RESTRICTEDWORLD TRADE
ORGANIZATIONG/PSI/WP/W/18
17 September 1998
(98-3549)
Working Party on Preshipment Inspection
VIEWS PRESENTED ON THE ISSUES IN THE PROGRAMME OF WORK
Note by the Secretariat
1. At its meeting of 10 December 1997, the General Council adopted the Report of the Working
Party on Preshipment Inspection, contained in document G/L/2141.  The Report contained 7
recommendations to enhance implementation of the Agreement on Preshipment Inspection (hereafter,
the Agreement), and 2 recommendations for future action of the Working Party.  These last tworecommendations read as follows:
"8. The life of the Working Party shall be extended for one year to exchange views on a
Code of Conduct/Practice for PSI entities;  a sta ndard inspection format;  selective examination
of shipments;  auditing of PSI entities;  the promotion of competition among PSI entities;  fee
structures for PSI entities; and the use, to user Members, of building price data bases.
9. An assessment of technical assistance activities should be undertaken, in accordance
with Article 3 of the Agreement, and draw upon the assessment of technical assistance activities
under consideration in the Committee on Customs Valuation and the integrated framework for
trade-related technical assistance endorsed by the WTO High-Level Meeting for Least
Developed Countries.  Technical assistance ac tivities, which should be administered on a
request basis, could include areas such as tariff and customs administration reforms;
simplification and modernization of systems and procedures; and the development of an
adequate legal, administrative, and physical infrastructure.
2. In accordance with recommendation 8, the Working Party has held two meetings this year, on
19 March and 12 June 1998, to exchange views on the issues contained in that recommendation.  This
note organizes the views presented in the Working Pa rty on the issues elaborated in recommendation 8
above, at these two meetings.  The views are listed under each issue.  In addition, as foreseen in
recommendation 9, the Working Party engaged in an exchange of views on the issue of technicalassistance;  these views are also contained in this note.
Issue No. 1: Code of Conduct/Practice for PSI entities
                                                     
1 The Working Party on Preshipment Inspection was established by the General Council at its meeting
of 7, 8, and 13 November 1996. The terms of reference are "to conduct the review provided for under
Article 6 of the Agreement on Preshipment Inspecti on and to report to the General Council through the
Council for Trade in Goods in December 1997".G/PSI/WP/W/18
Page 2
3. In exchanging views on this issue, several delegations discussed the proposal by the Swiss
delegation, contained in G/PSI/WP/W/16, for a draft model contract to be used to establish the
agreement and terms of the contract between a PSI company and a user Member.  Below are the
views presented on this issue:
The United States found that the Swiss proposal  could have merit in creating an interface
between the obligations of the Agreement and th e activities of PSI entities.  It posed questions
regarding the type of monitoring and enforcemen t mechanism that might be available to ensure
that PSI entities would fully implement the term s of a model agreement, and whether there
might be some role for technical assistance in th is area.  It assumed that there would not be any
rights for exporters and importers as a result of such a model agreement forming a part of a
contract.  If they were to include the mode l agreement in a contract, what would be user
Members' willingness to use their judicial m echanisms to enforce the specific provisions?
The European Communities said that the model cont ract would need to offer added value.  For
example, in the Agreement, there was no re ference to importers.  Some points might be
identified and inserted to provide this added valu e.  Also, it would be important to ensure that
the model agreement would not raise any incomp atibility with the Agreement.  Otherwise,
serious interpretation and enforcement problems mi ght arise.  Serious reflection was needed on
the manner of enforcing this model agreemen t;  it was difficult to imagine how it could be
binding.
The Philippines was concerned that if it, as a user Member, was bound by this model contract,
its freedom would be limited to enter into a type of contract fit for its purposes.  As a non-
binding instrument, it had more appeal as someth ing that might address the concerns raised by
exporters.  It should also not be applied retroa ctively;  The Philippine Government had just
renewed its contract with a PSI entity so this woul d not apply to this contract.  As a lot of the
provisions of the model contract were already in  the Agreement, what would be its added value?
Hong Kong, China noted that the model cont ract had taken into account many of the
recommendations in G/L/214. By repeating many of  the provisions of the Agreement, the model
contract effectively extended, in a contractua lly binding manner, the obligations of the
Agreement to PSI companies which otherwise would not be bound by these obligations.  The
contractual relation established would be between the user Government and the PSI entityconcerned.  As such, the enforcement of the model contract would be a matter for these two
parties, never for exporters nor their governments. The draft model contract contained separate
provisions, namely Articles 9.4 and 9.5, for complaints and appeals to the PSI entities.  This
two-tier structure, though not necessarily inconsistent, did not seem to be envisaged in Article
2.21 of the Agreement.  Discussions and any adop tion of such an instrument should not effect
the rights and obligations of WTO Members with respect to the Agreement.
Switzerland said its submission (G/PSI/WP/W/ 16) was based on its communication last year
(G/PSI/WP/W/9).  Such a model could help incr ease the efficiency of preshipment inspection
activities and meet some concerns of Members.  Its model was prepared in close consultationwith all the interested groups in the Swi ss private sector, and in accordance with the
recommendations of the Working Party containe d in G/L/214.  The model attempted to ensure
the respect of contractual freedom.  It had stated its view that it should not be binding nor that it
could not be modified according to specific circum stances of user Members.  It might add value
by including provisions that were in the Agr eement now and that actually only applied to user
Members.  Monitoring and enforcement laid w ith the user Members so a specific mechanism
was not needed.  It was true that the two-tier a pproach was not foreseen in the Agreement, and
that the model contract should be in conformity  with the Agreement. It would always be up to
PSI entities and user Members to agree on its specific provisions.G/PSI/WP/W/18
Page 3
Australia expressed its interest in pursuing th e ideas in the model contract.  This type of
instrument could be seen as a tool to help provide the link that was not in the Agreement
between who was actually going to be carrying out the PSI activities and who was responsible
under the Agreement.  The fact that there were already many items in the draft model contract
that were in the Agreement was intentional as it was meant to be an enforcement tool for
obligations under the Agreement.   The enforcement of the contract was left in the hands of the
user Members.  Regarding the independent revi ew and appeal procedures under paragraph 9 of
the model, while what was in the Agreement wa s slightly different, the Swiss proposal was a
useful way of formalising the PSI companies' ex isting obligations to entertain complaints and
appeals from traders within their existing structures.
The European Communities suggested two specific drafting changes to the Swiss text to allay
some of the concerns expressed.  The first was to add the sentence, 'in case of conflict between
the provisions of the model agreement and the Agreement, the provisions of the Agreement
always would prevail'.  The sec ond suggestion was to add the sent ence, 'the provisions of the
model contract in no way affect the sovereignty of Member states and th e freedom of contract'.
Issue No. 2: A standard inspection format
4. The following views were presented on this issue:
The European Communities thought such forms could not be standardized completely.
Inspections were usually product-related, therefore, to what extent would a fully standardized
inspection format be workable?
Australia expressed the need for additional time to reflect on what would be workable and
useful for Members.  It was open to IFIA and ICC involvement in developing this concept
and had a preference for any format to be contractual rather than the other options listed in the
US communication.
Colombia thought it would be useful to have a standard inspection format and would look into
specifics.
The United States said that standard inspection formats could be a useful idea to the extent
that different PSI entities used different formats which created confusion for exporters.
Issue No. 3: Selective examination of shipments
5. The following views were presented on this issue:
The European Communities said that selective examination could speed up the exporting
process and contribute towards avoiding excessive delays and bureaucratic burdens.  Serious
thought would have to be given to the criteria that would be used to avoid any discrimination
and to promote full transparency.
Switzerland noted that IFIA had expressed support for selective physical inspections on a
controlled basis provided that they complied wi th the Agreement requiring PSI activities in a
transparent manner and on an equal basis for all exporters.  Selective examination was alreadya reality and the Agreement did not prohibit it.  It was up to user Members to introduce this
concept in their contracts with PSI entities.  It would be interesting to hear from user
Members what criteria they had used, what were the results and the problems.  It seemed thatG/PSI/WP/W/18
Page 4
the criteria used, especially the objectivity, might be the key factor in dealing with any
discriminatory nature of selectively inspecting shipments.
The United States said that selective examination of shipments was a priority for his
delegation and should be addressed by the Working Party.  The trend among customs
authorities was to engage in risk assessment and to only examine those shipments that were
considered to be high risk.  The IFIA representative had noted, however, that it had concerns
related to non-discrimination.  This was not an issue because it was clear that customs
authorities, who had obligations with an even hi gher rigor than PSI entities in this area were
already using this.  There was no question as to whether their activities were non-
discriminatory and transparent.  Therefore, this  was not an obstacle to PSI entities using this
technique.  It would be interesting to hear  the experiences of those user Members whose
contracts with PSI entities provided for selective examination.
Issue No. 4: Auditing of PSI entities
6. The following views were presented on this issue:
The European Communities said some basic questions would need to be answered such as the
independence of auditors, the scope of audits to be undertaken, and the protection of
confidentiality which should not be undermined by auditing.
The Philippines had great reservations on auditing.  Each time its PSI contract was up for
renewal, intense scrutiny of the entity was conducted.  There were some parts of the
Philippine Government that were in favour of getting rid of PSI and some that were in favor
of keeping it.  The Philippine Government was against requiring an independent audit;  no
less than the legislative branch of the Government was auditing the PSI entity and from this itwas clear that it was not an easy task.
Hong Kong, China said that the Working Party should consider the cost effect of engaging an
auditor and the level of PSI activities to which the audit should be directed.  On the latter,
exporters might be concerned about whether they would be subject to repeated inspections
when the PSI entity was being audited.
Switzerland said that the Agreement did not prevent user Members from using independent
auditors.  Input from user Members would be useful.  The responsibility of the full
implementation of the Agreement was with user Members who should monitor PSI entities
and the presence of external auditors should not change this legal reality.  Auditing activities,
mandated by foreign government authorities, would be considered illegal in Switzerland asthey were not specifically foreseen in the Agreement.  It was also essential that the
confidentiality of information be preserved in accordance with the provisions of the
Agreement.  Given the unclear legal implications of auditing, this idea should not be pursued.
The United States was interested in looking at whether there would be use to user Members in
engaging the services of auditors.  This issue warranted further discussion.
Issue No. 5: The promotion of competition among PSI entities
7. The following views were presented on this issue:
The European Communities considered that competition among PSI entities should be
welcomed by user Members and the Working Party should reflect on practical means ofG/PSI/WP/W/18
Page 5
improving competition.  One way would be to enhance information concerning PSI entities
available to user Members so that they always would make an informed choice.
The Philippines noted that one user Member was seeking to promote competition by signing
multiple contracts.  Was this something that exporters would be in favor of, and would it be
more efficient to have multiple contracts?  It might be more confusing.  In the Philippines,
although there was no competition, there was a basis on which the fee structure was being set.
Exporters should reflect on this point and the Working Party should discuss the experience of
those exporter Members where an importer user Member had signed multiple contracts for
PSI services to be provided.
Switzerland said that promotion of competition was beneficial and useful, but it could not be
imposed neither on user Members nor on PSI entities.  It was difficult to accept the view that
the absence of competition led to non-transparent, arbitrary, and discriminatory treatment of
exporters and importers.  It would be useful to  hear from user Members who were using such
systems what the benefits had been.  Had the number of complaints increased or decreased as
a result of multiplying PSI entities?  For what reasons had these user Members decided tointroduce such systems?
The United States said that in an oligopolistic market such as the PSI industry true
competition was questionable.  There would not be a proliferation of PSI entities and the
Working Party's ability to promote competition would be somewhat limited.  However, atleast one user Member had engaged multiple contracts and it would be interesting to hear
about its experience.  While it may be confusing, there could be overriding benefits in
exporters having the potential choice among PSI entities.  User Members were at the same
time exporter Members and had interests in the issues as well.
Argentina stated that its experience was very recent, only six months.  However, the
discussions of the Working Party would be re ferred to the capital in order to secure
information on any results of the experience as soon as possible.  The reason behind
Argentina's particular PSI programme was basically to promote competition.  In the
programme, the exporter had the possibility of selecting among six PSI companies that had
been qualified through a process of public competition.  In this way, it was believed that the
exporter would have the chance to select the enterprise with which it felt most comfortableand which it considered was the best.  The Government thought that the promotion of
competition was positive and saw no obstacles in it.  In the initial experience, there was no
sign of any resulting confusion.  The compan ies were not divided by any particular product
sector, all companies offer services for all products.  Enterprises could be better monitored
and controlled if there were many in number.
Peru had a PSI programme which utilised several PSI companies and its experience was
positive.  Users of the programme were importers who also paid the fees for the inspection,
which was an ad valorem  percentage.  The fact that there was more than one PSI entity
competing stopped the fees from being too high and maintained them closer to reality.  If oneentity's fees were too high, an importer could go to another entity whose fees were lower.
Korea recalled that his delegation had initially proposed the issue of promotion of competition
to the Working Party last year which had come from Korean exporters' opinions.  When an
exporting company had a problem, such as being asked to provide information or delays, if ithad the possibility of choosing another PSI company, the problem could be solved.  So,
changing PSI entities could be a solution.  There was no information on the specific
experience, but more information could be sought from capital.G/PSI/WP/W/18
Page 6
Issue No. 6: Fee structures for PSI entities
8. The following views were presented on this issue:
The European Communities reiterated its strong reservation on practices based on flat fee
rates.  The fees charged should be proportionate to the services rendered which would help
avoid conflicts of interest.
Australia would prefer that fees be charged on the basis of services provided rather than ad
valorem  rates.  For example, this could mean a fee negotiated and agreed between the user
Member and the PSI entity at the time of the signing of the contract that would reflect an
estimate of the value of the resources and time.  Flexibility would have to be built in as itwould be an estimate.  The Working Party could examine the mechanics of this at a later time.
Hong Kong, China agreed that input from user Members would be helpful to better
understand this issue, especially from those user Members that were adopting structures
involving a linkage between fees and the verified value of the goods.  They should be givenopportunities to explain how they addressed the question of conflict of interest under such
arrangements.
The United States shared the views of the Eur opean Communities that fees should be strictly
related to the services rendered and that there could be implications with respect to Article
VIII of GATT 1994.
Issue No. 7: The use, to user Members, of building price data bases
9. The following views were presented on this issue:
Colombia considered that using price databases to make comparisons with prices declared by
importers and to justify doubts that the customs authorities could have about a price expressed
by an importer, would be a very useful tool in order to quantify the value which would allow
the release of the good to the importer.  Price databases could also be extremely useful in
determining the customs value in conformity  with Article 7 of the Customs Valuation
Agreement, that was when the customs value could not be determined on the basis of Article1 through 6 of the Agreement.  Article 7 said that such value would be determined according
to reasonable criteria which were compatible with the principles and the general provisions of
the Agreement and Article VII of GATT 1994, on the basis of data available in the importing
country.  As the representative of IFIA had said at the informal meeting, price databases could
also be useful as references for the valuation in accordance with Article 2 of the Agreement,the transaction value of identical goods, or with Article 3, the transaction value of similar
goods.  For Colombian customs authorities, a price database would include reference prices
and not minimum prices.  So, if it was understood that price databases constituted reference
prices and not minimum prices, the Working Pa rty could do away with the concern that such
a price database could distort the customs valuation and would therefore be against theprinciples of the Customs Valuation Agreement.  Columbia considered a price database with
market prices, not minimum prices, as a source of information to expedite customs valuation
work.  Nevertheless, the importer always had the right to show that the price declared was the
true price paid.
The European Communities had reservations against the building of price databases which
would have to be studied very carefully.  It entailed the danger of leading to fictitious prices,
undermining the market structure and complicating, instead of simplifying, exporting
practices.  According to Article 7 of the Customs Valuation Agreement, among the meansG/PSI/WP/W/18
Page 7
allowed to identify price for customs purposes were databases available in the country of
importation.  However, the EC considered that an y measures that might be used to allow the
identification of the price had to be strictly consistent with the principles and general
provisions of the GATT 1994 and the relevant agreements.  This was also included in Article
7 of the Agreement.  In this regard, a basic principle that would have to respected was that
every effort had to be made to avoid arbitrary or fictitious prices.  This was explicitly stated in
the Customs Valuation Agreement, in the PSI Agreement, as well as in Article VII of the
GATT 1994.  To the extent that these price databases might lead to fictitious prices, the EC
believed that they should be resisted.  Nothing, of course, would prevent the importing
country from using price references if they so wished provided that they stuck to the principle
of avoiding fictitious prices.
The United States appreciated the views of Colombia and noted the reference to Article 7 of
the Customs Valuation Agreement.  Nevertheless, the concerns of the EU were shared.  Under
Article 1 of the Customs Valuation Agreement, it would not appear to be legitimate to reject
the transaction value on the basis of price databases, at least solely on this basis.
Japan stated that it had a strong interest in the relationship between price databases and the
Customs Valuation Agreement.
Issue No. 8: Technical assistance
10. On this issue, the following views were presented:
The United States said that technical assistance in this area should not be oriented towards
encouraging Members to engage the services of PSI entities, but instead should assist them in
making the transition away from PSI and taking up these responsibilities themselves.  Thismeant effective customs reform.  There was a relationship with the discussions on technical
assistance in the Customs Valuation Agreement.  Surely there would have to be more focused
technical assistance to allow user Members to reform and modernize their customs
administrations.
The European Communities was willing to examine this issue in a structured way under
certain conditions.  The Working Party would need to have an integrated, global assessment
of on-going technical assistance problems and shouldn't engage itself in the issue without
having a clear picture of who was doing what, bilaterally as well as multilaterally.  In
addition, specific requests for assistance were needed, as foreseen in Article 3 of the
Agreement.  Further, specific programs were needed which were aimed at the objectives of
the Agreement and eventually of customs reform.  Coordination was also needed with otherorganizations and Members so that duplication of assistance was avoided and that a more
focused and targeted effort was made.  With these conditions and given the EU priorities and
capabilities, the EC was willing to examine this issue.
The Philippines stated that it was receiving technical assistance bilaterally, plurilaterally and
even multilaterally.  This assistance was geared towards reform of customs practices and
there were already tangible results.  Among them was the ASYCUDA program of UNCTAD
which had contributed towards a great improvement in the release time of goods in customs.
Whether this assistance would enable the Philippines to phase out the PSI programme was not
something that could be answered at present.  However, since by the year 2000 manydeveloping countries were obliged to shift to the transaction value of the WTO Customs
Valuation Agreement, that might be the time when PSI activities would have to be phased
out.G/PSI/WP/W/18
Page 8
Switzerland also considered that it would be useful to begin this work with a fact-finding
exercise with user Members, exporters and PSI entities to know more about the technical
assistance that was already provided and requested.  There was a clear relationship between
this subject and the exercise going on in the Committee on Customs Valuation in terms of
building up of customs infrastructures and capacities.  The life of the Working Party waslimited in time and, therefore, it might not be possible to launch a process at this time that
would go beyond a fact-finding exercise.  Such a process could also be duplicative.  Members
should endeavour to take the PSI dimension into the work of the Customs Valuation
Committee.
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