Regional Trade Agreements and the Interface Between Labour Standards and International Trade

The proliferation of regional trade agreements (RTA) in recent times has put into question the viability and effectiveness of the multilateral trading system, whose cornerstone is the non-discrimination principle. It is estimated that over half of world trade is being conducted on a preferential basis. This trend raises the question whether the multilateral trading system embodied in the World Trade Organization (WTO) is capable of regulating international trade relations among countries in the twenty-first century. It could be argued that it is the dissatisfaction with the WTO that has motivated a number of countries to turn to bilateral/regional trade agreements to underpin their trade policy.

The criticism is often made that it takes too long to negotiate new agreements in the WTO, given the different levels of development of its Members, and that agreements reached usually represent the lowest common denominator. The Uruguay Round was expected to have been concluded in 4 years, but it took almost 8 years to finalise. It should be borne in mind, however, that it was during the Uruguay Round that the number of RTAs notified to the GATT increased.

The increase in RTAs leads to the questions as to whether the surge indicates that countries are losing faith in the multilateral trading system and placing their hopes and aspirations in bilateralism and regionalism and whether trade policy officials believe that bilateralism and regionalism offered a better route to global trade liberalisation. Did countries during the Uruguay Round see RTAs as an insurance policy in the event that the Round failed?

The failure of the WTO Ministerial Conference in Seattle (1999) added to the uncertainty about the MTS, as it was during the Uruguay Round negotiations. Countries, which historically were in full support of the multilateral approach, have entered into RTAs. Does this again indicate that their confidence in the MTS is waning? Adding to all this was again the failure of WTO Members in Cancun (2003) to reach an agreement. The United States, for example, stated its intentions plainly after the Cancun meeting that it would promote free trade globally, regionally, and bilaterally,⁸ but more specifically it stated its intention to conclude more bilateral deals—a promise that it has kept, considering the number of bilateral agreements it has entered into.

In recent times, doubts have been cast on the Doha declaration made by trade ministers at Doha, Qatar, that the Doha Development Agenda launched in 2001 would be completed in 3 years. As at September 2013, WTO Members were still in negotiations on the modalities for the successful launch of the Doha Work Programme. However, some have expressed the view that the proliferation of RTAs should not be cause for alarm since the two approaches to global free trade are not mutually exclusive.⁹

Whilst a number of studies have concluded that the two approaches to the liberalisation of trade are complementary and mutually supportive,¹⁰ the former Director General of the WTO, Mr. Mike Moore, cautioned against the proliferation of regional trade agreements and highlighted the threat it poses to the multilateral trading system.¹¹ The view of the Director General cannot be disputed, given the nature of some of the agreements being concluded and the signatories of such agreements. The proposed Free Trade for the Americas (FTAA) and the North Asian Free-Trade Area linking Japan, China, and South Korea, if implemented, would remove a sizeable proportion of world trade from the aegis of the WTO with far-reaching implications for the multilateral trading system.

Economists agree, however, that regional trade agreements could be building blocks for the multilateral trading system if they embrace the principles of open regionalism. In other words, they contend that if regional trading blocs eschew protectionism and reduce barriers to the trade of third countries, it could provide a boost for the multilateral trading system.¹² Under WTO law, there is no obligation on parties to regional trade agreements to reduce barriers to the trade of third countries. Their main obligation is to ensure that barriers to the trade of third countries are not increased. In other words, the decision as to whether to embrace open regionalism and reduce barriers to the trade of third countries is a voluntary one.

However, because of political pressures, many regional trading arrangements insist on reciprocity before reducing barriers to the trade of third countries. Thus, whilst reduction of trade barriers among the parties to a regional trade agreement could generate some efficiency gains and increase the welfare of the participating countries, the impact of the agreement on third countries is far from certain. Considering the impact on poor countries, Jagdish Bhagwati has pointed out that “Everyone loses out but the poor countries suffer the most because their companies are least prepared to deal with the confusion”.¹³ Bhagwati further added that “where a significant power such as the U.S. or the European Union is involved in an agreement, it almost always sneaks in reverse preferences – and trade-unrelated issues such as patent protection and labour standards – that exact a heavy cost on developing countries”.¹⁴

In spite of such comments as stated by Bhagwati on the impact of RTAs on developing countries, especially the least developed, the findings of a case study conducted on the impact of the membership of Zambia and Mauritius in Common Market for Eastern and Southern Africa (COMESA) and Southern Africa Development Cooperation (SADC) provide some indication of how RTAs can assist to support and facilitate the participation, in this case, of developing countries in the WTO. Bilal and Szepesi stated:

[W]hile RTA Membership had little direct impact so far on the preparation and conduct of the WTO negotiations … regional groupings can play a much needed role in the WTO preparations through indirect means … By raising awareness, by training, by providing a platform for the exchange of views and information, and by stimulating trade capacity building initiatives, COMESA and the SADC have contributed to a better preparation of their member countries on trade issues, which have had positive spillovers on their participation in the WTO.¹⁵

The two opposite views of the impact of regionalism shows the need for striking a balance between the countries that form a regional group and those outside that group. This calls for WTO Membership in working with the WTO Secretariat to ensure that the Members adhere to the WTO rules. The Understanding of Article XXIV, for example, states in the preamble:

[T]he purpose of regional trade agreements should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other Members with such territories; … in their formation or enlargement the parties to them should to the greatest possible extent avoid creating adverse effects on the trade of other Members.¹⁶

The Ministerial Declaration in the Doha Development Round negotiations adopted on 14 November 2001 called for Members negotiating with the aim of further clarifying and improving the rules that apply to RTAs. In spite of the failure by the WTO Membership to successfully complete the Doha negotiations to date, Members have agreed to a new transparency mechanism.

Whilst the debate on the impact of RTAs at the WTO has been contentious at times, in recent times it appears the debate is taking a different turning. The shift is more from the costs and benefits analysis to how RTAs can be a force for good. In this respect, the Director General of the WTO, Pascal Lamy, notes:

I find the debate about whether regionalism is a good or bad thing sterile. This is not the point. 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 … We often think and talk about how regionalism might be hurting multilateralism, either by bolstering discriminatory interests, or perhaps by fostering an anti-trade-openness posture, if regionalism is seen as a way of building protectionist structures behind enlarged closed markets … what I would like to do is turn the question around. I would like to ask what the WTO might do to help avoid a situation in which these negative aspects of regional agreements prevail, and ultimately to promote multilateralization.¹⁷

Further to the Director General’s quote above, in his speech to the African Union Summit on 29 January 2012, he stated that WTO Members should use multilateral trade negotiations and the WTO system as impetus for greater regional integration. He added that “there is absolutely no contradiction between accelerating regional integration and deepening the multilateral trading system”.¹⁸

The apparent shift in the age old view on the impact on RTAs could also be related to the reluctance of WTO Members to challenge the consistency of RTAs with the multilateral rules under the dispute settlement system. Pauwelyn provides three reasons for which he considers why WTO Members refrain from this challenge. First, he states that with the exception of Mongolia, all WTO Members have entered into one or more RTAs. And that any Member should have an interest in clarifying or tightening the rules under Article XXIV as this might work against their own RTA agenda. Second, WTO Members might not have confidence in panels to make binding decisions on the complexity of Article XXIV compliance. Finally, should an RTA not liberalise ‘substantially all the trade’ among their members and thereby violates Article XXIV, a third party might not have the incentive to raise the issue of inconsistency since, in his view, this could result in more discrimination.¹⁹

Pauwelyn further states that the experience of the dispute system to date indicates that panels and the Appellate Body avoid making decisions on Article XXIV. He cites the cases of (1) Turkey-Textiles,²⁰ where the panel and the Appellate Body, without providing in-depth analysis, gave the presumption that the EC-Turkey customs union was in line with GATT Article XXIV, (2) the WTO case law under the Safeguards Agreement also suggest that the panel and the Appellate Body avoid ruling under Article XXIV, and (3) the panel decision in Brazil-Tyres ²¹ case is another example in avoiding an examination of RTAs as the panel did not rule on the exclusion for MERCOSUR imports under Article XXIV.²²

Given the political and legal reality that RTAs are here to stay,²³ it is no wonder that there has been a change in attitude towards RTAs in the multilateral system. The opinion of Director General of the WTO above provides a clear indication that the time for a change in approach in the international community on RTAs has arrived.

Pauwelyn recommends that there is the need for a shift in focus from WTO law from “hierarchy and supremacy over RTAs to one of mutual recognition, accommodation and respect”.²⁴ He proposes that (1) the focus should be on integrating developments in regionalism into WTO activities and also allow panels under the dispute system to interpret and apply WTO rules with respect to RTAs and (2) instead of emphasis on Article XXIV, RTA trade negotiators should work to achieve complementarity with other WTO Agreements in order to “preserve the integrity of both systems”.²⁵

The proposals by Pauwelyn in light of developments in the “world” of increasing regionalism is all the more timely, views that we subscribe to, given our observation that RTAs in spite of their apparent weaknesses and also possible negative impact on the multilateral system has a potential for good, especially in successfully resolving the CLS and trade debate. And as mentioned above, in light of recent financial crises and likely difficult employment creation prospects globally, the efficacious mixture of political, legal, economic, social, and moral policies holds the key to addressing the difficult issues, which bear on the linkage issues.

Policies relating to regional trade arrangements start with the most-favoured-nation (MFN) obligation. This principle is stated in Article I of GATT 1994—that there should be no discrimination between like products/services originating in or destined for different countries and that each trading partner gets immediately and unconditionally the best treatment given to any other trading partner. The importance of this principle in multilateral relations is undisputed.

The Appellate Body in EC-Tariff Preferences stated that the MFN principle is a ‘cornerstone of the GATT’ and ‘one of the pillars of the WTO trading system’.²⁶ Before the EC-Tariff Preferences ruling, the Appellate Body ruled in an earlier case: “For more than fifty years, the obligation to provide most-favoured-nation treatment in Article I of the GATT 1994 has been both central and essential to assuring the success of a global rules-based system for trade in goods.”²⁷

The report of a committee commissioned by the WTO in 2004 highlights the situation of how widespread RTAs have become. The Sutherland Report on The Future of the WTO on MFN and the RTAs stated:

[N]early five decades after the founding of the GATT, MFN is no longer the rule; it is almost the exception. Certainly, much trade between the major economies is still conducted on an MFN basis. However, what has been termed the ‘spaghetti bowl’ of customs unions, common markets, regional and bilateral free trade areas, preferences and an endless assortment of miscellaneous trade deals has almost reached the point where MFN treatment is exceptional treatment.²⁸

This statement buttresses the reality of the prevalence of RTAs in the global economy making the MFN obligation that has been the cornerstone of the GATT and a major pillar of the multilateral trading system less predominant.

Members of GATT/WTO can form regional trading arrangements pursuant to Article XXIV of GATT 1994, Article V of the GATS, or the Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (“the Enabling Clause”). Where the conditions of these Articles cannot be fulfilled, a waiver could be obtained from the Members under Article IX of the Marrakesh Decision Establishing the WTO to establish a regional trading arrangement, such as the Lomé Convention.

Analysis of the relevant provisions of Article XXIV demonstrate that the WTO rules pertaining to RTAs have been interpreted so broadly and inconsistently that it is difficult to state categorically what the obligations of Members are under the rules of the WTO. Further to this is also the lack of a coherent body of jurisprudence to guide Members who wish to form regional trading arrangements. Under GATT, the Working Parties established to examine the consistency of regional trade agreements with the relevant multilateral trade rules were open to all Members, including those whose agreements were being examined. In other words, the processes of examination to test the consistency of the agreements with the multilateral rules were not free from extraneous considerations such as national pride and politics.

An examination of some of the reports of the Working Parties reveal that in trade arrangements involving developing countries, the Working Parties were influenced by considerations relating to development.²⁹ So far as it was perceived that the agreement might assist the countries to increase their participation in the multilateral trading system, little regard was given as to whether the multilateral disciplines had been adhered to by the parties.

It is further argued that same holds true for agreements involving developed countries. Since the European economic integration in the 1950s and 1960s was seen as necessary to halt the spread of communism, the United States and other major non-European trading nations did not insist on full compliance with the terms of Article XXIV, as they thought that for geopolitical reasons it was necessary in the interest of world peace and security to have a stable and prosperous Western Europe.³⁰ Thus, notwithstanding the difficulties that some Members had with the Treaty of Rome, the six original members of the EEC were not vigorously challenged when they implemented their agreement. Doubts about the consistency of the Treaty of Rome with the rules of the GATT/WTO still lingers on as the Treaty was never given a clean bill of health by the GATT. This has, to some extent, set the stage for differing interpretations given to the provisions of Article XXIV by Members of the WTO.

Having discussed the rise of regionalism, we now turn our attention to the issue of the legal implications of these agreements under WTO rules. This analysis is relevant if RTAs are being recommended as testing grounds for the multilateral system.

To ensure that the formation of a regional trading arrangement does not worsen a Member’s terms of trade, WTO rules lay down a number of conditions that have to be complied with by countries wishing to form such arrangements. The Article that regulates regional trade arrangements is Article XXIV of GATT 1994 and the Provisions of the Understanding on the Interpretation of Article XXIV of the GATT 1994. This Article essentially provides legal cover for Members of the WTO to form or join customs unions or free trade areas, provided that their “purpose [is] to facilitate trade between the constituent territories and not to raise barriers to the trade of other contracting parties with such territories”.³¹ Paragraph 8 of Article XXIV makes it clear that the WTO rules only apply to customs unions, free trade areas, and interim agreements for the formation of free trade areas and customs unions. Thus, the rules do not cover agreements establishing common markets and economic unions.³²

A customs union is defined as the “substitution of a single customs territory for two or more customs territories, so that (1) 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 (2) 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”.

By way of comparison, a free trade area is defined as “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 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”.

Thus, the basic difference between a customs union and a free trade area is that whilst under the former the parties are obliged to apply “substantially the same duties and other regulations of commerce”, they are not obliged to do so in a free trade area. Put simply, each constituent member has the right to retain its external tariffs on the trade of non-constituent members.

The guiding principle is stated in Article XXIV:4. It provides that the formation of a free trade area or a customs union should lead to the creation of trade between the constituent territories and not raise barriers to the trade of third countries. Article XXIV:5 is intended to operationalise this broad principle as it provides that the general incidence of duties and regulations of commerce should not be increased or made more restrictive after the formation of the free trade area or customs union. Article XXIV:6 lays down procedures for compensating third countries in the event of a country breaching the rule laid down in Article XXIV:5. Article XXIV:7 obliges parties to regional trade agreements to notify their agreements to the WTO for examination to determine whether they are consistent with WTO rules. Article XXIV:8 obliges parties to a free trade area or a customs union to liberalise substantially all the trade between themselves, and in the case of a customs union, they should apply substantially the same duties and other regulations of commerce.

On face value, the rules appear to be very clear, but in reality they are ambiguous. Professor Jackson has observed that Article XXIV incorporates “criteria that are so ambiguous or so unrelated to the goals and policies of GATT Contracting Parties that the international community was not prepared to make compliance with the technicalities of Article XXIV the sine qua non of eligibility for the exception from other GATT obligations”.³³ This situation has been taken advantage of by WTO Members that have interpreted the rules in a manner more favourable to them.

Jackson’s observation indicates the starting point for this situation. He stated:

Article XXIV of GATT contains one of the most troubled provisions of GATT … [T]he most important of these provisions (Article XXIV, paragraphs 4 through 10) establishes an exception to GATT obligations for regional arrangements that meet a series of detailed and complex criteria.³⁴

Whilst the Committee on Regional Trade Agreement (CRTA) is expected to review and determine the consistency of agreements with the relevant rules of the WTO, it has not been able to make decisions due to the consensus rule that requires that decisions should be taken by all WTO Members. In effect, parties to the regional trade agreements being examined would have to agree that their agreement is inconsistent with the rules of the WTO before the Committee could take a definitive decision. Since this is unlikely, it could be said that the WTO does not exercise any effective control over regional trade agreements. To make up for the loophole in WTO rules and practice, Members of the WTO are increasingly being tempted to have recourse to the dispute settlement mechanism to challenge the consistency of regional trade agreements with the rules of the WTO.

During the years of the GATT, there was the implicit understanding that a Member could not have recourse to the dispute settlement mechanism to challenge the overall consistency of an agreement with the rules of the WTO. This was perceived to fall exclusively within the jurisdiction of the Working Parties, which were established to examine the agreements. It was thought, however, that a Member could use the dispute settlement procedures to challenge an aspect of the agreement that was inconsistent with WTO rules.

In the case between India and Turkey,³⁵ the Appellate Body held that it and the panels have the jurisdiction to determine the overall consistency of regional trade agreements with WTO rules. Some Members of the WTO have criticised the decision of the Appellate Body and accused it of usurping the functions of the CRTA.