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Compatibility and alternatives of the EC‐ACP agreementwithin the world trade organization legal frameworkDeepali Fernandes aa Associate Economics Officer , UNCTADPublished online: 12 Aug 2010.

To cite this article: Deepali Fernandes (2005) Compatibility and alternatives of the EC‐ACP agreement within the world tradeorganization legal framework, Commonwealth Law Bulletin, 31:3, 51-70, DOI: 10.1080/03050718.2005.9986707

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Internationaldevelopments

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COMPATIBILITY AND ALTERNATIVES OF THEEC-ACP AGREEMENT WITHIN THE WORLD TRADE

ORGANIZATION LEGAL FRAMEWORK

Deepali Fernandes*

Introduction and Background

In 2000, the European Community and the African, Caribbean and Pacific trade bloc signeda partnership agreement (EC-ACP Agreement). It was a culmination of previous agreementsbetween the EC-ACP countries dating back to 1975.' While the previous agreementsgranted ACP countries non-reciprocal preferential access to the EU markets, the currentEC-ACP agreement contains reciprocal trade obligations to be fulfilled by both partners inorder to make the agreement World Trade Organization (WTO) compatible.

The Commonwealth and ACP regions share in common approximately 40 members, andpotentially similar objectives in the trade negotiation arena despite differing economic inter-ests and size. Further, most Commonwealth countries have entered into some form ofregional/bilateral co-operation agreements. A common position and understanding on issuesarising from Art XXIV of the EC-ACP Agreement and regional trade agreements, generally,would therefore be beneficial to both ACP and non-ACP members of the Commonwealth.

The EC-ACP Agreement raises a number of issues vis-à-vis the WTO, specifically theissues of its WTO compatibility (and that of subsequent Economic Partnership Agreements(EPAs) and the issue of reciprocity. The importance of WTO compatibility stems primarilyfrom the fact that the majority of EU and the ACP countries are member states of the WTOand, hence, are required to comply with WTO obligations.4

The issue of reciprocity essentially relates to whether the EC can, within the WTOframework, technically grant ACP countries preferential access to its markets withoutreciprocal trade concessions being granted by the ACP countries. A related question iswhether the ACP countries are in a position to grant reciprocal trade concessions to theEC Member States and what the potential economic impact of such reciprocal trade conces-sions is likely to be for the ACP countries?

* Deepali Fernandes, Associate Economics Officer, UNCTAD. The article was written before she joinedthe UNCTAD Secretariat

1 The EC-ACP agreement signed on 23 June 2000 in Cotonou, Benin replaced the Fourth Lomé Conven-tion, which expired on 29 February 2000, prior to which there were three other conventions startingwith the first Lomé Convention signed in 1975.

2 In the past, the issue of WTO compatibility was addressed by seeking a waiver from the WTO, as theCotonou and Lomé preferences are not part of the EU's general system of preferences. The Lomé IVConvention required a temporary waiver from GATT rules to enable the EU to continue its preferentialtrade regime to the ACP group of countries. A similar waiver was sought for the current EC-ACP Agree-ment which runs to December 2007. The Economic Partnership Agreements are envisaged to go intoeffect in January 2008.

3 The EC's previous unilateral trade preferences were incompatible with the provisions of the EnablingClause. The Enabling Clause permits developed countries to extend unilateral preferential treatment totwo groups of countries i.e. Least Developed Countries or all developing countries. The EU's preferen-tial treatment of the ACP would not fall under the purview of the Enabling Clause and hence specificwaivers had to be sought.

4 The EC-ACP Agreement stated objectives include full conformity with WTO provisions (Arts 34:3, 36:1and 4, 37:7 and 41), including special and differential treatment, and active participation in the multilateraltrading system (Arts 34:4, 35:3, 37:7, 39:3, and 41:2).

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54 Commonwealth Law Bulletin Vol 31 No 3

Whereas liberalised trade maybe an objective of the ACP states, full reciprocity maynot be a desirable immediate step. Among other reasons, many ACP governments relyheavily on existing tax and tariff structures for their revenues. Instant reciprocity would leadto a loss of this chunk of revenue. Therefore gradual reciprocity would appear to be a moredesirable option, as it would enable economic impact assessment, gradual adjustments inexisting tariff structures and sufficient time to identify alternative revenue sources. Toincorporate this differential reciprocity one has to examine the existing WTO legal frame-work to ascertain whether it provides sufficient 'flexibility' for the incorporation of differen-tial reciprocity and development provisions vis-à-vis the ACP countries. This flexibilitywould have to be incorporated at two points, first, within the WTO legal framework and,secondly, within the individually negotiated EPAs.6 The question this paper seeks to addressis whether this flexibility exists in the current WTO framework; if not, then in what mannercan it be included.

The centrepiece of the General Agreement on Tariffs and Trade 1994 (GATT 1994) isnon-discrimination or what is commonly referred to as the Most Favoured Nation principleenshrined in Art I. However, certain exceptions were granted in terms of preferential treat-ment of products originating from a selected group of countries. These exempted trade pref-erences were broadly characterised into generalised and non-generalised trade preferences.

The generalised system of trade preferences that were non-reciprocal was coveredunder the 1979 GATT Decision on Differential and More Favourable Treatment, Reciproc-ity and Fuller Participation of Developing Countries (the Enabling Clause).8 The EnablingClause covers two types of non-reciprocal trade preferences:9 (i) generalised trade prefer-ences extended by a developed country to developing countries, for example the Genera-lised System of Preferences (GSP) and the more recent EU's Everything But Arms (EBA)initiative; and (ii) regional/global agreements entered into among developing countries orsouth-south trade agreements, for example MERCOSUR.10 It is clear that the EC-ACPagreement does not fall under the Enabling Clause as it does not fall into either of the above-mentioned categories.

The non-generalised trade preferences that were reciprocal fell within the purview ofArt XXIV which included all north-north free trade agreements (FTAs) and north-southFT As . This created a legal lacuna as far as non-generalised trade preferences that werenot reciprocal were concerned, that is north-south agreements such as the current EC-ACP agreement.

5 Hinkle, L, and Newfarmer, R, have suggested that the design, sequencing and timing of the EPAs andaccompanying reforms are important to overcome technical and administrative constraints to futuretrade liberalisation. Some of their suggested reforms include institutional reforms in customs adminis-tration and trade facilitation, infrastructure investment, and improvements in the investment climate toencourage private sector response. All of these reforms would require a sufficient time period. See'Risks and Rewards of Regional Trading Arrangements in Africa: Economic Partnership Agreements(EPAs) between the EU and Sub-Saharan Africa', (2005) World Bank.

6 This paper deals only with the aspects of the WTO legal framework.7 Art 1 sets out that WTO Members must grant unconditionally to each other any benefit, favour, privilege

or immunity relating to customs duties, charges, rules and procedures given to products originating inor destined for any other country.

8 See Decision of 28 November 28 1979 (L/4903).9 Para 2(a) of the Enabling Clause.10 Para 2(c) of the Enabling Clause.11 This paper uses the terms FTA and RTA (Regional Trade Agreements) interchangeably.12 The WTO provisions that deal with free trade areas and customs unions are covered under Art XXIV,

read with the Understanding on the Interpretation of Art XXIV of GATT 1994.

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The EC-ACP Agreement within the WTO Legal Framework 5 5

Given its development dimensions and its not entirely reciprocal nature, the EC-ACPAgreement raises the question of whether the EC-ACP Agreement falls within thetraditional FTA mould envisaged by Art XXIV requirements. After much discussion, suchnon-generalised and non-reciprocal trade preferences were sought to be made WTOcompatible by the grant of a specific waiver13 as an exemption from the provisions of Art Iof GATT.14 However the problem with waivers is that they are granted only for a specifiedperiod of time and have in the past been subject to legal challenge.15

In light of the above, some degree of flexibility is necessary for non-reciprocal orpartially-reciprocal north-south agreements at the multilateral level. Since the EPA negoti-ations are to be concluded in December 2007, it is important that both EC and ACP coun-tries use the present Doha trade round of negotiations within the WTO to ensure someflexibility measures are incorporated. This will provide policy space at the point at whichthe EPA negotiations are finally completed.

Part I of this paper describes the WTO legal framework as it stands, including arisingissues and problems that would indicate insufficient flexibility within legislation applicable toFT As between developed and developing countries. Part II makes the case for flexibility withinWTO legal framework, especially as far as the ACP countries are concerned. Part III sets outvarious alternatives that may have the effect of providing this flexibility for the ACP countries.

Part I: Legislative outline and arising issues of Article XXIV,the Enabling Clause and Article V

Article XXIV

North-south trade agreements fall within the scope of Art XXIV of GATT 1994. ArticleXXIV is a provision that permits the setting up of FT As and customs unions by WTOmembers as a derogation from the MFN principle, provided that the criteria set out withinArt XXIV are satisfied thereby making the FT A/customs union WTO compatible. The legalframework and some of the arising issues under discussion within the context of Art XXIVare set out below. Most of the discussions revolve around paras 4, S and 8 of Art XXIV.

(i) The purpose of an FTA under Article XXIV

Paragraph 4 of Art XXIV sets out that an FTA, customs union or an interim agreement lead-ing to one or the other must aim to facilitate trade between the parties concerned and notraise barriers to the trade of third parties.

An issue that has been raised in relation to para 4 is whether FTAs should be made toshow evidence of external trade creation or diversion as a result of the elimination of trade

13 This was earlier done in the case of the United States' Caribbean Basin Economic Recovery Act(Caribbean Basin Initiative); US Andean Trade Preference Act (ATPA); and that of the Canadian Trade,Investment and Industrial Co-operation programme (CARIBCAN).

14 GATT provisions pertaining to the granting of waivers are contained in Arts IX, XXV and the Under-standing in Respect of Waivers.

15 In the past, aspects of the Lomé Agreements have faced various forms of legal challenge within the W T Otrading system. See EEC-Member States' import regimes for bananas, initiated in February 1993.

16 Ar t XXIV of the GATT, the Enabling Clause and Ar t V of the General Agreement on Trade in Services.

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barriers between members, that is, whether para 4 is merely a purposive introduction tothe provisions of Art XXIV or whether it is an additional requirement to those already setout in Art XXIV paras 5-8. Members that are of the view that it is an additional require-ment,17 link para 4 to trade coverage. This might be interpreted to mean using an additionaltest - apart from the substantially all trade test contained in para 8 - to determine the tradecreation/diversion effects of an FTA while determining its WTO compatibility. It would inturn entail defining the nature of such a test. In the specific context of the EC-ACP Agreementit would put an additional '8 strain in terms of procedural requirements, gathering of statisticsand figures and reporting requirements within the Committee on Regional Trade Agree-ments (CRTA). The issue was resolved to some extent by the Appellate Body in the Turkey— Restriction on Imports of Textile and Clothing Products case (Turkey Textiles case), where it washeld that para 4 expresses 'purposive' and not 'operative' language vis-à-vis Art XXIV.19

(ii) The Substantially All Trade requirements are set out in paragraph 8

Paragraph 8 states:

Duties and restrictive regulations of commerce within such FTAs/customs union should beeliminated in respect of 'substantially all trade' between the concerned parties of the FTA orat least in terms of trade in products originating in such territories.

This raises three issues:

I. What amounts to duties and regulation of commerce within FTAs?20

1. Paragraph 8 provides for the elimination of restrictive regulations in respect ofsubstantially all trade (SAT). Much discussion has been generated on what the SATrequirement entails.

3. Lastly, in the absence of a definition as to what exactly constitutes an 'originatingproduct', how would products processed or assembled from inputs originatingoutside the FTA be treated? Would this involve the applicability of 'rules of origin'?

Article XXIV (8) provides for an elimination of restrictive regulations of commerce onsubstantially all trade on SAT and not merely the reduction of restrictive regulations ofcommerce.

There has been no agreement as to the extent of liberalisation that should occur beforethe SAT criteria have been satisfied. In this regard the CRTA has indicated the emergenceof two approaches. The first is a quantitative approach based on a statistical benchmark thatassesses the total trade flows between parties to an FTA existing prior to the implementa-tion of the FTA and quantified as a percentage figure. The quantitative approach may be usedto exclude a set amount of trade and completely ignore major sectors like agriculture. Forexample, the Stockholm Convention (EFTA) came in for criticism during the examinationof its WTO conformity, as even though the volume of trade under EFTA was high, theagreement excluded the agricultural sector.

17 CRTA, WT/REG/M/15, 13 January 1998, which indicates that this view has been supported in varyingdegrees by Australia, HKC, India, Japan and South Korea.

18 Additional to the 'Substantially All Trade' requirements set out in Art XXIV:8.19 Turkey Textiles WT/DS34/AB/R, para 57, adopted on 22 October 1999.20 See above.21 Report of the Working Party on the 'European Free Trade Area - Examination of the Stockholm

Convention', L/1235, adopted on 4 June 1960 95/70, 83-85, paras 48-49, 51, 54.

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The EC-ACP Agreement within the WTO Legal Framework 57

The second is a qualitative approach (based on the percentage of tariff lines covered byan FTA) whereby an FTA cannot exclude any sector (or at least major ones) from intra-trade liberalisation. The qualitative assessment method is similar to the same methodologyused in General Agreement on Trade in Services (GATS) Art V: I in relation to SAT require-ments which refers to 'substantial sectoral coverage*. This approach has been alluded to inthe discussions of working parties, as well as within the Preamble to the Understandingon the Interpretation of Art XXIV of the GATT 1994 which states that if main areas of tradeare exempted from the obligation to abolish restrictions, the contribution of FTA towardliberal trade is reduced.

Whereas the qualitative approach has been strongly supported by Australia and theUSA (perhaps because of its agricultural interests), the EU has argued that the word'substantially' does not obligate a country to liberalise all its trade; otherwise the term'substantially' would be meaningless. The Appellate Body held in the Turkey Textiles casethat the SAT test offers sufficient flexibility as the word 'substantial' is not all; it doesrequire 'something considerably more than merely some of the trade', thereforeimplying both the quantitative and qualitative elements in the calculation of the SATrequirement.

The qualitative assessment would appear to be more in line with the interests of ACPcountries, as it would not permit the exemption of sectors of key interest to ACP countries,such as cotton, agriculture, etc.

There has been much discussion and divergent views on what exactly the term'substantially all trade' translates into in terms of trade coverage. In I957,23 the ECinsisted that intra-EC trade be considered in the calculation of the 80% SAT require-ments while assessing agreements between the EC and overseas territories. Thiswould have meant that even if the overseas territories did not comply, the intra-ECtrade was sufficient to make up the 80% margin. In its more recent negotiations withSouth Africa, the EC has interpreted 'substantially all' as meaning an average of 90% ofthe items currently traded between the two partners. Australia pegged the SAT figureat 95%.24

In 2002, Australia submitted a proposal that the SAT test should be a numerical testbased on six-digit tariff line of the Harmonised Tariff Schedule, as this would prevent theRTA from excluding large sectors of trade.25 Although Australia did not suggest a figure, in1998 it proposed to the CRTA that the benchmark be set at 95%.The EU proposal madethe same year, preferred a trade volume approach, favouring deep integration by eliminatingnon-tariff barriers and harmonising regulatory standards.26 The EU proposal provided fordeveloping countries to take on lesser commitments in RTAs. Turkey favoured a quantitative

22 The working party which examined the EEC-Finland Free Trade Agreement in 1973 took the view thatthe 'substantially all' test should be interpreted to mean liberalisation of all products and not allow anexemption of a particular sector of the economy as to exempt an entire sector of the economy fromliberalisation would be contrary to the purposes of Art XXIV of the GATT.

23 Report of the Sub-group of the Committee on the European Economic Community, L/778, adopted on29 November 1957, 68/70, 99, para 30.

24 WTO members have implicitly used this figure as a measure based on existing trade, aggregated acrossall tariff lines within the CRTA while supporting their own conformity of FTAs with the SAT require-ment. Australia, however, first initiated this figure of 95%. Communication from Australia-Addendum,Australia, WT/REG/W/22/Add. 1, 24 January 1998, paras 9-10.

25 Submission on Regional Trade Agreements by Australia, Negotiating Group on Rules, WTO, TN/RL/W/15, 9 July 2002.

26 Submission on Regional Trade Agreements by the European Communities and Their member states,Negotiating Group on Rules, WTO, TN/RL/W/15, 9 July 2002.

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approach to calculating SAT requirements. Japan and Hong Kong pressed for stricter inter-pretation of the word substantial, indicating that the benchmark for ¡ntra-RTA trade shouldbe 95%, with greater sectoral coverage.

The debate to date remains inconclusive. The WTO Appellate Body has, in relation tothe SAT requirement, said nothing further than that it should include both quantitative andqualitative components.29

Rules of origin: The formation of an FTA might result in more restrictive rules of originof the FTA vis-à-vis non-members. Suggested solutions to avoid this discriminatory impacton non-members have included that the FTA contain a provision that specifies that the rulesof origin should not be more restrictive than those that existed prior to the FTA. Harmon-isation of the preferential rules of origin within the EC-ACP trading area is very important,in the absence of which transactions cost within the trading area will go up.

(Hi) Other regulations of commerce

Article XXIV:5 says:

Duties and other regulations of commerce imposed on third parties i.e. non members atthe formation of the FTA should not be more restrictive than those existing prior to itsformation.

It is generally accepted that para 8 deals with internal trade measures whereas para 5 dealswith external trade measures.

While Art XXIV itself does not contain a clear definition as to what amounts to otherregulations of commerce (ORC), there is a general understanding that ORCs would includemeasures, other than tariffs that affect trade.30 It is this broad interpretation as to whatcould amount to ORCs that has raised questions as to how exhaustive the list should be.Among member states there has been no consensus as to whether the term ORCs shouldinclude measures such as preferential rules of origin, anti-dumping, safeguards, sanitary andphytosanitary measures and technical barriers to trade.

Linked to this issue is the scope of Art XXIV, especially in relation to other GATTmatters and non-tariff regulations.3 In this respect two views have emerged:

(i) Article XXIV is a derogation only from Art I of GATT 1994, that is, the MFN require-ments, and therefore parties must abide by all other WTO regulations. If this isthe case, then Art XXIV cannot be used as a measure for defence against otherGATT-inconsistent measures. This view was put forward by the Panel in the TurkeyTextiles case.32 The decision was overturned by the Appellate Body which held thatArt XXIV may justify a measure that is inconsistent with GATT provisions

27 Submission on Regional Trade Agreements by Turkey, Negotiating Group on Rules, WTO, TN/RL/W732.28 WTO Countries wrestle with Rules on Regional Agreements, Inside US Trade, 19 October 2001.29 In the Turkey Textiles case, the Appellate Body held that the test in Art XXIV:8 implied a certain percent-

age of trade to be liberalised and the non-exclusion of any major sector of economic activity. It also saidthat the test offered some flexibility.

30 This definition was referred to in the Turkey Textiles case WT/DS34/R, paras 9,120.31 Non-tariff regulations generally refer to Import Policy Barriers such as licensing and quota requirements,

standards, testing, labelling and certification requirements, anti-dumping and countervailing measures,export subsidies and domestic support, government procurement, services barriers and lack of adequateprotection to intellectual property rights.

32 Panel Report on Turkey Textiles, adopted on 19 November 1999 (WT/DS34/R).

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The EC-ACP Agreement within the WTO Legal Framework 59

provided that (a) the customs union has fulfilled all the provisions of subparas 8(a)and 5(a) of Art XXIV and (b) the formation of the customs union would beprevented without the implementation of the measure under consideration. TheAppellate Body further held that Turkey had failed to prove that it was necessaryfor it to adopt the challenged measure,

(ii) The second view is that Art XXIV is a derogation from all GATT provisions and notmerely the MFN principle. Apart from the findings in the Turkey Textiles case, twoadditional instances point to this inter-relationship between Art XXIV and otherWTO provisions: (a) the opening sentence of Art XXIV:5 refers to the "the provi-sions of the agreement", implying it is applicable to the entire GATT agreementand not just to specific provisions within it. Similar references have been made inthe Council for Trade in Goods at the time of adopting the first terms of referencefor the examination of an FTA in the WTO; and (b) as put forward by the EC,international law holds that parties to a multilateral agreement could form subse-quent agreements between a subset of the wider agreement, varying their rightsand obligations as between themselves, provided they do not abridge the rights ofthird countries to the wider underlying agreement. Thus, a WTO member mayform FT As within the context of GATT with varying obligations as long as they didnot raise barriers to third-party trade.

There has been no consensus on the manner in which an Art XXIV:5 evaluation could bemade as far as the restrictive nature of ORCs are concerned. The EU suggested a 'balancing'approach whereby an increase in discriminatory trade barriers in one area may be offset byliberalisation of another sector as long as it leaves the non-RTA members 'on the whole'better off in accordance with the provision of Art XXIV:5. Again, as in the SAT requirement,the EU and other WTO members would be permitted to get away with substantial tradediversion as they could expand non-tariff trade barriers in a sensitive sector, such asagriculture, where other developing countries have a comparative advantage.35

(iv) Reasonable length of time

The fourth condition is that an interim agreement leading to the formation of an FTA mustinclude a plan and schedule for its formation within a 'reasonable length of time'. The reason-able length of time requirement has been clarified as not exceeding ten years except in excep-tional circumstances.37 The exceptional circumstances come into play only when parties tothe FTA inform the Council for Trade in Goods that a longer time period is necessary for theeffective implementation of the FTA and provide a reasonable justification for the same.

Although the transitional period provided for under Art XXIV is a ten year framework,several north-south agreements have exceeded this time frame.38 In practice the

33 Discussions at the time of enlargement of the EC to include Austria, Finland and Sweden.

34 EC Statement, WT/REG/M/14, 24 November 1997, para 13. The reference to international law isprobably a reference to the Vienna Convention on the Law of Treaties.

35 Cho, S, 'Breaking the Barrier Between Regionalism and Multilateralism: A New Perspective on TradeRegionalism' (2001) 42 Harv Int LJ 419 at 441.

36 GATT Ar t XXIV para 5(c).

37 Para 3 of the Understanding on the Interpretation of Ar t XXIV of GATT 1994.

38 Euro-Mediterranean Agreement between EU and Tunisia — 12 years; Trade, Development and Co-operation Agreement between the European Community-South Africa — 12 years; Canada-Chile FTA —15 years; NAFTA — 15 years.

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'exceptional circumstances' provision has been used to extend the transitional period to atotal of 17 years, that is, ten and seven.

In any event, would a time period of ten years be sufficient for the effective implemen-tation of trade reforms within the context of the EC-ACP Agreement? Hinkle andNewfarmer point out that the transitional period for implementation of the EPAs, that is,ten-twelve, years is too ambitious. In their view, even middle-income countries withsubstantial institutional capacity and strong political reforms are likely to be faced with aproblem, much less the least developed countries (LDCs) which have more serious capacityconstraints. They emphasise the importance of well sequenced and timed reforms.40

Another interesting question is what happens if at the end of the liberalisation periodthe intended trade liberalisation coverage is not achieved, that is, the SAT requirement isnot met. If the FTA falls within the purview of Art XXIV, then in the event of non-formationof the FTA within the contemplated period of time, WTO members would be in a positionto make recommendations as to how the parties to such an FTA should alter the agreementin order to ensure its compliance with Art XXIV4 '.

In the case of a south-south agreement, this question is less urgent as agreementsunder the Enabling Clause are not normally assessed under the CRTA and in any event theexamination process is not as rigorous. In the context of the EC-ACP Agreement, it wouldbe interesting how this would manifest itself.

Would it mean that in case of a failure of the EPAs to meet their liberalisation schedule,the various regional groupings within the ACP group would be required to implementsuggestions made by other members of the WTO as to the optimal manner in which theFTA can be achieved? Would this not be interference and perhaps a restriction of policymaking autonomy? Would the EC and ACP countries combined be sufficient to stem suchrecommendations, presuming they were in agreement as to the non-beneficial nature ofsuch recommendations?

(v) Applicability of the provisions of the dispute settlement understanding (DSU) incase of arising disputes under Article XXIV.

The only case that could be said to have discussed at some length the provisions of ArtXXIV was the Turkey Textiles case.43 In this case, one of the issues the Panel was faced withwas whether it had the jurisdiction to decide whether the Turkey-EC customs union was inconformity with Art XXIV. The findings raised two important issues:

39 These precedents have led to an interpretation of Art XXIV:5(c) of GATT 1994 and its Understandingthat a transitional period of longer than ten years could exceptionally be permitted for some productsif such products constitute a very small percentage of trade.

40 Hinkle, L, and Newfarmer, R, note 5 above, at 39.

41 Art XXIV para 7(b) read with the GATT Understanding provides that members must be willing tomodify their FTA in accordance with the recommendations contained in the examination report if its isfound that the agreement is not likely to result in an FTA within the time contemplated by the partiesto i t

42 Para 12 of the Understanding contains a provision whereby a dispute arising under Art XXIV pertainingto FTAs, customs union or interim agreements may be referred to the dispute settlement body.

43 In the Turkey Textiles case it was held that the Turkish quotas were W T O inconsistent and could be justi-fied only if the quotas were instituted upon formation of the customs union or were essential to theformation of the customs union.

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The EC-ACP Agreement within the WTO Legal Framework 61

(a) Measures taken by an FTA may be subject to Dispute Settlement Body (DSB) atany point in time, even if there existed previously a tacit understanding of accep-tance of the particular measure.

(b) In the absence of consensus within the negotiating body, the DSB may step in. Thisraises a question of institutional balance. In the Turkey Textiles case the AppellateBody held that it would be appropriate and necessary for the dispute settlementpanels to rule on the conformity of regional arrangements with Art XXIV. Asimilar view was expressed by the Appellate Body in respect of the Balance ofPayments case where the working party's report was inconclusive.44 Therefore,there is the possibility that issues of perceived WTO incompatibility may not bedealt with within the CRTA itself given the lengthy and time-consuming process.Instead member states may prefer to refer disputes arising under Art XXIV to theDSB.45

In the context of the EC-ACP Agreement, this raises the possibility of challenge even if theEC-ACP Agreement passes the examination within the CRTA committee and opens up thefloodgates to judicial decisions being made on RTA issues in the absence of the negotiatingbody being able to arrive at a clear understanding on the terminology of Art XXIV. A similarconcern was recently raised by the WTO's consultative body.46

Given that there are 77 ACP countries who will be granted preferential access to theEC markets, there is the likelihood of similar level countries, not party to the EC-ACPAgreement, challenging its trade preferences under the provisions of the DSU, specificallyin the absence of clarified terminology relating to FTAs. On the flip side, however, given thecurrent proliferation of FTAs it could also result in too many countries with trade interestsat stake preferring a flexible interpretation of provisions relating to FTAs. To act on thisassumption would, however, mean to leave much to chance.

(vi) Another arising issue is what exactly makes an FTA WTO compliant?

Here, too, member states' positions have been divergent There are two views as to whatwould make an FTA WTO compliant

(a) Adoption of a report that contains no recommendation, even if there are no clearconclusions.

(b) In the absence of a clear, conclusive report, the legal status of an FTA remainsunclear and therefore could be subject to dispute settlement procedures.47

It is clear that if the FTA were to meet the conditions set out in Art XXIV after anexamination carried out by the CRTA, it would be considered to be WTO compatible.However as of 2000, only one notified agreement to the CRTA was considered compatible

44 India quantitative restrictions case Panel Report, India - Quantitative Restrictions on Imports ofAgricultural, Textile and Industrial Products WT/DS90/R (6 April 1999) (adopted 22 September 221999), as modified by Appellate Body Report, WT/DS90/AB/R, AB-1999-3.

45 1994 Understanding on GATT Art XXIV makes the DSU applicable to matters arising under ArtXXIV.

46 Para 284 of the 2004 WTO report 'The Future of the WTO-addressing institutional challenges in thenew millennium', report by the consultative body to the Director General of WTO, which also pointsout that where there is a deep inability to move forward, issues that ought to have been decided by the'legislative rule making process' will be referred to the juridical system.

47 Submission by Hong Kong and China, WT/REG/W/19, paras 4-5.

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with GATT rules. Although the remainder of the working parties did not conclude thatthe agreements were not in conformity, they left the issue of conformity undecided. Thetrend towards RTA proliferation,49 hastened by post-Cancun developments and perhapsthe ambiguous wording of Art XXIV, has resulted in an 'implied acceptance' by memberstates of the WTO as to each others' flexible interpretations of Art XXIV. For example,even though the Treaty of Rome did not entirely meet the requirements of Art XXIV, thepolitical pressure to permit it was great, preventing the Art XXIV review from being pushedto conclusion.50 Most countries have vested interests in allowing this flexible approach toArt XXIV to continue. This view was shared by the Consultative Board, which emphasisedthe importance of clarification and better administration of Art XXIV provisions.5 '

As the margins of trade increase and the trade interests of third countries comes intoquestion, this situation of tacit acceptance may not last for long.

Given the time-consuming processes and the lack of momentum within the CRTA, thequestion arises as to what is the likelihood of EC-ACP Agreement being given a clear chitof WTO compliance within a reasonable time frame? Technically speaking, given theabsence or inconclusiveness within the CRTA in relation to the provisions of Article XXIV,there is no clear indication as to where the EC-ACP agreement would stand in respect ofWTO compliance. If such is the case then the EC-ACP would still be open to legal challenge.A view put forward for the reluctance and delay in GATT compliance is that it is linked tosovereignty issues. Trade liberalisation is only one of the reasons FT As are concluded,other reasons could be political and social. To what extent would member states be willingto permit perceived intervention on sovereignty issues? In addition, this inability to complywith the provisions of Art XXIV could also arise from a desire not to incriminate oneself infuture dispute settlement cases.

Services and RTAs

Article V of the General Agreement on Trade in Services (GATS) is the counterpart, in theservices sector, of Art XXIV of GATT 1994. It provides for free trade agreements pertain-ing to services, or parts of such agreements, to be notified to the Council for Trade inServices, which in turn refers them to the CRTA for examination. Article V provides forsimilar requirements as Art XXIV, that is, 'substantial sectoral coverage' and the 'absence/elimination of substantially all discrimination'; however Art V:3(a) of GATS provides devel-oping countries with flexibility with respect to both criteria.53

Art V:3(a) of GATS can be used to exempt non-reciprocal trade preferences in theservices sector.

Additional flexibility in GATS includes:

48 As per the WTO note by Secretariat, only the Czech Republic-Slovak Republic Customs Union wasconsidered W T O compliant. See Synopsis of Systemic Issues related to Regional Trade Agreements, W T /REG/W/37, 2 March 2000.

49 As of December 2002, 255 RTAs had been notified to the WTO with additional RTAs under negotiation.See Draft Report (2002) of the Committee on Regional Trade Agreements to the General Council,WTO, WT/REG/W/47, 4 November 2002, 1.

50 In reviewing the treaty, the GATT Executive Secretary expressed the view that the incidence of thecommon tariff was higher than that of the rates actually applied by the member states at the time ofentry into force of the Treaty of Rome (GATT Document C/M/8, p 6; cited in GATT 1994, p 750).

51 Note 46 above, paras 77 and 105.

52 Kessie, E, 'WTO Rules Relating to Regional Trade Agreements', WTO PowerPoint presentation forTrade Policy Issues workshop, Asian Development Bank, 25 February 2002.

53 Art V:3 provides flexibility vis-à-vis developing countries in relation to meeting the provisions require-ments of Art V.

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• Article V: I provides for 'substantial sectoral coverage', as opposed to the 'substan-tially all the trade1 of GATT Art XXIV:8.

• GATS provides the additional optional choice between eliminating existingdiscriminatory measures and prohibiting new discriminatory measures.54 Thismeans that the ACP countries may choose to reduce trade barriers by prohibitingthe creation of new or further discriminatory measures instead of eliminatingexisting discriminatory measures.

• Lastly, the time frame for implementing the requirements of GATS Art V: I (b) isleft up to the parties, with the wording of Article V: I (b) providing for the absenceor elimination of substantially all discrimination, in the sense of Article XVII,between or among the parties, either at the time of entry into force of that agree-ment or on the basis of reasonable time frame.

GATS Art V therefore appears to provide greater flexibility than Art XXIV, by making aspecific provision for the coverage of north-south agreements within the services sector. Itraises the question as to whether the absence of similar provisions within Art XXIV was anintentional omission or a result of legislative evolution.5

The Enabling Clause

The Enabling Clause56 permits both reciprocal and non-reciprocal regional or global pref-erential arrangements5 which enable WTO members to implement special and differentialtreatment, as long as the aim of such trade arrangements is to facilitate and promote tradebetween developing countries and the arrangements do not constitute an impediment totrade on an MFN basis.

As set out before, the Enabling Clause envisages three types of preferential trade arrange-ments:58 (i) regional trade arrangements among developing countries, that is, south-southtrade agreements; (ii) unilateral preferences provided by developed countries' GSP and theEUs EBA initiative; and (iii) special consideration of the needs of Least Developed Countries.

The requirements of the Enabling Clause are less stringent than those of Art XXIV. Asfar as south-south trade agreements are concerned, there is the absence of requirementssuch as SAT, reporting requirements and time limitations. Procedurally, a notification isrequired to be made to the Committee on Trade and Development. The RTA may or maynot be required to be examined in order to ascertain its conformity with the provisions ofthe Enabling Clause.

The Absence of SDT Treatment in Article XXIV and the Case toInclude such Flexibility

It appears, therefore, that Art XXIV lacks concrete development provisions that wouldprovide a certain amount of flexibility, thus enabling non-reciprocal trade concessions

54 GATS Art V: I (b).55 Art XXIV was drafted in 1947 when there were fewer north-south FTAs.56 The 'Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Coun-

tries - Decision of November 28 1979' adopted in the context of the GATT Tokyo Round negotiations.57 Para 2(c) of the Enabling Clause.58 Contained in paras 2(c), 2(a) and 2(d), respectively.

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within the EC-ACP Agreement. Given the ambiguity of Art XXIV wording, the lack ofconcrete development provisions and the real possibility of legal challenge, perhaps a morecertain option would be to consider alternative solutions, such as amendment of existingprovisions within Art XXIV, the Enabling Clause, or a mix of both.

Ambassador Ali Said Mchumo of the United Republic of Tanzania points out that therules were adopted at a time when such arrangements were negotiated mainly betweendeveloped countries. Article XXIV was negotiated as part of GATT 1947 when there werefew north-south trade agreements, and perhaps that is the reason for the absence of Specialand Differential Treatment (SDT) in the provisions of Art XXIV. On the other hand, Art Vof GATS (which came into force in 1995), intentionally provides developing countries withthis flexibility in relation to the services component of the north-south agreements.

Perhaps the case is best put forward by Ambassador Mchumo himself who said:

These rules were adopted at a time when such arrangements were being negotiated mainlybetween developed countries. Acknowledging the rigidity of the rules, developing countriesthat form regional groups among themselves have been allowed to do so under the EnablingClause instead. Deliberations in the CRTA suggest that the legal situation on RTAs is not fullyclear. Consequently, ACP countries must participate more actively in the work of the

Committee to safeguard their interests. If REPAs (regional economic partnership agree-

ments) are to be viable trading arrangements between the EU and the ACP, their legal basis

(Art XXIV) must be revisited to, inter alia, allow non-reciprocity between developed and

developing countries, and a set of corollary conditions created.59

Part II: Alternatives and Suggestions

If the aim of the ACP countries is to continue non-reciprocal trade preferences in thecontext of the EC-ACP Agreement, greater flexibility than currently exists within the WTOlegal framework in relation to north-south agreements becomes important.

The aim of such change should be: (a) to acquire legal status; and (b) to ensure contrac-tual obligations on both sides so as to avoid any manner of unilateral measures being takenat a later stage. Given these aims, the following are some suggested changes:60

Changes in GATT Article XXIV

Generic suggestions

One of the simplest alterations would be to introduce a paragraph on the same lines as GATSArt V:3, either within the provisions of Art XXIV itself or the Understanding on the Inter-pretation of Art XXIV. The paragraph could provide that developing countries may optionallychoose a less stringent application of the provisions contained in Art XXIV:5-8. A less strin-

59 Mchumo, Ali Said, 'Implications of Multilateral Trade rules for the Cotonou Partnership Agreement',Keynote Address to the Seminar on the Multilateral Aspects of the Cotonou Partnership Agreement,Geneva, (2000).

60 An excellent and in-depth analysis of possible alternatives is set out by Onguglo, B, and Ito, T, in 'Howto make EPAs W T O compatible? Reforming the rules on regional trade agreements' (2003) EuropeanCentre for Development Policy Management, Discussion Paper No 40.

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gent application of the provisions of Art XXIV could include a minimum threshold in bothSAT and transitional period conditions. For Instance, the SAT benchmark maybe requirednot to fall below 50% of all trade, or that the transitional period shall not exceed 20 years.

Specific suggestions

(i) Another option could be more flexible interpretations of the criteria required toqualify as an RTA under Art XXIV in relation to the SAT, transitional period andthe 'not-on-the-whole-higher-or-more-restrictive' requirements. For instance:

'Substantially all the trade' requirement: could involve not only differential thresh-olds for calculating SAT requirements,61 but also differing methodologies to calcu-late the SAT benchmark for developing and developed countries. Developingcountries could choose a qualitative approach, which could enable them toexclude or commit to lower SAT requirements in sectors of their export interest,that is, agriculture, cotton etc.

Longer transitional periods: this could be achieved either by extending the periodset out in the Understanding, to be longer than ten years, or by providing devel-oping countries with the option of extending the period beyond ten years, or bymeeting the "exceptional needs" test which is not made subject to recommenda-tions by other WTO member states. Another option in relation to transitionalperiods is that since Art XXIV does not contain a requirement of symmetry in themanner of liberalisation. The EC could be required to reduce all barriers to tradeimmediately on the EPAs coming into force. The ACP countries could then, overa period of ten years, slowly liberalise their tariff restrictions.

The asymmetry approach can also be applied to differential liberalisation. Whereas ArtXXIV sets out that trade barriers should be eliminated in respect of "substantially all" prod-ucts, it does not say that such liberalisation should take place in a symmetrical manner asfar as all parties to the FTA are concerned as long as the overall SAT figure is met Hencethe EU can liberalise 98% of trade, whereas the ACP countries may be required to liberaliseonly 80% of trade. This again would depend on the SAT requirement finally agreed upon. Asimilar approach was followed in the EU-South Africa FTA, whereby 96% of the goodsimported into the EU will be covered by the FTA, whereas only 86% of those imported intoSouth Africa will be covered.62

(ii) Seeking specific derogation from Art XXIV under Art XXIV: 10 as Art XXIV: 10provides that WTO member states may, by a two-thirds majority, approve propos-als that do not fully comply with the requirements of paras 5 to 9 inclusive, providedthat such proposals lead to the formation of a customs union or a free trade areaas per the conditions of Art XXIV. Proposals can thus be made in respect of theEC-ACP Agreement and the arising EPAs, either in terms of SAT or transitionalperiod requirements or both, on the lines of suggested changes made above. ArticleXXIV: 10 does not specify at what point in time these proposals may be made, thatis, at the point of formation of the FTA or at the point at which it looks like theformation of the FTA is jeopardised without the implementation of proposals.

61 Hinkle and Newfarmer have suggested that, for example, the EU could liberalise 100% of its importsfrom the ACP countries and the ACP countries could liberalise 80% of their imports from the EU, thusarriving at the target average of 90%. See note 5.

62 EU-South Africa Trade, Development and Co-operation Agreement was signed in 1999.

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(i¡¡) Another possibility is to seek a specific exception to the provisions of Art XXIV,only for the EC-ACP Agreement, in the same manner that provides for the India-Pakistan exception.63 However this is unlikely to be replicated.64

Possible difficulties in changes to Article XXIV

Changes in Art XXIV could either be made within the Article itself or through the Under-standing on Art XXIV. The problem with making changes within Art XXIV itself is that itrequires a two-thirds decision at a Ministerial Conference.65 An easier alternative66 mightbe to propose alterations/additions within the Understanding on Art XXIV to include a lessstringent application of the conditions in Art XXIV for developing countries, or to providea general SDT clause for the treatment of north-south FT As.

As suggested by Ongulugo and Ito,67 in practice even ministerial consensus might notbe a difficult proposition if it is clubbed together as part of the 'single undertaking' provisionin the current Doha round of negotiations.

Application of the Provisions of Part IV of GATT to ArticleXXIV

Another option would be to make applicable to Art XXIV (and thereby to north-southRTAs) the non-reciprocity provisions contained in Pt IV of GATT69 1994. The legal standingof Pt IV has, in the past, been questioned as to whether it should be considered a "bestendeavours clause" or whether it has legal enforceability.

GATT panels have already held as to the inapplicability of Pt IV to Art XXIV as Pt IV isapplicable to negotiations at the multilateral level and not at the regional level. In the 'EEC-Member States' import regimes for bananas', initiated in 1993, the Panel did not accept theEC's claim that the Lomé Convention was covered under GATT Art XXIV read in conjunc-tion with Pt IV. In its decision, the Panel cited the endnote of Art XXXVI:8 which limits the

63 Para I I of Art XXIV.

64 The India-Pakistan exception was made in 1947, coinciding with the political background of bothcountries.

65 Art X of the Marrakesh Agreement establishing the WTO.

66 This would require a three-quarters majority. See Art IX:2 of the Marrakesh Agreement establishing theWTO.

67 Onguglo, B, and Ito, T, note 60.

68 The Protocol amending the General Agreement on Tariffs and Trade introduced Pt IV on Trade andDevelopment in February 1965. The relevant article of Pt IV is Art XXXVI which sets out various tradeand development provisions, including that developed countries do not expect reciprocity, which, so theinterpretive note to the Article stated, meant that developed countries do not expect developing coun-tries, in the course of trade negotiations, to make contributions that are inconsistent with their individualdevelopment, financial and trade needs.

69 Art XXXVI:8 states: 'The developed contracting parties do not expect reciprocity for commitmentsmade by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of lessdeveloped contracting parties.'

Interpretative note to Art XXXVI:8: 'This paragraph would apply in the event of action under ArtXVIII:A, Art XXVIII, Art XXVIII bis ..., Art XXXIII, or any other procedures under this Agreement.'

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applicability of Art XXIV to negotiations undertaken within the GATT framework and notthose undertaken outside of it, such as the negotiation of FTAs.70

It might be argued here that Art XXIV is a multilaterally negotiated derogation fromArt I and the MFN principle. It permits the formation of FTAs provided that they meetconditions set out in Art XXIV. These conditions imply some degree of reciprocity (that is,SAT requirements, transitional periods, etc, for the purpose of trade liberalisation). Part IVwas made generally applicable to GATT and therefore Art XXXVI (8) should be read inconjunction with Art XXIV as the conditions implying reciprocity are contained within amultilaterally negotiated GATT framework.

This line of argument maybe used as a basis for revisiting the provisions of Art XXIVto carve out flexibility provisions for developing countries by perhaps modifying theendnote to Art XXXVI:8 to extend the non-reciprocity requirements to Art XXIV provi-sions. This in turn could translate into differential interpretations of SAT requirements orlonger transitional periods for developing countries within Art XXIV.

As explained earlier, the Enabling Clause, as it currently stands, covers, for thepurpose of our discussion, the existence of (i) south-south RTAs and (ii) preferential tradearrangements.

(i) South-south FTAs

One possibility is to amend the Enabling Clause to include not just south-south, but north-south agreements as well.7 This could be done under the para 44 of the Doha Develop-ment Agenda (DDA) which provides for a mandate in terms of a review of all SDTmeasures.

The problem with this is that the legal validity of the Enabling Clause has in the pastbeen challenged and may continue to be called into question. Australia, for example, hasproposed that RTAs formed pursuant to the Enabling Clause should be bought under thedisciplines of Art XXIV of GATT 1994 and the purview of the CRTA. There is the risk thatnegotiations may lead to a more stringent consideration of even south-south agreements.

(ii) The use of non-reciprocal preferential trade arrangements under the Enabling

Clause

As further suggested by Onguglo and Ito in their paper, another means of solving the issueis to differentiate on the basis of the level of development of the 77 ACP member states.Out of the 77 ACP member states, 33 can be classified as LDCs. LDCs would be subject todifferential treatment as opposed to non-LDC ACP countries. LDC exemptions for non-

70 The Endnote to Art XXXVI:8 states that 'This paragraph would apply in the event of action underSection A of Art XVIII, Art XXVIII, Art XXVIII bis, Art XXXIII or any other procedure under this Agree-ment'

71 A suggestion put forward by Bilal, S, 'Implications of the Doha Development Agenda on the EPA nego-tiations' (2002), European Centre for Development Policy Management (ECDPM), p 7.

72 Brazil, in October 2000, challenged the EC trade preference for soluble coffee imported from Andeancountries subject to certain drug control and combat measures undertaken by the Andean countries.Similarly, Thailand and India, at various points in time, have objected to certain positive incentiveschemes initiated by the EC.

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reciprocal trade preferences could be undertaken under the provisions of the EnablingClause.73 The problem with this classification of LDCs is that the provisions of the EnablingClause would have to be generally applicable to all LDC, including non-ACP LDCs.

Non-LDC ACP countries, on the other hand, may be offered trade preference underthe existing GSP system or an enhanced version of i t However it would be difficult to offernon-LDC ACP countries preferential treatment over other developing countries. In thepast, the EC has attempted to do this through a positive incentive scheme that would offertrade preferences to developing countries satisfying certain labour, environment or drugcombat conditions. These types of preferences may however be subject to challenge fromother developing countries who are not beneficiaries.

Possible difficulties arising from trade preferences

The grant of trade preferences under systems, such as the EBA and GSP schemes, posescertain difficulties: for example: (i) they are unilateral trade preferences and not negotiatedcontractual obligations. They can therefore be modified or withdrawn at any time, thusintroducing an element of instability. It also introduces an element of subjectivity as it isthe grantor who decides on product coverage and preference margins; (ii) they are open tochallenge, not only from developed countries, but also from other developing countries whomay not be beneficiaries or similar beneficiaries under the scheme;75 (iii) they are genera-lised preferences applicable to all LDCs and all developing countries and not specifically toACP LDCs/non-LDCs; (¡v) trade preferences are subject to review, (they may be conditionalon non-trade related conditionalites such as public health, labour and environment condi-tions). This raises the question as to whether they are truly non-reciprocal. A more viableoption therefore might be to bind trade preferences made within the WTO, so as to makethem legal and structured in process and substance, making them less open to challenges.

Doha Development Agenda and FT As

The DDA76 makes reference to the need for clarifying and improving on WTO provisionsrelating to RTAs. Paragraph 29 of the DDA provides for 'negotiations aimed at clarifying andimproving disciplines and procedures under the existing WTO provisions applying toregional trade agreements' while taking into account 'the developmental aspects of regionaltrade agreements'. Paragraph 44 of the DDA provides for SDT as 'an integral part of theWTO Agreements' and that 'all special and differential treatment provisions shall bereviewed with a view to strengthening them and making them more precise, effective andoperational'. The DDA therefore aims to reaffirm, strengthen and make operational SDTprovisions contained in WTO agreements. Further at the WTO's Hong Kong ministerial

73 Currently the EC has extended to 49 LDCs under its EBA initiative, duty-free market access to all LDCproducts with the permanent exception of arms and ammunitions and the temporary exemption ofthree products: sugar, bananas and rice.

74 In April 1992, the USA terminated India's GSP privileges on 60 million dollars worth of pharmaceuticalexports on the pretext that India did not have adequate intellectual property protection.

75 See note 72 above.

76 The Doha Development Agenda, adopted as a result of negotiations at the Fourth W T O MinisterialConference held in Doha, Qatar, 9-14 November 2001, sets out negotiations in several trade areas tobe completed as part of a single undertaking by 2005. Pursuant to the Hong Kong Ministerial Conference,this timeline has shifted.

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conference In December 2005, WTO members specified that RTAs have become impor-tant agreements which can foster trade liberalization and promote development formembers. While stressing the importance of transparency of RTAs as well as the need toensure that they are complementary with the WTO, the Hong Kong Ministerial Textfocussed on two points of action: (i) the need to define elements of a transparency mecha-nism for RTAs in terms of gathering factual information on RTAs without prejudice tomembers existing rights and obligations. In this regard a provisional date of April 30, 2006was set to reach a provisional decision on RTA transparency; (ii) The second more relevantpoint related to instructions to the Negotiating Group on Rules on WTO disciplinesgoverning RTA's to arrive at an appropriate outcome by the end of 2006 on SAT require-ments, the length of RTA transition periods and RTA development aspects.77

The Hong Kong Ministerial Text read together, with the DDA, and drawing from exist-ing SDT provisions within the WTO Agreements could provide a good opportunity toconsider the WTO legal framework pertaining to north-south FTAs.

Other Suggestions

The hubs and spokes analogy in the context of the EC-ACP Agreement shows that whilethe EC has access to individual ACP country markets, the ACP countries have access onlyin the EC market This might mean that the ACP countries, some of which have commonexports, agriculture for example, will end up competing with each other for the EC marketOne suggestion is to look at common areas of interest for all ACP countries, includingsectors/disciplines, etc, and conclude a single intra-ACP Agreement as a south-southagreement notified under the Enabling Clause. Subsequently, the EC-ACP agreement can benotified under Art XXIV using existing provisions for longer time periods in exception casesetc or by continuing with negotiations to incorporate more development provisions in thecontext of FTAs. This would give the ACP countries a stronger collective bargainingposition as they would be negotiating as a trade bloc.

Another issue has been whether changes and clarified rules on FTAs should applyretroactively or prospectively. Whereas some countries are in favour of retroactiveapplication of any new rules, most WTO member states are against i t7 8

Conclusion

The EC-ACP Agreement was envisaged as a comprehensive development-oriented FT A,between the EU Member States and those of the African Caribbean and Pacific trade bloc.The objective of the agreement was primarily development, with an emphasis on WTOcompatibility. It appears that the WTO legal framework, as it stands, does not cateradequately for such development-oriented north-south FTAs. In the absence of such flexi-bility provisions within the WTO legal framework, it would be difficult to fully satisfy thedevelopment objective of the Agreement and the ACP countries specific objective ofmoving towards trade liberalisation in a sequenced and balanced manner.

77 Text of the Hong Kong Ministerial Declaration, adopted on December 18, 200S. Annex D - Rules, PartII - Regional Trade Agreements, paragraphs 1-3.

78 Japan, South Korea, Hong Kong, Australia, New Zealand, India and Pakistan are in favor of retroactiveapplication. For further details, see WTO Countries wrestle with Rules on Regional Agreements, Inside USTrade, 19 October 2001.

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Apartfrom this lack of flexibility, the exact legal nature of the relationship between theWTO rules and FTAs remain unresolved. Given the reluctance of the negotiating body tomove forward, the ambiguous wording of the agreements, the inevitable conflict of tradeinterests and the very real possibility of legal challenge, it is important for flexibility provi-sions, in whatever form conceived by the ACP countries, to be incorporated within theWTO legal framework so as to ensure a degree of legal certainty.

As far as negotiations on FTAs within the WTO are concerned, countries like HongKong-China, Japan, South Korea and Australia seek to reaffirm the supremacy of the multi-lateral trading system, given the ambiguity in WTO legislation pertaining to FTAs. This nego-tiating view could translate into more transparency and stringent application of WTO rules,as FTAs could have the effect of undermining the WTO system.

One of the greatest fears about incorporating flexibility in terms of developmentprovisions in north-south agreements in general and the EC-ACP Agreement specifically isthat it would set a precedent that would be replicated by other developing countries. Thismight lead to developing countries preferring to enter into bilateral trade agreements andmultilateral trade agreements as opposed to the multilateral trade liberalisation, as theymight have more to gain at the bilateral level than at the multilateral level.

It is therefore quite possible that an attempt to incorporate development provisionswithin FTA relevant legislation in the WTO would meet with opposition. The advantage ofseeking a general exemption in respect of all north-south RTAs is that the ACP countriesare likely to find support from other developing countries engaged in similar bilateral orregional trade agreements, such as the EuroMed bilateral negotiations between the EC andMediterranean countries, the FTA of the Americas and other similar north-south agree-ments. Important allies could include the USA79 and the EC.80

It is important for the ACP countries, given their interests, the short time frame ofimplementation, their own development needs and costs, to find within the WTO a viableoption that forms part of binding requirements and would not be open to immediatechallenge within the DSU.

It would be appropriate to incorporate any planned reform within the current attemptsto clarify Art XXIV provisions as it would provide greater negotiating leverage and formpart of the single undertaking.

Whichever choice of planned reform is taken, it is important that any proposal be nego-tiated within the context of the current Doha round, where there is an explicit mandate forthe clarification of rules on FTAs, specifically their development dimension and formalisationof special and differential treatment It is important for the ACP countries to make submis-sions, lobby and follow up on submissions made within this current round of negotiations.81

79 Zoellick, R, B, US Trade Representative, 'Globalization, Trade and Economic Security, Remarks at theNational Press club', 1 October 2002. Zoellick set out a ten-point plan for the new USA trade agenda.The tenth point pertained to the use of FTAs as building blocks to achieve sustainable development.Reference was also made to the provision of special and differential treatment and flexibility within theinternational trading system.

80 Once the FTAA comes into force, the USA and Canada will not be required to apply for waivers fortheir region-specific GSP schemes. They may not necessarily support the EC-ACP in its preferentialtrade alternatives, and there is the likelihood that existing trade alternatives, such as the EC's super GSPscheme for the Andean countries, might be challenged.

81 On 26 April 2004, the ACP countries made a submission calling for the incorporation of special anddifferential treatment in W T O rules, specifically Art XXIV and the Enabling Clause. See Submission onRTAs - Paper by the ACP Group of States: 'Developmental aspects of regional trade agreements andspecial and differential treatment in W T O Rules: GATT 1994, Art XXIV and the Enabling Clause'. T N /RL/W/155.

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