WTO and Electronic Commerce: Issues for World Trade

A Microsoft White Paper

Microsoft appreciates the opportunity to contribute to the work of the WTO Ministerial and the Seattle Round negotiations on international trade policy and electronic commerce. We believe that the upcoming Ministerial and Round provide important opportunities to help ensure that electronic commerce continues to contribute to dynamic markets and worldwide economic growth. Key principles include:

I. BENEFITS OF ELECTRONIC COMMERCE

The explosive growth of electronic commerce conducted via the Internet is leading to changes in the ways that people conduct their lives and provoking interest by businesses and governments alike. A key factor in this growth has been the relative lack of regulatory barriers. For the most part, entrepreneurs have been free to create innovative products and services that respond to the opportunities and demands of the new electronic marketplace. The results have been impressive, with global revenues expected to reach half a trillion dollars by 2002. Not surprisingly, the sheer magnitude of these developments has begun to attract the attention of some policymakers who have raised concerns about the implications of an unregulated marketplace, and in certain instances, suggested new legislation. It is important to takes steps now to coordinate this nascent legislative activity and ensure that trade barriers are not erected. The WTO can play an important role in this effort. But before acting, WTO Members should reflect on the wide range of benefits that electronic commerce generates for consumers, companies, and governments, and recognize the need for a "light handed" and internationally consistent regulatory approach.

A. Benefits for Consumers

Consumers benefit from electronic commerce in many different ways. The most obvious benefit is broader choice. Every consumer that connects to the Internet has access to every company engaging in electronic commerce. According to a recent survey of Chief Financial Officers, the proportion of U.S. companies that sell products over the Internet will jump from 24 percent in 1998 to 56 percent by 2000. According to Datamonitor, the number of retailers in Europe offering full online commerce will grow tenfold over the next five years to 22,500. Consumer choice expands every time a new retailer goes online - provided regulatory or other barriers do not inhibit trade.

The extraordinary expansion of goods and services available over the Internet has produced a number of additional benefits for consumers. One benefit is the opportunity to purchase products and services at the lowest possible price. In Brazil, for example, Bradesco Net and Visa Net offer consumers merchandise in Virtual Malls that incorporate secure payment and other financial services. Yahoo! Video Shopping, for example, enables a consumer to search among online video sellers, compare prices for a particular video, and select the seller with the lowest price. As search engines make the electronic marketplace increasingly transparent, sellers will likely continue to lower their prices. This will be particularly valuable to consumers in countries with smaller markets, because such consumers traditionally have not always benefited from the same degree of robust price competition that ordinarily occurs in the distribution channels found in larger markets. Consumers will not enjoy the benefits of price competition, however, if national legislation prevents them from purchasing products and services electronically from companies established in other countries.

Perhaps the greatest benefit that consumers will enjoy from electronic commerce is customized service. Holt Toys, for example, provides online consumers with personalized information about educational toys. Amazon, the online retailer, provides each consumer with lists of books and videos that reflect the consumer's preferences, based on information about the consumer's prior purchases through Amazon. In addition to reflecting personal preferences, website customization can ensure that a consumer receives information only in his or her own language.

B. Benefits for Businesses

Electronic commerce is creating tremendous opportunities for businesses. Worldwide revenue from electronic commerce is expected to increase to between $350 and $500 billion by 2002, accounting for between 5.0 and 9.4 percent of total sales revenue worldwide. Revenue from electronic commerce in Europe was in the range of one billion dollars in 1997, and is expected to grow to anywhere from $30 to $88 billion by 2001. These estimates may turn out to be conservative. Forrester Research has suggested that business-to-business electronic commerce alone could reach $1.3 trillion by 2003.

Another benefit for businesses is reduction in operating costs. Andersen Consulting has suggested that by putting functions online companies may be able to cut costs by 20 to 45 percent. According to the OECD, U.S. companies are using Internet-based communications to improve forecasting of inventories and cut replenishing time, leading to an overall reduction in inventories of $250 to $350 billion, or 20 to 25 percent. The same study concludes that the introduction of electronic delivery systems allows companies providing, for example, financial or travel services to cut distribution costs by 50 to 90 percent.

One example of an electronic procurement system can be found in Singapore where Commerce Exchange, a provider of electronic commerce services, has set up a centralized infrastructure though which buyers, sellers and financial institutions are connected via Internet-based technology. Commerce Exchange supports business-to-business transactions combined with an integrated payment process. This enables end-to-end procurement, making thing convenient and cost effective for business-to-business (or government) purchasing and selling.

Electronic commerce provides access to a larger market. A traditional retailer has access only to the market where its business is physically located. Even a retail chain can sell only to people living in locations where the retailer has outlets. Electronic commerce can alter fundamentally the size of a company's market, potentially expanding it to include every person with Internet access. Morgan Stanley has estimated, for example, that the number of European adults using the Internet regularly should exceed 100 million by 2003. Thus, the online market will be larger than the largest national market in Europe. Indeed, the only limit on the size of the electronic marketplace will be national regulations that interfere with international trade.

Still another benefit of electronic commerce to companies is customized marketing. Dell Computer, for example, now offers a customized website to most of its business customers. The site contains current information on products and prices, and is tailored to the needs of the individual business. The customer benefits because the purchasing department does not have to wade through large amounts of generic information to get to useful materials. Dell benefits because it can anticipate customer requirements, allowing better management of inventories and supplier relationships.

Small and medium-sized enterprises (SMEs) are especially likely to benefit from competing in the electronic marketplace Using tools as basic as a Windows PC, an SME can connect easily to a large retailer's supply chain. For example, the UK supermarket Sainsbury's has implemented a system called SID - Sainsbury's Information Direct - that includes a supplier's guide to terms and conditions, information on promotional planning and stock movements, and supplier performance data. SID is open to the many SMEs with which Sainsbury's trades, allowing them to produce specialized goods for a niche market while taking advantage of the customer base that only a large, well-known retailer could generate. Of course, some SMEs may forego the intermediary retailer and sell directly to consumers over the Internet, thereby gaining direct access to the electronic marketplace.

Importantly, no longer does the size or location of a business determine the size of its potential market. In Malaysia, MyBiz, an acronym for Malaysian Business, provides an e-commerce value network to promote trade not only in the region but globally. The MyBiz site currently promotes about 150 SME manufacturers as a community. Through this community site, a large international purchaser could order a folder from one manufacturer and a calculator from another packed into nice packaging. All of this can be done on the site. In addition, products on the site are customizable. In effect, this allows the manufacturer to offer his capacity via the site and not just a fixed range of products.

C. Benefits for Governments

Electronic commerce is contributing solutions to a number of problems that governments and policymakers currently confront. One example is jobs creation in the IT sector. According to a study by the University of Texas, in the United States the Internet economy employed 1.2 million people in 1998, of which 481,000 were directly linked to electronic commerce. The OECD has estimated that industries connected with electronic commerce, such as IT companies and content creators, were responsible for approximately one third of the jobs created in the United States and the European Union between 1993 and 1996. Indeed, IT jobs are being created faster than they can be filled, because many such jobs require specialized training in the use of new technologies. According to a study by IDC, some 320,000 IT jobs were unfilled at the end of 1997 and that, if action is not taken, the number could reach 1.6 million by the year 2002 - nearly a five-fold increase.

Governments also are benefiting from electronic commerce by reducing the cost of providing services to the public. In a recently published White Paper on Modernising Government, the UK indicates that it plans to make all services deliverable electronically by 2008. Starting in 2000, taxpayers and companies will be able to file income tax returns electronically and register for VAT over the Internet. Similarly, by the end of 2000, the Hong Kong government will introduce an Electronic Service Delivery Scheme allowing the public to conduct business with the Government electronically at any time. The Australian government also plans to provide "all appropriate Commonwealth services" online by the 2001.

Other governments are moving in the same direction. Earlier this year, the South Korean Intellectual Property Office reported that patent applications filed through KIPOnet, an online application service, have outnumbered on-paper applications since KIPOnet was first launched at the beginning of 1999. By March 1999, almost 65 percent of patent applications were being filed electronically. This year Brazil's Receita Net will accept 6 million tax returns via the internet. France is placing all State calls for tender online and making government reports available in a Digital Library of Public Reports. Mexico has developed Compranet, an online system for government contracting that contains bidding instructions, forms and support services. Compranet averages 4,500 hits per day and, in 1998, received over 2,600 electronic bids. The Iranian Customs Administration has launched a website containing customs regulations, exports statistics, and other information necessary for merchants and travelers. In the United States, several federal agencies have begun delivering services electronically. The General Services Administration has placed hundreds of commonly used government forms on a single website. The Department of Education allows students to file for Federal Student Aid via an electronic form. And a special website has been established to provide seniors with "one stop shopping" for Federal government services.

Governments, which are major consumers of goods and services, also will save money by communicating with vendors electronically. New Zealand's GSB Supplycorp, which supplies the New Zealand government with products such as computers, pens, and soap, is working with Australia's Telstra on an Internet-based electronic commerce system for Government organizations. GSB Supplycorp predicts that, when the system is in place, the government will save more than $161 million by eliminating the need to generate purchase order documents to obtain supplies. According to the European Commission, a shift toward use of electronic commerce technology in the field of public procurement is a prerequisite for opening up procurement markets to SMEs and increasing competition for government contracts. Much of the benefit that governments might derive will be lost, however, if national regulatory barriers prevent international competition in the electronic marketplace.

D. Benefits for Developing Countries

Countries with modernizing economies, including developing countries and former state-trading countries, will also benefit from the growth in electronic commerce. Consequently, a number of governments in these countries have taken steps to promote electronic commerce. The South Korean government has established a consultative body to develop the nation's Internet shopping malls. The government of Singapore has introduced the Local Enterprise Computerization Program to assist SMEs in conducting electronic commerce. Thailand's Board of Investment announced that it will launch a website containing information about the 8,000 companies from ASEAN that want to export their products. The Chinese government launched a website to attract interest in Chinese goods, and to act as a clearinghouse for Chinese businesses. Electronic commerce is beginning to grow rapidly in China. Spending over the Internet is expected to climb from a relatively modest $26 million in 1998 to $1.87 billion by the end of 2002. These numbers should improve as consumer spending power rises and Internet penetration of the huge Chinese market increases from the current rate of 0.1 percent.

African governments are developing programs to promote electronic commerce. The Nigerian state of Lagos launched a website mall intended to facilitate advertising on the Internet for Nigerian companies. Similarly, a national portal site in Sierra Leone offers links to local businesses, along with travel and education resources. It should be noted, however, that basic infrastructure problems in many African countries, including lack of telephone service, are likely to impede growth in Internet use in the near term. According to the eGlobal Report, prices in Africa for an hour of Internet access range from as low as 40 cents in Nigeria to as high as $13.90 in Gabon. Nevertheless, Internet use is rising in Africa and the Middle East, from 1.2 million users in 1998 to 1.9 million in 1999 to a projected 12.3 million in 2003.

The situation is even more dynamic in the former state-trading countries of Eastern Europe. Electronic commerce in Russia grew from $81.3 million in 1998 to $302.6 million in 1999. Internet access will grow from 420,000 in 1998 to an expected 1.6 million in 2000. Impressive results have been reported in the Czech Republic and Hungary, with electronic commerce growing in value from approximately $10 million in 1998 to approximately $30 million in 1999. As telephone service in these countries is liberalized and more consumers and companies go online, electronic commerce is likely to enjoy the same explosive growth that we have seen in Western Europe and the United States.

E. Contribution of the Software Industry

The software industry continues to play a key role in the development of electronic commerce. Not only is software one of the leading products sold and delivered by electronic means, but software also is an essential component of the backbone of the Internet. In addition, software enables businesses to sell other products and customize their offerings as well as to establish intranets and extranets to facilitate internal operations and structure relationships with the chain of supply. Software is being marketed and sold over the Internet in ever-larger quantities. According to a report published by IDC, the worldwide market for electronic sales of software, regardless of mode of delivery, will reach $3.5 billion in 1999. This is expected to climb to $32.9 billion by 2003. The rapid growth of this market is not surprising. Consumers find online software purchasing simple and efficient and companies often find it the least expensive way to sell their products. Moreover, online delivery of software is expanding rapidly. According to an OECD estimate, by 2000, 50 percent of all prepackaged software will be delivered online.

Software, in the form of Internet browsing technology, allows users to access the Internet. Browsing software also enables users to store electronic money and access websites with security features that safeguard financial information transmitted during a transaction. In addition, browsing software contain features designed to protect user privacy and empower parents to prevent their children from viewing objectionable content. But software plays an even more important and sometimes invisible role in electronic commerce by allowing companies to create and maintain websites, and enabling those websites to engage in customized transactions with consumers. Software directs personal computers, telephone networks, routers, and servers in the performance of their operations, allowing the Internet to function. In addition, software allows companies to construct intranets and extranets, enabling secure communication with vendors as well as purchasers. Using appropriate software, companies can integrate information gathered via intranets and extranets into inventory management and sales tracking, among many other things.

Of course, many people already are aware of the central role of software, and we mention it here only to underscore our commitment to the continuing development of electronic commerce. Indeed, it is because software is so central that we are concerned about regulatory efforts that may impede trade in the electronic marketplace. National laws are being developed that may prevent consumers in one country from buying goods or services electronically from companies in another country. In some instances, a country may discourage consumers from buying through foreign websites by, for example, tacitly supporting artificially high shipping costs or an overly burdensome tax or tariff system. In other instances, a country may discourage foreign companies from selling into its market, often with the threat of civil or criminal penalties for violations of local norms. Such national regulatory measures could lead to what some authorities have described as the "artificial reconstruction of frontiers and the compartmentalisation of markets."

Microsoft does not oppose sensible government regulation. On the contrary, it is very important to establish the basic rules of the road that will allow the market to function properly and fairly, while giving companies the freedom to innovate and meet the demands of consumers. Without some degree of legal certainty, investors will not continue to provide the long-term support that electronic commerce requires in order to flourish. Without confidence in the underlying legal system, consumers will refuse to purchase goods and services online. Like many other companies, we are working with government officials in the United States, Asia, Europe, Latin America and elsewhere to develop a reasonable, "light handed" approach to regulation of electronic commerce. The software industry has flourished in such a regulatory environment, and we believe this model would facilitate the development of a flourishing electronic marketplace.

I. EXISTING TRADE AGREEMENTS APPLY, BUT DO NOT SUFFICE

A. Existing agreements are technology neutral

Since the post-War period, the process initiated by the GATT has led to unprecedented reductions in barriers to international trade. Between 1947 and 1995, the GATT mandated reductions in tariffs on a broad array of goods, and created strong incentives for the elimination of non-tariff barriers. At the conclusion of the Uruguay Round in 1995, participating countries established the WTO to provide the GATT with a much-needed institutional infrastructure. They also added important new agreements to supplement the GATT. These include the GATS, which initiated a "process of liberalization" affecting international trade in services, and TRIPs, which requires all WTO Members to adopt and maintain at least minimum legal standards for the protection and enforcement of intellectual property rights. In addition, they strengthened the dispute settlement mechanism to ensure that countries comply with their obligations under the WTO Agreements.

The key WTO Agreements embody two fundamental principles of international trade law - Most Favored Nation (MFN) and National Treatment. In each instance, these principles are stated in a manner that is technologically neutral. In other words, the principles apply regardless of how a good, a service, or a piece of intellectual property is marketed, purchased, or delivered. This is a point of fundamental importance, because it means that electronic commerce in goods, services, and intellectual property already benefits from existing trade principles, and WTO Members must observe these principles when adopting rules that affect electronic commerce. Moreover, these principles have teeth. Failure to observe them may lead to legal action under the dispute settlement mechanism and, ultimately, to retaliatory trade sanctions and other penalties.

B. Existing agreements not sufficient

Since late 1998, the WTO has been engaged in an effort to determine whether the GATT, the GATS and TRIPs must be amended to respond to the challenges posed by electronic commerce. This review process is focusing on questions of interpretation that arise when these agreements are applied to international electronic trade. We strongly support this review process, and we encourage WTO Members to resolve any ambiguities in favor of more aggressive liberalization.

But the WTO has a rare opportunity to do more than pursue a traditional liberalization agenda. Despite phenomenal rates of growth, electronic commerce over the Internet is in its early stages of development, and most countries are still reflecting on whether, and to what extent, new legislation may be required. The WTO is in a unique position to encourage its members to adopt rules that are consistent across international borders without unnecessarily burdening electronic commerce or establishing barriers to trade.

In order to play this coordinating role, the WTO will have to supplement the existing framework of agreements. The existing GATT framework will not suffice because it is clear that much of electronic commerce does not involve trade in goods. Everyone would agree, for example, that providing online brokerage advice or travel information involves delivery of a service, not sale of a good. Moreover, there is disagreement over whether some electronically delivered products should be treated as "virtual goods" - an issue of considerable significance to the software industry (see Part IV, below).

Similarly, the existing GATS framework will not suffice. Unlike the GATT, the GATS does not require Members to remove existing barriers to trade. Indeed, a Member is not obligated to liberalize any part of its market for services unless it specifically commits to do so. Members may decide whether to subject themselves to National Treatment in a particular services sector and may claim exemptions from the application of MFN. In light of these flexible legal arrangements, it is not surprising that most WTO Members to date have made very limited commitments to remove barriers to trade in services. Detailed proposals are being developed to reform the GATS framework, giving it more bite, and we support this work. In particular, we believe that every effort should be made to expand market access commitments, and that MFN and National Treatment should be made obligatory with respect to all services sectors. In light of the regime's current limitations, however, it would not make sense to rely on GATS as the principal tool for eliminating barriers to electronic commerce and coordinating regulatory policy.

Despite the importance of TRIPs, it also will not serve as a tool for preventing or eliminating most potential barriers to electronic commerce. TRIPs covers intellectual property, not goods or services, and thus will not prevent barriers to trade in either of these areas. Moreover, TRIPs is not fully implemented, and will not be fully implemented, until 2006. Thus, although TRIPs provides a good model for WTO's role (see Part III, below), TRIPs alone cannot serve to coordinate national efforts to regulate electronic commerce.

I. ENSURING INTERNATIONAL FREE TRADE

Recognizing that the GATT, the GATS, and TRIPs will not suffice, Microsoft urges WTO Members to seize this opportunity to think boldly about a new approach to electronic commerce. The overarching goal must be to eliminate existing trade barriers, prevent new barriers, and aid Members in coordinating regulatory policy with regard to electronic commerce. In our view, the best solution would be a binding "horizontal" statement of substantive free trade principles with which governments should comply when regulating electronic commerce in general, and electronic contracts in particular.

TRIPs provides the most obvious precedent for such an approach. In addition to applying the basic principles of MFN and National Treatment to trade in intellectual property (a field not previously subject to trade disciplines), TRIPs broke new ground by requiring all WTO Members to adopt and maintain at least minimum legal standards in a key substantive area - i.e., protection and enforcement of intellectual property rights. Another useful, although less satisfactory, precedent is the 1996 Telecommunications Reference Paper, which sets forth essential regulatory principles for a liberalized telecommunications sector. The Reference Paper is useful because it demonstrates that a new agreement containing model regulatory provisions can be negotiated as a supplement to a pre-existing trade agreement. It is less satisfactory, however, because it is non-binding and applies to only a subset of WTO Members.

Outlined below are the free trade principles that we believe would provide the light-handed, internationally consistent regulatory approach necessary to sustain the development of electronic commerce. In addition, for reasons that we will explain, we hope that WTO Members will consider several other steps to promote free trade in the international electronic marketplace. These include creation of a permanent tariff-free zone for electronic transmissions, completion of the second Information Technology Agreement, further liberalization in the telecommunications sector, and appropriate enhancements to TRIPs to protect intellectual property in the networked environment.

A. Horizontal statement of free trade principles

A horizontal statement of free trade principles should be the cornerstone of any WTO effort to eliminate barriers to trade and coordinate national regulatory policy affecting electronic commerce. Like TRIPs and the Telecommunications Reference Paper, the statement should record the principles that WTO Members must observe when enacting national regulations. Each WTO Member would be free to implement these principles in a manner that is consistent with its own legislative traditions.

The principles that we propose, which are described below, fall into two broad categories. The first are principles requiring governments to exercise restraint when adopting regulations affecting electronic commerce. These include applicability of existing trade law, non-discrimination, technology neutrality, forbearance, least restrictive means, and transparency. Many of these principles already have been adopted, explicitly or implicitly, in existing WTO Agreements. The second category contains substantive principles at the core of electronic commerce that every WTO Member should embody in its national law. These include freedom for private parties to form valid electronic contracts, and agree on a mutually acceptable form of electronic signature.

Principles of regulatory restraint

Core substantive principles of electronic commerce

A. Other initiatives to promote free trade through e-commerce

1. Permanent prohibition on tariffs affecting electronic transmissions

WTO Members should also move promptly to finalize a binding agreement creating a tariff-free zone for electronic transmissions over the Internet. Such an agreement would make permanent the current "standstill" on customs duties affecting electronic transmissions. Several WTO Members have suggested that they may withhold support from an agreement on a tariff-free zone until they have received commitments on other trade issues of interest to them. We believe it would be a mistake to hold hostage a final agreement on a tariff-free zone.

2. Information Technology Agreement

The IT sector provides the infrastructure that makes electronic commerce possible, and it has become a driving force in the development of the world economy. The adoption of the Information Technology Agreement (ITA) in 1996 was an important milestone in the effort to ensure market access for IT products. The proposed ITA II will push these market access commitments into new areas, and should be finalized as soon as possible. In particular, ITA II should cover all types of electronic devices (IT products) and media (whether pre-recorded or blank) used to conduct electronic commerce. An effort should be made to persuade a broader group of countries - ideally the entire WTO membership - to commit to be bound by ITA II's terms.

3. Liberalization of the telecommunications sector

The cost of telecommunications services in general and high-speed lines in particular remains too high in many markets, and this is a significant impediment to the growth of electronic commerce, particularly in developing countries. Businesses cannot operate effectively in the electronic marketplace unless and until competition has further driven down the cost of telecommunications services. In order to facilitate such competition, WTO Members should make broader and deeper commitments in all areas affecting telecommunications services.

The 1996 Telecommunications Reference Paper was intended to liberalize regulation of basic telecommunications services, leading to increased competition. Unfortunately, the Reference Paper is non-binding and plurilateral. It would be a substantial stimulus to electronic commerce if the Reference Paper simply were made binding on all WTO Members.

The Reference Paper does not apply to Internet access and network services, which are value-added services. It would not be appropriate to extend the Reference Paper's universal service requirement to services involved in the provision of electronic commerce. Rather, WTO Members should make specific market access commitments under the GATS for all Internet services.

4. Intellectual property initiatives

Strong intellectual property rights protection is essential to the continuing development of electronic international trade. The Internet and similar services provide many opportunities for the developers of creative works, services, and technologies to create new interactive products, and to license and distribute these products in more efficient and refined ways. Copyright provides the market-based incentives and rewards necessary to spur the development and dissemination of creative content, services, and technologies. Intellectual property protection also can address the risks of online piracy and help to keep the environment for electronic trade stable and healthy.

The WTO, in conjunction with WIPO, will play a central role in protecting intellectual property rights in the field of electronic commerce. WTO Members should press ahead with full implementation of TRIPs. Moreover, in the context of the 2002 TRIPs review, WTO Members may need to consider new provisions that will better adapt TRIPs to the digital environment. Indeed, the EU has declared that, at the appropriate time, the results of the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty should be incorporated in TRIPs. We support this. In the mean time, countries should move promptly to ratify the WIPO Treaties.

I. WTO TREATMENT OF THE INFORMATION TECHNOLOGY SECTOR

The future viability and expansion of electronic commerce depends on maintaining a vigorous trade in software and other IT products. Many of the broader trade issues likely to come up for discussion during the Seattle Round have important direct or indirect implications for this trade. These include classification of software, government procurement disciplines, improvement of the dispute settlement mechanism, and new initiatives in the area of trade facilitation.

E. Classification of Software

There is considerable debate about whether all electronic transmissions should be classified as services under international trade law or, alternatively, at least some transmissions should be classified as "virtual goods." This debate could have very significant consequences for the software industry.

Traditionally, companies have delivered software to the user via a floppy disk, a diskette, or a CD-ROM. In the future, however, more and more software will be delivered electronically. But electronic delivery will never entirely replace traditional delivery by disk. Thus, international trade rules will have to recognize two quite different modes of delivering software and treat them in a consistent manner.

Software has long been treated as a good subject to GATT. More precisely, major trading nations have treated the carrier medium (floppy disk, diskette, or CD-ROM) as a good and regarded the information on the carrier medium as non-dutiable. This approach has produced very significant benefits, most recently in the original ITA negotiations, which resulted in the elimination of duties on most software products. The consequence has been vigorous international trade in such products, supporting dynamic growth in the computer industry, with obvious benefits in recent years for the development of electronic commerce.

The increasing use of electronic delivery systems has led some to question whether software in its electronically delivered form should now be reclassified as a service. Such a change would be unjustified and unwise for several reasons.

First, a good does not become a service simply because it is being delivered in a different way. Software has always been treated as a good, and this should not change simply because electronic delivery systems are now widely in use.

Second, reclassifying electronically delivered software as a service would result in application of the GATS rather than the GATT. The GATS regime is still in its formative stages, and much work remains to be done before services markets are fully liberalized (see Part II, above). Applying GATS to electronically delivered software would weaken applicable trade disciplines, allowing Members to resurrect barriers eliminated under the GATT and the ITA, depriving trade in software of its current unqualified national treatment benefit.

Third, subjecting software to inconsistent regimes - one for software on disks, another for digitally delivered software - would violate the principle of technology neutrality.

Software should be treated as intellectual property plus a delivery system.

The solution to the problem of digitally delivered software is not to develop a new category of "virtual goods" and not to reclassify software as a service. Rather, the solution is to build on the regime created by TRIPs, which recognizes a product that is neither a good nor a service, namely intellectual property. Once it is agreed that the information on a carrier medium is intellectual property, it becomes clear how software should be treated. Under GATT, the carrier medium is dutiable, although with widespread acceptance of the ITA, duties on "hard" carrier media such as disks have been reduced to zero. If, as we recommend, WTO establishes a tariff-free zone for electronic transmissions, then electronically delivered software - i.e., information transmitted on a "soft" carrier medium - also would be duty-free. There would be no duty on the transmission, and no duty on the intellectual property transmitted. This solution has several advantages. It preserves the well-established view that software distributed via traditional "hard" carrier media is a good subject to the GATT. It avoids the suggestion that software must be reclassified as a service when distributed electronically. It preserves the policy outcome that has contributed so greatly to the explosive growth of the software industry - duty-free treatment.

F. Government Procurement

Government is a major consumer of software and IT products. Transparent and non-discriminatory procurement procedures promote public sector IT uptake by affording access to high-quality, low-cost IT products. WTO has made an important contribution in this area through the Agreement on Government Procurement (AGP), but more can and should be done. Further reforms should focus on providing greater transparency, opportunities to challenge non-conforming bids, and protection for the rights of bidding parties.

A key issue for the software industry is protection of third-party rights. Unfortunately, some governments are large-scale purchasers and users of pirated software. WTO Members can combat this problem by revising the AGP to require lawful use by government agencies and ministries of goods and services procured through public tender. A revised AGP also should prescribe advance controls and audit procedures to protect third party rights in tendering, contract execution, and use of publicly procured goods and services.

G. Dispute Settlement

The Dispute Settlement Understanding (DSU) is the core of the WTO's effectiveness, and will be vitally important in efforts to enforce any agreements that WTO Members may reach with respect to electronic commerce. Although the DSU is a powerful enforcement tool, there is room for improvement. Both the EU and United States have proposed wide-ranging revisions. We believe the WTO could increase public trust by opening DSU proceedings to public scrutiny, increasing public access to documents, and allowing non-governmental participation via amicus curiae briefs. Additional reforms should focus on making the DSU a more effective vehicle for dispute resolution. One step would be to ensure that panels have access to all information relevant to a particular dispute. To help ensure such access, WTO Members should strengthen the information-gathering powers of parties and panels to include both production of existing information and responses to written interrogatories.

H. Trade Facilitation

The WTO already recognizes that burdensome customs procedures, inadequate customs resources, corruption, and excessive costs of administration impede trade and investment in all areas. The experience of Microsoft and other software companies confirms that these non-tariff barriers hinder trade in the technology sector. We believe the WTO should work toward a framework agreement covering, among other matters, greater cooperation between customs authorities, improved control of customs fraud, and strengthened measures to restrict trade in products violating intellectual property rights.

GLOSSARY

AGP (Agreement on Government Procurement) - Agreement among some WTO Members requiring that they apply non-discriminatory rules to the goods, services, and suppliers of other parties to the agreement. See http://www.wto.org/ wto/govt/agrmnt.htm.

ASEAN (Association of Southeast Asian Nations) - International organization to promote prosperity, peace and stability in Southeast Asia. Currently 10 members. See http://www.aseansec.org.

CAs (Certificate Authorities) - Persons or entities that confirm the authenticity or integrity of electronic communications, and provide other services related to the sending or receiving of electronic communications.

DSU (Dispute Settlement Understanding) - Agreement among all WTO Members providing detailed procedures for the resolution of disputes arising under the WTO Agreements. See http://www.wto.org/wto/dispute/dsu.htm.

Electronic Signature - A method of authenticating an electronic record by means of attached or associated electronic sounds, symbols, or processes.

GATT (General Agreement on Tariffs and Trade) - Agreement among all WTO Members requiring liberalization of trade in goods through tariff reduction and application of trade law principles. The present GATT 1994 incorporates GATT 1947. See http://www.wto.org/wto/legal/finalact.htm.

GATS (General Agreement on Trade in Services) - Agreement among all WTO Members requiring limited liberalization of trade in selected services sectors. See http://www.wto.org/wto/services/gatsintr.htm.

ITA (Information Technology Agreement) - 1996 agreement among some WTO members requiring the elimination of customs duties and other duties and charges on information technology products by January 2000. See http://www.wto.org/ new/inftech.htm.

MFN (Most-Favored Nation) - Trade law principle requiring WTO Members that confer trade preferences on another trading partner to extend the same preferences to all Members.

National Treatment - Trade law principle forbidding WTO Members from discriminating against foreign suppliers in preference to their own suppliers in their internal markets.

Non-tariff Barriers - Measures that have an indirect adverse impact on trade, such as technical regulations and standards, import licensing requirements, rules of origin and rules on the valuation of goods for customs purposes.

OECD (Organization for Economic Cooperation and Development) - International organization that provides a forum for discussion on issues of economic and social policy. Currently 29 members. See http://www.oecd.org.

Plurilateral - Term used to describe optional WTO Agreements that bind fewer than all Members (e.g., the AGP and the ITA).

"Standstill" Agreement - 1998 political agreement in which WTO Members resolved to refrain from imposing customs duties on electronic transmissions. See http://www.wto.org/wto/ecom/e_mindec1.htm.

Tariff - A tax or charge imposed at the border on imported goods. It can be a fixed sum for each good or a percentage of the item's value.

Telecommunications Reference Paper - Non-binding 1996 statement by some WTO Members declaring common regulatory principles designed to promote liberalization of the telecommunications sector. See http://www.wto.org/wto/services/tel23.htm.

Trade Facilitation - Non-economic measures designed to promote international trade, such as cooperation on technical standards, trade fairs and periodic discussions on trade issues.

Transparency - Trade law principle requiring that governments publish laws affecting trade and openly administer trade-related judicial and administrative processes.

TRIPs (Agreement on Trade-Related Aspects of Intellectual Property Rights) - Agreement among all WTO Members requiring protection and enforcement of intellectual property rights. See http://www.wto.org/wto/intellec/intellec.htm.

TRIPs Review - Periodic review of the implementation of the TRIPs Agreement conducted by the WTO Council for TRIPs. Must occur every two years starting in 2000.

Uruguay Round - Round of trade negotiations from 1986 to 1994 during which signatories to the GATT drafted the WTO Agreements.

WIPO (World Intellectual Property Organization) - Specialized agency of the United Nations charged with promoting the protection of intellectual property worldwide and the administration of several intellectual property treaties. Currently 170 members. See http://www.wipo.org.

WTO Agreements - Agreements among Members of the WTO, most of which were adopted or revised during the Uruguay Round. Includes both multilateral agreements (among all Members) and plurilateral agreements (among some Members).

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