The European Economic Community (EEC), based on the Treaty of Rome that was signed in
March 1957, was established in January 1958. It was aimed at the creation of the Single
Common Market, and by 1968, had completed the establishment of a customs union and a
common agriculture policy. They then went on to remove barriers within the region, and
liberalize the movement of four basic actors, "goods, people, services, and
capital." This set the stage for the signing on November 1, 1993 of the Treaty of
Maastricht, which charts the course to political union as well as economic and monetary
union for the twelve countries of the "European Union (EU)". Later, in January
1995, the accession of Austria, Finland, and Sweden brought its membership to fifteen.
From January 1994, the EU and three European Free Trade Association (EFTA) countries
(Norway, Iceland, and Liechtenstein) established a "European Economic Area
(EEA)" that goes beyond "the scope of a FTA by including liberalization of the
movement of people, goods, capital and services, and enhanced and expanded cooperation in
research and development, environment, and other areas.".
In order to strengthen its relationship with the Central and Eastern European countries
(CEECs), the EU has signed ten "Europe Agreements" that seek to establish FTAs
(and ultimately accession to the EU) by liberalizing trade and removing duties and
quantitative restrictions on industrial imports, reducing duties on agricultural imports,
liberalizing investment and services, and providing economic cooperation. These agreements
define a broad range of cooperation, including cooperation in the political, economic, and
social spheres, but must be ratified by EU members before they take effect. Because of the
time required to achieve ratification, the trade portions of the Europe Agreements will
take effect in the form of provisional agreements, and cooperation is now moving forward
in trade areas (the core of which is the establishment of FTAs).
The EU is also strengthening its economic relationships with the countries of the
Mediterranean. It has begun to negotiate free-trade agreements between Europe and the
Mediterranean countries to replace the first agreements dating from the period 1975-77.
The new Europe-Mediterranean Association Agreements are being negotiated, to introduce
reciprocal trade liberalization for most industrial products, and trade liberalization in
services and free movement of capital. The objective of the EU and Mediterranean countries
is to establish a wide FTA between all countries by 2010.
Twelve countries - which are largely central and eastern countries - have applied for
membership in the EU. In December 1997, the European Council announced that the EU and the
applicants, other than Turkey, will begin the process to accession from April 1998. To
date, the following negotiating countries for formal accession have got through the first
screening: Cyprus, Hungary, Poland, Estonia, Czech Republic and Slovenia. Since the
meeting of the Board of Ministers for Foreign Affairs held in November 1998, the Council
has conducted formal negotiations on the accession.
In addition, negotiations regarding the remaining five countries (Slovak Republic,
Bulgaria, Romania, Latvia and Lithuania) will also proceed in light of annual progress in
As examples of the construction of broader regional cooperation between the EU and other
countries, for the purpose of establishing the FTA, the cooperation agreement between the
EU and MERCOSUR and their Member States signed a Framework Cooperation Agreement in
December 1995. This agreement provides for the framework to promote economic cooperation
and establishes the basis for a future interregional partnership. Furthermore, the EU and
the United States have considered the creation of "the Trans-Atlantic Free Area
(TAFTA)" through the reduction of barriers to trade. In December 1995, the EU and the
United States adopted "the New Transatlantic Agenda," which provides a framework
for dialogue and cooperation in several economic and political areas.
||Tariff Increases in Contravention to GATT Article II
The Tariff Schedules of the three New EU Member States (Austria, Finland, and Sweden) were
replaced by the Common Tariff Schedule of the EU, which resulted in higher tariffs on some
items, most notably semi-conductors, computers, and transportation equipment, effective
January 1, 1995. Japan therefore initiated negotiations with the EU for compensation under
the provisions of Article XXIV:6 of the GATT. These negotiations resulted in an agreement
by the EU to bring forward to 1996 the concession rates scheduled to take effect in 1997
under the Uruguay Round Agreement, and to accelerate or further reduce final concession
rates for products, such as semi-conductors and photographic film.
In this case, the EU increased the bound rates of the new member states without conducting
prior negotiations with WTO Members with the exception of the United States. It would be
problematic for such a practice to be repeated upon further enlargement of the EU (the
accession of the CEECs and the Baltic States). Prior negotiations under GATT Article
XXVIII:1 with interested countries must, in principle, precede the increases in bound
||Meeting the Condition of "Substantially All the Trade" under Article
The Agreement of the EU has signed exempts agricultural products or the like from trade
liberalization, which may violates Article XXIV:8 of the GATT 1994 requiring that ORRCs be
eliminated on "substantially all trade" within the region.
The EEA Agreement requires that member countries make efforts to liberalize trade in
agricultural and marine products, but does not provide for the complete elimination of
both duties and ORRCs. In Protocol 3, the EEA Agreement stipulates that variable
surcharges, reflecting differences in production costs within the area, be retained for
imports of vegetables and certain other agricultural products.
The European Agreement between the CEECs and the EU has special provisions with respect to
liberalizing trade in textiles and clothing, agricultural products (the CEECs must
eliminate quantitative restrictions, quotas and approvals on specific imports from the EU
and reduce duties on a limited number of products; and the EU must eliminate restrictions
on imports from the CEECs, while extending tariff quotas and reducing primary tariff rates
on certain products) and does not call for the elimination of duties and quantitative
Regarding customs unions, EU-Turkey Customs Union excepts certain agricultural products
from trade liberalization, and EU-Andorra Customs Union applies only to industrial goods.
||"Automatic" Extension of Anti-dumping Measures to new members of the EU,
"Selective" Non-application of Anti-Dumping Measures imports from the EU members
The enlargement of the EU resulted in "automatic" extension in the three new
countries of the anti-dumping measures (against third countries) implemented by the twelve
existing members. Japan protested to the EU commission on this matter as well, and final
agreement was reached on a special arrangement for expedited review, upon request, of
anti-dumping measures for the EU as a whole.
"Automatically" extension anti-dumping measures without fresh investigations to
establish injury to the domestic industry is, in our opinion, in contravention to the
principle of Article XXIV:5 that obligates not be "more restrictive" after the
formation of a custom union than before. Nor do we think it justified in light of the
stronger disciplines on invocation of anti-dumping measures in the new Anti-dumping
This is, under Article 26 of the EEA Agreement, a party to the agreement may not invoke an
anti-dumping action against imports from another member country. Unlike a customs union,
which is regarded as a single customs territory with a single "domestic"
industry stipulated by Article 4 of the new Anti-dumping Agreement, the FTA members
maintain separate and distinct domestic industries. Thus the GATT provides no
justification for the EU to exempt the EFTA countries from application of an anti-dumping
measure and to impose anti-dumping duties on third parties in a discriminatory manner
simply on the fact that it is a member of a FTA. We think it is not justified under the
GATT Article XXIV, as to do so would be to violate Article 9 of the new Anti-dumping
Agreement (non-discrimination in the collection of anti-dumping duties) and GATT Article I
||Increase in Polish Customs Duties on Automobiles
Poland raised its tariffs on imports of automobiles in January 1992, two months before the
date the European Agreement entered into force in March 1992 from 15 percent to 5 percent.
This tariff rate will be reduced to zero percent for automobiles from the EU and to 24.5
percent for automobiles from outside the EU in the future. It also established a zero
tariff import quota (30,000) for EU automobiles.
Because Poland raised tariffs just before the entry into force of a RTA, we believe it
violates GATT Article XXIV:5(b) which stipulates that duties should not be raised upon the
entry into force of a FTA. One could argue that there was no violation of GATT XXIV:5(b),
because the tariffs were already raised at the time the RTA went into force, but in light
of the fact that the agreement had already been signed in December 1991 when the increases
were made, it is more logical to view the hikes as having come about in conjunction with
the agreement. Further more, if we were to allow this line of argument, it would be easy
to evade legal obligations.
In addition, there are non-transparent and uncertain elements regarding the Europe
Agreements between the EU and the CEECs. At the current stage, at any rate, the zero
tariff import quota of the Europe Agreement is unlikely to meet the Article XXIV
requirement of covering "substantially all the trade." We, therefore, find
serious problems with the attempts to expand MFN exceptions, for example, by establishing
a non-tariff quota for the EU. Such non-tariff quotas are not justified by Article XXIV
and therefore violate Articles I and XIII. This is not isolated to the case regarding
Poland but may soon happen in other CEECs, where due to the anticipated enlargement of the
EU, barriers to the outside may be raised and unjustifiable MFN exceptions created.
India requested the establishment of a panel on this matter in the GATT Council in
November 1994, and the Council established the panel. In September 1995, India again
requested GATT Article XXIII consultations with Poland under the WTO rules. In August
1996, the two countries notified the WTO that they had notified a mutually agreed solution
to DSB (Poland created a special quota of preferential tariff rates for countries affected
which qualify for the GSP). Japan, the United States and other countries also pointed out
these problems when the EU-Poland Interim Agreement was examined at the WTO.
|EU-Turkey Customs Union
In entering into the Customs Union Agreement between the EU and Turkey on 1 January 1996,
Turkey unilaterally imposed quantitative restrictions on textiles effective January
1,1996. These restrictions seek to preserve the EU's remaining restrictions on textile and
clothing products under the MFA and cover exactly the same items for which the EU has
quantitative restrictions. This is a clear violation of Article 2 of the Agreement on
Textiles and Clothing, which bans the imposition of any new import restrictions other than
TSGs for all measures except those in place prior to the WTO. It also clearly violates
GATT Article XI which provides for a general ban on quantitative restrictions, as well as
Article XXIV:5(a) stipulation that ORCs under a customs union shall not be higher or more
restrictive than prior to the formation of such union. This case is pending in a WTO panel
with Japan participating as a third country.
<Reference> The Fourth Lome Convention and EU Restrictions on Banana Imports
|In December 1989, the European Communities signed the Fourth ACP-EEC Convention of
Lome with countries of Africa, the Caribbean, and the Pacific (ACP). The Convention
provided for preferential treatment between members and their former colonies and under it
ACP countries received preferential treatment in banana imports. Present ACP States
parties to the Lome Convention is 71 which includes 54 WTO Members.
Prior to market integration, the EU banana import regime waived the 20 percent ad valorem
tariff on imports from ACP States under the Convention of Lome, allowing their bananas to
be imported tariff-free. Individual EU States could, however, impose quantitative
restrictions. In February 1993, a panel was established at the request of Panama, Costa
Rica, Guatemala, Nicaragua, and Venezuela (EEC-Member States' Import Regime for Bananas
(1993)). The panel report was issued and circulated to Members in June 1993 and found the
quantitative restrictions of EU members to be in violation of Article XI:1 of the GATT
(general ban on quantitative restrictions), and the special measures favouring ACP bananas
to be in violation of GATT Article I and unjustified under Article XXIV. The EU did not,
however, allow this panel report to be adopted.
In February 1993, the EU decided, connected with market integration in January 1993, to
replace quantitative restrictions on banana imports with a tariff quota regime, and to
move to a specific duty rather than an ad valorem duty. The change took effect in July
1993. Five countries, Columbia, Costa Rica, Guatemala, Nicaragua and Venezuela maintained
that this import regime violated Articles I, II, III and XI. Consultations failed to reach
a mutually satisfactory solution, so the panel was established at the request of the
countries in June 1993 (EEC-Import Regime for Bananas (1993)). The panel issued and
circulated its report in February 1994, finding: 1) the change from an ad valorem to
specific duties to be in violation of GATT Article II:1 (requirement to apply tariffs that
are not any more disadvantageous than the bound tariff), 2) discrimination in the
assignment and tariff rates for tariff quotas to be in violation of GATT Article I
(most-favoured-nation treatment) because ACP bananas were given preferential treatment
over those of other countries, and 3) the violation of GATT Article I to be unjustified by
claiming that it fell under the FTA provisions of Article XXIV.
In considering whether the preferential treatment of ACP bananas was justified in terms of
Article XXIV, the panel focused on the Convention of Lome and the fact that only the EU
undertook the obligation to eliminate trade barriers; the ACP countries came under no
obligation whatsoever. It therefore found that a non-mutual agreement, in which only part
of the constituent countries in the region eliminate ORRCs, did not constitute a FTA as
defined in GATT Article XXIV. The interpretation that the EU had advocated that under the
provisions of Part 4 (Trade and Development), the unilateral elimination of barriers to
trade by developed countries for the benefit of developing countries in treaties in which
developing countries undertook no obligation to liberalize should be considered to meet
the requirements of Article XXIV was not adopted in light of the fact that a waiver had
been granted in the general most-favoured-nation treatment regime and an agreement had
been reached on authorization conditions.
The panel report had been brought to the Council in March 1994, but the EU blocked its
adoption. As GATT terminated at the end of 1995, this panel report was not adopted. During
this period, the EU and the ACP States applied for a waiver under Article I:1 for the
Fourth ACP-EEC Convention of Lome, which was granted by the session of the Contracting
Parties to the GATT 1947 in December 1994. During the Uruguay Round negotiation, the EU
offered an increase in the amount of tariff quota for bananas in exchange for withdrawal
of the panel proceedings , and reached on agreement, with four countries except Guatemala.
From January 1995, the quota allocations were implemented with respect to Columbia and
Costa Rica according to the agreement.
Later, the new EU banana import system, established after the waiver had been obtained,
resulted in a complaint being filed in May 1996 by the United States, Guatemala, Honduras,
Mexico, and Ecuador claiming violations of GATT Article I (Most-favoured-nation Treatment)
and Article XIII (Non-discriminatory Application of Quantitative Restrictions).The panel
was then established and in September 1997 and at a DSB meeting, adopted a panel report
submitted in April 1997 and a report by the Appellate Body submitted in September of the
same year. (See Chapter 1 Most-Favoured-Nation Treatment Principle for a discussion of the
content of this report. See Chapter 14, "Unilateral Measures" for the dispute
between the United States and the EU over the implementation of the recommendations.)
||The North American Free Trade Agreement (NAFTA)
The North American Free Trade Agreement (NAFTA), which is a RTA for the United States,
Canada, and Mexico, was signed on 17 December 1992 and took effect on 1 January 1994. It
seeks to eliminate barriers to trade within the region, and establish a framework for
international cooperation. To do this, it will establish rules for investment,
intellectual property rights, and competition policy in addition to ordinary rules on the
trade in goods and services (elimination of tariffs and quantitative restrictions within
the region, harmonized rules of origin etc.).
In December 1994, the three NAFTA members reached an agreement with Chile to begin
negotiations on its membership in the RTA (a FTA between Canada and Chile took effect in
June 1997). During the Summit of the Americas held at roughly the same time, with
participation from all thirty-four countries in the Americas except Cuba, agreement was
reached to conclude negotiations on the Free Trade Area of the Americas (FTAA) by 2005.
||Strengthening of Rules of Origin
Rules of origin in NAFTA adopt the change in tariff heading ("CTH") approach
used in the United States-Canada FTA. However, the number of goods subject to origin
requirements in addition to the CTH has increased relative to the United States-Canada
FTA. As a result, more and more parts and materials of finished goods are required to be
of NAFTA origin, often resulting in rules more restrictive than the United States-Canada
The substantial strengthening of Rules of Origin may well violate Article XXIV:5 which
stipulates "Duties and ORRCs" shall not be higher or more restrictive than the
corresponding deities and other regulations of exciting in the same constituent
territories prior to the formation of the FTA.
Several examples illustrate the more-stringent NAFTA rules of origin. Under the United
States-Canada FTA, textile products satisfy the origin rule if the fabrics originate in
the region. Under NAFTA, however, products must be produced from yarns originating in the
region in order to qualify as North American origin. (see Figure 15-8)
<Figure 15-8> Comparison of the Rules of Origin for Textiles Products Between the
United States-Canada FTA and NAFTA
Note: A circle means to be treated as U.S.-Canada or NAFTA origin, and a cross means
Colour television sets (CTVs) are considered to be of either United States or Canadian
origin if they satisfy the United States-Canada FTA 50 percent value-content requirement.
For CTVs over 14 inch to qualify as North American under NAFTA, however, the colour
picture tube (CPT) or at least either the funnel or front panel of the CPTs must originate
in North America. After January 1999, in addition to the foregoing, components such as
tuners and tuner control systems and audio detection and amplification systems must be of
NAFTA origin for a CTV to qualify for North American origin status.(see Figure 15-9)
With respect to automobiles, both the United States-Canada FTA and NAFTA require a change
in tariff heading and a certain level of local content. The United States-Canada FTA's
local-content requirement is 50 percent. However, NAFTA's initial requirement of 50
percent will be raised eventually to 62.5 percent. In addition, the NAFTA did not follow
the United States-Canada FTA in its "roll up" of certain automobile components
when calculating the regional value content of finished automobiles. Under the United
States-Canada FTA, as long as the completed part has originated in the region, the entire
cost of the part is included in the regional value content of the finished vehicles (the
entire cost will be excluded if the completed part does not originate in the region).
Instead, NAFTA adopts the "tracing" rule, which only allows the North American
materials or components constituting certain North American auto parts to be counted
toward the regional value content requirement of the automobiles. Since the calculation
method of local content is different between the two FTAs, figures used in each FTA cannot
be simply deemed as equivalent. Nevertheless, considering the adoption of the tracing
rule, origin rules for automobiles have been strengthened under NAFTA.
<Figure 15-9> How NAFTA Calculates the Local Content of Automobiles
|(The Method of the NAFTA)
|Local content rate =
||(Net costs) - (Value of parts from outside the region)
Net costs *
To calculate the value of non-regional parts, NAFTA uses a "tracing method"
rather than the "roll-up method" used by the United States- Canada FTA. The use
of the tracing method enables the actual value of non-regional parts to be calculated
regardless of whether they have more than 50 percent local content.
||Net costs are defined as the ex-factory price. However, if this price includes
marketing costs, royalties, or shipping, those expenses are deducted.
(Reference : The Method of the United States - Canada FTA )
|Local content =
||(Price of parts and materials originating in the United States or Canada)
+ (Direct assembly costs in the United States or Canada)
Price of the exported product
Because roll-up system is used for calculations of local content, a part with 50 percent
local content will be counted as a 100 percent domestic part, while one with less than 50
percent local content will not be counted at all.
||Coverage of the Agreement
With respect to trade in agricultural goods, NAFTA consists of three separate agreements:
one between Mexico and the United States, one between Mexico and Canada, and
the United States-Canada FTA, which will continue to apply to trade between those two
Import restrictions between the United States and Mexico will be replaced by tariff
measures when NAFTA takes effect. Between Canada and Mexico, however, quantitative
restrictions and tariffs will remain on dairy products, sugar and sugar confectionery,
chicken, and egg products. Between the United States and Canada, the United States-Canada
FTA provides a schedule for eliminating tariffs on agricultural products, but not for
abolishing non-tariff measures on such products. There will also remain certain tariffs on
fresh fruits and vegetables.
Quantitative restrictions on agricultural products - between the United States and Canada
and between Canada and Mexico - are allowed under the provisions of GATT Article XI, but
it is limited to the extent that such restriction is necessary under the provision GATT
Article XXIV:8(a)(i). Japan should monitor WTO consistency of these measures.
||"Selective" Non-application of Safeguard Measures imports from the NAFTA
Article 802 of the NAFTA allows members not to apply safeguards to other NAFTA parties in
taking a safeguard action. Safeguards are emergency measures to protect domestic industry
and therefore involve a temporary suspension of other obligations under the GATT. It is
not rational to apply them selectively only to imports from third parties while giving
preferential treatment to imports from its RTA partners. We therefore see the
"selective" non-application of safeguard measures under NAFTA as a violation of
GATT Article XXIV:8(b).
Schedules for eliminating and non-tariff barriers within the FTA vary according to the
countries and goods concerned:
||United State - Canada (under the terms of the United States-Canada FTA):
All import restrictions, except those on agricultural products, will be completely
eliminated by 1 January 1998.
||Canada - Mexico:
Restrictions on imports from Mexico into Canada of products for which schedules have been
formulated will be eliminated by 1 January 2003. Restrictions on imports from Canada into
Mexico of corn, kidney beans, and certain other products for which schedules have been
formulated, will be eliminated by 1 January 2008. Restrictions on imports of other
products will be eliminated by 1 January 2003 at the latest.
||United States - Mexico:
Restrictions on imports from Mexico into the United States of saccharide, sugar- based
confections, footwear, glass products, watches, and other goods will be eliminated by 1
January 2008. Restrictions on other imports will be eliminated by 1 January 2003 at the
latest. Restrictions on imports from the United States into Mexico will be eliminated
according to the same schedule as imports from Canada into Mexico.
Among the requirements that the WTO places on interim agreements is that they result in
the formation of a such a customs union or a FTA within a reasonable length of time (GATT
Article XXIV:5). "The Understanding on the Interpretation of Article XXIV of the GATT
1994" takes this farther by defining a reasonable length of time as ten years, absent
exceptional circumstances. The NAFTA members have not explained clearly why a period in
excess of ten years is required, so there are reasonable doubts about whether the treaty
meets the requirements for an interim agreement.
||MERCOSUR (El Mercado Comun del Sur), the southern Cone Common market
The southern Cone common market (MERCOSUR) agreement was signed on March 26, 1991 and took
effect on 1 January 1995. MERCOSUR is composed of four countries Brazil, Argentina,
Uruguay, and Paraguay, and is an interim agreement that seeks the establishment of a
customs union by 2006.
MERCOSUR has reached an agreement with the Andes common market (four countries: Columbia,
Venezuela, Ecuador, and Bolivia) to form a FTA by 2005, and negotiations towards that goal
are in progress. In June 1996, it approved the creation of a FTA with Bolivia, and in
December 1997 the participation of Chile in this FTA. There are also plans to expand
MERCOSUR into a South American Free Trade Agreement (SAFTA) or even a Free Trade Agreement
of the Americas (FTAA).
MERCOSUR also signed an inter-regional cooperation agreement with the EU in December 1995.
(See Section (1) above.)
||Degree of Progress towards "Substantially the Same Duties"
MERCOSUR common tariffs on goods from outside countries are between 0-20 percent for about
85 percent of all items (total of 9,000 items). Member countries are permitted to list
exceptions, and they are broad. There are both common exceptions for all four members and
individual exceptions for specific members. MERCOSUR gives its members a maximum of eleven
years to make the transition to common tariffs (Argentina and Brazil must have the
transition complete by 2001, Uruguay and Paraguay have until 2006 to phase them in). We
will need to watch closely to ensure that the agreement meets the condition in GATT
Article XXIV:8(a)(ii) for "substantially the same duties."
||New or Higher Common Tariffs
The MERCOSUR common tariffs have resulted in the tariff rates on some items exceeding the
bound rates. By rights, MERCOSUR ought to have followed GATT Article XXIV:6, initiated the
concession amendment procedures found in Article XXVIII, and negotiated adjustments with
interested countries before the common tariffs were imposed. It did not do so. The common
tariffs took effect on 1 January 1995, harming the interests of its trading partners in
contravention of GATT Article II. Japan, the EU, Canada, and other countries have
therefore reserved the right to negotiate with MERCOSUR under Article XXIV:6.
On 13 November 1997, Brazil imposed a 3 percent across-the-board hike in the tariffs on
most of the common tariff goods and exceptions (the tariff rate on most common tariff
goods went from 14 percent to 17 percent, the maximum tariff rate from 20 percent to 23
percent, the rate on excepted capital goods from 17 percent to 20 percent, and the rate on
automobiles was held at the current level of 63 percent). MERCOSUR members have also
agreed to raise common tariffs by a flat 3 percent by 31 December 2000. Such hikes in
common tariffs would seem to go directly against Article XXIV:4, which states that
"the purpose of a free-trade area [is] not to raise barriers to the trade of other
contracting parties with such territories." It is also likely to be a violation of
GATT Article II
||"Selective" Non-application of Safeguard Measures imports from the
MERCOSUR's common safeguard rules are not clear on whether other members of the region
will be exempted. However, when Brazil enacted safeguards for toys in January 1997 and
Argentina for footwear in September 1997, other MERCOSUR members were exempted. Exempting
members and applying safeguards selectively to third parties is in violation of the
non-discrimination rule in the Safeguards Agreement, and is also in violation of GATT
Article XXIV:8(b). The footwear safeguards case is still pending in the panel requested by