The World Trade Organization - Regionalism and the World Trading System_E220_CK

8/12/2019 The World Trade Organization - Regionalism and the World Trading System_E220_CK

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WORLD TR DE ORG NIZ TION

REGION LISM ND TH WORLD TR DING SYSTEM

This study has been prepared under the sole responsibility of the WTO Secretariat. The analysis andconclusions contained herein should not e attributed to members of he WTO.

Geneva March 1995


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OVERVIEW AND CONCLUSIONS......................................................................................................... 1I. REGIONAL INTEGRATION: MULTILATERAL RULES AND THEIR OPERATION ............... 6

I ............................................................The MFN clause and regional integration agreements 62 ................................................................................................... The origins of Article XXIV 83 ..............................................................................................The provisions ofArticle XXIV 94 ............................................................................................................. Issues of interpretation 12(a) Inter im agreements: notification. plans and schedules for completion .................. 4(b) The substantially-all-trade requirement .............................................................. 5(c) The not on the whole higher or more restrictive requirement ............................ 6(d) Relationship between Part IV and Article XXIV ................................................... 8(e) GATT status ofagreements notified under Article XXIV ..................................... 9(f) Dispute settlement proceedings .............................................................................. 205 .......................................................................................................................Enabling Clause 26 ........................................................................................................... Article XXV (Waivers) 227 ........................................... The WTO: revised and extended rules for regional agreements 22

(a) ................... ................... .................. ........ ....The Understanding on Article XXIV 23(b) ........................................................................ The Agreement on Rules ofOrigin 24(c) ........................................................... Rules for Services: Article V of he GATS 24(d) .............................................................................. Dispute settlement in the WTO 26

8 .................................................................................. Strengthening the rules and procedures 27II. CUSTOMS UNIONS AND FREE TRADE AREAS SINCE 1948 .................................................... 28

1 ............................................................................. Regional integration in the postwar period 28(a) ............................................................................ ....................................... Europe 33

(b) North America ........................................................................................................ 38(c) Latin America ......................................................................................................... 39d) Asia and the Pacific ................................................................................................ 42

(e) Africa and the Middle East ..................................................................................... 432. Trade patterns and integration in seven geographic regions

............................................................... : ............................................................................................ 45Ill TRADE AND INVESTMENT EFFECTS OF REGIONAL INTEGRATION AGREEMENTS ... 49............................................................................................................................Trade effects 49

(a) Empir ical estimates ................................................................................................. 52 ..................................................................................................................... 1nvestment effects 53(a) Empir ical estimates ................................................................................................. 543 .................................................................. Impact on the trade policies of member countries 55

(a) ...................................................................................................................... Ill :ilfi 55(b) ........................................................................................................ Rules of origin 56(c) ....................................................................................... Poli tical economy aspects 57

4 ............................................................................... Trade policy responses of hird countries 60(a) ............................ Accession or association with regional integration agreements 60b) ....................................................... Creating new regional integration agreements 62(c) ..................................................... Supoorting multilateral liberalization initiatives 63

IV. REGIONAL INTEGRATION AND THE WORLD TRADING SYSTEM ..................................... 651 .................... Liberalization through regional integration agreements and through the WTO 66(a) ....................................................................................................................... Goods 66b) ........... ...................................................................................................... Services 70

(c) .............................................................................. lntel lectual prooertv protection 7


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I

OVERVIEW AND CONCLUSIONS

During the latter stages of the Uruguay Round, there was a surge in new regional integrationagreements thirty were notified to GATI between 1990 and 1994 as well as a deepening andwidening of existing agreements, particularly in Western Europe. The possible implications for worldtrade, for the world trading system and for trade relations generally, have been the subject of a great dealof discussion and debate. Factors fuelling concern included the shortcomings of the GAT systemwhich provided the stimulus to launch the Uruguay Round, as well as the repeated (and widelypublicised) delays in bringing the negotiations to a successful conclusion. Another factor was thereversal of the longstanding opposition of the United States to participation in regional integrationagreements. A number of countries undertook or contemplated new regional integration initiatives, insome instances as an insurance policy in the event of failure of the Uruguay Round negotiations.Many observers cited these developments as evidence of the emergence of three potentially inwardoriented trading blocs centred in North America, Western Europe and the Asia-Pacific region, andconcluded. that this signalled the end of multilateralism as the primary vehicle for postwar economicintegration.

By restoring confidence in the future of the world trading system, the successful conclusion ofthe Uruguay Round and the establishment of the World Trade Organization (WTO) on I January 995have put to rest many of these concerns. Still, the appeal of regional integration shows no sign ofabating, and the issues raised by the interaction between regional integration agreements and the worldtrading system are unlikely to disappear from the international policy agenda.

Regional integration agreements primarily customs unions and free trade areas can be studiedfrom different angles. In this study, the focus is on their systemic effects; in particular on theirinteraction with the world trading system as embodied in the GATI and the WTO. Two broad themesare addressed: first, whether postwar regional integration agreements have complemented orundermined the objectives of the world trading system; and second, whether WTO rules and proceduresare up to the task of ensuring that regional and multilateral approaches to integration are mutuallysupportive.

Part I reviews the GAT rules governing regional integration agreements, and how they havefunctioned or not functioned) in practice, as well as the changes to the rules in the WTO. Part II detailsthe postwar history of regional integration agreements, noting that integration through preferential tradeagreements has been a significant feature of the trade policies of GAT contracting parties. As a result,when the WTO was established on I January 1995, nearly all its members were parties to at least oneagreement notified to GAT (notable exceptions are Hong Kong and Japan). These range from customsunions such as the European Community and the C RlCOM, to free trade areas such as EFTA andNAFTA, and to non-reciprocal preferential agreements such as the ACP-EEC Fourth Lome Convention.If APEC's recently agreed objective of achieving open trade and investment by the year 2020 isformalized as a free trade area all WTO members will be parties to at least one preferential agreement,and third countries to other agreements.

Concerns of third countries, especially as regards trade and investment diversion, together withthe impact of regional integration agreements on the trade policies of participants and third countries, areconsidered in Part III. The more explicitly systemic effects of regional integration are then examined inPart IV, in particular, the question ofwhether regional integration agreements complement or underminethe objectives of the world trading system. Part V concludes the study by examining various issues andproposals that would arise in any attempt to strengthen and improve the functioning of WTO rules and


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procedures on regional integration agreements.Complementary or competing?

The diversity of postwar regional integration agreements makes it difficult to analyze theirimpact on trade and trade relations. First, because they have been broadly-based across GAT Icontracting parties, no generalization is possible as to the features of national economies that wouldappear to favour this line of policy development. Second, few of the regional agreements concludedamong developing countries met their original timetables. This limits the amount of relevant empiricalevidence, and complicates the analysis by making it necessary to look beyond the formal content ofindividual agreements to he details of their implementation and the results achieved. And third, regionalintegration agreements vary widely both in scope (range of policies and sectors covered) and in terms ofthe depth ofliberalization actually achieved. Thus, beyond noting their evident variety, it is not easy togeneralize about the scope of postwar agreements.

n alternative approach to understanding why regional agreements arise, and their significance,is to compare the growth in trade between participating countries and with other regions before and afterthe completion of agreements. This analysis does not support the conclusion of an increasingregionalization of world trade, nor does it confirm the often-alleged emergence of rading blocs centredin North America, Western Europe and the Asia-Pacific region. Trade with partners in the same regionand with partners in other regions has become increasingly important in national economies throughoutthe postwar period.

Western Europe, which is the only region which exhibits a clear policy-induced increase in therelative importance of intra-regional trade, is an exception to this generalization. Within this region, thecreation of the European Economic Community in 1958 led into an almost continuous process ofwidening and deepening the economic integration among its member states. In contrast, agreements inother regions mainly free trade areas either did not meet original objectives or are too recent to havehad their full impact on trade trends. But even for Western Europe, its increasing openness to trade haslargely maintained the importance of extra-regional trade in relation to output. More importantly,however, the uniqueness of the European Union in terms of the political commitment to carryintegration f r beyond what is envisaged in other regional integration agreements makes it very riskyto draw conclusions from its experience that would be applicable to conventional customs unions or freetrade areas. This uniqueness explains why the European Community is the only customs union which isa member of he WTO in its own right, in conjunction with its member states.

These considerations suggest that, rather than focusing on a formal economic or statisticalanalysis, a better approach to the question of whether regional integration agreements and the worldtrading system are friends or foes is to examine their institutional complementarity in achieving theobjectives set out by their participants. Both regional and multilateral initiatives share the generalobjective of achieving, within their respective spheres of application, the substantial reduction of tariffsand other barriers to trade , as is stated in the Preamble to the G IT 1947 and in the Preamble to theWTO. Have these two approaches reinforced or conflicted with each other in reducing tariffs and otherbarriers to trade (despite the discriminatory treatment inherent in regional agreements), and in thedevelopment ofa more open rules-based trading system?

When fully implemented, free trade areas and customs unions dismantle tariffs on all orsubstantially all trade, the first layer of barriers to market access. At the same time, it is also true that theexternal (MFN) tariffs of developed countries on industrial products have been reduced in successiveG T I tariff-cutting rounds: 43 per cent of their imports from MFN origins will be duty-free once the


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results of the Uruguay Round are fully n place, with an average tariffof 6.6 per cent on the remainder.t s clear that third countries have actively supported multilateral tariff negotiations n order to reduce

margins of preference among participants, especially in relation to the members of the EuropeanCommunity. But so have members of agreements, despite the claim that resistance to diluting regionalpreferences can be an important stumbling block to multilateral tariff-cutting. There have been nofortress-type regional integration agreements among WTO members. And although tariff barriers aregenerally higher in developing countries, autonomous liberalization - much of which has been bound nthe Uruguay Round- has greatly reduced the significance of such barriers in recent years.

The diminished role of tariffs n world trade n industrial products has shifted attention both toproducts or sectors that have lagged behind, and to other policy instruments. The latter include non-tariffborder measures, which often re not administered preferentially, and domestic policies (such asproduction subsidies), which generally c nnot be administered preferentially. Members of most regionalagreements have continued to apply non-tariff measures on imports from ll trading partners. A notableexception, of course, s the European Community, which all along has maintained a much moreambitious integration agenda, eliminating virtually all measures applied to cross-border trade among itsmembers(the European Economic Area and the Australia-New Zealand Closer Economic RelationsTrade Agreement eliminate the possibility for anti-dumping action on intra-member trade throughharmonized competition policies). As for membtirs of other regional integration agreements, they willbenefit from the enhanced transparency, predictability and procedural guarantees for the application ofnon-tariff measures to intra-area trade as well as n trade with third countries, under the WTOagreements which they participated n negotiating n the Uruguay Round.

Furthermore, few regional integration agreements cover trade n agriculture or services, orprovide for rules on other issues of major importance for the conduct of international trade relations,such as intellectual property protection and investment As a result of the Uruguay Round, members ofthe WTO subscribe to all major agreements reached covering goods (including agriculture), services andintellectual property protection, which together form an integr ted system of rights and obligations (thesingle undertaking ). Alongside this expanded and more unified legal basis, the WTO has been

provided with a strengthened dispute settlement system as well as a monitoring function in the form ofits Trade Policies Review Mechanism, which together will bring increased transparency andpredictability to trade and economic policies. Consequently, parties to regional integration agreementswill by virtue of joining the WTO adopt an enhanced set of policies, and procedures for their tradeand economic relations, including with respect to each other. Even within the European Community,where services and intellectual property protection have remained largely within the domain of memberstates, the new multilateral rules will make a difference. Conversely, it s important to note that earliersteps taken n certain regional integration agreements to develop disciplines on services and intellectualproperty protection, helped lay the foundation for progress in the Uruguay Round. The agenda of theWTO already includes issues such as environmental standards, and investment and competition policies,to name but three explicitly referred to n the Final Act, each of which has figured in various forms n atleast one regional integration agreement.

Rules and procedures for trade-related policies are the essence of the world trading system.From this perspective, it is clear that, to a much greater extent than s often acknowledged, regional andmultilateral integration initiatives are complements rather than alternatives n the pursuit of more opentrade. By accepting higher levels of obligation (than in multilateral agreements) in certain areas,members of regional agreements have gone further plurilaterally than was possible (at the time)multilaterally. Conversely, the WTO has gone further than most regional integration agreements n anumber of areas, complementing the process of plurilateralliberalization and extending those disciplinesacross all current and future trading partners on a global basis. For example, the WTO Agreement on


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Trade-Related Aspects of Intellectual Property Rights (TRIPS) will complement related provisions inregional agreements which by definition cover a limited number of trading partners. Furthermore, thenew multilateral agreements on non-tariff measures and on subsidies will substantially enhance theeffects of ariff- fr trade at the regional level.Possible reforms

f the co-existence of regional integration agreements with the GATT system is considered tohave been at least satisfactory, if not broadly positive, there is still the question of the role played byGATT rules and procedures in this outcome. While the basic orientation of the substantive rules doesnot seem to attract too much criticism, there s a widespread perception of serious difficulties at theprocedural level with the working party process, and with regard to the interpretation of and compliancewith the rules. This raises the possibility that the broadly complementary relationship between regionalintegration and the trading system thus far in the postwar period may have had little to do with theGATT rules and procedures. Considering the current proliferation of regional agreements, and therecurrent fears of trade conflicts, there is also concern about the impact of the experience with the rulesand procedures for regional integration agreements on the credibility of WTO rules and procedures inother areas. Thus, it may be that governments will consider that reforms are necessary in order to put themutually supportive relationship between multilateralism and regionalism on a more solid foundation.

The most obvious sign that the rules and procedures are not working properly is the fact that, ofthe 69 working parties that had completed their examinations by the end of 1994, only six were able to-reach a consensus on the question of he conformity of individual customs uniMs or free trade areas withthe conditions laid down in Article XXIV. Beneath this general problem lie a number of more specificdifficulties, notably conflicting interpretations of the requirements that customs unions and free tradeareas cover substantially-all-trade and that the level of trade barriers be not on the whole higher ormore restrictive . Furthermore, regional agreements notified under the Enabling Clause have given riseto additional problems, in part because the provisions are different and even less precise. The UruguayRound made only limited progress in removing the ambiguities plaguing the interpretation ofArticle XXIV, while adding similarly worded provisions for services. In addition, negotiators did notaddress the issue of the relationship between the TRIPS Agreement on intellectual property and regionalagreements that cover intellectual property rights protection.

Possible improvements in the GA TT/WTO rules and procedures fall into three categories. Thefirst concerns improving the functioning of the working party process. With the examinations ofagreements having become in practice ex post there is little or no scope for changes to be made toagreements in the light of recommendations made by third countries. In order to better ensure thatworking parties complete their examinations while there is still scope for change, one proposal is torequire notification before the formal process of signature and domestic approval begins. Onedisadvantage of this approach is that it would lead, in certain cases, to the examination of agreementsthat ended up being rejected by one or more of the countries involved, or which might otherwise changein content.

A second and more ambitious category of possible reforms centres on interpreting Article XXIVto clarity key provisions, such s the substantially-all-trade and not on the whole higher or morerestrictive requirements, or possibly considering other changes designed to improve the protection ofthird country interests. In the latter category, suggestions for reforms or for the introduction of new rulesr nge from requiring th t members o customs unions h rmonize t riffs t the lowest level ppliedpreviously by members, and requiring relatively unrestrictive rules of origin for fr trade areas, tointroducing tight disciplines to deal with hub-and-spoke systems, and requiring that customs unions


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and free trade areas have liberal accession clauses.The third category of possible reforms centres on improving the surveillance of customs unions

and free trade areas in the WTO, reforms which would not require interpreting or amending the rules.Since experience has shown that peer pressure is a key enforcement mechanism in the world tradingsystem, countries generally try to forestall future conflicts by keeping their multilateral obligations andpotential concerns of third countries in mind when drafting and administering regional integrationagreements. In this context, enhanced surveillance could make a contribution in the implementationphase of agreements, after the initial examination by the working party has been completed. TheUnderstanding on Article XXIV agreed to in the Uruguay Round has taken one step in this direction byinstructing the Council to revive the calendar for biennial reports by members of regional agreements.However, past experience suggests that its revival may not greatly improve the x post surveillance ofagreements, unless improvements are made in the manner in which this reporting requirement is fulfilledby members of agreements.

A new but related approach would be to examine individual agreements within a commonforum. Held at special sessions of WTO members, this surveillance activity could provide for a periodicstructured debate going beyond the subject-matter considered in working party examinations.Alternatively, procedures for enhanced surveillance could take the form of periodic special sessions ofWT members to examine the interaction of ll regional integration initiatives and the world tradingsystem. Among other things, such an exercise would reveal the simultaneous status of most WTOmembers as both parties t regional integration agreements and third countries to other agreements - incontrast to working parties and biennial reports, which emphasize the divergent interests between partiesto a particular agreement and third countries - thereby shoring up the collective interest in sustaining thecredibility of the multilateral rules. Either of these new approaches to surveillance would increase tbetransparency of developments under regional integration agreements and improve the dialogue betweenthe WTO members on regionalism, thereby helping to ensure a complementary relationship betweenregionalism and the world trading system.


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I. REGIONAL INTEGRATION: MULTILATERAL RULES AND THEIR OPERATION

Article of the GA1T establishes the central requirement that signatory governments( Contracting Parties in the GATI; now embers under the WTO) shall extend unconditionally to allother contracting parties (members) any advantage, favour, privilege or immunity affecting customsduties, charges, rules and procedures that they give to products originating in or destined for any othercountry. ' Such a most-favoured-nation (MFN) rule had featured in various guises in bilateral tradetreaties since the 16th century, but its inclusion in the GA1T made it for the first time an obligationapplicable to each signatory in its treatment of products of all other contracting parties, and consequentlya multilateralobligation.

Regional integration agreements receive a considerable amount of attention from tradespecialists in good measure because their provisions, while designed to permit the achievement ofgreatereconomic integration, involve an exception - indeed the major exception - to this fundamental GA1Tprinciple. Before turning to an overview of GA1T rules governing regional agreements, and the newrules that apply under the WTO, it is helpful to recall the purpose of he MFN principle.1. The MFN clause and regional integration agreements

In essence, MFN ensures that the principles ofGA1T and the commitments made in the courseof trade negotiating rounds are uniformly applied by each country to its trading partners, whichcontributes to securing and realising the economic benefits of international trade, both for importers andfor exporters.2 Equal treatment of imports from different origins helps ensure that these are purchasedfrom the lowest-cost foreign suppliers, thereby reinforcing comparative advantage in the world marketand minimizing the cost of protection at home. Exporters can expect new multilateral tradingopportunities to result from the multitude of bilateral bargains negotiated during GA1T rounds, and to beprotected from having those new opportunities impaired by subsequent discrimination between sourcesof supply. In terms of domestic political considerations, the requirement to treat all signatories equally isa restraint on the temptation to discriminate against imports from particular sources, especially small orpolitically weak countries. More generally, by limiting the extent to which a country can play favourites,and thus depoliticizing trade, the MFN principle helps smaller trading nations realize their desire to betreated equally in their economic relations with their more powerful trading partners. In these and otherways, non-discrimination contributes greatly to the regularity, orderliness and predictability which formthe essence of a rules-based international trading order.

The resulting multilateral trading system has permitted world trade to flourish through increasedreliance on comparative rather than political advantage. The additional trading opportunities arisingfrom the conclusion of negotiating rounds, automatically extended to all its members, and the enhancedoperation of the price system, have brought the world economy to the point that it is now commonplaceto speak of the global market . The postwar trading system is credited with facilitating theunprecedented expansion of trade - up 6V per cent annually in real terms since the creation ofGA1T in1947, for a twelve-fold increase versus a six-fold increase in world output and a more rationalallocation of he world's resources.

The drafters of he Gcnc::r tl Agrccmcnt also recognized that a discriminaluy application of non-tariffbaniCB could fiustrate the aim of non-discrimination with .respect to the matleni covend by Article I. he Genernl Agreement theref on: ~ n t i n s a ~ of non-di.scriminadcn or MFN-type cla uses relatmg, for example,to internal quantitative regulations Article 10:7), qulllltitative ICStrictioos Article XIII) and state trading Article XVII: I). Non-discrimination also cxlendsbeyond bordef measures. lo cover domc:stic policies affecting the treatmentof mpmed products in relation to dontcstic products once the former have passed thefrontier) through the ftiUIIiooal treatmcniM requirement in Article Ill


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With the case for non-discrimination so strong, the question naturally arises as to why thefounders of GA T included provisions permitting customs unions and free trade areas. One part of theanswer s political realism. Customs unions have a long history (see Box I), and many countries wouldnot have signed an agreement that prohibited future such arrangements with neighbours. But it alsoseems likely that genuine customs unions and free trade areas were viewed as compatible with theprinciple of non-discrimination, as distinct from the various forms of d ho and partial discriminationthat were evident in the interwar period. Dismantling restrictions on all (or most) trade represents animportant step in the direction of carrying out economic activity with one or more partners on the samebasis as, say, between different states or provinces of the same country. The founders of GAlTrecognised, in other words, that economic integration between several countries has or can have aneconomic rationale analogous to the process of integration within a single sovereign state, which in tummeans that regional integration agreements do not pose an inherent threat to efforts to promote continuedintegration on a world-wide basis.

Box 1: Sekcted early regi nal integration agreementsReciprocal reduction or elimination o rade barriers between states have a long history, as is evident from the following examples taken fromMachlup's (1977) History o[Thought on Economic lntegralion

Great Britain: proposals for union between England and Scotland during 1547-48 and the 1603 union of crowns; the 1703 Actof Union o England and Scotland established political as well as economic union.

- France: Colbert's plan in 1664 to unite all the provinces o he Kingdom into a customs union with internal free bade failed; allinternal barriers were abolished by the Revolutional)' govenunent. 1789-90.

- Canada: Ontario, Quebec, Nova Scotia, and New Brunswick agreed on free trade in foodstuffs and raw materials in 1850; as asingle union, a Reciprocity Treaty was concluded with the Unlted States o America, removing all import tariffs on natural productso both nations in 1854. The 1867 Canadian Confederation t b l i s h e d free internal trade.

- United States of America: initially American colonies mainlained separate tariff systems with a moderate number of duties; theConstitution adopted in 1789 barred the individual states from levying any duties on trade with other states.- German Zollverein: plans laid for a customs union o German splinter states which, at that time 1813-15), were imposing

customs duties at 38 frontiers; Prussia abolished internal tariffs in 1818, and through bilateraJ and plwilateml treaties in 1818-28established three customs unions, i) WOrttemberg-Bavaria, li) Prussia-Hesse-Dannstadt, and iii) Central Getman Union;eventually a treaty in 1833 established a single Gennan Zollverein, which was in effect from t834 to 1871.

Examples o other customs unions in Europe include fiVe between Austria and neighbowing countries between 1775 and 1879; the SwissConfederation, established in 1848 with economic unioo; Italian states wtited by a customs union during 1860-66; a customs unionestablished between Sweden and Norway in 1874-75; a customs union fanned by Belgium and Luxembowg in 1921; and the Beneluxcustoms union established by Belgium. Luxembourg and the Netherlands n 1944 (effective in 1947).

GA T rules on customs unions and fr trade areas reflect the drafters desire to provide for suchagreements, while at the same time ensuring that the trading interests of third countries are respected and,more generally, that such agreements are compatible with a rules-based and progressively more openworld trading system. For this reason, the provisions on customs unions and fr trade areas establish anumber of conditions which the agreements must satiszy, as well as transparency requirements in orderto monitor whether those conditions are being met.

The principal GA T rules on regional integration agreements (see Box 2) are contained in


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r t i ~ l ~ XXIV;, P art IV Trade and Development, and since 1979, the Enabling Clause (formally, theDec1s1on on D1fferentml and More Favourable Treatment, Reciprocity and Fuller Participation o fDeveloping Countries ) have offered further provisions of relevance to regional arrangements involvingdeveloping countries. In addition , Article XXV (waivers) has provided the G TT basis for several pastagreements. (Appendix Table I lists regional integration agreements notified to G TT since 194 7.)

Box GAIT provisions on rq:ional n l ~ r t i o n agreements

Ar1:ide XXIV: This Article is the principal one dealing with customs unions and free tnlde areas. It provides a number of rules governingsuch agreements, including notification and review by the contracting parties acting jointly. Agreements must m t the "substantially-alltrade requirement, and members of a regional integration agreement must have a trade policy with respect to third countries that is ot on thewhole higher or more restrictive than the individuaJ policies prior to the agreement.

Grandfathering: Certain then existing preferential trade anangements were exempted from the MFN requirement at the time of GArrsinception, including British Imperial Preferences. preferences granted by the Bmelux customs union and the French Union (Article 1:2).However, these preferences were capped and their significance reduced in the course ofmultilateral tariff-cutting exercises. Jf agreed by lheContracting Parties acting jointly, pre-existing regional integration agreements may be so exempted (grandfathered) at the request of newmembers at the time of heir accession (for example, the customs union between Switzerland and Liechtenstein is provided for in Switzerland'sGA1T accession protocol).Part IV on "Trade and Development", added to the GAlT in 1965, provides for special measures intended to promote the trade anddevelopment of developing contracting parties. Prior to the 1979 EnablingClause Part IV was invoked by developing-country participantswith respect to preferential trade arrangements which did not m t the substantially-all-trade requirementofArticle XXIV.In some instances, parties to agreements with developing countrM s have invoked Part IV in Article XXIV working parties 10 justifYpreferential, non-reciprocal access for developing counby members (for example the European Community in the context of he First, Secondand Third LomC Conventions). Views among contracting parties differ regarding the merits of nking Article XXIV with Part IV.The Enabling Clause, agreed in I979 during the Tokyo Round of negotiations, includes a legal cover for preferential trade agreementsbetween developing countries, subject to certain conditions, including transparency. Among contracting parties, views differ as to whether theE'Jlabling Clause covers regional integration agreements (customs unions and free trade areas) for which provision is also made in ArticleXXIV

Article XXV: The contracting parties acting jointly have occasionally granted waivers for sectoral free trade agreements (for example, theEuropean Coal and Steel Community in 1952 and the 1965 Canada-United States Auto Pact). ln one early instance a waiver was obtained byFnmce for its proposed customs union with Italy, not then a GA1T member.*See Section 7, below, on revised and additional provisions under the WTO.

2. The origins of rticle XXIVParagraph 2 of Article I of the G TT explicitly exempts ( grandfathers ) from the MFN

requirement preferential arrangements in force at the time the G TT came into effect. These includedthe existing British Imperial Preferences, preferences in force in the French Union, preferences given bythe Benelux countries and by the United States, those exchanged between Chile and its neighbours, andthe preferences granted by the Lebano-Syrian Customs Union to Palestine and Transjordan. However,these preferences were capped y the requirement that they could not be raised above existing levels(generally those in force in April 194 7), and the ir significance in world trade has been steadily reducedover the past four decades by successive rounds of tar iff negotiations.

The introduction of MFN, with existing preferences tolerated but capped, laid the foundationsfor future growth of world trade on the basis of non-discrimination. This was a central goal, in


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particular, o the United States. Nevertheless, even the United States, vigorously opposed to preferences,accepted from the beginning the case for customs unions in which participating countries would adopt acommon trade policy, including a common external tariff.3 A provision for customs unions was thusincluded, subject to conditions, in the United States' proposals o 1945 which launched the negotiationsthat eventually led, via the draft Charter for the stillborn International Trade Organization (ITO), to theGATT. The concept was strongly supported by several European governments, notably France and themembers o he recently established Benelux customs union.

The United States' proposals did not, however, mention free trade areas nor provide for interimagreements leading to customs unions or free trade areas. The practical need for interim agreements, onthe grounds that participants in customs unions could not be expected to move overnight to mutual freetrade and common trade policies, was accepted during preparatory negotiations on the GATT andreflected in Article XXIV o he original General Agreement signed in October 1947.

Drafting o the ITO Charter continued during the United Nations Conference on Trade andEmployment held in Havana from November 1947 to March 1948. At the end o he Conference, a FirstSession o the GATT Contracting Parties was held, at which recognition was given to the concept o afree trade area in which members would remove their mutual trade barriers but maintain their individualnational trade policies towards non-members. The proposal was introduced by Lebanon and Syria, withsupport from several other developing countries, on the grounds that avoidance o the requirement for acommon external trade policy - which required the further step o an agreement on the harmonization otrade policies - made the free trade area technique better suited to the needs o integration amongdeveloping countries. The proposal, championed by France, was accepted as a means o bluntingdeveloping-country demands for a legitimization o preferences.2 These changes were incorporated intothe General Agreement in 1948. Article XXIV has remained essentially unchanged since (the UruguayRound on Article XXIV clarifies certain provisions, but does not change the rules.

. 3 The provisions o Article XXIV'Under Article XXIV, customs unions and free trade area agreements are a permitted exception tothe cardinal principle o non-discrimination because it is recognized that such agreements have thepotential to further economic integration without necessarily adversely affecting the interests o third

countries. Paragraph 4 sets out the parameters o rade liberalization both internally and externally:the purpose o a customs union or o a free trade area should be to facilitate tradebetween the constituent territories and not to raise barriers to the trade o othercontracting parties with such territories .

Paragraph 8 o Article XXIV defines the characteristics o customs unions and fr trade areas.Summarizing and simplifYing slightly, it states that parties to customs unions and fr trade areas musteliminate duties and other restrictive regulations o commerce with respect to substantially all the tradebetween their constituent customs territories.

Under Article XXIV, customs unions and free trade area agreements are a permitted exception tothe cardinal principle o non-discrimination because it is recognized that such agreements have thepotential to further economic integration without necessarily adversely affecting the interests o thirdcountries. Paragraph 4 sets out the parameters o rade liberalization both internally and externally:

l Jlte United States took the view that the technic l diffiCUlties o ree lr dc areas would soon push their members lnto establishing full customs urlions Brown,1950, p.l56 .


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the purpose of a customs union or of a free trade area should be to facilitate tradebetween the constituent territories and not to raise barriers to the trade of othercontracting parties with such territories .

Paragraph 8 of Article XXIV defines the characteristics of customs unions and free trade areas.Summarizing and simplifYing slightly, it states that parties to customs unions and free trade areas musteliminate duties and other restrictive regulations of commerce with respect to substantially all the tradebetween their constituent customs territories.' The requirement to eliminate duties and other restrictionson mutual trade is not absolute, however. Apart from the flexibility implicit in the substantially-alltrade requirement, members may still where necessary exercise their rights to maintain duties orrestrictions under GAIT Articles XI (quantitative restrictions), XII (restrictions applied for balance-ofpayments purposes), XIII (non-discriminatory administration of quantitative restrictions), XIV(exceptions to the rules of non-discrimination), XV (exchange arrangements) and XX (generalexceptions). A further criterion which applies only to customs unions is that its members must applysubstantially the same duties and other regulations of commerce to trade with non-members (in otherwords, have a common external tariff and more generally a common trade policy).

An important rationale for the substantially-all-trade requirement is that it helps governmentsresist the inevitable political pressures to avoid or minimize tariff reductions in inefficient importcompeting sectors. A wider sectoral coverage enhances the trade-creating effect of such agreements.The requirement also ensures that regional agreements are limited to those which have sufficient politicalsupport in member countries to overcome protectionist opposition to more or less complete free tradeamong the participants, and that agreements are not misused as a cover for narrow (sectoral)discriminatory arrangements. The criterion thereby helps differentiate between politically unavoidableand containable deviations from the most-favoured principle by determining the point where tradepolicy is allowed to give way to foreign policy .' Recast to emphasize its incentive effect, the argumentis that the rules ofArticle XXIV attempt to limit discrimination by imposing a high (political) cost on it:strictly interpreted, they would only allow it when the parties are really serious about favouring eachother (free trade among the partners for most products) ... [thus) the high political cost of establishingsuch preferential arrangements acts as a deterrent to their formation. 6

Paragraph 5 of Article XXIV spells out the conditions to be met by customs unions and freetrade areas so as to avoid adverse effects on the trade of third countries. A major constraint placed oncustoms unions is the requirement that the common external tariff, and other trade measures imposed atthe time of the formation of a customs union, be set at a level that is not on the whole higher or morerestrictive than was imposed by the constituent territories prior to its formation. If the level of thecommon external tarif f is such that any of its individual members' bound tarif S are raised, paragraph 6states that the procedures set forth by Article XXVIII shall apply . This procedure provides for thewithdrawal or modification of previously negotiated tariff concessions, with the possibility forcompensatory tariff reductions (see Box 3), taking into account the new market access opportunities

JAniclcXXIV provides no guidance on one of he reatun:s that distiuguishcs a fee ttade area &om a customs union, namely, lhe rules of origin. These areelaborated by mc:mbcrs of free trade areas due 10 the fact that each mains ils owa cxtcmal trade policy, in conlrast to members of customs unions. These rules areused to detennine the products that are eligible for duty-free treatment in inua-area trade.

vincr 1950), Bhagwati 1991) 8lld Roessler 1993).sRocsskJ 1993, p.314).6Roesslcr 1993, p.314). Snape 0.993. p.286) continues ~ H o w e v e r interpretation of rticle XXIV has lowered this OSI for all countries while the Enabling

Clause has reduced the cost for developing ~ s even further. 1be plethora of pseudo-free trade agreementS now being implemented proposed and thelhre at which they provide to an efficient. libendizins, ndtillltend system, s gest that the cost may now be too low.


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created for the same product by decreases in tariffs of other members of the customs union.' Membersof free trade areas, even though they do not adopt a common external tariff or commo n trade policy, aresubject to similar obligations.

Box3 Operation ofArticle :XXVIUArticle XXVIII entitled Modification of Schedules is the main procedure for the withdrawal of previously negotiated lariff o m m i t m e n ~ asbound in wro schedules. The need to invoke this provision generally occurs in the event of he fonnation of a customs union. whereby thewro schedules of its constituent members are withdrawn and their new tariff policies are those of he customs union, as reflected in a singlecommon tariff schedule. For example, the European Community has a single tariff schedule, and each successive enlargement has requiredthe withdrawal of he new members' previous GAlT schedules.In this event, it may be the case that the tariffbound on a particular product in a new membets previous Uniff schedule is to be replaced with atariff bound at a higher level in the customs union's conunon schedule. Under Article XXVIII, negotiations are required with certain tradingpartners (those with initial negotiating rights or principal suppliers) in order to obtain agreement on a compensatory reduction in tariffs onother products. No specifac fonnulae for compensation are included in Article XXVIU to guide the negotiations. In general terms, thepurpose is to maintain a general level of reciprocal and mutually advantageous concessions not less favourable to trade than that provided forin this Agreement prior to such negotiations.f no agreement is reached between the withdrawing members and their affected trading partners, the withdrawal may nevertheless take place.

A f f ~ t e d trading partners arc subsequently free to retaliate by withdrawing previously negotiated tariff concessions. This retaliation is, by itsnature. effected on an MFN basis, which means that it is very difficult to larget the retaliation on an individual country without also affectingthe trade interests of other trading partners For this reason, it seems that only in three cases was retaliatory action taken (actions taken byAustralia in 1968, Canada in 1976 and in 1986, respectively, following actions taken under Article XXVIII by the European Community, butnot in connection with Article XXIV:6 negotiations). As a Secretariat Note on ''The Use of Article XXVIII of he GATf (GA1T DocumentMTN.GNG/NG7/WIIO) stated: The very rare use of he retaliation provision ofArticle XXVIII:3 would therefore appear to be based on thefact that in almost all cases, negotiations were successful and partly also because of he diffkulty inherent in finding appropriate concessionswith regard to which retaliatory action can be taken; the latter point applies especially to countries with a limited number of tariffconcessions.n

Paragraph 7 contains requirements to ensure transparency ofproposed agreements. Agreementsare to be promptly notified to GAIT for examination by the contracting parties, which may makerecommendations. Because customs unions and free trade areas are normally established over a fairlylong period to avoid the economic dislocations of a rapid move to free trade among the members,Article XXIV provides explicitly for interim agreements. To avoid the danger that such interimagreements are used as a pretext for introducing discriminatory preferences, paragraph 5(c) requires thatthey include a plan and schedule for the formation of such a customs union or such a free trade areawithin a reasonable length of time . If the contracting parties, acting jointly, find that the plan andschedule in the interim agreements are not likely to lead to the formation of the customs union or freetrade area, or not to do so within a reasonable period, the contracting parties are to makerecommendations. The agreement is not to be maintained or put into force unless it is amended inaccordance with such recommendations.

In 1972, it was decided that notification should be made following the signature of theagreements. 8 The practice has been for parties to the agreement to provide trading partners with a text of

7Thc Decision on Procedures for Negotiations under Article XXVIW (BISD 27SI26) confinn that these are in relevant parts also valid for Rneg,otiations underArticle XXIV:6.

'The 1972 Decision states that the Colmcil decides to invite oonlral:ting parties that sign (emphasis added] an agreement falling within the lemiS ofArticle XXIV paragraphs to 8 to inscribe the itcmoo the agenda for the first meeting of he Council following such signat urt ..w (BISD 19S/13).


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4. Issues o interpretation5For most of GAITs first decade of existence, the General Agreement's rules on regional

agreements were little used, and remained - as had been envisaged by the drafters - a minor element inworld trade relations. This changed in 1957, with the notification to GA1T of the Treaty of Romecreating the European Economic Community (EEC). The birth of the Community, an event of primepolitical and economic importance, required the GA1T contracting parties to interpret certain provisionsof Article XXIV for the first time, and involved, again for the first time, important trade and economicinterests on all sides. The member states of the proposed EEC, on the one side, and many of theirtrading partners, on the other, found themselves unable to reach agreement on the consistency of theTreaty with Article XXIV, or on compensation for changes in the bound tariffs ofEEC member states. thas been argued that, in the ensuing attempt to reconcile GAlT provisions with a political developmentof over-riding importance, compromises and interpretations were put forward that subsequentlyundermined the authority and clarity of he GA1T rules on regional integration agreements. 10

Although the Treaty of Rome was drafted with the GAlT rules in mind, its examination inGA1T revealed diametrically opposed views among different parties on the compatibility of several ofits provisions with Article XXIV. Questions were raised regarding the trade implications for nonmembers of the application of a simple, unweighted arithmetic average of the tariffs applied by each ofthe EEC member states as of I January 1957. Third countries argued that this approach would lead to asubstantial increase in tariffs affecting products of current export interest, thereby conflicting with therequirement of paragraph of Article XXIV that the common external tariff not be set at a level that wason the whole higher than previously.11 Strong objections were voiced regarding the association betweenthe Community and the Overseas Territories , mainly former colonies and territories of France and ofmembers of the Benelux Union. This association, although presented as a collection of bilateral freetrade areas, was seen by non-members as effectively dismantling the ceiling placed on preferences inforce at the time the GA1T was established, thereby creating a new and wider preferential system. As aresult, no agreement was reached on the compatibility of he Treaty of Rome with Article XXIV, and thecontracting parties agreed that because there were a number of important matters on which there wasnot at this time sufficient information .. o complete the examination of the Rome Treaty thisexamination and the discussion of the legal questions involved in it could not be usefully pursued at thepresent time .12 The examination of he EEC agreement was never taken up again.

The inconclusive nature of the examination of the Treaty of Rome set a pattern which was todominate virtually all future examinations of agreements notified under Article XXIV. Summing up thisexperience, the Chairman of the Working Party on the Canada-United States Free Trade Agreement(CUFTA) introduced the report to the GAlT Council in 199I y observing that

Pattcrson 1966) and Finger 1993).11Patterson (1966).

ISD 75n I Consultation and notificati.OD procedures were agreed and it was reaffirmed that p o s ~ p o n n e n t wou]d clearly not prejudice the rights o thecootniCI ing parties under Article XXJV.


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Over fifty previous working parties on individual customs unions or free trade areas hadbeen unable to reach unanimous conclusions as to the GAIT consistency of thosea g r e e m ~ t s . On t h ~ other hand, no such agreements had been disapproved explicitly ...One m 1 g h ~ ... questmn what point was there in establishing a working party if no-oneexpected It to reach consensus findings in respect of specific provisions of such

~ r e e m e n t s or to recommend to the participants how to meet certain benchmarks. Itm ght not be irrelevant that the Working Party on the [Canada-United States Free Trade]Agreement commenced work only after a delay of more than two years. As furthera g r e e m ~ n t s carne along, there might be a risk that they would be treated increasinglys u p e r f i c ~ a l l y a n ~ t_hat :ontracting parties would lose - if they had not already done so.the abd1ty to d1stmgmsh between agreements of greater or lesser GAIT consistency.. 3

In adopting the Report of the Working Party, the Council agreed to consider how examinations ofagreements submitted under Article XXIV might be improved. At the December 1992 session of thecontmcting parties, the Chairman observed that the time is now ripe for a substantial review of the wayin which working parties fulfil their remits under Article XXIV, especially to ensure that the results oftheir efforts are both clear and meaningful . 4 This question remained on the agenda of the GAITcontracting parties in 1993 and 1994, but no review took place. In view of the fact that theimprovements agreed to in the Uruguay Round (see Sections 6 and 7 below) do not alter existingprocedures for examination, the question of the working party's examination of agreements will alsofigure on the agenda of the WTO.

A principal concern, especially in the light of an increasing number of regional integrationagreements, is that such initiatives and the world trading system can and should be mutually supportive.Leaving aside for the time being the question of whether agreements since the creation of the GAIThave met this goal, it is evident that the interpretation of the obligations and the application of theprocedures relating to Article XXIV have encountered a number of serious problems, as described morefully below. At the interpretative level, these problems are mainly due to the imprecise language ofArticle XXIV in a setting that does not invite consideration of systemic aspects of such processes butwhere, instead, third countries concentrate on the specifics of the case in hand and seek to limit the tradediversionary effects of regional integmtion agreements (see Part III of this study), and of course tomaintain their GAIT rights. In turn, as a result driven at least partially by the procedures themselves,third countries have generally withheld their approval of particular agreements, leading to aninconclusive examination process. These issues are discussed in Part V in connection with possibleimprovements in the rules and procedures.(a) Interim agreements: notification, plans and schedules for completion

As was noted above, a contracting p rty entering into a customs union or free trade area isrequired to promptly notifY the contracting parties. With respect to interim agreements, especially,Article XXIV provides for the contracting parties to make recommendations to the parties to theagreement if, after having studied the plan and schedule for its'completion, they find that such agreementis not likely to result in the formation of a customs union or of a free trade area within the periodcontemplated or that the period is not a reasonable one. The parties to the interim agreement shall notmaintain or put into force the agreement if they are not prepared to modifY it in accordance with theserecommendations.

llGATTdocument CIM/l 3, p.2S.14GA T ress Releasc 15S8, p.3.


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Most notified agreements have in practice been interim agreements, and the p r c t ~ c e ofparticipants in terms of the timing of notification has varied. In the first d e c d ~ of GAITs htstory,notification was made with the intention of seeking the approval of the contractmg parties before thefirst actions were taken under the agreement. The Treaty of Rome, for instance, was signed on 25March 1957 and notified to the contracting parties immediately thereafter, with the Treaty entering intoforce on 1 January 1958. Similarly, the examination of the Montevideo Treaty establishing the LatinAmerican Free Trade Association (LAFTA) n 1960 was completed before entry into force.

Since these early agreements, however, there have been few instances in which the workingparty completed its examination of an agreement prior to its entry into force. For agreements notifiedsince 1980, the period between the date of entry into force and the adoption of the working party's reporthas ranged from three months to over four years. Partly, this is due to sometimes very short intervalsbetween signature and entry into force, but in other cases, notification has occurred only after ratificationof the agreement by the domestic legislatures, leaving little time for examination prior to entry intoforce. Recently, the NAFTA was ratified by Canada, Mexico and the United States in 1993 and enteredinto force on I January 1994, while its members agreed to the establishment of a working party only inJanuary 1994. Similarly, the enlargement of the European Union on 1 January 1995 to include Austria,Finland and Sweden preceded the establishment of a working party In practice, the examination ofagreements by the contracting parties has become x post when there is little or no opportunity for thirdcountry concerns raised in the working party to be taken into account by members of he agreement.

In discussions among participants in working parties, the provisions of interim agreements haveraised issues of interpretation. Article XXIV requires that interim agreements include a plan andschedule for the formation of a customs union or of a free trade area within a reasonable time .However, no defmitions of the terms interim agreement , plan and schedule and a reasonable lengthof time are provided. This absence of agreed definitions h s led to controversy in certain casesregarding whether a particular interim agreement qualified as such, in that it clearly and unambiguouslywould lead to the establishment of a valid customs union or free trade area, within a well-defined periodoftime. In several instances, third countries were of the opinion that there was no definite end-point tothe period of transition since no reference dates were provided for in the text of the agreement. Thisissue has arisen less fiequently in interim agreements notified recently, however, which have includedplans and schedules with fixed transition periods.

Another area of difficulty has been the reporting obligations of members of regional agreementssubsequent to the working party's examination. In 1971, the contracting parties acting jointly instructedthe GATT Council of Representatives to establish a calendar fixing dates for the examination every twoyears of reports on preferential agreements.15 The effectiveness of this exercise was undermined by theabsence of an agreed format for reports - reflecting the different opinions on the objective of thisreporting obligations among contracting parties - and the contracting parties claiming to have completedthe implementation of free trade areas or customs unions (for example, the European EconomicCommunity, the European Free Trade Association and the Australia-New Zealand Closer EconomicRelations Trade Agreement) did not submit reports. A calendar for such reports h s not been set by theCouncil sinee 1987.(b) The substantially-all-trade reauirement

uB SD 18SJ37


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Differences ofopinion among participants in working parties regarding the interpretation of thesubstantiaiJy-aiJ-trade requirement in Article XXIV have been a major reason why working partieshave not reached a consensus on theGAIT consistency ofindividual agreements.

This requirement refers to the scope of liberalization to be achieved by members of a customsunion or free trade area. Discussions in GAIT working parties have centred on whether this conceptshould be understood in qualitative terms (no exclusion of major sectors) or in quantitative tenns(percentage of trade of the members covered). With regard to the qualitative perspective, third countrieshave questioned whether agreements that explicitly excluded trade in unprocessed agricultural products -the case with most agreements - met the substantialJy-alJ-trade requirement.7 For example, the workingparty which examined Sweden's fr trade agreements with the Baltic States would have agreed on thefulJ confonnity of these agreements with Article XXIV, the rest of whose contents and provisionsreceived broad acceptance, had some members of the working party not claimed that the exclusion fromthe agreements proper (and separate treatment) of agricultural trade prevented fulJ confonnity of theAgreements with the obligations ofArticle XXIV. 6

The signatories defending their agreement in this particular instance, and more generalJymembers of agreements which exclude agricultural products have maintained that the criterion ofArticle XXIV is that obstacles be eliminated on substantialJy all the trade between the parties and not ontrade in substantially all products or sectors. These members thus believe that this language does notpreclude the exclusion of a sector of economic activity such as agriculture, provided that the overalltrade coverage of the agreement meets the criterion laid down in Article XXIV. This quantitativeinterpretation of the relevant provision of Article XXN:8(b) thus argues that the percentage of trade onwhich obstacles had been eliminated by the agreements should be considered as detennining whether theprovision has been respected.17 The counter-argument is that the observed value of trade in a givensector may be low as a result of impediments to trade, and not because of its having an intrinsicalJylesser economic or trade importance. These differences of opinion demonstrate the subjective nature ofthe interpretation of Article XXIV:8(b) in the absence of further u i d a n ~ e or agreed interpretations.

Another issue on which differences of opinion have been frequent is the scope o iberalizationn the notified agreement in terms o measures rather than sectors covered in particular the extent to

which non-tariff as weiJ as tariff measures on intra-area trade are dismantled. As was noted earlier,Article XXIV :8 specificaiJy provides that members of a fr trade area or customs union may exercisetheir rights to maintain duties or restrictions on intra-area trade under a list of certain GATT Articles. Ifthis were to be interpreted as being an exhaustive list, it would disqualifY agreements where membershave retained the right to apply restrictions on intra-member trade under GATT provisions not explicitlymentioned in the list, such as safeguard measures (under Article XIX) or restrictions for national securityreasons (under Article XXI) or even to apply anti-dumping or countervailing measures (Article VI). Inthis regard, the EEC argued, before the Committee which examined the Treaty ofRome, that nationalsecurity (Article XXI) was not mentioned in the list but it would be difficult, however, to dispute theright of contracting parties to avail themselves of that provision which related, inter alia to traffic inarms, fissionable materials, etc. 8

~ a rr documeat tnns.7be report of he working party on lhc ~ u r o p e a n &onomie Community records lhe proposal ofEEC th t a fiee trade area s h ~ l l d be oonsidcrcd as havingbeen achicvod fOf substantially all the trade when lhe volwnc of iberalized trade reached RO percentof otal trade BISD 65199)

BISD 6S/70.


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17

A related issue is whether parties to a free trade area or customs union are entitled (or, indeed,can be required) to exempt the other members from safeguard actions in the form of quantitativerestrictions (for example, under Article XIX), which would otherwise be administered in a nondiscriminatory manner according to historical tmde shares (Articles XIII and XIV). Is a member of anagreement permitted to introduce such restrictions only on imports from non-members even though thealleged source of the problem is imports from all sources? In practice, members of certain free tradeagreements have sometimes exempted regional trade partners from safeguard actions. 9 However, thirdcountries have often taken issue with an interpretation of Article XXIV that permits a departure from allGAIT obligations requiring n o n ~ d i s c r i m i n t o r y treatment.20(c) The not on the whole higher or more restrictive requirement

A major constraint placed on customs unions under paragraph of Article XXIV is therequirement that the common external tariff and other restrictive regulations imposed at the time of theformation of the union not e on the whole higher or more restrictive than those imposed by theconstituent territories before the formation. As was noted above with reference to the Treaty of Rome,the method in which the common external tariff of a customs union is elabomted from individualmember tariffs - for example, simple avemging, trade-weighted averaging or alignment at the lowesttariff has important effects on the ex post market access opportunities of third-country suppliers. Aclosely related issue is whether it is necessary, for the purpose ofmaking a comparison between ex anteand ex post market access opportunities, that a country-by-country and product-by-product examinationof the effect of increases in tariffs be undertaken. In the examination of the Treaty of Rome, thirdcountries argued that members of a customs union or free trade area should not raise barriers to the tradeof any individual third country, while the EEC was of the view that such an interpretation would beinconsistent with the requirement that the duties and other regulations imposed at the institution of theunion should not on the whole be higher or more restrictive than the general incidence prior to theformation of he union. The requirement has been interpreted by the EEC to apply to third countries as agroup rather than individually, and to not preclude the raising of barriers to trade in a sector or sub-sectorofmerchandise trade provided barriers are lowered in other sectors or sub-sectors. Third countries haverepeatedly raised their concerns regarding the operation of this provision in the working partiesestablished to examine subsequent enlargements of he EEC.'

1'Thc OUecto General's Annual Report for 1992-93 to the Council on 8 Devd.opments in International Trade and the Trading System (GATT DocumeatCIRM/OV/4) provides details on five new Article XIX actions: On 8 Aprill992, Hung;uy notified a swcllarsc: of per cent on imported cement and an iqx>rtqoota 011 intraocular lenses applicable for the calendar year 1992 (these two actions expired at the end of 1992). On 1S November 1992, Hunglll)' imposed importquota on certain pap products for Orts from Qr'iglns except foc the European Conununitics and Finland, with whom it has &ee kadc

On 26 February 1993, the European Communities introduced mWmum ~ f o whitefish from all origins (cod, haddock. coalfisb, hake andmonkfish). extended on 13 MatCh (to Alaska pollack), t remain in force unbl30 June 1993. On IS April 1993, Austria introduced a siOOal quota for a twelvemonth period on imports of certain fertilizers, wbicb applies to all ttadi.ng partners wb ic:h an:: not of he Ew-opean Comnunities EfTA.

rbe report of the wking party on European Free Trade Associatioo and Associacioo between EfTA and Finland Accession ofkeland ~ t h viewof certain members ~ t h t Article XXIV did not affect the obligatioo of contracting parties 1o apply quota restrictions in a DOIHliscriminac ory IJIIIIUICf (BISDl8S/177).


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As regards bound rates, if a contracting p rty proposes to increase a bound rate of duty onjoining a customs union, the normal G IT procedures for the modification of schedules apply, as setforth in Article XXVIII. In providing for compensatory adjustment, paragraph 6 of Article XXIV statesthat due account is to he taken of the compensation already afforded by the reductions brought about inthe corresponding duties of the other members of the union. However, controversy exists as to when thenegotiations for compensation should he carried out (before or after the establishment of the customsunion), the nature of compensation, and whether account must also be taken of tariff reductions by themembers of the customs union on other items. The negotiations on compensation that followed thesubmission of the common external tariff of the EEC (the 96 Dillon Round), proved sufficientlycomplex and disappointing for third countries that some were led to threaten retaliation.>

A particularly controversial issue in examinations of free trade areas has been their rules oforigin, which are the criteria established for products to receive free trade area treatment in instances inwhich intermediate goods imported from third countries are used in the production process. Sincethere are more and less restrictive ways of designing and administering rules of origin, third countrieshave been concerned that such rules create new trade barriers to their trade with member countries. Thirdcountry members of the working parties on the 1973 free trade agreements between the EC andindividual EFTA member states, for example, indicated that the effect of heir rules of origin would he toraise barriers to third-country trade in intermediate products, and that the rules oforigin were so complexand cumbersome as to be a barrier to trade in and of hemselves?' Another view was that the absence ofG IT guidelines on rules of origin for regional integration agreements left contracting parties free toadopt whatever rules they may deem appropriate.(d) Relationship between Part IV and Article XXIV

As was noted above, Part IV of the G IT on Trade and Development (Articles XXXVI,XXXVII and XXXVlll) establishes the principle of non-reciprocity in trade negotiations betweendeveloped and developing countries, and provides for developed countries to adopt special measures topromote the expansion of imports from developing countries. Part IV has been invoked in certaininstances by developed country parties to agreements with developing countries to justifY preferential,non-reciprocal access for developing country parties. For example, in the working party on the FirstLome Convention, the European Community stated that it had not demanded reciprocity in its traderelations with contracting parties from the African, Caribbean and Pacific (ACP) group of countries inthe light of their development needs and the principles of Part IV of the General Agreement 9 Noreverse preferences were required of the ACP countries, and all remaining preference arrangements withACP countries (for example, under the Yaounde Convention between the original six members of theEC and their former colonies) were eliminated. The parties to the Convention were of the view thatthese trade arrangements were compatible with their obligations under the General Agreement inparticular the provisions of Articles I:2, XXIV and XXXVI, which had to he considered side by side andin conjunction with one another .24 Other participants in ttie working party did not share this view,arguing that reciprocal preferences should he part of any regional integration agreement.25 t was alsoemphasized that Part IV of the G IT did not permit discrimination against other developing countries,since it endorsed special treatment in favour of ll developing countries and not just a sub-group.

PanerSOD 1966).nRulcs of origin are elabofated by menbc:rs of free trade areas due to the fact that cacb 1ctains its own external trade policy in contrast 10 members of ~ s t o m s

unions.nBISD lOS/14.5, 20S/. 8 2051171, lOS/113, 2051196.lCBISD 23S/53.

has also been an issue in the working parties lhllt examined the Australia-Papua New Guinea Trade and Commercial Relations Agreement BISD24S/63), and the agreements between the European ommunity and Algeria Egypt. JordMt Lellanon Morocco, Syria aad Tunisia, rcspcctivdy, for which Article


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These arguments were taken up again in the working parties established to examine the Second,Third, and Fourth Lome Conventions. (See also item (f) below on dispute settlement proceedings.)Recently, the working party examining the Fourth Lome Convention heard the views of severalparticipants that:

" .. while they recognised the Lome Convention as a praiseworthy initiative, it violatedmost favoured nation treatment and they could not accept that it was in conformity with Article XXIVand with Part IV of the General Agreement. They strongly affirmed tha t the Convention would be inconformity with the provisions of the General Agreement only if the parties to the Convention weregranted a waiver of their contractual obligations under the provisions of Article XXV as was done forthe United States' Caribbean Basin Initiative and Canada's CARIBCAN programme."26

On 9 December 1994, the GATT contracting parties acting jointly (Artic le XXV:5) granted the membersof the Fourth Lome Convention a waiver from Article : until29 February 2000 to the extent necessaryto permit the European Community to provide preferential treatment for products originating in ACPstates as required by the Fourth Lome Convention?

7The decision notes that the parties to theConvention made the request for a waiver without prejudice to their position that the Convention is

entirely compatible with their obligations under Article XXIV in the light ofPart IV.(e) GAIT status of agreements notified under Article XXIV

As of January 1995, a total of 98 agreements had been notified under Article XXIV (seeAppendix Table I for details on notifications and Part U of this study for the postwar history of regionalintegration).' 0 Working parties were established to examine virtually all notified agreements. In recentyears, the large volume of agreements notified under Article XXIV has led to a practice of grouping,where possible, the examination of several agreements under a single working party. This applies toagreements whose purpose is to link West European GATT members with countries in Central andEastern Europe. For example, a single working party examined Switzerland's agreements with Estonia,Latvia and Lithuania, respectively.

Five working parties, for various reasons, did not complete their examinations?' Sixty-nineother working parties have submitted their reports to the Council. There are, in addition, fifteen workingparties where the examina ion was still ongoing at the end of 1994 and is continuing in 1995 under theWT0 29

XXIV and Pa11IV were claimed in coojunelion BISD 24SI80, 2SS/114, 25SII33, 25S/142, 24SJ88, 2SS/123, 24SI97).GATI document l/7502.

nGAIT documeat tn604.lln e 1961 Ghana-Upper Volta Agrc:emcntfl was examined with lhc 1962 African Cotnnon Market . which was not r tified The examination of lhc 1973

a c c ~ ~ s i o n of Denmark, Ireland and doc United Kina;dom o tm: EC was hailed. The examination of the 1974 Bulgaria-Finland Agreement was suspended. T heworking party ~ i n g the 1975 Finlancl-Gcnrmn Dernoaatic Republic Agnx:ment submitted an interim report.~ GATI WOJking parties that have not Oftllleted their examinations as o the end of 1994 include those established to examine: he Free Trade

Agreements between the EC and the Czech Rep. and the Slovak Rep., Hungary, and Poland, respectively; the EFTA-Bulgaria Free Trade Agreement; the EFTAHungary free Trade Agreement; the EFTA-Israel Free Trade ~ the EFTA-Poland Free Trade g r e e m c n ~ the EFTA-Romania Free Trade Agtecment;the Free Trade Agn:emcnts between Switterland and Estonia, Latvia, and Uthuania. respectlvcly; the North American Free Trade ~ t (NAFTA); theCentral European Free Trade AgJecmmt (CEFTA); the Free Trade AgJcements between Slovenia and the Czech Rep. and Slovak Rep., respectively.


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Confonnity with Article XXIV has been explicitly acknowledged by the working party, throughthe requisite consensus, in the case of only six agreements: the Southern Rhodesia-South AfricaCustoms Union Agreement; the El Salvador-Nicaragua Free Trade Area and the Participation ofNicaragua in the Central American Free Trade Area; the Caribbean Free Trade Agreement and the laterCaribbean Community and Common Market (CARICOM); and the Czech Republic-Slovak RepublicCustoms Union. In the case of the Ireland-United Kingdom Free Trade Agreement, the conclusionsstated that no recommendations were being made under paragraph 7 of Article XXIV. Since four ofthese six agreements are presumed to be no longer operative, there are only two active agreementsnotified under Article XXIV - namely CARlCOM and the customs union between the Czech and SlovakRepublics - on which a definite view has been expressed by the working party on the confonnity of theagreement with the requirements laid down in Article XXIV.

In the remaining cases the vast majority- the conclusions of the reports submitted by theworking parties generally note the divergent views expressed by participants regarding the confonnity ofthe agreement in question with the GATT, with members of the agreement upholding the latter sconfonnity with Article XXIV, whi le one or more third countries taking. an alternative view orwithholding any definite view on the question. Thus, while there have been very few unanimousconclusions or specific endorsements that all the legal requirements ofArticle XXIV have been met, theworking parties have also never reached the conclusion that the legal requirements had not been met. Inother words, and this needs to be emphasized, making no pronouncement o the key matters they werecharged to examine has been the rule for Article XXIV working parties The absence of suchrecommendations has been interpreted by several contracting parties as meaning that it must therefore bepresumed that the agreement in question is in confonnity with Article XXIV, while others haveconsidered that, in the absence of any final decision by the contracting parties acting jointly on theconfonnity of a particular agreement with the provisions of Article XXIV, the legal status of such anagreement remains open.(f) Dispute settlement proceedings

The obligations ofGATT Contracting Parties have been enforced under the dispute settlementprovisions (Articles XXII and XXIII) through complaints brought by governments of trading partners.The fiTS step has been the request by the applicant contracting party for consultations with therespondent contracting party. The second step has been the establishment of a panel to examine thelegal basis of the complaint and provide the GATT contracting parties with an advisory opinion on thematter in the fonn of a report. The next step, in most complaints, has been the request by the applicantfor adoption of he report by the Council, the governing body of the contracting parties. Adoption underthe GATT h s required consensus.

Despite the large number of agreements notified under Article XXIV, and the absence ofconsensus findings on their compatibility with the GATT in virtually all working party examinations,preferential treatment granted and notified under Article XXIV has been tl1e subject of only three disputesettlement proceedings in GAITs history. Two of these cases have occurred within the past two yearsand all three have involved the EC as the respondent. In each instance, the preferential suppliers haveblocked a consensus on the adoption of the report by the Council, and the reports of these panels haveremained unadopted.


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The first of these cases was EEC - Tariff treatment of citrus products from certainMediterranean countries , a complaint initiated in 1982 by the United States.3 In its report, the panelfound that tariff preferences were contrary to the most-favoured-nation obligation under Article 1: IAlthough Article XXIV could provide a legal cover for such preferences, the panel noted the absence ofconsensus on conformity with the GATTof the agreements under which these preferences were granted.The panel considered that the legal status of the agreements under the GATT therefore remained open,and recommended that the EC undertake offsetting or compensatory adjustment to the extent that thegrant of tariff preferences had caused substantial adverse effects to the trade opportunities of the UnitedStates. Supported by the Mediterranean countries concerned, the EC disagreed with the Panel'sconclusions, arguing that their implementation could disrupt the balance and basis of the agreementsconcluded with the Mediterranean countries and was therefore not politically viable.31

In the second case, EEC - Member States' import regimes for bananas , a request for theestablishment of a panel was made in February 1993 by Colombia, Costa Rica Guatemala, Nicaraguaand Venezuela. The Panel found that Part IV of the General Agreement was not intended to subtractfrom other GATT obligations - through discriminatory treatment, for example- and concluded that alegal cover for the tariff preferences (on bananas imported from ACP countries) under considerationcould not be found in Article XXIV or in Article XXIV in conjunction with Part IV. The Panelrecommended that the contracting parties, acting jointly, request the EC to bring its measures intoconformity with the GATT.32

The third case followed from the second. On I July 1993, the EC instituted a common marketorganization for bananas, replacing the various national banana import regimes existing in the memberstates. The new Community-wide set ofmeasures for bananas included duty-free access for traditionalACP suppliers and a tariff quota of 2 million tonnes for third-country shipments and non-traditionalACP sources combined. Colombia, CostaRica Guatemala, Nicaragua and Venezuela initiated a disputesettlement proceeding against this new regime, claiming that aspects of this regime were inconsistentwith a number of the EC's GATT obligations. A panel was established in June 1993 which ruled infavour of the Latin American complainants on a number of these issues. Following a negotiation, and aspart of the European Community's Uruguay Round commitments on agricultural products, a tariff quotaof2.2 million tonnes of bananas was agreed for Colombia, Costa Rica, Nicaragua and Venezuela, whichin tum agreed not to ask for adoption of the panel's ruling (a satisfactory settlement of Guatemala'scomplaint remains pending). A related development is the waiver for the EC mentioned earlier, toprovide preferential treatment for products originating in ACP states as required by the Fourth LomeConvention.5. Enabling Clause

n e countries in the Meditcnancan region in question were Algeria, Cyprus Egypt Israel, Jordan, Lebanon Malta. Morooco, Spain then not 1 member o heEC , Tunisia and Turkey.

J1GATI I98S, pp.43-44).11GA1T Focus March 1993, No. 97.


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The Enabling Clause was agreed in November 1979, as part of the results that emerged from theTokyo Round.u t includes a number of provisions permitting GAIT contracting parties to grantdifferential and more favourable treatment to developing countries, notwithstanding the nondiscrimination requirement in Article I of the General Agreement. It thus provides the legal cover for,most notably, trade concessions granted to developing countries under the Generalised System ofPreferences (GSP) of 25 June 1971, by waiving the provisions of Article I, in its application todeveloping countries, initially for a period of ten years. Paragraph 2(c) of the Clause applies suchtreatment to regional

Documents

The World Trade Organization - Regionalism and the World Trading System_E220_CK