What does “for” mean? The US-European dispute over multi-function IT products

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The United States and Europe are in a high-tech dispute. Their conflict lies in determining the difference between a LCD computer monitor and a flat screen television, and a WTO decision may wind up turning on the meaning of “for.”

But first, some background. The 1996 Information Technology Agreement (ITA), a plurilateral agreement adopted under the auspices of the WTO by the world’s major IT-producing nations, lowered those members’ MFN tariffs on information technology products to zero by 2000. Since 1996, another 42 WTO members have joined the original 29 signatories.

Yesterday, the United States, Japan, and Taiwan filed a request for a WTO dispute settlement panel to review the European Union’s compliance with the ITA. In the USTR’s words:

The EU in the past several years has adopted a series of measures that resulted in new duties on imports of specific high-tech products – cable boxes that can access the internet, flat panel computer monitors, and certain computer printers that can also scan, fax and/or copy… These products were included in the ITA… However, the EU claims it can now charge duties on these products simply because they incorporate technologies or features that did not exist when the ITA was concluded.

Of course, the European Commission sees it differently:

The EU, as required by WTO law, bases its customs classification exclusively on the objective characteristics of the products. Where changes in technology have given a product multiple functions – for example, a digital photo camera that also records large amounts of high-quality video – then these products in many cases are objectively different products falling outside of the original product categories covered by the ITA and are classified as such by the EU and others. The US claims this is a violation of the ITA. But both the spirit and explicit provisions in the ITA make it clear that extension to new products to reflect technological change would not be automatic, but based on periodic review by signatories…

Is it a LCD monitor or a flat screen TV? The ITA gives duty-free treatment to computer monitors, not to monitors for consumer electronics such as TV or DVD players. What the US claims are LCD computer monitors are in fact screens equipped with a Digital Visual Interface to allow use with consumer electronics such as DVD players. They are therefore properly classified as video monitors and not covered by the ITA. Incidentally, the classification of such products by US customs is similar to EU practice.

It’s a little unusual to see a WTO dispute about product classifications – usually conflicts revolve around how to calculate duties, the eligibility of safeguard mechanisms’ application, etc. Why can’t we just match a Harmonized System code from the text of the ITA to the EU tariff schedule and make sure the the latter number lies below the former?

First, the Information Technology Agreement was negotiated under the HS1996 product classification scheme. High-tech products have certainly evolved by leaps and bounds since then (should we just say an iPod is a CD player for tariff purposes?) and the HS2007 revisions were dedicated to information technology and communication products. Unfortunately, it is difficult to translate HS1996 tariff agreements into HS2007 tariff schedules:

The WCO Members agreed as a primary goal of the third HS review to conduct an overhaul of the provisions in the technology area in the HS2007 amendment…

In order to assess the impact of HS2007, and to serve as guidelines in transposing the schedules of concessions, the ITA participants asked the Secretariat to prepare a model list in HS2007 through a technical transposition which, like the methodology used for schedules of concessions, maintains the actual product coverage of the new list strictly identical to the original one. However, it goes without saying that several of the above-mentioned divergences in classification would not be solved through this technical exercise.

If ITA participants decide to strictly adhere to the original product coverage, the list in HS2007 cannot take advantage of the improved HS structure on IT products. In many cases, the new HS2007 subheading cannot be directly included in ITA lists because these subheadings normally combine previous “ITA” with some “non-ITA” subheadings. In order to exclude these non-ITA parts, many ex-outs and complicated descriptions need to be introduced by the Secretariat in the HS2007 model list, even though those non-ITA parts sometimes consist of only a minor part of the subheading and represent a very small amount of trade.

But more importantly, the Information Technology Agreement didn’t even use HS1996 codes in many cases!

[P]roducts were specified in two attachments of the Ministerial Declaration: Attachment A and Attachment B. Attachment A consists of two lists of categories of products legally defined by their HS1996 codes. Attachment B is a list of legal product descriptions without reference to their HS codes; restrictions on these products shall be liberalized “wherever they are classified”. Although these lists have provided a good guidance in terms of product coverage, there are still some ambiguities due to the lack of clear HS classifications…

[F]or the products listed in Attachment B and a number of items in Section 2 of Attachment A, consensus was reached only on the textual description of the products, but not on the corresponding HS codes. The ITA participants need to designate national codes based on their own interpretations and classifications.

A WTO committee that was supposed to add new products to the original coverage never reached any agreements.

Flat panel displays fall into Attachment B, which also specifically excludes TVs:

Flat panel displays (including LCD, Electro Luminescence, Plasma and other technologies) for products falling within this agreement, and parts thereof… The agreement does not, therefore, cover televisions, including high definition televisions.

So the LCD monitor needs to be for an automatic data processing machine, as computers are known under the ITA. And the European Commission’s description of the US tariff schedule seems to be right. LCD computer monitors entering the US under tariff line 8528.61 are duty-free, as they are projectors “of a kind solely or principally used in an automatic data processing system of heading 8471.” But tariff line 8528.69.50, for “other projectors, color, with a flat panel screen, display diagonal exceeding 34.29cm” applies a tariff of 5%. Flat panel televisions (8528.72.72) also face a 5% duty.

How will the WTO dispute panel evaluate the difference between a LCD monitor and a flat panel TV? Will the panel have to think hard about the meaning of “for”? I leave any further analysis to the good folks at the International Economic Law and Policy Blog, who may actually be qualified to predict where this case is going.

It seems unavoidable that product innovations will outpace their regulatory classification, especially in trade agreements that must be negotiated between governments. Are trade conflicts resulting from that lag equally unavoidable?

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One Response to “What does “for” mean? The US-European dispute over multi-function IT products”

  1. Global Conditions Says:

    Thanks for this entry, Jonathan! The case is very complicated, and it is really not clear who is, in purely legalistic terms, right or wrong: the US or the EU. Economically it is of course quite absurd to to what the EU is doing. There was already a similar classification case in 1996-1997 on computers, where the appellate body couldn’t ultimately prove the EU wrong:http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds62_e.htm .

    For me there are two main issues:

    1) Differences in the fundamental approach to the ITA. The EU has always been rigid about its will to exlude many consumer electronics products such as TVs, DVDs, video cameras etc. It is simply sticking to its line. The “General Rules of Interpretation” provided with the Harmonized system stipulate that “goods consisting of different materials or made up of different components (…) shall be classified as if they consisted of the material or component which gives them their essential character”. But what is the “essential character” of a contemporary LCD monitor?

    2) It was probably a mistake to have a positive list of items to free from duties as a basis for the agreement. Given that many products were excluded, the negotiators haggled over a list of products classified at the detailed 6-digit-level (not the more generic 4-digit classification). They couldn’t agree on everything, which explains the setup of Annex B. This means that Annex B was contentious from scratch. If the agreement is ever renegotiated to extend product coverage, then it might be wise to adopt a negative list, with, if necessary, precise exclusions. It might make life easier.

    Hope indeed that the International Economic Law and Policy Blog will provide us with extra insights!

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