs on electronic transmissions may well be applied to the delivery of
digital products and maybe even service transactions and thus be very damaging to the
growing trade field of electronic trade. Therefore a permanent moratorium on electronic
transmissions should be part of a liberal WTO e-commerce framework.

As technology grows to become more sophisticated any service transaction that is conducted
electronically may – as opposed to traditional service delivery forms – be subject to tariffs or
differential taxation. Thus, the issue of a moratorium that looks quite innocent and
unimportant to begin with has more systemic consequences. On a more generic level, the
question is raised whether tariffs, unheard of in the GATS world, can and should find their
way into the treatment of trade in services and in what way the legal framework is to be
updated to avoid tarification of this new type of electronic service delivery.

23
Also, the moratorium is really only binding because of the practical difficulties in actually trying to assess
duties on electronic transactions. See “U.S. looks for WTO Guidelines on E-Commerce by Cancun
Ministerial”, Inside U.S. Trade, Vol. 20, No. 38, September 20, 2002.
24
See also WT/GC/25, July 5, 1999, Communication by Australia.
25
See WT/COMTD/17, February 12, 1999, Communication by the United States, that argues that a bias
towards e-commerce transactions has to be considered a positive development.
10
Since the moratorium was not extended three years ago at the Seattle Ministerial Conference
(1999), the question arose before the Doha round whether the temporary moratorium had lost
its validity and whether it should be made permanent. WTO members, such as the EU, were
of the opinion that the moratorium became null and void because it was not extended 26 . The
American and the Japanese delegation acted in solidarity in favor of electronic trade 27 and
insisted on a permanent e-commerce moratorium. The United States were consequently
irritated that, until shortly before the Fourth WTO Ministerial Conference in Doha, the EC
member states were not willing to agree on either an extension or on a permanent status for
the moratorium 28 . Although the submissions of the EC and DG Trade representatives endorse
the principle of a duty- free e-commerce trade framework 29 , they have been unwilling to agree
on a permanent moratorium. The EC argues that the US focuses too much on the moratorium
while neglecting the other outstanding and more substantial e-commerce issues in relation
with trade in services 30 . It will only agree to a moratorium if an overall e-commerce package
is adopted 31 .

Clearly, there is a link between the pending classification of digital products and the
moratorium 32 . As opposed to the above arguments on the limited importance of the
moratorium, the WTO Secretariat has noted that there is no reason in principle why customs
duties should not be applied to services33 . Also if digital products are considered goods they
are subject to customs duties. It can be assumed that some WTO member states are only
willing to decide on the continued validity of the moratorium after the classification questions

26
See “EC Discussion Paper on Electronic Commerce and the WTO”, available on the website of DG Trade, p.
11. There are nevertheless no indications that some WTO members now impose custom duties on electronic
transmissions.
27
And of course in favor of the local e-commerce and IT industry.
28
Source is missing.
29
WTO document S/C/W/183, November 30, 2000, Communication from the EC or see the position of
Germany in: Bundestag, 14th Legislative Period, Questions and Replies "Electronic Commercial Traffic
(Elektronischer Geschäftsverkehr)", Printed Matter 14/3173, April 11, 2000, p. 5 and the German Industry
Lobby BDI (2001), p. 4.
30
“EC Discussion Paper on Electronic Commerce and the WTO”, available on the website of DG Trade, pp. 3-
4 and 11. Before the Doha Round, the EC said that it would only accept a reactivitation of the moratorium if
further progress was made in the work program.
31
International Trade Reporter, “EU says it will not support WTO e-commerce Moratorium”, Vol. 16, No. 28,
July 14, 1999.
32
WTO Document S/C/8, March 31, 1999, p. 10.
33
S/C/W/68, November 16, 1998, Note of the WTO Secretariat to the GATS Council.
11
have been answered conclusively34 . As will be seen later, this attitude has its roots in the
desire of the EC and other WTO member states to preserve its policy autonomy in the field of
digital product trade (music, movies, etc.). Instead of agreeing on a generic moratorium to
promote e-commerce, the EC argues that “it may be more practicable to address the issue in
the market access negotiations by preventing the appearance of customs duties as a scheduled
market access barrier” 35 .

Another reason for the lack of consensus on the moratorium is the fear of developing
countries concerning a potential permanent loss of their tariff revenue 36 . Even if the US and
the EU were to agree on the classification issues the developing countries may not accept a
permanent duty- free moratorium.

At the Fourth Ministerial Conference in Doha (2001) it was agreed that the moratorium
should again be extended temporarily until the Fifth Ministerial Meeting in 2003 37 . This
renewed temporary extension should not avert one's attention from the fact that no consensus
could be found for a permanent duty- free moratorium. On the contrary: the Europeans and
other delegations already agreed in Seattle and in Doha that in no way the temporary
moratorium shall prejudge the results of the work program38 .

34
WTO Document S/L/74, July 27, 1999.
35
“EC Discussion Paper on Electronic Commerce and the WTO”, available on the website of DG Trade, pp.
10. This remark must be seen in light of the fact that the EC wants to keep the whole audiovisual sector
unbound; meaning that all market access limitations are permitted without scheduling them.
36
Quote UNCTAD estimations here.
37
WTO Document WT/MIN(01)/DEC/W/1, November 14, 2001, p. 7: "We declare that Members will maintain
their current practice of not imposing customs duties on electronic transmissions until the Fifth Session.“
38
WTO Document G/C/W/158, July 26, 1999, "It was stated that the standstill agreement could in no way
prejudge the outcome of the work program”. This type of clause is a popular negotiating tactic that leaves the
door open for subsequent deviations from agreements. The European delegation formulated an identical
formula in the Doha Ministerial Declaration concerning the agricultural negotiations: "Building on the work
carried out to date and without prejudging the outcome of the negotiations we commit ourselves to
comprehensive negotiations aimed at: substantial improvements in market access…”, italics by the authors of
the thesis. See NZZ, November 16, 2001.
12
2.1.2 Open Classification Questions concerning the Electronic Trade of Services

The classification questions raised by e-commerce are certainly one of the key elements of the
work program39 . Answers to these questions are needed fast as the meaningfulness of the
specific commitments made during the new services negotiations may otherwise not be
guaranteed. Throughout the different questions the issue of “likeness” in terms of the Most-
Favored Nation and National Treatment principles and the clarification of existing and future
commitments to electronic services is of crucial importance (see also Part 2.2). This is
definitely a question that of horizontal relevance to the whole GATS.

Again, the whole discussion is influenced by differing EC and USA viewpoints. Whereas the
USA wants to ensure that electronically delivered goods and services receive no less
favorable treatment under trade rules and commitments than like products delivered in
physical form (the “most liberal treatment possible”) 40 the EC has a more nuanced approach.
This EC approach is often influenced by the desire to maintain regulatory autonomy in the
field of audiovisual policies and an absence of trade concessions.

2.1.2.1 Digital Products: Are they Goods (GATT), Services (GATS) or Intellectual
Property (TRIPS)?

WTO Members agree that the majority of services that are delivered electronically (such as
financial or professional services) fall under the GATS. As most of these services are listed in
the GATS country schedules their classification is not disputed. The fundamental question
asked in the WTO's e-commerce work program was, however, the following: Should products
that were usually sold on a carrier medium (CD, etc.) but that can now simply be downloaded
from the Internet, be classified under GATS or GATT? In other words: are online movies
"like products” to conventionally delivered goods like video tapes or does this transaction fall
under a new service category to be created for this purpose? The answer has a strong practical
relevance due to the widely diverging liberalization commitments under GATT and GATS 41 .
Certainly the issue is of particular importance to “cultural, entertainment and software

39
WT/GC/W/475, June 20, 2002, Second Dedicated Discussion on E-Commerce under the auspices of the
General Council on May 6, 2002.
40
Source is missing.
41
See PANAGARIYA (2000), p. 4. Assuming that the duty-free moratorium does not apply to electronically
delivered services, it can be argued that the duty-free moratorium increases the difference of commitment
levels between goods and services.
13
products” 42 . Statisticians and the WCO have hesitated to proceed with a classification due to
these sensitivities in the ‘goods or services’ debate about digitized products in trade
negotiations in the World Trade Organization43 . But also the output of professional services,
such as architectural or engineering designs that traditionally had a physical equivalent with a
Harmonized System tariff line can now be delivered online 44 .

It is very difficult to delineate the exact borders between the GATS and the GATT, because
the Treaties do no t contain any comprehensive definitions of or distinctions between the
concepts of "goods" and "services"45 . It is also quite probable that as the goods and service
transactions continually become more intertwined, one will not be able to achieve any
satisfactory distinction between the two. Although, for the time being, the discussion on a
watertight distinction between GATT and GATS applicability has been confined to the e-
commerce work program it is a question that will soon have to be dealt with on a more
generic level also. For instance, the problem of distinguishing goods and services for the
audiovisual sector has always been and is still a problem46 . Moreover, as the service content
embedded in goods is on the increase the boundaries between goods and services increasingly
blur. At one point one must ask whether we deal with a “service embedded in a good” or a
“good embedded in a service”.

In the case of audiovisual services again, it has always been unclear how to treat production
and distribution services that really constituted the core value-added that finally led to a
standard good ( a movie canister ). A very similar question arises with respect to goods that
actually derive their core value of previous R&D services 47 Furthermore, it is now standard
knowledge that traditional goods industries (automobile, etc.) derive their profits from
attached service transactions (finance, repair, etc.). Under the heading of “splintered services”
this discussion on the value of services within goods has already been triggered nearly twenty

42
See SAUVÉ & STEINFATT , 2001, p. 324.
43
Personal discussion with official of the W ORLD CUSTOMS UNION (Brussels) and TASK FORCE ON SOFTWARE
M EASUREMENT IN THE NATIONAL A CCOUNTS (2002), p. 4 f.
44
Interview with DG Trade official on e-commerce and WT/GC/W/475, June 20, 2002, Second Dedicated
Discussion on E-Commerce under the auspices of the General Council on May 6, 2002.
45
WTO Document S/C/W/68, November 16, 1998. For a legal treatment of the absence of a proper distinction
between goods and services in the WTO context, see TIETJE (xxx), p. 67 and for an interpretation in the
context of audiovisual service negotiations, see BAUMANN (XXX), p. 62 ff.
46
HAHN (1996), p. 326 ff. Experts as ked in what way the treatment of a movie transmitted via cable or satellite
deserved different WTO treatment than a movie delivered on a physical carrier media.

14
years ago 48 . But with the two separated GATT and GATS Treaties within the WTO it did not
yet have tangible repercussions.

The next three sections present the arguments used to defend one of the three classification
possibilities (GATT, GATS and TRIPS). Most of the arguments in favor of the application of
GATT principles to digital products emanate from the USA, whereas most of the arguments
for a GATS classification come from the EC. Whereas the EC argues for a strict
categorization of all intangible products under GATS, the USA wants to achieve that GATT
and not GATS principles apply to digital products 49 . Consequently, downloaded products
should not be subject to less liberal treatment than their "like product" counterparts imported
on a physical media carrier. There have also been interesting arguments in favor of a TRIPS
classification.

GATT: Arguments in favor of categorizing digital products as goods

1. Trade is more liberal under GATT

The US argues that a classification in terms of the GATT regime, rather than GATS, would be
more trade friendly because of the greater liberalization degree of GATT50 . Moreover, the
best of all worlds – in other words free trade – would prevail when all electronic
transmissions are classified as goods and the moratorium on customs duties is extended
indefinitely 51 . Table 1 on the differences between the two WTO Treaties reinforces the fact
that the degree of liberalization under GATT is much more encompassing than under GATS.
This is not surprising, since the WTO member states have had more than 45 years to improve
the architecture and the commitment level under GATT. The following extracts of the table
demonstrate that GATT is more trade friendly than GATS.

47
Like the pharmaceutical companies.
48
BHAGWATI (1984), p. 134.
49
See WT/COMTD/17, February 12, 1999, Communication by the United States, p. 5. Although one can read
in many US industry position papers (quote) that digital products should be classified under the GATT, the
DG Trade and the USTR official assert that the US has never called for an outright GATT classification of
digital products.
50
WTO Document WT/GC/16, February 12, 1999, p. 5, contribution by the USA.
51
PANAGARIYA (2000), pp. 3-5, who comments though that the already existing classifications of most internet
transactions as services, would render such a scenario impossible.
15
(i) The application of the National Treatment Principle is obligatory for goods covered by
GATT, whereas national treatment under GATS can be refused via a simple entry in
the individual country schedules.

(ii) GATT does not tolerate any quotas, but they are allowed in terms of GATS if full
market access has not been granted by an individual WTO member.

(iii) With a view to technical standards and health measures, GATT offers a variety of
regulatory disciplines that do not yet been exist under GATS 52 . Regulatory disciplines
under GATT ensure that national regulations do not unnecessarily hamper trade and
insist that international standards be used. In the context of electronic trade there is a
danger that heterogeneous and deliberately protectionist regulations may imperil free
trade. Regulatory disciplines, as applied in terms of GATT, are thus urgently required.

(iv) For software on carrier media covered under the Information Technology Agreement
the industrialized country signatories (56 participants that covers approximately 95%
of world trade in IT) have agreed to a zero tariff line by the year 2000. The GATT
Agreement, together with the duty- free moratorium, guarantees low customs duties.
Only if the moratorium should be lifted, will some WTO member states be in a
position to lift customs duties on digital products that do not enjoy the advantages of a
nil tariff under GATT. Under GATS however, the quasi-absence of customs duties on
electronic services is not guaranteed 53 . Until now tariffs on services have been largely
unknown54 . But if digital products are qualified as services, then customs duties on
services would also be theoretically possible 55 . Under GATS discriminatory tax
regulations or customs duties could be implemented by countries that have not made
national treatment commitments. All toghether GATT is thus the better guarantee for a
duty- free e-commerce environment.

52
The GATT Treaty on Technical Barriers to Trade (TBT) or the GATT Treaty on Sanitary and Phytosanitary
Measures (SPS) go much further than the existing GATS rules on domestic regulation. The latter consists
mainly of a mandate to develop regulatory disciplines for the GATS. See TRACHTMANN (2002) or W UNSCH-
VINCENT (2001) for a comparison.
53
WTO Document S/L/74, July 27, 1999.
54
WTO Document G/C/W/158, July 26, 1999.
55
The recording and imposition of customs duties on electronic transactions nevertheless remain a problem.
16
(v) GATT goes considerably further than the GATS in mandating development-related
objectives vis- à-vis the developing countries 56 .

(vi) In contrast with GATS, GATT offers an agreement on subsidies that forbids certain
types of state financial assistance completely, and others partially. No similar GATS
agreement on subsidies has been developed yet. The present state of negotiations does
not indicate that the conclusion of such an agreement is in the offing 57 . Equally, GATS
has no agreement on anti-dumping, on safeguard measures, on trade related
investments or on rules of origin. Clearly, GATS mandated further work on four
topics: emergency safeguard measures, procurement, subsidies and a regulatory
discipline. The meager results of the currently ongoing negotiations on the above-
mentioned GATS rules indicate that it will be a lengthy undertaking to negotiate rules
under GATS that are similarly effective as the existing GATT rules 58 .

(vii) It should finally be point ed out that the degree of liberalization of GATS depends to a
large extent on the individual concessions of the WTO member states. These
concessions can of course not assume the same function as a GATS subsidy agreement
or a GATS regulatory discipline. But it should be noted that wide-ranging GATS
obligations regarding market access and national treatment could mean that GATS
could become almost as trade- liberal as GATT.

56
SENTI (2000), para. 645.
57
See W UNSCH-VINCENT (2001a) for a stocktaking of the lengthy negotiations on the GATS rules.
58
See SAUVÉ (2002).
17
 Table 1: Comparison between GATT and GATS Agreements

GATT, 1948 and 1995 GATS, 1995

Age of the 55 Years 8 Years, GATS rules are incomplete
Agreement in 2003
National Treatment General obligation that does not permit Obligation relates only to list of
Principle any exceptions 59 , but is limited only to specific commitments that varies
domestic measures. between countries
Most favored nation Exemptions from this obligation only Timebound country-specific
status granted under special circumstances exemptions from the most favored
(preferential trade agreements, nation obligation are possible
developing countries, etc.)
Customs duties Allowed where members have not set GATS does not deal with tariffs.
their customs duties on nil. The latter is When a country grants unlimited
applicable for most states that have national treatment, then
signed the ITA, including software. discriminatory limitations are not
allowed.
Quotas Only allowed in certain emergency Permitted when no unlimited market
situations access has been granted
Transparency Obligation under GATT whic h is Obligation under GATS, but less
reinforced by GATT agreements, such as strict than under GATT (no
the TBT consultation requirements, etc.)
Regulatory discipline Exists in the area of technical standards Only an incomplete regulatory
and sanitary and phytosanitary measures, discipline and a mandate to develop
to impede unnecessary trade-restricting such a discipline exists (GATS Art.
regulations and to encourage the use of VI)
international standards
Preferential treatment Special conditions for developing Special GATS conditions are less far-
for developing countries exist reaching than under GATT60
countries
Agreement on Yes None
subsidies
Anti-dumping rules Yes None
Emergency safeguard Yes None
rules
Agreement on trade - Yes No, but investments may be covered
related investments under GATS mode 3
Rules of origin Yes No

59
The procurement division of the public sector is excluded.
60
SENTI (2000), para. 645.
18
 2. Safeguarding the technological neutrality of the WTO Agreements

The USA and the leading software manufacturers fear that those products that had hitherto
been included under the trade- friendly GATT Agreement, could now fall under the still
somewhat underdeveloped GATS Agreements 61 .

Following this logic, it seems as if the existing tariff lines in the GATT schedules, the
presence of GATT Art. IV on screening quotas for films and the software treatment via the
Information Technology Agreement (ITA) show that hitherto content was treated under the
GATT. Then, it seems incomprehensible that whereas software and movies have so far been
classified as goods, these should now be reclassified from goods to services merely because of
a new distribution technology. It could well happen that due to the Information Technology
Agreement software delivered physically would reach the consumer free of customs duties
and without any trade restrictions, but that the same kind of software, transmitted online, is
indeed subject to trade restrictions tolerated by GATS.

The fact that there are no clearly defined GATS commitments for electronically delivered
software creates tremendous uncertainty for software suppliers that influence the US position.
Suppliers of digitized content are concerned about the prospect of years of trade negotiations
just to obtain the market access and national treatment assurances under GATS that they
already enjoy under GATT. Thus, the USA has repeatedly pointed out that a WTO dispute
settlement case would certainly regard downloaded music on the one hand, and CDs from a
store on the other hand, as "like products" – hence the GATT rules should apply. The
resulting legal uncertainty of a differential treatment would otherwise put the more efficient
form of transactions, namely the online distribution, at disadvantage 62 .

61
"To date some countries have argued, for example, an anti-virus software program that is downloaded is to be
treated as a service, while the same product, if imported on disk, is to be treated as a good. Adoption of this
rule in the WTO would result in substantial uncertainty and harm our industry", cited from BSA (2001a),
Business Software Association.
62
PANAGARIYA (2000), pp. 5-7 illustrates the negative consequences of the absence of technological neutrality.

19
Moreover the classification of similar items under GATT has not been problematic so far. It
has so far been normal practice to abstain from classifying an electronic service that may be
necessary to manufacture a product – for instance the cross-border transmission of text data in
order to print a book – as a separate service transaction63 . It has also become normal practice
that most goods incorporate a number of services, data or software and that these would still
be seen as a part of the goods transaction64 . In that sense all manufactured products are
regarded as carrier media for digitized information65 . Finally, as mentioned before, the
physical outputs of certain service transactions, such as architectural designs, have always
been considered under GATT.

3. Physical condition of the product points to a GATT classification

The United States argues that there are indeed a number of products, such as entertainment
games, that may change their physical carrier medium various times during a trade
transaction. A game manufacturer may copy the content of a Game-CD onto a hard drive,
send it to the consumer over the Internet who then burns the game on a CD. In nearly all such
situations the “content” is intricately linked to a physical object. Digital products are not
consumed during consumption. Both this "durability" and the inseparability from a physical
medium mean that digital products are rather a good than a service 66 . Finally, the USA
contends that since the GATT came into being the EC has insisted that electricity – which in
terms of comparability (form, shape, etc.) comes closest to digital products – should be
regarded as a good and not a service 67 .

63
DRAKE & NICOLAIDES (2000), p. 16.
64
WTO Document S/C/8, March 31, 1999.
65
Printed in WTO Document G/C/W/158, July 26, 1999.
66
See WTO Document WT/COMTD/17, February 12, 1999, Communication by the USA.

20
GATS: Arguments for a categorization as services:

In contrast with the USA, the EC argues that digital products should be classified as
services68 . Moreover, as opposed to the US, the EC has pointed out that no such thing as a
technological neutrality principle exists across WTO agreements that would demand
identical treatment for goods and services 69 . The EC holds the view that a service should not
receive a different treatment under GATS when it is delivered through another technology.
But the EC is clear that the principle of technological neutrality cannot be applied to
compare a goods transaction (software on a carrier medium) to a services transaction
(software delivered online). Likeness of products and consequently the same market access
and national treatment should not be accorded.

On the whole the EC’s interpretation should be seen from the perspective of various internal
negotiation parameters that will be analyzed in chapter 3. Certainly, the desire of the EC to
protect its ability to extend its audiovisual policies to digital products plays a major role 70 . If
these electronic deliveries are in fact a service, the EC can continue to apply its restrictive
rules on the distribution and broadcast of audiovisual works to films and TV programs
transmitted over the Internet. Part 2.2 will return to the low level of audiovisual liberalization
by the EC.

But the EC is not alone in taking on this interpretation. All other WTO members that are
interested in maintaining a wide margin for audiovisual policy intervention follow the same
logic. But also the background studies of the WTO’s Trade in Services Division and

67
It should be pointed out that the HS System gives WTO member countries the possibility to classify
electricity as an "intangible good". The HS System does not allow any other good to be classified under this
category.
68
S/C/W/87, December 9, 1998, Communication from the EC and “EC Discussion Paper on Electronic
Commerce and the WTO”, available on the website of DG Trade and „Digital Products: The case for
services“, from europa.EU.int/comm/trade/services/ecommerce/digi.html, March 26, 1999. See TIETJE
(XXX), para. 69 for a legal background.
69
Personal Interview with DG Trade Official.
70
This point comes from private interviews with DG Trade, the WTO Secretariat and German and French
delegates to the WTO (133 Committee). See also in this respect “US holds e-commerce talks with WTO
partners, covering nature of digital products”, BNA WTO Reporter, June 13, 2001. This point will be taken
up in more detail in chapter 3 and 4.
21
interviews with the responsible WTO officers indicate that it is leaning towards a GATS
classification of all digital products 71 .

1. In the long-term GATS allows more liberal trade than GATT

Certainly GATT presently provides the most trade- liberal framework for cross-border trade of
digital products. But this may be a static analysis. Contrary to GATT, the GATS framework
allows liberalization along four different distribution modes. Assuming that full commitments
are taken under GATS, a far greater liberalizing effect may be achieved than under GATT 72 .
This is true because the WTO member states would then also have commitments in their
schedule that guarantee foreign direct investments (mode 3) and the temporary migration of
natural persons (mode 4). GATT does not address these dimensions of market entry that can
be very important for the audvisual industry, for instance (i.e. ownership of a local TV
license, operation of a local cable network, etc.).

Considering this fact, the GATT classification may only be the most liberal for e-commerce
seen from a short-term perspective. In the long run, however, it may be an empty gesture. The
fact that for instance the software or the film industry is so strongly in favor of a GATT
classification, can only be explained by two reasons. Either the more far-reaching dimension
of GATS has not been sufficiently taken into account or the supporters of a GATT
classification would rather prefer an existing free trade commitment under GATT they can
build on rather than an uncertain future GATS commitment 73 .

71
The presentation of LEE TUTHILL (Trade in Services Division of the WTO and GATS Council delegate for
the WTO E-commerce work program) during the WTO audiovisual conference in November 2001 (see
footnote 1) reinforces this impression. But although the viewpoint of the WTO Secretariat may certainly
influence some WTO Member States it has no formal consequences, because the Secretariat lacks the
authority to make decisions.
72
The author thanks LEE TUTHILL for this point.
73
Whether GATS liberalizes more than GATT depends crucially on the willingness of the WTO member
countries to make wide-ranging liberalization concessions in all four modes and for all service classifications
that potentially affect digital trade. Those that favor the GATT classification are certainly not wrong when
believing that full commitments in fields like audiovisual services are not realistic in the near future.
22
In response to the US argument of technological neutrality the EC position is that this concept
only exists within a trade agreement (like the GATS), but that legally speaking, technological
neutrality cannot be build between trade agreements 74 .

2. GATT has never been a good framework for trade in content

The international standard for recording merchandise trade is set out in the “International
Merchandise Trade Statistics: Concepts and Definitions”75 (IMTS) and the GATT
classification follows the "Harmonized Commodity Description and Coding System (HS)“,
created by the World Customs Organization (WCO). This register bases the classification of
goods in terms of their physical characteristics, and not in accordance with their eventual use.
Because digital products, such as movies, have no real physical attributes, the HS system does
not offer any fitting classification to such "content” 76 . And so software has so far been
classified according to the kind of carrier on which it is recorded (laser disc, magnetic tapes,
etc.) 77 . These are goods that are carriers of software within HS heading 85.24. (“packaged sets
containing CD-ROMs with stored computer software and/or data developed for general or
commercial use ”). But diskettes or CD-ROMs with stored computer software and/or data
developed to order are to be scheduled under trade in services.

This classification of digital products, according to the type of carrier on which they are, is
nowadays problematic. Earlier one could distinguish much more clearly between carrier
mediums, such as books, LPs or videocassettes. But today some of these carrier systems, such
as laser discs, could be used on various platforms, which means that the strict separation
between types of carriers and thus also the straightforward HS classification, have all become
redundant.

Another proof that GATT may not be present the most appropriate classification for digital
products is the fact that due tariffs are mostly determined by the value of the carrier medium

74
Interview with DG Trade Official and position taken by VIVIANE REDING (Commissioner DG Education and
Culture) on “Cultural Policy and WTO”, 58th Mostra Internazionale d’Arte Cinematographica, Venice,
September 7, 2001, DG EAC C.1/XT D (2001).
75
UNITED NATIONS (1998).
76
WTO Document G/C/W/128, November 5, 1998.
77
For an explanation how software fits into the HS system, see the TASK FORCE ON SOFTWARE M EASUREMENT
IN THE NATIONAL A CCOUNTS (2002), p. 4 f.

23
and not by the often much higher value of the underlying content 78 : "In determining the
customs value of imported carrier media bearing data 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 instructions, provided that this is distinguished from
the cost or the value of the carrier medium" 79 . The latter decision that does strictly not apply
to electronic transactions, to cinema, to movie or to video recordings leaves it to the WTO
members to choose whether they would like to impose tariffs on the basis of the value of the
transaction of the carrier contents or on the basis of the value of the carrier medium. It can,
however, be empirically verified that the majority of WTO members impose customs duties
on the value of the carrier medium 80 . This could be attributed to the fact that it is difficult at
border posts to ascertain and to classify the contents. Undoubtedly, it is in the US interest that
this procedure also applies to any digital product81 .

Under the current GATT framework, an electronic transmission that takes place without a
carrier medium physically crossing a border has so far not been registered as an actual
import/export. In connection with electronic networks the fundamental question arises as to
where exactly the boundaries of an actual import actually lie. Thus questions were asked in
the e-commerce program whether downloaded data were in reality covered by the definition
of an import 82 : "With electronic commerce [...] it was unclear whether there was a 'thing' that
actually moved across a border, which would lead to the conclusion that an importation in the
sense of Art. II of the GATT had taken place."83 . In the WTO Forum an electronic
transmission without a carrier physically crossing any border, has so far not deemed as an
import/export in the true sense of the word. In the 1984 the Chairperson of the Committee on
Customs Valuation stated that when the importation of software is so closely connected with

78
On this discussion, see WTO Document WT/GC/24, April 12, 1999: "Valuation Issues arising from the
application of the agreement on the implementation of Art. VII of the GATT 1994", G/VAL/1-8 and
G/VAL/W/1-5.
79
World Customs Organization (WCO) Technical Committee Commentary, printed in WTO Document
G/C/W/128, November 5, 1998. The basis for this kind of classification of contents was the the Agreement
on "Valuation Issues arising from the application of the agreement on the implementation of art. VII of the
GATT 1994" or the "Decision on the Valuation of Carrier Media Bearing Software for Data Processing
Equipment". See also WTO Document G/VAL/8, October 21, 1996.
80
Personal conversation with the Brazilian delegate to the WTO, SERGIO DOS SANTOS, on November 22, 2001.
81
“U.S. looks for WTO Guidelines on E-Commerce by Cancun Ministerial”, Inside U.S. Trade, Vol. 20, No. 38,
September 20, 2002.
82
WTO Document G/C/W/158, July 26, 1999.
83
Cited from WTO Document WT/GC/24, April 12, 1999.
24
the importation of goods (for instance from an assembly plant), then the data transmission
should be classified as part of the imported goods and not as a new importation action84 . Quite
interestingly this could mean that if one deals with an electronic content transmission alone
then it may well be the case that no WTO Agreement obligations or liberalization concessions
apply. Of course, it should be kept in mind that the decision was made roughly 20 years ago,
when there was no agreement yet on trade in services.

This and the fact that customs values have so far been established on the basis of the type of
carrier and not the content itself – are witness of the rather incomplete appreciation of the
emerging content industries and of digital trade. Indeed, GATT has difficulties in dealing with
any trade on which customs duties cannot be imposed at physical border posts. This is an
indication that the GATT categorization of digital products is not adequate.

3. Physical condition of the product points to a GATS classification

The distinction between goods or services is often made on the basis of the physical form of
the product; in other words whether it is tangible or intangible. Accordingly products without
any physical form – such as a financial consultation or an online software program– are
regarded as services. Following that logic, all products delivered electronically should be
considered services. But the question remains how close the relationship should be between
such a product and a so-called carrier technology in order to qualify as a good rather than a
service. If a consumer would watch a video stream online, transmitted via the Internet, then
this would be described as an audiovisual service. What then happens if this same consumer
burns this film to a CD and thereby attaches the "content" to a carrier medium that falls under
GATT? In the opinion of the WTO Secretariat this subsequent transformation process was not
connected to the initial cross-border import 85 . Thus, the mere fact that in the end the consumer
puts the data on a carrier medium does not suffice to make it a GATT transaction.

84
WTO Document G/VAL/W/14/Rev. 2, July 25, 1984. Also: "The point that had been made was that the
delivery of information or software via satellite did not conform to the traditional definition of importation of
goods upon which customs duty might be payable. The WCO Secretariat had suggested that there could be
circumstances where the delivery of information was closely associated to the importations of goods and, in
this case, the software could be taken into account in the determination of the value of the imported goods."
Fifth Meeting on the interpretation of the WTO Agreement on Customs Valuation, contained in WTO
Document G/C/W/128, November 5, 1998. See also in this connection G/VAL/W/14/Rev. 2, July 25, 1984 or
G/VAL/W/12, October 8, 1996.
85
"If hard copies are produced, whether legally or not, this is a manufacturing process resulting in the
production of goods, into which the electronic transmission could be seen as a service input: [...] virtually all
25
 4. GATS classification offers new and more adequate classification possibilities

The argument offered by the USA that certain digitizeable products have always been
classified under GATT and that therefore digital products should consequently be regarded
"like products" is not convincing. After all, at the time of classifying these products – such
as in the case of electricity – the GATS treaty did not exist. For the lack of something better,
at the time the integration of these products into GATT via their carrier medium was the
most desirable solution. But because the WTO Agreements have now matured, there is
some justification to change the classification of products that hitherto have been attributed
to the GATT. After all, audiovisual or computer services that determine the value of most
digital products are themselves classified under GATS.

From a legal point of view it is in fact incorrect to determine the GATT or GATS
positioning of digital contents according to whether they can be interpreted as falling into
any particular category within the HP or CPC codes. One should rather determine where the
real value of the product lies and then see whether that fits to a service or a goods
transaction. Moreover, the advantage to group all digital transactions under GATS ("across-
the-board definition") lies in the fact that trade frictions resulting from the various
classification possibilities of individual products are avoided 86 . Finally, since the initial
classification of movies under GATT, more than 50 years have gone by. During that time
the understanding of the service sector in general and the trade of content has greatly
evolved 87 . It may now be time that this change is reflected by a new classification.

5. The underlying business models point to a service categorization

In this section it will be argued that digital products, such as online software cannot be
considered “like products” to the original offline products. The change towards a network-
based services economy means that business models for products like software (hitherto
classified under the GATT) increasingly rely on complementary electronic service
transactions. Nowadays the purchase of software for example is no longer a one-stop action.
Online software support, updates and steps to customize the software increase service

manufactured goods involve services inputs of various kinds", cited from WTO Document S/C/W/68,
November 16, 1998.
86
Please note that an across-the-board classification of all electronic products underGATT is impossible
because many relevant areas have already been registered as services by the GATS classification system.
87
See RÜCK (2000) for the changing economic understanding with respect to services.
26
interaction between producers and consumers. Besides, the degree of personalization that the
product then receives makes it very different from a standardized software package 88 . The
value of the software really lies in these later online interactions. Because of the increased
functionality and service component the software may in the final analysis not be a “like
product” of the traditional software anymore 89 .

TRIPS: Arguments for a classification as trade in intellectual property rights

The above examples about the trade in online movies or customizable software may also
create the impression that neither a trade in goods nor a trade in services transaction takes
place. It would rather appear as if these transactions derive their value from commercial
transactions with “ideas and content” that are protected by intellectual property rights 90 . The
only service involved may well be the distribution service that delivers content from country
A to country B. In trade statistics these transactions are mostly reflected in the trade in
services tables, under the heading, “Royalties and License Fees”. However, in the audivisual
service nomenclatura of the GATS that is used to make market access or national treatment
commitments this classification does not exist. Furthermore, when a cross-border software
purchase takes place not the program as such, but actually the license to use the program to a
certain extent (in other words the usufructs), that is being purchased 91 . The program itself
remains the possession of the intellectual proprietor92 . Thus, some have argued that the issue
of content classification deserves to be treated under TRIPS 93 .

Although the idea that commercial transaction in knowledge-based economies have le ss to do

with traditional goods or service transactions than with the actual licensing of content,

88
See BACCHETTA, LOW , ET AL. (1998), p. 52.
89
WTO Document G/C/W/158, July 26, 1999.
90
WTO Document WT/GC/W/247, July 9, 1999, contribution by Indonesia and Singapore.
91
"Even when a consumer 'purchases' a product, such as a music CD or a software application on CD-ROM,
the true legal nature of the transaction is somewhat different from a simple purchase of a physical product –
what is really happening is that the consumer is taking out a limited licence to use a sound recording (and
musical work) or a software application, in a limited range of circumstances. Equally, in the case of
software, the licence may extend to future use of software code yet to be written, in the form of upgrades that
can be downloaded electronically.”, in: WTO Document IP/C/W/144, July 6, 1999, Contribution by
Australia.
92
WTO Document WT/GC/24, April 12, 1999.
93
WTO Document WT/GC/W/247, July 9, 1999, contribution by Indonesia and Singapore.
27
information and knowledge, a classification of digital products under the TRIPS Agreement is
not a solution. The reason is that whereas the TRIPS Agreement offers far-reaching standards
to protect intellectual property it guarantees neither market access nor any other form of trade
liberalization. Consequently, TRIPS cannot constitute the trade framework for digital
products. In this connection it should however be noted that in the IMF and OECD manuals
on trade statistics the “Cross-border payments for royalty and license fees” figure prominently
under trade for services94 .

A hybrid solution: GATS classification but with GATT treatment?

The latest proposals tabled at the WTO e-commerce work program rather propose a kind of
hybrid solution to the categorization problem; namely a categorization under GATS while
ensuring that GATT- level market access applies. The Singaporean and Japanese
representatives stated tha t if market access in the form of unconditional MFN, national
treatment and the prohibition of quantitative restrictions is to be recognized, even under
GATS, the “goods or services” argument over digital contents could be rendered
meaningless 95 .

At first sight this solution is quite popular among the WTO delegations. But pragmatically
speaking, these digital products would then appear in one or several service classification
groups. In this context the GATT principles (unconditional MFN, national treatment, the
prohibition of quantitative restrictions and often free market access) would have to be mirored
by the individual countries’ GATS commitments that would translate into significant cross-
border market access and national treatment commitments. Clearly it is not realistic to assume
that most countries would accommodate that prerequisite for audiovisual services and the like.
Otherwise it would not have been all that difficult to reconcile the differences of opinion
regarding GATT or GATS classification. A second look thus reveals that this hybrid approach

94
See OECD (2000) and IMF (2000).
95
METI (2001): Proposal on WTO’s approach to E-commerce Towards eQuality: Global E-Commerce
presents a Digital Opportunity to Close the Divide Between Developed and Developing Countries, Non-
published communication of Japan to the WTO work program on e-commerce of June 15th, 2001 non-paper
of Singapore to the regular meeting of the General Council on 8 May (JOB(01)55, 26 April 2001). Para. 16
of the latter paper argues that by this agreement online delivered products, such as software, would not be
treated worse than traditional offline sales. See also “WTO Members Fail to Agree on Rules For E-commerce
Deals; New Meeting Called”, BNA WTO Reporter, May 10, 2001.
28
does not constitute an acceptable solution to the US if this is not followed up by the
subsequent necessary GATS commitments.

To conclude, the correct classification of digital services remains a hotly contested issue. The
WTO members have not yet accepted any of the above classifications and an agreement is not
in sight. But clearly the questions at hand may be more important than one would first think.
It is now realized that trade in content (not only music, but also designs and other blueprints
or ideas) may not fit well within the classic GATS or GATT- frameworks. Furthermore, many
observers regard this discussion as a symptom for the prospect that - in the long term - the
division of the WTO into GATT, GATS and TRIPS will be difficult to maintain96 .

96
See for instance FEKETEKUTY (2000), pp. 108-110 who was one of the first to raise the issue of the increasing
complexity to distinguish between goods and services and the ensuing potential need for a fusion of both the
GATS and the GATT agreement.
29
2.1.2.2 If in GATS: Where to Classify Digital Product Services?

The problem of categorizing digital products does not stop here. In fact, even if a GATS
classification is agreed to, it is quite uncertain under what commitments many electronic
services fall. This problem results of the generic fact that the 1991 classification scheme
chosen for the positive list approach taken is outdated. Although here the problem of digital
product services is dealt with only, the problem of correct classification is a horizontal one
that also pertains to financial services, for instance.

This unclear classification “within” the GATS is highly problematic, as no one knows
whether individual GATS signatories have committed themselves to free trade for this
particular service; overlap and duplication of listed sectors exist97 . Two essential questions
need to be addressed:

(i) Where to classify digital services such as online movies, entertainment games,
interactive information services, etc.?

(ii) Once the classification for all services is clear, how will the “likeness” of such
services be assessed?

Again seen from a very broad perspective the issue of determining the likeness between
services will be one of the most difficult issues the WTO members and international law
experts will have to deal with in the future 98 . On a narrow front, the next paragraphs will show
that this issue is of particular relevance to digital products. It is unclear under what entry in
the sectoral classification list certain digital products will be treated. To complicate the matter
even more, there is a marked imbalance of commitments between the different possibilities.
Thus, to determine what service receives the same treatment as another, it is essential to be in
a position to pronounce on their likeness.

But on a broader front, the greater feasibility of cross-border trade in services brings to the
fore larger questions that are not limited to the issue of digital products. For instance: when is
a service from abroad “like” a service provided domestically? Is it the service itself or the
service providers themselves that have to be alike in order to be guaranteed equal trade

97
BARTH (2000), p. 287 and SHRYBMAN (2001), p. 31 f.
98
See A RKELL (2002), p. 5 who points out that the GATS concept of likeness has not been subject to significant
panel interpretations and that the advent of the Internet will constitute a severe test of the bounds of likeness.
30
treatment? Previously, when nearly all of the service trade was conducted via some
establishment (GATS mode 2) this question did not often arise. Most foreign service
providers were incorporated under domestic law and their product was submitted to the same
regulations as any other domestically produced service. However, the issue currently becomes
much more complex when one starts dealing with foreign service providers that are actually
established in a different country with different practises and different regulatory
requirements. From an American perspective, one needs to determine whether a banking
service from a provider in the Phillippines is “like” a financial service from an American or
Swiss provider. While the question of likeness has – despite of considerable efforts - not been
dealt with satisfactorily in the doma in of the GATT it is not exaggerated to say that the work
in the field of “likeness” for services has hardly begun99 .

Whereas this work cannot deal with the broader question of “likeness”, it concentrates on the
classification of electronic content services. To this day, it is questionable which GATS
commitments apply to electronic services. Although the WTO Secretariat has proposed a
homogeneous classification model for services not all countries schedule in accordance with
this model100 . Those who do so certainly have a different interpretation concerning the
different service categories.

Several principles for the classification of electronic content services may be followed. One
may opt for a sector-specific treatment (an electronic content service from a bank is scheduled
under financial services) or for a content-related treatment (an electronic content service, such
as a multimedia product is scheduled under audiovisual, software or similar service
categories). Questions arise as to whether financial information services over an interactive
web platform should be classified under financial, consulting or even news press agency
service 101 . Moreover, the question where to classify trade in digital products in the existing
nomenclature is a central issue.

99
The author thanks RUDOLF A DLUNG (Trade in Service Division, WTO) and A LEXANDER ZIEGLER (EFTA
Secretariat) for interesting discussion on this point.
100
Known as the W/120 among the WTO delegates. See WTO Document MTN.GNS/W/120, 10.7.1991 for the
full classification schedule these paragraphs are based upon.
101
Certainly the service providers may see themselves differently than the service negotiators do. Financial
information providers (Dow Jones, Reuters, etc.), for instance, see themselves more as business information
service providers. See OECD (2001), p. 10.
31
Table 2 reflects the most relevant classification possibilities concerning electronic content
services. They range from classification as a regular business service over communication to
recreational services. As discussed previously the coverage of the content itself is actually
uncertain. Although there is an entry for computer services or motion picture distribution
services, the software or the movie itself may not be covered. As the table indicates is
important to look at the whole range of classificatio n possibilities because very different
commitment levels apply for the different sectors. They range from liberal on the left hand
side to very limited market access and national treatment commitments on the right hand side.

Table 2 Classification Possibilities for Electronic Content Services

1. Business services 2. Communication services 10. Recreational,

cultural and
sporting
services102
B. Computer and C. Telecommunication D. Audiovisual services A. Entertainment
related services services services103
a. Consultancy services h. Electronic mail a. Motion picture and B. News agency
related to the installation j. On-line infor-mation video tape production and services
of computer hardware and data base retrieval distribution services C. other
b. Software imple - k. Electronic data b. Motion picture
mentation services interchange projection service
c. Data processing n. On-line infor-mation c. Radio and television
services and/ or data processing services
d. Data base services d. Radio and television
transmission services
A. Advertising Services e. Sound recording
f. other

Regulatory Creep
Full GATS commitments, “none” No or few GATS commitment, “unbound”
Most liberal to less liberal

Source and exp lanation: The darker area to the right indicates less commitments than the lighter area to the left.
Own display of information contained in the services sectoral classification list in WTO-Document
MTN/GNS/W/120, 10.7.1991.

102
Other than audiovisual.
103
Theatrical producer, singer group, band and orchestra entertainment services; services provided by authors,
composers, sculptors, entertainers and other individual artists; circus, amusement park and similar attraction
services; ballroom, dis cotheque and dance instructor services; other.
32
In any case, the distinction between the content itself and the actual delivery (e.g.
telecommunication service) is a crucial but difficult one that the GATS negotiations have
been struggling with since the telecommunications negotiations started 104 . Again, the EC
position is very different from the American one. Whereas according to the EC “content” is to
be scheduled under audiovisual and not the telecommunication services 105 , the US does not
agree to this straightforward delineation106 . When for instance the Secretariat wrote that, “as a
general rule of thumb, however, it has become accepted that commitments involving
programming content are classified under audiovisual services, while those purely involving
the transmission of information are classified under telecommunications.” 107 , the US was
strictly opposed to this interpretation. It contended that the distinction between these two
sectors that exist in the analogue world is not as easy to identify in the digital world 108 .

In sum, no consensus could be achieved on the differences between basic or value-added

telecommunications or which services would actually fall under audiovisual or
telecommunication services 109 . A look at the GATS Annex for Telecommunications also

104
The WTO Secretariat notes in a background note on audiovisual services: “Especially for the sub-category of
Radio and television transmission services (CPC 7524), it sometimes becomes difficult to determine exactly
the boundary between services classified under telecommunications and those classified under audiovisual
services.”. WTO-Document S/C/W/40, Audiovisual Services, Background Note by the Secretariat,
15.6.1998.
105
The EC’s schedule of specific commitments for telecommunication services (see WTO document
GATS/SC/31/Suppl.3, April 11, 1997) features the following description: “Telecommunications services are
the transport of electro-magnetic signals - sound, data image and any combinations thereof, exc luding
broadcasting. Broadcasting is defined as the uninterrupted chain of transmission required for the distribution
of TV and radio programme signals to the general public, but does not cover contribution links between
operators. Therefore, commitments in this schedule do not cover the economic activity consisting of content
provision which require telecommunications services for its transport. The provision of that content,
transported via a telecommunications service, is subject to the specific commitments undertaken by the
European Communities and their Member States in other relevant sectors.”, underlining by the author. In the
EC schedule broadcasting is defined as the uninterrupted chain of transmission required for the distribution
of TV and radio program signals to the general public, but does not cover contribution links between
operators.
106
See NIHOUL (2001) for details about the US-EC disagreements concerning the differences between
audiovisual and telecommunication services.
107
WTO-Document S/C/W/40, Audiovisual Services, Background Note by the Secretariat, 15.6.1998, para. 5.
108
Based on a personal interview with a USTR representative in Geneva. A closer look though at the American
specific telecommunication commitments reveals that they exclude one-way satellite transmissions of digital
television services and of digital audio services. This seems somewhat inconsistent with the above
proposition. It is not clear though if the US sees these as telecommunication services, but it simply does not
make any commitments, or whether the US considers these outside the scope of the telecommunication
services list. See GATS/SC/90/Suppl.2., date is missing.
109
See BRONCKERS & LAROUCHE (1997), p. XX for the difficulty of distinguishing between basic and value-
added telecommunication services. Concerning the differences between audiovisual and telecommunication
33
reveals that cable and broadcast distribution of radio and television programming is carved
out of the Annex110 .Thus, this created a vacuum in terms of trade disciplines governing the
regulation of on- line audio and video content. Moreover, it is not clear whether the GATS
Telecommunications Agreements apply to applies to cable companies and other non-
traditional telecom service suppliers over whose networks scheduled services (e.g. on- line
stock quotes) may be delivered 111 . On the whole, uncertainty remains as to what parts of the
total value-chain of getting content out to viewers is covered by what commitments. Whereas
countries may have listed no limitations to audiovisual service production and even
audiovisual projectionthey may have retained limitations on the transmission of particular
content 112 .

Equally, the distinction between advertising and audiovisual services is not clear-cut 113 .
Within the sectoral classification list of audiovisual services there is also an entry for
promotion or advertising (CPC 9611) that creates an element of uncertainty towards the
applicable advertising commitments 114 . Finally, the distinction between computer and
telecommunication services becomes increasingly blurred 115 because the telecommunications
schedules include services difficult to differentiate from computer services, such as electronic
mail, voice mail, on- line information and data base retrieval, electronic data interchange, etc.
If a country does not have a commitment on library or audiovisual services, for instance, it

services a conference was recently (November 2001) held at the WTO (see www.ulg.ac.be/ieje/nip/ for the
conference papers).
110
Para. 2(b) of the GATS Annex for Telecommunications. Also, broadcasting is not mentioned as a sectoral
activity in the audiovisual classification. See also ROBERTS (1999).
111
ROSEMAN (2002), p. 6.
112
It may also be the case that the transmission itself, the bottleneck in getting content to viewers, is not covered
by full market access and national treatment commitments. These points have strongly benefited from a
discussion with CAROL BALASSA (USTR).
113
See WTO Document S/C/W/47, Advertising Services, Background Note by the Secretariat 9.7.1998, p. 3 on
the difficult distinction between advertising and audiovisual services.
114
In that respect the WTO Secretariat notes the following: “Given the lack of further clarification, at least three
diverging interpretations are possible: CPC 96111 is intended to cover activities related to (i) production and
circulation of advertisements for audiovisual services; (ii) broadcast of advertisements through audiovisual
media; and/or (iii) production of audiovisual advertisements, e.g. for TV commercials. The potential for
interpretation problems is compounded by the fact that, while 51 Members have undertaken commitments on
"other business services/advertising services", no more than 8 Members have committed on "promotion or
advertising services" (CPC 96111).”. Same source as previous footnote.
115
WTO document S/C/W/45, Computer and related Services, Background Note by the Secretariat, July 14,
1998, p. 3-4.
34
may still be bound by content-related commitments made in sectors like computer services
that expose the content sector to the full array of GATS obligations 116 .

At times, members have been explicit on the distinction between these services – as the EC on
the difference between telecommunication and content services 117 – but most of the times the
meaning of the commitments is uncertain. Even in the case of the EC that explicitly excludes
content from its telecommunication schedule, the EC schedule leaves the reader in doubt
under what “other relevant sectors” content provision may fall. This latter problem of lacking
certainty towards applicable commitments is aggravated in cases of “new” services, such as
online trading platforms for banks 118 or entertainment products that combine software,
audiovisual and telecommunication services 119 .

To conclude, there is also an issue that has been termed “regulatory creep” that adds relevance
to these classification problems 120 . Traditionally, these less liberalized sectors on the right of
the grid in table 2 were also the most regulated sectors whereas the sectors on the left profited
from low regulatory intensity. But today the increasing convergence of service products - or at
least the consensus that is still outstanding for a straightforward classification - poses
problems related to the different degree of state regulation that the range of the sectors in table
2 are faced with. In other words, in the process of convergence regulations from the one
sector increasingly influences (or “creeps”) the hitherto unregulated sectors121 . A standard
example in this respect are the constraints faced by the heavily regulated telecommunications
and broadcast sectors that may suddenly apply to the trade in software (or software
services) 122 .

116
See SHRYBMAN (2001), p. 24 f. for how commitments under the subheadings “computer and related
services”, or “research and development” may affect library services in which no GATS commitments have
been undertaken.
117
See footnote XX above.
118
The author thanks Christophe Perritaz from SECO for this point on new services.
119
See also CHADHA (2000), p. XX for this point.
120
This term has been coined by the U.S.-based Business Software Alliance (BSA) that sees the software sector
being negatively affected by regulations from other sectors.
121
See S/C/W/81, December 9, 1998, Communication from the US on Computer and Related Services that
describes this phenomenon for computer services.
122
WTO-Document S/C/W/45, Computer and related Services, Background Note by the Secretariat, 14.7.1998,
p. 2 and pp. 13 f.
35
To summarize: these paragraphs illustrate that the WTO member states have far-reaching
interpretation margins for their commitments that may be used to the advantage of most
liberal trade. In addition, some services may rely on both a telecommunication and for
example an audiovisual service (interlinkage between service sectors) that may make it even
more necessary to eliminate the imbalances of the concessions in between services sectors123 .
This or more precise definitions of service sectors would also avoid uncertainties over
commitments. An example relating to entertainment software in box 1 illustrates the
classification debate and indicates how interrelated the issues presented here are in fact.

Box 1: Case study for Multimedia Online Games or Entertainment software

Most sources agree that the product ‘computer software’ is not well identified in current international
trade codes (neither for GATT nor GATS) or balance of payments (BOP) items 124 . One the one hand,
an individual entry for software itself cannot be found in the GATT classifications. Only certain
carrier media are subject to favorable GATT treatment. Ad valorem tariffs are thus mostly imposed on
the value of the carrier media and not the value of the content itself. Moreover, the treatment of
software through the Information Technology Agreement (ITA) seems even more favorable 125 . It
phases out all tariffs by 2000 of major IT exporting and importing countries126 . But this tariff free zone
applies to software only indirectly via the transporting carrier media 127 . Still, most experts - and
certainly the IT industry - itself agree that for software the tariff line is set to zero128 . Some differences

123
Considering that point the OECD (2001a) and the preparatory work for the GATS negotiation guidelines
(WTO documents under S/CSS/W/* and especially the EC’s contribution S/CSS/W/3) have addressed the
need to address certain “clusters” of services in the negotiations. This proposition however, was not taken on
as a negotiation technique in the GATS negotiation guidelines because of serious disagreements of WTO
members on that topic. The traditional sectoral request-offer negotiation remains the basis for this round.
124
See TASK FORCE ON SOFTWARE MEASUREMENT IN THE NATIONAL A CCOUNTS (2002), p. 4 f.
125
Legally speaking, the ITA is a special agreement under GATT. See FLIESS & SAUVÉ (1998) for an excellent
discussion of the ITA and p. 3 for these points on software. W ASESCHA & SCHLAGENHOF (1998) also provide
valuable background information on the ITA.
126
By 2003 54 WTO members that represent roughly 95 percent of the world trade in IT have joined the ITA.
All the industrialized countries have maintained a zero tariff line since the year 2000.
127
A look at the ITA commitment list of the USA or the EC reveals that the word “software” does not appear
individually but always appears via the HS code for carrier media ( ITA US Rev 3, March 26, 1997 and ITA
EC Rev 2, March 26, 1997 ). The fact that software itself is not covered in the ITA is buttressed by the
official list of ITA products (see the WTO page http://www.wto.org/english/tratop_e/inftec_e/itadec_e.htm or
the WTO Press Brief, “Information Technology Agreement”, March 27, 1997). A press release from of the
WTO makes clear that the WTO definition of IT excludes software (see the WTO News: 1997 Press
Releases, “Ruggiero cites progress in the ITA”, , March 3, 1997 under
http://www.wto.org/english/news_e/pres97_e/pr69_e.htm.
128
FLIESS & SAUVÉ (1998), p. 38. The Business Software Association (www.bsa.org) documents BSA (2001)
and BSA (2001a) and information taken from www.itic.org and www.itaa.org contain an American industry
position on that point. See also M ATTOO & SCHUKNECHT (2001), p. 4 and 10 f.
36
between the IT industry and experts persist with regard to the type of software covered. The BSA, the
ITIC and the ITAA state that all software types are covered under the agreement because the broad
definition of software products extends to multimedia, interactive and other software129 . But during the
ITA negotiations the EC wanted entertainment software carrying sound and or visual recordings to be
deleted from the ITA software definition and some observers are of the opinion that the EC got its
way130 .

Considering that the commitments are made for carrier media and not for the content itself, one may
wonder how particular content types could be excluded131 . Moreover, it is questionable how the
distinction between software and multimedia products could be made in practice. Both points can be
taken as a demonstration that the ITA covers either all or no software types. Clearly, no WTO member
defends the latter stance.

This uncertainty may also go a long way in explaining why the US is pressing hard for the duty-free
moratorium on e-commerce that – according to the American interpretation – would apply to all types
of electronic transmissions (including entertainment software). If however, entertainment software was
not covered by the ITA but by the far-reaching GATS mode 1 commitments for computer services,
then the USA may be wrong in assuming that the GATT is more liberal after all.

GATS classification: On the other hand, the classification of software under the GATS is not any
easier. Again, software and content are not directly mentioned in the existing classification scheme
and it is questionable where to draw the line between the software product and an actual service132 .
This is because the GATS sub-sector on computer services (known as UNCPC 842) refers only to the
"consultancy" services related to "development and implementation" of software. And even if GATS
were to be applied, parts 2.1.2.2 showed how difficult a classification of multimedia or entertainment
products between sector-specific services (financial software = financial service), computer,
telecommunication, audiovisual or entertainment services may be.

129
See for example the recent ITAA Press Release under
http://www.itaa.org/news/pr/PressRelease.cfm?ReleaseID=85.
130
FLIESS & SAUVÉ (1998), p. 51 f.
131
As mentioned on page XX, the only carrier media formally exluded from ITA and submitted to the GATS
domain is the one containing software to conduct orders.
132
See WTO-Document S/C/W/45, Computer and related Services, Background Note by the Secretariat, July
14, 1998, p. 3-4 and CHADHA (2000), p. XX.
37
2.1.2.3 When GATS: Should Electronic Content Services be Covered by Mode 1 or
Mode 2?

Regarding open e-commerce questions, there is no unanimity on the important question

whether electronically delivered trade in services falls under GATS Mode 1 (cross-border
trade) or Mode 2 (consumption abroad). In the forum of the e-commerce work program
different arguments were put forward in favor of both classifications. The Japanese delegation
for example argued that until now telephone and fax transactions were always considered
under GATS mode 1. It is thus only logical that electronic trade too, should be covered
likewise 133 . The Americans who argued for the most liberal classification form questioned
whether a mode 2 classification would not be better. The US actually argued that the
consumer actually "visits" the website of an Internet service provider in another country134 .
Countries, such as Switzerland, that are interested in cross-border financial services followed
this argument.

If one applies the GATS sectoral classification list135 , then this distinction depends on whether
the service is produced in the recipient country (the foreign producer is locally established) or
whether it is produced abroad and consumed by a national resident (the national consumer
“travels” to the foreign producer). However, this criterion for distinction breaks down if
neither a physical movement of the provider nor of the consumer takes place 136 .

Apart from statistical considerations, an answer to this classification problem is important

because the existing commitments differ widely depend ing on the selected GATS transaction
mode. If in one of these modes a WTO member state has not reported any limitations to
market access, national treatment or the Most Favored Nation principle, then any actions it
may take to place in jeopardy these principles of opening up markets, may not be legitimate.

Firstly, Mode 3 concessions often contain more wide-ranging obligations towards the opening
of service markets than GATS mode 1 and 2. Secondly, concessions under mode 2 are
generally deeper than concessions under mode 1. The reason for the focus on mode 3
concessions is that under mode 3 the local physical presence of the service provider is

133
WTO Document S/L/74, July 27, 1999, Communication of Japan.
134
WTO Document WT/COMTD/17, February 12, 1999.
135
See MTN.GNS/W/120, July 10, 1991. Explanations as to how the classification system operates are found in
WTO Document MTN.GNS/W/164, September 3, 1993.

38
guaranteed. This in turn means that regulators have better control over the service provider. In
addition to this theory of regulatory capture, some authors argue that the focus on mode 3
concessions is a hidden trade-related measure to encourage investments in the local
economy 137 .

Many states have undertaken obligations in Mode 2, accompanied by no limitations to non-

discriminatory market entry ("none"). States simply accepted that their citizens couldn’t be
prevented from consuming abroad 138 . In contrast, the concessions not to renounce on present
or future market access or national treatment limitations against the mode 1 type of delivery,
are much more modest (see table 3) 139 . So it may certainly be argued that in the context of
cross-border services the lack of 'None' commitments in Mode 1 means that WTO members
will have the ability to impose regulatory roadblocks to electronic services 140 .

Table 3: Mode dependent GATS concessions

Mode 1 Mode 2 Mode 3

„all limitations possible “no limitations possible “no limitations possible
(unbound)“ (none)“ (none)“
Business Services 25% 88% 86%
Finance 30% 57% 39%
Entertainment 31% 94% 86%
Health 80% 89% 76%
Comments on Table 3: This table provides a sector-specific analysis of the degree of liberalization concessions
in the respective modes. To illustrate, under Mode 1 for health services, 80 % of the GATS concessions by all
member states permit all discriminatory market access limitations (unbound). The columns on Modes 2 and 3 in
turn show the share of concessions that adhere to relinquishing discriminatory regulations (none). For example in
the health sector under mode 2 only 11 % (100 % - 89 %) of the concessions are of such a nature that further
limitations may be continued.
Source: Own translation and compilation: Data from A LTINGER & ENDERS (1996), p. 320.

This picture of imbalanced GATS commitments between modes, could certainly lead to one
questioning the eventual technological neutrality of GATS. In the end only a few
technological variants – such as mail, telephone, electronic networks, etc. – come into play for

136
WTO Document S/C/W/68, November 16, 1998.
137
See WTO Secretariat (2001a), p. XX.
138
WTO Secretariat (2001a), p. 8.
139
TINAWI & BERKEY (1999), p. 5. In their country lists the authorities have mostly entered "unbound" in the
mode 1 column and "none" for limitations under the mode 2 column. Also see PANAGARIYA (2000), p. 12.
140
TINAWI & BERKEY (1999), pp. 7-8. This imbalance is particularly strong for the USA and the EC.
39
cross-border service distributions. Thus the limited mode 1 concessions in themselves amount
to a discrimination by WTO member states against certain technological delivery methods. It
is likely that this was not done for the purpose of discriminating against certain technologies.
The low GATS mode 1 commitment level rather meets the desire of WTO member states to
subject service providers to the local regulatory regime. Still, the negative effect on the use of
new technologies for trade is a reality. Box 2 provides two examples for the relevant problem.

Box 2 Example of a case in favor of the questions on Mode dependent classification

Whereas until recently it was unthinkable that data processing services or other IT services could be
outsourced abroad, there are a variety of these services operating today. If a country has not made any
commitments under mode 1 (unbound), and it has not registered any limitations under mode 2 (none),
then the question of classifications in terms of mode 1 or 2 has a marked effect.

If in this scenario electronically delivered services are classified as mode 2 transactions, then the WTO
members with no limitations on GATS mode 2 have no right to limit the market entry of foreign
suppliers by means of discriminatory regulations 141 . This obligation is effective for traditional services
that are now delivered with the help of technology and for new services that fit into existing
commitments. A classification under mode 2 thus translates to a preemptive ban on discriminatory
regulations that some WTO members may now want to introduce.

But on the other hand, if electronic services should be classified under Mode 1, then the majority of
WTO members who have scheduled some limitations, are still able to erect discriminatory barriers
concerning cross-border services. Most newly created services that fit under a service classification
with limitations could thus be burdened with regulations that are in conflict with the market access and
national treatment principle.

This contrast is qualified by the fact that under any mode 1 or 2 commitment WTO member states may
still adopt regulations for reasons that fall under GATS Art. XIV exemption clause 142 . In other words:
Despite of full mode 1 and mode 2 commitments (entry of “none”) a country may choose to enact
regulations that go counter the market access and national treatment principle to prevent fraudulent
practices or to protect the privacy of individuals.

Source: Adapted from TINAWI & BERKEY (1999), pp. 7-8 and own contributions

141
These relate to discriminatory regulations that fall under GATS Art. XVI and XVII.
142
The general exceptions found in GATS Art. XIV are public morals, public order, human/animal/plant life or
health, etc. and the security exceptions are in GATS Art. XIV bis. However, the chapeau of this article makes
quite clear that disguised restrictions on trade in services or discriminations between countries are not
accommodated by this general exception.
40
The categorization either under Mode 1 or 2 also may have far-reaching legal consequences
that are leading experts into unchartered waters 143 . There is a frequent question as to what
national legal system is applicable in a cross-border electronic delivery of services. Whereas
some experts state that GATS does not pronounce itself on matters of jurisdiction144 others
state that the GATS classification under either two modes indicates which country's
regulations are applicable in the case of a cross-border transaction145 . Following this
interpretation, under mode 1 the regulatory regime of the buyer’ locality and under mode 2
the foreign regime of the service provider abroad would be applicable. If, for example, a
financial transaction146 over the Internet (an American customer makes transactions over the
website of a Swiss bank) is classified under mode 2 for example, then Swiss laws on financial
services (including laws on disclosure and confidentiality147 , on investor protection, etc.)
apply. Consequently, consumers who make electronic transactions are covered by foreign and
not their own national law system. Depending on the degree of protection offered by national
vs. foreign law this will not per se result in a worse position for the consumer. But the fact
that consumers would have to resort to foreign courts to settle a claim is not an acceptable
scenario to many regulatory agencies responsible for consumer protection.

This example enables one to see that – seen from a national government perspective – this
adds a particularly tho rny dimension to the mode 1 vs. mode 2 classification. Obviously, a
mode 2 classification would mean that all efforts of WTO members to submit service
providers under their regulatory control - and therefore all efforts to avoid regulatory
competition from abroad - have not been achieved through a reluctant stance on mode 1
liberalization. Nevertheless, WTO member countries have expressed some serious interest to
tackle these jurisdictional questions from the GATS perspective 148 .

143
See FTC (2000) for a good overview of the debate around country of origin regulation versus country of
destination regulation.
144
HOEKMAN & KOSTECKI (2001), p. 265.
145
DRAKE & NICOLAIDIS (2000) and PANAGARIYA (2000), p. 12. See also KAMPF (2000), para. 136 for a legal
discussion of mode 1 and mode 2 in the financial context.
146
As will be seen in the parts on necessary liberalization the financial sector is very affected by this mode 1/2
differentiation because the imbalance between the two commitments modes is particularly conspicuous.
147
This is obviously a big issue for the Swiss financial landscape that derives some of its competitiveness from
the very strict confidentiality requirements (Bankgeheimnis) to which banks are held by tax or other
government authorities. This point was derived from a interview with a SECO official.
148
WT/GC/W/475, June 20, 2002, Second Dedicated Discussion on E-Commerce under the auspices of the
General Council on May 6, 2002.
41
Until now only unsatisfactory solutions to the categorization problem have been offered149 .
Concerning a straightforward classification of all electronically delivered services under mode
2, it should be noted that although it is the “most trade- liberalizing approach” it is not
politically feasible. During the Uruguay Round and Post-Uruguay negotiations many states
did not list any limitations to the market entry under Mode 2 because they did not foresee that
Internet transactions could actually be classified under that entry. Now, if it is decided to
apply mode 2 to electronically delivered services, many member states will be forced into
GATS commitments that they initially did not intend. Despite the obligation by GATS
towards progressive liberalization (Art. XIX), it is more than questionable whether this
somewhat blunt modus operandi would create confidence among WTO members regarding
future commitments.

Other suggestions have not performed better. Australia, for instance, was in favor of
classification according to the country where the final consumption of the service took
place 150 . It has been shown elsewhere that the application of this delineation method however
does not always lead to clear-cut answers 151 . There are also proposals to create a new fifth
delivery mode for Internet services 152 . The advantages of such an action are not clear. All
commitments would need to be renegotiated for that mode and the division between these
would not become clearer merely because a new Mode has been created. In conclusion:
suggestions that do not make the distinction clearer in practice were made during the financial
services negotiations when certain WTO member states proposed that any service provider
who actively approaches the consumer (promotion, direct solicitation, etc.) should fall under
mode 2.

From a liberal trade perspective the most appealing solution would be that WTO members
agree to identical liberalization levels between the two modes. This is also a proposition the
EC and US delegation to the WTO find – at least in the non-binding discussion of the WTO e-
commerce program – acceptable. Even the WTO Secretariat underlined that the distinction
should be left to negotiations on market access 153 . Three problems arise with this procedure.

149
DRAKE & NICOLAIDIS (2000), pp. 21-22.
150
WTO Document S/C/W/108, May 18, 1999: Contribution by Australia.
151
See HAUSER & W UNSCH (2002), p. XX.
152
Source is missing.
153
“EC Discussion Paper on Electronic Commerce and the WTO”, available on the website of DG Trade, p. 9.
42
Firstly, it would not solve the jurisdictional questions. Secondly, the WTO member states
would again postpone finding a meaningful distinction between mode 1 and mode 2. One has
to keep in mind though that a clear distinction between mode 1 and mode 2 could easily be
achieved by means of geographical references 154 would almost certainly accord the lower
level of liberalization, namely mode 1, to electronically delivered services. And finally, - as
this thesis will gradually uncover – the chances that the mode 1 commitments would be
increased to the mode 2 leve l in sectors, such as financial service, are extremely slim. Maybe
it is exactly these criticisms - no need to define clear boundaries between mode 1 and 2 and
no automatic but discretionary liberalization of e-commerce - that make this solution
approach so popular among some WTO delegations.

154
Only if the consumer has actually physically traveled to consume abroad and a physical co-presence of the
foreign service supplier and the consumer is present then mode 2 applies. This understanding would certainly
come closest to the original intention of WTO members.
43
 2.2 Sector-specific Analysis of Necessary Liberalization: The Case of
Digital Products

When it comes to e-commerce prone sectors, the field of digital products is the most debated
and the less liberalized service sector. It also plays a pivotal role for the clarification of the
horizontal e-commerce questions and in the trade competence distribution of the EC.

One can identify two distinguishing factors to most other service sectors.

First, Part 2.1 showed that digital content is the only case where neither the GATS nor the
GATT offer clear guidance as to where it should be classified. Even if the WTO negotiating
parties agree on a GATS classification, it is still questionable what part of the GATS country
schedules reflects the current and future liberalisation level for digital products. On the one
hand, the most obvious classification group for content products, namely the “audiovisual
services” category, displays an absence of liberalisation commitments for most WTO Member
States. This state of play is unseen in other GATS service sectors 155 . A similarly low level
applies to recreational and entertainment services. On the other hand, the other classification
groups like computer or value-added telecom services are characterized by significant GATS
commitments of most industrialized WTO Member States156 .

Second, in contrast to the financial and other service sectos under negotiation the EC and the
USA were not pulling on the same rope to advance the GATS liberalization of audiovisual
services. In fact, the two WTO members each headed a coalition of WTO member states that
held very opposing views on the desirability of audiovisual service liberalization. The open e-
commerce questions that relate to the moratorium or the classification issues should actually
be seen as a transposition of this dispute in the early 1990s to the negotiations on e-commerce
that – ten years later – are ongoing.

155
Even the health and education service sectors that have only few countries committing are more liberalized
under the GATS.
156
However, this trend of full commitments has not been followed by less developed WTO Member States.
44
The analysis of the liberalisation degree for digital trade products has to proceed along the
various classification possibilities in a step-by-step fashion (audiovisual, computer, value-
added telecommunication and entertainment services) because the GATS scheduling structure
does not reflect the state of convergence in the field of digital products. For the value-added
telecommunications sector only category C “Online Information and Data Base Retrieval” is
considered relevant for this digital product analysis. It shall be reiterated here that neither of
these sectoral classification groups specifically refers to digital products like movies,
software, etc. (see Part). First, the next part goes into detail about the liberalisation process for
audiovisual services. Due to the fact that there a few mode commitments to analyse and that
the difficult audiovisual negotiations are crucial for the understanding of the open horizontal
questions, here more attention is given to the in-depth study of the opposing EC and US views
in the audiovisual negotiations. Concerning the other classification possibilities for digital
trade products the texts only briefly addresses their GATS commitment levels.

45
2.2.1 The GATS Liberalization Process for Audiovisual Services and the Resulting
Commitment Structure

Technological advances, the convergence of media products and the increased household
demand for entertainment products point to a rapid development of cross-border trade in
digital content. The fact that a lot of cross-border trade in content is mirrored in the statistics
on royalties and license fees or not taken up at all in statistics make it difficult to come with
correct trade figures. But the economics behind these information goods, namely the high
fixed initial production costs but negligible marginal variable costs of producing and
distributing digital copies 157 , make them ideal “tradable services”. The media industry is
getting increasingly globalized and concentrated. Moreover, other sectors like the advertising
industry increasingly rely on audiovisual products to distribute their services. Finally, as
opposed to the financial service sector, the developing countries also heavily contribute to
global content exports 158 .

Seen from this angle, it is even more surprising that most WTO Member States have made no
audiovisual GATS commitments. This unparalleled absence of trade concessions stands in
contrast to the other sub-classifications of the communications sector.

In WTO framework audiovisual products are different from other trade items. Already during
the GATT negotiations movies, then considered as goods, already received a special treatment
that was first cemented via the more than fifty-year-old GATT Art. IV 159 . This article allows
the maintenance of film quotas in the cinema and legitimises discrimination160 . Thereby it

157
Once the initial investment on content production has been undertaken, the costs are best recouped by world-
wide market penetration. See VARIAN & SHAPIRO (2001) for the economics of information goods and W OLF
(2000) for a description of the entertainment economy.
158
India is the largest movie producing trade nation in the world and also exports. Countries like Jamaica are
very involved in the production of music, interactive entertainment and educational products. See ITC
(2000).
159
See the WTO document MTN.GNS/AUD/W/1, 4.10.1990 for an elaboration on the GATT Art. IV. For a
detailed elaboration on the WTO treatment of audiovisual products see BAUMANN (1998), JAROTHE (1998),
p. 347 ff. or A CHESEON & M AULE (1999).
160
It must be noted that GATT Art. IV only applies to the cinema. Television, software or other potentially
digitizeable content products are not covered. This truism explains why the US advances the argument that
the GATT is more trade favorable than the GATS. See Tietje (XX), p. X.
46
runs counter to the uncond itional national treatment obligation (GATT Art. III) and the quota
ban that are both fundamental GATT principles 161 .

But audiovisual services also got special treatment during the GATS negotiations. WTO
Member States were allowed to maintain market access and national treatment limitations and
to schedule exemptions from the MFN principle. This uncommon treatment of audiovisual
products is rooted in the two very different perceptions that exist on audiovisual services.

On one side, the USA and a few other WTO Member States have always emphasized the
commercial nature of the media industry’s entertainment products. With respect to trade,
movies, music or other audiovisual products are not seen as any different from other trade
commodities. Consequently, they deserve the same GATS treatment than other services and
therefore an open and non-discriminatory treatment to all content providers should be
fostered 162 . This American position is certainly buttressed by the fact that the audiovisual
sector is one of the few trade areas in which the US holds a significant trade surplus163 .
Moreover, the EC is the biggest demandeur of US movies. Not without reason, the president
of the Motion Picture Association (MPA) has repeatedly characterized American movies as
“crown jewel of American exports” 164 .

Moreover, it is important to note that the US does not have a national audiovisual policy
comparable to the other WTO member states. The US has no Ministry of Culture that is
responsible for a coherent audiovisual policy framework and – except for matters relating to
obscenity - no US federal regulation exists that discriminates against foreign content per se or
that influences the production or distribution of cinematic motion pictures165 . Increasingly the
individual US states rely on financing, tax initiatives or simplified administrative procedures
to attract entertainment industries. Infrastructure investments by the government are also
increasingly considered a good way to attract industry. But as opposed to other WTO member
states’ actions these measure are mostly non-discriminatory and still small in scope and scale.

161
See TIETJE (XX), para. and JACKSON (XX), p. 293. Jackson, 293/Fn. 2, world trade and the law of the GATT
162
BALASSA (1995), p. 6.
163
The importance of certain service sectors to outweigh the negative US trade balance was addressed on p. XX.
164
Source is missing.
165
The US trade barriers reports from the EC (quote) do not mention any US audiovisual market access barrier.
USTR negotiators trade this non-discrimination towards content back to the First Amendment of the US
Constitution. See BALASSA (XXX), p. 1.
47
On the other side, a majority of WTO member states (especially France and Canada)
attributes a decisive cultural and social dimension to audiovisual products. These countries
refuse to treat audiovisual products as mere trade commodities that should be submitted to the
dictate of free trade. Especially, the EC affirms that cultural products are part of their “cultural
heritage” and are tightly linked to concepts like national identity, pluralistic democracy,
freedom of speech, cultural diversity and human dignity166 . The EC fears that free trade in
content would lead to a small number of American groups to control audiovisual content.
They contend that in the US anti-competitive agreements between producers and distributors
restrain market access for outsiders, that they can better recoup there large fixed costs on the
larger home market and subsequently conduct “cultural dumping” abroad 167 .

Even before the existence of the GATS treaty, this special role of cultural products led most
WTO Member States to introduce policies for audiovisual services that are based on two
pillars: a dense regulatory framework for audiovisual services (including content quotas that
discriminate against foreign content) and financial or non-pecuniary support measures for
local content production168 . Further specific measures that restrict trade are restrictions on the
production and transmission of advertisements sourced from overseas restrictions on foreign
ownership and control of broadcasting services and other tax incentives and government
subsidies provided to promote the production and exhibition of domestically produced films
and television programs 169 . In box 3, some policy measures of the EC are illustrated 170 .

The two pillars of the above- mentioned audiovisual policy have as express goal to favour
national or European works via quantitative limitations and subsidies to local producers.
Hence, they are not in conformity with the GATS principles of free market access and
national treatment 171 . Moreover, the selective extension of the EC policy measures on third
countries runs counter to the MFN principle. Nevertheless, most WTO member states were
not ready to give these up for the GATS agreement.

166
See JAROTHE (1998), p. 348 and SAUVÉ & ST EINFATT (2000), p. 327.
167
IAPADRE (2000), p. 4, FOOTER & GRABER (2000), p. XX and BERNIER (1998) on this accusation of cultural
dumping.
168
OECD (1997), p. 5. This OECD report nicely surveys the national policies with respect to the content
industries for OECD Countries.
169
This listing stems from A SIA-PACIFIC BROADCASTING UNION (1999).
170
This shall not divert the reader’s attention from the fact that most other WTO Member States maintain
similar regulations and support schemes.

48
Box 3 Some Elements of the Audiovisual Policies of the EC

As the first policy pillar, the EC has imposed restrictions on the diffusion of non-European content on
TV. Specifically, the EC’s “TV without Frontiers Directive” (TVWF) introduced TV screen quotas for
European works 172 . This directive that is to be implemented by all EC Member States specifies that a
majority of television transmissions must be of European origin 173 . The TVWF will be revised by the
end of 2002. As the second pillar, this quota scheme is complemented by financial support schemes
for European content production or content distribution. Also, educational and training support for
people employed in the media industry is granted. These measures are run under the name of the
European MEDIA I and II Program174 .

Both the quota regime and the financial support measures do not only apply to service providers of EC
Member States. Via bilateral agreements with “culturally close” nations and above all with the EC
accession countries, the EC selectively extends the benefits to third parties 175 . In addition, it is
important to understand that these EC-wide audiovisual policy measures only supplement the much
more extensive national policy measures that have individually been initiated by the EC Member
States. In some federal EC Member States like Germany, the responsibility of audiovisual regulation is
held by the different “Länder” (federal states).

As a result and to the great surprise of many negotiators the different views concerning the
audiovisual sector were so radically opposed that this conflict almost led to a breakdown of
the conclusion of the whole WTO agreements 176 .

The EC (mostly driven by France, Spain and Belgium) and countries like Canada formulated
the desire to be able to maintain their room for manoeuvre with respect to any audiovisual
policy measure at the start of the negotiations 177 . Their objective was that the GATS
negotiations should not lead to a situation in which the legitimacy of the past or future
audiovisual policies of EC Member States would get under pressure through the GATS treaty.

171
Provide sources.
172
See the EC directive EEC/89/552, modified by EC/97/36 (OJ L 202/60, 30.7.1997).
173
Sources are missing.
174
See EUROPEAN COMMISSION (1999) or CINCERA (1999) for a comprehensive overview on the EC policies.
The latter article also deals with the 1998 modernis ation of these instruments that were made necessary by
technological advances.
175
Here it may be interesting to note that GATT Art. IV does not allow for a differential treatment of different
trade partners and therefore prohibited a violation of the MFN principle.
176
Sources are missing.
177
See M ESSERLIN (2000), p. 306. See M ORGAN DE RIVERY (1995) for an overview of the EC position.
49
First a flooding of Europe with American content that would endanger the cultural European
creations was feared and second these countries understood very well that it would be difficult
to reconcile their existing policy measures with the standard GATS principles.

The seemingly impossible task of reconciling the GATS principles with the existing and
future EC audiovisual policy put the EC delegation into a difficult negotiation position.
Finally, the EC delegation with the support of others opted to pressure for an exclusion of the
audiovisual sector from the GATS negotiations ; the so-called “exception culturelle” 178 . This
suggestion entailed an exclusion of the cinema and broadcasting sectors from the GATS 179 .

It was really the determination of France 180 and an introverted European film industry that
tilted the EC to this rather extreme position. The Commission and some EC Member States
like Germany had a far more liberal view on the opening of the European audiovisual
market 181 . In the end, the EC converged to the more defensive European position for two
reason. Firstly, all EC Member States attached a great importance to the incontestability of
their national public broadcast system. But most importantly, neither the Commission nor
individual EC Member States wanted to run the political risk of upsetting the extremely
determined French delegation182 .

But the USA and Japan were not ready to grant this special status to the audiovisual
services183 . It claimed that the special treatment of a particular service sector would damage
the whole regulatory coherence of the GATS treaty184 . Consequently, the USA not only
insisted on the inclusion of this service category into the GATS but it also requested far-
reaching market access concession of the EC. The USA knew that the EC’s financial support
measures for the local content industries were not very damaging to their exports but they

178
FALKENBERG (1995), p. 429 ff.
179
Same as in previous footnote.
180
In fact the French Assemble Nationale was the only national Parliament which was significantly involved in
this position. See W OOLCOCK & HODGES (1996), p. 322. See BALLE (1995) for a good overview of the
French audiovisual policies and position towards external trade liberalisation in the audiovisual sector.
181
See the document of the German Parliament with the title „Antwort auf die Kleine Anfrage, Bundestags-
Drucksache 12/6339: Auswirkungen des GATS-Abkommens auf die deutsche Film- und Fernsehindustrie,
Bonn, 1993“.
182
Personal Interviews with officials of the European Commission and some EC Member States.
183
EECKHOUT (XX), p. 135
184
It was a widespread fear that the introduction of sector-specific exemptions could lead other WTO Member
States to desire the introduction of other “special treatments” of other sectors.
50
criticized the EC’s violation of the national treatment principle anyway. Most importantly, the
US trade were determined to reach the abolition of the European screen quotas that were
considered very harmful to US movie exports185 .

Finally, with the pressure for success of the whole round extensive negotiations led to a
tailored integration of the audiovisual sector into the GATS; the so-called „spécificité
culturelle“ or “exemption culturelle” 186 .

Other than in the case of financial services here the commitment structure of the EC and USA
is very different and representative of the main opposing groups around this model of
„spécificité or exemption culturelle“ for audiovisual services 187 .

The peculiarity of the „spécificité culturelle“ is that on the one hand the audiovisual sector is
fully submitted to the GATS general obligations (GATS Art. II to XV) like MFN Treatment
(Art. II), Transparency (Art. III), Domestic Regulation (Art VI)188 but also to the obligations
on Progressive Liberalisation (Art. XIX to XXI). The final provisions do not contain language
referring to “cultural exception” and as opposed to a widespread misconception Art. XIV
(GATS exemptions) does not explicitly refer to the protection of cultural values189 .
Temporary exemptions from the MFN clause can however be taken.

But on the other hand, countries were not pressured into any specific commitments on Art.
XVI or XVII meaning that the EC could maintain its quota regime 190 . Also, the service area
that the EC wanted to protect most (broadcasting) does not appear as a subsector of the

185
This point results from an interview with Harvey Rouse, MPA representative to the European Commission,
MPA Office in Brussels, October 2001.
186
See DUJAT (2000), p. 9-11 for a background to the evolution behind the terms “exception culturelle”,
“spécificité culturelle” and “exemption culturelle”. See FOOTER & GRABER (2000) and REYNA (XXXX), p.
2335/2390 for more details on the negotiations.
187
See FALKENBERG (1995) and M ORGAN DE RIVERY (1995) for the outcome of the negotiations. See also
S/C/W/40, June 15, 1998, Background Note by the WTO Secretariat on Audiovisual Services for a
comprehensive analysis of the audiovisual commitment level.
188
However, Art. VI:1 holds only for these sectors where commitments have been entered.
189
See YÜKSEL (2001), p. 72 for such a misconception and HAUSER & WUNSCH (2002), p. XX, BAUMANN
(1998), p. XX and IAPADRE (2000) for the applicable GATS rules in the case of the audiovisual sector. In this
light of full submission of the audiovisual services to the GATS princip les it is misleading to see statements
by the EC that mention that thanks to the results of the Uruguay Round it has no policy guidelines
whatsoever for the design of its audiovisual policies, see KOM (98) 446.
190
BALASSA (1995), p. 2 and Balassa (XXXX), p. 4 refers to this situation as a draw between the EC and the US
at the end of the Uruguay negotiations. PAEMEN & BENSCH (1995), p. 233-234.
51
 audiovisual service category191 . Furthermore, as the GATS does not yet have a discipline on
subsidies governments can continue to fund audiovisual activities.

In terms of specific commitments following results emerged:

Audiovisual services is a sector with the lowest number of GATS commitments (19
commitments). The commitments were concentrated on very few countries. Most WTO
Member States followed the approach of the EC and made no market access or national
treatment offers whatsoever 192 . The very few commitments that have been made however are
full market access commitments (see table 4 below). This contrast between no and full
commitments has later been termed the „all or nothing“-approach to audiovisual services 193 .

As opposed to the other service sectors – no imbalance in commitments exists between mode
1 and 2 in audiovisual services194 . The few countries that made audiovisual GATS
commitments often have their own country-specific definition of the audiovisual sub-sector
activities. This makes the comparability of commitments more difficult and can reduce the
meaningfulness of the commitments.

Table 4: Full and partial mode 1 /2 commitments in the audiovisual sector

Service sub-sector Full and partial market access Full and partial national treatment
Motion picture and video tape Hong Kong, Japan, Korea, Mexico, Japan, Korea, Mexico, Singapur,
production and distribution New Zealand, Singapur, Switzerland, Switzerland
USA (none)
Motion picture projection New Zealand, Singapur, USA (none) Singapur, USA (none)
services
Radio and television services New Zealand, USA (none) USA (none)
Radio and television New Zealand, USA (none) USA (none)
transmission services
Sound recording services and Hong Kong, Japan, Korea, New Japan, Korea, Singapur, USA (none)
other audiovisual services Zealand, Singapur, USA (none)
Other audiovisual services USA (none) USA (none)
Source: Analysis of the individual GATS country schedules and the OECD (2000), S. 41-45. In the case of the

191
TIETJE (XX), p. 72. One can take this as a further example for the fact that the scheduling methodology is
itself an outcome of interest-based negotiations.
192
Some have scheduled the audiovisual sector as “unbound” but most WTO Member Countries fully excluded
the audiovisual sector from their GATS country schedule. This is only possible if no commitments on any
audiovisual subsectors in any mode of delivery exist.
193
S/CSS/W/21, December 18, 2000, Communication by the US on Audiovisual Services.
194
Mostly, either the whole sector is left out of the schedule (unbound) or by these few countries full
commitments are made in mode 1 and 2.
52
 US, the table indicates the degree of commitments (binding of “none, partial or unbound”). Each country

In stark contrast to the majority of the WTO member states, the USA made full cross-border
market access commitments in all audiovisual subsectors specified in the GATS schedule. In
mode 1 and 2 it maintains only one modest national treatment limitation in the case of motion
picture and videotape production and distribution195 . USTR negotiators have argued that this
rather unilateral opening of the audiovisual sector in terms of the GATS reflects the current
open US regulatory environment that does not tolerate foreign content restrictions 196 .

But contrary to the generally accepted view that the USA has full commitments for
audiovisual services in all modes 197 , noteworthy limitations remain that are partially the result
of the GATS framework itself.

First, seen in the light of the contemporary technological innovations (pay-per-view, satellite
television, etc.) the coverage of included audiovisual services is moderate in coverage 198 . This
has to do with the fact that the CPC classification of 1991 or the country-specific definitions
employed for the commitments 199 could not or did not want to reflect future innovations.
Thus, in the case of the US and all other WTO member states commitments on pay-per-view
TV or for video-on-demand for example do not exist.

Second, under mode 3 the US maintains significant establishment limitations on radio &
television transmission services. For example, radio and television licences that enable control
over transmission and content may not be held by firms chartered under foreign law or by
firms where more than 20 percent of the capital stock is owned or voted by a non-US

195
The following mode 1 national treatment limitation has been scheduled: “Grants from the National
Endowment for the Arts are only available for: individuals with US citizenship or permanent resident alien
status, and non-profit companies”. In comparison to the EC subsidy instruments for cultural support measures
(Media I and II) and the instruments of the EC member states the volume of grants from which foreigners are
excluded here is negligible. In 2002, the National Endowment for the Arts provided $ XX Million Dollars in
subsidies to non-profit whereas only the subsidies on the EC level amounted to roughly $ XX Million
Dollars.
196
BALASSA (1995), p. 2-3.
197
Quote a source that tells us that USA is totally open.
198
See BALASSA (1995), p. 3, a USTR negotiator who notes that the coverage was moderate already by
standards of 1995 and who notes that the commitments of the Uruguay Round provide a “starting point for
future negotiations”.
199
The US like the other few WTO member states has used its own definitions to make audiovisual
commitments.
53
citizen200 . Elsewhere, the US maintains other mode 3 national treatment limitations and has
left the entirety of mode 4 unbound. Most importantly, as a consequence of the CPC
classification used and probably also to maintain future bargaining leverage, even the US has
no commitments for cable and satellite television services in its audiovisual GATS column201 .
This limitation to the transmission of audiovisual services under mode 1 is also declared in the
US telecommunications column that specifies that no commitments be taken on one-way
satellite transmissions of DTH and DBS television services and of digital audio services202 .
On top, the US lists one MFN exemption for that particular service area that establishes
reciprocity conditions 203 . Assuming that an integrated value chain of content production and
transmission relies on cross-border satellite transmission and some form of establishment,
together these limitations may amount to a significant impairment of the liberal mode 1
commitments.

In terms of the general obligations following results emerge:

The absence of the specific GATS commitments in audiovisual services was not enough to
ensure the WTO conformity of the audiovisual policy of the EC and its preferential treatment
of EC accession and other selected countries 204 . Thus the EC managed to negotiate an
exemption possibility of the MFN clause and thus a differential treatment of its trade
partners205 . As can be seen in the list of the EC’s MFN exemptions the EC made vivid use of

200
Moreover, the licenses may not be held by foreign governments, a corporation chartered under the laws of
the US that is directly or indirectly controlled by a corporation more than 25 per cent of whose capital stock
is owned by non-US citizens or a foreign government or a corporation of which any officer or more than 25
per cent of the directors are non-US citizen. All these limitations reflect the regulations of the
Telecommunications Agreement of 1934 that out of national security considerations made sure that local
media (airwaves, etc.) was under US control. Thanks goes to JONATHAN LEVY (FCC) for explanations
concerning this point.
201
See BALASSSA (XXXX), p. 8 who links this absence of US commit ments to the fact that the GATS schedule
does not specify these categories.
202
In this case a limitation from the telecommunications schedule of the US negatively impacts on commitments
made in the audiovisual schedule. See part XX for the different EC and US views on the boundaries between
both of these service sectors.
203
Differential treatment of countries due to application of reciprocity measures or through international
agreements guaranteeing market access or national treatment. See GATS/EL/90/Suppl.2, April 11, 1997, List
of Article II (MFN) Exemptions of the USA, Supplement 2.
204
Especially the quotas but also the other measures of the European audiovisual policy programs do not only
favor national service suppliers but also provide special treatment for service suppliers in other EC Member
States. This constitutes a violation of the MFN principle.
205
GATS Art. II:2 and GATS Annex on Article II Exemptions.
54
this derogation206 . Again other countries fo llowed suit and in total 33 MFN exemptions
specifically mentioning the audiovisual sector were put in place 207 . In addition to the above-
mentioned sector-specific US MFN exemption, its numerous horizontal limitations relating to
favourable tax treatment (see p. XX) also apply to the audiovisual sector. The sector-specific
exemptions, however, commonly cover co-production arrangements for film and television
productions, typically granting national treatment status in respect to eligibility for financial
assistance, tax benefits and simplified entry procedures for natural persons.

It can be concluded that the EC managed to shape the GATS Rules and commitments in such
a way that, temporarily, its audiovisual policy stood in no conflict with GATS rules208 .
Clearly, this room for maneuver must be reassessed and confirmed when renegotiations of
MFN exemptions or progressive liberalization in the next GATS rounds takes place.
Observers of the final overall outcome of the GATS note that the EC’s determination had a
significant political price attached to it in terms of the negotiation results in financial,
maritime and aviation construction services 209 .

206
The exemptions are listed in MTN.GNS/W/228, 8.12.1993 (negotiation document), GATS/EL/31, 15.4.1994
(final document).
207
See S/C/W/40, June 15, 1998, Background Note by the Secretariat on Audiovisual Services.
208
Hahn (1996), p. 343.
209
KRUSE (1993), p. 291 and JAROTHE (1998), p. 352. According to the author of this work, it is questionable
whether the weak results of the before-mentioned sectors can be fully attributed to the audiovisual
considerations of the EC. During interviews, this direct link was also refuted by officials of the European
Commission.
55
2.2.2 Analysis of the GATS Commitment Structure for the Other Service Sectors
Relevant to Digital Products
3

For the other classification possibilities mode 1 commitments are more plentiful. Still, there is
a great degree of variation in the commitment level between the three categories. In sum, the
computer and related services field has most commitments whereas the commitment level of
recreational services rather resembles the audiovisual level

Computer and related services

Computer and related services are a subsector of the Business Services classification. In
general business services constitute a very heterogeneous group of services that are much
more liberalised than professional services (like legal services, accounting services, veterinary
services). This is also due to their originally low level of sector-specific regulation210 .

One finds a high number of commitments for the field of computer and related services (66
commitments) 211 . Moreover, in percentage terms full commitments to market access and
national treatment outweigh other types of more restricted commitments. No sector-specific
MFN exemptions have been listed. Also, mode 2 commitments do not significantly outweigh
mode 1 commitments. In sum, a look at the consultancy service columns of the GATS
member states reveals that during the Uruguay Round the GATS negotiators achieved the
greatest liberalisation in that field 212 .

But considering that over 130 schedules existed at the time of analysis, one can again find a
group of industrialized economies with full/partial commitments on the one hand and some
less developed countries on the other hand. The EC, the US and most other industrialized
countries have committed fully in mode 1 and mode 2 without listing limitations on market
access or national treatment. Countries like Thailand and Morocco and some developing

210
Here, as in other GATS sectors, a low level of internal regulation leads to few limitations to Art. XVI or
XVII in the GATS schedules.
211
See S/C/W/45, July 14, 1998, Computer and Related Services, Background Note by the Secretariat, p. 12-14
and S/CSS/W/95, July 9, 2001, Communication fro m Mercosur, Computer and Related Services, for a
stocktaking of existing commitments.
212
This assertion excludes the telecommunication and the financial service sector that were liberalised in the
Post-Uruguay Round.
56
countries like Brazil, India, Egypt, Indonesia that are known for their notoriously low GATS
commitment level have left the sector unbound 213 . For completeness one must also note that
many of the total number of commitments entered entail limitations 214 .

Despite this relatively good-looking overall picture, it has been mentioned that the increasing
convergence of the audiovisual and the telecommunication sector with the computer sector
had a pronounced upward impact on regulations applicable in the computer service sector (the
so-called “regulatory creep”, see page XX) 215 . Accordingly, this sector that faced little or no
sector-specific regulation to begin with, is increasingly confronted with new regulatory trade
barriers. Moreover, the classification problem of “new services” also applies with respect to
computer services. As pointed out before, it is questionable if the commitments in the
computer service classification apply to online entertainment games or multimedia education.

Value--added telecommunication services (online databases, etc.)

The following three service subsectors within the value-added telecommunications schedules
may be relevant for the classification of digital products: j. on- line information and data base
retrieval, k. electronic data interchange (both 7323** in W/120 classification) and n. on- line
information and/or data processing (843** in W/120 classification) 216 .

Unfortunately, in this case the GATS member countries have not always used the CPC
classification to its full extent or – as the USA - have it their own definition217 . The fact that
different definitions have been used complicates the comparability of the commitments218 .

213
Here the most surprising result is that India, one of the greatest exporters of software services, has left all
sectoral groups for computer services unbound.
214
M ATTOO & SCHUKNECHT (2000), p. 14.
215
See S/C/W/45, July 14, 1998, Computer and Related Services, Background Note by the Secretariat, p. 2,
para. 5.
216
In document W/ 120, the telecommunications services classified as “value- added”, following the CPC
listings are: (h) electronic mail, (i) voice mail, (j) on- line information and data base retrieval, (k) electronic
data interchange, (l) enhanced/ value- added facsimile services, including store and forward, store and
retrieve, (m) code and protocol conversion, (n) on- line information and/ or data processing (inc. transaction
processing).
217
Enhanced telecommunications services as defined by the US Federal Communications Commission -
services offered over common carrier transmission facilities (i.e. public telecommunications transport
services) which employ computer processing applications that: (i) act on the format, content code, protocol or
similar aspects of the subscriber’s transmitted information; or (ii) provide the subscriber additional, different
or restructured information; or, (iii) involve subscriber interaction with stored information.
218
S/CSS/W/35, December 11, 2000, Commu nication from the EC and their Member States, GATS 2000:
Telecommunications, para. 6.
57
Moreover, again the CPC does not reflect the current state of technology and the delimitations
between subsectors is increasingly blurred 219 . Many statements made here pertain to the
whole range of value-added telecommunication services rather than to individual subsectors.

The case of these three value-added telecom services depicts a lower level of commitments
than for the computer services category (40-54 commitments) 220 . Actually, the WTO
telecommunications agreement of the Post-Uruguay negotiations only furthered the
commitments of basic telecommunication services. Like with computer services, it was
mostly the industrialized countries that committed to value-added services. The EC has full
commitments in on-line information and data base retrieval and electronic data interchange
(EDI) but not for online information and data processing. Still, the exclusion with respect to
content from the EC telecom schedule explained explained before applies 221 . The
commitment situation for the USA seems to be similar, although its own definition (footnote
XX) leaves room for interpretation with respect to coverage of content.

In general, this subsector “online information and data processing” received the fewest overall
commitments of all value-added subsectors. For all three subsectors by large partial
commitments outweigh full commitments and that full mode 2 commitments outweigh the
full mode 1 commitments in the case of market access. Yet the usual pattern is somewhat
disturbed by the fact that full commitments outweigh partial commitments and that full mode
1 commitments outweigh full mode 2 commitments in the case of national treatment. In more
general terms, the commitments of ind ustrialized economies for value-added telecom services
are more open than for mode 1 and 2 than for commercial presence 222 . The opposite holds for
emerging economies. Finally, the regulatory level for value-added telecommunications
services is less burdensome than for basic telecommunications 223 .

219
S/C/W/74, December 8, 1998, Telecommunication services, Background Note by the Secretariat, p. 7, para.
19.
220
See S/C/W/74, December 8, 1998, Telecommunication services, Background Note by the Secretariat, p. 6 ff.
for a comprehensive analysis of the commitment level in value-added telecommunication services. The
number of commitments for value-added telecommunication services is slightly lower than the one for basic
telecommunication services.
221
This distinction between transmission and the content itself has been reiterated in the most recent EC
submission with respect to telecommunication services. See S/CSS/W/35, December 11, 2000,
Communication from the EC and their Member States, GATS 2000: Telecommunications, para. 7.
222
Note, p. 7, para. 23.
223
S/C/W/74, December 8, 1998, Telecommunication services, Background Note by the Secretariat, p. 7, para. 9
and S/CSS/W/30, December 18, 2000, Communication from the US, Market Access in Telecommunications
58
Recreational, cultural and sporting services (entertainment and news agency press
services other than audiovisual)

Generally speaking, the low number of commitments for all WTO Members makes this sector
very similar to the audiovisual service sector’s „all or nothing“-approach. A majority of
countries has not made any commitments in mode 1 and the EC abstained from making
commitments in the entertainment services category whereas the USA has full commitments
for market access and national treatment. Only countries like Austria and Sweden that
acceded to the EC in 1995 and Iceland have committed to full market access like the USA.

With respect to press agency news services and sporting services both the EU and USA are
part of the very few countries that have fully committed. Gambling services that are
particularly suitable to e-commerce are excluded from the EC commitment. The EU and its
Member States have not made any commitments for services relating to libraries, archives and
museums.

and Complementary Services, para. 13.

59
2.2.3 Requirements for Further Cross-border Audiovisual Service Liberalization

The necessary steps for meaningful mode 1 liberalisation of digital trade services can be
structured along two lines: a successful tackling of the open e-commerce questions that are
noteworthy in the audiovisual and other service context (resulting from Part 2.1) and
necessary agreements on regulatory issues involved in further liberalization (resulting from
Part 2.2). Both points are intricately related.

2.2.3.1 Solutions to the Open E-commerce Questions

Almost all horizontal questions that were raised through the E-Commerce Work Program are
extremely relevant to the digital trade sector.

In fact, especially the debates about the duty-free moratorium and the GATT or GATS
classification of digital trade products are actually driven by audiovisual considerations 224 .
The difficult content classification within the GATS and the regulatory creep from very
regulated sectors to more unregulated ones is also of particular relevance. Any further
liberalization of the audiovisual sector is dependent on clear answers to these open horizontal
questions raised in this chapter. It must be clear whether certain content transactions fall under
the GATT or the GATS. Ideally the level of GATS liberalization should be equal to the
previous GATT liberalization granted. Clearly, the boundary between different sector-
dependent commitments (audiovisual vs. telecommunication) must be addressed. Only a
predictable legal framework like this can re- introduce clarity about existing commitments and
create trustworthy climate for new commitments. It is also of great importance to avoid too
many electronically deliverable services being drawn into the low audiovisual commitment
level.

Furthermore, a significant overhaul of the current classification schemes - be it for computer

or audiovisual services - is necessary. Technology has changed and the commitments that
correspond to certain service activities need to reflect these technological and business model
innovations. Otherwise the current GATS commitments that are very limited in the first place

224
Only the mode 1 and mode 2 distinction and the ensuing jurisdictional issues have not yet received much
attention with respect to digital trade.
60
run the risk to become obsolete. This change of classification structure should be informed by
specific trade transactions that actually take place. Much trade in content, for example, takes
place via the licensing of works rather than the transfer of rights. This is just one of the
transactions that are not adequately reflected in the W/120 225 . Moreover, it is uncertain where
all cross-border electronic content delivery transactions find their place within the GATS.

2.2.3.2 The link Between Further Trade Liberalisation for Digital Products and
Regulatory Issues

In addition to the solution to the open horizontal GATS questions more commitments in mode
1 and mode 2 are necessary for the service sectors deemed relevant to digital trade
(audiovisual, value-added telecommunications, computer services, etc.). Most importantly it
will be important to find a solution to the liberalization of the audiovisal service sector for
these cross-border delivery modes.

With respect to the GATS liberalisation of audiovisual services one thing is sure. The status
quo of audiovisual service commitments is called into question by the necessity of progressive
liberalization and the elimination of scheduled MFN exemptions 226 . As opposed to some
misleading public statements of French or EC officials a cultural exception or indefinite
policy flexibility with respect to the audiovisual sector does not exist 227 . Thus, in principle,
the “freedom of action” with respect to national audiovsual policies is of a temporary nature.

225
Compare to p. 27 on TRIPS: Arguments for a classification as trade in intellectual property rights. See also
S/C/W/78, December 8, 1998, Communication of the USA that discusses the need of a major overhaul of the
current audiovisual classification scheme.
226
See para. 3 of the GATS Annex to Art. II exemptions concerning the five-year review period of the
exemptions and para. 6 that calls for a 10 year limitation on the MFN exemptions: “In principle, such
exemptions should not exceed a period of 10 years. In any event, they shall be subject to negotiation in
subsequent trade liberalizing round.”. This would mean elimination of the exemptions by 2004 or 2005. This
date coincides with the scheduled end of the Doha negotiations. See GRABER (2002), p. 1, SAUVÉ &
STEINFATT (2000), p. 2 and IAPADRE (2000) that buttress the argument that the status quo in audiovisual
services will be re-opened for negotiatons during the current GATS round.
227
Some EC officials from DG Education and Culture continue to portray the idea of cultural exception or
indefinite policy autonomy in the GATS: “What the Community obtained as a result of the Uruguay Round is
more than a vague exception subject to the restrictive interpretation of a WTO panel of experts. It obtained
the freedom to act, which is essential in order to maintain and develop national and Community policies in
the audiovisual sector.” position taken by VIVIANE REDING (Commissioner DG Education and Culture) on
“Cultural Policy and WTO”, 58th Mostra Internazionale d’Arte Cinematographica, Venice, September 7,
2001, DG EAC C.1/XT D (2001), p. 2. The director of the audiovisual department of the DG Education and
Culture, JEAN-M ICHEL BAER, made similar statements at the European Forum Luzern, “Kultur im
Quotenstress” (Culture under the stress of quota systems ), October 24-25, 2001.
61
The decisions taken towards the end of the Uruguay Round were rather a postponement of a
debate concerning more audiovisual trade liberalization.

In addition to the progressive offering of more specific commitments one further element of
change results from the fact that the GATS itself is not a static instrument 228 . Even if members
are not formally obliged to make audiovisual commitments the build-in agenda of the GATS
asks them to further horizontal GATS rules on subsidies, emergency safeguard measures,
domestic regulation and government procurement.

In the current Doha Development Agenda, the US and other WTO members have actually
already requested market access commitments from countries like the EC. Clearly, the US
now displays a greater awareness towars the cultural diversity sensitivities and affirms that
subsidies that are not too trade-distortive may be tolerated. On the one hand, the US is not
demanding an elimination of existing audiovisual policies. They simply ask their trading
partners to freeze their current regulatory schemes by entering them as limitations in their
GATS schedule 229 . On the other hand, it seems that the US trade negotiators will insist very
much on the fact that new electronic delivery means (like the Internet) remain free of new
trade barriers. A new dynamic behind the negotiations will be the fact that developing country
interests in this sector may prevent a polarization of the debate between the USA and the
EC230 .

To be meaningful and to incite commitments, any liberalisation of the audiovisual and other
digital trade sectors must involve special provisions. Due to the network-based characteristics
of the media industry it will simply not be enough to negotiate simple partial or full GATS
commitments under GATS Art. XVI and XVII. Similar to the negotiations on
telecommunication services in the Post-Uruguay Round, the elaboration of a reference paper
or an annex for the media industry is necessary231 .

228
HAUSER & WUNSCH (2002), p. 134 ff., SAUVE (2002), W UNSCH-VINCENT (2001a) and GROUPE DE TRAVAIL
FRANCO-QUEBECOIS SUR LA DIVERSITE CULTURELLE (2002), p. 42 ff.
229
„Priorities for the US Audiovisual Sector“, speech delivered by BONNIE RICHARDSON (Motion Picture
Association) on the following conference: Services 2002: Conference on WTO Negotiations on Services, US
Department of Commerce, September 12, 2002 and personal interviews with USTR negotiators.
230
Brazil has expressed interest in liberalization with its communication to the Council for Trade in Services and
UNCTAD is working on a mobilization of the developing countries for the audiovisual service negotiations
(see UNCTAD, 2002).
231
As argued before the broadcasting sector, for instance, was not part of the telecommunications agreement.
See ROBERTS (1999).
62
On one side, this reference paper could address the cultural diversity considerations that most
WTO members have (special subsidy provision, cultural safeguard measures, vertical
integration of the US media industry, antidumping provisions, etc.). On the other side, it will
be important to address the regulatory issues pertaining to these industries. The regulatory
density of the the content-producing and content-diffusing sectors (broadcasting, etc.) has
already been extremely high before more recent regulatory challenges or cross-border
tradability materialized 232 .

Latter challenges result of a more globalized, concentrated and vertically integrated media
industry and the increasing convergence of different service fields (broadcasting,
telecommunications, Internet, etc.) that put into question the current regulatory
frameworks 233 . The fact that content distribution is always dependent on essential facilities
like an Internet Service Provider (AOL, etc.), a cable operator (Murdoch Inc.) or a Pay- TV
operator (Canal +) raises interesting competition policy issues that have not yet been
addressed in the WTO context 234 . Moreover, many regulations that concern that sector are, de
iure, of a non-discriminatory type (content regulation, etc.) 235 . Despite of their non-
discriminatory nature these rules create significant trade barriers that must be addressed to
allow for more integrated and contestable markets that leave enough room for cultural
considerations of nation-states.

The communications from the United States, Brazil and Switzerland and at least two very
significant conferences show that some thinking in these directions has been undertaken236 .
But it would be false to believe that the three existing GATS position papers or these
conferences reflect a consensus to start discussing meaningful audiovisual service
liberalization in the WTO. The European Communities (especially the French) and the

232
M CKINSEY (2002), OECD (1998b) and OECD (1997).
233
See S/CSS/W/21, December 18, 2000, Communication of the USA or FOOTER & GRABER (2000), p. 130-132
for some challenges.
234
During the elaboration of the telecommunications annex that contains elements of competition policy the
broadcasting sector was excluded.
235
Compare to OECD (1999) and FOOTER & GRABER (2000), p. 122-126.
236
S/CSS/W/74, May 4, 2002, Communication from Switzerland and S/CSS/W/99, July 9, 2002,
Communication from Brazil. The conferences referred to are the International Workshop on “Competition,
Cultural Variety and Global Governance: The Case of the Global Audio-Visual System”, organized by Prof.
Guerrieri and Prof. Scharrer held on October 31 – November 1, 2002 and the WTO conference
"Telecommunications and Audio-visual Services in the Context of the WTO: Today and Tomorrow" held on
November 21-22, 2001.
63
Canadians do not seem to be moved by the imperatives of progressive GATS liberalization.
Instead of showing willingness to discuss above-mentioned elements of “healthy” audiovisual
service liberalization their primary goal is to drive the audiovisual debate outside of the WTO
forum. To their mind the issue of audiovisual service liberalization should be dealt with by the
UNESCO or a similar international organisation237 . As they correctly point out, that is there
only chance to maitain maximum audiovisual policy flexibility238 . Consequently it is very
likely that the EC will not address the audiovisual services within the WTO. Moreover, they
will remain alert as to the audiovisual implications of the horizontal rule development of the
GATS and the issues raised in the WTO E-Commerce Work Program239 . This will also affect
the whole discussion of horizontal questions to be answered for the cross-border delivery of
digital products. In the worst case scenario, this stance already has and will continue to
negatively influence progress on the unfinished agenda for the development of missing GATS
rules (subsidies, domestic regulation, etc.).

And a more liberal stance towards audiovisual service liberalization within the WTO should
not be expected from the EC in the future. At the recent Conference on Cultural Diversity in
Johannesburg, the French President himself (Jacques Chirac) has very reiterated the
determination of France to block any treatment of the cultural products in the framework of
the WTO 240 . With respect to electronically tradable services, recent questionnaires and
statements from the DG Education and Culture and French officials even seem to indicate that
hybrid products like entertainment games are also covered by the exception of audiovisual
commitments 241 .

237
See SAGIT (1999), SAGIT (2002) and GROUPE DE TRAVAIL FRANCO-QUEBECOIS SUR LA DIVERSITE
CULTURELLE (2002).
238
See EUROPEAN COMMISSION (1999) for the desire to maintain policy flexibility with respect to audiovisual
services.
239
No EC or Canadian WTO position paper has been received so far. See the speech of CATHERINE
TRAUTMANN, UNESCO Round Table Discussion «La diversité culturelle face à la mondialisation»
(November 2, 1999) in which she indicates that the EC will try to block any decisions in the E-commerce
Work Program that may endanger the cultural exception desired by the French government.
240
See “Extraits du discours prononcé par le Président de la République à Johannesburg le 3 Septembre 2002“,
obtained from the French Embassy in Washington D.C.. Similar statements have been issued by France
during its EU presidency „Audiovisual Policies and Cultural Diversity in an Enlarged Europe“, Note of the
Presidency, downloaded from www.france.diplomatie.fr/cooperation/audiovisuel/semprague00/npf_en.htm
(downloaded in October 2002) and first remarks made by the new French Cultural Minister A ILLAGON, Press
Conference of JEAN-JACQUES A ILLAGON, Ministre de la culture et de la communication, July 4, 2002,
downloaded from http://www.culture.gouv.fr/culture/actualites/ in October 2002, p. 18 f.
241
See „Consultation on the GATS 2000 / WTO negotiations concerning certain audiovisual services and
cultural services“ under http://europa.eu.int/comm/avpolicy/extern/gats2000/ncon_en.htm.
64
Most importantly, the EC position does not seem negotiable. Despite of the fact that a number
of EC Member States (like the UK, the Netherlands and even Germany) want to negotiate
some elements pertaining to audiovisual services 242 France has the willingness and the ability
to block such a move. Both the distribution of trade policy jurisdiction between the European
Communities and the EC Member States and the extremely limited jurisdiction of the EC on
cultural matters (Art. 151 of the Amsterdam Treaty) basically tie the hands of the EC
negotiators on the defensive side. In other words, despite of a majority of EC Member States
that may be in favor of audiovisual service liberalization, commitments on audiovisual
services by the EC can be blocked by one single EC member state (see chapter 3 for the
mechanics behind that French veto power over audiovisual services).

242
Discussions with representatives of these national governments have revealed that their national music and
media industries actively ask for further liberalization. Bertelsmann, the German media giant, for example,
realizes that a further development of its US presence requires US audiovisual offers that can only be
requested if the EC gives something up in return. Although public broadcasting shall not be part of this EC
offer, the European industries see room for consensus concerning an elimination of quotas in radio
distribution of music.
65
 2.3 Summary of Deliverables and State of Play

It is not clear whether the audiovisual conflict that is cooking up between the USA and the EC
has – as in 1994 - the potential to block the Doha Development Agenda or at least the GATS
negotiations 243 . For the moment, a very similar conflict – the agricultural negotiations – seems
to function as the stumbling block for the Doha negotiations 244 .

But what is certain is that both the clarification of the horizontal questions relating to
electronic content delivery and further cross-border commitments in audiovisual services are
not likely to be decided upon before any substantial negotiations for specific commitments
take place. In sum, a global WTO framework that offers a predictable, robust and applicable
legal regime to current and future developments for cross-border content delivery has not yet
been successfully established.

In sum, the horizontal questions raised by the WTO E-Commerce Work Program will not be
answered any time soon. The questions raised are still in a working group not entitled to
negotiations and the WTO E-Commerce Work Program that lost much time on procedural
issues is currently stalled 245 . Furthermore, the Doha Mandate has been very disappointing in
this regard. Instead of proposing deadlines for solutions to the open questions, it only
mandates the General Council to come up with procedural arrangements to deal with the
questions by September 2003 – six months later than the initial offers to be tabled in March
2003246 . The decision- making situation and this instruction are similar to the situation in 1998
and it is questionable whether this new "old" point of departure would lead to any results. Fact
of the matter is that a renewed delegation of the responsibility to the respective Councils will
not produce any new basis for decisions.

243
See GRABER (2002) and HAUSER & W UNSCH (2002), p. 134 ff. who see a major stumbling block for the
negotiations.
244
Interestingly, the French determination to maintain agricultural subsidies is the driving forces of that conflict.
245
WT/GC/W/434, May 7, 2001, Communication by Argentina, Brazil, Paraguay and Uruguay, WTO Reporter,
„Electronic Commerce: WTO Members Preparing to Endorse Ad-Hoc Group on E-Commerce“, December
14, 2000 and WTO Reporter, “WTO chair to Drop Proposal To Start E-commerce Task Force”, July 13,
2000.
246
The recent fourth WTO Ministerial Conference again put the ball in the General Council's court: "We instruct
the General Council to consider the most appropriate institutional arrangements for handling the work
program and to report on further progress to the Fifth Session of the Ministerial Conference.”, WTO
Document WT/MIN(01)/DEC/W/1, November 14, 2001, p. 7. This lack of attention devoted to e-commerce
certainly also has to do with the fact that the hype surrounding this new trade technology has been dampened
by more recent stock market developments. Thanks goes to KEN SCHAGRIN (USTR) for this point.
66
Clearly, this uncertainty regarding the classification of e-commerce products is exercising a
counterproductive effect in the current request-offer process. As has been demonstrated in
previous parst the questions raised in the E-Commerce Work Program have overarching
importance for the whole GATS framework. The issue of correct mode 1 vs. mode 2
classification and the treatment of new services, for instance, has already surfaced in recent
meetings of the Committee on Trade in Financial Services 247 . Only clarity on the question
how electronic content services should be classified, will create the right environment for new
liberalization entries in the country lists. In personal interviews, both the EC and the US
reiterate that the they do not want to treat e-commerce as some separate negotiation topic but
that they would like to deal with the open e-commerce questions during the negotiations on
specific commitments248 . Also, in order to have an additional bargaining chip, the deve loping
countries seem to have an interest in postponing the e-commerce decisions until the
negotiations on specific commitments. However, the current activities during the request stage
- that admittedly are in their very early stage - do not show any efforts to deal with the open
GATS questions in an horizontal manner. The chances of having any decision before the
Ministerial Meeting in Cancun are therefore slim249 .

When it comes to further audiovisual service commitments progress will very much depend
on the ability of the US and the EC to group other WTO trading partners on their side. Thus, it
is very likely that the US-EC fight over further audiovisual liberalization will take place with
respect to third country commitments. A prelude to this new sort of US-EC debate could
already be observed in the accession negotiations concerning future EC Member States
(Lithuania, Latvia, Croatia, etc.). Fights over their WTO commitments in audivisual services
between the US and the EC have considerably slowed their WTO accession250 . In sum, it is
thus very likely that – instead of tackling the more complex regulatory challenges depicted in

247
S/FIN/M/25, May 8, 2000, Committee on Trade in Financial Services, Report of the Meeting held on April
13, 2000 and S/FIN/M/31, June 1, 2001 Committee on Trade in Financial Services Report of the Meeting
held on May 9, 2001 Note by the Secretariat.
248
Also there seems to be a ten
249
“U.S. looks for WTO Guidelines on E-Commerce by Cancun Ministerial”, Inside U.S. Trade, Vol. 20, No.
38, September 20, 2002.
250
See „Croatian Accession to the WTO“, Embassy of Croatia, Washington D.C., April 10, 2000,
www.croatiaemb.org/politics/fsheets/wto.htm and « Towards a transversal strategy for promoting Cultural
Diversity », Report by the Council of Europe, http://culture.coe.fr/postsummit/nti/ en/ documents/eStrategy
_cccult(2001)15.htmdownloaded on 24.9.1002 in this respect.
67
Part 2.2.3.2 - much energy of the trade negotiators will be used up in battling the same “all or
nothing”- isssues as in 1994 251 .

Unfortunately, this missed opportunity would render the GATS framework and its “status quo
commitment level of 1994” even more obsolete than it already is today. This increased
lagging of the GATS treaty and its commitments behind new technological possibilities and
existing trade flows may well – peu à peu – lead to a gravitation towards bilateral and regional
service trade agreements. The recent US-Jordan Free Trade Agreement with its sophisticated
language on service and e-commerce liberalisation and the upcoming US agreements with
Chile and Singapur are only indicative of this move away from the GATS for meaningful
service liberalisation252 . If this process of service liberalisation proves more successful to
countries with ambitious agendas in terms of services trade, they may well turn their back on
the GATS for other issues as well.

251
This term has been coined by S/CSS/W/21, December 18, 2000, Communication of the USA.
252
USTR (2002): 2002 Trade Policy Agenda and 2001 Annual Report of the President of the United States on
the Trade Agreements Program, http://www.ustr.gov/reports/2002.html, March 19, 2002. Also the language
on electronic service delivery inserted in the new text of the Trade Promotion Authority seems to be more
targeted to regional or bilateral rather than for WTO trade agreements.
68
 Literature ( to be completed and revised)

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