Digital Law Asia

Author(s):

Tsai-fang Chen
  1. Introduction

I had the honor to present the paper Goods/Services Bundling and Non-discrimination Obligations: The Need for a New Approach in the 2021 Online Research Workshop on Digital Trade Law Governance in the Asia-Pacific on November 19, 2021. The Research Workshop was hosted by National Yang Ming Chiao Tung University School of Law, Center for Digital Governance and Legal Innovation, Center for Trans-Pacific Partnership and Transnational Trade Laws, and Center for Enterprise & Entrepreneurship. The Research Workshop is a continuation of the fruitful academic collaboration between Monash University and the National Yang Ming Chiao Tung University in recent years. The Research Workshop was composed of three sessions: (1) Multilateral, Plurilateral and Regional Governance in Digital Trade, (2) Digital Sovereignty and Cross-Border Data Transfer, and (3) The Impact of Technology on the Development of Rules of International Trade. This paper was presented in session 3.

The lines between goods and services under international trade norms have become blurred, as the servitization of manufacturing in the global value chain (GVC) has changed the way industries work and governments regulate. However, the dichotomy between goods and services under the World Trade Organization (WTO) has remained. As the development of the Internet of Things (IoT) and Industry 4.0, physical goods and services are increasingly bundled together. Under this trend, the existing dichotomy between physical goods and services from the perspective of existing trade rules face new challenges. The focus of this post is IoT products that could continuously provide services to consumers. One could argue that a physical product can always be described in terms of its function. There is nothing new that a product has service components embedded in it.[2] For example, when a physical product is purchased, it is always in the back of the mind of the purchaser that the product may be capable of performing certain functions. A washing machine is purchased for its function of providing laundry services. A refrigerator is purchased for the cooling and preserving services of food. For the purpose of this post, however, this type of function is not the force that causes trouble for existing trade regulations.[3] The focus of this post is those services that are continuously provided and can be separated from the physical aspect of the physical goods.[4] It should be noted that continuously provided services can generate separate economic value for the service providers. The intrinsic function that can be provided by the physical goods therefore should be distinguished from the continuous services that are enabled by modern technology.

The development of consumers’ expectations towards continuous services to be provided through physical products is a new reality of the market. This brings challenges to the existing trade regime. From the perspectives of the consumer, what is being purchased by consumers may no longer be simply a clear cut pure physical product or pure service, but an increasing percentage of the purchase is about a bundling of goods and services. From the perspectives of the government, the regulatory measures are also increasingly of a hybrid nature that concerns both goods and services, as a response to the development of servitization.[5] A governmental measure that intends to regulate a product consists of a bundling of goods and services can be such a hybrid measure.

The hybrid nature of such regulatory measures alone is not the source of challenges. The GATT and GATS are not mutually exclusive, and the hybrid nature of such measures would mean that both agreements could apply to the measures at the same time. Based on the scope of both agreements and the trend of servitization, the government measure that regulate such products will increasingly likely fall within both the GATT and the GATS.[6] This is especially the case where the sales of physical goods in conjunction with the continuous supply of services through the good in question. Therefore, a measure that regulates or otherwise affects an IoT product may therefore be subject to both GATT and GATS.[7]

While it is helpful and important to recognize that a measure that regulates a product/service bundle is subject to both GATT and GATS, the enquiry does not end here. As Prof. Shin-yi Peng pointed out, the traditional goods/service dichotomy “fails to reflect the reality of the converging regulations,” which “inevitably leads to uncertainty in trade limitation and gridlock in trade negotiations.”[8] The uncertainty is inevitable because a measure that intends to regulate both goods and services is not envisioned by either the GATT or the GATS. Such uncertainty could occur when the GATT and the GATS apply to a hybrid measure individually and simultaneously. The following section of the post focuses on one of the areas that is an example of such uncertainty, i.e., the obligation of nondiscrimination.

  1. Nondiscrimination Issues for the Bundled Offerings

For the increasing trend of bundling physical goods and services together, uncertainly in the simultaneous application of the agreements occurs. Uncertainly could occur for modern IoT products that bundles a physical good with a continuing services provided through the physical good.

  • Likeness Analysis

A violation of the non-discrimination obligation under the WTO requires a determination of likeness. The test determining whether products are like requires an adjudicator, on a case-by-case basis, to examine relevant factors including the product’s end-uses in a given market, consumers’ tastes and habits, and the product’s properties, nature, and quality.[9] Similar tests have been brought into a determination of like services/service providers.

As the GATT and GATS are separate agreements that prescribe distinct obligations, the determination of any violation of the obligations should be conducted separately. Complications may arise when goods and services affect each other when bundled together. A bundled offering could in theory entail multiple scenarios, including two bundles composed of the following four scenarios: 1) like products and like services, 2) like products and unlike services; 3) unlike products and like services; and 4) unlike products and unlike services.

There are four possible scenarios here.

Scenario 1: Like Products + Like Services/Service Providers.

Scenario 2: Unlike Products + Unlike Services/Service Providers.

Scenario 3: Like Products + Unlike Services/Service Providers.

Scenario 4: Unlike Products + Like Services/Service Providers.

A problem for the likeness analysis for IoT products is that if bundles are viewed as a whole, there is a likelihood that the bundles are like if viewed holistically, even when the components of the bundle are unlike. This could cause uncertainty in the application of the rules. The potential optimal outcome may also not be obtainable under the current separate regime. One example of the uncertainty in the likeness analysis would occur if the likeness can not be established by its own attribute alone. Assuming, for example, that in an instance of scenario 2, a comparison of bundle A and bundle B is conducted. The product parts of bundle A are not like the product part of bundle B due to a difference in their key end-uses. Assuming that the product of bundle A could provide end-use A, while bundle B could provide end-use B. As a function could be delivered though both physical components or a service, it is possible that the service part of bundle A could provide end-use B while that of bundle B could provide end-use A. For a consumer, the two bundles could both deliver end-use A’ and B’, and the bundle themselves could constitute a like bundle while neither their product parts nor the service parts are like individually. Similar situations could also occur in scenarios 3 and 4. This demonstrates the potential pitfall for limiting the likeness analysis to only the product part and the service part of the bundled offerings.

  • Spill-over effects

Separate application of each agreement to the bundled offering could lead to a blurring of the obligations in each agreement despite an insistence on separate application. This post calls it “spillover effects.” Here are some examples of the spillover effects between the GATT and GATS that lead to potential obligations beyond Members’ commitments.

Two bundles are like for both goods and services aspects. Assuming that in this scenario, a measure does not discriminate against the product component of the bundle but only discriminates against the service component. The competitiveness of the product is nonetheless affected due to the discriminatory treatment focus on the service part of the bundle. Assuming further that the bundled offering that incorporates the service part discriminated against by the measure is put in a competitive disadvantage. This could mean that the product incorporated in the bundle was negatively affected by the measure due to the worsened competitive condition of the whole bundle. Since a like product is discriminated, there could be a violation of non-discrimination under the GATT.

The above result of a potential GATT violation seems justified if one’s focus is on the GATT part of the issue. But what if the Member does not make a relevant commitment under the GATS under this scenario? In that case, there is no violation of an NT obligation under the GATS, and the measure is not inconsistent with the Member’s commitment under the GATS. Recall that under the scenario the measure at issue does not discriminate against the physical product component of the bundle. This suggests that this Member could be penalized for conduct that does not violate its commitment. However, if the measure is not regarded as inconsistent with the GATT, it seems that it would give too much leeway for a Member to indirectly affect the competitiveness of products under the GATT.

Like products/unlike services. Under scenario 3, for two bundles, Bundle A and Bundle B, with like products and unlike services, the measure provides inferior treatment to the service component of Bundle B only. As the services between Bundle A and Bundle B are not like, there should not be a violation of non-discrimination under the GATS. However, assuming that the product component of Bundle B is negatively affected due to limitations on the bundle’s services. As the competitiveness of the product component of Bundle B is negatively impacted, there could be a violation of the non-discrimination obligation under the GATT. But, similarly to the earlier scenario, why should a Member be penalized for a measure that differentiates unlike services?

The above difficulty demonstrates that maintaining the current separate application of the GATT and GATS for the bundled offering creates uncertainty and may lead to spillover effects that create uncommitted obligations on the one hand, or create too much leeway for Members in adopting discriminatory measures on the other hand.

 

  1. Concluding Remarks

The complication and difficulty demonstrated above suggests that maintaining the current separate application of the GATT and GATS for bundled offering creates uncertainty and may lead to spillover effects that create uncommitted obligations on the one hand, or create too much leeway for Members in adopting discriminatory measures on the other hand. This post therefore concurs with the proposal advanced by scholars that the new development would require a new response from international economic law and policy. This post agrees that a new type of norm would need to be developed for good/service bundling, or at least the non-discriminatory obligations under GATT and GATS should be applied together, instead of separately. But before the new rules are established, this post argues that a cautious approach should be adopted in the situation where non-discrimination obligations under GATT and GATS could be applied beyond the limit of the respective agreement.

 

 

[1]            Associate Professor, National Yang Ming Chiao Tung University, School of Law. Part of this research has been supported by a grant from Ministry of Science and Technology, Taiwan (110-2410-H-A49-003). The author can be reached at: tfc@nycu.edu.tw.

[2]           Anupam Chander, The Internet of Things: Both Goods and Services, 18(1) World Trade Rev. 9, 16 (2019).

[3]           See id. at 16 (arguing that this would transform all goods into services which would eliminate the goods/services distinction without any useful effect).

[4]           See id. at 19 (arguing that a smart object should be treated as both a good and an ongoing service.)

[5]           Shin-yi Peng, A New Trade Regime for the Servitization of Manufacturing: Rethinking the Goods-Services Dichotomy, 54(5) J. World Trade 699, 705 (2020).

[6]           Id. at 708-09.

[7]           Chander, supra note 2, at 19.

[8]           Peng, supra note 5, at 713.

[9]           The AB Report, Canada—Periodicals, at 20-21.

Suggested Citation:

Tsai-fang Chen, Goods/Services Bundling and Non-discrimination Obligations: The Need for a New Approach, Digital Law Asia (Dec. 1, 2021), https://digital.law.nycu.edu.tw/blog-post/xlsl3p/.

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