Free Trade Agreement for Outsourcing to and from Australia

© 2004 William B. Bierce.  All rights reserved.

    On March 3, 2004, U.S. Trade Representative Richard Zoellick announced the conclusion of a broad free-trade agreement with Australia.   The pact contains clarifies the rights of enterprises in each country to engage in electronic trade in information technology-enabled services.  While the pact clearly covers data processing services as "digital products," there may be some debate over whether it also covers IT-enabled call centers, claims administration, credit application scoring and pre-underwriting for lending and insurance activities, business process outsourcing ("BPO") and even HR administrative outsourcing ("HRO").  We believe this agreement represents a major advance in the concept of trade in outsourcing services.  By a wave of the definitional wand, outsourcing becomes entitled to the core protections of international trade: national treatment, most-favored nation status, non-discrimination and transparency of applicable legislation relating to trade in services that delivered as "digital products." 

    Unlike the pending FTA's with Morocco and Central American countries, the US-Australia FTA offers a window into the Bush Administration perspective on bilateral free trade agreements with a large democratic Western country that shares with the U.S. common levels of economic development, technology, political freedom, constitutional foundation and cultural and "common law "legal system from a British colonial heritage.  As such, it will serve as a showcase for bargaining proposal at the WTO Doha Round in of multilateral trade negotiations.

    MFN Treatment for Outsourcing.

    Historical Insufficiencies.  The WTO Uruguay Round of multilateral trade agreements, that include agreements on Trade-Related Intellectual Property protection and Trade-Related Investment Measures, were negotiated in an era before exponential growth of the Internet.  As a globalizing enabling technology, the Internet has spawned the growth of such business process outsourcing ("BPO") services as VOIP-enabled (voice over Internet Protocol) customer call centers and Internet chat for online help desk services.  Existing multilateral and bilateral trade agreements are insufficient to reduce trade barriers in international outsourcing.    

    Since the stalled progress of the World Trade Organization's Doha Round of multilateral trade negotiations, President George W. Bush has been promoting bilateral trade agreements.  

    New Framework.  The new United States-Australia Free Trade Agreement (the "US-Australia FTA"), dated March 1, 2004 (subject to legal review for accuracy, clarity and consistency), establishes a broad new framework for international outsourcing under the rubric of "electronic commerce."   

    Under the agreement, the parties agree to treat the "electronic supply of services" through the "supply of a service employing computer processing" as entitled to the other protections afforded to cross-border trade in services, investment and financial services, subject to specified exceptions.  Trade in digital products is free of customs duties.   

    Basic Concepts.   Under the principle of national treatment, each country agrees to accord to service suppliers of the other country "treatment no less favourable" than that which it accords, in like circumstances, to its own service suppliers.   Under the most-favored nation principle, each country agrees to accord to the other country's service suppliers "treatment no less favorable that it accords, in like circumstances, to service suppliers of a non-Party" to the FTA.  US-Australia FTA, Arts. 10.2 and 10.3.  Under the principle of open market access, each country agrees not to impose limits on the number of service providers, the value of service transactions, quantity of service transactions or number of employees.  Under the "local presence" test, no local presence is required as a condition for the cross-border supply of a service.  US-Australia FTA, Article 10.5.

    Digital Products.  A ""digital product," as a subject of the agreement, is defined as "the digitized form, or encoding of, computer programs, text, video, images, sound recordings, and other products, regardless whether they are fixed on a carrier medium or transmitted electronically."   For clarification, a footnote explains that "digital products can be a component of a good, be used in the supply of a service, or exist separately, but do not include digitized representations of financial instruments that are settled or transmitted through a central bank-sponsored payment or settlement system."  

    When it comes to "outsourcing,"  it seems that the two governments acknowledge that not all countries believe that the core international free trade principles, such as most-favored-nation treatment, national treatment and transparency of legislation should be applied to electronic commerce in services, such as ITO, BPO and HRO.  The two governments decided to advance the theory of international trade in "digital products" by including them in the US-Australia FTA even though there are ongoing discussions within the WTO "on whether trade in digital products transmitted electronically is trade in goods or trade in services."  US-Australia FTA, Art. 16.8 and footnotes 16-4 and 16-5.

    Outsourcing as a Digital Product.   The key element of outsourcing is the supply of a service that includes the digitized form of text as a product, where the service is transmitted electronically.   Accordingly, in our view, information technology-enabled outsourcing is clearly intended to enjoy the protections of non-discriminatory treatment that is afforded to digital products.   Thus, the US-Australia FTA prohibits either the U.S. or Australia from discriminating against the "digital products" of the other.  Three forms of such discrimination are banned.

• Discrimination based on Foreign Origin: No discrimination is allowed "on the basis that the digital products receiving less favourable treatment are created, produced, published, stored, transmitted, contracted for, commissioned or first made available on commercial terms outside the territory" of the particular country.  US-Australia FTA, Art. 16.4(1)(a).
  

• Discrimination based on Foreign Authorship or Performer:   No discrimination is allowed "on the basis that the author, performer, producer, developer or distributor of such digital products is a person of the other" country or a third-country.  US-Australia FTA, Art. 16.4(1)(b).
  

• Similar Digital Products: No discrimination can favor one party's domestically-originating digital product over "other like digital products that are created, produced, published, stored, transmitted, contracted for, commissioned or first made available on commercial terms in its territory."   US-Australia FTA, Art. 16.4(1)(c) and 16.4(2)(a).

Under the MFN principle, such discrimination on the basis of origin or national origin of the author, performer, producer, developer or distributor compared to origin or national origin in any third country, subject to specific exceptions..    US-Australia FTA, Art. 16.2.

    Use of Authentication and Digital Certificates in Electronic Transactions.

   The US-Australia FTA requires each country's government to "maintain domestic legislation for electronic authentication" of electronic transactions.   US-Australia FTA, Art. 16.5.   Such legislation is intended to permit "parties to an electronic transaction" to choose their preferred "authentication solutions and implementation models for their electronic transaction" and to prove in court that such preferred solutions meet the legal requirements for authentication. 

    Online Consumer Protection in Offshore Outsourcing.  

    The US Australia FTA opens a new chapter in international trade regulation by requiring that each country afford to "consumers who participate in electronic commerce" the benefit of "transparent and effective consumer protection under their respective laws."    US-Australia FTA, Art. 16.6.  This establishes a floor of consumer protection in international e-commerce. 

    It remains to be seen whether courts or dispute resolution panels will interpret the "consumer" to include any business that is a consumer of electronically delivered services.   Such an interpretation would probably be a "stretch" because consumer protections are generally adopted to overcome some fundamental inequality in resources or bargaining power between the "consumer" and a transactional counterparty.  

    Globalization of the Digital Millennium Copyright Act and Impact on Offshore Outsourcing.

   The U.S. Digital Millennium Copyright Act ("DMCA") prohibits circumvention of technological measures that control access to any work or other subject matter that is protected by copyright.  Pub. L. 105-304, Oct. 28, 1998, 112 Stat. 2860, amending 18 U.S.C. 101 et seq.  The US-Australia FTA imposes on each country a duty to enact legislation imposing, for violations of such technological measures, "a separate civil or criminal offence" that is independent of any infringement that might occur under a Party's law on copyright."   US-Australia FTA, 17.4(7))(d).  Criminal procedures will be applied to authorized circumvention of such technological measures for copyright protection.

    Outsourcing contracts may establish rights relating to copyrights in work in process.  Under the U.S. Digital Millennium Copyright Act and the US-Australia FTA, third parties (including the foreign service provider) would be barred from overcoming such digital measures at any phase in the processing of data and the performance of outsourced services.   

    The US-Australia FTA thus extends the DMCA to international outsourcing, whether under the Web-enabled "application service provider" ("ASP") model, the remote data processing center model or the VPN-enabled retained-resource deal-room model of outsourcing service provisioning.  In so doing, it adopts certain exceptions under the U.S. Copyright Act to digital copyright protection that do not generally affect outsourcing or the confidentiality of protected information that is created or processed in the outsourcing service.  See US-Australia FTA, Art. 17.4(e).

    Exceptions: State and Local Laws in the U.S.

    The US-Australia FTA does not require the U.S. government to override any non-conforming measures of any U.S. states, the District of Columbia or Puerto Rico in relation to cross-border services and investment.   Such services and investment will not be bound by the obligations of national treatment or MFN treatment, among others.   US-Annex I-19.  Because Congress has the right to legislate on interstate and foreign commerce under the Commerce Clause of the U.S. Constitution, the exception should not present significant challenges to offshore outsourcing.

Posted: March 11, 2004