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

International Baccalaureate, Geneva, Switzerland


6.1 Introduction

More than four decades ago, John Jackson wrote:

As the general incidence of all tariffs and other trade barriers decline world-wide, assuming the trend of the last twenty years continues, the problem of preferential arrangements may fade in importance.1

Contrary to Jackson’s statement, regionalism has grown in strength and regional trade agreements (RTAs) are seen as an integral part of the multilateral trading system (MTS) and account for almost half of world trade and operate alongside the trade agreements of the WTO. In 1995, when the WTO was established, only three members (Japan, Korea, and Hong Kong) out of the original 120 members belonged to an RTA.2 By the end of 2013, with 159 Members the number of countries not part of any RTA was very few.

As at September 2013, about 500 RTAs had been notified to the GATT/WTO.3 According to the WTO, during the period 1948–1994, the GATT received 124 notifications of RTAs (relating to trade in goods). However, since the establishment of the WTO, there has been a marked increase in the number of RTAs notified. Since 1995, over 400 additional arrangements covering trade in goods or services have been notified.4 This indicates the increase in the number of RTAs since the establishment of the WTO, and this in spite of the success of the Uruguay Round negotiations.

This increase in part could be attributed to the inadequacy of the MTS to address in a coherent manner issues of global concern such as the definition of international standards, restrictions on business practices of cartels, setting of the rules for investment and competition policy. The MTS has not been able to effectively tackle issues such as immigration and under the General Agreement on Trade in Services (GATS), Mode 4 (temporary movement of natural persons). However, the MTS has implemented the Trade Related Intellectual Property Rights (TRIPS) agreement, by moving beyond trade liberalisation to establish worldwide standards.5 The rise in the number of RTAs raises the question of whether RTAs may be allowed to precede multilateral agreements and serve as a testing ground for multilateral solutions.

Although the multilateral trading system and the regional integration agreements share the common goal of trade liberalisation, trade liberalisation is not the only objective for which states enter into regional arrangements. Some countries have entered into RTAs for geopolitical reasons, and for some other countries, RTAs could act as a stepping stone to the multilateral system. Whilst there is no clear answer as to the extent to which regional integration agreements have influenced the multilateral trade system, it cannot be denied that recent regional developments have major implications for the multilateral system. This influence is in two main areas. First, the growth of regionalism may at times stimulate progress at the multilateral level. Second, regionalism may serve as laboratories for the multilateral trade system.6

In this section, we will carry out an analysis of the legal implications of regional trade agreements under WTO rules to determine the legality of these agreements. It is not intended in this section to provide a definite answer as to the extent of influence of regional trade agreements on the multilateral system but merely to provide a framework of analysis from which policymakers could take cue in resolving the contentious issue of the relationship between labour standards and international trade. Before we examine the influence of RTAs on the MTS, it is necessary to first discuss the momentum that RTAs have gained in recent times.

6.2 The Rise of Regionalism

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.

Box 6.1: The Motives for Regionalism

The spread of regionalism, including among countries that have traditionally avoided this approach, is due to a range of factors, including:

  • a concern not to be left out of the growing web of preferential deals;

  • a belief in the business community that, as product cycles get shorter and multilateral negotiating cycles get longer, quicker results may be obtained regionally;

  • the desire to use regional liberalisation as a catalyst for domestic reform;

  • a concern on the part of government to use bilateral deals to promote underlying political or strategic objectives;

  • or to pursue non-trade concerns, for example, related to core labour standards or protection of the environment. It is sometimes suggested that developing countries pursue RTAs for market access gains while developed countries seek deeper integration. This is too stark a distinction. Developed countries too have market access goals (including via regulatory issues like trade facilitation), while developing countries have a stake, via institution-building, in deeper integration, Cottier (1998).7

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.

6.3 Legal Basis for RTAs Under the Multilateral System: GATT/WTO Rules on RTAs

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.

6.4 Relevant Multilateral Rules on Regional Trade Agreements

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.

6.5 Examination of the Relevant Sections of Article XXIV

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.

6.5.1 Analyses of the Legal Implications of Regional Trade Agreements Under WTO Rules

As stated above, the legal basis for the formation of customs unions and free trade areas is Article XXIV. GATT 1994 allows members to deviate from the MFN principle. Members are allowed to form or join customs unions or free trade areas. The basis for the formation of regional integration agreements is Article XXIV.4, which states:

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 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 (italics added).

This provision makes it clear that WTO Members can form WTO-consistent regional groupings. As compared to the other WTO provisions regulating regional trade agreements, much has been written about Article XXIV of the GATT 1994. It is generally perceived as lacking in clarity and not providing sufficient guidance to Members wishing to form free trade areas or customs unions. Over the years, WTO Members have given differing and conflicting interpretations of the main provisions of Article XXIV. The reports of Working Parties established to examine the consistency of regional trade agreements with GATT/WTO rules were mostly inconclusive and did not provide sufficient guidance to WTO Members.

In the Turkey-Textiles case, the Panel and the Appellate Body provided valuable insight on the main requirements of Article XXIV. According to the second sentence of Article XXIV:4, the purpose of a free trade area or a customs union should be to create trade among the parties to the agreement and not to raise barriers to the trade of third parties. This implies that WTO Members are obliged not to use regional trading arrangements as instruments to discriminate against the trade of nonparties to the agreement. The agreement is expected to create trade between the parties and not result in substantial trade diversion of trade from third countries. However, the relationship between Article XXIV:4 and the other provisions of Article XXIV has raised a number of issues.

6.5.2 The Scope of Article XXIV:4 and Its Relationship with Other Provisions in Article XXIV of GATT 1994

There has been a long debate on the issue as to whether the requirements of Articles XXIV:4 and XXIV:5–9 are mutually exclusive or supportive in the sense that parties to regional trade agreements are not expected to comply with the conditions set out in those articles without any clear result. Hong Kong, in a communication to the Committee on Regional Trade Agreements, stated that “[t]he uncertainty is whether this provision should be regarded as being in the nature of a preamble or whether the injunction “not to raise barriers to the trade of (third parties)” can be applied objectively”.36

During the review of the Treaty of Rome by a subgroup of the Working Party, members of the European Economic Community (EEC) provided forceful arguments that the only requirements that had to be complied with by Members wishing to form free trade areas or customs unions were paragraphs 5–9 of Article XXIV, as paragraph 4 thereof did not lay down any positive obligation on Members.37

The interpretation provided by the EEC was not shared by some members of the Working Party, who were of the view that the second sentence of paragraph 4 created a separate obligation in addition to those laid down in paragraphs 5–9.38

The apparent reason for the divergent opinions is that if paragraph 4 is accepted as imposing a separate and an additional obligation, members of a customs union or a free trade area may be obliged not to raise barriers to the trade of any individual Member of the WTO. Put differently, in assessing the impact of a customs union or a free trade area, an aggregated analysis is to be avoided as it may conceal the real impact of the agreement on individual countries. The difficulty in determining the relationship between paragraphs 4 and 5–9 is succinctly summarised by Professor Kenneth Dam:

The relationship between paragraph 4 and paragraphs 5 through 9 is…a fertile source of controversy. If an agreement clearly complies with paragraph 4, is it automatically to be considered as meeting the standards of paragraphs 5 through 9? Or does paragraph 4 really contain only introductory language, and, in view of the word “accordingly”, are the substantive rules to be found in paragraphs 5 through 9? Perhaps there are two complementary or additive sets of standards—the “purpose” test of paragraph 4 and the form requirement of the following paragraphs. The number of ways in which paragraph 4 can be related to paragraphs 5 through 9 is limited only by the number and the ingenuity of lawyers involved in the interpretation of Article XXIV.39

During the Uruguay Round, negotiators had the opportunity to clarify the scope of this provision and its relationship with other provisions of Article XXIV but failed to state in clear and unambiguous language what the obligations of Members are under the Article. Indeed, it could possibly be argued that the Understanding compounded the murky situation by providing that “[c]ustoms unions, free trade areas, and interim agreements leading to the formation of a customs union or free trade area, to be consistent with Article XXIV, must satisfy, inter alia, the provisions of paragraphs 5–8 of that Article”. Proponents of a broader interpretation of the terms of Article XXIV:4 have seized upon the use of the words “must satisfy, inter alia, the provisions of paragraphs 5, 6, 7 and 8” to bolster their argument that in addition to the specified articles, there are other obligations that have to be satisfied by Members wishing to form customs unions or free trade areas, including those specified in Article XXIV:4.

Even though the argument has some merit, there is nothing in the terms of the Understanding that confirms that Article XXIV:4 lays down a separate and distinct obligation that has to be complied with by Members. If the Members so intended, they could have expressly stated so. The panel in Turkey-Textiles held that Article XXIV:4 did not lay down a separate obligation in and of itself.40 The fundamental issue in that case was whether Article XXIV of GATT 1994 obligated Members of the WTO that are parties to a regional trade arrangement (customs union) to have the same commercial policy towards third countries and, if it did, whether it justified the introduction of quantitative restrictions prohibited by GATT 1994 and the Agreement on Textiles and Clothing and Article XI of GATT 1994.

Turkey argued that Article XXIV:4 did not create a separate obligation that had to be complied with by Members wishing to form regional trade arrangements. Turkey submitted that the consistency of measures adopted by parties to a regional trading arrangement had “to be determined by reference to Article XXIV:5 to Article XXIV:8 of GATT and not to other GATT provisions”.41

India argued that whilst Members of the WTO were free to enter into regional trade arrangements, they still had to respect other WTO disciplines. In other words, a Member is not exempted from its WTO obligations simply because it has entered into a regional trade arrangement with another country, be it a Member of the WTO or not. The guiding principle laid down in Article XXIV:4 had to be respected by all Members entering into regional trade arrangements; otherwise, WTO rules would be abused and rendered ineffective.42

India’s argument was supported by several countries that had participated in the proceedings as third parties. The Panel, however, was not swayed by these arguments, as is evident from the following passage:

[w]hile not expressed as an obligation, paragraph 4 (and its elaboration in the fifth paragraph of the Preamble of the GATT 1994 Understanding on Article XXIV) argues against an interpretation of paragraph 5(a) that would read into that paragraph an exception to GATT rules that prohibit specific trade barriers.43

This view of the Panel was endorsed on appeal by the Appellate Body:

Paragraph 4 contains purposive, and not operative, language. It does not set forth a separate obligation itself but, rather, sets forth the overriding and pervasive purpose for Article XXIV which is manifested in operative language in the specific obligations that are found elsewhere in Article XXIV. Thus, the purpose set forth in paragraph 4 informs the other relevant paragraphs of Article XXIV, including the chapeau of paragraph 5. For this reason, the chapeau of paragraph 5, and the conditions set forth therein for establishing the availability of a defence under Article XXIV, must be interpreted in the light of the purpose of customs unions set forth in paragraph 4. The chapeau cannot be interpreted correctly without constant reference to this purpose.44

Regardless of the views of the Panel and the Appellate Body, it cannot be taken as settled that Article XXIV:4 does not create a separate obligation that has to be respected by WTO Members wishing to form regional trading arrangements. Although the views of the Appellate Body are treated with respect by WTO Members, it is expressly stated in Article IX:2 of the Marrakesh Agreement Establishing the WTO that “[t]he Ministerial Conference and the General Council shall have the exclusive authority to adopt interpretations of this Agreement and of the Multilateral Trade Agreements”. Thus, the views of the Appellate Body are not binding on the entire membership of the WTO. Indeed, as is stated in Article 19.2 of the Dispute Settlement Understanding (DSU), “in their findings and recommendations, the panel and Appellate Body cannot add to or diminish the rights and obligations provided in the covered agreements.”

Similarly, it is provided in Article 14 of the DSU that “[a]n Appellate Body report shall be adopted by the DSB and unconditionally accepted by the parties to the dispute”. In other words, Members that were not parties to the dispute are not under any obligation to accept the report. It is well established under GATT/WTO law that the views of previous panels are not binding on subsequent panels. They are merely of persuasive effect and not required to be followed.

6.5.3 Review of WTO Rules Relating to Regional Trading Agreements: Examination of Article XXIV:5, 7, & 8 of GATT 1994

Article XXIV of the GATT 1994 lays down five broad obligations that have to be complied with by WTO Members wishing to form free trade areas or customs unions. Breach of any of these conditions could potentially render an agreement inconsistent with the relevant rules of the WTO. Relevant Provisions of Article XXIV

Tariffs Should Not Be Higher After the Formation of the Customs Union or Free Trade Area: Article XXIV:5

One of the cardinal principles of the WTO is that tariffs and regulations of commerce should not be higher or more restrictive after the formation of the free trade area or customs union. In the case of free trade areas, Article XXIV:5(b) provides that “the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free-trade area … 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”.

This provision has been the subject of differing interpretations among WTO Members. Some Members argue that the words “maintained” and “applicable” demonstrate that it is the applied rates of duty that have to be taken into account in the examination of the consistency of an agreement with Article XXIV of GATT 1994. Others disagree and insist that it is the bound rates that have to be taken into account. In any event, the disagreement is moot as in many instances, the parties to free trade agreements do not usually change their external tariffs vis-à-vis third parties. It is this flexibility that distinguishes free trade areas from customs unions. In the case of the latter, the parties are required to have substantially the same duties and other regulations of commerce towards third countries,

The basic objective of this provision is to prevent WTO Members from increasing barriers to trade when they form free trade areas. In Turkey-Textiles, the Appellate Body held that under certain circumstances, Article XXIV:5 could provide legal cover for measures that are inconsistent with WTO rules:

[I]n a case involving the formation of a customs union, this ‘defence’ is available only when two conditions are fulfilled. First, the party claiming the benefit of this defence must demonstrate that the measure at issue is introduced upon the formation of a customs union that fully meets the requirements of sub-paragraphs 8(a) and 5(a) of Article XXIV. And, second, that party must demonstrate that the formation of that customs union would be prevented if it were not allowed to introduce the measure at issue. Again, both these conditions must be met to have the benefit of the defence under Article XXIV.45

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