International Trade Law

International Trade LawTopics Covered: Exceptions regarding trade in goods. - General Exception (Art.XX of GATT)- Exception for Regional Trade Agreements (Art.XXIV of GATT)- Economic Development Exception (Enabling Clause) 1Key headings: Introduction: nature of Art.XXThe two tier test of compliance with Art.XXTier 1: conformity with specific exceptionsMeasures necessary to protect human, animal, plant life or healthMeasures necessary to secure compliance with domestic regulationMeasures relating to the conservation of exhaustible natural resourcesTier 2: conformity with chapeau.General Exception (Article XX) Article XXArticle XX:General Exceptions - Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:(a)necessary to protect public morals;(b)necessary to protect human, animal or plant life or health;[](d)necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices;(g)relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption;

ChapeauSpecific Exceptions Introduction: nature of Art.XXArticle XX is available as a conditional and limited exception justifying a Members GATT inconsistent measure.Conditional, because it is only available after fulfilling the pre requisites mentioned in the article.Limited, because of the exhaustive nature of the list contained.It provides an avenue to Member to protect societal values.Strikes a balance between the interest of trade liberalization of protection of societal values (AB in US Gasoline) The two tier compliance testTo test whether a GATT inconsistent measure could be justified under Article XX, it needs to the ensured that the measure meets i. the specific requirements of one of the exceptions listed in paragraphs a-j of Article XX, and;ii. the requirements of the chapeau.The reason is that The task of interpreting the chapeau so as to prevent the abuse or misuse of the specific exemptions provided for in Article XX is rendered very difficult, [], where the interpreter has not first identified and examined the specific exception threatened with abuse [AB in US-Shrimp, p. 119-120] Compliance with the specific exceptionsParagraphs a j of Art.XX contains various economic/non-economic interests of societal value, e.g. plant/animal life, public morality, exhaustible natural resources etc.Different terms have been used for different categories necessary in paragraph a, b, and drelating to in paragraph c, e, and jin pursuance of in paragraph hfor the protection of in paragraph finvolving in paragraph iDifferences in this terms indicate the difference in the required relationship between the measure adopted by the Member in issue and the societal value pursued. XX(b): necessary to protect human, animal, plant life or healthA measure inconsistent with the GATT can be provisionally justified under Art.XX(b) if:The measure is designed to protect human, animals or plants.The measure is necessary to fulfil that policy objective.First element, examples:In Thailand Cigarettes, panel found that smoking constituted serious health risks and therefore measures with an objective to reduce smoking falls under Art.XX(b).In Brazil retreaded tyres, it was found that waste tyres create risk of mosquito borne diseases such as Yellow Fever and Dengue Fever. So ban on import of retreaded tyres falls under the range of allowed policy measure under Art.XX(b).An objective of environmental protection does not automatically come under Art.XX(b), unless the Member shows that there is a linkage with risks to human/animal/plant life or health. Second element: the requirement of necessity would be satisfied only if there were no alternative measure consistent with the General Agreement, or less inconsistent with it, which a Member could reasonably be expected to employ to achieve its policy objective under Art.XX(b). [Thailand Cigarettes, and US - Gasoline]Here, the question is not of the necessity of the policy objective, but the necessity of the measure to attain that objective.In EC Asbestos, it was further clarified by the AB that it is for the Members to determine the appropriate level of health and environment protection. In EC Asbestos, AB further confirmed the approach taken in Korea Beef that the requirement of necessity calls for a weighing and balancing to determine whether a WTO consistent alternative is reasonably available and the extent to which the alternative measure contributes to the realization of the objective in question.The more important the objective, the easier it is to find necessity of a measure taken.In the above dispute, the AB further introduced a requirement that any suggested alternative measure must be less trade restrictive than the one taken. In Brazil retreaded tyres it was clarified that a countrys capacity to implement the alternative measures should be considered to find whether they are reasonably availableAlso, the alternative measure must suffice to provide the same level of protection compared to the contested measure.Art.XX(b) requirements succinctly summarized in the above dispute [i]n order to determine whether a measure is necessary within the meaning of Art.XX(b) of the GATT 1994, a Panel must consider the relevant factors, particularly the importance of the interests or values at stake, the extent of the contribution to the achievement of the measures objective, and its trade restrictiveness. If the analysis yields a preliminary conclusion that the measure it necessary, this result must be confirmed by comparing the measure with possible alternative, which may be less trade restrictive while providing an equivalent contribution to the achievement of the objective. XX(d): necessary to secure compliance with domestic regulationArt.XX(d) also sets a two element test to justify a Members otherwise GATT inconsistent measure-i. that the measure is designed to secure compliance with domestic law, which itself is not GATT inconsistent, and;ii. that the measure is necessary to ensure such compliance. (in light of Korea Beef)First element: the terms laws or regulation in Art.XX(d) means domestic laws and regulations and not any measure, e.g. -Taken to ensure compliance with a non-WTO agreement (Mexico soft drinks)Taken in pursuance of any international obligation. Furthermore, To be characterized as designed to secure compliance it is not necessary for a measure to be an absolute success. A measure can be said to be designed to secure compliance even if the measure cannot be guaranteed to achieve its result with absolute certainty. (Mexico soft drinks)Second element: the interpretation of the necessity requirement in the context of Art.XX(d) is similar to that encountered in Art.XX(b). In Korea Beef, where the dual retail system of domestic and imported beef was questioned, the AB clarified the necessity requirement of Art.XX(d) in the following manner The reach of the word necessity is not limited to that which is indispensable or of absolute necessity or inevitable [] As used in Art.XX(d), the terms necessity refers to a range of degrees of necessity. At one end of the continuum lies necessary understood as indispensable; at the other end, is necessary taken to mean as making a contribution to. We consider that a necessary measure is, in this continuum, located significantly closure to the pole of indispensable than to the opposite pole of simply making a contribution to.There are other aspects of the enforcement measure to be considered in evaluating that measure as necessary. One, is the extent to which the measure contributes to the realization of the end pursued [] Another aspect is the extent to which the compliance measure produces restrictive effects on international commerce [] a measure with slight restrictive impact on imports may be more easily considered necessary than one having an intense or broader restrictive effect.

Weighing and balancing of the following factors Relative importance of the common interest/value protectedDegree of contribution of the measure towards protection of the interestExtent of restrictive effect on international trade.(Flexibility and interpretative room created by the Appellate Body) XX(g): relating to the conservation of exhaustible natural resourcesArt.XX(g) contains a three-tiered approach requiring that i) conservation of exhaustible natural resources is the subject matter, and;ii) the measure is related to such conservation, and;iii) it is made effective in conjunction with restrictions on domestic production and consumption.First element: the concept of exhaustible natural resources has a broad and evolutionary character in this context.It covers both non-living and living resources, including renewable resources, as long as they are exhaustible. (e.g. stock of fish, endangered species, etc.) Second element: It is not necessary to show that the measure is necessary. Rather it is enough if the questioned measure is related to the policy objective.To be considered as such, the measure needs to be primarily aimed at conservation of an exhaustible natural resource. [Canada Herring and Salmon, and US Gasoline]From the later AB decision in US Shrimp, it was further clarified that, Art.XX(g) requires a close and real relationship between the measure and the objective, i.e. there should be a reasonable relationship. Also, the measure should not be disproportionately wide. Third element: it is basically a requirement of evenhandedness in the imposition of the restriction on imported and domestic products.It is not necessary that the imports and domestic products are treated equally: Art.XX(g) requires that they are treated in an evenhanded manner, i.e. without any bias.Lack of evenhandedness can also vitiate finding that the measure is primarily aimed at resource conservation.If all the limitations are imposed on imports, and no similar limitation is imposed on like domestic products, then the measure is not one primarily aimed at conservation. It is a naked discrimination for protecting domestic production. (US Gasoline) Chapeau: object and purposeAppellate Body ruled in US Gasoline The chapeau by its express terms addresses, not so much the questioned measure or its specific contents as such, but rather the manner in which that measure is applied.The principle is that while the exceptions of Article XX may be invoked as a matter of right, they should not be so applied so as to frustrate or defeat the legal obligations of the holder of the right under the substantive rules of the General Agreement.Similarly, in US Shrimp need to maintain a balance between the right of a Member to invoke one or another of the exceptions of Art.XX,, on the one hand, and the substantive rights of the other Members under the GATT 1994, on the other hand Therefore, the chapeau stands to prevent misuse or abuse of the grounds of justification provided in Art.XX.It is an application oriented provision that checks the provisionally justified measures from being applied in a discriminatory manner.The task of interpreting and applying the chapeau is, hence, essentially the delicate one of locating and marking out a line of equilibrium between the right of a Member to invoke an exception under Art.XX and the rights of other Members under varying substantive provisions (US Shrimp)This line of equilibrium is found following the two guidelines provided in the chapeau That no arbitrary or unjustifiable discrimination is allowed, and;That no disguised restriction on international trade should occur. Chapeau: arbitrary and unjustifiable discriminationArt.XX does not prohibit discrimination per se, but only arbitrary and unjustifiable discrimination.The idea of discrimination under Art.XX is different from that in Arts. I or III of GATT 1994.According to the AB decision in US Shrimp, to establish arbitrary and unjustifiable discrimination three elements must exist i. the application of the measure must result in discrimination,ii. the discrimination must be arbitrary and unjustifiable in character,iii. it must occur between countries where same condition prevails. Application of a provisionally justified measure would constitute arbitrary and unjustifiable discrimination when the discrimination arising in the application of the provisionally justified measure is explained by a rationale that bears no relation to the objective of the measure or even goes against that objective. Chapeau: disguised restriction on international tradeDisguised restriction would cover any restriction that is arbitrary and unjustifiable in international trade and it has taken the guise of a measure formally within the terms of an exception listed in Art.XX.When Art.XX is only used a disguise to conceal pursuit of trade-restrictive objective.Design, architecture and revealing structure of a measure should be analyzed to determine its protective application. Art. XXIV of GATTRegional Integration exception IntroductionRegional trading arrangements, per se, are inconsistent with the WTO laws.Historically existing, regional trade agreements (RTAs) are necessary for many reasons, economic as well as non-economic.Given the paucity of the development of multilateral trade rules, RTAs have become all the more relevant.The necessary carve out to maintain the RTAs is made in the WTO laws by Art. XXIV in GATT (for goods) and Art V of GATS (for services, discussed later). Article XXIV: Territorial Application Frontier Traffic Customs Unions and Free-trade Areas

[]5. Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area;Providedthat:(a) with respect to a customs union, or an interim agreement leading to a formation of a customs union, the duties and other regulations of commerce imposed at the institution of any such union or interim agreement in respect of trade with contracting parties not parties to such union or agreement shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement, as the case may be;(b) with respect to a free-trade area, or an interim agreement leading to the formation of a free trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free-trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement as the case may be; and(c) any interim agreement referred to insubparagraphs (a)and(b)shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time. Article XXIV: Territorial Application Frontier Traffic Customs Unions and Free-trade Areas

[]8. For the purposes of this Agreement:(a) A customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories, so that(i) duties and other restrictive regulations of commerce (except, where necessary, those permitted underArticles XI,XII,XIII,XIV,XVandXX) are eliminated with respect to substantially all the trade between the constituent territories of the union or at least with respect to substantially all the trade in products originating in such territories, and,(ii)[], substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union;(b) A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted underArticles XI,XII,XIII,XIV,XVandXX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.

Role of Art. XXIVArt.XXIV holds that, the provisions of this Agreement shall not prevent,[] formation of a customs union, free trade area or an interim agreement.So the relevant provisions operate as an exception.AB in Turkey Textile: We read this to mean that the provisions of the GATT 1994 shall not make impossible the formation of a customs union [etc.]. Thus, the chapeau makes it clear that Article XXIV may [] be invoked as a possible defence to finding a [GATT] inconsistency [of a measure]. (para 45) Scope of Art.XXIVIs Art. XXIV applicable outside GATT?XXIV (5) starts with holding the provisions of this Agreement, shall not prevent []So, apparently, it should not be applicable in areas outside the coverage of the GATT 1994.However, in US line pipe, the panel highlighted the close relationship between Art.XIX of GATT and the Safeguards Agreement (SA) and held that Art.XXIV would be applicable as an exception to Art.2.2 of the SA.Similarly, in Turkey textile, Art.XXIV coverage was extended to the Agreement on Textile and Clothing (ATC), because Art.2.4 of the ATC contained specific reference of GATT 1994.Therefore, it would depend on the wording and context of the specific provision as well as its relationship with the GATT 1994.

Coverage of Art.XXIVCovers three types of agreements:Customs Union (XXIV(8(a))): the substitution of a single customs territory for two or more customs territories, so that almost all restrictions are eliminated with respect to substantially all trade between the parties (i.e, internal trade), and the parties apply substantially the same restrictions to the trade of other countries (i.e., external trade).Free Trade Area (XXIV(8(b))): a group of two or more customs territories in which almost all restrictions are eliminated with respect to substantially all internal tradeInterim Agreement: interim agreements necessary for the formation of customs unions or FTAs, subject to certain requirements. Under Article XXIV:5(c), an interim agreement must lead to the formation of a customs union or FTA within a reasonable length of time. Paragraph 3 of the RTA Understanding specifies that this period should exceed 10 years only in exceptional cases. Coverage of Art. XXIVCoverage of measures:First, the party claiming the benefit must demonstrate that the measure at issue is introduced upon the formation of a customs union that fully meets the requirement of sub-paragraph 8(a) and 5(a) of Article XXIV. And, second, that party must demonstrate that the formation of that customs union would be prevented if it were not allowed to introduce the measure at issue. (AB, Turkey textiles, para 58) Two tier test

Twofold requirements that the above types of agreements have to comply with Internal requirement: Determines the standard of relation between the parties to the agreements.External requirement: Determines standard of relation between the non-parties.

Internal requirementFor both Customs Union and Free Trade Areas, Art.XXIV(8)(a) and XXIV(8)(b) contains following language Duties and other restrictive rules of commerce are eliminated on/with respect to substantially all trade between members.Also, restrictions imposed under Arts. XI, XII, XIII, XIV, XV and XX can be maintained, where necessary Internal requirement: substantially all the tradeMembers disagree on the interpretation. There are two conflicting approaches (i) qualitative, (ii) quantitativeThe qualitative approach is designed to prevent RTA parties from maintaining restrictions to protect important sectors from competition within the RTA.An RTA should only validly operate as an exception, if it brings about closer economic cooperation among its members. Excluding an important economic sector wouldnt achieve that target.Under the quantitative approach, one suggestion is that internal restrictions should be eliminated on 95% of all HS tariff lines at the six digit level.As sometimes exclusion of a few tariff line can exclude a huge amount of trade between partner countries, an alternative approach is to have a requirement 95% of total trade volume be covered under the RTA.Debates exist, regarding apportionment of the trade volume, and applicable rules of origin.

Internal requirement: substantially all the tradeThere has not yet been any clear indication of interpretation of the term substantially all trade in any of the disputes.In Turkey Textiles, the Appellate Body noted that substantially all the trade is not the same as all the trade, but that it is something considerably more than merely some of the trade.In order to prove that NAFTA complied with Article XXIV:8(b) in US Line Pipe, the United States submitted evidence that NAFTA eliminated duties on 97 percent of the Parties tariff lines, representing more than 99 percent of the trade among them in terms of volume. The argument, though accepted in Panel stage, was considered to be of no legal effect by the Appellate Body.Problem is that there is not textual basis for further clarification.

Internal requirement: elimination of duties and restrictive rules of commerceIndicates the types of restrictions that needs to be eliminated.Duties is self evident. However, other restrictive rules of commerce (ORRC) requires clarification.The requirement of elimination applies only to regulations that have a restrictive effect on commerce, irrespective of whether the regulation imposes duties or takes some other form.No clear indication exists. Probably, any marketplace regulation that in some way or other restricts commerce would potentially fall under this provision. External requirementXXIV (5)(a) and (b) duties and other regulations of commerceCustoms Union: General incidence not to be higher on the whole compared to before the formation of Union.FTA: shall not be higher or more restrictive to non-parties to the FTA.The term is reminiscent of ORRC in Art.XXIV(8), only the word restrictive is missing.