Demarcating the boundary between Goods and Services: an analysis GATT and GATS
By Abhay Shankar Babu & Nupur Nayak
4th Year BA LLB, Hidayatullah National Law University, Raipur
Goods and products have always been approached differently with different set of rules. But the main issue has been as to how to demarcate the line between goods and services. This question can be answered by referring to the characteristics of the products, or perusing over the economic characteristics, the legal context, or use of the product. This process of determination is not problematic at the national level as it may reflect the national interests of the imposing state but problems of legitimacy may arise under international regulatory regimes. International regulatory structures must be perceived as “legitimate” by those participating in them. Interpretation of international rules is not only driven by the underlying rationale of the rule drafters, but also by the need to ensure the continued legitimacy of the rules themselves. In particular, questions arise over who should make the boundary decision in the international context.
In the context of the WTO, the demarcating line between the goods and services is still blurred but help can be taken from European Union (EU), where such questions have also been faced. The researcher in this paper has first tried to analyze the WTO’s categorization of products as goods and/or services. Then she has tried her to highlight the mode of distinguishing between goods and services as adopted by the European Union. In the end attempt has been to interpret the dictionary meaning of goods and services which would assist in defining objectively the boundary between goods and services, serving the interests of legal certainty and, crucially, reinforcing the legitimacy of the WTO and the European Union and their respective decision-making processes.
Before 1995 (creation of WTO) i.e. during the period of GATT 1947 multilateral trade rules as formulated be GATT only covered trade within its limits. The trade was liberalized by GATT with the help of reduction of trade barriers and removing restrictions on the import and export of goods by the government. GATT essentially followed the two non-discriminating provisions i.e., MFN and the NT.
But there were also few exceptions followed by GATT which made imposition of trade barriers in limited circumstances valid. But it was not until 1995 i.e. with the formation of WTO that trade in services was included within multilateral trade rules with the making of GATS. It helped in reducing barriers to trade in services in two ways.
1.It eliminated restrictions in domestic regulations.
2.GATS addressed particular service sectors through subject specific annexes.
The GATS has essentially been formed by the help of GATT and features many of its rules including the MFN and national treatment provisions, as well as the general exceptions clause in Article XIV. However, GATS also includes a separate market access commitment based heavily on a combination of the wording of the MFN and national treatment rules in Article XVI.
Article XVI requires any member undertaking full liberalization commitments without restrictions in one service sector in their schedule to give MFN treatment to all services and service suppliers in that sector from other members. GATS rules also only affect those sectors which members have agreed to liberalize in their schedules annexed to the main agreement.
Structure of GATT and GATS
Perusal of provision of the GATT and GATS also supports the existence of a boundary between goods and services. GATS includes a definition of “trade in services” in Article I (1), implying a distinction between trade in goods and trade in services. Moving further while GATS incorporates within itself different types of commitment, the same has not been done in GATT. Finally, the wordings of the obligations in the two agreements are drafted differently.
Under GATT the principal of MFN and NT are followed in every case but the same is not the case with GATS. GATS obligations have been classified as (1) general obligations in Part II and (2) specific commitments in Part III. Under GATS, the MFN clause is included in the general commitments, meaning it will apply to all trade in services, unless the member has notified an MFN exemption. In contrast, the national treatment and market access rules are present in Part III of GATS meaning that members need only comply with the rules to the extent that they have elected to do so in those service sectors specifically listed in their schedules of commitments annexed to the GATS.
In Bananas, the Appellate Body argued that as Article II of GATS was an MFN commitment, it was more appropriate to use the corresponding MFN jurisprudence in GATT as a guide rather than that on national treatment. The Appellate Body dismissed the importance of the type of trade in order to achieve a homogenous interpretation of the substantive scope of the MFN clause in GATT and GATS.
In Canada—Autos, the panel found a violation of Article II(1) of GATS by focusing on the question of whether the Canadian measure provided less favorable treatment to a “limited and identifiable group of manufacturers/wholesalers of motor vehicles of some Members,” allowing some manufactures/wholesalers to import vehicles duty-free whereas others were specifically excluded from this exemption. The Appellate Body rejected this approach, arguing that by equating the treatment of wholesalers with that of manufacturers, the panel was applying a “goods” analysis rather than one applicable to GATS. It argued that the wording of GATS meant that the effect on both the manufacturers and the wholesalers had to be considered separately and it was not possible to merely extrapolate the analysis from one sector to the other, as would be the case for the MFN analysis in GATT.
While Bananas removes the importance of the categorization of the product from the scope of the MFN clause by homogenizing the GATT and GATS rules, Canada—Autos re-introduces it.
Demarcating The Line Between GATT And GATS
The definition of Goods is missing in GATT while GATS provides a restricted definition of “services” and “defines “trade in services” in terms of mode of supply of the product: either products are traded across borders, the consumer travels to another member’s territory to receive the product, products are supplied by the “commercial presence” of the service supplier within the member’s territory, or there is movement of “natural persons” to another member in order to supply the product.
The panel in Mexico—Telecommunications was of the view that the definition of “trade in services” in Article I (2) of GATS was “defined comprehensively.” This view lays emphasis on the method of transfer without specifying the essential characteristics of the product itself. But in Canada—Autos case it was stated that the inherent economic characteristics of the product were relevant to the scope of the MFN obligation in GATT and GATS, as both agreements covered different subject matters. Thus GATS definition is alone not enough to determine the boundary. Scheduling is a way to find out the boundary between goods and services even though classification for scheduling purposes is complex, though being similar for both GATT and GATS. Numerical categorization systems is adopted in both, where products are allocated distinct codes, which are then listed in the members’ schedule. Once a product fits within a code, it is classed as either goods or services purely based on the code allocated by the relevant nomenclature.
Classification of Goods and Services Under the european union
The European Union established by the Treaty of Rome had an essentially trade-based purpose. The main aim of the European Union even after various amendments is to achieve its objectives through the establishment and proper functioning of a common market. One of the essential elements of the common market is the four freedoms i.e., free movement of goods, services, people, and capital, thus distinguishing between goods and services. Three issues arise from this. First, what is the significance of this distinction in the European Union? Second, the manner in which the European Union dealt with this matter? Finally, is the difference between goods and services institutionalized within the European Union in the same way as it is in the WTO?
Analysing the EC Treaty
Freedom to provide services has been dealt in Article 49, while freedom of movement of goods has been dealt in several articles. There is a difference in the type of action which the two organizations may take, the European Union having legislative powers that the WTO lacks. Article 14 (2) of the TEC states that the internal market includes free movement of both goods and services and lays emphasis on the harmonizing measures. The incorporation of Article 95 is for achieving the objectives set out in Article 14 but does not apply to fiscal provisions, to those relating to the free movement of persons nor to those relating to the rights and interests of employed persons. The involvement of the European Parliament depends upon procedure used as its involvement is different for different levels. Under Articles 95 and 47(2), its consent to a proposal is required, whereas under Article 52(1), the Parliament need only be consulted. Further, under Article 47(2) unanimity in the Council will be required, but Article 52(1) and Article 95, it will not be. Thus decision making is the ultimate way which decides whether the particular issue falls within goods and services and has a particular impact on the freedom of the Member States to maintain their own national position. Whereas in the case of unanimity requirement in council, each state effectively has a veto, a state may have an interest in compromise, where qualified majority voting is required. The Council in general may have to compromise when the European Parliament effectively vetoes a legislative proposal (co-decision procedure). The reason for difficulties in this area is due to unclear nature of scope of each of the provisions thus creating potential for overlap. For example, the relationship between the services harmonization provisions and Article 95 is unclear. The fact that separate treaty provisions deal with the free movement of goods and services, suggests that a distinction should be made between the two provisions, an assumption which is supported by decisions of the European Court of Justice (ECJ) that indicate that the four freedoms are mutually exclusive. The WTO also faces the similar questions regarding distinction in treatment of goods on the basis of structural difference. The crucial difference relates to scope of Article 28 as opposed to Article 49. The original scope of Article 28 of the TEC was uncertain. The central question was whether it only operated to catch those measures that were overtly discriminatory. The cases of Dassonville and Cassis de Dijon made clear that the scope of Article 28 would not be so limited; it could apply to “indistinctly applicable” rules which nonetheless might affect trade. In Sunday Trading cases where an English rule which prohibited trading on a Sunday, irrespective of the origin of goods, was found to fall within Article 28. In that case, there had been no proof of an actual effect on inter-state trade. The ECJ limited the scope of article 28 on account of criticism regarding over-extension of Article 28, whereby virtually any rule which had a potential impact on trading goods could fall within Article 28. It sought to distinguish between those indistinctly applicable rules which did have an impact on intra-Community trade and those which did not. The case in which this change occurred was Keck where “Requirements to be met” or “product requirements,” which are rules relating to the content of a product such as recipe or packaging rules fell within Article 28. The ECJ distinguished between those rules which impose an additional burden on imported products and those rules which, although they may affect access to the market; did not impose a specific additional burden on imports. But, in Alpine Investments, the court rejected the argument that the distinction between “selling arrangements” and “product requirements” should apply in the context of services as well thus narrowing the scope of Article 28 with respect to Article 49, thereby stressing the need within the European Community of making a distinction between goods and services.
While the TEC gives provides a fractional definition of services in Article 50 of TEC, it is silent on the meaning of goods. Despite vital importance of the free movement of goods in the European Union, the reference of goods is minimal. In the context of various articles, the approach adopted by ECJ as regards to meaning of goods is a common one. The ECJ faced the questions regarding the scope of goods since long and defined goods as products which have a monetary value ascribed to them and as such can then form the basis of a commercial transaction thus must be capable of being the subject matter of trade. The Public Interest and the non trade issues are protected by the European Union legal order by specific provisions derogating from the Treaty freedoms. Although the Art Treasures case provides a starting point, it does leave some questions unanswered, notably whether items which have no “value in money” should be considered goods. This issue came before the ECJ in the Belgian Waste case which concerned, amongst other types of waste, waste that was neither reusable nor a recyclable. According to the ECJ, “objects which are shipped across borders for the purposes of commercial transactions are subject to Article 28 of the Treaty, including non-recyclable waste.” Thus the central notion in determining the applicability of the goods provisions is whether there is an object which is likely to be the subject of a commercial transaction, even where the transaction may involve the provision of a service such as the disposal of waste.
Article 50 states that services for the purposes of the Treaty are those that are provided for remuneration insofar as they are not governed by the provisions relating to the other treaty freedoms on goods, capital, and persons. No sector is excluded in principle from the scope of the TEC, widening the category of services.
Article 49 covers the situation in which both service provider, service and recipients move to a third Member State. The definition of services which specifies that services should be provided “for remuneration raises an important question as to whether this requirement mean, that we are looking for services of that type that are generally provided for remuneration or for those which are provided for remuneration in a given set of circumstances? When this question was addressed to the ECJ in the context of education, The Advocate General noted that, “[s]tate education, is largely financed from State taxes” and thus it was decided that state education fell outside the scope of Article 49 of the TEC, implying that it will be necessary to look at each individual case to determine whether remuneration existed. With passage of time, it was felt that for determining whether a service falls within Article 49, the type of service as a general issue should be looked at rather than the individual case. An approach based on the type of services has now been adopted rather than looking to see if there is a commercial transaction in a given case.
Drawing the line between Goods and Services
In the Dundalk Water Case,  it was held that, “the fact that a public works contract relates to the provision of services cannot remove a clause in an invitation to tender restricting the materials that may be used from the scope of the prohibitions set out in Article 28.” By contrast, in Läärä, the ECJ found that gaming machines were goods with a capital value in addition to being necessary for the provision of gambling services. The question of the boundary between goods and services in relation to the import of gaming machines arose again in Anomar where the same view was applied. Although Anomar and Läärä may be consistent in identifying the independent existence of gaming machines as key in determining the boundary between goods and services, in the light of cases such as de Coster, it is hard to discover a consistent rule within the cases applied by the ECJ.
In the case of Sacchi, the Court had to determine whether broadcasting should be viewed as falling within the goods or services provisions. It adopted the position that trade in material sound recordings and other products used for the diffusion of television signals fall under freedom of movement for goods and surveyed the product’s physical nature and the mechanism of transmission to distinguish between the same products in a different medium. However in de Coster in which satellite dishes were at issue, the Court did not even consider the question of whether the matter should be viewed as goods. Even if this is justified by reference to the fact that the satellite box is clearly tied to the provision of a service and has no function outside of that, de Coster is inconsistent with the wording of Sacchi which specifies that items for transmission or reception of signals constitute goods. De Coster reflects the better position. The emphasis on the form of a product has been criticized since it may give rise to difficulties with the development of digital products and artificial distinctions between the same products delivered via different mechanisms. Thus WTO and the EU suffer similar problems when determining where the boundary lies between goods and services.
Defining The Boundary In A General Context
Article 3(2) of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the “DSU”) states that the WTO rules can be interpreted “in accordance with customary rules of public international law.” Article 31(1) of the Vienna Convention states that “[a] treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.” These approach emphasize that the “ordinary meaning” of the language should be used and, the “context” of the language should be used. The Oxford English Dictionary effects a distinction between both products, defining “goods” as “saleable commodities; merchandise or wares.”
Merchandise is the commodities of commerce or goods to be bought or sold, with commodities as “a thing of use or value; . . . a thing that is an object of trade.”
In contrast, services are the sector of the economy that supplies the needs of the consumer but produces no tangible goods. This reflects that dissimilarity between services and goods can be determined by deciding whether the product falls into the category of goods, as the incapability to meet the “goods” test moves the product into the “services” category. It is clear that in the Oxford Dictionary the definition of “goods” is derived from the value of a tangible product measured in monetary terms which then allows that product to be traded. Thus tangibility and tradability is cornerstone to establish the product as goods. The product must have an inherent physical existence and should be capable of being stored. The producer can allow periods of time to elapse before the goods are disposed of, thus not requiring proximity between the manufacturer and ultimate consumer. In contrast, services are intangible and must be consumed immediately on production and cannot be stored in the same way as goods. Thus, a certain degree of proximity between the service provider and consumer is necessary, increasing the likelihood of interaction between them both.
In order to incorporate a product within the definition of goods, the product must be categorized as saleable. While the dictionary definition explicitly refers to a product’s tradability in relation to goods only, it is arguable that even products designated as services must exhibit this tradability characteristic. The precondition for tradability is that, it should be capable of being transferred from one party to another and also be capable of being the subject of a commercial transaction. Thus tangibility paves the way to differentiate between goods and services, whereas tradability, distinguishes between those products which fall under goods or services and all other products which do not fall into either the goods or services definition at all. Thus tradability test makes it possible to exclude products from any regulatory framework when it is not possible to transfer ownership from the producer to the consumer.
Although the WTO is primarily a trading agreement where products are exchanged for their market value, there have been questions regarding the extent to which it should enlarge its ambit to include non-trade issues such as environmental concerns, cultural concerns, and human rights defined broadly. A shift in the WTO debate means that the classification of products as non-trade issues may move them beyond the competence of the WTO completely. The European Union argued during the Uruguay Round of multilateral trade discussions that audiovisual products should be classified as trade in services rather than goods. The European Union and Canada are now arguing that the cultural content or value of audiovisual means that they fall outside the scope of the multilateral trade rules completely. Clearly, the classification decision in this case is taken on the basis of non-economic considerations, which feeds directly into the role that non-trade concerns play in the WTO.
It is assumed that because a product is intangible it cannot be stored and, therefore, production and consumption occur simultaneously. As a consequence, the trade method differs from tangible products because the method must accommodate such instantaneous use. On this interpretation, separate rules regulating goods and services are necessary on pragmatic grounds solely due to the different ways in which products are traded.
Implicit in the transfer element of “tradability” is the transfer of products from the producer to the consumer in a way which allows the consumer to enjoy the product freely without interference from the producer. Therefore, to fulfill the transfer element it must be possible for property in the product to move from the producer to the consumer as a prerequisite or concurrent requirement of the product’s physical transfer.
Although services’ intangibility means it is difficult to possess the service per se, the consumer can still have physical evidence of the existence of the service or legal evidence of their right to receive it. Physical existence can occur in three ways. First, after the provision of the service, physical evidence may exist demonstrating that the service has been received. For example, when a consumer receives a haircut, the receipt of the service is evident as the hair is shorter. Second, physical evidence of the service may be available before it is provided to indicate that the consumer has the right to receive that service. A legal document, such as a contract or receipt, may fulfill this function. A third, more complex situation may arise as in the case of pay television where the consumer must subscribe to a package first and obtain a decoder card and box before they are able to access the television signal sent by the broadcaster. For example, should pay television be viewed as services, goods, or a combination of goods and services? In these difficult situations, the key to classification of products as goods or services could lie in the notion of ownership and, more specifically, possession. In the case of goods, control is the right to enjoy the physical product itself, whereas in services, it is control over the right to receive the product. To ascertain the answer to this question in borderline cases the starting point must be the function of the product or how it is perceived by the parties to the transaction. Where the product’s function is to form the subject matter of the transaction, the product will be goods because its possession is enough to transfer ownership from the producer to the consumer.
Using the definitions in the dictionary and economics literature provide a coherent starting point for distinguishing between goods and services, but problems arise from relying solely on this material. Both definitions assume that the distinction is intuitive, flowing directly from the economic characteristics inherent in all products. They also assume there is a single economic criterion that places products into one category or another, so all goods of the same type are always placed in the same category.
Although the Appellate Body and the panel in a number of cases suggest that there may be some significance in the distinction, the same is not clear. Inconsistencies may also arise in the context of who is making the decision and what is the basis of decision in the context of the formal ascription to the category of either goods or services.
Based on the natural language and economic literature, there are two concepts underpinning the products captured by the WTO: tradability and tangibility. Tradability first acts to distinguish between products that are bought and sold and which therefore fall within the economic sphere addressed by the rules in WTO and EU. In practice, few transactions fall outside the scope of these treaties. Then comes in to picture the concept of tangibility, which constitutes a rebuttable presumption that intangible items are services while tangible items constitute goods. Thus the determining factor is the product’s function, in combination with tradability. To form the subject matter of a trade transaction, ownership must be transferred from the producer to the consumer followed by the consumer gaining possession of the product thus exercising control over it. Whether a product is a good or a service depends on whether the consumer needs the product per se or whether they need it to gain access to the product which forms the subject matter of the transaction. While these criteria form a framework for making decisions, it is clear that in some cases the boundary will remain contested. On a broader level, it is clear that if a supra-national body like the WTO or European Union substitutes a different boundary from that drawn by its members, then that institution is interfering directly with the members’ national policies, raising legitimacy questions as to its competency to intervene in all subject areas without specific acquiescence by the member. The drawing of the boundaries again even though within the competence of institution is subject to acceptability to its members who can be said to give consent or be likely to accept interference with their national policies if the goods/services boundary is re-drawn according to rationally established principles.
 GATT art. I.
 Id. art. III.
 Id. art. XX; see also GATT art. XIX.
 See, e.g., Annex on Air Transport; Annex on Financial Services; Annex on Basic Communications.
 See GATT art. I
 GATT art. III; GATS art. XVII.
 GATT art. XX.
 GATS art. XVI.
Id. art. XVI(1).
 GATS art. XX.
 GATS defines trade in a service in terms of its supply, either between members across borders, by the presence of the consumer in another member’s territory, the commercial presence of an entity within the member’s territory, or by the presence of a natural person within the territory of another member.
 See GATS Annex on Article II Exemptions.
 WT/DS27/AB/R (May, 22, 1997).
 WT/DS139/AB/R & WT/DS142/AB/R (May 31, 2000)
 GATS art. I(2)(a)-(d).
 WT/DS204/R (Apr. 2, 2004)
 Treaty Establishing a Constitution for Europe, article I-3(2) specifies that the Union is to “offer its citizens an area of freedom, security and justice without internal frontiers, and an internal market where competition is free and undistorted.”
 TEC art. 3(1)(c).
 TEC arts. 23–31.
 TEC art. 49.
 TEC art. 39.
 TEC arts. 56–60.
 Although TEC article 3(1)(c) refers to all four freedoms together, TEC article 3(1)(a) also refers separately to “the prohibition, as between Member States, of customs duties and quantitative restrictions on the import and export of goods, and of all other measures having equivalent effect.”
 Community legislation takes direct effect in the legal systems of the Member States. The terms of the WTO treaties will not necessarily have such effect, depending on the terms of each state’s constitution.
 TEC art. 95(2).
 ex parte Imperial Tobacco Ltd., 2000 E.C.R. I-8419, ¶ 63.
 See Commission v. Italy (Re: Export Tax on Art Treasures), 1968 E.C.R. 423.
Case 8/74, Procureur du Roi v. Dassonville et al., 1974 E.C.R. 837.
 Case 120/78, Rewe-Zentral v. Bundesmonopolverwaltung fur Branntwein (Cassis de Dijon), 1979 E.C.R. 649.
 Case 145/88, Torfaen BC v. B & Q plc, 1989 E.C.R. 3851.
 C-267, Keck and Mithouard, 1993 E.C.R. I-6097.
 Case C-384/93, Alpine Investments BV v. Minister van Financiën, 1995 E.C.R. I-
 Case 7/68, Commission v. Italy (Re: Export Tax on Art Treasures), 1968 E.C.R. 423 [referred to in authors’ discussion as Art Treasures].
 Case 7/68, Commission v. Italy, 1968 E.C.R. 423 [Art Treasures].
 Case C-2/90, Commission v. Belgium (Walloon Waste), 1992 E.C.R. I-4431 [referred to in authors’ discussion as Belgian Waste].
 Case C-2/90, Commission v. Belgium (Walloon Waste), 1992 E.C.R. I-4431, ¶ 26.
 Case 263/86, Belgian v. René Humble and Marie-Thérèse Edel, 1988 E.C.R. 5365, 5379.
 Case 186/87, Cowan v. Trésor public, 1989 E.C.R. 195.
Case 45/87, Commission v. Ireland, 1988 E.C.R. 4929, ¶ 17.
 Case C-124/97, Läärä and Others, 1999 E.C.R. I-6067.
 Case C-6/01, Associação Nacional de Operadores de Máquinas Recreativas (Anomar) and Others v. Estado português, 2003 E.C.R. I-8621.
 See, e.g., Case 52/79, Procureur du Roi v. Debauve, 1980 E.C.R. 833. In more recent cases, it has often not considered the question of whether goods or services provisions are relevant.
 Case 155/78, Sacchi, 1974 E.C.R. 409, ¶ 7.
 Vienna Convention, supra note 9, art. 31(1).
 Concise Oxford English Dictionary (Oxford University Press, 10th Edn, 1999).
 The panel did point to “ownership” transfer in Mexico—Telecommunications although it did not give a detailed explanation on this point.
 This has been an issue for the European Union as well. See Ernst-Ulrich Petersmann, Human Rights and the Law of the World Trade Organization, 37 J. WORLD . TRADE 241 (2003)
 See Council for Trade in Services Special Session, Communication from Switzerland: GATS 2000: Audio-visual services, ¶ 6 , S/CSS/W/74 (May 4, 2001).