COURSE ON WTO LAW AND JURISPRUDENCE PART I: BASIC WTO LEGAL PRINCIPLES

COURSE ON WTO LAW AND JURISPRUDENCE PART I: BASIC WTO LEGAL PRINCIPLES The non-discrimination exception for regional trade agreements Session 9 14 January 2016

REGIONAL TRADE AGREEMENTS Part I GATT Article XXIV

REGIONAL TRADE AGREEMENTS Regional Trade Agreements ("RTAs") are a major exception to the most-favoured-nation principle: Article XXIV of the GATT 1994: Customs Unions and Free Trade Areas. The Enabling Clause: Preferential trade arrangements for and among developing countries Article V of the GATS: Economic integration (services). The purpose of these arrangements is to facilitate trade between parties to arrangements. They should not raise barriers against non-parties.

CUSTOMS UNION Customs Union Definition The substitution of a single customs territory for two or more customs territories, so that: (i) (ii) duties and other restrictive regulations of commerce are eliminated with respect to substantially all the trade between the constituent territories of the union. 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. Internal Trade External Trade Article XXIV:8(a) of the GATT 1994.

FREE-TRADE AREA Free Trade Area Definition A group of two or more customs territories in which the duties and other restrictive regulations of commerce are eliminated on substantially all the trade between the constituent territories in products originating in such territories. Internal Trade Article XXIV:8(b) of the GATT 1994.

ECONOMIC INTEGRATION Economic Integration (services) - Definition Agreement liberalizing trade between or among the parties to such an agreement [but not with respect to all other WTO Members]. Article V:1 of GATS.

SUBSTANTIALLY ALL INTERNAL TRADE Customs Unions and Free Trade Areas: elimination of substantially all the internal trade barriers between the parties Article XXIV:8(a)(i) (Customs Unions) and Article XXIV:8(b) (FTAs) both require that "duties and restrictive regulations (except, where necessary those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated with respect to substantially all the trade between the constituent territories". This raises the critical question: How much trade needs to be liberalised to constitute "substantially all the trade" ("SAT")?

SUBSTANTIALLY ALL INTERNAL TRADE CRTA The "lack of consensus on the meaning of 'substantially all the trade' has repeatedly led examinations of RTAs to an impasse" DSU Note by the WTO Secretariat, 2000 AB, Turkey Textiles, para. 49: "It is clear, though, that 'substantially all the trade' is not the same as all the trade and also that 'substantially all the trade' is something considerably more than some of the trade." (CU Art. XXIV:8(a)(i)) The panel in US Line Pipe Safeguards looked at NAFTA. Elimination of duties on 97% of tariff lines and 99% of trade volume met the SAT threshold. (FTA - Art. XXIV:8(b))

APPROACHES TO "SAT" Four broad approaches can be discerned from CRTA discussions: 1. The "Quantitative Approach" - % of Trade Flows "many Members have been involved in the RTA negotiations under the impression that duty elimination needs to cover at least 90% of trade between the parties". Paper by Japan, TN/RL/W/190, October 2005 2. The "Qualitative Approach" No sector/substantial sector may be excluded The contribution of RTAs to the expansion of world trade "is diminished if any major sector of trade is excluded". Article XXIV Understanding, 4 th Preamble

APPROACHES TO "SAT" (CONT.) 3. The "Mixed Approach" - % of Tariff Lines and % of Trade Flows a benchmark to prevent the exclusion of entire sectors by "eliminating all duties on a maximum of at least 95% of tariff lines at the six-digit level in the harmonised system of tariff classification lines" coupled with a requirement that no "highly traded" products (<2%) are excluded from elimination. 4. The "Development Approach" Paper by Australia, TN/RL/W/173, March 2005 "appropriate flexibility shall be provided for developing countries in meeting the 'substantially all trade' requirement in respect of trade and product coverage, including in terms of methodology and/or lower threshold levels, applied, in the measurement of trade and product coverage of developing country parties to an RTA". Paper by the ACP, TN/RL/W/155, April 2004

APPROACHES TO "SAT" (CONT.) Developed - Developing Country RTAs and the SAT Requirement: Do developing countries need to liberalise in a reciprocal manner? "Had non-reciprocal agreements between developed and developing contracting parties been considered justifiable under Article XXIV the decisions of the CONTRACTING PARTIES on the GSP and the Enabling Clause would have been largely unnecessary. Developed countries could simply have formed a "free-trade area" with selected developing countries by reducing barriers unilaterally on imports from these countries." Unadopted GATT Panel Report, EEC Import Regime for Bananas, 1994 Does SAT need to be specific to each country or can it apply to a regional bloc generally? "only agreements providing for an obligation to liberalize the trade in products originating in all of the constituent territories could be considered to establish a free-trade area within the meaning of Article XXIV:8(b)" Ibid.

RTAS WITH NON-MEMBERS? RTAs discriminate in favour of their constituent parties, by eliminating internal tariffs and other restrictive regulations of commerce. Article I:1 states that the MFN principle applies to the treatment given by "any contracting party" to "any other country". For States participants of major RTAs, would there be an incentive to join the WTO? Article XXIV: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..."

RTAS WITH NON-MEMBERS? Potential solutions? Article XXIV:10 "The CONTRACTING PARTIES may by a two-thirds majority approve proposals which do not fully comply with the requirements of paragraphs 5 to 9 inclusive, provided that such proposals lead to the formation of a customs union or a free-trade area in the sense of this Article". Waiver under Article IX:3 of the WTO Agreement (requires three fourths majority, granted in "exceptional circumstances", for a limited time period). Some RTAs with non-members did not go through the approval process under Article XXIV:10, but instead were evaluated under procedures in Article XXIV:7, which did not result in any objections by other Members.

ELIMINATION OF TRADE REMEDIES What about the elimination of trade remedies? Must anti-dumping, countervailing and safeguard measures be eliminated pursuant to Article XXIV:8? (e.g., "duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated with respect to substantially all the trade between the constituent territories of the union"). No reference to Articles VI, XIX.

ELIMINATION OF TRADE REMEDIES What about the elimination of trade remedies? Must anti-dumping, countervailing and safeguard measures be eliminated pursuant to Article XXIV:8? (e.g., "duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated with respect to substantially all the trade between the constituent territories of the union"). Requirement of parallelism: the imports included in a trade remedy investigation should correspond to the imports included in the application of the measure, even if these imports are from RTA partners (see Argentina Footwear and US Wheat Gluten).

CUSTOMS UNIONS Customs Unions: conditions on external trade barriers Duties and other regulations of commerce imposed on the formation of the union on trade with other WTO Members not parties to the union 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 the union (Article XXIV:5(a)). This evaluation "shall be based on an overall assessment of weighted average tariff rates and of customs duties collected import statistics for a previous representative period to be supplied by the customs union, on a tariff line basis " (Understanding on Article XXIV, para. 2). Under Article XXIV:5(a), applied not bound rates must be considered (Understanding on Article XXIV, para. 2).

CUSTOMS UNIONS Customs Unions: conditions on external trade barriers (cont.) "Substantially the same duties and other regulations of commerce must be applied by all parties to the trade of territories not party to the union" (Article XXIV:8(a)). "The constituent members of a customs union are thus required to apply a common external trade regime". However, this requirement "offers a degree of flexibility" (Appellate Body Report, Turkey Textiles, paras. 49-50).

FREE TRADE AREAS Free Trade Areas: conditions on external trade barriers "The duties and other regulations of commerce maintained in each of the FTA territories and applicable at the formation of such a FTA to the trade of other WTO Members 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 FTA" (Article XXIV:5(b)) This test is simpler than that applied to customs unions under Article XXIV:5(a)).

NOTIFICATION Notification of RTAs Article XXIV:7 of GATT 1994 and Article V:7 of GATS require WTO Members to notify their RTAs (Council for Trade in Goods or Council for Trade in Services). All notifications shall be examined by a working party that will issue a report to the Council for Trade in Goods (Understanding on Article XXIV, para. 7). A Committee for Regional Trade Agreements (CRTA) was established in 1996 as part of WTO institutional structure, inter alia, to review individual agreements consistency with WTO provisions. In 2006, the General Council adopted a "Transparency Mechanism for Regional Trade Agreements" (in the form of a Decision), setting out procedures for the early announcement and notification of RTAs to the WTO.

PROCEDURE Procedure under Article XXIV:6 Article XXIV:6 provides for a procedure where the formation of a customs union may result in an increase in a bound rate of duty. In these cases, the procedure in Article XXVIII (Modification of Schedules of Concessions on Goods) is to be followed. The Understanding on Article XXIV states that "negotiations will be entered into in good faith with a view to achieving mutually satisfactory compensatory adjustment". However, where these efforts are unsuccessful within a "reasonable period", the customs union may go ahead with its plans and other affected Members may withdraw "substantially equivalent concessions".

Part II The Enabling Clause Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries GATT Decision of 28 November 1979 (L/4903)

THE ENABLING CLAUSE The Enabling Clause provides a further exception to the MFN obligation in Article I:1 of the GATT 1994 for preferential treatment accorded to developing countries: "Notwithstanding the provisions of Article I of the General Agreement, [Members] may accord differential and more favourable treatment to developing countries, without according such treatment to other [Members]". (Para. 1) The Enabling Clause has been characterised as the "the most concrete, comprehensive and important application of the principle" of S&DT. (AB, EC GSP, para. 14) Questions: Where is it? Is it part of WTO law?

TYPES OF PREFERENTIAL ARRANGEMENTS Paragraph 2 of the Enabling Clause sets out in four subparagraphs, four kinds of preferential treatment exempted from the MFN obligation in Article I:1 of the GATT: (a) Preferential tariff treatment from developed to developing countries under the GSP. (b) Differential treatment with respect to non-tariff measures negotiated under the auspices of the GATT. (c) Regional/global arrangements between developing countries for mutual reduction or elimination of tariffs. (d) Special treatment granted to least developed countries in the context of general or specific measures in favour of developing countries.

REGIONAL/GLOBAL ARRANGEMENTS Paragraph 2(c) of the Enabling Clause exempts "regional or global arrangements entered into amongst less-developed [Members] for the mutual reduction or elimination of tariffs". These arrangements must satisfy the following conditions: Para 3(a): "Designed to facilitate and promote the trade pf developing countries and not to raise barriers or to create undue difficulties for the trade of other [Members]". Para 3(b): "Not constitute an impediment to the reduction or elimination of tariffs or other restrictions to trade on a mostfavoured-nation basis". Questions: Why might some Members prefer to proceed under the Enabling Clause and not under Article XXIV? Under the Enabling Clause, would they need to comply with XXIV/SAT requirements?

XXIV/SAT REQUIREMENTS FOR DC RTAS? "The conditions that regional trading arrangements under the Enabling Clause must meet are less demanding and less specific than those set out in Article XXIV of the GATT". P. Van Den Bossche, The Law and Policy of the WTO, 2006 "Product exclusions are more common in RTAs notified under the Enabling Clause where a similar provision [XXIV] does not apply". WTO World Trade Report, 2011, p. 88

EXAMPLES OF NOTIFIED ARRANGEMENTS Only 39 RTAs have been notified under the Enabling Clause para. 4(a) which is a fraction of the 377 RTAs notified under GATT Article XXIV (242) and the GATS Article V (135). Notified arrangements under the Enabling Clause include: Customs Unions - Common Market for Eastern and Southern Africa (COMESA). FTAs - Common Effective Preferential Tariffs Scheme for the ASEAN Free Trade Area. The Transparency Mechanism for Regional Trade Agreements (WT/L/61) also applies to RTAs under the Enabling Clause. However, notifications are made to the Committee on Trade and Development as opposed to the CRTAs.

THE ENABLING CLAUSE The Enabling Clause also permits developed countries to provide non-reciprocal preferential tariff treatment to developing countries under GSP schemes (Para 2(a)) and to further preferences to the LDCs (Para 2(d)). The remaining aspects of the Enabling Clause will be examined in Session 25 of the course on 26 May 2016.

DID YOU KNOW THAT Between 1948 1994 124 RTAs/PTAs Since 1994: More than 500 RTAs/PTAa

ASIAN SPAGHETTI BOWL

AFRICAN SPAGHETTI BOWL

AMERICAS' SPAGHETTI BOWL

RTAS AND WTO DISPUTE SETTLEMENT Why have there been so few Article XXIV WTO legal disputes? All WTO Members have Article XXIV-inconsistent RTAs themselves? The provisions of Article XXIV are not sufficiently clear for a WTO panel to determine whether an RTA is inconsistent (e.g., SAT some/not all)? WTO Members are of the view that RTAs should only be considered by the CRTA and not by the WTO dispute settlement system? (See World Trade Report, 2011, p.186). All of the above?