Options for defining products covered by the Environmental Goods Agreement

3 June 2015

Groups of WTO members have in the past negotiated tariff-liberalising deals on select goods. What lessons from these talks for a planned EGA? 

Seventeen WTO members are currently in the process of negotiating an Environmental Goods Agreement (EGA) geared towards liberalising trade in a number of products that will help countries address environmental challenges.  Like other sectoral agreements undertaken by a subset of WTO members – also known as plurilateral initiatives – it is envisaged that these tariff cuts will be extended to all other WTO members on a most-favoured-nation (MFN) basis. [1] Moreover, as any new commitments will be recorded in the participants’ WTO schedules of tariff concessions, they would also become enforceable through the global trade body’s dispute settlement mechanism.

One of the most difficult tasks in this type of initiative is defining the product coverage or scope of the agreement.  In the initial phase of the EGA negotiations, participants spent the first few rounds conceptually exploring the environmental credibility of products related to ten broad environmental categories, and set a deadline of the beginning of April for the formal nomination of specific products for inclusion in an EGA. [2] Reports suggest that approximately 650 products have been proposed by various participants.  With product proposals now on the table, participants will start their negotiations to determine the specific products that will be covered by the agreement.  Although the list of proposed products has not been made public, it appears that a diverse set of products have been proposed for inclusion, and one of the negotiating objectives is to try to design some sort of "living list" in order to allow the product coverage to adjust to future needs. Some of the products reportedly nominated for inclusion range from wind power generating equipment, solar panels, and carbon capture and storage (CCS) equipment, to other items such as bicycles, lithium-ion batteries, and even garden mowers.

In practical terms, what are the tools that EGA negotiators have at their disposal to define what’s in and what’s out of the final deal?  What kinds of approaches have been used in previous sectoral initiatives?  Can the product coverage be “future-proofed” to take account of technological change? 

Without prejudice to the manner in which the EGA negotiations may be carried out, and acknowledging that other relevant issues will also need to be tackled, this article will focus on the challenges and solutions found in selected past sectoral agreements at the WTO. [3]

How are products defined in a typical tariff negotiation?

The results of tariff negotiations are ultimately implemented by customs officers at the border.  Therefore, products are typically defined in their preferred classification scheme, the "Harmonized System" (HS).  The HS is an international product nomenclature developed and regularly updated by the World Customs Organization (WCO).  It comprises approximately 5000 commodity groups that are uniform around the World.  Products are classified according to their objective characteristics and properties at the time of import.  Their end-use or the manufacturing methods used in their production are normally not relevant, unless they have an impact on their objective properties, for example goods that are "of a kind used" for certain activities.

Tariff liberalisation negotiations such as the EGA normally result in a list of relevant HS codes, which could be expressed in terms of Chapters (2 digits), headings (4 digits), or subheadings (6 digits), or a combination of the three.  What should be done, however, if negotiators only want to cover some of the products falling within a particular subheading?  Using national tariff lines, at the 8-digit level or higher, is typically avoided because they are not standardised across countries.  Rather negotiators would normally make use of "ex-outs" to define a subset of products to be covered.  For example, subheading 0901.11 relates to "coffee, not roasted nor decaffeinated," so an ex-out could be used to indicate that only Arabica coffee beans are covered.  This could be expressed as "ex0901.11 Arabica coffee beans."

However, while negotiating HS codes is relatively straightforward as they are either "in" or "out," negotiating ex-out descriptions can become a lengthy and difficult process.  The description has to be commonly agreed by participants and be precise enough to allow customs officers to identify the products.  One example of this approach is the APEC list of environmental goods that was agreed to in September 2012, which lists 54 HS subheadings, many of which are only partially covered.  Notwithstanding the benefits of defining the scope of a sectoral agreement on the basis of HS codes, there have been situations where alternative approaches have been required.

Table 1. Product coverage definition in the Pharma, ITA, and the TCA

Source:  Summary by the author based on WTO documents.

The Agreement on Trade in Pharmaceuticals ("Pharma")

In 1994, as part of the Uruguay Round multilateral trade negotiations, representatives of 12 General Agreement on Tariffs and Trade (GATT) Contracting Parties agreed to liberalise trade in pharmaceutical products.[4]  Negotiators initially struggled to define what "pharmaceutical products" were to be covered by the Pharma, because there was no exact HS definition, and thousands of products were involved.  They eventually agreed on a mixed approach that included a list of HS codes to be fully covered plus four specialised annexes listing a number of chemical compounds that should receive duty-free treatment "wherever they are classified in the HS." [5]

Annex I of the Pharma lists a number of pharmaceutical active ingredients that bear an "international non-proprietary name" (INN).  INNs are official generic and non-proprietary names that facilitate the identification of pharmaceutical substances or active pharmaceutical ingredients.  Each INN is a unique name – including well-known medical cabinet favourites "paracetamol" and "cortisone" ­– that is globally recognised by the medical community.  This system has been co-ordinated by the World Health Organization (WHO) since 1953 and results in at least one new INN list per year.  Active ingredients were also identified using "CAS numbers," which are unique and widely used numerical identifiers for chemical compounds, polymers, biological sequences, mixtures and alloys, assigned by the Chemical Abstracts Service (CAS). Annex II and III of the Pharma list a number of "salts, esters, and hydrates" of pharmaceutical products of INN active ingredients. These are substances that are used to "suspend" the pharmaceutical active ingredients and result in the addition of "prefixes" and "suffixes" to the INNs.  Although "suspending" a substance may result in a different tariff classification, it does not change the nature of the active ingredients.  Finally, Annex IV of the Pharma lists a number of "intermediate substances" that are used in the production of finished pharmaceutical products. While intermediates could also have other uses, participants decided that it was worth liberalising trade in these without further restrictions. 

To take account of this mixed approach Pharma participants modified their WTO schedules in two ways.  Firstly, they bound the HS codes listed at duty-free levels in the "traditional" part of the tariff schedules and, secondly, they also included specialised annexes to take account of the four Pharma annexes.  Unlike other Uruguay Round sectoral initiatives, which were quite informal in nature and were not recorded, Pharma participants submitted a formal communication that provides details on the agreement reached, as well as the options for the national implementation.  It also states that each national customs authority may require importers to provide specific additional information to "certify" that the product is really covered by the Pharma. 

The Information Technology Agreement (ITA)

In terms of volume of trade involved and number of participants the ITA is the most significant tariff liberalisation initiative negotiated in the context of the WTO since it was established. It was announced on the margins of the global trade body’s first ministerial conference held in Singapore in 1996. Initially sponsored by 29 signatories, its participation had increased to 42 by the time of its implementation in 1997.  Besides providing for the tariff elimination of a number of IT products the ITA also launched a work programme to tackle non-tariff barriers affecting trade in these products.

Although the ITA negotiators were able to define most of the relevant "IT products" in terms of HS codes, they faced a peculiar problem for 55 of them, when their customs experts could not agree where to classify these in the HS.  The disagreement for some of these products stemmed from rapid technological convergence, whereby two or more single-function apparatus were incorporated into a new “multi-function” device, and the lack of an official decision by the WCO’s HS Committee on how to classify the new good. This problem affected products such as computers with multimedia capabilities – should they be classified as computers or as TV reception apparatus? And LAN equipment – should they be classified as telecommunications or computer equipment? Other products, such as certain semiconductor manufacturing equipment, could also be used for the production of other items and it was not always clear where such equipment should be classified in the HS. Finally, some parts and intermediate products could also be used in the production of products that were not meant to be covered by the ITA. For example, an LCD screen could be used to produce a computer monitor, which negotiators wanted to include, but it could also be used to produce a television, which they did not.

Possibly inspired by Pharma, ITA negotiators decided to use a mixed approach in the product scope definition.  While several products were defined in terms of HS codes and ex-outs – those for which the HS classification was not controversial – others were defined with narrative product descriptions on the understanding that the tariffs would be eliminated "wherever they are classified in the HS."  The latter are referred to in ITA jargon as the "Attachment B" products.  Negotiators agreed that each participant would grant duty-free treatment for the above-mentioned products regardless of where these products were classified in the HS. Like in Pharma, the results were incorporated in the WTO schedules of concessions using two sections and including a specialised Attachment B annex, which includes a headnote that states that duty-free treatment will be provided to those products wherever they are classified in the HS.   Mindful of the long term importance of arriving to a common classification of these products, and with a view to narrowing down those classification differences over time, ITA participants committed to work in different fora, including the HS Committee of the WCO.  As a result of this work the classification of a number of IT products has been clarified over the years.

The Agreement on Trade in Civil Aircraft (TCA)

The TCA was initially negotiated during the GATT Tokyo Round (1973-79).  Unlike the ITA and the Pharma, where legal relevance stems primarily from the inclusion of the concessions in WTO schedules, the TCA is also an official plurilateral agreement under Annex 4 of the Marrakesh Agreement that established the WTO.  TCA concessions are also intermingled in the traditional part of WTO members’ schedules.

One problem faced by TCA negotiators is that many products used in the production and maintenance of civil aircraft can also be used in the manufacture or maintenance of other goods, for example, a sheet of aluminium could have many “end-uses.” Although the TCA does include a positive list of HS codes and ex-outs to be covered, it expressly states that products shall only be accorded duty-free treatment or be duty-exempted if they are "for use" in civil aircraft or ground flying trainers.  It also includes a negative list of products that are not covered, such as certain materials when they have not been "cut to size or shape" for incorporation in a civil aircraft or ground flying trainer. 

How are these end-use concessions implemented?  Several approaches could be adopted, including an import licensing scheme, or a self-certification scheme complemented with post-clearance audits.  The EU, for example, applies a tariff suspension that is conditional to the presentation of an "airworthiness certificate".  It goes without saying that end-use concessions are not necessarily easy to implement if the product can be easily used for other purposes and if there are a large number of importers to control.

Is it possible to future-proof a list of products?

No matter how well informed negotiators are at the time of a negotiation it is nearly impossible for them to foresee all future change in technology.  While some key products during the negotiating process could eventually lose significance, or even disappear from the market, new ones may acquire importance.  Will those new products be covered by the agreement? It depends. The manner in which products are recorded in WTO schedules could play an important role in answering this question. One general misconception by those unfamiliar with the HS classification and the WTO schedules of concessions is the notion that "new products," which did not exist at the time of negotiations, are not subject to tariff liberalising obligations.  This is rarely the case.  Once a member binds a certain tariff level for a particular HS code it is obliged to provide no less favourable treatment  to any product that falls within the scope of that HS code.  As a result any future product classified or classifiable within that HS code will also be subject to that concession. This occurred when ITA participants bound at duty-free level HS heading 84.71, which refers to "automatic data-processing machines" and their units, namely computers.  In 2012, the HS Committee of the WCO began discussing the correct classification of "tablet computers," which clearly did not exist at the time the ITA was negotiated in the 1990s.  Because WCO members agreed that tablets should be classified under HS 84.71, it followed that ITA participants had to provide these with duty-free treatment. 

The result would obviously be different if it turns out that the new product is not classified in an HS code covered by the agreement.  What can be done in such situations?  ITA negotiators partially addressed this problem for some Attachment B products.  As the obligation to provide duty-free treatment revolves around the narrative product descriptions, any product that meets such description is therefore covered by the agreement.  The scope of some Attachment B descriptions is quite broad in nature and is not linked to any particular technology.  For example the "Flat panel display devices" has an illustrative list of technologies used that reads "including LCD … and other technologies."  However, others were drafted with a much narrower scope, as they were linked to specific technologies that subsequently lost importance.  This occurred with "monitors" that were defined as display units for computers that use a "cathode ray tube," a technology that has been superseded by newer display technologies such as LCD, plasma, and other technologies. Inclusion in the Attachment B was not a guarantee for survival in the market place, as some products even disappeared when they became functions incorporated into other apparatus, think paging alert devices. Although negotiators clearly have a high degree of control on how they craft these narrative product descriptions, negotiating realities and participants' sensitivities may prevent them from agreeing on a future-proofed result.  

Mindful of the difficulties around agreeing on a product coverage that can stand the test of time, negotiators can also revert to "review clauses," where they agree to negotiate again in the future.  The Pharma and the ITA provide an interesting point of comparison in this respect.  While both sectoral initiatives were finalised within two years of one another, the Pharma has been reviewed and updated on four occasions, whereas ITA participants have not yet been able to do so and efforts for an expansion remain ongoing.  Granted, the number and level of development of the parties involved, as well as the types of products and the amount of trade are probably not completely comparable. It may also be easier to include a small number of products that were agreed elsewhere than to hold fully fledged negotiations to include many more additional products.  Whatever the reasons, however, the Pharma is a living proof that review clauses can work effectively.

Final thoughts

The types of products currently discussed in the EGA are quite different in nature from those covered in previous sectoral initiatives. The “green goods” talks also have the additional task of wedding environmental credibility with the dynamics of a trade negotiation. However, while new and unique challenges are always likely to emerge, it is also quite possible that negotiators will have to deal with some familiar problems in the coming months.  Of course, past experience may not necessarily offer a ready-made template to copy, but it can provide valuable lessons to allow negotiators to think out of the box in order to reach an agreement. 

Roy Santana, WTO Secretariat, Counsellor in the Market Access Division. Santana has assisted the work of the ITA Committee, in particular on classification issues, and the preparation and review of ITA schedules. He has also assisted WTO Members in the NAMA negotiations, two Pharma reviews, and the ITA expansion negotiations. The opinions expressed herein are the sole responsibility of the author and do not necessarily reflect the views of the members of the WTO or of the WTO Secretariat. 

[1] For a detailed description of the evolution of sectoral negotiations, see the note by the WTO Secretariat in TN/MA/S/13.

[2] These categories include air pollution control; solid and hazardous waste management; water management and water treatment, environmental remediation and clean-up; noise and vibration abatement; cleaner and renewable energy; energy efficiency; environment monitoring assessment and analysis, resource efficiency; and environmentally preferable products

[3] Other questions that are likely to become relevant include inter alia the critical mass question, the "staging" or speed at which the tariff eliminationwill take place, whether non-tariff barriers will also be addressed, and whether special and differential treatment provisions will be required. 

[4] See GATT document L/7430.

[5] Chapters 30 and subheadings 29.36, 29.37, 29.39, and 29.41.

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