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RTAs and the WTO

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WTO E-Learning

Copyright WTO, October 2013 Visit the website: http://etraining.wto.org

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RTAs and the WTO

WTO E-Learning

Course Guide

WELCOME to the Online Course on Regional trade agreements and the WTO

This Course Guide section provides an overview of the organization of your course, as well as of the main functions of the E-Learning platform.

This WTO E-Learning course gives you the flexibility to combine your training and professional responsibilities. You will be able to benefit from interactive activities such as the Chat Session with WTO experts. WTO E-Learning is available for government officials.

While the WTO E-Learning material is freely available on the WTO E-Learning website, you will need to register and submit the nomination form in order to access the course exams and obtain a WTO certificate. Once your registration process is complete, a username and password will be sent to you by email. Your access codes are available for a two-month period. During this period, you will have to complete AND submit all exams. A Trainer will be available to assist you with any questions you may have.

The estimated study time for this course is 20 hours. Therefore, you decide the rhythm you want to follow.

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Course Objectives After successfully completing the elements of the E-Learning course on Regional trade agreement and the WTO, you will:

Be able to relate WTO terminology about regionalism with the concepts behind it;

Be able to consider regionalism in its global economic, and geopolitical context;

Be able to discuss the substantive WTO rules governing RTAs;

Have practised navigation through the WTO website, and in particular the RTA database.

WTO E-Learning

Structure of the course

Training material

Each module contains training material on a specific issue, including explanatory texts and examples,

Exercises

Self-assessment exercises are available in most modules. They allow you to measure your progress in the course.

End-of-module Exams

Please note that you may take the end-of-module exam only once and it will count towards your final average. Once submitted, your answers cannot be modified.

Final Exam

The Final Exam is at the end of the last module of your course. This exam covers all the issues addressed during the course. Take your time to complete and submit it, since you will only be able to do it once. The result of the final exam counts double in the calculation of your final average.

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Interactive tools

The E-Learning website offers interactive tools to foster the exchange among course participants, as well as between participants and WTO experts. Please refer to the Online tutorial for more detailed information on:

Your own E-Learning email account. Use it to contact your Trainer, Help Desk, other participants, etc, and build-up your network.

This is the place to discuss the latest WTO news of interest to you by exchanging comments and views with other participants and trainers.

Chat sessions with WTO experts and special guests will be organized during the course. An invitation will be sent to you with the date and time of the Session.

Internal Email Service

News Forum

Chat Sessions

Evaluation

At the end of each module, you will have to complete an exam and submit it to the E-Learning team in charge of the course. These exams contain multiple-choice questions addressing the substantive content of each module. Should you have questions on the evaluation of your exams, please remember to first carefully read the reasoning for correct answers, which you will see together with your test results. The results of each exam will be taken into account for the calculation of your final average. After completing the last module, you will have access to a Final Exam, which counts double in the calculation of your final average.

Upon successful completion of the course, the WTO Institute for Training and Technical Cooperation will send you a Certificate, signed by the Director General of the WTO, if:

You achieve a final average of at least 60% of correct answers;

You scored more than 50% in each exam except in one (this means: if the course has 6 modules, you need to have 5 exams above 50%); and

You have taken part in the interactive activities (chat session and/or forum).

Participants with outstanding results (i.e. with a final average above 90% and no exam below 50%) will be awarded a Certificate with Distinction.

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Certificate

Course sequence

The six modules have been designed to introduce progressively key concepts, allowing you to build up knowledge leading to a better understanding of the various aspects of regional trade integration.

Module 1 Introduction to RTAs What are preferences? What are RTAs ? And what they are not

Module 2 The evolving world of regionalism Through facts and figures, the past and present landscape defining the phenomenon of regional trade integration and the various motivations behind the conclusion of RTAs.

Module 3 WTO rules on RTAs Right into the heart of the WTO rules governing the establishment of RTAs.

Module 4 DDA & Transparency Mechanism How it came to life and how it works.

Module 5 WTO RTA-IS How to get info on regional initiatives and navigate through the WTO Database on RTAs.

Module 6 Recap and conclusion

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When clicking on these icons you will navigate

through modules

User Agreement The use of the E-learning platform, the training materials and interactive features is subject to the terms and conditions contained in the User Agreement. You have automatically agreed to the User Agreement by using the log-in details (username and password) that were sent to you. The User Agreement reads as follows:

1. The E-learning platform is property of the World Trade Organization. It is managed by the E-learning Unit of the Institute for Training and Technical Cooperation and its objective is to deliver online courses on the WTO and its Agreements, while taking full advantage of the internet and the latest multimedia technologies.

2. The User is a trade official from a developing country or economy in transition, nominated by his/her respective government. The User enjoys access to the platform during the duration of the course, under the following terms and conditions:

a. The WTO is the copyright holder of the content of the E-learning platform. Training materials and other tools available online shall not be disseminated without prior written authorization from the WTO E-learning Unit; b. During the course, the User may print the training materials and documents available on the E-learning platform for his/her personal use only; c. Citations and references to the course materials available on the E-learning platform shall fully acknowledge the source (i.e. WTO E-learning course); d. Only authorized Users (i.e. participants, nominated by their governments, who have received a username and password) are entitled to use the E-learning platform; e. The User is responsible for maintaining the confidentiality of the username and password to access the E-learning platform. If you become aware of any unauthorized use of your account, you shall notify the E-learning Unit ([email protected]) immediately; f. The utilization of the E-learning platform and its contents shall be exclusively in relation to the course that is being followed by the User; g. Communications through email and the Discussion Forum may be monitored by the WTO to ensure civility and compliance with the User Agreement; h. If the User breaches the terms and conditions of this User Agreement, his/her right to access the E-learning Platform will be revoked unilaterally by the WTO.

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Introduction to RTAs

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Introduction to RTAs Module 1

INTRODUCTION

Regional trade agreements (RTAs) have become a dominant feature of contemporary global trade.

The increase in the number of RTAs has not weakened since the early 90s. The development of these regional trade agreements took place against the background of a multilateral trading system based on fundamental principles such as the most-favoured-nation principle.

The relationship between regionalism, in its various forms, and multilateralism, symbolized by the rules applicable between the Members of the WTO continues to be a critical question for the development of both international trade and the multilateral trading system.

Click on TV screen to

see a short introductory

video



TRADE UNDER PREFERENTIAL REGIME

The abundant literature addressing the phenomenon of regional trade integration refers often indistinctly to regional trade agreements (RTAs) or to preferential trade arrangements (PTAs). However, for this course, as often with the WTO, RTAs and PTAs are acronyms covering distinct types of preferential regimes. RTAs and PTAs are subject to different legal requirements, and different procedures are attached to them. Therefore we need to know what, for the purpose of this course, is defined as an RTA. We will then briefly address other forms of preferential schemes, which are not the principal focus of this course.

RTAs are AGREEMENTS on TRADE;

RTAs establish a PREFERENTIAL regime; and

RTAs are RECIPROCAL.

These three elements are detailed below

REGIONAL TRADE AGREEMENTS (RTAs)

RTAs are reciprocal trade agreements between two or more partners (not specifically in the same region). They include partial scope agreements (PSAs), free trade agreements (FTAs) and customs unions (CUs). The latter two are legally defined in WTO texts detailed in Module 3.

Active RTAs

Active RTAs are still in force. They produce effects on the parties and the text of these RTAs are currently binding between them.

Inactive RTAs

Inactive RTAs were concluded in the past and are no longer in force. They may still appear in some statistics but they do not produce any effect.

Physical RTAs

The term physical RTA regroups RTAs for which goods and services aspects are notified separately. The establishment of an RTA and further accession to it are also counted as one RTA.


RTAs ARE AGREEMENTS

RTAs are negotiated and signed by the authorities of countries / territories. In that regard, an RTA is not fundamentally different from the WTO Agreement(s), which also establishes legally binding obligations between the governments parties to the agreement.

on TRADE

RTAs are regulating TRADE matters, initially in relation to trade in goods, but increasingly also in relation to trade in services. More recent RTAs also contain provisions on other trade-related aspects. However, the core of RTAs remains trade liberalization.

The traditional objective of an RTA is to eliminate or reduce tariffs in relation to trade in goods. In the case of trade in services, RTAs aim at eliminating or reducing restrictions to trade in services.

A number of RTAs however stretch well beyond to areas such as standards, intellectual property, competition, environment or even labour law.


RTAs are PREFERENTIAL and therefore DISCRIMINATORY REGIMES

By agreeing to grant each other preferential treatment to goods and/or services traded between the parties to the RTA, an element of discrimination is introduced into international trade. This is in contradiction with one of the cornerstones of the WTO.

The preferential nature of RTAs goes against the non-discrimination principle. It introduces discrimination and is therefore incompatible with the MFN principle! Under the rule on MFN, a WTO Member is in breach of its WTO obligations when it grants preferential treatment to products (or services) originating only in one or a selected group of countries. Nevertheless, the WTO rules (for goods and services), like the GATT rules (only for goods), allow WTO Members to enter into RTAs under certain conditions. Module 3 goes into the details of the relevant provisions.

MFN In the legal framework of the WTO, NON-DISCRIMINATON is considered to be a BASIC PRINCIPLE.

It finds its expression in Article I of the GATT of 1994 (for trade in goods), and in Article II of the GATS (for trade in services). These two legal provisions concretize the idea that the most favourable treatment granted to a product imported from any country should be given (immediately and unconditionally) to a product (a like product) from any Member of the WTO. Through this most-favoured-nation (MFN) treatment, each WTO Member has the guarantee that its good (or service) exported to another WTO Member will benefit from the best available treatment.

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to learn more about the history

of MFN

The MFN rule, in one form or another, can be traced back to the sixteenth century or even earlier. Typical of these older provisions is the formulation contained in the Treaty of Peace and Friendship between Great Britain and Spain of 1713, part of the instruments making up the Treaty of Utrecht. This says that the subjects of each kingdom shall have the like favour in all things as the subjects of France, or any other foreign nation, the most favoured, have, possess and enjoy, or at any time hereafter may have, possess or enjoy.

An MFN clause was included in the Cobden-Chevalier Treaty between England and France of 1860. This is thought to be the ancestor of its modern application. At any rate, the MFN rule was then copied into many other European trade agreements.

In the years before the First World War, the MFN rule suffered a decline. These years led to its virtual demise. In the third of his fourteen points, President Wilson called in January 1918 for the removal, as far as possible, of all

economic barriers and the establishment of an equality of trade conditions among all the nations consenting to the peace and associating themselves for its maintenance. This is deemed by some to have been the equivalent of a call for MFN.

The Versailles peace conference did not discuss trade barriers, but in the Peace Treaty Germany and the other central powers were required to extend unconditional MFN for three years to the trade of the allied powers.

The Covenant of the League of Nations only referred to equitable treatment of commerce of other League members. This fell well short of an MFN clause.

The Geneva World Economic Conference of may 1927 pronounced strongly in favour of the widest possible interpretation of the MFN clause, and it stressed that its use in commercial treaties ought to be normal. In 1933, the League of Nations published a 300-word model text of an MFN clause. By that time, economic conditions had been very difficult for several years, and the MFN principle was not able to attract broad support.

The Atlantic Charter of 1941 revived the MFN principle and made it the cornerstone of the post-war multilateral trading system as exemplified by the GATT.

The MFN principle through time


RTAs ARE RECIPROCAL

Reciprocity is intrinsic to, and constitutes an important feature of, RTAs (as defined in the WTO context).

As reciprocal trade agreements, RTAs result from a give-and-take NEGOTIATION between the RTA partners (Parties). In order to enter into an RTA (whatever form the RTA may take), each Party grants some preferential treatment to the other. For Parties that are WTO Members, this means that they agree to introduce a specific trade regime inconsistent, by nature, with the MFN principle.

The nature of the reciprocity may vary from one RTA to another.

RECIPROCITY DOES NOT AUTOMATICALLY MEAN SYMMETRY

RTAs may be symmetrical, when each Party gives as much as the other(s), or asymmetrical, when some Parties agree to make substantially more concessions, or liberalize over a shorter transition period, than the other(s). The latter is often (but not systematically) observed where the level of economic development of the Parties differs considerably.

PTAs ARE NOT RTAs

In WTO parlance, preferential trade arrangements (PTAs) are unilateral decisions under which a (usually a developed country) party decides unilaterally to accord one or more other parties (usually developing countries, including least developed countries - LDCs) preferential treatment in trade.

PREFERENTIAL TRADE AGREEMENTS

(PTAs)

PTAs do not refer to reciprocal preferential agreements per se but rather to PREFERENTIAL TREATMENT granted UNILATERALLY to certain products (such as under GSP Schemes).

Generalized System of Preference (GSP)

First proposed at UNCTAD II in 1968. Entered into force in 1971. It gives developing countries a margin of preference in the tariff rates their goods face in the markets of developed countries and in this way increases their competitiveness. The massive tariff reductions since 1971 as a result of multilateral trade negotiations and unilateral actions, as well as changes in productivity, have reduced the importance of the GSP to many developing country exporters, but it remains an important plank in the trade policies of many developing countries. UNCTAD is the main forum for discussion of GSP issues.


Click here to learn

more about PTAs

PTAs are outside of the scope of this

course

Click here to consult the list of

PTAs


DATA & STATISTICS

Throughout this course, we will make reference to various sources of data and statistics. When counting RTAs, we will, in principle, refer to the number of NOTIFIED RTA, which are currently ACTIVE RTAs. Nevertheless, readers should be conscious of the difficulty in capturing the reality of economics and trade through numbers and percentages.

As an illustration of the challenge facing those who collect and compile trade-related statistics, today, companies spread their operations across the world, from the design of the product and manufacturing of components to assembly and marketing, creating international production chains. More and more products are Made in the World rather than Made in China or Made in France.

The analysis of RTAs presents a number of statistical challenges. WTO Members have the obligation to notify their RTAs, yet a number of RTAs are in force, but have not been notified. Non-WTO Members have no such obligation. Thus, the information on notified RTAs presented in this course is an incomplete picture of the true extent of preferential trade. In addition, few countries collect detailed data on the actual use of preferences, so it is difficult to determine to what extent preferences are used.

In services, data collection systems are still being refined and there is often a lack of detailed services trade statistics, particularly on a bilateral basis.


DUTY FREE NON-PREFERENTIAL TRADE:

NO ROOM FOR PREFERENCES

In practice, a rather large proportion of world trade is crossing borders without payment of customs duties. This is the case for trade benefiting from duty free treatment when granted to all trading partners. It should therefore be discounted when calculating the share of trade performed under preferential conditions. Preferences (for example through an RTA), can then only be granted for the remaining portion of trade (at the maximum). Still, this may represent an important potential for discrimination.

PREFERENTIAL TRADE:

In a sample covering imports of the 20 largest importers from all their trading partner countries, accounting for 90% of world merchandise trade in 2008, only 16% qualified as preferential trade, assuming full utilization of preferences.

50%

16%

Duty-free MFN trade.

It is generally estimated that approximately half of world trade of goods (in value) is crossing borders without having to pay customs duty.

.

Preferential

Trade

Trade in goods conducted under more favourable conditions for RTA partners than for the non-RTA partners.

Sources: WTO World Trade Report, 2011 The WTO and preferential trade agreements: From co-existence to coherence

Click here to access the 2011 WTR


NO PREFERENCES BETWEEN THE BIG 4

While 16% represents a relatively low share for preferential trade (globally), a number of actors in international trade have invested in developing network of RTAs, and, as a result, some have concluded a long list of RTAs. Others are in preferential business with fewer but important partners for them, resulting in a large share of their trade being conducted under preferential regimes.

The attached chart shows the situation of some of the G20 countries. The vertical axis shows the percentage of merchandise exports conducted with RTA trading partners with and thus preferential trade is probably overstated as: (i) RTAs do not always have full coverage of products); and (ii) not all trade covered by the RTA is carried out under the preferential regime. The size of the bubbles indicate the importance of each countrys exports in global terms.

It is remarkable to note that none of the trade between the four biggest traders (EU, China, USA, and Japan) is, yet, conducted under preferential regimes; thus partly explaining why the overall percentage of preferential trade is only 16%. If and when the big four start concluding RTAs between themselves, the overall share of preferential trade will automatically rise.

Click on the Graph to enlarge it

Sources: UNSD Comtrade / WTO Statistics / WTO RTA-IS

EU

China

USA

Japan

Korea

Russia

Canada

India

Saudi A.

Mexico

Australia

Brazil

Chile 0 10 20 30 40

100 90 80 70 60 50 40 30 20 10 0

% o

f ex

po

rts

to R

TA p

artn

ers

Participation in RTAs, Share of World exports & Exports to RTA partners

Sources: UNSD Comtrade / WTO Statistics / WTO RTA-IS

Number of RTAs concluded and ratified to the the WTO

Example

COUNTRY

E

A

B

C

D


HOW PREFERENTIAL IS PREFERENTIAL TRADE?

Despite the proliferation of RTAs, as already indicated, only a relatively small part of global trade appears to have been conducted between RTA partner countries (in 2008, 16% of the trade between the G-20 countries).

It may be that part of the preferential trade is actually granted less preferential access than it may seem.

This may for instance be the case when a country has concluded different RTAs with partners that export the same product into its domestic market. We will assume, for the sake of simplification, that the same preferential treatment is granted to the same products.

In the example below, products imported from countries A, B, C, and D each represent 25% of Country Es total imports.


Assume the following sequence of events:

First country E concludes a RTA granting preferential treatment to products originating in A. At this stage, the statistics may show that, if they qualify under the RTAs rules of origin, 25% of all imports to E benefit from preferential treatment.

Later, country E concludes an identical RTA granting preferential treatment to products originating in B. The statistics will show that 50% of all imports to E benefit from preferential treatment. However, the products from A have lost the advantage of preferential treatment compared to similar products from B. However they keep this advantage when competing with products from countries C and D in the market of country E.

Assume now that country E concludes RTAs with countries C and D. Statistics may now show that preferential treatment is granted to 100% of countrys E imports. However, none of the imported products enjoy an advantage over the other competing imported products!

PREFERENCE EROSION

In our example, the preferences (initially granted to products from A, and then to products from B, and finally to all imported products) have been progressively eroded.

Our example does not take into account the dynamic effect the initial RTA (between E and A) may have had (i.e. the increase of the imports share from country A). However, it helps to make the point. The multiplication of preferential schemes may lead both to an increase of discriminatory treatment and, in a second stage, to a reduction of such discrimination.


IMPERFECT RTA COVERAGE

Taking the same example, it may be reasonable to assume that:

The RTAs concluded by Country E with its different partners exclude some products or groups of products from the coverage of tariff liberalization agreed. In such cases, the RTA coverage would be less than full and, consequently, not all the trade between the RTA partners would be preferential.

PREFERENTIAL RULES OF ORIGIN:

a tool to SCREEN preferential trade

Still using the same example, it has to be remembered that:

A set of (sometimes complex) preferential rules of origin accompanies each RTA. These rules assist the RTA partners in the administration of the preferential regime.

Such preferential rules of origin may establish certain conditions relating to the origin of bilaterally traded products. This can sometimes be engineered in a way that makes it difficult for certain products to comply. As an illustration, a requirement for a high regional content ratio could, in some cases, significantly restrict the volume of bilaterally trade goods benefiting from preferential treatment under the RTA.

LESS PREFERENCES AS IT MAY SEEM.

Imperfect RTA coverage and/or restrictive preferential rules of origin can limit the degree of preferential treatment agreed by the RTA partners. Paradoxically, for the third parties, this would reduce the level of discriminatory treatment introduced by a RTA (in relation to the products excluded from preferential treatment).

The evolving world of Regionalism

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A BRIEF HISTORY OF CONTEMPORARY REGIONALISM

To understand the most recent developments of regionalism, it may be useful to look at how the phenomenon of regional economic integration has evolved over the years.

The next section goes back in time and walks through the decades during which the multilateral trading systems and regional trade integration schemes have coexisted, from the early years of GATT to the present.

European reconstruction and Soviet Bloc

EEC, EFTA and Central America

CARICOM LAIA, Andean Community and ANZCERTA

The evolving world of regionalism

Explosion of regional trade initiatives

Proliferation of RTAs

Fifties Sixties Seventies

Eighties Nineties

Since 2000

Module 2

2013 249 RTAs in force

(notified by the end of July 2013)

+approx. 100 not notified and/or

in the pipeline

* Note A total of 124 agreements were notified to the GATT between 1948 and 1994. Of these, however, only 38 remained in force in 1995 when the WTO was established. This reflects in most cases the evolution of the agreements themselves, as they were superseded by more modern ones between the same signatories (most often involving deeper integration), or by their consolidation into wider groupings.



Regionalism at GATTs birth The place of regionalism in the world economy in the mid-fifties was very different from its place now. At that time, the international community was trying to reorganize itself after the Second World War. Economies had to be rebuilt or redirected to civilian use of scarce resources. The war had brought new powers into play (in the West, the USA, and in the East, the Soviet Union). France and the United Kingdom were about to face decolonization, leading many nations to gain (or regain) independence. As the international community was trying to build cooperation around the newly born United Nations, with international institutions like those of Bretton Woods, on the international trade front, a trade agreement was negotiated and entered into force on 1.1.1948 pending the establishment of the International Trade Organization. The ITO never came into being until but the trade agreement (the GATT) remained in force "provisionally" for about 50 years, before the WTO was established in 1995.

We will see in Module 3 that the rules governing regional trade agreement that were adopted in 1947 still govern the multilateral trading system today (with some amendments). It is important to remember this historical context because when the rules on RTAs were adopted, very few RTAs were in force. The Benelux and some other regional agreements were in place or being negotiated, in Southern Africa and Central America (the first real "poles of regional integration"). The Soviet area of influence was being cemented around an agreement (the COMECON) that was not an RTA per se but that had some similarities. The Soviet Union, though, was not a Party to the GATT. So-called imperial preferences, inherited from colonial schemes (about to collapse) were still in place.


Plans for the constitution of the European Economic Communities (EEC) were on the table and that was why, at least partly, an exception to the MFN principle was about to be included in the original text of the GATT. The establishment of the EEC in 1957: the real commencement of the GATT/RTAs relationship The signature, in March 1957, of the Treaty of Rome establishing the European Economic Community of Six (Belgium, France, Germany, Italy, Luxemburg, and the Netherlands) followed by its notification to the GATT in April 1957, marked the real commencement of the GATT/RTAs rich, yet troubled, relationship. The Treaty of Rome is at the origin of todays European Union (EU), comprising 28 Member States. The EEC evolved over-time*, inter alia in the context of successive enlargements and deepening EEC integration.


Regionalism during the sixties and seventies In the sixties, the European states not members of the EEC constituted the European Free Trade Association (EFTA); the EEC, in turn, established its first association with some of its member States former colonies and associated territories (Yaound I and II Conventions), pushing regional trade beyond geographical boundaries. In Latin America, a Latin American Free Trade Association (LAFTA/ALALC) was established and a Central American Economic Integration Agreement was becoming effective. The seventies were marked by the first enlargement of the EEC to include Denmark, Ireland and the United Kingdom, followed by the replacement of the Yaound Agreement by a wider cooperation agreement between the EEC and 46 countries in Africa, the Caribbean and the Pacific (the Lom Convention with the ACP countries). Also the f CARICOM was established between the Caribbean States.

The eighties: regionalism picks up During the second part of the eighties, regional integration started to interest a number of countries, in parallel with the launch of multilateral trade negotiations (the Uruguay Round started in 1986). The EEC gained three new member States. The replacement of LAFTA by the Latin American Integration Association (LAIA/ALADI) established a new framework for economic integration initiatives in the region. One immediate realization (though legally independent from LAIA) was the setting up of the Andean Community. On the other side of the globe, Australia and New Zealand were consolidating their close economic relations with the signing of the ANZCERTA. Further, in the mid-eighties, another non-regional partnership occurred with the conclusion of the US/Israel Free Trade Agreement.


The nineties The nineties started with the disintegration of the Eastern European bloc and of the Soviet sphere of influence, leading the way for the later development of a myriad of RTAs. This involved: (i) the conclusion of RTAs between, on one

side, the EEC or EFTA and, on the other side, individual Central and Eastern European countries; and

(ii) the constitution of a series of RTAs around the Commonwealth of Independent States (CIS) formed by the newly independent States resulting from the collapse of the Soviet Union.

In Africa, numerous regional economic co-operation institutions (partly inspired by efforts by the UN) had been set up and transformed into economic integration agreements: the Economic Community of West African States (ECOWAS), the Common Market for Eastern and Southern Africa (COMESA), and the Economic and Monetary Community of Central Africa (CEMAC).

In Latin America a powerful Customs Union between Brazil, Argentina, Paraguay, and Uruguay (the MERCOSUR) was established. In Asia the ASEAN Free Trade Area entered into force. In North America, the conclusion of the NAFTA, in 1992, set a new template for regional integration as two major trader (Canada and the US), joined by Mexico entered into the race for RTAs.

In the Arab world, the Pan-Arab Free Trade Area was also notified to the GATT as an FTA. In addition to the constitution of these poles of regional integration, the number of bilateral, often cross-regional RTAs exploded during the nineties. In parallel, a number of regional integration processes were deepening, such as the EU.


On the multilateral front, it was also during this decade that the Uruguay Round was concluded. The GATT was being de facto replaced by the WTO, with greater coverage, and a considerably larger country base. Regionalism since 2000 Since 2000, RTAs have proliferated at a sustained rhythm. Africa complemented its network of regional hubs with the establishment of the West African Economic and Monetary Union (WAEMU / UEMOA, the East African Community (EAC), the Southern African Development Community (SADC), and the Southern African Customs Union (SACU). Central and eastern European countries consolidated the Central European FTA (CEFTA), while progressively the EU was absorbing a large number of countries through successive enlargement processes (reaching 28 Members in 2013).

In Asia, the ASEAN network densified and expanded to develop progressively closer ties with the three large traders, Korea, Japan, and China (ASEAN+3). The Gulf Co-operation Council GCC (Co-operation Council for the Arab States of the Gulf), signed in 2001, was notified to the WTO and became one of the poles of regional economic integration for the Arab region. More than half of the RTAs currently in force have been concluded and notified to the WTO since 2000.


In the pipeline Many more RTAs or regional economic integration initiatives are "in the pipeline. Often these initiatives are led by poles of regional integration in North America (NAFTA), Central America (CACM), South America (MERCOSUR, the Andean Community, and LAIA); in Africa (principally around EAC, SADC, and COMESA, with the Tripartite Agreement); in Europe (essentially around the EU and the EFTA); around the CIS (now complemented by the EurAsec - customs union between Russia, Belarus, and Kazaksthan); in the Asia Pacific region (around the ASEAN+3 and the pole led by Australia and New Zealand); and in connection with the two poles of regional cooperation constituted by Arab countries (i.e. the Greater Arab Free Trade Area (GAFTA) and the development of the GCC). A number of major cross-regional trade integration initiatives, which are currently being negotiated, may fundamentally change the panorama of international trade.

46% Goods + Services

54% Goods only

87% FTA

7%CU 6%PSA

53% Intra-regional

47% Cross-

regional

81% bilateral

19% plurilateral

RTAs on GOODS and RTAs on SERVICES

On 31 July 2013, 249 (notified) RTAs were in force. Of these, 135 were on goods only and 114 included both goods and services provisions.

Note: the EEA is the only RTA notified on services only.


FTAs, PSAs, or CUs?

Most of the active RTAs have been notified (to the GATT or the WTO) as free-trade agreements (FTAs). Only a handful of RTAs have been presented by the parties as customs unions (CUs) or partial scope agreements (PSA).

Bilateral or plurilateral RTAs?

As of 31 July 2013, 201 (notified) RTAs had been concluded between two parties (bilateral), while 19% of all RTAs were plurilateral (constituted by more than two parties but not extended to all WTO Members).

Intra-regional or cross-egional RTAs?

Also in July 2013, intra-regional RTAs still represented 53% though, more cross-regional RTAs are being concluded.

July 2013 figures

Click here to get an

update on key figures relating to

notified RTAs

Facts and Figures


On 13 December 1996, in the Singapore Ministerial Declaration, the Ministers of all the WTO Members reaffirmed

the primacy of the multilateral trading system, which includes a framework for the development of regional trade agreements. They also renewed their commitment to ensure that regional trade agreements are complementary to (the multilateral trading system) and consistent with its rules.

Five years later, when they agreed to launch the DDA, on 20 November 2001 and enshrined in the text of the Doha Ministerial Declaration, the Ministers of the same Members, again, stressed their

commitment to the WTO as the unique forum for global trade rule-making and liberalization, while also recognizing that regional trade agreements can play an important role in promoting the liberalization and expansion of trade and in fostering development.

Still, at the end of July 2013, more than 200 physical regional trade agreements were in force, with WTO Members showing no signs of slowing their involvement in negotiating new RTAs and/or deepening or expending existing ones.

The following section briefly explains why countries officially committed to give priority to the multilateral forum (WTO) for negotiating and monitoring trade rules, choose, time and again, to use the regional approach to design an almost limitless series of intertwined preferential trade legal frameworks.

Why regionalism?*

Most elements of this section are extracted from

WTO World Trade Report, 2011: The WTO and preferential trade agreements: From co-existence to coherence

Click here to access the 2011 WTR

*


ECONOMIC MOTIVES FOR RTAS

Numerous authors have identified various economic rationales for RTAs.

Neutralizing beggar-thy-neighbour trade policies

Economists have long recognized that trade policy can have beggar-thy-neighbour effects. That is, protectionist trade measures can be unilaterally attractive but multilaterally destructive. Specifically, the beggar-thy-neighbour problem is based on the idea that trade policy decisions of one country affect the welfare of another country through a cross-border effect (i.e. an international externality).

Independently of how one countrys trade policy affects its trading partners, an RTA may be a means of neutralizing negative cross-border effects.

Gaining credibility

Aside from avoiding the temptation to adopt beggar-thy-neighbour trade policies, RTAs may also serve as instruments to stop governments from implementing beggar-thyself policies. This is where a government chooses to tie its hands and commit itself to trade openness through an international agreement in order to prevent future policy reversal that might be convenient in the short run, but inefficient in the long-term. In other words, the government understands that a RTA (the argument also applies to a multilateral trade agreement) may help it to make more credible policy commitments than it would otherwise make.

Why regionalism?

1 2


Other motives

Various other economic reasons why may lead countries to form RTAs, some are referred to as non-traditional motives. These include, but are not limited to:

a) increasing policy predictability;

b) signalling openness to investors;

c) achieving deeper commitments; and

d) political considerations.

Increasing market size

This may be a reason for establishing RTAs since it enables firms from parties to exploit economies of scale and to gain a relative advantage over excluded competing firms. In addition, preferential access to a larger market may increase a countrys attractiveness as a destination for foreign direct investment (FDI) or relocation of enterprises. Both reasons are particularly valid for small economies, which may help to explain why these countries agree to make concessions on other, more controversial issues, such as intellectual property rights or environmental standards, when negotiating RTAs with larger economies.

Why regionalism?

3 4

Increasing policy predictability

An RTA may be signed to reduce uncertainty on future trade policy, thus sending an important signal to investors. Since future administrations might have policy preferences that differ from those of the current administration, a government may sign an RTA in an attempt to lock-in its policies (for example, a pro-open trade policy) and to diminish the likelihood that they might be reversed. In this way, the government addresses the issue of policy predictability rather than policy credibility .

Signalling openness to investors

A country with a reputation for protectionism might find it particularly valuable to signal its willingness to shift towards a more liberal and business-friendly policy. In this case, the precise provisions of an RTA are less relevant than demonstrating to investors that the government is open to business.

a)

The evolving world of regionalism Why regionalism?

Alternatively, a country might want to enter into an RTA to signal that its economy, or a particular sector, is competitive.

Achieving deeper commitments

A final argument for signing an RTA is related to the need for deeper form of integration that goes beyond traditional trade (i.e. border) measures such as tariffs. This deeper integration may require institutions and policy coordination more easily achieved at the regional level than the multilateral level.

Political considerations

The creation of RTAs cannot be fully understood without considering the political context within which they are formed.

c)

b) d)

OTHER MOTIVES


Political science has provided additional explanations for why states might engage in RTAs, focusing in particular on the role of political integration, domestic politics, forms of government, institutions, diplomacy or the influence of power and ideas.

The spill-over effect

Some authors have postulated that a policy spill-over effect would incrementally drive integration from low politics (trade integration) to high politics (political integration). This functionalist school of thought was challenged by political scientists who marshalled empirical evidence that cast doubt on the extent of the spill-over effect.

Pooling resources

In a number of cases, RTAs may have been, at least partly, by the desire motivated to increase influence in international negotiations by pooling resources between relatively small states.

Grouping forces to resist threats

Other strategic motives include a common goal to resist the threat of falling under the zone of influence of powerful neighbouring countries, where political and/or economic regimes are constructed on fundamentally different ideologies. Counteracting the growth of other regional arrangements might also be considered as another strategic motive for forming a RTA.

Power games

The decision to negotiate and sign RTAs may also be affected by the extent to which countries use trade policy to reinforce wealth and empower relations. If governments distrust one another they may form bilateral treaties to try to limit or control the growth of other powers (e.g. to serve as counter-balances). The design of RTAs may also be indicative of power relations. Stronger states can more easily dictate the terms of agreements in a bilateral or regional context (than in a multilateral context). Other diplomatic and foreign policy considerations may also influence the decision to form RTAs.

Why regionalism? WHY STATES MIGHT ENGAGE IN RTAS?


Domino Theory

Changes in the underlying dynamic of trade relationships across the globe may prompt countries to sign RTAs. The Domino Theory of Regionalism, refers to the potential loss of market share inducing countries not party to an RTA (third parties) to join existing RTAs or to negotiate parallel RTAs with each party to an existing RTA. This illustrates a process of action and reaction (or contagion). Exporters in third parties push their governments to join or create RTAs to counteract the potential damage caused by preferential trade liberalization. This may be linked to a race to conclude an RTA with an economic partner that has concluded an RTA with a competing country.

RTAs instead of multilateral deals?

Finally, some suggest a relationship between the formation of RTAs and the multilateral system, either reflecting a lack of progress at the multilateral level or a strategy to improve governments leverage in the WTO. Gridlock or stagnation in multilateral negotiations, for example, may create incentives to pursue preferential trade liberalization.

Domino Theory Regionalism vs Multilateralism ?

Read more about it: WTO World Trade Report, 2011 The WTO and preferential trade agreements: From co-existence to coherence

A domino theory of regionalism Baldwin, R. (1995).

TEST YOUR

BRAIN

Without going back to your notes, try to elaborate on each of the keywords listed below, which correspond to elements discussed in the previous section


Keywords

Proliferation of RTAs Bilateral vs plurilateral RTAs Intra-regional vs Cross-regional

RTAs

Keywords Beggar-thy-neighbour policies Beggar-thyself policies Economies of scale Gain of relative advantage Locking-in policies Signal to investors Deep integration Non-economic motives for RTAs Domino theory


EXERCISE YOUR Chronological SKILLS

Match the following events with their associated date.

Click on this icon to check if your

results corresponds to ours

A Sixties

B

C

D

E

Seventies

Eighties

Nineties

Since 2000

1

2

3

4

5

Establishment of the EFTA

Development of the ASEAN+3

Entry into force of the NAFTA

Enlargement of the EEC to 9

Signature of the ANZCERTA (Aus-NZ)


EXERCISE YOUR Chronological SKILLS

Match the following events with their associated date.

OUR RESPONSES

A1, B4, C5, D3, E2

A

B

C

D

E

1

2

3

4

5

Establishment of the EFTA Sixties

Seventies

Eighties

Nineties

Since 2000

Development of the ASEAN+3

Entry into force of the NAFTA

Enlargement of the EEC to 9

Signature of the ANZCERTA (Aus-NZ)

WTO Rules on RTAs

MO

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WTO rules on RTAs Module 3

WTO AND REGIONAL RULES RESULT FROM NEGOTIATIONS BETWEEN GOVERNMENTS

Trade rules, either multilateral or regional, are the result of negotiations between representatives of governments (WTO Members for multilateral rules, and parties for RTAs). Though trivial, this should not be forgotten, at least for two reasons:

The process leading to the establishment of rules and disciplines on trade is the result of a complex, not always rational, process involving economic, political, legal, and behavioural components. The economic theory usually constitutes the logical foundation of the process.

The negotiating process leading to the rules is conducted by Members. In the context of the multilateral trading system, as in most

regional trading systems, the participants in the negotiations are usually governments, competent to regulate, inter alia, commerce and economic matters within a defined territory. Consequently, the rights, obligations, and commitments undertaken in the negotiation, which become legally binding when the rules (multilateral as well as regional) enter into force, can only bind those who have made the commitments. In other words, the multilateral rules and most regional rules on trade remedies, the rights and obligations have a direct effect only on measures taken by those who have negotiated, i.e. Governments. The actions and behaviour of most economic actors (producers, sellers, buyers, consumers) cannot be addressed directly by the WTO rules or rules negotiated in the context of, say, a free trade agreement. However, although only measures taken by government must conform to the negotiated rules, these measures may, and do, have a direct impact on various economic operators. This should be recalled when analysing the rules.

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WTO rules on RTAs

ARCHITECTURE OF PRINCIPLES AND EXCEPTIONS UNDER THE WTO

At this stage, it is useful to understand the architecture of multilateral rules, as they apply to RTAs. These rules are the result of multilateral negotiations, which progressively established the legal framework under which RTAs are regulated under WTO law.

STARTING WITH THE MFN PRINCIPLE

Under WTO law, a Member must guarantee that the most preferential market access is immediately and unconditionally granted to all other WTO Members. The objective is to prevent any discrimination based on origin or nationality. This principle is carved in stone for trade in goods through Article I of the GATT, for trade in services through Article II of GATS, and for holders of intellectual property rights through Article 4 of the TRIPS Agreement.

The WTO Agreements nevertheless grant Members the right to derogate from these fundamental obligations, in certain circumstances and under certain conditions. These derogations some might even consider that they constitute exceptions are therefore CONDITIONAL RIGHTS granted to WTO Members to take measures that may be inconsistent with one or more basic principles. To exercise their rights, WTO Members must be in a situation that justifies the derogation, satisfy the conditions established by the legal provisions, and follow the required procedures.

WTO rules on RTAs

CONDITIONAL EXCEPTIONS TO MFN ALLOWING REGIONAL TRADE AGREEMENTS

The provisions on Regional integration constitute major derogations to the MFN principle.

For TRADE IN GOODS, the main provisions governing the use of these conditional derogations are GATT Article XXIV (and the Understanding on its Interpretation enacted in 1995), and a Decision, dated 1979, entitled Differential and more favourable treatment, reciprocity and fuller participation of developing countries, generally referred to as the Enabling Clause.

For TRADE IN SERVICES, the key provision is contained in GATS Article V. The concept contained in GATT Article XXIV has been essentially retained but adjusted for the intrinsic difference between goods, on one side, and services and services providers, on the other side.

For TRADE-RELATED INTELLECTUAL PROPERTY RIGHTS, Article 4(d) exempts, from MFN obligations, international agreements related to the protection of intellectual property which entered into force before 1 January 1995. This provision has never been the object of interpretation.

WTO rules on RTAs

THE EVOLUTION OF MULTILATERAL RULES ON RTAs

Although the core principles of the multilateral trading system have, in essence, remained relatively untouched since the conclusion of the GATT in 1947, the rules have evolved over time to respond to the transformation of world trade and the development of international relations.

Some key dates mark the path of multilateral rules on RTAs.

Click on this icon to learn more

about the history of multilateral rules on RTAs

1948

1979

1995

1996

2006

Entry into force of the GATT, including Art. I (MFN principle) and Art. XXIV (Exception for Customs Unions and Free-Trade Areas)

Adoption of the Enabling Clause (Exception for, inter alia, preferential trade arrangements between developing countries)

Entry into force of the Marrakech Agreement establishing the WTO:

Understanding on the interpretation of Art. XXIV

GATS Art. II (MFN principle for services), and GATS Art. V (exception for Economic Integration Agreements)

Establishment of the Committee on Regional Trade Agreements (CRTA)

Adoption of the New Transparency Mechanism for RTAs

The origins of the RTA rules in the GATT The first RTA rules were included in the 1947 GATT text, provisionally applied from 1 January 1948 until 31

December 1995, when it ceased to exist. As of 1 January 1995, the WTO and the new GATT 1994 entered into force. During the negotiations held in 1946-47, some countries aimed to dismantle certain preferential trade

arrangements, such as the preferences between territories belonging to the British Commonwealth. While the first drafts referred only to customs unions and interim arrangements leading to customs unions, the exception was widened to include free trade areas (FTAs).

From the early GATT years to the Tokyo Round The European Economic Community (EEC now EU) and its agreements were the principal focus of Article XXIV

discussions during the early years of the GATT. In 1957, the examination by a GATT Committee of the compatibility of the Treaty of Rome with the requirements of Article XXIV was inconclusive: The Committee felt that it would be more fruitful if attention could be directed to specific and practical problems, leaving aside for the time being questions of law and debates about the compatibility of the Rome Treaty with Article XXIV of the General Agreement. Eventually the GATT contracting parties opted for resolving some of the tariff issues surrounding the formation of the EEC as part of the Dillon Round. That experience made clear that the GATT was not fully equipped to deal with Article XXIV notifications such as the one presented by the EEC.

Agreements notified as FTAs, e.g. EEC agreements with third parties and the European Free Trade Association (EFTA), were also the subject of intense debate, in particular as regards the absence of a clear plan and schedule for liberalization (as required by Article XXIV) and the exclusion of agriculture and fisheries.

An approach was developed progressively to examine notified RTAs in working parties in the light of the relevant GATT provisions. However, reports on these examinations showed that there remained some questions of a legal and practical nature which it would be difficult to settle solely on the basis of the text of the notified RTA, and that these questions could be more fruitfully discussed in the light of the application of the Agreement. The working parties were often not in a position to judge the compatibility of the RTA, and accordingly did not find it appropriate to make recommendations to the parties to the RTA pursuant to paragraph 7b of GATT Article XXIV

Multilateral rules on RTAs through time Sources: GATT and WTO Analytical Index, GATT BISD, and WTO World Trade Report 2011.

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The GATT practice had been that reports on the evolution of the RTA be submitted periodically by RTA parties, as stipulated in working party reports. To counter a lack of consistency in the reporting procedure, the CONTRACTING PARTIES adopted a Decision in 1971 according to which the Council was to establish a calendar fixing dates for the examination, every two years, of the reports on the preferential agreements.

From the Tokyo Round up to the launch of the Uruguay Round (1973-1986)

The 1979 the Enabling Clause was adopted as a Tokyo Round result. The first notifications under it included the 1971 Protocol on Trade Negotiations among Developing Countries, the 1975 Bangkok Agreement, and the 1978 ASEAN Agreement. All were previously under the legal cover of waivers. No changes were made to Article XXIV.

Biennial reports on RTAs were received regularly; from the early 1980s, they gave rise to very little discussion and by the time of the Uruguay Round, the practice of submitting them had been discontinued.

Throughout the years, divergences of view on how to handle the relationship between RTAs and the relevant GATT provisions (in particular GATT Article XXIV) were becoming increasingly apparent. The report of an eminent persons group created by GATTs Director-General (the Leutwiler Report) proposed that GATT rules on customs unions and free trade-areas should be examined, redefined so as to avoid ambiguity, and more strictly applied, so that this legal cover is available only to countries that genuinely use it to establish full free trade among themselves. These issues were finally addressed in the Uruguay Round constituting an early prelude for future controversial debates on the question of the coexistence of regionalism and multilateral trading rules.

RTAs in the Uruguay Round

The Round resulted in the adoption of the Understanding on Article XXIV and the inclusion in the GATS of a provision on RTAs relating to trade in Services (Article V); no changes were made to the Enabling Clause.

Negotiations on Article XXIV took place in the Negotiating Group (NG) on GATT Articles and as from April 1991 in the NG on Rule Making and Trade Related Investment Measures. Substantive discussions on the Article were held as from May 1987; the final text was ready by the Brussels Ministerial Meeting of December 1990.

Despite reservations regarding certain parts of the Brussels text on the provisions relating to paragraphs 6 and 12 of Article XXIV and on the lack of measures aimed at countering a perceived trend away from multilateralism and towards RTAs the Chairman of the NG forwarded the text to the TNC, on his own responsibility, which in his view represented a reasonable balance between the interests involved. The final text of the Understanding only differs from that of the Brussels Ministerial as regards legal drafting.

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The 1992 notification under the Enabling Clause of the MERCOSUR (comprising Argentina, Brazil, Paraguay, and Uruguay) is also of relevance. Though RTAs under this provision were not, at that time, subject to examination in working parties, MERCOSUR was treated sui generis, being subject to an in-depth examination by a working party in the light of the relevant provisions of the Enabling Clause and of the GATT, including Article XXIV, with the examination report being submitted to the CTD with a copy to the Council.

Discriminatory treatment under RTAs became a topic of increasing concern over the years.

CRTA - Committee on Regional Trade Agreements The CRTA, established by the General Council in February 1996 (WT/L/127) following a proposal by Canada made in

November 1995, is mandated to carry out the examination of RTAs (instead of individual working parties), to deal with the reporting on the operation of RTAs, to develop procedures to facilitate and improve their examination process, to provide a forum for the consideration of the systemic implications of RTAs and regional initiatives for the multilateral trading system and to carry out any additional functions assigned to it by the General Council.

Despite the establishment of the CRTA in 1996, the examination of RTAs resulted in stalemate. From 1996 until 2013, not one examination report was adopted by the CRTA, mainly due to continuing disagreements over the inherent ambiguities in GATT Article XXIV, the absence of consensus on the format and content of examination reports under the WTO, the lack of information submitted by RTA parties, and the fact that the consistency of determination was to be made by all WTO members, including those whose RTAs were under examination.

In 2004, celebrating the 10th anniversary of the WTO, the report from an eminent group of persons - the Sutherland Report proposed a dual solution to counter the proliferation of RTA: attacking them indirectly through effective reduction of MFN tariffs and non-tariff measures in multilateral trade negotiations and a clarification of Article XXIV and a better-organized means of administering its provisions [by] entrusting the [WTO] Secretariat with the factual presentation of their agreements.

RTAs and the Doha Development Agenda (DDA), launched in 2001

These are developed in Module 4 of this Course. In December 2006, the WTO members adopted a new Transparency Mechanism for Regional Trade Agreements

(WT/L/671) on a provisional basis. Work on systemic issues has continued but as of 2013 no result has been achieved.

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WTO rules on RTAs

GATT X

XIV

Enabling

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GATS V

Keywords (Basic principles)

MFN GATT Art. I (Trade in goods) GATS Art. II (Trade in services) TRIPS Art. 4 (TRIPS)

Keywords (Derogations)

GATT Art. XXIV (Trade in goods) Enabling Clause (Trade in goods)

RTAs between developing countries only

GATS Art. V (Trade in services)

TEST YOUR

BRAIN

Without going back to your notes, try to elaborate on each of the keywords listed below, which correspond to elements discussed in the previous section

When you are through, continue

your journey through the RTA-related provisions

by clicking on one of the tabs on side.

Enabling

Cla

use

GATS V

WTO rules on RTAs

The initial legal foundation

The main, and longest-standing legal rule lies in Article XXIV of the original text of the GATT (GATT 1947). It entered into force on 1 January 1948.

At the time of the establishment of the WTO, in 1995, the provisions of the GATT 1947 were incorporated into the GATT 1994, and made part of the legal texts governing the trade relationships between the WTO Members. In addition the Understanding on the Interpretation of GATT Article XXIV was adopted, clarifying certain notions contained in the original text.

GATT Article XXIV

GATT X

XIV

Un

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Ad

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GA

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WTO rules on RTAs

The principle

The first sentence (the Chapeau) of Paragraph 5 of Article XXIV presents the principle: The rules contained in the GATT (in particular its Article I establishing that trade measures adopted by governments may not discriminate on the basis of the origin of imported goods) shall not prevent WTO Members from creating(or entering into) free-trade areas or customs unions.

This Chapeau therefore establishes that free-trade areas (FTAs) and customs unions (CUs) may derogate from the MFN principle.

It also sets the forms of regional integration that are authorized (FTAs and CUs), though without defining the conditions to be fulfilled to qualify as an FTA or a CU (this is set out later in the paragraph and in subsequents paragraphs).

GATT Article XXIV, 5:

(...) the provisions of [GATT] shall

not prevent, as between the

territories of contracting parties*,

the formation of a customs union or a

free-trade area or the adoption of an

interim agreement necessary for the

formation of a customs union or of a

free-trade area; Provided that: ...

*Replace the term contracting parties, (original

GATT text) by WTO Members.

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ATT X

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the Case

GATT Article XXIV

WTO rules on RTAs

Purpose of FTAs and customs unions

The purpose of the two types of RTAs authorized under the GATT is identified in paragraph 4 of Article XXIV.

Intra-RTA impact

First, the purpose is defined in relation to the expected impact within the RTA: to facilitate trade between the constituent territories.

Extra-RTA impact

Second, the purpose is defined in relation to the possible impact of the RTA for WTO Members that are not parties (third parties): not to raise barriers to the trade of other [Members] with such territories.


The [Members] recognize the

desirability of increasing freedom of

trade by the development, through

voluntary agreements, of closer

integration between the economies of

the countries parties to such

agreements. They also recognize that

the purpose of a customs union or of

a free-trade area should be to

facilitate trade between the

constituent territories and not to

raise barriers to the trade of other

[Members] with such territories.

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ATT X

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Relationship between multilateralism and regionalism

In 1947, through the first sentence of the paragraph, the possibility (and even the desirability) of the coexistence ofregionalism and the multilateral trading system was recognized.

GATT Article XXIV

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WTO rules on RTAs

Free Trade Area (FTA)

The conditions to be fulfilled to qualify as a free trade area are contained in GATT Article XXIV paragraph 8(b), as well as paragraph 5(b). Other paragraphs also set similar procedural conditions for FTAs and CUs.

Paragraph 8(b) determines the

Intra-FTA conditions.

The parties must:

1. ELIMINATE CUSTOMS DUTIES on SUBSTANTIALLY ALL THE TRADE* (meaning the trade between the parties).


For the purposes of (GATT):

b) a free-trade area shall be

understood to mean a group of two

or more customs territories in

which the duties and other

restrictive regulations of

commerce (except, where necessary,

those permitted under Articles XI,

XII, XIII, XIV, XV and XX) are

eliminated on substantially all

the trade between the constituent

territories in products

originating in such

territories.

FTA

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WTO rules on RTAs

Free Trade Area (FTA)

In GATT Article XXIV, the conditions to be fulfilled to qualify as a free trade area are contained in paragraph 8(b), as well in paragraph 5(b). Other paragraphs also set similar procedural conditions for FTAs and CUs.

Paragraph 8 (b) determines the

Intra-FTA conditions.

The Parties must:

2. ELIMINATE OTHER RESTRICTIVE REGULATIONS OF COMMERCE* (with certain exceptions) on SUBSTANTIALLY ALL THE TRADE (between the parties).


For the purposes of [GATT]:

b) a free-trade area shall be

understood to mean a group of two

or more customs territories in

which the duties and other

restrictive regulations of

commerce (except, where necessary,

those permitted under Articles XI,

XII, XIII, XIV, XV and XX) are

eliminated on substantially all

the trade between the constituent

territories in products

originating in such

territories.

*Note There seem to be diverging views about what exactly is covered by the terms Other restrictive regulations of commerce. In particular, the nature of the list of exceptions contained in the parenthesis (exhaustive or illustrative) remains open for discussion.

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WTO CASE LAW In 2000, the Appellate Body, in the case Argentina-Footwear, while inconclusive on the issue of the imposition or maintenance of safeguard measures between the parties to an RTA in relation to Article XXIV, stressed the need for a parallelism between the scope of a safeguard investigation and the scope of the application of safeguard measures.

FTA

WTO rules on RTAs

Paragraph 5(b) sets a limit as to how much third parties (WTO Members not parties to an FTA) may be affected by the establishment of the FTA.

Paragraph 5(b) determines

extra-FTA conditions.

The parties must:

3. Ensure that the CUSTOMS DUTIES and the OTHER REGULATIONS OF COMMERCE* applicable to the trade between the parties to an FTA and WTO Members not parties to the FTA (third parties) do not increase as a result of the establishment of a free trade area.

This condition is to be understood in relation to the purpose of a FTA that should not be to raise barriers to the trade of other Members (See paragraph 4 of Article XXIV).


b) with respect to a free-trade area,

(...) the duties and other

regulations of commerce maintained

in each of the constituent

territories and applicable at the

formation of such free-trade area

to the trade of [third parties]

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 (...);

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FTA

WTO rules on RTAs

Customs Union (CU)

The conditions to be fulfilled to qualify as a Customs Union are contained in GATT Article XXIV paragraph 8(a), as well as paragraph 5(a). Paragraph 6 is also relevant. Other paragraphs set similar procedural conditions for FTAs and CUs.

Paragraph 8 (a)(i) determines the

intra-CU conditions.

The parties must:

1. ELIMINATE CUSTOMS DUTIES on SUBSTANTIALLY ALL THE TRADE (meaning the trade between the parties).

2. ELIMINATE OTHER RESTRICTIVE REGULATIONS OF COMMERCE (with certain exceptions) on SUBSTANTIALLY ALL THE TRADE (between the parties).



a) a customs union shall be

understood to mean the

substitution of a single customs

territory for two or more customs

territories, so that

i. duties and other restrictive

regulations of commerce

(except, where necessary,

those permitted under Articles

XI, XII, XIII, XIV, XV and XX)

are eliminated with respect to

substantially all the trade

between the constituent

territories of the union or at

least with respect to

substantially all the trade in

products originating in such

territories (...)

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CU

WTO rules on RTAs

Paragraph 8(a)(ii) also contains an

extra-CU condition.

In essence it implies that :

3. a Common External Tariff (CET) (substantially all the same duties applied to third parties), and a common external regulatory trade regime (substantially all the same regulations of commerce applied to third parties) must be established.



a) a customs union shall be

understood to mean the

substitution of a single customs

territory for two or more customs

territories, so that (...)

ii. 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 (...)

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Country B

Country A

Country D

Country C

CU

WTO rules on RTAs

Paragraph 5(a) contains an additional extra-CU condition:

The parties must:

4. Ensure that the CUSTOMS DUTIES and the OTHER REGULATIONS OF COMMERCE imposed by customs union to the trade of WTO Members not parties to the FTA (third parties) do not ON THE WHOLE increase as a result of the establishment of a Customs Union.

What has to be assessed, therefore, is the overall impact the CU has on market access for third parties. This allows that, for some products or in some CU member countries, the formation of the CU may have raised new barriers (for example: an increase of a customs duty as a result of the adoption of the new CU Common External Tariff (CET). However, at the same time, the adoption of the CET may also have lowered barriers (possibly for other products or in other CU member countries). Therefore, the question is : Has the CET provoked, on the whole, an increase of tariffs for products imported by the CU from third parties?



a) with respect to a customs union,

(...) the duties and other

regulations of commerce imposed at

the institution of any such union

(...) in respect of trade with

[Members] not parties to such

union (...) shall not on the whole

be higher or more restrictive than

the general incidence of the

duties and regulations of commerce

applicable in the constituent

territories prior to the formation

of such union (...)

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CU

WTO rules on RTAs

The Understanding on the Interpretation of Article XXIV of GATT 1994 is part of the results of the Uruguay Round. The Understanding complements and clarifies some aspects of Article XXIV.

In particular it defines more precisely how the GENERAL INCIDENCE of the duties and other regulations of commerce applicable before and after the formation of a CU should be calculated.

In particular:

calculation is based on applied duties;

calculation is based on trade-weighted values;

data shall be provided by the CU;

the methodology used during the Uruguay Round to assess the tariff offers shall be used to perform the assessment.

The Understanding also gives a mandate to the WTO Secretariat to do the calculation.

Understanding on the Interpretation

of Article XXIV of GATT 1994

...

Article XXIV:5

2. The evaluation (...) of the

general incidence (...) shall in

respect of duties and charges be

based upon an overall assessment of

weighted average tariff rates and of

customs duties collected. This

assessment shall be based on import

statistics for a previous

representative period to be supplied

by the custom union, on a tariff-line

basis and in values and quantitates,

broken down by WTO country of origin.

... The Secretariat shall compute the

weighted average tariff rates and

customs duties collected in

accordance with the methodology used

in the assessment of tariff offers in

the Uruguay Round of Multilateral

Trade Negotiations. (...)

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CU

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If, in the process of forming the CU, a WTO Member that is party to the CU, has to increase a tariff above the corresponding bound rate (for this Member), it would be in violation of its tariff concessions (Article II of GATT). In that case, the procedure contained in Article XXVIII of GATT (Modification of Schedules) applies*, as provided for by paragraph 6 of Article XXIV and clarified by the Understanding, applies.

However, two aspects are specific to CUs:

1. in providing for compensations, due account is taken of compensation that may already have been given (to the same third party) through a reduction of a tariff on the same tariff line by another party to the CU. Frequently, the establishment of a CET means, for some countries a reduction of the tariff, and for others an increase of the tariff);

2. the compensation, if any, shall be given by the CU (and not by individual countries), as the CU territory has substituted the single customs territory of the CU members.


If, in fulfilling the requirements of

subparagraph 5(a), a [Member]

proposes to increase any rate of duty

inconsistently with the provisions of

Article II, the procedure set forth

in Article XXVIII shall apply. In

providing for compensatory

adjustment, due account shall be

taken of the compensation already

afforded by the reduction brought

about in the corresponding duty of

the other constituent of the union.

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A concept largely obsolete

The original text of Article XXIV refers to Interim Agreements* necessary for the formation of a customs union or of a free trade area.

The rules applicable to an interim agreement leading to the formation of an FTA are the same as those applicable to an FTA; and the rules applicable to interim agreement leading to the formation of a CU are the same as those applicable to a CU. However, in paragraph 5 c) of Article XXIV, the parties are required to provided for a plan and schedule for the formation of the FTA or the CU.

The duration of such a plan is not mentioned in Article XXIV. However, the Understanding on the Interpretation of GATT Article XXIV, clarifies that is should exceed 10 years only in exceptional cases.


(...)

c) any interim agreement referred to

in subparagraphs (a) [CU] and (b)

[FTA] shall include a plan and

schedule for the formation of such

a customs union or of such a free-

trade area within a reasonable

length of time.

Understanding on the Interpretation

of Article XXIV of GATT 1994

Article XXIV:5

3. The reasonable length of time

referred to in paragraph 5(c) of

Article XXIV should exceed 10 years

only in exceptional cases. (...)

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Interim Agreements

FTAs & CUs

To facilitate trade between parties Not to raise barriers to the trade of

third parties

WTO rules on RTAs

TEST YOUR

BRAIN Without going back to your notes, try to elaborate on each of the keywords listed below, which correspond to elements discussed in the previous section

Keywords (GATT XXIV)

Free-Trade Area (FTA) Customs Union (CU) Interim agreement (leading to

FTA or CU)

FTAs

Eliminate customs duties Eliminate other restrictive

commercial regulations Substantially all the trade Barriers (tariff & other

regulations of commerce) not higher after than before the formation of a FTA

CUs

Eliminate customs duties Eliminate other restrictive

commercial regulations Substantially all the trade Common external trade regime

(tariff and other regulations) General incidence ,on the whole ,not

higher after CU than prior to the formation of the CU

Renegotiation / compensation

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1979: Special and differential treatment for RTAs

The Tokyo Round of multilateral trade negotiations ended, in 1979, with the adoption of a Decision entitled Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries. This Decision was later called the ENABLING CLAUSE because, inter alia, it enables developing countries to grant each other preferences without having to apply the MFN treatment to the other WTO Members. The Enabling Clause has contributed to make SPECIAL AND DIFFERENTIAL TREATMENT in favour of products from developing countries a permanent part of the legal framework of the multilateral trading system.

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Enabling Clause

WTO rules on RTAs

The principle

Paragraph 1 (the Chapeau) of the Enabling Clause presents the principle: Despite Article I of the GATT (the MFN principle) developing countries may benefit from PREFERENTIAL TREATMENT.

DIFFERENTIAL AND MORE FAVOURABLE

TREATMENT RECIPROCITY AND FULLER

PARTICIPATION OF DEVELOPING COUNTRIES

Decision of 28 November 1979

(L/4903)

1. Notwithstanding the provisions of

Article I of the [GATT],

[Members] may accord differential

and more favourable treatment to

developing countries, without

according such treatment to other

[Members].

Paragraph 2 of the Enabling Clause lists four types of preferential treatment that may be applied to developing countries and that derogate from MFN treatment.

(a) covers tariff preferences granted by developed countries to developing countries in accordance with the Generalized System of Preferences (GSP). GSP schemes are unilateral, and therefore are not considered as RTAs.

(b) covers non-tariff preferences governed by multilateral instruments negotiated under the GATT. Such multilateral instruments do not take the form of RTAs.

(c) See next slide

(d) covers special treatment in favour of LDCs granted in relation togeneral or specific measures in favour of developing countries. ...

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(c) covers RTAs ENTERED INTO ONLY BY DEVELOPING COUNTRIES.

Specific conditions are attached to the RTAs covered by the Enabling Clause.





(L/4903)

2. The provisions of paragraph 1

apply to the following:

(...)

(c) regional or global arrangements

entered into amongst less-

developed [Members] for the

mutual reduction or elimination

of tariffs and, in accordance

with criteria or conditions

which may be prescribed by the

[Ministerial Conference], for

the mutual reduction or

elimination of non-tariff

measures, on products imported

from one another;(...)

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Purpose of RTAs covered by the Enabling Clause

Paragraph 3 of the Enabling Clause describes the purpose and characteristics of RTAs concluded only between developing countries (paragraph 2(c)).

intra-RTA impact

First, the purpose is defined in relation tothe expected impact within the RTA: to facilitate and promote the trade of developing countries.

extra-RTA impact

Second, the purpose is defined in relation tothe possible impact of the RTA for WTO Members that are not parties to the RTA (third parties): not to raise barriers to or create undue difficulties for the trade of any other [Members].

In addition, the RTA shall not constitute an impediment to future multilateral tariff or non-tariff reductions (through future rounds of negotiations).





(L/4903)

3: Any differential and more

favourable treatment provided under

this clause:

a) shall be designed to facilitate and

promote the trade of developing

countries and not to raise barriers

to or create undue difficulties for

the trade of any other [Member].

b) shall not constitute an impediment

to the reduction or elimination of

tariffs and other restrictions to

trade on a MFN basis; (...)

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RTAs covered by the Enabling Clause

The conditions to be fulfilled to qualify as a regional or global arrangement are contained in the Enabling Clause paragraph 2(c).

THE PARTIES MUST MUTUALLY REDUCE or ELIMINATE TARIFFS *.

Whether the parties must also MUTUALLY REDUCE or ELIMINATE NON-TARIFF MEASURES is an open question**.





(L/4903)

2. (...)

(c) regional or global arrangements

entered into amongst less-

developed [Members] for the

mutual reduction or elimination

of tariffs and, in accordance

with criteria or conditions

which may be prescribed by the

[Ministerial Conference], for

the mutual reduction or

elimination of

Documents

RTA-R1-E-Print (1).pdf