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FRED TROST
“Yet, nearly five decades after the founding of GATT, MFN is no longer the rule; it is almost the exception.”[1]
The recent proliferation of Regional Trade Agreements[2] (RTAs) between WTO-GATT member states draws into focus the apparent contradiction that such agreements pose against the background of the original charter of the WTO viz. to promote multilateral trade arrangements via Most Favored Nation treatment (MFN) and, that of RTAs which are “inconsistent with this obligation because of the most favourable treatment granted by FTA parties to each other’s goods.”[3] Indeed, the original mandate of the WTO, with the end of WW2 in sight, was one of actively discouraging bi and plurilateral agreements in favour of multilateral agreements which (it was expected) would promote global free trade through consensus between all member states.
However, just the opposite has happened and MFN has been discarded in favour of more expedient RTAs which, whilst legal in terms of the loose interpretation of GATT rules and weakness of the WTO as an administrative instrument, are certainly not in the spirit of MFN treatment on which GATT was founded. Notwithstanding this conflict, there are those who argue that RTAs lead more rapidly to MFN treatment whilst, the contrary view is that it leads to entrenched regionalism favouring large, developed economies such as the United States and European Community at the expense of the smaller middle powers (such as Australia) and developing nations.
Whilst there is an apparent conflict between MFN treatment and RTAs the reality of economic politics is driving the growth of RTAs. This is evident as the WTO reports from 1948 to 1994 GATT received 194 notifications of RTAs whereas from 1995 to the present over 240 have been notified to the WTO.[4] As Goh (2006) observes, there have been more RTAs “concluded in the first 10 years of the World Trade Organization (WTO) than in the previous 50 years of GATT.”[5] The following graphic representation well illustrates the growth of RTAs from GATT 1947 to 1995 and post 1995 to 2006.[6]
Key:
Enabling Clause – Developing Countires -1979 Tokyo Round
Article V – GATS
Article XXIV - GATT
As at July 2007 there were 205 RTAs in force accounting for some 40% of total global trade[7] and by 2010 it is expected that over 400 such agreements will be implemented.[8]
This paper will explore the GATT exception rules that permit WTO-GATT member states to enter into MFN discriminatory RTAs and issues in respect of how these rules are interpreted by various member states to provide legality to particular RTA agendas. The various WTO supervisory and appellate bodies appointed to interpret GATT rules and report on their conformity (or otherwise) will also be identified. Given that RTAs have now become the norm instead of the exception in respect of the promotion of international trade it is also important to discuss why this is so and global economic merits or otherwise of RTAs vs. MFN in promoting world trade.
Arising from this examination it is axiomatic that the paradigm shift from MFN to RTA calls into question the relevance of the WTO and, consequently, raises a further question, albeit beyond the scope of this paper to address; is the move from MFN treatment to RTAs signaling a return to the pre-WW2 trading block systems?
As Pascal Lamy put it, RTA “proliferation is breeding concern”[9] and become a major issue for the WTO-GATT as the move away from multilateral negotiation brings into question the ‘raison d’etre’ of the organisation and, therefore, the need to reform it if it is to maintain its relevance. This view is echoed by Davey (2007) not only in respect of the WTO but also the IMF and World Bank when he posits that some “of the questions raised about these organizations go to the very essence of their existence. For example, are they still needed?”[10]
The central concept of MFN in GATT has been extended into other WTO trade agreements and, consequently, is now also prioritised under the General Agreement on Trade in Services (GATS) (Article 2) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) (Article 4).[11] This means that in respect of the areas of trade covered by the WTO there should be no discrimination in trade or services between member countries.
Although there are MFN exception rules in GATS, given the constraints of this paper, attention shall focus on the how MFN in GATT 1994 is circumvented in the creation of RTAs with particular reference to Article XXIV.
However, before examining Article XXIV in more detail it is necessary to understand the central role of MFN treatment in GATT. Following from this, in order to appreciate how RTAs have proliferated, it is pertinent to gain a contextual appreciation of how these exception rules evolved by examining the historical background to the formation of GATT.
It is universally acknowledged that the foundation core of GATT 1994 is the concept of free, multilateral trade between member states. This is clearly enunciated in GATT 1994, Part I, Article 1.1, General Most Favoured Nation Treatment, “…any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other destined contracting parties.”[12] MFN treatment is further stipulated in Article XIII in respect of ‘like’ products[13] providing for non-discriminatory administration of quantitative restrictions. This simply means that any trade restriction or quota “must be administered in a non-discriminatory fashion regarding like products, and that in administering import restrictions and tariff quotas, WTO Members shall aim to allocate shares close to that which might be expected in their absence.”[14]
The claimed positive effects of MFN status on the global economy include increased efficiencies based on the principle of comparative advantage, stabilisation of the free trading system by increasing predictability of trade and therefore enhancing trade and investment between countries and reducing the costs associated with the maintenance of the free trade system by reducing WTO member “monitoring and negotiation costs - the cost of watching and comparing treatment received with that given to third countries - and of negotiating remedies to disadvantageous treatment”[15] as well as associated country of origin costs.
Whilst the foundation concept of MFN in GATT 1994 and claimed associated benefits to world trade is self evident from the above, in order to appreciate why MFN has been eroded by RTAs, it is important to appreciate that it was the history of GATT’s formation that has resulted in MFN becoming the exception rather than the rule.
Global commerce developed from a system of bilateral trade treaties in the 1700’s that saw the emergence of a closed system of trading blocks such as the Imperial Preference System which, by the 1930’s, underpinned a large portion of the world’s commerce. It has often been said that these trading blocks (based in most part on old colonial alliances) was a contributing factor to global conflict culminating in WW2 and, hence the end of the War saw a dramatic change in the international trading paradigm from that of bi or plurilateral trading regimes to one of multilateralism.[16]
Planning for a global free trading economy post WW2 emerged from the Atlantic Charter[17] and Mutual Aid Agreement[18] negotiations between the United States of Amercia (U.S.) and Great Britain in 1941.[19] These negotiations also involved the laying of the groundwork for what would become the World Bank, IMF[20] and the mooted trade regulating body called the International Trading Organisation (ITO) which, for reasons to be elaborated later, did not materialise until, the formation of the WTO.[21] In order to avoid trade related wars, the U.S. position was essentially predicated on the principal of free trade between the U.S. and its allies[22] and Cordell Hull, the then U.S. Secretary of State,[23] was appointed by President Roosevelt to “initiate negotiations with Britain on postwar economic policy.”[24] Keynes, on the British side, had been an advocate of maintaining preferential trading regimes in place, [25] given the vested commercial interests of Great Britain and its Commonwealth he was quite a passionate advocate of the pre-war Imperial Preference trading bloc system.
The importance of these conflicting positions is that the negotiation in the lead-up to the formation of GATT in 1947 was predicated on two opposing trade philosophies, multilateralism versus traditional trading blocs.[26] It was not surprising that the U.S. argument should win on this position given that, economically, it had the whip hand, however, it was also deemed pragmatic that RTAs “could have an overall benefit to international trade and that some trade liberalisation between some countries was better than none at all.”[27] This was of particular importance given the “need to support European integration efforts then underway and its importance for European (and international) peace and security.”[28] Thus, the seeds for bi and purilateral trade arrangements were already sown in the fabric of the pre-GATT negotiations and then enunciated, in particular, in Article XXIV of the GATT 1947.[29]
Whilst the UN was working on the ITO the 22 UN member nations (convened by the U.S. to form the working group on the trade liberalisation program) drafted a temporary document called the ‘General Agreement on Tariffs and Trade’ (GATT).[30] Given what was happening at the UN there was scant regard given to any instruments of trade administration such that, when GATT came into force in 1948 under the ‘Charter for an International Trade Organisation’[31] the body that was to regulate it, the ITO, had been shelved by U.S. Senate.[32]
As GATT was never ratified as a treaty by member countries they were not required to enact legislation to mandate its provisions and, instead, “GATT was brought into being under the 1947 Protocol of Provisional Application (PPA), under which the contracting parties undertook to apply the various trade policy disciplines.”[33] by complying with Section II of the GATT (national treatment laws) “to the fullest extent not inconsistent with existing legislation.”[34] The idea was that future agreements would conform to the GATT whilst protecting pre-existing laws and agreements and, as Raghavan (1990) notes, this permitted countries newly acceding to the GATT to claim the same privileges as the founding states.[35] In any event, it was thought that the absorption of GATT into the ITO would lead to ratification but this did not transpire due to U.S. Senate intransigence to ratify the Havana Charter.[36]
This left GATT, as the framework around which future international trade was to be conducted. It is therefore important to bear in mind that GATT arose as a set of general, ‘temporary’ trade rules that had been drafted out of a set of competing wartime U.S./British trade interests and that these interests reflected both the U.S. position of “substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis”[37] and that of the U.K. to protect its Imperial Preference system.
The legacy of wartime negotiations on the initial draft of the GATT and the failure to have the GATT regime incorporated into an administrative body such as the ITO left the provisions, most notably Article XIV and XXIV of GATT, by which countries can opt out of the regime of MFN in favour of preferential trade arrangements in the form of either Customs Unions or Regional Trade Agreements (RTAs).
Notwithstanding, GATT has succeeded in providing a trade negotiation framework with the 8 rounds since 1947 culminating in the completion of the Uruguay Round in 1993 with 117 countries agreeing to “reduce trade barriers and to create more comprehensive and enforceable world trade rules.”[38] The proof of the effectiveness of GATT has been a decline in general tariffs from an average of 50% to 5% albeit that there are still extant many trade anomalies and tariff peaks.[39]
Arising from the Uruguay round was a re-affirmation of the original GATT 1947 agreement as GATT 1994 and an agreement called, appropriately, Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations as well as the creation of the WTO in 1995. Despite the idealistic principles of the WTO being “the foundation of the multilateral trading system,”[40] as it emerged from Uruguay Round negotiations it was nothing like the ITO envisaged by Keynes and, as George (2007) put it, the “present World Trade Organisation is even further removed from his vision.”[41]
Before examining rules, such as Article XXIV of GATT 1994 used to circumvent MFN obligations, it is appropriate to define a RTA.
There are many terms used to describe trade agreements outside of the WTO multilateral trading system. These include ‘regional’, ‘preferential’ or ‘free’ trade agreements as well as ‘Customs Unions’ i.e. countries employing common customs policies such as the EC. The WTO defines RTAs as having “both a more general and a more specific meaning: more general, because RTAs may be agreements concluded between countries not necessarily belonging to the same geographical region; more specific, because the WTO provisions which relate specifically to conditions of preferential trade liberalization with RTAs.”[42]
Accordingly, for the purpose of this paper, the term ‘Regional Trade Agreement’ (RTA) will be employed to cover the wide range of bilateral and multi-country (plurilateral) preferential trade and tariff arrangements such as the North American Free Trade Agreement (NAFTA), the Southern Common Market (Mercosur), and Australia–New Zealand Closer Economic Relations (CER).[43]
Whilst the term ‘regional’ denotes close geographical proximity of partners such as EC members or CER there is a trend to expand such agreements far more widely; for example, between Europe and the Carribean (CARICOM) or the Tripartite Agreement between Egypt, India and Yugoslavia. Given that some countries who are close regional partners such as India/Pakistan and China/Japan are not likely to agree to a RTA in the near future the expression is used “both to accommodate ‘extra-regional’ agreements and to emphasise the preferential (and discriminatory) nature of such arrangements”.[44]
As distinct from dealing with matters in trade only, RTAs now “cover services, investment, intellectual property, technical barriers to trade, dispute settlement, supra-national institutional arrangements and so on”[45] and contain such disciplines as may limit the “use of quantitative restrictions and subsidies.”[46] The EC is an example of such an arrangement in that the single market effect has seen the elimination and harmonisation of technical barriers that has achieved economies of scale and enhanced competitiveness.[47]
As has already been mentioned, the rapid growth of RTAs has been almost exponential in the last decade since the formation of the WTO. The following chart provides some appreciation of this growth such that nearly all WTO members belong to a RTA and some are involved in over 20 such agreements.[48]
Even Australia has been an active participant in the RTA rush. Up until 2003 Australia only had one RTA, CER[49], however, as Goh (2006) observes, since then Australia has concluded RTAs with “Singapore, Thailand and the United States. Australia is currently negotiating or exploring FTAs with ASEAN, China, Malaysia, Japan, Mexico and the United Arab Emirates.”[50]
Having dealt with the definition of a RTA, this paper will now address how RTAs must conform to GATT rules in order to be accepted by the WTO.
There are several rules in GATT 1994 that permit WTO members to enter in RTAs. The Sutherland Report[51] (SR) outlines the two principle classes by which MFN may be the exempted under a RTA. The first is for “functional reasons” and the second “those that exempted certain classes of contracting parties from the rules accepted by all the others (or modified the rules for them).”[52]
In respect of the first class there exists Article XXIV of the GATT rules that permits the formation of RTAs and Customs Areas[53] whilst the second class permits developing countries preferential trading rules such as those under Article XVIII of GATT and under Article 1:2 which permitted pre-existing colonial trading arrangements to continue.[54] Given that colonial (Imperial Preference) type arrangements have more or less disappeared as a pretext for exemption, those provided under Article XXIV will be examined more closely later in this section.[55]
In addition to the above, during the 1960’s were added positive discriminatory arrangements for developing countries known as ‘Special and Differential Treatment’ (S&D) provisions in GATT that explicitly relieved them “of any requirement to reciprocate the benefits provided by developed countries.”[56] Such waivers were engrossed in a ‘Generalised System of Preferences’ (GSP) that were then adopted into GATT in 1979 under the ‘Enabling Clause’[57] that also extended the non-reciprocity to what was then termed ‘least developed countries.[58] The GSP is characterised as follows:
(a) In addition to preferential tariffs being applied to countries that may have historical (colonial) ties they can also be claimed by developing countries generally.
(b) Only developing countries can obtain the benefit of GSPs and
(c) Developed countries unilaterally grant GSP benefits to developing countries.[59]
An example of a developing country RTA under the ‘Enabling Clause’ is AFTA (ASEAN Free Trade Agreement) between China and ASEAN.
Apart from these two principles classes (Article XXIV and Enabling Clause type exemptions) there exist other MFN exceptions under Article XXIV:3 in respect to frontier traffic between common border countries whilst under the rubric of General Exceptions there is also provision for exemptions on the basis of protection of “public morals, life and health and Article XXI regarding Security Exceptions.”[60] In exceptional circumstances there also exists the possibility of obtaining a waiver (clearly defined and subject to annual review under Article IX:4) for MFN under Article IX:3 whereby, given the consensus agreement of 75% of the other contracting parties, a country may “waive their obligations under the agreement.”
There are also instances where the justification for a RTA has not been accepted by GATT panels albeit that a waiver was still granted. For example, the Lome IV Convention between the EC and African, Caribbean and Pacific (ACP) countries was presented as a GATT waiver under GATT Part IV and Article XXIV. The panels (in un-adopted 1993/94 reports) found that the waivers did not comply with the claimed exemptions as some of the trade parties were not GATT members. Notwithstanding, the EC still managed to obtain a temporary waiver to for the agreement until 31 December, 2007.[61]
There may also be instances whereby a WTO member does not wish, for political reasons, to accede MFN status on a new member. Article XIII also takes this situation into account and permits the non-application of MFN “only if the Member not consenting to the application has so notified the Ministerial Conference before the approval of the agreement on the terms of accession by the Ministerial Conference.”[62]
Despite there being many GATT disputes in respect of RTAs that arise from what are deemed to be MFN issues, it is rare that MFN is invoked alone. Usually, such disputes also deal with matters of “national treatment, quantitative restrictions, TRIMs, rules of origin, and standards and conformity assessment”[63]
By way of summary, RTAs can be formed by WTO members in one of two ways:
(1) By following the rules laid down under Article XXIV of GATT 1994 (from 1947 to the signing of Uruguay Round Agreement the Article remained unchanged save for clarification under the Understanding on the Interpretation of Article XXIV of GATT 1994).[64] Paragraphs 4 and 10 “provide for the formation and operation of customs unions and free trade areas covering trade in goods”[65] and there are two criteria by which a RTA can be waived from MFN obligations. These are:
(a) a ‘substantial’ proportion of the trade among members of a CU or RTA must be free[66] and
(b) post-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”[67] or RTA.
(2) Developing countries have recourse to the ‘Enabling Clause’ that was invoked in the 1979 Tokyo Round Agreement. Essentially, this clause permits developing countries to participate in trade with developed countries on more favourable terms and with other developing countries “for the mutual reduction or elimination of tariffs and, in accordance with criteria or conditions which may be prescribed by the CONTRACTING PARTIES, for the mutual reduction or elimination of non-tariff measures, on products imported from one another…”[68]
Whilst not covered under the scope of this paper it needs to be mentioned that under trade agreements such as the GATS there also exists the means by which RTAs can be formed. For example, Article V of the GATS states that this Agreement “shall not prevent any of its Members from being a party to or entering into an agreement liberalizing trade in services between or among the parties to such an agreement,”[69] and “governs the conclusion of RTAs in the area of trade in services, for both developed and developing countries.”[70]
The predominant set of rules by which RTAs are permitted to be formed to the exception of MFN obligations is under Article XXIV of GATT 1994 and this important exemption rule will now be explored in more detail.
It was never envisaged that Article XXIV would be much used; indeed, the architects of GATT expected it to be implemented quite judiciously and prudently. Just the opposite has happened. Whereas Article XXIV recognised the practical need for Customs Unions and Free Trade Agreements it was to be subject of certain basic conditions, viz. that ‘substantially all’ trade barriers between partners in such agreements was to be eliminated. The sad reality is that this rule has been very loosely interpreted in its application,[71] so much so that of the hundreds of agreements on foot only one agreement advised to GATT has passed examination under Article XXIV rules.[72]
Importantly, RTAs created under this exemption must “above all be trade-creating as opposed to trade-limiting”[73] and seek to reduce duties and tariffs on ‘substantially all trade’. The definition issues that arise from this important term are dealt with in more detail in the next section.
The trade creating and tariff/duty reducing aspects of RTAs finds expression in Article XXIV:4 of GATT[74] and finds further elaboration in the Understanding on the Interpretation of Article XXIV of the GATT 1994 which re-affirmed “that the purpose of such agreements should be to facilitate trade between the constituent territories“[75] and recognizes that “the contribution to the expansion of world trade that may be made by closer integration between the economies of the parties to such agreements” [76] and that such contribution “is increased if the elimination between the constituent territories of duties and other restrictive regulations of commerce extends to all trade, and diminished if any major sector of trade is excluded.”[77] It is, therefore, apparent that there was an attempt in the drafting of GATT to “balance the interests of countries pursuing RTAs with the rights of non-parties to benefits under GATT such as Most Favoured Nation treatment.”[78]
For ease of reference, Article XXIV is reproduced:
Article XXIV
Territorial Application - Frontier Traffic - Customs Unions and Free-trade Areas
1. The provisions of this Agreement shall apply to the metropolitan customs territories of the contracting parties and to any other customs territories in respect of which this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application. Each such customs territory shall, exclusively for the purposes of the territorial application of this Agreement, be treated as though it were a contracting party; Provided that the provisions of this paragraph shall not be construed to create any rights or obligations as between two or more customs territories in respect of which this Agreement has been accepted under Article XXVI or is being applied under Article XXXIII or pursuant to the Protocol of Provisional Application by a single contracting party.
2. For the purposes of this Agreement a customs territory shall be understood to mean any territory with respect to which separate tariffs or other regulations of commerce are maintained for a substantial part of the trade of such territory with other territories.
3. The provisions of this Agreement shall not be construed to prevent:
(a) Advantages accorded by any contracting party to adjacent countries in order to facilitate frontier traffic;
(b) Advantages accorded to the trade with the Free Territory of Trieste by countries contiguous to that territory, provided that such advantages are not in conflict with the Treaties of Peace arising out of the Second World War.
4. The contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements. They also recognize that the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories.
5. Accordingly, the provisions of this Agreement shall not prevent, as between the territories of contracting parties, the formation of a customs union or of a free-trade area or the adoption of an interim agreement necessary for the formation of a customs union or of a free-trade area; Provided that:
(a) with respect to a customs union, or an interim agreement leading to a formation of a customs union, the duties and other regulations of commerce imposed at the institution of any such union or interim agreement in respect of trade with contracting parties not parties to such union or agreement shall not on the whole be higher or more restrictive than the general incidence of the duties and regulations of commerce applicable in the constituent territories prior to the formation of such union or the adoption of such interim agreement, as the case may be;
(b) with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free‑trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement as the case may be; and
(c) any interim agreement referred to in subparagraphs (a) and (b) shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time.
6. If, in fulfilling the requirements of subparagraph 5 (a), a contracting party proposes to increase any rate of duty inconsistently with the provisions of Article II, the procedure set forth in Article XXVIII shall apply. In providing for compensatory adjustment, due account shall be taken of the compensation already afforded by the reduction brought about in the corresponding duty of the other constituents of the union.
7. (a) Any contracting party deciding to enter into a customs union or free-trade area, or an interim agreement leading to the formation of such a union or area, shall promptly notify the CONTRACTING PARTIES and shall make available to them such information regarding the proposed union or area as will enable them to make such reports and recommendations to contracting parties as they may deem appropriate.
(b) If, after having studied the plan and schedule included in an interim agreement referred to in paragraph 5 in consultation with the parties to that agreement and taking due account of the information made available in accordance with the provisions of subparagraph (a), the CONTRACTING PARTIES find that such agreement is not likely to result in the formation of a customs union or of a free-trade area within the period contemplated by the parties to the agreement or that such period is not a reasonable one, the CONTRACTING PARTIES shall make recommendations to the parties to the agreement. The parties shall not maintain or put into force, as the case may be, such agreement if they are not prepared to modify it in accordance with these recommendations.
(c) Any substantial change in the plan or schedule referred to in paragraph 5 (c) shall be communicated to the CONTRACTING PARTIES, which may request the contracting parties concerned to consult with them if the change seems likely to jeopardize or delay unduly the formation of the customs union or of the free-trade area.
8. For the purposes of this Agreement:
(a) A customs union shall be understood to mean the substitution of a single customs territory for two or more customs territories, so that
(i) duties and other restrictive regulations of commerce (except, where necessary, those permitted 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 or at least with respect to substantially all the trade in products originating in such territories, and,
(ii) subject to the provisions of paragraph 9, substantially the same duties and other regulations of commerce are applied by each of the members of the union to the trade of territories not included in the union;
(b) A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Articles XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.
9. The preferences referred to in paragraph 2 of Article I shall not be affected by the formation of a customs union or of a free-trade area but may be eliminated or adjusted by means of negotiations with contracting parties affected.* This procedure of negotiations with affected contracting parties shall, in particular, apply to the elimination of preferences required to conform with the provisions of paragraph 8 (a)(i) and paragraph 8 (b).
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.
11. Taking into account the exceptional circumstances arising out of the establishment of India and Pakistan as independent States and recognizing the fact that they have long constituted an economic unit, the contracting parties agree that the provisions of this Agreement shall not prevent the two countries from entering into special arrangements with respect to the trade between them, pending the establishment of their mutual trade relations on a definitive basis.*
12. Each contracting party shall take such reasonable measures as may be available to it to ensure observance of the provisions of this Agreement by the regional and local governments and authorities within its territories.
Notwithstanding, the same article also permits inconsistent GATT measures to be applied to RTAs under Article XXIV:8(b) insofar that duties and restrictive regulations of trade are to be “eliminated on substantially all the trade between the constituent territories in products originating in such territories”[79] except “where necessary”[80] those permitted under the various articles of the agreement.
If a WTO member wishes to form a RTA there are, essentially, three conditions that must be met in order to satisfy other members that a preferential trade arrangement meets the requirements of Article XXIV. These are:
1. By meeting “the definition of a free trade area or customs union under Article XXIV:8 of GATT”[81] in that tariffs, “duties and other restrictive commercial regulations must be eliminated”[82] and in respect of such tariffs or other trade restrictions, it must be shown that ‘substantially all the trade’[83] between the parties has been freed from such restrictions.[84]
2. The second is that the RTA (or Customs Union) shall not “be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area.”[85] This, however, does not mean that individual duties cannot be raised provided that a “compensatory adjustment”[86] is provided to RTA members and
3. The third, in respect of a WTO member challenging the application of Article XXIV (preventing the RTA) [87] is the ability to prove to the Appellate Body[88] that any measure “being justified under Article XXIV”[89] in respect of formation of an RTA is permitted. However, Goh (2006) points out, the “Appellate Body has considered ‘prevented’ as requiring a test of impossibility”[90] citing the Turkey-India Textile Report[91] “‘the provisions of the GATT 1994 shall not make impossible the formation of a customs union’.”[92] In this case the Appellate Body found that “restrictions on imports from India were therefore not necessary for the formation of the customs union.”[93]
As stated earlier in this section, given that there was never any clear set of definitions provided in the original GATT of 1947 there have been many difficulties over the years in respect of interpretation. This contention is supported by Crawford and Laird (2000) who state that within “the GATT and the WTO, the examination of specific RTAs has been plagued by disagreement about the interpretation of certain elements of the rules relating to RTAs as well as by certain procedural aspects.”[94] For example, in Article XXIV “the term ‘substantially all trade’ has never been defined and it remains unclear whether this would equate to, for example, 90 per cent of trade, 80 per cent or even 60 per cent.”[95] Even the Understanding on the Interpretation of Article XXIV GATT 1994 does not define the term preferring to limit its reference to the expression “extends to all trade.”[96]
By way of example of the uncertainty in definition of terms, referring again to the Turkey-India textiles case, Goh (2005) makes the point that the Appellate Body (which does not have a mandate to interpret the GATT provisions; only to apply them) deemed the term ‘substantially all trade’ to mean “‘not the same as all the trade’ but was ‘something considerably more than merely some of the trade’.”[97] In more recent times, Kim (2007) reports that Australia has proposed to define this term as a “threshold level of 95 percent of all HS tariff lines at a six-digit level”[98], however, the “practice by countries in the coverage of tariff elimination in their FTAs varies widely.”[99]
This problem of interpretation provides an appropriate segue to the important issue of what constitutes ‘substantially all trade’ under GATT rules.
The WTO admits that interpreting RTA rules is an ongoing problem stating that “regional trade agreements have to meet certain conditions. But interpreting the wording of these rules has proved controversial”.[100] The reason for the controversy is political in nature as the members must pass rulings, in effect, on themselves.
The controversy is based on the two possible, but not necessarily mutually exclusive interpretations of ‘substantially all trade’. The first, “a quantitative approach, favours the definition of a statistical benchmark, such as a certain percentage of trade between the parties” whilst the second, “a qualitative approach, would require that no sector (or at least no major sector) be excluded from intra-RTA trade liberalization.”[101] The argument is characterised by those parties in an RTA who believe that trade enhancement with only partial trade liberalisation is justifiable whilst others argue that partial reduction of tariff or duties is not justifiable and, unless full trade liberalisation is achieved, “commerce remains subject to MFN principles.”[102]
As Grimmett and Tatleman (2004) observe, WTO members “have never expressly disapproved an FTA, despite misgivings about the consistency of particular provisions with GATT requirements.”[103] This situation is exacerbated by lack of resolve to find a solution and evident by the fact that The Regional Trade Agreements Committee (RTAC) of the WTO formed in 1995 has “yet to complete its assessments of whether individual trade agreements conform with WTO provisions.”[104]
It is a requirement of the rules of GATT that RTAs arising from Article XXIV be ‘notified’ to the WTO and subjected to examination for consistency with the rules by the Council for Trade in Goods (CTG). Given that the problem with the interpretation of the rules has been so problematic, in 1996 the WTO created a “Committee on Regional Trade Agreements (CRTA) to give coherence to these discussions.”[105] RTAs notified to the CTG were then forwarded to the CRTA for examination and, in addition the CRTA also examined these RTAs for compatibility with multilateralism[106] and to consider the ‘systemic’ implications of such agreements.
Those agreements formed under the Enabling Clause are referred to the Committee on Trade and Development (CTD). The CTD debates the RTA but they are not necessarily referred to the CRTA for more detailed examination.[107]
As distinct from Article XXIV rules, the ‘Enabling Clause’ does not require that the elimination of trade barriers and tariffs be applied to ‘substantially all the trade’ between RTA members over a 10 year period and, given the ambiguous nature of the rules for examination all that is required is the reporting of the RTA to the WTO Committee on Trade and Development.[108] An additional problem is what is termed ‘early harvest’ schemes whereby, as Ueno (2005) cites by way of example, AFTA tariff reductions are provided on certain agricultural products whilst trade negotiations on industrial products are still under way.[109] This process of ‘cherry picking’ tariffs for elimination is contrary to the objectives of Article XXIV.
To elaborate further, as previously stated, RTAs are required to be examined and assessed on a consensus basis by the CRTA. It is understood under Article XXIV that, within a 10 year period, RTAs require ‘substantially all the trade’ to be free of restrictive regulations and tariffs to be eliminated. Concurrently, the RTA members cannot raise trade barriers nor increase tariffs to non-RTA members. Accordingly, in the case of a dispute, each member interprets ‘substantially all the trade’ according to their own agenda such that those “belonging to a particular RTA assert that it is consistent with the GATT, while those outside it insist otherwise; the resulting CRTA report thus ends up presenting the two opposing arguments in most cases.”[110]
For example, the EU has argued that it is up to the WTO to provide consistency to the RTAs, however, at the same time they also said “that ‘substantially all the trade’ is understood to have both qualitative and quantitative dimensions, meaning that no less than 90% of all trade between contracting parties without excluding any major sectors.”[111] The final effect has been that in respect of GATT consistency, the CRTA can only provide ‘qualified’ endorsement to RTAs such that in “most cases, RTAs go into effect with the question of GATT consistency unsettled.”[112]
Importantly, as Nataraj (2007) points out, the CRTA “has enjoyed no success so far in assessing the consistency of the more than 100 RTAs notified to the WTO, due to various political and legal difficulties, most of which were inherited from the GATT years.”[113] and Crawford and Laird (2000) add to this critique by stating that “the CRTA has not been able to resolve many of the ‘systemic’ issues”[114] inherent in RTAs. It is seen that the link between the consistency judgement provided by the CRTA and the dispute settlement process is problematic given that WTO members are hesitant to “provide information or agree to conclusions that could later be used or interpreted by a dispute settlement panel.”[115]
In addition are the controversial interpretations of the “WTO provisions against which RTAs are assessed, and institutional problems arising from either the absence of WTO rules (e.g., on preferential rules of origin) or from troublesome discrepancies between existing WTO rules and those contained in some RTAs.”[116] Added to the mix is the confusion created by the plethora of “incoherent trade policy regulations being implemented through these special regimes.”[117]
Whilst RTAs have been notified to the WTO to test for conformity with Article XXIV, as a result of the uncertainty in relation to interpretation of the article and “potential sensitivities over the legal implications of adverse findings”[118] save for one exceptional case[119], there has never been an examination completed by the CRTA! A legacy of the failure to implement the ITO has been a clear lack of any institutional framework with the necessary mandate to interpret trade agreements and apply disciplinary measures to WTO-GATT member countries.
Notwithstanding this inertia, the WTO members did agree to resolve these difficulties in Doha Declaration of 2001 by “clarifying and improving disciplines and procedures under the existing WTO provisions applying to regional trade agreements. The negotiations shall take into account the developmental aspects of regional trade agreements.”[120] Despite the good intentions of the members, the first deadline of 1 January 2005 passed and it was not until 29 June 2006 that the Regional Trade Agreements Committee (RTAC) published its ‘Transparency Mechanism for Regional Trade Agreements’[121], prompting Pascal Lamy to declare in July 2006 that “This is an important step towards ensuring that regional trade agreements become building blocks, not stumbling blocks to world trade.”[122] Accordingly, future negotiations in respect of FTA rules will now take place within the Rules Negotiating Group.
As is evident, there is scope for the implementation of RTAs under GATT rules, however, given that the spirit of the GATT was one of encouraging multilateral trade, why have bilateral RTAs now become the norm?
The SR also examined the effects of individual RTAs in enhancing trade between countries (not conclusive given that there are more trade variables than just simple two way traffic)[125] and whether they were conducive to the creation of multilateral trade relationships via the expansion of FTA groupings.[126] The report suggests that the RTA partner benefits create entrenched blocs with vested interests and conflicting rules of commerce that preclude the further liberalisation of trade and cites negotiations in Doha Round that highlighted issues with developing countries not wishing to diminish their preferential agreements in favour of reducing tariffs multilaterally.[127]
The more recent growth in RTAs has been driven by not just trade related concerns and, consequently, address many non-trade issues such as labour rights, environmental protections and protection of intellectual property rights.[128] As Goh (2006) summarised, RTAs today include issues such as sanitary, phytosanitary, harmonisation rules and copyright protection (an important U.S. concern) as well as “investment facilitation and protection, mutual recognition of technical regulations, customs facilitation, intellectual property protection, competition policy, government procurement, as well as ‘non-trade’ issues such as labour and environmental protection.”[129] This makes it even more difficult for the encouragement of member states to take part in multilateral trade negotiations if, through RTA negotiations, these non-trade related issues become ‘boiler-plate’ template requirements in future WTO negotiations.[130]
The resulting convoluted ‘spaghetti bowl’ of RTAs has meant that MFN (as a central tenet of WTO-GATT) has become the exception rather than the rule such that it is probably better described as the “least favoured nation”[131] principle and, consequently, “matters profoundly to the future of the WTO.”[132]. By way of example Ueno (2005) cites the example of the EC having only 9 MFN’s whilst all their other trade agreements are preferential in nature (RTA or GSP schemes) having lower tariffs than those for the MFN partners.[133]
The following illustrations[134] provide graphic evidence of the ‘spaghetti bowl’ effect of RTAs.
There is the real possibility that the abuse of MFN status can be used as an argument to justify RTAs as trade liberalising. The METI report of 2001 makes the point that a bilateral RTA outside of the WTO can be said to be to the advantage of MFN in that any benefits derived by the parties to the RTA are then, as a consequence of MFN, passed on to other members. The justification for the RTA is that it is less time consuming than WTO negotiations and delivers the same trade results. This is specious argument because “bilateral negotiations lack transparency, there is a possibility that MFN treatment is not extended to countries not in the negotiation, and the fact that bilateral negotiations tend to reflect the power relationship between the two countries.”[135] In addition, there is inherent procedural and political unfairness in the bilateral negotiation process.
The important issue here lies in relative market strength between trading partners. Bown (2004) explains that “‘power’ measures, such as the credible threat of retaliation by the plaintiff, allow defendant governments to live up to their trade liberalization commitments”[136] whereas there exists only “limited evidence that particular procedural or institutional features of the GATT/WTO dispute settlement process have contributed to the successful economic resolution of trade disputes.”[137]
This contention is support by Abbott (2007) who points out that RTAs “strongly favors powerful economic actors like the United States and European Union, which are largely dictating terms to developing (and developed) countries. Developing countries, particularly the less economically powerful, are losing autonomous decision-making authority.”[138]
As Goh (2006) asserts, “commentators have expressed concerns that RTAs undermine the multilateral trading system and reduce global welfare by eroding the Most Favoured Nation principle, by diverting trade from non-parties and by diverting attention and resources from WTO negotiations.”[139] Unwanted consequences of such arrangements give rise to phenomena such as ‘bilateral opportunism’ whereby “subsets of countries have an incentive to renegotiate aspects of the agreement over time in order to enhance their own well-being at the expense of third countries excluded from the bilateral renegotiations.”[140] Both Japan and the EC have been formally accused on engaging in such activity and Brown (2004) cited the example of Canada’s intervention in a Japan/EC dispute over access to pork markets in Japan.[141] Goh (2006) also supports this argument stating that “Australia has recognised, RTAs can undermine the multilateral trading system where they have ‘poor trade-liberalising outcomes and trade distorting effects’.”[142]
The other side of the argument claims that RTAs “support WTO objectives by promoting trade liberalisation, the development of new rules and closer integration between countries.”[143] Notably, Bhagwati (1996) does agree that “the only sound argument for embracing FTAs is that we cannot negotiate trade liberalization on an MFN, worldwide basis in multilateral negotiations like the Uruguay Round.”[144] and Abbott (2007) also points out, he does not see RTAs as “aggressively threatening”[145] and trying to quantify negative factors (particular in such a robust global economic climate) “may raise questions better attuned to moral philosophers than economists.”
By way of example of the administrative trade costs of RTAs, Ueno (2005) points to the Japan-Mexico Economic Partnership Agreement (EPA) in respect of rules of origin and how they differ to those of the Japan-Singapore EPA and the GSP.[146] The reality is that Japan applies a different treatment to the same product imported from both Mexico and Singapore. Such regimes incur additional costs to trade leading the Taiwanese ambassador to the WTO to comment that “the costs incurred for the issuance and verification of certificates of origin, if executed strictly, would offset the trade diversion effect when the gap between the MFN tariff rates and FTA tariff rates is 5% or less.”[147] However, Goh (2006) asserts, despite these negative costs, they are outweighed by any lower duty rates and the “fact that business and exporter groups continue to support successive RTAs in, for example Australia and the United States, would appear to support this contention.”[148]
Notwithstanding Goh’s assertion, Bhagwati (1996) is quite scathing of RTAs pointing out that they “they can divert trade from efficient non-member suppliers to higher-cost member countries simply because the former pay tariffs while the latter do not. This hurts other member countries, who must pay more for imports. But it can also harm non-members, who lose exports.”[149] A contrary argument to this is put forward by Clausing (2001) as cited by Bown (2004) in respect of the CUSFTA “finding substantial evidence of trade creation and little evidence of trade diversion.”[150]
The SR acknowledged the utility and potential benefits that RTAs could bring to the liberalisation of international trade, however, the report was equally concerned that the fundamental principal of MFN had been completely eroded by RTAs (which the report describes as Preferential Trade Agreements)[151] These RTAs also include the Generalized System of Preferences (GSP) scheme by which developing countries are granted non-reciprocal trade preferences such as tariff reductions.[152]
On the surface, most WTO members take the view, as espoused by Mark Vaile, Minister for Trade, that RTAs are positive for trade liberalisation “where they deliver substantial commercial and economic benefits across all sectors faster than through multilateral reform. Bilateral and multilateral trade activities are mutually reinforcing. Free trade agreements can accelerate trade liberalisation and set higher benchmarks for the multilateral system. The knowledge and skills gained through FTA negotiations can be transferred to multilateral trade negotiations, within APEC and the WTO.”[153] This view is supported by the U.S. in that they are forging ahead with RTAs and yet support MFN. USTR[154] spokesman, Richard Mills, commented that, in respect of the SR’s plea for ongoing support to “opening markets and reducing trade barriers globally offer the world the best hope to expand economic growth, development, and opportunity both for developed and developing countries”[155] the U.S. position was “We agree.”[156] In addition, it was the U.S. position to support “ambitious multilateral trade liberalization” and that in urging other WTO members to support this initiative it was necessary that all “must contribute to expanding market access for all Members.”[157] At the same time, the U.S. has, throughout 2005/06 been pursuing RTAs with Central and South American countries as well as North African, Asian and Middle Eastern countries.[158]
Notwithstanding the undermining of the GATT in respect of multilateral trade, the SR does acknowledge the benefits that broader and deeper bilateral trade has had in respect of bringing regional stability, for example, the EU,[159] accelerating aspects of multilateral trade albeit on a more localised basis such as NAFTA[160] or developing countries enhancing their international trading expertise through more egalitarian groupings such as Mercosur.[161]
Pascal Lamy, whilst not wishing to condemn, nor praise RTAs, finds instead that “the debate about whether regionalism is a good or bad thing sterile. This is not the point.”[162] The concern with their proliferation means that we “need to look at the manner in which RTAs operate, and what effects they have on trade opening and on the creation of new economic opportunities. ... (and) we also need to reflect on whether regionalism is causing harm to multilaterally-based trading relationships.”
Consequently, the argument rests in the relevance of the WTO as a body designed to encourage multilateral trade. It is evident that in order to be relevant the WTO needs to be reformed and strenghtened if MFN is to survive as a viable instrument for promoting global trade linberalisation.
It has been demonstrated that RTAs do conform with the somewhat liberal interpretation of the GATT rule Article XXIV and the ‘Enabling Clause’ that permit their formation at the expense of MFN treatment.
Whilst compliant with the rules of GATT they do not conform with the spirit and intent of GATT, viz. to promote trade via MFN so as to provide equal treatment to all WTO member states. In other words, to provide a level playing field for the benefit of all nations. At the core of this issue lies the matter of national interests that include, as Goh (2006) asserts, “improving market access, securing competitive advantage against other competitors, and avoiding potential discrimination.”[163] and, in addition, they “also include broader economic, political and strategic considerations such as promoting economic integration, improving global competitiveness, enhancing diplomatic influence and supporting regional peace and stability.”[164] It is clear that no country is going to act altruistically at the expense of its own set of wide ranging national trade and political interests.
Given that RTAs are, by their nature, discriminatory, as Abbott (2007) asserts, there also arises the issue of “the exercise of virtually unconstrained political and economic power by the United States and EU to secure concessions from developing (and developed) countries.”[165] Abbott (2007) goes on to argue that “while this phenomenon might (or might not) have negative economic implications for developing countries, that is not at the heart of the problem. The heart of the problem is that it deprives developing countries of the capacity to make autonomous decisions about the way their affairs should be governed.” [166] This undermining of power essentially makes the weaker nations servile to the larger powerhouses and is quite reminiscent of the relationship between old colonial powers and their subject trading partners. Whilst this is certainly not the way in which the U.S. or the E.C would characterise their relationships with smaller RTA partners, the hint of paternalism is not lost on Abbott (2007) who makes the observation that presumably “most imperial leaders have believed they were acting in the best interests of their vassal states, and no doubt in some cases they were. But this does not justify subjugation.”[167] This raises the question of whether a return to a form of the ‘Imperial System’ that preceded (and contributed to) WW2 will be a consequence of political alignment of various trading blocks and, if so, what does this portend for future global stability?
One of the problems that the rush to enter in RTAs has created is the undermining of the WTO as a trade regulating body whose purpose was to promote global stability.
According to the authors of the SR, the only real solution to the trade related aspect of this quandary is to reduce the MFN tariffs to zero since “preferences are relative to MFN tariffs, if the latter go to zero so do the preferences.”[168] However, the reality of the situation is recognised in that “as is often the case in public policy, while RTAs increase the necessity for MFN tariffs to be taken to zero, their perceived discriminatory value also increases the incentive not to do so.”[169]
A probably more practical approach is to provide a clearer understanding of the application of Article XXIV and its compliance via a suggested Trade Policy Review Mechanism in order to provide greater “transparency and understanding.”[170]
In the interim, governments will act pragmatically in respect of entering into RTAs whilst at the same time playing at least lip service to MFN in the WTO forum or, more optimistically, following a parallel agenda of developing MFN through various trade round discussions such as Doha whilst pursuing RTAs.
The SR makes a plea that governments take into account the damage there are doing to multilateral trading arrangements should they continue to enter into RTAs saying that if the “motivation is to promote non-trade agendas or simply an instinctive desire to ‘catch-up’ with others or follow suit, they should show restraint.”[171] In this respect, it is posited that the reality of the situation is that RTAs are like street gangs, "you may not like them, but if they are in your neighbourhood, it is safer to be in one."[172]
[1] Chapter 2 at 60 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium”, January, 2005 (Sutherland Report).
[2] Also referred to as Free Trade Agreements (FTA’s).
[3] Grimmett, J. J., Tatelman, T. B., “Free Trade Agreements and the WTO Exceptions” Legislative Attorneys, American Law Division, CRS Report for Congress, September 22, 2004
http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-8208:1
[4] Source: http://www.wto.org/english/tratop_e/region_e/region_e.htm.
[5] Goh, G., “Regional Trade Agreements and Australia: A National Perspective.”, Australian APEC Study Centre, Monash University, May 2006.
[6] Source: Pg. 5, Fiorentino, R. V., Verdeja, L., Toqueboeuf, C., “The Changing Landscape of Regional Trade Agreements: 2006 Update”, Discussion Paper No. 12, Regional Trade Agreements Section, Trade Policies Review Division, World Trade Organization, Geneva, Switzerland 2007.
[7] World Bank, “Global Economic Prospects: Trade, Regionalism and Development,” Washington (2005), at 27 , http://www.wto.org/english/tratop_e/region_e/region_e.htm.
[8] http://www.wto.org/english/tratop_e/region_e/region_e.htm.
The WTO also reports that “Some 380 RTAs have been notified to the GATT/WTO up to July 2007. Of these, 300 RTAs were notified under Article XXIV of the GATT 1947 or GATT 1994; 22 under the Enabling Clause; and 58 under Article V of the GATS. At that same date, 205 agreements were in force.”
[9] Lamy. P., Director General, WTO, “Proliferation of regional trade agreements ‘breeding concern’”, Conference on ‘Multilateralizing Regionalism’, WTO NEWS: Speeches, Geneva 10 September 2007
http://www.wto.org/english/news_e/sppl_e/sppl67_e.htm
[10] Davey, W. J., “The Future of International Economic Law”, Journal of International Economic Law, 10 J. Int'l Econ. L. 439, Oxford University Press, September, 2007
[11] Understanding the WTO - Basics - Principles of the trading system
http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm
[12] See GATT 1947 - http://www.wto.org/english/docs_e/legal_e/gatt47_e.doc.
[13] The issue of ‘like’ products can be contentious. For example, Ministry of Economy, Trade and Industry (Meti) report on Most Favoured Nation Treatment Principle January, 2001, highlights the basis for potential discrimination should one variety of coffee bean be subject to tariff discrimination, yet, all coffee beans like products could be considered ‘like’ products resulting in tariffs being applied to imports from specific countries; a clear contradiction of the MFN rule. See Spain - Tariff Treatment of Unroasted Coffee, BISD 28S/102 at http://www.meti.go.jp/english/report/data/gCT9901e.html.
[14] Ministry of Economy, Trade and Industry (Meti) report on Most Favoured Nation Treatment Principle, January, 2001 http://www.meti.go.jp/english/report/data/gCT9901e.html.
[15] Ibid.
[16] Abbott, F., “A New Dominant Trade Species Emerges: Is Bilateralism a Threat?” Journal of International Economic Law, Oxford University Press, 10(3):571-583; doi:10.1093/jiel/jgm 021 2007.
[17] The Atlantic Conference : Joint Statement by President Roosevelt and Prime Minister Churchill, August 14, 1941 http://www.yale.edu/lawweb/avalon/wwii/atlantic/at10.htm.
[18] Anglo-American Mutual Aid Agreement : February 28, 1942.
http://www.yale.edu/lawweb/avalon/wwii/angam42.htm.
[20] Pg. 281 – Arndt, J. H., “Capital Controversy, Post-Keynesian Economics and the History of Economic ... Keynes and Churchill”, Essays in honour of Geoff Harcourt, Volume 1, Routledge; 1 edition December 6, 1996.
[21] George, S., “The world trade organisation we could have had: Alternative finances.” Le Monde Diplomatic – January 2007
http://72.14.253.104/search?q=cache:rQPaOtLwJ:mondediplo.com/2007/01/03economy+ITO+2B+keynes+%2B+history&hl=en&ct=clnk&cd=3&gl=au George also points out that Keynes proposal for an international clearing union (ICU) also did not materialize.
[23] Under the administration of President Franklin D. Roosevelt for the 11 years from 1933 to 1944 Cordell Hull became the longest-serving Secretary of State in the US he also became on of the principal architects of the founding of the United Nations and heavily involved in the drafting, of the United Nations Charter in 1943.
[24] Pg. 30 - Brabant van, J., “The Planned Economies and International Economic Organizations” Cambridge University Press, Series: Cambridge Russian, Soviet and Post-Soviet Studies (No. 77), 1991
[25] Pg. 33 - Brabant van, J., “The Planned Economies and International Economic Organizations” Cambridge University Press, Series: Cambridge Russian, Soviet and Post-Soviet Studies (No. 77), 1991
[26] It has often been observed that one of the principal reason given for the shift towards multilateralism was that the Great Depression and WW2 were, in part, blamed on the emergence of regional blocs. See: Chapter 2 at 59 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” (Sutherland Report) and Ueno, A., “Erosion of the Non-discrimination Principle Through Waves of Preferential Trade Agreements: A Warning from the Sutherland Report”, RIETI Research Institute of Economy & Trade (Japan), March, 2005 http://www.rieti.go.jp/en/index.html.
[27] Goh, G., “Regional Trade Agreements and Australia: A National Perspective.”, Australian APEC Study Centre, Monash University, May 2006.
[28] Ibid.
[29] There are other MFN exception rules in GATT such as Article XXIV:3 dealing with frontier traffic between common border countries, Article I:2 Article XXI regarding Security Exceptions. and waivers under Article IX:3. Each of these is discussed in more detail later in this paper.
[30] Ibid.
[31] Also known as the ‘Havana Charter’.
[32] Raghavan, C., “EEC Seeks Limitation on waivers and ‘Grandfather Clause’ use.” Geneva, March 1 1990 http://www.sunsonline.org/trade/process/during/uruguay/country/03030190.htm
[33] Ibid.
[34] Protocol of Provisional Application of General Agreement on Tariffs and Trade - http://72.14.253.104/search?q=cache:fgVSTUNOPo8J:www.marxists.org/history/capitalism/gatt/ch41.htm+%22to+the+fullest+extent+not+inconsistent+with+existing+legislation%22&hl=en&ct=clnk&cd=8&gl=au
[35] Raghavan, C., “EEC Seeks Limitation on waivers and ‘Grandfather Clause’ use.” Geneva, March 1 1990 http://www.sunsonline.org/trade/process/during/uruguay/country/03030190.htm
[36] Ibid.
[37] Preamble to GATT,
http://sul-derivatives.stanford.edu/derivative?CSNID=92290274&mediaType=application/pdf.
[38] Topulos, K., “WTO/GATT”, Duke University School of Law Library, Research Guides, January 2007, http://www.law.duke.edu/lib/researchguides/pdf/gatt.pdf.
[39] George, S., “The world trade organisation we could have had: Alternative finances.” Le Monde Diplomatic – January 2007.
http://72.14.253.104/search?q=cache:rQPaOtLwJ:mondediplo.com/2007/01/03economy+ITO+2B+keynes+%2B+history&hl=en&ct=clnk&cd=3&gl=au.
[40] Understanding the WTO - Basics - Principles of the trading system
http://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm and See Appendix F.
[41] George, S., “The world trade organisation we could have had: Alternative finances.” Le Monde Diplomatic – January 2007
[42] WTO web site: http://www.wto.org/english/tratop_e/region_e/scope_rta_e.htm.
[43] Goh, G., “Regional Trade Agreements and Australia: A National Perspective”, Australian APEC Study Centre, Monash University, May 2006.
[44] Ibid.
[45] Pg. 4, Crawford, J., Laird, S., “Regional Trade Agreements and the WTO”, Centre for Research in Economic Development and International Trade (CREDIT) Research Paper No. 00/3, University of Nottingham. Prepared for a meeting of the North American Economic and Finance Association in Boston, 6-9 January 2000.
[46] Pg. 4, Crawford, J., Laird, S., “Regional Trade Agreements and the WTO”, Centre for Research in Economic Development and International Trade (CREDIT) Research Paper No. 00/3, University of Nottingham. Prepared for a meeting of the North American Economic and Finance Association in Boston, 6-9 January 2000.
[47] Notwithstanding, a conflicting requirement is that EC standards may stand in stark relief to those which are accepted internationally. Pg. 5, Crawford, J., Laird, S., “Regional Trade Agreements and the WTO”, Centre for Research in Economic Development and International Trade (CREDIT) Research Paper No. 00/3, University of Nottingham. Prepared for a meeting of the North American Economic and Finance Association in Boston, 6-9 January 2000.
[48] Source: WTO web site: http://www.wto.org/english/tratop_e/region_e/regfac_e.htm.
[49] The 1983 Closer Economic Relations (CER) Agreement with New Zealand.
[50] Goh, G., “Regional Trade Agreements and Australia: A National Perspective”, Australian APEC Study Centre, Monash University, May 2006.
[51] As part of the reform movement within the WTO the then DG of the WTO, Supachai Panitchpakdi commissioned a report in 2005 called “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” herein referred to as the ‘Sutherland Report’. The Sutherland Report was released in January 2005 and a key area addressed was the growth in RTAs and what this meant for the multilateral trading system on which WTO-GATT was built. See: http://www.wto.org/english/thewto_e/10anniv_e/future_wto_e.pdf.
[52] Chapter 2 at 67 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” (Sutherland Report).
[53] Chapter 2 at 68 Ibid.
[54] Chapter 2 at 69 Ibid.
[55] Ministry of Economy, Trade and Industry (Meti) report on Most Favoured Nation Treatment Principle, January, 2001 http://www.meti.go.jp/english/report/data/gCT9901e.html.
[56] Chapter 2 at 70 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” (Sutherland Report).
[57] The agreement “Differential and more favourable treatment reciprocity and fuller participation of developing countries” See: http://www.wto.org/English/docs_e/legal_e/enabling1979_e.htm
[58] Chapter 2 at 70 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” (Sutherland Report).
[59] Ministry of Economy, Trade and Industry (Meti) report on Most Favoured Nation Treatment Principle, January, 2001 http://www.meti.go.jp/english/report/data/gCT9901e.html.
[60] Ibid.
[61] Grimmett, J. J., Tatelman, T. B., “Trade Preferences for Developing Countries and the WTO” Legislative Attorneys, American Law Division, CRS Report for Congress, January 8, 2007
http://fpc.state.gov/documents/organization/79277.pdf.
[62] Ministry of Economy, Trade and Industry (Meti) report on Most Favoured Nation Treatment Principle, January, 2001 http://www.meti.go.jp/english/report/data/gCT9901e.html.
[63] Ibid.
[64] GATT - Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994 http://www.wto.org/english/docs_e/legal_e/10-24_e.htm.
[65] Nataraj, G., “Regional Trade Agreements in the Doha Round: Good for India?” Tokyo: Asian Development Bank Institute. 2007
http://www.adbi.org/files/dp67.regional.trade.agreements.doha.pdf.
[66] GATT – 1947 - http://www.wto.org/english/docs_e/legal_e/gatt47_e.doc.
[67] Ibid.
[68] Differential and More Favourable Treatment Reciprocity and Fuller Participation of Developing Countries. Decision of 28 November 1979 (L/4903)
http://www.wto.org/english/docs_e/legal_e/enabling_e.doc.
[69] General Agreement on Trade in Services, (GATS) Article V
[70] Nataraj, G., “Regional Trade Agreements in the Doha Round: Good for India?” Tokyo: Asian Development Bank Institute. 2007
http://www.adbi.org/files/dp67.regional.trade.agreements.doha.pdf.
[71] Chapter 2 at 75 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” (Sutherland Report).
[72] The Czech and Slovak Republics following the break-up of Czechoslovakia.
[73] Goh, G., “Regional Trade Agreements and Australia: A National Perspective”, Australian APEC Study Centre, Monash University, May 2006.
[74] ‘The contracting parties recognize the desirability of increasing freedom of trade by the development, through voluntary agreements, of closer integration between the economies of the countries parties to such agreements. They also recognize that the purpose of a customs union or of a free-trade area should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories.’
[75] Preamble to the WTO Understanding on the Interpretation of Article XXIV of the GATT 1994
[76] Ibid.
[77] Ibid.
[78] Goh, G., “Regional Trade Agreements and Australia: A National Perspective”, Australian APEC Study Centre, Monash University, May 2006.
[79] GATT – 1947 – Article XXIV:8(b) http://www.wto.org/english/docs_e/legal_e/gatt47_e.doc.
[80] Ibid.
[81] Goh, G., “Regional Trade Agreements and Australia: A National Perspective.”, Australian APEC Study Centre, Monash University, May 2006.
[82] Grimmett, J. J., Tatelman, T. B., “Free Trade Agreements and the WTO Exceptions” Legislative Attorneys, American Law Division, CRS Report for Congress, September 22, 2004
http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-8208:1.
[83] Article XXIV:8(a)(i) of GATT 1994.
[84] Interim RTAs must also contain a plan that details how tariffs and duties as well as restrictive trade regulations are to be eliminated – GATT 1994, Article XXIV:5(b)&(c) supra note 1and 8(b).
[85] Article XXIV:5(a) and (b) of GATT 1994.
[86] Article XXIV:6 of GATT 1994.
[87] See the chapeau of Article XXIV:5 of GATT 1994.
[88] As per the WTO website: “The Appellate Body was established in 1995 under Article 17 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU). It is a standing body of seven persons that hears appeals from reports issued by panels in disputes brought by WTO Members. The Appellate Body can uphold, modify or reverse the legal findings and conclusions of a panel, and Appellate Body Reports, once adopted by the Dispute Settlement Body (DSB), must be accepted by the parties to the dispute. The Appellate Body has its seat in Geneva, Switzerland.”
http://www.wto.org/english/tratop_e/dispu_e/appellate_body_e.htm.
[89] Goh, G., “Regional Trade Agreements and Australia: A National Perspective”, Australian APEC Study Centre, Monash University, May 2006.
[90] Ibid.
[91] WTO Appellate Body Report, Turkey – Textiles, adopted 19 November 1999.
[92] Goh, G., “Regional Trade Agreements and Australia: A National Perspective.”, Australian APEC Study Centre, Monash University, May 2006 citing WTO Appellate Body Report, Turkey – Textiles, adopted 19 November 1999, para. 54.
[93] Ibid.
[94] Pg. 8, Crawford, J., Laird, S., “Regional Trade Agreements and the WTO”, Centre for Research in Economic Development and International Trade (CREDIT) Research Paper No. 00/3, University of Nottingham. Prepared for a meeting of the North American Economic and Finance Association in Boston, 6-9 January 2000.
[95] Goh, G., “Regional Trade Agreements and Australia: A National Perspective”, Australian APEC Study Centre, Monash University, May 2006.
[96] Preamble to the WTO Understanding on the Interpretation of Article XXIV of the GATT 1994
[97] Goh, G., “Regional Trade Agreements and Australia: A National Perspective.”, Australian APEC Study Centre, Monash University, May 2006 citing WTO Appellate Body Report, Turkey – Textiles, adopted 19 November 1999, para. 48.
[98] Kim, J. B., “Legal Review of FTA Tariff Negotiations”, KDI School of Public Policy and Management, August 6, 2007.
http://www.rieti.go.jp/jp/events/07080601/pdf/3-1_E_Kim_PPT_o.pdf
[99] Ibid.
[100] WTO rules: regional trade agreements – The Doha Round was supposed to have reached a consensus on interpretation but only succeeded in the members agreeing to find a way to agree on interpretation. http://www.wto.org/english/tratop_e/dda_e/dohaexplained_e.htm#regional.
[101] Pg. 8, Crawford, J., Laird, S., “Regional Trade Agreements and the WTO”, Centre for Research in Economic Development and International Trade (CREDIT) Research Paper No. 00/3, University of Nottingham. Prepared for a meeting of the North American Economic and Finance Association in Boston, 6-9 January 2000.
[102] Pg. 8, Ibid.
[103] Grimmett, J. J., Tatelman, T. B., “Free Trade Agreements and the WTO Exceptions” Legislative Attorneys, American Law Division, CRS Report for Congress, September 22, 2004
http://digital.library.unt.edu/govdocs/crs/permalink/meta-crs-8208:1.
[104] WTO rules: regional trade agreements.
http://www.wto.org/english/tratop_e/dda_e/dohaexplained_e.htm#regional.
[105] Nataraj, G., “Regional Trade Agreements in the Doha Round: Good for India?” Tokyo: Asian Development Bank Institute. 2007
http://www.adbi.org/files/dp67.regional.trade.agreements.doha.pdf
[106] Ibid
[107] Ibid
[108] Ueno, A., “Erosion of the Non-discrimination Principle Through Waves of Preferential Trade Agreements: A Warning from the Sutherland Report”, RIETI Research Institute of Economy & Trade (Japan), March, 2005 http://www.rieti.go.jp/en/index.html.
[109] Ibid.
[110] Ibid.
[111] Ibid.
[112] Ibid
[113] Nataraj, G., “Regional Trade Agreements in the Doha Round: Good for India?” Tokyo: Asian Development Bank Institute. 2007
http://www.adbi.org/files/dp67.regional.trade.agreements.doha.pdf.
[114] Pg. 9, Crawford, J., Laird, S., “Regional Trade Agreements and the WTO”, Centre for Research in Economic Development and International Trade (CREDIT) Research Paper No. 00/3, University of Nottingham. Prepared for a meeting of the North American Economic and Finance Association in Boston, 6-9 January 2000.
[115] Nataraj, G., “Regional Trade Agreements in the Doha Round: Good for India?” Tokyo: Asian Development Bank Institute. 2007
http://www.adbi.org/files/dp67.regional.trade.agreements.doha.pdf
[116] Ibid.
[117] Ibid.
[118] Goh, G., “Regional Trade Agreements and Australia: A National Perspective”, Australian APEC Study Centre, Monash University, May 2006.
[119] The Czech Republic and Slovak Republic customs union following the break-up of Czechoslovakia.
[120] See Para 29, Doha Declaration, “We also agree to negotiations aimed at clarifying and improving disciplines and procedures under the existing WTO provisions applying to regional trade agreements. The negotiations shall take into account the developmental aspects of regional trade agreements.”
http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_e.htm
[121] Transparency Mechanism for Regional Trade Agreements – June 29, 2006 http://www.wto.org/english/news_e/news06_e/job06_59rev5_e.doc.
[122] Lamy. P., Director General, WTO, “WTO rules: regional trade agreements”, WTO NEWS: 2006 NEWS ITEMS, Geneva 10 July 2006
http://www.wto.org/english/news_e/news06_e/rta_july06_e.htm.
[124] Pg. 1, Fiorentino, R. V., Verdeja, L., Toqueboeuf, C., “The Changing Landscape of Regional Trade Agreements: 2006 Update”, Discussion Paper No. 12, Regional Trade Agreements Section, Trade Policies Review Division, World Trade Organization, Geneva, Switzerland 2007.
[125] Chapter 2 at 78-82 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” (Sutherland Report).
[126] Chapter 2 at 83 Ibid.
[127] Chapter 2 at 85 Ibid.
[128] Interestingly, this harks back to the original intent of the of GATT to be under the administration of the ITO whose charter did include respecting labour rights.
[129] Goh, G., “Regional Trade Agreements and Australia: A National Perspective.”, Australian APEC Study Centre, Monash University, May 2006.
[130] Chapter 2 at 87 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” (Sutherland Report).
[131] Chapter 2 at 60 Ibid.
[132] Chapter 2 at 60 Ibid.
[133] Ueno, A., “Erosion of the Non-discrimination Principle Through Waves of Preferential Trade Agreements: A Warning from the Sutherland Report”, RIETI Research Institute of Economy & Trade (Japan), March, 2005 http://www.rieti.go.jp/en/index.html.
[134] Source: “Global Economic Prospects. Trade, Regionalism and Development”, International Bank for Reconstruction and Development/World Bank, Washington DC, 2005.
[135] Ministry of Economy, Trade and Industry (Meti) report on Most Favoured Nation Treatment Principle, January, 2001 http://www.meti.go.jp/english/report/data/gCT9901e.html.
[136] Bown, C. P., “Trade policy under the GATT/WTO: empirical evidence of the equal treatment rule” 0008-4085 / 04 / 678–720 / Canadian Economics Association, Canadian Journal of Economics Vol. 37, No. 3 August, 2004 at Pg 681.
[137] Ibid at Pg 681.
[139] Goh, G., “Regional Trade Agreements and Australia: A National Perspective”, Australian APEC Study Centre, Monash University, May 2006.
[140] Bown, C., “Trade policy under the GATT/WTO: empirical evidence of the equal treatment rule” 0008-4085 / 04 / 678–720 / Canadian Economics Association, Canadian Journal of Economics Vol. 37, No. 3 August, 2004 at Pg 679.
[141] Ibid at Pg 680.
[142] Goh, G., “Regional Trade Agreements and Australia: A National Perspective”, Australian APEC Study Centre, Monash University, May 2006.
[143] Ibid.
[144] Bhagwati, J., “Asia's Chance to Lead – ‘Free trade areas,’ favored by the U.S., are harmful.” Asia Week, Nov 1996 http://www.asiaweek.com/asiaweek/96/1129/view.html He also goes on to point out that it was frustration with trying to get MFN agreements in place that led Washington to embrace RTAs as a solution.
[146] Ueno, A., “Erosion of the Non-discrimination Principle Through Waves of Preferential Trade Agreements: A Warning from the Sutherland Report”, RIETI Research Institute of Economy & Trade (Japan), March, 2005 http://www.rieti.go.jp/en/index.html.
[147] Ibid.
[148] Goh, G., “Regional Trade Agreements and Australia: A National Perspective.”, Australian APEC Study Centre, Monash University, May 2006.
[149] Bhagwati, J., “Asia's Chance to Lead – ‘Free trade areas,’ favored by the U.S., are harmful.” Asia Week, Nov 1996 http://www.asiaweek.com/asiaweek/96/1129/view.html He also goes on to cite an important case study based on Mercosur undertaken by World Bank economist Alexander Yeats that supports this contention.
[150] Bown, C.P., “Trade policy under the GATT/WTO: empirical evidence of the equal treatment rule” 0008-4085 / 04 / 678–720 / Canadian Economics Association, Canadian Journal of Economics Vol. 37, No. 3 August, 2004 at Pg 682.
[151] Chapter 2 at 61 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” (Sutherland Report).
[152] Ueno, A., “Erosion of the Non-discrimination Principle Through Waves of Preferential Trade Agreements: A Warning from the Sutherland Report”, RIETI Research Institute of Economy & Trade (Japan), March, 2005 http://www.rieti.go.jp/en/index.html.
[153] Trade 2005, Statement made by Mark Vaile, Minister for Trade, Chapter 3, http://www.dfat.gov.au/trade/trade2005/chapter_03.html.
[154] US Mission to the United Nations in Geneva.
[155] Mills R., “Re: Sutherland Report on the WTO”, US Mission to the United Nations in Geneva, January 17, 2005 http://www.usmission.ch/Press2005/017SutherlandReport.htm.
[156] Ibid.
[157] Ibid.
[158] These are, more specifically, “Colombia, Peru and with five Central American countries and the Dominican Republic (DR-CAFTA)37 and it has further pursued negotiations with Ecuador and Panama. Further afield, it has secured deals with some Northern African and Middle Eastern countries, as part of its Middle East Free Trade Initiative: the FTA with Oman has been signed while the FTAs with Morocco and Bahrain have both entered into force; negotiations have been launched with the United Arab Emirates (other prospective FTAs could include Egypt, Kuwait, Qatar and Tunisia). In Asia-Pacific, the United States has opened FTA negotiations with Korea and Malaysia in an effort to strengthen ties with ASEAN countries.” Pg. 14, Fiorentino, R. V., Verdeja, L., Toqueboeuf, C., “The Changing Landscape of Regional Trade Agreements: 2006 Update”, Discussion Paper No. 12, Regional Trade Agreements Section, Trade Policies Review Division, World Trade Organization, Geneva, Switzerland 2007.
[159] Chapter 2 at 63 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” (Sutherland Report).
[160] Chapter 2 at 62 Ibid.
[161] Chapter 2 at 65 Ibid.
[162] Lamy. P., Director General, WTO, “Proliferation of regional trade agreements ‘breeding concern’”, Conference on ‘Multilateralizing Regionalism’, WTO NEWS: Speeches, Geneva 10 September 2007 http://www.wto.org/english/news_e/sppl_e/sppl67_e.htm.
[163] Goh, G., “Regional Trade Agreements and Australia: A National Perspective.”, Australian APEC Study Centre, Monash University, May 2006.
[164] Ibid.
[165] Abbott, F., “A New Dominant Trade Species Emerges: Is Bilateralism a Threat?” Journal of International Economic Law, Oxford University Press, 10(3):571-583; doi:10.1093/jiel/jgm021 2007.
[166] Ibid.
[167] Ibid.
[168] Chapter 2 at 104 of “The Future of the WTO: Addressing Institutional Challenges in the New Millennium” (Sutherland Report)
[169] Chapter 2 at 104 Ibid.
[170] Chapter 2 at 105 of Ibid.
[171] Chapter 2 at 104 of Ibid.
[172] Crawford, J., Laird S., Pg 201 “Regional Trade Agreements and the WTO”, North American Journal of Economics and Finance, 12 ~2!:193–211, 2001 Statement attributed to Alan Winters, Statement at Seminar on Regional Trade Agreements, WTO, Geneva, Wednesday 30 June 1999
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