Digital/WTO: JSI E-Commerce, MFN and GATS Article V
For those interested in digital trade and the WTO, Keith Rockwell’s article earlier this month at the Hinrich Foundation is worth a read. Of particular interest to me is the idea that some are suggesting that GATS Article V (Economic Integration) could apply to a standalone e-commerce agreement and therefore allow its parties to not give the benefits of the agreement to non-participants:
Plurilateral agreements are not new to the WTO or to its predecessor the General Agreement on Tariffs and Trade. There are many ways in which they can be negotiated. Article V of the General Agreement on Trade in Services, which experts strongly suggest could also apply to an e-commerce agreement, states that no member can be prevented from “being a party to or entering into an agreement liberalizing trade in services between or among the parties to such an agreement.” It also states the coverage of the agreement must be broad and that its terms do not discriminate against those which are not party to the pact. It is for this reason that so many favor a different tack for the e-commerce plurilateral.
As context, GATS Most-Favoured-Nation treatment (MFN) requires each WTO Member to treat service suppliers from all other WTO Members at least as well as they treat service suppliers from other (WTO and non-WTO) countries. In the language of GATS Article II, WTO Members must “accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country”.
This would mean that if a WTO Member enters into a digital trade agreement, to the extent that it results in more favourable treatment for service suppliers, that WTO Member needs to give that treatment to service suppliers from all WTO Members (even those not participating in or bound by the agreement). For example, in the case of the JSI E-Commerce it looks like the concern is the prohibition on customs duties on electronic transmissions (i.e. some participants want the freedom to apply custom duties on transmissions from non-participants).1
GATS Article V is an exception to the MFN rule. It allows WTO Members to enter into preferential trade agreements even if this results in better treatment being given to the parties of the agreement as compared to that given to other WTO Members. The key parts of Article V are:
Article V Economic Integration 1. This Agreement shall not prevent any of its Members from being a party to or entering into an agreement liberalizing trade in services between or among the parties to such an agreement, provided that such an agreement: (a) has substantial sectoral coverage[1], and (b) provides for the absence or elimination of substantially all discrimination, in the sense of Article XVII, between or among the parties, in the sectors covered under sub-paragraph (a), through: (i) elimination of existing discriminatory measures, and/or (ii) prohibition of new or more discriminatory measures, either at the entry into force of that agreement or on the basis of a reasonable time-frame, except for measures permitted under Articles XI, XII, XIV and XIV bis. 2. In evaluating whether the conditions under paragraph 1(b) are met, consideration may be given to the relationship of the agreement to a wider process of economic integration or trade liberalization among the countries concerned. [1] This condition is understood in terms of number of sectors, volume of trade affected and modes of supply. In order to meet this condition, agreements should not provide for the a priori exclusion of any mode of supply
From these paragraphs, the two key conditions for using Article V are that the agreement must:
Have “substantial sectoral coverage” in terms of the number of sectors, volume of trade affected and modes of supply (with no mode of supply a priori excluded); and
Provide “for the absence or elimination of substantially all discrimination, in the sense of Article XVII [National Treatment], between or among the parties” in the covered sectors.
Could a standalone e-commerce agreement (like the JSI E-Commerce) meet these requirements? Not without a pretty innovative reading of Article V.
In relation to substantial sectoral coverage, looking at the latest draft of the JSI E-Commerce agreement (which is in line with other digital trade agreements): it applies to all “measures…affecting trade by electronic means” (Article 1.1), doesn’t have any major sector carved out, and its commitments aren’t limited to scheduled sectors.2 So you could argue that the number of sectors covered shouldn’t be an issue.
On modes of supply - digital trade rules are most commonly thought of in the context of cross-border supply (Mode 1) as compared to say consumption abroad (Mode 2), commercial presence (Mode 3) or through the presence of natural persons (Mode 4). However, “trade by electronic means” doesn’t necessarily exclude those other modes of supply, all of which arguably could be impacted by measures affecting trade by “electronic means”. So perhaps there’s also an argument to be made that this limb is covered.
The requirement for eliminating substantially all discrimination, though, is likely to be more difficult to meet. The scope provision of the JSI E-Commerce (as just shown) limits the agreement to “measures…affecting trade by electronic means”, meaning any discrimination that doesn’t affect “trade by electronic means” can’t be eliminated or prohibited by the agreement (and there’s a bunch of such measures).
Also, the latest draft text of the JSI E-Commerce contains few if any rules that actually aim at reducing discrimination, particularly in a national treatment sense. Perhaps it could be argued that the substantive rules reduce discrimination by harmonising regulatory approaches on some issues - but this would seem a way off eliminating “substantially all discrimination” or even prohibiting “new or more discriminatory measures”. Other digital trade agreements (like the US-Japan Digital Trade Agreement3) go further with rules like the Non-Discriminatory Treatment of Digital Products Article. But even this still seems a far cry from what is typically envisaged by this limb.
So - I think trying to fit a standalone digital trade agreement into Article V would be difficult (though would love to see what others are thinking on this - particularly the experts referred to by Rockwell). I also think that even if it was possible to use Article V for something like the JSI E-Commerce, this would require such a broad reading of Article V that it would seem to make it far too easy for other narrowly focused agreements to similarly provide cover for avoiding MFN.
It’s also worth noting that Article V is typically aimed at non-WTO Agreements. Pursuing this route for the JSI E-Commerce is part of the frustration at India and South Africa blocking consensus on initiatives such as the Investment Facilitation for Development Agreement (which would apply on an MFN basis). But using Article V would presumably mean that the agreement won’t be part of the WTO any more - i.e. it won’t benefit from WTO dispute settlement, Secretariat support, or being part of the broader WTO project. This would be big step and one that some of the 71 participants are likely to be hesitant to take.
A few other digital trade/MFN points:
Article V is not the only way to justify preferential treatment under the GATS - e.g. WTO Members can have their own specific MFN exemptions (Article II:2), they can use recognition arrangements (Article VII), and of course there are always the general and security exceptions (Articles XIV and XIV bis).
In the addition to the WTO, preferential trade agreements often also have MFN obligations, many without an Article V-type exception. So many JSI E-Commerce participants will have broader MFN commitments than just those under the GATS/WTO.
The extent of the ‘MFN risk’ will often depend on each government’s consideration of the specific rule/treatment, their MFN obligations, how this is implemented domestically, and the reasons for not affording that same treatment to specific non-Members. For example, one can imagine security or privacy law arguments under the exceptions that could apply to allow a government to justify not offering the same data flow treatment to all WTO Members.
While Article V may be a handy catch-all approach to telling JSI E-Commerce participants they don’t have to worry about MFN, even without it each participant may still be able to put together its own defence of any preferential implementation that it decides it needs to undertake.
Finally, Rockwell’s piece suggests that limiting the benefits of the JSI E-Commerce to just its participants “could shake the WTO to its foundations”. I think a preferential outcome was always on the table for this JSI (although perhaps less so once the data rules got dropped), and the bigger issue will be how this justified by participants.
Looking at the other rules in the JSI E-Commerce, it also would appear that many would be difficult to apply preferentially in any case.
As an aside, I wondered if perhaps some services sectors couldn’t be delivered by electronic means or had no possible connection to digital trade rules. I think though (a) this is unlikely, even sectors like construction services (a quintessential sector where parties make Mode 1 “Unbound due to lack of technical feasibility” commitments) can have digital elements; and (b) even if this did apply to some sectors, I doubt it would enough to say there wasn’t “substantial sectoral coverage”.
To my knowledge, neither the US nor Japan have ever explicitly linked this agreement to Article V. While the US was asked if it would notify the agreement to the WTO’s Committee on Regional Trade Agreements during its 2022 Trade Policy Review, this was by Russia (p. 492) and so the US refused to engage given Russia’s invasion of Ukraine. Canada also asked this of Japan, which said “Notification of the Japan-US Trade Agreement to the CRTA is under consideration with the U.S.” (p. 202) (unclear if the answer deliberately only referred to the separate Japan-US Trade Agreement even though the question appeared to ask about that and the digital trade one). Also to note - with a bilateral agreement like the US-Japan Digital Trade Agreement, there may be scope to use paragraph 2 of Article V (quoted above) and say there is a “wider process of economic integration or trade liberalization” that justifies applying Article V to this more limited agreement. I haven’t considered that for the JSI E-Commerce given it seems on its face difficult to see how such an argument would work with 71 parties.