(1) Regional Integration

    In addition to the global economic regime based on the GATT and IMF systems, which has sustained the world economy since World War II, regionalism, through which neighbouring countries seek to strengthen their economies by entering into some form of "regional integration" has become a major trend. This trend was triggered by the EU market integration. In both developed and developing countries, customs unions and free trade areas (FTAs) continue to increase and expand. Today, they account for a considerable amount of world trade. The WTO calls agreements that establish customs unions and FTAs "regional trade agreements (RTAs)." In this chapter, we use the term "regional integration" to signify both RTAs and other forms of regional cooperation.
    Some 90 percent of the WTO Members are parties to such RTAs. Japan and Hong Kong are among the few exceptions.
    Article XXIV of the GATT allows RTAs to be exempted from the most-favoured nation principle under certain conditions; RTAs must not raise barriers to trade with countries outside of the region. This is because while RTAs promote trade liberalization within the respective regions, if they raise barriers to trade with countries outside the regions, they would impede trade liberalization as a whole. Such RTAs should not be overlooked so that the WTO framework does not become a dead letter.

    Moves towards "Regional Integration"

    In recent years, moves towards regional integration have been more and more active, with countries seeking to strengthen their ties with other countries. In Europe, when the Treaty on the European Union (the Maastricht Treaty) took effect in November 1993, the European Union (EU) was created, which enlarged and built upon the European Community (EC). The enlargement of the EU took place on 1 January 1995 by accession of new three countries, Austria, Sweden and Finland, which were former members of the European Free Trade Association (EFTA). Meanwhile, the September 1993 signing of the side agreements to the North American Free Trade Agreement (NAFTA) launched the free trade arrangement in North America in January 1994. Also in the Americas, certain countries in Latin America initiated the Southern Common Market Treaty (MERCOSUR) in January 1995. On the other side of the Pacific, the ASEAN Free Trade Area (AFTA) began lowering tariffs among its members in January 1993, and while expanding the range of items covered, has agreed to begin negotiations on access to service areas. The AFTA members have also agreed to make efforts toward the acceleration of the integration process with a view to full implementation of AFTA by the year 2000.
    One of the trends that have recently been observed is to create mechanisms for broader regional cooperation. This includes: 1) enlargement of existing regional integration, including the FTAs between the EU and the Central and Eastern European countries (CEECs), the FTA to be set up between the EU and the Mediterranean countries, and the creation of a Free Trade Area of the Americas (FTAA); 2) linkage between regional integration organizations, such as economic cooperation, including the creation of a future FTA between the EU and MERCOSUR; and 3) continent-based regional cooperation that may not necessarily be seeking to create a FTA or customs union, such as Asia-Pacific Economic Cooperation (APEC) and the Asia-Europe Meeting (ASEM).
    The APEC is some form of regional cooperation that does not immediately seek to establish customs unions or FTAs. The APEC is founded on an open regionalism that seeks not only to reduce the barriers to trade among its member economies but to make the result of these efforts available to other non-region economies as well. In November 1994, an unofficial summit of the leaders of the APEC economies was held, and a joint declaration was issued "setting a goal of free and more open trade and investment by the year 2010 in the developed countries, and 2020 in the developing countries" (the Bogor Declaration). At the Manila meetings in November 1996, all members submitted specific Individual Action Plans (IPA). All members (including new participating members in 1998, i.e. the Russian Federation, Vietnam and Peru) submitted revisions of the Plans at the Vancouver meetings held in November 1997 and at the Kuala Lumpur Meeting in November 1998 and steps are therefore taken toward liberalization and facilitation have been taken..

    <Figure 15-1> Growth in the Value of World Trade by Region, 1990-97 (Trade in Goods)

    (Unit: Billion Dollars)

    1997 ( % ) 1990-7 1997( % ) 1990-7
    North America
    South America
    Western Europe
    5305 ( 100)
    903 (17.0)
    279( 5.3)
    421( 7.9)
    183( 3.4)
    5470 (100)
    1101 (20.1)
    319( 5.8)
    339( 6.2)
    142( 2.6)
    75( 1.5)
    336( 6.6)
    86( 1.6)
    372( 7.1)

    (Source) WTO Annual Report 1997(the WTO Secretariat)
    (NOTE) 1990-7:rate of increase (%)

    <Figure 15-2> Ratio of Internal to External Trade for Major Regions (Trade in Goods)

      EXPORT 1997
    IMPORT 1997
    64.5 ( 5)
    42.7 (11)
    8.9 (26)
    19.5 (20)
    69.1 (10)
    35.1 ( 7)
    57.3 ( 7)
    91.1 ( 5)
    80.5 (14)
    30.9 ( 7)
    63.0 ( 5)
    34.4 (11)
    14.5 (26)
    15.9 (19)
    67.0 (11)
    37.0 ( 5)
    65.6 ( 7)
    85.5 (18)
    84.1 (14)
    33.0 ( 7)

    (Source) WTO Annual Report 1997(the WTO Secretariat)

    1)  Figures in parentheses ( ) for internal/external exports and internal/external imports show the 1990-1996 growth rate (%).
    2) Numbers given here may not match those in Figure 15-1 because of the margin for error in the calculations.

    (2) Legal Framework

    (i) Existing GATT/WTO Provisions on Regional Trade Agreements (RTAs)

    Tariff reductions applying exclusively to specific countries are prohibited in principle under Article I of the GATT, which requires most-favoured-nation treatment as a basic rule.
    The WTO, however, under Article XXIV of the GATT, authorizes the establishment of customs unions, FTAs and interim agreements, if their purpose is to facilitate trade within the region, and not to raise barriers to trade with countries outside of the region, The WTO allows these RTAs to be exempted from the most-favoured-nation principle as long as they conform to the following conditions (Figure 15-3).
    So far, the question of whether most customs unions or FTAs conform to GATT Article XXIV has been examined by working parties established separately for each RTA for which notification has been given. However, there is almost always disagreement over how to interpret Article XXIV since the wording is vague: "substantially all the trade between the constituent territories", "other restrictive regulations of commerce (ORRCs)", "on the whole....shall not be higher or more restrictive." Because of this, in almost every case, the claims of the parties to the FTAs and customs union and those of third countries with competing interests have been given equal weight.
    Interpretation of GATT Article XXIV became an issue in the review of the Treaty of Rome that established the European Economic Community (EEC) in 1957. Indeed, only six of the 69 working parties that had completed reviews by the end of 1994 had been able to reach a consensus on conformity questions. But while there have been conflicts of opinion on Article XXIV interpretation in almost every review of a RTA, the legitimacy of most-favoured-nation treatment for a RTA has only been contested in three panel cases. None of these panel reports has been adopted by the GATT Council.

    <Figure 15-3> Conditions of Customs Unions, FTAs and Interim Agreements under Article XXIV of the GATT.
    (Conditions under Article XXIV: 5, 8 of the GATT)
    - ORCs :other regulations of commerce
    - ORRCs :other restrictive regulations of commerce
          Article XXIV:5 Article XXIV:8
    Customs Unions (a) The duties and ORCs shall not on the whole be higher or more restrictive than the general incidence of those previously applicable in the constituent territories prior to the formation. (a)(i) The duties and ORRCs (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.
    (ii) Substantially the same duties and ORCs are applied by each of the members of the union to the trade of territories not included in the union.
    Free Trade Areas
    (b) The duties and ORCs shall not be higher or more restrictive than those previously existing in the same constituent territories prior to the formation (b) The duties and ORRCs (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 .
    (a) (b) same condition as in the customs unions or FTAs
    (c) any interim agreement shall include a plan and schedule for the formation of such a custom union or of such a FTA within a reasonable length of time.

    (Compensatory adjustment under Article XXIV:6)

    - With respect to a Customs Union, in fulfilling the requirements of Article XXIV:5(a), when a contracting party proposes to increase any rate of duty inconsistent with the Article II, the procedures set forth in Article XXVIII shall apply for compensatory adjustment.

    (Notification to the Contracting Parties, Considerations)

    - Any contracting party deciding to enter into a customs union or FTAs or an interim agreement, shall prompt notify the WTO. (Article XXIV:7(a))
    - After notification, the contracting parties will discuss and review the plans and schedules in the interim agreement with the parties to the agreement, the Contracting Parties shall make recommendations where appropriate. (Article XXIV:7(b))

    The three panel disputes on most-favoured-nation treatment were: EEC - Tariff treatment of citrus products from certain Mediterranean countries (1982), EEC - Member states' import regime for bananas (1993), and EEC - Import regime for bananas (1993). In all of these cases, what was at issue was special treatment unilaterally given by developed countries such as the EU to developing countries such as their former colonies. The panels found that such RTAs did not constitute FTAs under GATT Article XXIV and could therefore not be justified under Article XXIV. They suggested seeking waivers for the measures instead (see 2.(1), Reference).

    (ii) Treatment of RTAs Among Developing Countries

    To address RTAs among developing countries, the GATT has issued the decision of the contracting parties on 28 November 1979 ("Differential and More Favourable Treatment Reciprocity and Fuller Participation of Developing Countries," hereinafter "Enabling Clause"), reached during the Tokyo Round negotiations, to serve as the basis for special treatment accorded to developing countries in matters of trade. The Enabling Clause allows RTAs entered into among less-developed contracting parties for the mutual reduction or elimination of tariffs and non-tariff measures to be exempted from the most-favoured-nation principle under Article I of GATT as long as the following conditions are met (paragraph 2(c), see Figure 15-4).

    <Figure 15-4> Condition of the Enabling Clause
    - Such regional arrangements 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 contracting parties (paragraph 3(a)).
    - and not constitute an impediment to the reduction or elimination of tariffs and other restrictions to trade on a most-favoured-nation basis (paragraph 2(b)).

    (Notification to the contracting parties, Consultations)

    - Parties to such regional arrangements shall notify the contracting parties and furnish them with all the information they may deem appropriate to such action (paragraph 4(a)).
    - and afford adequate opportunity for prompt consultations at the request of any interested contracting party (paragraph 4(b)).

    There are three ways to view the relationship between the RTAs among developing countries and the Enabling Clause and Article XXIV.

    (a) The Enabling Clause was enacted so that developing countries could increase their exports and further develop their economies. RTAs between developing countries should therefore be looked at only under the terms of the Enabling Clause.
    (b) The Enabling Clause only imposes certain requirements on contracting parties to notify and consult countries that are entering into agreements or taking measures that are by nature partial and non-inclusive. It is therefore not sufficient as a basis for dealing with RTAs. This must be done under Article XXIV.
    (c) Judgements concerning RTAs among developing countries should take into account both Article XXIV and the Enabling Clause.

    How to examine such RTAs first became a focus of discussion in 1992 with the formation of the MERCOSUR, an arrangement entered into by Brazil, Argentina, Uruguay and Paraguay. Since the GATT was formally notified of MERCOSUR in March 1992, some contracting parties called on the GATT to form a working party under the Council to examine the agreement under the terms of Article XXIV. However a consensus was reached to have the Committee on Trade and Development (CTD) review MERCOSUR under the terms of reference in light of both the Enabling Clause and Article XXIV and report back to the contracting parties with a copy of its report going to the Council. With the establishment of the new WTO Committee on Regional Trade Agreements (CRTA) in February 1996, examinations are now performed by the Committee. A similar debate regarding the AFTA has been raised, but there has been no consensus. So far only the CTD has been notified of the agreement to form the area.

    (iii) New Rules in the WTO Agreement

    During the Uruguay Round negotiations, countries studied ways to remove the ambiguousness that had made interpretation of Article XXIV difficult. This led to a new "Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994," in which there is an explicit requirement to calculate "the general incidence of the duties" with an average weighted for trade volume rather than the arithmetical average used by the EU. There was also a proposal to prohibit RTAs from excluding major goods, for example agricultural products, from "the substantially all the trade between the constituent territories" clause, but no consensus could be reached on this issue. Instead, limited improvements were made as shown in Figure 15-5. For the services area, countries agreed to add wording similar to GATT Article XXIV to Article V of the GATS (see Figure 15-6).

    <Figure 15-6> General Agreement on Trade in Services Article V (Economic Integration)
    Article V of the Agreement on Trade in Services provides the following conditions for conclusion of an agreement liberalizing trade in services within the region:
    - Has substantial sectoral coverage in terms of number of sectors, the volume of trade affected and the modes of supply (the GATT requires "substantially all trade") (Paragraph 1(a));
    - Provides for the absence or elimination of substantially all discrimination, through: 1) elimination of existing discriminatory measures, and/or 2) prohibition of new or more discriminatory measures (Paragraph 1(b));
    - Shall not in respect of any member outside the agreement raise the overall level of barriers to trade in services compared to the level applicable prior to the agreement (Paragraph 4);
    - May not seek compensation for trade benefits that may accrue to any other member from such agreement (Paragraph 8); and
    - The Council for Trade in Services may establish a working party to examine an agreement (Paragraph 7(a)) (This is not an obligation, which is different from the case of trade in goods where the establishment of a working party is obligatory.)

    <Figure 15-5> New Rule for Clarification of Article XXIV of the GATT

    (a) Understanding on the Interpretation of Article XXIV of the GATT 1994.
    - The "general incidence of duties and other regulations of commerce" shall in respect of duties and charges be based upon an overall assessment of weighted average tariff rates and of customs duties collected (paragraph 2).
    - The "reasonable length of time" referred to in Article XXIV 5(c) should generally not exceed 10 years (paragraph 3).
    - When a Member forming a customs union proposes to increase a bound rate of duty, the procedure set forth in GATT XXVIII must be commenced before tariff concessions are modified or withdrawn (paragraph 4).
    - Members benefiting from a reduction of duties as a consequence of the formation of a customs union or an interim agreement are not obligated to provide compensatory adjustment (so-called "reverse compensation") to the constituents of such an agreement (paragraph 6).
    - The Council of Trade in Goods may issue appropriate recommendations based on working party fact recognition reports regarding the creation of a regional union or the addition of new members (paragraph 7).
    (b) The New Anti-Dumping Agreement (Article 4.3)
    Where two or more countries have reached under the provisions of Article XXIV:8(a) of the GATT 1994 (customs unions) such a level of integration that they have the characteristics of a single, unified market, the industry in the entire area of integration shall be taken to be the domestic industry for purposes of antidumping measures.
    (c) The New Subsidies Agreement (Article 16.4)
    Same provisions as in the New Anti-Dumping Agreement.
    (d) Agreement on Safeguards (Article 2.1)
    Nothing in this Agreement prejudges interpretation of the relationship between Article XIX and Article XXIV:8 of GATT 1994.
    (e) Agreement on Rules of Origin (Annex II)
    When a Member applies preferential rules of origin to the other Members of the union area, a member must ensure that
    - Administrative determinations of general application set out clearly the requirements to be fulfilled in order to meet the preferential rule of origin (Paragraph 3(a)).
    - Preferential rules of origin are based on a positive standard (Paragraph 3(b)).
    - All laws, regulations and determinations relating to preferential rules of origin are to be published in accordance with the provisions of Article X:1 of GATT 1994 (Paragraph 3(c)).
    - In introducing changes to the preferential rules of origin or new preferential rules of origin, they shall not apply retroactively (Paragraph 3(e)).

    (iv) Issues Studied by the Committee on Regional Trade Agreements (CRTA)
    - Strengthening Disciplines and Procedures -

    Due to the growing number of RTAs, a large number of working parties had been established and were still in the process of review (21 as at November 1995). Further increase in review burdens was anticipated because of regular notifications from existing RTAs. In view of these developments, it was agreed to make the transition to a single committee, which would be in charge of all reviews. This transition is expected to greatly improve the efficiency of the review process, and it was with this in mind that the General Council established the "Committee on Regional Trade Agreements (CRTA)" in February 1996 as a special committee to review regional integration.
    The CRTA is solely responsible for all of the reviews that used to be conducted by individual working parties for each RTA under the direction of the Council on Goods, Council on Services, and CTD. It also provides analysis of the impact of RTAs on the multilateral free trading system. More specifically, the CRTA has been assigned the following terms of reference: (a) to carry out the examination of RTAs adopted by the Council for Trade in Goods, the Council for Trade in Services or the CTD; (b) to consider how the required reporting on the operation of such agreements should be carried out and make appropriate recommendations to the relevant body; (c) to develop procedures to facilitate and improve the examination process; and (d) to consider the systemic implications of such agreements and regional initiatives for the multilateral trading system and the relationship between them (so-called "systemic issues").

    (a) Examination of RTAs

    In 1998, the CRTA was referred to carry out examinations for 62 RTAs and has completed the factual examination for 27 agreements and is well along in the process for another fourteen. The remaining 21 are only scheduled for examination. Of the major RTAs the Committee has completed examination of trade in goods for the enlargement of the EU by accession of Austria, Finland, and Sweden. The committee will begin examination of trade in services next. As for the NAFTA examination, informal negotiations of the final version are in progress. For the MERCOSUR, the Secretariat is currently producing the first draft of conclusions.

    (b) Reporting on the Operation of Agreements

    The "Understanding on the Interpretation of Article XXIV of the GATT 1994" obligates existing RTAs to report periodically to the Council for Trade in Goods on the operation of the agreement (paragraph 11) but this obligation does not extend to trade in services, raising the possibility that authorized RTAs are not making adequate reports. And RTAs under the Enabling Clause are required to notify and submit appropriate information to CTD, but adequate information has not notified to CTD. This has led to consideration to improve the required reporting on the operation of RTAs. While such efforts are certainly necessary from the standpoint of improving the transparency of implementation, detailed reporting is also a burden, and would represent an additional obligation beyond existing legal obligations and overlap with the TPRM process. The Committee is therefore discussing specific ways to implement a biannual reporting system.

    (c) Procedures to Facilitate and Improve the Examination Process

    In order to facilitate and improve the examination procedures by solving such problems as those related to: 1) the increasing number of "after the fact" examination; and 2) insufficient provision of information for the examination, the CRTA is working to facilitate and standardize the provisions of information for examination of RTAs. For the standard format for the provision of information on RTAs, Members have agreed on non-binding guidelines for both goods and services and the Committee took note of the Standard Formats. For the procedures to facilitate and improve the examination process, the Committee took note of the non-binding, voluntary guidelines setting out notification timings, standard examination processing periods, and the composition of reports, containing the Committee's further consideration and improvement of the guidelines.

    (d) "Systemic Issues" - Systemic Implications of Agreements and Initiatives for the Multilateral Trading System and the Relationship Between Them

    To deal with "Systemic Issues," the WTO has created the "Checklist of Systemic Issues" focused on identifying systemic issues as they emerged from RTA examinations and interpretation of Article XXIV of the GATT 1994. The Committee began considering approaches for the analysis of "Systemic Issues" using the checklist. The Committee is considering the concepts of "other restrictive regulations of commerce" and "substantially all the trade between the constituent territories" in Article XXIV:5 and 8, which are used to judge whether "other regulations of commerce" in the RTA have raised the barriers to the trade of other contracting parties with such territories (see Figure15-7).

    <Figure 15-7> Major Points of the Systemic Issues Emerged from WTO Rules for RTAs
    1) "The general incidence of ORCs" clause in Article XXIV:5
    Article XXIV:5 states that the RTAs shall not raise duties and ORCs to the trade of third parties, but there is contention over how to judge if barriers have risen. Members have agreed that the evaluation under Article XXIV:5 of "the general incidence of the duties and ORCs" shall in respect of duties and charges be based upon an overall assessment of weighted average tariff rates, and of customs duties collected, but there is still no agreement on the method to be used in overall assessment of "the general incidence of ORCs."
    2) Relationship between Article XXIV:4 and Article XXIV:5-9
    Article XXIV:4 states that the purpose of RTA should be to facilitate among the parties and not to raise the barriers to the trade of third parties. Article XXIV:5-9 define that the requirements and criteria for "duties and ORCs" maintained in an RTA, the obligated procedure under the GATT, definitions of customs unions and FTAs for determining if an RTA met the GATT.
    The two divergence of opinions was addressed by Members. One view, addressed by the EU and other members, has been that Paragraph 4 is clarified and pointed out by the provisions of Paragraphs 5-9, which follow it, but that Paragraph 4 itself is not a standard of judgement, in other words, if the requirements of the provisions of Paragraphs 5-9 are met, then Paragraph 4 is automatically met. They therefore argue that even if the formation of a customs union results in the raising a new barriers to the trade of other contracting parties with respect to individual measures, a customs union will not be recognized to "raise barriers to trade of other contracting" in Paragraph 4, as long as the general incidence of ORCs "on the whole" does not higher or more restrictive in Paragraph 5(a), as a result. Other view has been that Paragraph 4 is itself a standard of judgement.
    3) The "substantially all the trade between the constituent territories" clause in Article XXIV:8
    Article XXIV:8 states that the range of liberalization under a customs union and a FTA must be "substantially all the trade between the constituent territories". No criteria have been agreed to for determining what the term "substantially" all the trade in Articles XXIV:8. Two distinct conceptual views, one emphasizing its quantitative dimension, the other calling for a qualitative analysis. Under the qualitative view of the term "substantially" all the trade basically focuses on the possibility of an RTA to cover a large option of the parties' trade and exclusion of major sectors, particularly agriculture, from intra-RTA trade liberalization. There has been a proposal to integrate the quantitative and qualitative approaches.
    4) Relationship between Article XXIV:8 and other provisions of the WTO Agreements
    Article XXIV:8 stipulates that the possible exceptions to "the duties and ORRCs" to be eliminated those measures found in Articles XI, XII, XIII, XIV, XV, and XX. The fact that, however, Article XIX (Emergency Measures) and Article VI (Anti-dumping Measures) are not mentioned among the possible exceptions is a source of contention. A number of questions have been raised in CRTA discussions, within the context of Either the extended scope of WTO obligations after the Uruguay Round, or the characteristics of enlarging existing customs unions, or both. Specifically, the issue is whether a customs union's existing measures such as safeguards measures, anti-dumping measures, import restrictions (against third countries) can or should automatically be extended to new members of the union, and whether an RTA member can take a safeguard or anti-dumping type action exempt from the application only for third countries not for among parties of the union. Different views have been expressed in the CRTA on whether there are justified by Article XXIV:8.

    (3) Economic Implications

    "Trade Creation Effect" and "Trade Diversion Effect"
    Regional integration expands markets and promotes competition by eliminating barriers to trade among constituent countries. This contributes to more efficient allocation of resources and greater productivity among the constituent countries, as well as having a "trade creation effect" that improves the economic welfare of the members. These aspects are quite obviously positive for the economies that are integrated. With regard to countries outside the region, the creation of a expanded regional market as a whole can be expected to have a positive side effect of an "increase of trade opportunity."
    On the other hand , the positive trade creation effect can also in fact be overshadowed by a negative "trade diversion effect" if the elimination of barriers to trade between members of the region causes trade that had been conducted with efficient non-regional countries to be diverted to less efficient regional countries.

    "Economic Evaluation of Regional Integration"

    Impact on constituent countries and outside countries from these two effects differ according to the contents and the policies of the agreement and the time that has elapsed. In general, the positive "trade creation effect" exceed the negative "trade diversion effect" in the case of constituent countries, although one cannot deny the possibility that the reverse may also hold. Imports from outside countries, on the other hand, tend to be placed at a competitive disadvantage to imports from constituent countries because RTAs usually raise barriers to trade relatively, if not absolutely.
    Thus regional integration may affect outside countries negatively. However, by increasing the productivity and make constituent countries highly competitive, it may lead to elimination of the barriers and the worldwide trade liberalization in the future. Still, Generally, the reduction of tariffs through the multilateral efforts in the round has tended to decrease the level of discrimination against outside countries through preferential margins, new rules and policies that discriminate against and disadvantage outsiders can be seen. Below are concrete examples of measures found in some RTAs that may violate GATT/WTO principles and disciplines.
    (a) Movement towards stricter preferential rules of origin;
    (b) Conditional rules to not apply tariffs on certain products, that are applicable only to certain corporations, but that are not applied to new entrants or outsiders; and
    (c) Increase of tariff rates imposed on outside countries just before a regional integration agreement has been signed (forestalling).

    These problems must not be repeated in the process of regional integration. Integration should be pursued in such a way that outsiders can enjoy the positive effects of market expansion while the negative effects of trade diversion are minimized. In this respect, APEC, "an open regional integration" does not have negative impact on outside countries because it dose not have trade diversion effects for them.

    "Investment Diversion Effect"

    Interest has recently been growing in the "investment diversion effect" of regional integration as well. For example, in 1984 the EU received only one thirds of the direct investment that the United States did but by 1989 was at the same level. To foreign companies, the single, unified market that regional integration creates is also an attractive investment market, and the larger the integrated market, the greater the scale merits and therefore the attraction of locating there. However, in as much as investment resources are limited, this has the effect of diverting investment away from other countries.
    Naturally, investment decisions are part of a company's business judgement and the investment diversion effect should be seen as the result of this. But if regional integration brings with it trade policies that discriminate against products from outside the region, then it may distort the investment pattern between regions. (For example, if regional integration results in stricter rules of origin for non-regional products, then it will encourage direct investment in the region rather than exports to it.)


    As mentioned above, Article XXIV of the GATT is not necessarily administered strictly. However, now that moves towards trade liberalization are extensive such as the enlargement of the EU, the formation of the Free Trade Area of America (FTAA) and the planning of the Trans-Atlantic Free Trade Area (TAFTA), and that regional integration such as customs union and FTAs has been given more and more weight, it is essential to ensure through the GATT/WTO examinations that RTAs does not constitute excessive barriers against non-members so that the multilateral trading system may survive.

    At the time of the drafting of the original GATT Agreement in 1947, the customs unions that the drafters had in mind were small, generally on the scale of the Benelux Customs Union. Bearing in mind the drafting history and the increasing pressure of regional integration in world trade, the provisions of Article XXIV must be enforced strictly, and rules must be increasingly clarified so as to minimize the potential negative consequences for the multilateral free trading system. We must be aware that were Article XXIV of the GATT to be interpreted in an arbitrary fashion that grants exemptions to the most-favoured-nation treatment rule, it would risk turning the WTO into an empty shell.

    Regional integration can have both positive and negative effects for the multilateral free trading system. That is why we advocate the use of the WTO framework to minimize the adverse effects of regional integration while maximizing the positive effects of its anticipation of multilateral liberalization, that is, we should make every effort to see that the liberalization achieved within a regional integration is extended to the entire WTO at some point in the future. Japan is a core member of APEC and believes that APEC's principle of open regionalism (the idea that benefits should be extended on a most-favoured-nation basis) should be actively applied in this context.

    During the course of the WTO Committee on Regional Trade Agreements (CRTA) deliberations, Japan needs to articulate the need for clearly stated rules to minimize the adverse effects on outside countries during the debate on the interpretation of the provisions of Article XXIV. Japan will also need to argue that the preamble and body of Article XXIV should not be interpreted and judged formalistically, but in relation to their conformity to the entire WTO Agreement, and particularly within the context of most-favoured-nation treatment and the purposes of the WTO.

    There are three specific points to be made in this regard. First, 1) when the establishment of a RTAs results in rules of origin being used to substantially increase the barriers to trade on outsiders, then it is in contravention to the requirement in Article XXIV:5 that restrictions on commerce not be any higher than prior to formation of the customs union or the FTA. Second, 2) "substantially all the trade between the constituent territories" must be judged on the basis of both qualitative and quantitative criteria, and the listing of agricultural products or other important sectors as "exceptions" may not necessarily be justified. Third, 3) when a regional integration is enlarged, the safeguards and anti-dumping measures should not be automatically extended without fresh investigations to establish injury to the domestic industry, and when they are applied, application only to outsiders and not to members is not justified under Article XXIV. For all three of these points, clear rules need to be articulated.

    (i) European Union

    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 preparation,

    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.

    (a) 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 rates.

    (b) Meeting the Condition of "Substantially All the Trade" under Article XXIV:8

    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 restrictions.
    Regarding customs unions, EU-Turkey Customs Union excepts certain agricultural products from trade liberalization, and EU-Andorra Customs Union applies only to industrial goods.

    (c) "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 Agreement.
    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 (MFN Treatment).

    (d) 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.)

    (ii) 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.

    (a) 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 FTA rules.
    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
    Yarns Origin Fabrics origin US-Canada FTA NAFTA
    Inside Inside









    Note: A circle means to be treated as U.S.-Canada or NAFTA origin, and a cross means reverse.

    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.

    (note *) 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.

    (b) 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 parties.
    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.

    (c) "Selective" Non-application of Safeguard Measures imports from the NAFTA members

    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).

    (d) Transition Period

    Schedules for eliminating and non-tariff barriers within the FTA vary according to the countries and goods concerned:
    1) 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.
    2) 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.
    3) 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.

    (iii) 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.)

    (a) 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."

    (b) 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

    (c) "Selective" Non-application of Safeguard Measures imports from the MERCOSUR members

    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 the EU.

    (iv) AFTA, the ASEAN Free Trade Area

    The January 1992 ASEAN summit reached an agreement to begin work towards a FTA and on 1 January 1993, member countries began to reduce their tariffs. AFTA members employ a system known as "Common Effective Preferential Tariffs" (CEPT), in which they phase in tariff reductions within the region, ultimately seeking intra-regional tariffs of 0-5 percent by 2003. Quantitative restrictions on CEPT items will also be eliminated by 2003.
    AFTA was expanded to include Vietnam in January 1996, and agreed during 1997 to work towards the eventual membership of Cambodia, Laos, and Myanmar.
    And the December 1998 ASEAN summit was decided to accelerate the implementation of the reducing CEPT products from 2003 to 2002, and to expand them. As result, this summit also was decided to bring forward one year the day for an end of implementation AFTA, so AFTA will be completed by 2000.

    (a) Handling of RTA for Which Notification is Received under the Enabling Clause

    As we have already noted, AFTA provided notification to the Committee on Trade and Development (CTD) as mandated by the Enabling clause, but there is still no consensus on whether it should be reviewed for conformity to GATT Article XXIV.
    In February 1993, the United States, the EU and others members argued before the GATT General Council that the CEPT at the core of AFTA required detailed review because it sought to create an integrated market. CEPT, they said, was an agreement on comprehensive tariff reductions and therefore not only was it extremely important from a GATT perspective, it also went well beyond the size and scope of the regional agreements intended by the Enabling clause. Developing countries argued that CEPT was a RTA between developing countries as defined in Paragraph 2(c) of the Enabling clause, and notice of it having been provided to the CTD, and subsequent handling was up to the developing countries themselves. A solution to the impasse has yet to be found.

    (b) Intra-regional Preferences

    The ASEAN Industrial Cooperation (AICO) scheme, which took effect in November 1996 under the ASEAN framework, allows two or more countries approving items for AICO to give preferential 0-5 percent tariffs on AICO-designated items to applying companies, conditional on the companies having been founded in the ASEAN countries, having at least 30 percent local capitalization, and at least 40 percent local content in their products. We will need to monitor AICO administration closely. It has the potential, depending on how it is administered, to raise barriers to imports.
    And the 1998 ASEAN summit was decided to remove of the conditions that request at least 30 percent local capitalization only two years, 1999 and 2000.