(b) Article XXIV:5(a)

50. India recalled that, in the communication dated 9 January 1996 handed to the Indian authorities at Ankara, Turkey attempted to justify its new restrictions with reference to Article XXIV:5(a) of GATT. India submitted that obligations under Article XI:1 of GATT and Article 2.4 of the ATC were not modified by Article XXIV:5(a) of GATT.
51. India argued that any interpretation of Article XXIV:5(a) that would entail an authorisation to impose, on the occasion of the formation of a customs union, new barriers to the trade of third Members inconsistently with Article XI:1 of GATT and Article 2.4 of the ATC on the grounds that other barriers to imports had been voluntarily reduced was excluded by the general principle set out in Article XXIV:4, which provided a recognition of the purpose of a customs union as "not to raise barriers to the trade" of other Members with such territories.
52. India noted that, according to Article XXIV:6 of GATT, Members parties to a customs union wishing to raise tariffs beyond the rate bound under Article II of GATT had to renegotiate them under the procedure for the modification of tariff concessions in Article XXVIII of GATT. India considered that, if tariff concessions under Article II could not be ignored by Members forming a customs union, an interpretation of Article XXIV permitting such Members to ignore their obligations under Article XI:1 of GATT and Article 2.4 of the ATC was not justified.
53. India also recalled that the issue of the introduction of new QRs by a party to a regional trade agreement had been discussed in detail in the GATT Working Party on the Accession of Greece to the European Communities. ¹⁰⁵ Several delegations stated their concern with the introduction of new discriminatory QRs by Greece on imports from state-trading countries of products, which they claimed were contrary to Articles XI and XIII of the GATT and contravened their Protocols of Accession. The Working Party Report recorded the response of the European Communities as follows:

"With reference to Article XXIV:5 and against the background of the very considerable liberalisation of restrictions which would occur in Greece, it was hard to claim that barriers were being created; even if it might be true for one or two products, the overall situation was clearly the opposite. On the question of the alleged inconsistency of this with Article XIII, the EC did not consider this point relevant to the Article XXIV:5 exercise; the matter could be further discussed in the context of the relevant Accession Protocols for the countries concerned." ¹⁰⁶

54. The issue of new QRs was again discussed in detail in the GATT Working Party on the Accession of Spain and Portugal to the European Communities. ¹⁰⁷ Several delegations expressed concern regarding Spain�s imposition of new QRs on imports from third countries. The European Communities defended the new restrictions with the argument that, on the whole, the number of Spanish restrictions had declined. Those delegations responded that newly established GATT-inconsistent measures could not be traded off against the alleged reduction of other barriers. The Working Party Report recorded the ensuing discussion as follows:

"Some members of the Working Party stated that since acceding to the Communities, Spain had introduced discriminatory QRs which contravened Articles XI, XIII and XXIV:4 as well as their countries� Protocols of Accession to the GATT under which contracting parties undertook not to increase the element of discrimination which they maintained on these countries� imports. Before acceding to the Communities, Spain had repeatedly notified the GATT that it maintained no discriminatory QRs on their countries� imports and they had no reason to doubt the validity of these notifications. Since Article XXIV did not provide a waiver from obligations contained in Articles XI and XIII and did not allow or require a country acceding to a customs union to adopt the more restrictive trade regime of the customs union, they called on the Communities and Spain to eliminate all GATT-inconsistent measures, which in the case of one of these countries affected one quarter of its total exports to Spain. The same members of the Working Party considered that measures that were inconsistent with the GATT could not be traded off against the alleged reduction of other barriers and could not be included in the assessment of incidence of changes in "other regulations of commerce" required by Article XXIV:5(a) under which only GATT-consistent measures should be taken into account. They did not consider the Treaty of Accession was in conformity with the GATT and reserved their rights under the General Agreement." ¹⁰⁸

55. India noted that, on the question of other regulations of commerce, and in particular QRs, the European Communities agreed that Article XXIV did not provide a waiver from other provisions of the GATT. By the same token, however, the role of the Working Party in this context was to examine the situation in the light of Article XXIV rather than with respect to any other provision such as Articles XI or XIII. Contracting parties were free to reserve their GATT rights and to have recourse to other provisions on these questions. ¹⁰⁹
56. Turkey submitted that Article XXIV:5 of GATT authorized the formation of a customs union, as defined by Article XXIV:8(a), provided that the conditions of Article XXIV:5(a) were met. If it had been the intention of the Members to ban the imposition of new QRs whenever a customs union was being instituted, Article XXIV:5 would have been a redundant provision.
57. Turkey considered that provisions of Article XXIV:5(a) should be read as permitting, at the time of the completion of a customs union, the introduction of restrictive regulations of commerce to the trade of third countries, provided that the overall incidence of duties and other regulations of commerce was not higher or more restrictive after the completion of the customs union than before. Further clarification was brought to the expression "on the whole" used in Article XXIV:5, in paragraph 2 of the Understanding on the Interpretation of Article XXIV of GATT 1994 ("Understanding on Article XXIV"). The view that a total prohibition on new restrictions was not intended, found its confirmation in the last sentence of that paragraph, which stated, inter alia, that "for the purposes of the overall assessment of the incidence of other regulations of commerce for which quantification and aggregation are difficult, the examination of individual measures, regulations, products covered and trade flows affected may be required" (emphasis added). In Turkey's view, such a provision would not be meaningful if it had been the intention to totally prohibit the imposition of new restrictions by one party to the customs union. ¹¹⁰
58. Turkey noted that this point had been made very effectively by the European Communities at a meeting of the Working Party on the Accession of Spain and Portugal, as follows:

"The task was general, namely to reach a view on whether the general incidence of customs duties and regulations after enlargement was on the whole more or less restrictive than before. Even if a negative incidence were shown to be the case for certain items, such as when duties were increased or replaced by variable levies, one had to consider whether these effects were not balanced by the effects of other changes in the tariff sector taken as a whole. An overall appreciation of effects of changes in tariffs and regulations of commerce had to be made. In assessing general incidence, one had to avoid too static an analysis and to take into account the trade-creating effects of the establishment or enlargement of a customs union." ¹¹¹

In its conclusions, the Working Party had noted that:

"Because of the divergent views expressed, [it] was unable to reach agreed conclusions as to the consistency of the Treaty with the General Agreement. It decided to forward to the Council, this report which summarizes the views expressed by its members during the discussion. It noted the fact that many members of the Working Party had reserved their rights under the General Agreement and that these rights would not be prejudiced by submission of the report." ¹¹²

59. Nevertheless, problems which might have arisen in connection with the accession of Spain and Portugal to the European Communities were settled under the procedures of Article XXIV:6 and no contracting party chose to invoke Articles XXII and XXIII in relation to the question of whether the obligations arising out of Articles XXIV:4 and XXIV:5(a) had been met.
60. Turkey noted further that, if it had been the intention of WTO Members to prohibit the imposition of new restrictions at the time of the formation or enlargement of customs unions, they would no doubt have seized the opportunity provided by the Uruguay Round to do so.
61. Turkey also recalled that, despite regular examinations of the Association Agreements between Turkey and the European Communities, both prior to and subsequent to the completion of the Turkey-EC customs union, no recommendations had ever been addressed to the parties to the agreement under Article XXIV:7(b). In the absence of such recommendations, it could not be argued that the Association Agreement and the Turkey-EC customs union to which it had led were inconsistent with obligations arising out of Article XXIV.
62. In Turkey's view, therefore, Article XI:1 had to be read in conjunction with Article XXIV, concluding that measures whose application constituted a requirement of the Turkey-EC customs union were deemed to be justified under Article XXIV. ¹¹³
63. In support of its argument, Turkey also recalled changes in its import regime vis-�-vis third countries triggered by the completion of the Turkey-EC customs union, which led to an incidence of tariff levels much lower than that of Turkey's previous tariff and to a process of alignment of its external trade policy with that of the European Communities resulting in the Turkish market becoming as open as the EC market to products of third countries. Turkey also referred to developments in its imports of textiles and clothing products in this respect, stressing that the lower level of tariff protection had led to a more open access to the Turkish market in these products despite the introduction of a system based on QRs, and recalled that the restrictions in question were of a temporary nature and would be phased out as foreseen in the ATC.
64. Turkey concluded that, overall, the Turkey-EC customs union had resulted in the lowering of the general incidence of duties and other regulations of commerce and, consequently, the requirements of Article XXIV:5(a) had been met.
65. Turkey explained that there were basically only three options open to the parties to a customs union when setting up a single set of external trade rules, in accordance with Article XXIV:8(a)(ii) requirements, both for reasons of logic and for practical purposes. Supposing that WTO Member A and WTO Member B formed a customs union, the options for establishing single external trade rules could be:

1. to extend the external trade rules of Member A to the entire customs union;
2. to extend the external trade rules of Member B to the entire customs union; or
3. to develop an external trade regime for the entire customs union somewhere in the middle between options (i) and (ii).
66. For this reason, Article XXIV:6 provided for the procedure to give compensatory adjustment in case of increased bound customs duties, which clearly indicated that the otherwise stringent rules of Article II were in this case applied in a more flexible way in order not to stand in the way of the creation of a customs union. However, the special rules contained in Article XXIV:5-8 did not only provide increased flexibility in the application of Article II. For example, although not specifically spelled out anywhere in these provisions, Turkey stated that it would simply make no sense if they did not authorize a derogation from Article I as well, and this had never been contested.
67. Turkey argued that the derogation authorized by Article XXIV:5 was not limited to a particular GATT rule, but encompassed all those rules from which a derogation was necessary to permit the formation of customs unions. In support of this argument, Turkey noted that the opening clause of Article XXIV:5 was drafted in language that was similar to the language used in the opening clause of Article XX, which demonstrated that the derogation referred to all the provisions of the GATT, and not just from those contained in Article II, more specifically mentioned in Article XXIV:6. ¹¹⁴ In this context, Turkey recalled that it had offered to enter into negotiations to address India�s concerns with regard to the change in its external trade regime, but India had not wished to participate in such negotiations.
68. India endeavoured, following the provisions of Article 3.2 of the DSU and the consistent jurisprudence of the Appellate Body, to interpret Article XXIV:5 of the GATT, which Turkey invoked as a defense, in accordance with the principles of interpretation set out in Articles 31 and 32 of the VCLT. These principles required an interpretation in accordance with the ordinary meaning to be given to the terms of Article XXIV:5 in their context and in the light of the object and purpose of the GATT.
69. India could not see how the terms of Article XXIV:5 could provide for a justification of the measures taken by Turkey. This provision authorized merely the formation of a customs union or free trade area, nothing else. Its terms consequently exempted from the other obligations under the GATT only measures inherent in the formation of a customs union. For instance, a customs union or a free trade area could only be formed by the granting of preferential treatment inconsistent with Article I and Article XXIV therefore clearly provided a justification for it. However, customs unions and free trade areas could be formed without the introduction of new QRs on imports from third Members inconsistent with Article XI of GATT. There was, in particular, nothing that required Members forming a customs union to impose new restrictions on imports from one particular third Member inconsistently with Article XIII of GATT and Article 2.4 of the ATC. Article XXIV:4, according to which the purpose of customs unions and free trade areas should not be to raise barriers to the trade of third Members, was drafted on that assumption. The terms of Article XXIV therefore could not be interpreted to provide a legal basis for discriminatory restrictions against a third Member inconsistent with Articles XI and XIII of GATT and Article 2.4 of the ATC.
70. In this regard, India referred to the GATT panel on the EEC-Member States� Import Regimes for Bananas, which summarized the legal implications of the text of Article XXIV as follows:

"The Panel noted the argument of the EEC that the restrictions and prohibitions on imports of bananas, even if inconsistent with Article XI:1, were nonetheless consistent with the General Agreement because they were covered under the provisions of Article XXIV. The Panel noted that Article XXIV:5 to 8 permitted the contracting parties to deviate from their obligations under other provisions of the General Agreement for the purpose of forming a customs union or free trade-area, or adopting an interim agreement leading to the formation of a customs union or free trade area, but not for any other purpose. Article XXIV:5 to 8 therefore did not provide contracting parties for a justification for restrictive import measures as such; it merely provided them - within the limits set out in this provision - with a justification for not applying to imports originating in such a union or area the restrictive measures that they were permitted to impose under other provisions of the General Agreement. The Panel therefore considered that the import restrictions on bananas could not be justified by Article XXIV." ¹¹⁵

71. Though the report of this panel was not adopted, the Appellate Body recognized that the reasoning in a not-adopted panel report could provide useful guidance. ¹¹⁶ In India's view, the succinct and clear exposition of the legal situation flowing from the terms of Article XXIV in the above quotation was such an example.
72. With reference to the next element to be considered under the principles of interpretation of the VCLT, i.e. the context in which the terms set out in Article XXIV:5 appeared, India noted that, since the preceding paragraph, Article XXIV:4, stated why customs unions and free trade areas were permitted and which purposes they were to serve, Article XXIV:5 had to be interpreted consistently with the principles set out therein. This meant that, in the absence of any clear indication to the contrary, Article XXIV:5 could not be interpreted as providing a justification for measures raising barriers to the trade of third Members.
73. India noted further that Article XXIV:6 was also part of the context of Article XXIV:5. Both according to the terms of this provision and the consistent practice under it, it applied only to custom duties bound under Article II, and the related paragraphs 5 and 6 of the Understanding on Article XXIV, also referred only to customs duties. There was no corresponding mechanism for renegotiation and compensation following an increase in QRs. India considered this a logical consequence of the principle that tariffs were negotiable (and renegotiable under Article XXVIII) while QRs might only be imposed in narrow circumstances defined in the WTO agreements. Given that rules governing quotas were fundamentally different from the rules governing tariffs, there was no basis to apply Article XXIV:6 by analogy to quotas, as Turkey had claimed. Moreover, paragraph 4 of the Understanding on Article XXIV made it explicit that paragraph 6 of Article XXIV established the procedures to be followed when a Member forming a custom union proposed to increase a bound rate of duty. Had the Uruguay Round negotiators meant to extend Article XXIV:6 to quotas, they would have formulated this provision accordingly.
74. India noted that two important conclusions for the interpretation of Article XXIV:5 could be drawn from Article XXIV:6. Firstly, if Members forming a customs union could not ignore their obligations under Article II and any duty increased by such Members was to be brought into conformity through a renegotiation under Article XXVIII, it could reasonably be concluded that they could also not ignore such obligations in respect of quotas. Secondly, Members adversely affected by a duty increase had to be compensated under the procedures of Article XXVIII; since Article XXIV did not provide for any form of compensation for Members adversely affected by the imposition of a new quota, it could logically be concluded that Article XXIV was not meant to authorize the imposition of quotas.
75. Turning to analyze, in accordance with Article 31:3(b) of the VCLT, subsequent practice in the application of Article XXIV:5, India could not find any which would lend support to Turkey�s interpretation of this provision.
76. India recalled that the claim that Article XXIV:5 of GATT authorized QRs inconsistent with Article XI was made by the six members of the EEC in 1957 when the CONTRACTING PARTIES to GATT 1947 examined the Treaty of Rome. The Report of the Sub-Group considering the EEC�s restrictions recorded the following:

"Most members of the sub-group could not accept the interpretation of the Six of paragraph 5(a) ... The notion that paragraph 5(a) would require that temporary QRs should be treated in the same way as normal protective measures such as tariffs in determining the trade relations between countries in a customs union and third countries would be contrary to the basic provision of the Agreement which precludes the use of QRs as an acceptable protective instrument." ¹¹⁷

77. India noted that this had been the position of third countries in all cases in which the claim that Article XXIV:5 justified restrictions had been made. ¹¹⁸ More recently the European Communities had accepted this position since it stated during the GATT examination of Portugal and Spain�s Accession to the European Communities as follows:

"On the question of the other regulations of commerce, and in particular QRs, the Communities agreed that Article XXIV did not provide a waiver from other provisions of the GATT." ¹¹⁹

78. India also considered that it was on the basis of such interpretation of Article XXIV that the EC-Turkey Association Council Decision 1/95 had been drafted. Referring to paragraphs 2 and 3 of Article 12 of the Decision, it noted that the provisions described the adoption of the same policy in the textile sector as an "objective" and recognized that "cooperation" between the European Communities and Turkey was required to achieve this objective. Moreover, the provisions made it clear that the drafters envisaged the possibility that Turkey would not succeed in negotiating restraint agreements identical to those of the European Communities because they explicitly agreed that in this case the European Communities would continue to apply the system of certificates of origin to prevent the circumvention of its policies through shipments into the European Communities via Turkey. The parties, when drafting these provisions, thus recognized that Turkey could not, simply by invoking Article XXIV, unilaterally impose the import restrictions which the European Communities was entitled to impose under the transitional provisions of the ATC.
79. India recognized that the pronouncements listed above might not be sufficiently "concordant, common and consistent" to constitute subsequent practice within the meaning of Article 31:3(b) of the VCLT; ¹²⁰ however, they demonstrated that the claim that Article XXIV:5 provided a waiver from the general prohibition of QRs had never been accepted and that the European Communities and Turkey had themselves not proceeded on the assumption that it did provide such a waiver. Turkey negotiated restraint agreements similar to those of the European Communities with 24 countries; it imposed unilateral restrictions or surveillance regimes to imports from 28 countries with which it was not possible to reach agreements, among them India. India noted that the interpretation of Article XXIV which the European Communities and Turkey had adopted in response to their failure to conclude restraint agreements with all exporting countries was in complete contradiction with the legal assumption on which their original decision to negotiate such agreements was based.
80. Turkey disagreed with India's argument according to which, if the Turkey-EC customs union could put in place a common regulation of commerce determined by restrictive measures applied by the European Communities, the obligations under Article XI:1 of GATT and Article 2.4 ATC would be ignored. Turkey pointed out that, while the GATT expressly stated that its provisions "shall not prevent the formation of a customs union" (the chapeau of Article XXIV:5), it took account of the pre-existing obligations of members of a customs union vis-�-vis other GATT contracting parties by the requirements in Article XXIV:5(a) relating to the customs tariff and the common regulation of commerce of the customs union.
81. Turkey also disagreed with India's argument that, unlike in the case of the raising of customs duties rates for certain items that might result from the establishment of a common customs tariff, there was no procedure on compensatory adjustment for QRs and that as a result Article XI obligations could be ignored. According to Turkey, it could not be inferred from the fact that Article XXIV:6 only referred to increases of customs duty rates that the intention behind Article XXIV:5(a) was to prohibit restrictive measures of a common regulation of commerce of a customs union, determined by one of the parties to such customs union. Such interpretation would be difficult to reconcile with Article XXIV:5(a) providing a test for the GATT consistency of a customs union with the GATT establishing, inter alia, that a regulation of commerce of a customs union could not on the whole be more restrictive than the regulation of commerce applicable in the constituent territories prior to the formation of the customs union.
82. Turkey noted that Article XXIV:6 did not exclude compensatory adjustments, where the common regulation of commerce of a customs union applied a restrictive measure taking account of the application of such a measure by a party to a customs union prior to the formation of that customs union. In agreeing to the Understanding on Article XXIV, WTO Members made this clear. In paragraph 2 of that Understanding they agreed on further rules on the evaluation under Article XXIV:5(a) of the general incidence of duties and other regulations of commerce applicable before and after the formation of a customs union, when recognizing "that for the purpose of the overall assessment of the incidence of other regulations of commerce for which quantification and aggregation are difficult, the examination of individual measures, regulations, products covered and trade flows affected may be required".
83. Turkey submitted that it would make little sense to provide for an evaluation of the overall incidence of other regulations of commerce if, as India asserted, the regulation of commerce of the Turkey-EC customs union could not be determined by pre-existing restrictive measures applied by the European Communities. It would equally make little sense to provide for an examination of individual measures, with a view of the evaluation of their incidence if, as India asserted, GATT did not permit the regulation of commerce of the Turkey-EC customs union to be determined by pre-existing restrictive measures applied by the European Communities. Why evaluate the incidence of a measure which would be prohibited? It would also make little sense to provide for an evaluation of the incidence of individual measures of a regulation of commerce of a customs union, if this would not to give rise, where appropriate, to a duty to offer a compensatory adjustment. In this context, Turkey drew attention to the steps taken by Turkey in this sense. In respect of textiles and clothing products, Turkey had negotiated adjustments with 24 countries. Turkey had also, repeatedly but in vain, offered to India to negotiate adjustments.

To continue with Article XXIV:8(a)

¹⁰⁵ See BISD 30S/168, paras. 25-33.

¹⁰⁶ Ibid., para. 32.

¹⁰⁷ See BISD 35S/293, paras. 19-21.

¹⁰⁸ Ibid., paras. 19-20.

¹⁰⁹ Ibid., para. 45.

¹¹⁰ In its Report on US - Gasoline, the Appellate Body had made clear that an interpretation might not result in reducing whole clauses or paragraphs to redundancy or inutility (p. 22).

¹¹¹ Appellate Body Report on US - Gasoline, para. 6.

¹¹² Ibid., para. 49.

¹¹³ In this context, Turkey recalled that the accession of Sweden to the European Union on 1 January 1995 had led it to adopt the EC's common commercial policy in textiles and clothing, which had resulted in the replacement of a tariff-based system by QRs similar to those applied by Turkey since the completion of the Turkey-EC customs union, without the relevant procedures of the MFA being observed. No country had however invoked Article XXII or Article XXIII rights in connection with the adoption of those measures by Sweden despite the fact that Sweden was not applying quantitative restrictions to imports of textiles and clothing before. Moreover, the formula used in the calculation of the quota levels to be applied by Turkey after completion of the Turkey-EC customs union was the same as the one used in the accession of Austria, Finland and Sweden.

¹¹⁴ Of course, as required by Article XXIV:5(a), the overall impact of the creation of the customs union should not be such as to be on the whole more trade-restrictive than the general incidence of the duties and regulations of commerce applicable to the constituent territories prior to the formation of the customs union. As demonstrated before, however, this was not the case in the Turkey-EC customs union.

¹¹⁵ Panel Report (not adopted) on EEC - Member States' Import Regimes for Bananas, DS32/R ("EEC - Bananas I"), para. 358 (emphasis added).

¹¹⁶ Appellate Body Report on Japan - Alcoholic Beverages, section E.

¹¹⁷ Reports on the European Economic Community, adopted on 29 November 1957, BISD 6S/70, para. 5.

¹¹⁸ See detailed references to past discussions in the GATT on the use of QRs by Members forming a customs union in the third-party submission of Thailand (para. 7.84 below).

¹¹⁹ Report of the Working Party on the Accession of Portugal and Spain to the EC, adopted on 19-20 October 1988 (BISD 35S/293).

¹²⁰ See the Appellate Body Report on Japan - Alcoholic Beverages, Section E, on this issue.