Art. XXIVGATT Sets Out WTO Rules for Bilateral Agreements

Introduction

GATT Article XXIV is considered a much debatable article in the World Trade Organization (WTO). Reason for this lies in its practical application and the existence of the contentious issues from the viewpoint of developing countries. Developing Countries form a large part of the WTO, are considered much affected by its application which remains unsuccessful for them. Another concern put forth by the developing countries is the existence of controversial issues in the article. Two controversial issues namely, ‘free trade area’ and ‘customs union’ can be identified after a careful examination of the article.

How the above mentioned issues have created arguments among the WTO members and what if any recommendation is available for the Developing Countries, is the main concern of this assignment. For the purpose of discussion, first brief history of Article XXIV will be discussed which will lead to the identification and examination of two prominent controversies related to the article. The position of the Developing Countries with regard to these controversies will be discussed at length. Some advice and recommendations will be put forth for the Developing Countries on a negotiation position. Concluding remarks will summarize the whole discussion at the end.

It is observed that no other provision of the GATT/WTO, perhaps, parted scholarly opinions more than Article XXIV, where critics have come up with various different observations. According to some,

‘Article XXIV is “extremely elastic” (Curzon, 1965: 64), “unusually complex” (Dam, 1970: 275), and “full of holes” (Bhagwati, 1993: 44) due to language that is full of “ambiguities” and “vague phrases” (Haight, 1972: 397). Haight (1972: 398) criticizes Article XXIV as an “absurdity” and a “contradiction”, while Dam (1970: 275) stamps it “a failure, if not a fiasco”.’

It is important to note that in spite of disagreement among observers, there is one common and certain observation that is, Article XXIV has be unsuccessful to function well in practice – of all reported PTAs during the GATT years, in only one case was there a consensus of opinion that the reported PTA (Professional Trade Agreements) was in accordance with the requirements of the Article14, however, not a single was found to be incompatible with it.

According to some observers, The WTO Committee on Regional Trade Agreements (CRTA), that is now assigned with the task of verifying the WTO compliance of PTAs notified under GATT Article XXIV and GATS Article V, does not seem to be efficient in disciplining the execution and later operation of PTAs either.

A careful examination of Article XXIV reveals that it contains strict criteria for the formation of those regional groupings which are accepted by the GATT. GATT accepts only free trade areas, of the many existing forms of regional integration customs unions and interim agreements for the formation of either free-trade areas or customs unions. GATT does not accept preferential trading arrangements as they allow selective tariff reduction without inquiring about the goal of complete tariff liberalisation or without increasing the benefits of a range of agreements to other GATT contracting parties. These arrangements are all the time trade diverting as they lead to the movement of trade from countries with a comparative advantage in the production of the goods80 on the world market to the countries whose prices are lower due to the preferential trade arrangements.81 These arrangements are also in conflict with the MFN principle as they would allow preferences between contracting parties that are not expanded to other contracting parties of the GATT instantly and absolutely.

It is submitted the creation of barriers to free trade on the world market are encouraged with this type of regional arrangement and that is the biggest problem with this type of regional arrangement. Trade barriers are created because the advantages of liberalization between the contracting parties to the regional groupings are not expanded to third parties. In a situation like this, trade would be influenced by other non-economic consideration and would no longer be supported exclusively on the economics of trade and comparative advantage .This would make it significantly more difficult for the smaller non-influential countries to trade freely on the world market. The process of the concept of fair trade on the world market would also be seriously obstructed.

It is surprising to note that Article XXIV does not mention common markets or economic unions. However, it is not meant that they are undesirable in terms of the GATT. As mentioned in Article XXIV, the common market and the economic union are both expansion of the customs union. The external policy of these regional groupings remains the same as that of a customs union though the relationships between the contracting states of both the common market and the economic union are changed and are taken to a greater level of cooperation,82.The contracting states are required in both the common market and the economic union to accept a common external tariff which is not higher than that of the tariff rates applied by the individual states before the formation of the relevant regional grouping. Therefore, no disagreement can be raised against either the economic union or the common market on this basis. As an alternative the harmonisation of economic policies or the free movement of goods within economic unions and common markets respectively is made easier for countries which are not in the relevant groupings to interact with them, as their internal policies create greater synergy within these groupings. This, in turn, facilitates communication with third countries.

Background and History of Article XXIV of GATT

It is evident from the drafting history of GATT which shows the first draft of the GATT was proposed by the United States. Among the greatest concerns of the US one was the self-styled ‘Commonwealth preference system’ existing between the UK and its earlier colonies. To the US an effective way in order to restrict the Commonwealth preferences in an affective way, was to subject them to the MFN discipline under GATT. Known the fact that many recipients of the system did not accede to the GATT at that time, it seems that the drafters under the US influence intended Article 1 to cover preferences granted by GATT members to non-GATT-member states.

The US raised another concern that the advantage of the MFN principle could be divided by non-ITO24 member states. It was said that any non-ITO member states could free ride on the benefits of MFN treatment accorded by the ITO-member-trading partners to other ITO members if it concludes with their major ITO-member-trading partners bilateral trade agreements that included an MFN clause. It was taken to mean that there is no substantial reason for non-ITO members to join the ITO and to stand the weight of having to provide corresponding concessions to ITO members.

It is purported that Article XXIV’s origin and rationale have confused prominent scholars all the way through this ill-fated history. The United States, at postwar conferences, accepted wisdom preserves, strongly put forth sophisticated multilateral principles and rejected preferential trade. In this regard, US officials put up persistent demands to allow leeway for regional arrangements. For this, they mentioned two reasons, namely, they worried that Britain and developing nations would discard the talks, and they desire to get rid of impediments for European incorporation

Multilateral standards to promote European integration or conciliate Britain and developing countries were not compromised by the United States. The US officials negotiated a trade treaty with Canada secretly. A concept introduced at Havana to amend the Havana Charter to allow free trade areas was pushed behind by the US officials. Their effort to shape global trade rules to accommodate the US-Canada trade treaty became successful which, luck would have it, was never signed or approved and shaped the probing text of Article XXIV. Even to date, this text has been confusing the analysts.

The account of Article XXIV is not just of a historical interest. On theoretical levels it extends a picture of how established normative views are updated and changed by policymakers. It looks as if that to solve this ‘ free-ride’ hitch the US put in an additional article in the US Draft Charter of the ITO that banned member states from participating in any agreements with non-member states that expanded ITO charter advantages to these non-member countries.25 However, the decision reached at London Conference, the first preparation conference held in 1946 to sketch the ITO Charter, was that this proposal would go through ‘consideration at a later stage’.26 In the 1947 Geneva Conference, this proposal was raised again and it was supported by quite a few states where they suggested the need for a clause that avoids GATT benefits from being extended to non-member countries. But that proposal was not approved. After some time, the problem of ‘free-riding’ was brought forth again in the 1955 review meetings that summoned to discuss amendments of GATT articles and utility of the GATT. But majority of GATT member states at this time had the opinion that whether or not to allow free riding of non-GATT-member states was a matter to be decided exclusively by the GATT member reaching the bilateral agreement with the non-GATT-member country.28 In that situation, parties to GATT decided to restrict GATT’s extent to obligating themselves to provide any benefits, given to non-member states, to other member states through the MFN clause, while being unsuccessful to include a clause stopping non-member states from free riding.

It is extended that the fundamental system behind provisions in Article XXIV was that GATT as a rule, would permit PTAs but only as a recompense for fully fledged liberalisation in the form of either a CU or a FTA among the voter members.29 Hence, from the beginning it is important to observe that Article XXIV does not make any exception for PTAs that falls through of a fully fledged FTA or CU further than a reasonable period, as put in Article XXIV: 5 (c). Meaning thereby, to comply with the provision of Article XXIV a PTA has to take the form of a FTA or CU at the expiry of the provisional phase. The innermost substantive provisions of the GATT 1994 are enclosed in Article XXIV: 4, Article XXIV: 5(a), (b) and (c), Article XXIV: 6 and Article XXIV: 8(a) (I), (ii) and (b). Article XXIV: 4 which describe a general principle that the rationale of a CU or of a free-trade area should be to smooth the progress of trade between constituent territories, and to avoid from lifting barriers to the trade of other contracting parties with such territories.

The Contentious Issues contained in the Article XXIV

It is instructive to note that the submissions put forth by Japan and India, throughout the Uruguay Round of negotiations, on PTAs articulated disappointment at the vagueness of GATT rules, and the breakdown of contracting parties to rule definitively on notified PTAs in the GATT years. It was stated in Indian submission :

‘Customs unions and free trade areas have formed a fertile ground for trade conflicts. Article XXIV is replete with concepts about which there are conflicting interpretations. Even in regard to the major question of conformity with GATT of notified arrangements, the absence of recommendations by CPs has been interpreted differently.’

On the other hand, Japan described PTAs as inherently of a prejudiced nature, and brought attention of contracting parties, which at the same time as GATT allows discrimination, it does not endorse bringing about serious injury to non-members by the arrangement or enlargement of a PTA. For that reason Japan proposed a new mechanism within the framework of Article XXIV to address the issue of severe injury borne by domestic industry of a non-member by the making of the PTA. It also suggested that compensation for injury and/or market access of the concerned product on a MFN basis should be well thought-out within such a system. There was submission of an argument that the practice of unilateral withdrawal from an entire tariff schedule upon the creation of a CU, and subsequently renegotiating it, goes against the GATT rules and it should be synchronized.

divergent viewpoint was also presented. It said that Article XXIV had played a vital role in nurturing trade liberalization and was not being applied as a mechanism for uplifting trade barriers against third parties. At the same time, a claim was raised that any unfavorable effects on non-members of reduced market access in the PTA market would be regulated by the general trade creation effects of the formation of the PTA.23 an idea was that while adverse effects on third parties should be reduced, they could not be prevented. Specifically an apprehension was formulated that a strong bearing on harmful impact of PTAs would be damaging for many countries, as an instance, for certain European countries which might be excluded from participating regional arrangements.

Free-trade Area

It is alleged that among the chief contentious issues for developing countries is free trade area. The concept of the free trade area is taken as a group of two or more customs territories in which the duties and other restrictive trade regulations have been eradicated on substantially all the trade between the contracting states. The removal of all the duties and other restrictive trade practices must apply to products coming from within the territories of the contracting states.87 After the creation of a free-trade area88, those duties and other trade regulations related to third countries should not be advanced or more preventive than the duties or trade regulations which applied within the same territories preceding to the formation of the free-trade area.

It is proposed that 90 the provisional agreement should include a plan and schedule for the formation of such a free-trade area within a logical time.91 where the contracting parties are dedicated to a provisional agreement which leads to the development of a free-trade area. After deciding to go into into this regional grouping, the parties of the free-trade area92 must, without delay inform the other GATT contracting parties. They should also make available enough information relating to the proposed union or area. By doing this, GATT contracting parties will be able to make recommendations and present any reports to the contracting parties as they think appropriate.

It is extended that in the case of short-term agreements the working party in its report may make suitable recommendations on the anticipated time-frame and on the actions necessary to complete the making of the customs union or the free-trade area. If required, it can serve for further appraisal of the agreement. It is required from member parties to a temporary agreement that they should notify important amendments in the plan and schedule which were incorporated in the agreement to the Council for Trade in Goods. On request, the Council will observe the changes.94 It is essential for member states of the free trade area that they report periodically to the Council for Trade in Goods on the process of the related agreement.95 And If there is any substantial changes and/or developments in the agreement they must be reported as they are brought forth.

Customs union

The concept of the customs union as presented in Article XXIV can be described as the exchange of one customs territory for that of two or more customs territories with the subsequent conditions being met;

Duties and other restrictive trade regulations must be removed on significantly all trade between the constituent territories of the union. At least these regulations and duties must be eradicated on substantially all the trade in the products originating in the customs territory; and

Substantially the same duties and other trade regulations must be applied to trade with nonunion members.

For the formation of a customs union, among one of requirement is that the duties and other trade regulations enforced by the union with regard to trade with non-union members must not overall be higher or more restrictive than the duties and regulations of trade imposed on the constituent territories prior to the creation of the union. It is required of the parties of the customs union that they notify the GATT contracting parties promptly of their intention to enter into the customs union. It is also essential for them that they must make available to them such information related to the proposed union as will allow them to draw such reports and recommendations to the contracting parties as they deem fit.

It is noteworthy that the administration and notification requirements regarding free-trade areas are also valid to customs unions in spite of the dissimilarity between free-trade areas and customs unions. The requirements for the temporary union leading to the development of customs unions are the similar with those related to free-trade areas.

It is alleged that the main reason why an explanation of these contentious issues in the interpretation of article XXIV could not occur in the GATT working groups recognized to assess these RTAs can be seen by the fact that these groups run on the basis of the consensus principle, the middle decision making standard for the whole GATT law, which is unsuitable to come up agreed solutions if interests of primarily diverse nature have to be considered. It is not surprising that the working parties made for the evaluation of the many RTAs notified to the GATT reach at no conclusion since to the GATT conformity this integration project was insignificant. Now article XXIV, despite all its flaws and pitfalls which became very obvious over the decades, after the Havana conference remained largely unchanged not only until the end of the days of GATT 1944 but became alive in WTO law. It seemed enough to the WTO Members to recollect the fundamental principle mentioned before. To this, tolerance towards RTAs required a balancing between positive and negative trades’ effects of regional incorporation. But it was not a complacency towards past events in this area instead a warning that this harmonizing should be taken critically. As a consequence, in the Understanding on the Interpretation of article XXIV approved at the end of the Uruguay Round it was reaffirmed;

“… that the purpose of such agreements should be to facilitate trade between the constituent territories and not to raise barriers…; and that in their formation or enlargement the parties to them should… avoid creating adverse effects on the trade of other Members”.

Article XXIV and the Position of Developing Countries

It is professed that since the internal policies of the customs union connect and have an effect on all the contracting parties, any protectionist policies implemented by one contracting party which affects the interior balance of the customs union will not be authorized by the other contracting parties. Together, there is probability that the more advanced economies within the customs union by putting their economic needs first may neglect the needs of the smaller, less powerful economies. The larger economies, in this situation, benefit a lot from the customs union than their less powerful partners who may not get as much benefit and might in some circumstances be enforced to alternate cheaper, imported goods with the more dear products of the leading contracting parties. This issue has not been addressed by the GATT and which could hamper a truly fair and liberal trade order from being approved by the contracting parties to the customs union.

It is observed that many changes have been made by GATT 1994 rules regarding customs unions. Apart from the removal of NTB’s, a formula for the calculation of Common External Tariff (CET) has been presented and customs unions are subject to annual review by the WTO Council for Trade in Goods. The opportunities for contracting parties to protect themselves and the union have been greatly reduced. However, in the customs union, the problem of domination of the bigger economies still remains prevalent. The power of the customs union as a way of liberalization is in the readiness of contracting parties to present a collective face to the rest of the world by means of the CET. As it is expected of the parties to yield to the group their ability to decide individual tariff rates for their countries, they will in the process also develop nearer links with other contracting parties on other related trade matters. It results in greater liberalization inside the union. It is said that parties to this category of union will generally have to be more committed to the process of liberalization as compared to the parties related to a free-trade area. To observe regional groupings in isolation is not possible. The provisions of the GATT 1994 have excelled in the removal of protectionist barriers to trade even in a situation, where parties may be prone to protectionism. So parties are appreciative to eliminate many barriers which have in the past enabled them to save important industries. At the same time, there is no perfect rule, because any party wishing to save its various industries may do so with a little resourcefulness on its part. With regard to customs union, protection by one country cannot go unnoticed. It is the parties themselves who will perhaps provide the greatest restriction to protection by other contracting states to the union though the WTO provides for annual reports from these parties.

The objective of a customs union as provided in paragraph 4, is ” to facilitate trade” between the constituent members and ” not to raise barriers to the trade” with third countries. This purpose stress for that a sense of balance be struck by the constituent members of a customs union. It is required of a customs union to facilitate trade within the customs union, at the same time it should not do so in a way that lifts up barriers to trade with third countries. It is noted that the Understanding on Article XXIV clearly reaffirms this purpose of a customs union, and describes that in the development or enlargement of a customs union, the constituent members should ” to the greatest possible extent avoid creating adverse affects on the trade of other Members” . Paragraph 4 has suggestive not the functional language. It does not express a detached obligation itself but, rather, sets forth the superseding and persistent rationale for Article XXIV which is evident in operative language in the specific obligations that are found elsewhere in Article XXIV.46 Though the language of the preamble of Understanding on Article XXIV does not lay down compulsory legal duty yet the recommendation to avoid creating adverse effects, to the greatest possible extent, on the trade of other Members puts forth an important principle in understanding and applying Article XXIV:5.

As an instance, with regard to EC the ACP countries have shown concern in relation to formulating their proposal on Article XXIV of GATT that was creating a legal coverage by means of the WTO for introducing sound elements of flexibilities and unevenness in commitments in their negotiations with the EC of Economic Partnership Agreements (EPAs).

Considering regional integration for many developing countries, complete performance of the external and internal obligations would be a challenging task. A 1979 GATT Decision (so called ‘ Enabling Clause’ ) As a special and differential treatment for developing countries, provides for more favorable treatment to ‘ regional … arrangements entered into amongst less-developed contracting parties for the mutual reduction or elimination of tariffs and … of non-tariff measures’ than under GATT Article XXIV.117 With respect to the understanding of this provision, several points should be observed. For example, more favorable treatment is provided to RTAs or provisional agreements in goods where only developing countries and WTO Members are parties. On the other hand, any RTAs between developed and developing countries or between a WTO-member-developing country and a non-WTO-member-developing country cannot get that advantage.

The Advice to the Developing Countries on a Negotiation Position with Regard to Contentious issues

There are a number of suggestions put forth for developing countries which are on a negotiation position. When ACP countries in establishing relation to EC realised that the possible modification of substantive provisions of Article XXIV of GATT can either be advanced in the direction they wished or turn in the opposite sense meaning thereby, to introducing more strict rules. Some ACP regions, it is stated, are willing to discuss the EPAs under the current provisions of Article XXIV and hence, do not consider modifications of such provisions important to achieve their negotiating purposes in the background of the EPAs with the EC.

A caution was put forth in the meeting held on 23 June 2006 at the World Meteorological Organization in Geneva, with respect to taking a inactive approach to negotiations on Article XXIV of GATT owing to at least two considerations. Firstly, the fact that improved disciplines on transparency provisions with regard to RTAs is likely to be adopted in the background of current negotiations. After they are concluded these new disciplines will apply to the EPAs agreements facilitating the scrutiny by other WTO members of the terms and conditions of the agreement reached between the EC and ACP States. Secondly, related to the previous point, the ACP suggests that the EC may be vulnerable to challenge in the WTO if the EPA agreements are observed as incompatible with the WTO provisions which do not embrace as of today, provisions on elasticity for developing countries as the ACP would like to include in the EPAs.

It is submitted that the developing countries have to to exercise caution in these negotiations for their interests to be fully reflected in the final results, by specific flexibilities for developing countries. Along with others, these flexibilities should include:

– SAT level: ACP countries are required to investigate closely what products they require to exclude from the extent of liberalisation and argue that developing countries be allowed these SAT levels;

– ORCs and ORRCs that do not limit development policy gap especially related to the possibility – merely for developing countries – of applying safeguard measures within the RTA if needed ;

– Transition periods: the description of “exceptional circumstances” is desired to be based on development concerns. In these circumstances, transition periods more than ten years should be obviously WTO compatible.

– Notification and examination requirements: fewer stringent requirements should be made available to developing countries. Technical assistance should be methodically provided to developing countries that demand it in the announcement and in the assessment processes.

It is purported that such flexibilities if included in the final outcome of WTO negotiations should very much facilitate the participation of developing countries in RTAs included in the Article XXIV of GATT that will be the situation of the EPAs. This result would plainly make the Doha Round a Development Round.

To avoid MFN, a cost can exact to countries. Firstly, the Article XXIV provision for free trade areas required total rather partial preferences. Free trade was costlier than partial preferences, so this rule would limit derogations from MFN among more protectionist members such as the British Commonwealth. Second, ‘ substantially all’ trade had to be freed, which meant that not too many industries could be excluded – a barrier for Latin American countries that wanted preferential trade in specific manufactured goods. These groups would find it difficult to meet the conditions of Article XXIV, and preferential arrangements that failed these criteria would have to qualify under the more closely monitored provisions of Havana Charter Article 15. Thus, countries that wished to deviate from MFN would have to bear the domestic political cost of complete free trade within the preferential area.

It is suggested that to gain an exception from obligations contained in the TBT Agreement and SPS Agreement, principally the MFN obligation, in accordance with the Turkey — Textiles necessity test interpret Article XXIV:5. This eliminates imposing an unsuitable obstacle to the agreement of RTAs. Secondly, take ‘other restrictive regulations of commerce’ and ‘other regulations of commerce’ in Articles XXIV:5 and 8 to embrace merely discriminatory and pointless TBT or SPS measures. It avoids requirements to eradicate or match non-protectionist TBT or SPS measures and striking an inapt barrier to creation of RTAs.

Conclusion

From the discussion above it is evident that the misuse of authority by contracting states to customs unions is not an inbuilt fault of the customs union rather an ambiguity which has to be eradicated. The new computation for the CET and the abolition of NTB’s has made big progress to solving the dilemma present for many particular GATT contracting states, however, some prospective is still there for the contracting states to customs unions in order to enforce their determination on more susceptible sole state. For the same, the provisions for the execution of customs unions and the regulations running these customs unions should be made significantly tighter. Many pitfalls were there in the GATT prior to the negotiation of the Uruguay Round. Parties in trade saved their industries with the help of these lacunae with third parties. Scope of this practice was extended to single countries too. Despite the apparent foolproof rules, the contracting parties with the maximum power on the world market were clever to disregard the GATT provisions. The reason for this was insufficient managerial powers of the GATT body and their bigger power on the world market. Although the Uruguay Round has presented many solutions for this problem in the GATT 1947 yet it is up to the contracting states to accomplish their obligations in an excellent way and well thought way.