Trade Disciplines with a Trapdoor: Contract Manufacturing

At first glance, this article deals with a simple classification issue only: the coverage of certain manufacturing operations and the resulting products under the General Agreement on Trade in Services (GATS) rather than under its long-standing counterpart in merchandise trade, the General Agreement on Tariffs and Trade (GATT). Yet there are important structural/conceptual differences between the two Agreements, which may have far-reaching consequences, inter alia, for the use of GATT-based tariffs and trade remedies. It is submitted that the generally applied classification system in services could prompt companies to (re-) define the ownership conditions of otherwise identical production activities, with a view to achieving cover under the GATS and thus avoiding GATT disciplines. However, the relevant criteria separating goods- from services-related operations are not only hard to specify and monitor in practice, but it is also difficult to see an underlying economic rationale. In the interest of clarity and consistency, WTO Members might thus want to close this definitional trapdoor. Due to the rapid proliferation of international production-sharing arrangements, the stakes will likely be rising.