(c) Article XXIV:8(a)

(i) Relationship between Article XXIV:8(a)(ii) and other Article XXIV provisions

84. India submitted that the obligations under Article XI:1 of GATT and Article 2.4 of the ATC were not modified by Article XXIV:8(a)(ii) of GATT, which required Members forming a customs union to apply substantially the same regulations of commerce to the trade with other Members of the WTO.
85. India recalled that, in the communication dated 9 January 1996, Turkey attempted to justify its new restrictions with reference to Article XXIV:8(a)(ii) of GATT as follows:

"The GATT jurisprudence since 1957 has considerably widened the scope of "regulations of commerce". Indeed, in the 1986 Working Party examining the accession of Spain and Portugal to the Community, it was no longer disputed that QRs formed part of "other regulations of commerce". The conformity assessment of the EU-Turkey Customs Union in the framework of Article XXIV should therefore not be abused in an attempt to shape new substantive WTO law. Since a customs union must cover "substantially all trade" and may not exclude particular economic sectors, the EC�s customs union with Turkey must also cover the textiles sector, which, it must be recalled, represents over 40% of Turkey�s trade with the Community." (Emphasis added.)

86. In India's view, however, that sub-paragraph merely defined one of the requirements to be fulfilled by an RTA to qualify as a customs union within the meaning of Article XXIV. The provision could not possibly be interpreted to imply that Members, in fulfilling that requirement, were entitled to ignore their WTO obligations when applying restrictions to imports from third Members. Article XXIV:4 made it clear that the purpose of a customs union was not to raise barriers to the trade of third countries, and Article XXIV:6 stipulated that tariff bindings could not simply be ignored by Members forming a customs union which, if necessary, had to renegotiate them in accordance with the procedures set out in Article XXVIII. If the obligations under Article II could not be ignored by Members forming a customs union, how could one reasonably conclude that the obligations under Article XI:1 of GATT and Article 2.4 of the ATC could be ignored?
87. India recalled that this position was also taken by the representative of Thailand at the meeting of the CRTA in October 1996:

"... Article XXIV:6 ... required the parties to RTAs to enter into compensation negotiations under Article XXVIII. A unilateral withdrawal of concessions under Article II of GATT 1994 would thus constitute a breach of the multilateral rules. Similarly, the imposition of QRs by new members of a customs union violated the provisions of GATT 1994, as this could not be justified under Article XXIV." ¹²¹

88. India also warned against importing into Article XXIV:8(a)(ii) in terms of creating rights to impose QRs where there were not specifically provided. Moreover, while Turkey claimed to be obliged by Article XXIV:8 to adopt common quotas with the European Communities for textiles and clothing, it was also claiming the right to follow divergent trade policy practices and to adopt different instruments in other areas. India noted in this respect differences inter alia in external trade policies on agriculture, steel and other sensitive industrial products, as well as in relation to anti-dumping, countervailing and safeguards measures. There was additionally no requirement that Members fulfil the requirements of Article XXIV:8(a) immediately.
89. Turkey submitted that Article XXIV:8(a)(ii) required it to apply to third countries import restrictions similar to those applied to the same countries by the European Communities, since the term "regulations of commerce" had traditionally been interpreted as incorporating QRs. ¹²² This was precisely the reason for Article 12 of Decision 1/95 unequivocally envisaging the wholesale adoption by Turkey of the EC Common Commercial Policy Instruments, as well as the EC Customs Code, in the area of textiles and clothing products, prior to the completion of the Turkey-EC customs union. Article 12(1) specified the external trade measures to be adopted by Turkey towards third countries, which constituted the critical mass of commercial policy regulations applied by the European Communities. Appropriate measures were envisaged to prevent trade diversion to Turkey over the EC customs territory. ¹²³ The provisions of Decision 1/95 which had permitted the European Communities to continue applying - even after the completion of the Turkey-EC customs union - certificates of origin to imports of textiles and clothing from Turkey, had lapsed because Turkey had been able to meet all the requirements for the free circulation of these products set out in the Decision itself (including the adoption of substantially the same commercial policy as the European Communities for those products).
90. Turkey referred again to the example of a customs union between WTO Members A and B, where A applied (fully WTO-compatible) QRs on certain imports but low tariffs, while B had no QRs but (fully WTO-compatible) high tariffs on such imports. In such a case, the mentioned option (i) would entail that the A-B customs union would have to adapt its external trade regime to that of B, which meant raising tariffs to the high B level, an undoubtedly permissible move under Article XXIV:6. Option (ii) would result in the A-B customs union aligning its external trade regime with A, which would entail the introduction of QRs corresponding to those of A. Option (iii) would attempt to find some middle ground between the other two options.
91. In Turkey's view, the position of India would entail, in the context of the present case, that options (ii) and (iii) be legally unavailable. This would come down to an overly restrictive interpretation of Articles XXIV:5 and XXIV:8(a)(ii), because under this reading, the inescapable need to raise the tariffs to a high level could easily enter into conflict with the requirement of Article XXIV:5(a) according to which the external trade regime of the customs union should not on the whole be more restrictive than the general incidence of the external trade regime of each of the constituent territories prior to the formation of the customs union. This would make option (i) likewise legally unavailable.
92. Turkey was of the view that any interpretation of Article XXIV which could lead to the conclusion that in certain circumstances, WTO Members with diverging external trade regimes were legally inhibited from forming a customs union would also be in contradiction with the objective clearly stated in Article XXIV:4. In order to fully preserve the right of WTO Members to form customs unions, it was necessary to keep open in all cases options (i), (ii) and (iii) as referred to above, since only by maintaining this flexibility would it be possible to allow WTO Members to form a customs union where they have diverging (but entirely legal) external trade regimes prior to the formation of such a customs union. As already mentioned, this reading of Article XXIV:8(a)(ii) was also commanded by the requirements laid down in Article XXIV:5(a).
93. Turkey considered therefore that, under India�s reading, Articles XXIV:5-8 could stand in the way of the formation of a customs union between WTO Members with diverging external trade regimes. Such a reading of the portions of Article XXIV flew in the face of the purpose of this provision which was, on the contrary, to facilitate the formation of customs unions.
94. Turkey submitted further that, contrary to India's reading, Article XXIV:8(a)(ii) did not merely define a customs union. If such interpretation were followed, the set of GATT provisions on customs unions would be incoherent and logically inconsistent. If, in order to qualify as a customs union, the Turkey-EC customs union had to cover substantially all trade - as required by Article XXIV:8(a)(i) - it had obviously to cover trade in textiles and clothing products, which represented 40 per cent of Turkey's sales in the European Communities. If such trade had to be covered, the Turkey-EC customs union had to have a common regulation of commerce with other countries in accordance with Article XXIV:8(a)(ii). Such common regulation of commerce, as determined by restrictive measures which the European Communities applied in conformity with WTO rules, applied to goods imported in the Turkey-EC customs union via Turkey. Article XXIV:5(a) could not be interpreted as prohibiting this: if it were, the absence of a common regulation of commerce for textiles and clothing products would result in the exclusion of these products from the coverage of the Turkey-EC customs union, which then would not meet the requirement of Article XXIV:8(a)(i).

(ii) Relationship between Article XXIV:8(a)(ii) of GATT and Article 2.4 of the ATC

95. India believed that, implicit in Turkey's argument that Article XXIV:8(a)(ii) required it to apply to its customs territory the same import restrictions that the European Communities were authorized to apply under the transitional arrangements of the ATC, there was the claim that a conflict existed between the provisions of Article 2 of the ATC and those of Article XXIV:8(a)(ii) of GATT. India also believed that, implicit in this argumentation was the further claim of Turkey that it was entitled to resolve this conflict in favour of its obligations under Article XXIV:8(a)(ii).
96. For these reasons, India considered that Turkey�s argumentation had to be examined in the light of the General Interpretative Note to Annex 1A of the WTO Agreement, which read:

"In the event of a conflict between a provision of the General Agreement on Tariffs and Trade 1994 and a provision of another agreement in Annex 1A of the Agreement Establishing the WTO ..., the provision of the other agreement shall prevail to the extent of the conflict."

97. In the EC-Bananas III case, the panel interpreted this note as covering two types of conflicts: Firstly, conflicts between obligations contained in GATT and obligations contained in agreements listed in Annex 1A to the WTO Agreement, where those obligations were mutually exclusive in the sense that a Member could not comply with both obligations at the same time. Secondly, the situation where a rule in one agreement prohibited what a rule in another agreement explicitly permitted, illustrated by the panel with the following example:

"� Article XI:1 of the GATT 1994 prohibits the imposition of quantitative restrictions ... Article 2 of the � ATC � authorizes the imposition of quantitative restrictions in the textiles and clothing sector, subject to conditions specified in Article 2.1-21 of the ATC. In other words, Article XI:1 of GATT 1994 prohibits what Article 2 of the ATC permits in equally explicit terms. It is true that Members could theoretically comply with Article XI:1 of GATT, as well as with Article 2 of the ATC, simply by refraining from invoking the right to impose quantitative restrictions ... However, such an interpretation would render whole Articles or sections of Agreements covered by the WTO meaningless and run counter to the object and purpose of many agreements listed in Annex 1A which were negotiated with the intent to create rights and obligations which in parts differ substantially from those of the GATT 1994." ¹²⁴

98. India noted that, in the present proceedings, no conflict of the first type arose because the European Communities and Turkey could meet their obligations under Article XXIV and Article 2.4 of the ATC simply by not imposing any restrictions on imports of textiles and clothing. However, the second type of conflict between Article XXIV:8(a) of GATT and Article 2.4 of the ATC did arise because, while the former required the European Communities and Turkey to apply substantially the same regulations of commerce, the latter explicitly required them to apply different regulations of commerce. The provisions of Article 2.4 of the ATC therefore clearly prevailed to the extent of this conflict.
99. India therefore submitted that the European Communities and Turkey could meet their obligations under the WTO agreements if they were to form a customs union under which the import policies of the European Communities and Turkey on textiles and clothing differed to the extent that their obligations differed under Article 2.4 of the ATC. Turkey�s defense based on the notion of a conflict of obligations was therefore without any legal basis. In this context, India noted further that the ATC was a newly negotiated agreement designed to exempt partially the textiles and clothing sector from the earlier GATT disciplines during a transitional period; it therefore constituted a later and more specific statement of Members' rights and obligations in the field of textiles and clothing.
100. Turkey submitted that, with regard to the ATC, no conflict existed. In addition, Turkey considered that it was in the first place for the TMB to determine the relationship between the ATC and GATT, as this relationship depended on an interpretation of the ATC. Turkey therefore continued to believe that this issue could not be considered by the Panel without prior examination by the TMB which had been given the task to examine measures taken under the ATC and their conformity therewith.
101. Turkey submitted further that, in any case, since the ATC specifically referred back to the "relevant GATT 1994 provisions" in Article 2.4, Turkey could not see any basis for construing a conflict between ATC and GATT. This was also evidenced by footnote 3 to Article 2.4 of the ATC, which solely excluded Article XIX of GATT from the reference contained in the main body of this provision. ¹²⁵ Finally, the ATC established a transitional regime, the ultimate aim of which was full integration of the textiles and clothing sector in the GATT. It would therefore be surprising if Article XXIV of GATT would be considered inapplicable in the context of the ATC, since the purpose of the ATC was to phase out gradually any special rules applying to textiles and clothing products and to phase in all the GATT rules, which obviously included Article XXIV.

(iii) Differences between the formation of a customs union and the enlargement of an already existing one

102. India noted that Turkey had not become a Member State of the European Communities, and the territory to which the European Communities applied the WTO Agreement had therefore not been extended to comprise that of Turkey. The new restrictions were consequently not EC measures extended to the territory of Turkey, but restrictions imposed by Turkey. In this context, India recalled that, in the communication dated 9 January 1996, Turkey further attempted to justify its new restrictions as follows:

"To the extent that the EC's current regime for textiles is in accordance with WTO rules including the ATC, nothing prevents the Community from applying its existing regime to the enlarged territory of the EU-Turkey customs union, as has been done by the EC on the occasion of previous enlargements."

103. India was of the opinion that this statement was both factually and legally incorrect. While the European Communities were responsible for the implementation of the WTO Agreement within its own separate customs territory (which essentially comprised the European territories of its Member States), ¹²⁶ it had assumed no obligations under the WTO Agreement in respect of the territory of those countries with which it had concluded a customs union agreement. The case before the Panel was thus not the case of an extension of the territory to which the European Communities applied the WTO Agreement (which occurred for instance when Austria, Finland and Sweden acceded to the European Communities and when Germany was unified). This case concerned the adoption by Turkey of the EC restrictive textiles and clothing import regime within the framework of an RTA. There was therefore no need for the Panel to make any findings on the complex legal issues arising from an extension of the territorial application of the WTO Agreement by the European Communities to the territory of States that acceded to the European Communities but remained Members of the WTO.
104. Turkey submitted that, from the point of view of rights and obligations arising out of membership of the WTO, there was no distinction between accession to the European Communities and participation in a customs union with it, as long as a single customs territory had been created with the inclusion of both parties. For that reason, the procedures followed, whether in relation to Article XXIV:5(a) or Article XXIV:6, were identical in both cases. In Turkey's opinion, the precedents set by EC accessions were valid for the examination of its own customs union with the European Communities. While the decision-making processes varied depending on whether a country had acceded to the European Communities or joined in a customs union with it, what mattered was the fact that the obligations which arose out of both cases were indistinguishable in essence, as in the case of the Turkey-EC customs union which had a single customs territory as provided for in Article 3(3) of Decision 1/95. Precisely because a common commercial policy was applied over this single customs territory, Turkey and the European Communities had insisted on the latter's participation in the examination of India's complaint by the Panel, since the elements of that common commercial policy could not be modified without the consent of the European Communities.
105. Turkey therefore did not agree with the argument made by India concerning the alleged difference in WTO terms between an extension of the EC customs union through accession of new member States and the substitution of a single Turkey-EC customs territory for the pre-existing individual customs territories of Turkey and the European Communities respectively. In fact, in both cases, the territory covered by the customs union was extended by comparison to the situation prevailing beforehand. The main difference was in the administration of the customs union, which was the responsibility of the European Communities alone in the case of an accession, but the joint responsibility of Turkey and the European Communities in the case of the Turkey-EC customs union. This was however entirely irrelevant for the application of Article XXIV:5 to 8 of GATT.

(iv) Scope of harmonization of the external trade regime in the Turkey-EC regional trade agreement

106. India noted that Turkey and the European Communities had chosen to eliminate the barriers on trade between them in respect of most industrial products, and Turkey had harmonized certain aspects of its external trade policies with those of the European Communities. However, outside the sector of textiles and clothing, the European Communities and Turkey would continue to apply different trade policy measures to third countries. The RTA between the European Communities and Turkey, at its present stage of implementation, could best be characterized as a free-trade area whose parties had chosen to harmonize certain aspects of their external trade policies. The argument that Article XXIV required Turkey to raise the level of its restrictions in the field of textiles and clothing to that of EC restrictions was therefore particularly unconvincing in this context. As the representative of the United States pointed out in the CRTA:

"The reasoning by the EC that Article XXIV required new member countries to adopt certain restrictive and discriminatory arrangements so as to ensure the smooth functioning of the Turkey-EC customs union was dubious, as it was not applied across the board. The selectivity of this reasoning confirmed that it was being used as a disguised restriction to the trade of third countries. In textiles, Turkey was required to adopt quotas, but in other areas was exempted. Regional trade agreements should have the objective of strengthening, rather than weakening the multilateral trading system." ¹²⁷

107. Turkey submitted that over 98 per cent of trade between Turkey and the European Communities was covered by the Turkey-EC customs union and the criteria contained in the twin sub-paragraphs of Article XXIV:8(a), were more than fulfilled in the completion of the customs union. With reference to the requirements in Article XXIV:8(a)(i), Turkey noted the following:

1. Duties and QRs had been eliminated on intra-trade in industrial products. Textiles and clothing products, which accounted for around 40 per cent of Turkey's exports to the European Communities, were in free circulation in the Turkey-EC customs union. As far as steel products were concerned, they would be incorporated into the customs union before the ECSC was phased out in 2001 and benefit from free circulation.
2. The only sector not fully covered by the Turkey-EC customs union in 2002 would be agriculture, although intra-trade in agricultural products would have been significantly liberalised. 90 per cent of intra-trade in agricultural products had been liberalised as a result of a separate Decision of the Association Council, Decision 1/98, which entered into force on 1 January 1998.
108. With respect to the harmonisation exercise carried out by Turkey in the area of commercial policy, Turkey referred to the provisions contained in Section III of Decision 1/95 and, stressing its comprehensive nature, noted as follows:

1. Turkey had adopted the CCT for all industrial products, except those of EURATOM and ECSC. ¹²⁸
2. Turkey had adopted in the textiles and clothing sector a trade regime identical to that of the European Communities, in conformity with Article 12(2) of Decision 1/95.
3. Turkey, as the European Communities, applied restrictions on a limited range of products imported from some state-trading countries not Members of the WTO.
4. In order to achieve free circulation of agricultural products between the two parties, Turkey has to adopt necessary elements of the Common Agricultural Policy. The "European Strategy" for Turkey, endorsed by the European Council at its meeting held in Cardiff on 15-16 June 1998, had proposed modalities for reaching that objective and discussions on these proposals were expected to be initiated shortly
5. In competition and state-aids, the harmonisation process had already been initiated and, once completed, resort to anti-dumping and countervailing duties would cease and identical policies would be applied to third countries. ¹²⁹ (Meanwhile, the Parties to the Turkey-EC customs union were required to coordinate their actions towards third countries.) ¹³⁰ Such gradual integration of anti-dumping actions was envisaged in Article 4.3 of the WTO Agreement on Implementation of Article VI of the GATT 1994.
109. Consequently, Turkey was of the view that the Turkey-EC customs union could not be described, as India did, as a "free trade area whose members have chosen to harmonise certain aspects of their external trade policies", nor could it be argued that "Turkey has chosen to harmonise its commercial policies with those of the EC on a selective basis".

To continue with Other options available

¹²¹ WT/REG22/M/1, para. 17. India, Japan, Hong Kong, and the United States expressed their agreement with Thailand.

¹²² See BISD 35S/293, para. 45.

¹²³ A transitional period was only provided for in Article 16 of Decision 1/95 (see WT/REG22/1) for alignment by Turkey on the EC preferential trade policy as no risk of trade diversion through the Turkish customs territory was likely as long as Turkey maintained towards the countries concerned a more restrictive import regime than that of the European Communities.

¹²⁴ Panel Report on EC - Bananas III (Complaint by the United States), para. 7.159 and footnote 403.

¹²⁵ See also, in this respect, paras. 6.27 to 6.29 above.

¹²⁶ See Article XXIV:1 and the Explanatory Notes at the end of the WTO Agreement.

¹²⁷ WT/REG22/M/1, para. 13.

¹²⁸ Exceptionally, for a transitional period ending on 1 January 2001, imports from third countries of products covering 1.4 per cent of eight-digit tariff lines would be subjected to higher duties than the CCT, in accordance with Article 19 of the Additional Protocol.

¹²⁹ See Article 44(1) of Decision 1/95 (WT/REG22/1).

¹³⁰ See Article 45(2) of Decision 1/95 (WT/REG22/1).