VII. Summary

A. Hong Kong, China

1. General

1. Hong Kong, China submitted that Turkey had unilaterally imposed discriminatory QRs on imports of textiles and clothing from Hong Kong, China and some other WTO Members as from 1 January 1996. Turkey�s measures covered a broad range of textile and clothing products from selected Members including Hong Kong, China. According to Turkey, these measures were taken in order "to achieve the Customs Union between the EC and Turkey" and "to fulfill the requirements of Article XXIV".¹⁷⁵
2. Hong Kong, China did not question the right of Members to form a customs union in accordance with WTO rules and had no intention to focus on whether Turkey had fulfilled the requirements of Article XXIV of GATT. Its concern was that Turkey�s measures constituted an infringement of the WTO Agreement. Specifically, Hong Kong, China submitted that the measures were inconsistent with Article 2.4 of the ATC and hence with Article XI ipso facto and Article XIII of GATT. The GATT did not provide carte blanche for a customs union to introduce discriminatory QRs.
3. Hong Kong, China considered that, in line with the views of the Appellate Body in US - Shirts and Blouses, ¹⁷⁶ a party claiming a violation of a provision of the WTO Agreement by another Member needed to assert and prove its claim. Having done so, it was up to the defending party to bring forward evidence and arguments to disprove the claim. Furthermore, the burden of establishing a defense including that derived from exceptions from obligations under certain provisions of GATT should rest with the defending party. Turkey claimed that the measures were required as part of a process of alignment of its external trade policy with that of the European Communities so as to ensure the free circulation of products, including textile and clothing products, covered by the Turkey-EC customs union, relying on Article XXIV to justify the measures. The burden of proof rested therefore with Turkey to substantiate its claim that a customs union formed under Article XXIV did provide a derogation from other GATT provisions.

2. Article 2 of the ATC and Articles XI and XIII of GATT

4. Hong Kong, China submitted that Turkey�s measures were in violation of Article 2.4 of the ATC. Hong Kong, China viewed Article 2 of the ATC and Article XI of GATT as both dealing with QRs, the former specifically about QRs in the textiles and clothing sector, and the latter about QRs in the goods field. Since the former was lex specialis to the latter, any time Article 2.4 of the ATC was violated, Article XI of GATT was violated ipso facto (but not vice versa).
5. The objective of the ATC was to reintegrate trade in the textiles and clothing sector into the full disciplines of the GATT over a period of ten years starting from 1995. Article 2.4 of the ATC provided that the restrictions which were notified by a Member under Article 2.1 when the WTO came into force constituted "the totality of such restrictions" and that no new restrictions in terms of products or Members were to "be introduced except under the provisions of this Agreement or relevant GATT provisions".
6. As at or before 31 December 1994, Turkey maintained no QRs on imports of textile and clothing products from Hong Kong, China. It only started to do so on 1 January 1996. Obviously, Turkey�s measures were new restrictions which had never been notified as having been in force on the day before entry into force of the ATC. Nor had Turkey justified them under other provisions of the ATC. Turkey had therefore violated Article 2.4 of the ATC unless it could justify the measures under other provisions of GATT.
7. The burden of proof was with Turkey to identify "the relevant GATT 1994 provisions" and to clearly demonstrate the relevance of such provisions in the context of the ATC in general, and to the extent that such provisions should provide an exception to Article 2.4 of the ATC in particular. However, Turkey had not provided any legal arguments that could substantiate its claim in this respect. Hong Kong, China therefore submitted that Turkey had failed to discharge the burden of proof. Moreover, in its view, Article XXIV:5 of GATT did not provide any exemption for Turkey�s measures.
8. Hong Kong, China submitted further that Turkey�s measures were inconsistent with Article XIII of GATT. Non-discrimination was a fundamental principle of the WTO. Since the measures applied only to selected Members and textile and clothing products from many other Members were not subject to the same measures, Turkey was obviously in breach of the principles of non-discrimination under Article XIII of GATT.

3. Article XXIV of GATT

9. In the view of Hong Kong, China, Article XXIV only set out the obligations to be fulfilled when customs territories of the constituent parties formed a customs union. It did not enable or provide justifications for any Member to establish or extend discriminatory QRs against selected third parties. Article 31 of the VCLT required that "a treaty shall be interpreted � in the light of its object and purpose". The specific object and purpose of GATT was set out in its preamble as "entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce".
10. If the imposition of discriminatory QRs using Article XXIV as a waiver was permitted, it would render meaningless the purpose of a customs union, as reaffirmed in the preamble of the Understanding on Article XXIV, that economic integration agreements "should be to facilitate trade between the constituent territories and not to raise barriers to the trade of other Members with such territories; and that in their formation or enlargement the parties to them should to the greatest possible extent avoid creating adverse effects on the trade of other Members". It would be difficult to think of a more adverse effect than the imposition of discriminatory QRs against selected third parties.
11. Hong Kong, China did not agree with Turkey's view that the intention of the authors of Article XXIV:5 had been to permit the introduction of new restrictive regulations of commerce which might be made necessary by the formation of a customs union, as long as their effect on the whole was not more restrictive than that of the previously applicable regime. Hong Kong, China did not consider that Article XXIV:5 went so far as to provide a waiver from other provisions of the GATT. ¹⁷⁷ It also questioned whether an overall reduction of barriers could legally justify GATT-inconsistent measures.
12. Were Article XXIV:5 to be interpreted as providing carte blanche for customs unions to impose discriminatory QRs against selected third parties, subject only to the proviso that the balance of all third parties� trade interests taken as a whole be respected, the outcome could be highly discriminatory, contrary to the interests of natural justice, and not consistent with the object and purpose of GATT as stated above. Such an interpretation would thus not be in accordance with the VCLT. Hong Kong, China considered, therefore, that the opposite was the case, i.e. that Article XXIV:5 did not sanction the imposition of discriminatory QRs.
13. In the view of Hong Kong, China, Article XXIV:8 was a definition clause. In itself it created neither rights nor obligations. Article XXIV:8(a)(i), on the internal trade regime of a customs union, entailed the elimination of duties and other restrictive regulations of commerce with respect to (i) substantially all the trade between the constituent territories, or (ii) substantially all the trade in products originating in such territories. Article XXIV:8(a)(ii), on the external trade regime of a customs union, entailed the application by members of a customs union of substantially the same duties and other regulations of commerce to the trade of third parties.
14. While the meaning of the two key terms "substantially all the trade" in Article XXIV:8(a)(i) and "substantially the same" in Article XXIV:8(a)(ii) might not be completely clear and precise, they all undoubtedly pointed to the unambiguous effect that the required free circulation of goods within a customs union and the alignment of the external trade regimes of constituent territories need not be absolute.
15. As regards the internal trade regime of a customs union, it was quite clear from Article XXIV:8(a)(i) that a customs union could be based on (i) the principle of free circulation of goods or (ii) a set of origin rules, provided its benefits applied to substantially all the trade in products originating in the constituent territories. In other words, some deviations from the free circulation of goods within a customs union were not ruled out totally.
16. Likewise, some differentials between the external trade regimes of constituent territories were clearly provided for in sub-paragraph (a)(ii) as borne out by the use of the word "substantially". Hong Kong, China considered that the purpose of such flexibility was to address, among others, situations where it was not justified, by virtue of other provisions of Article XXIV, for a constituent territory to impose new discriminatory QRs against selected third parties for the purpose of alignment. In the view of Hong Kong, China, Article XXIV of GATT did not necessarily require a constituent territory to align every aspect of its external trade regime with that of the other constituent territory, especially if the regime of the latter was more restrictive and discriminatory.

4. Alternative solutions and conclusions

17. As far as Hong Kong, China understood, a border still existed between the European Communities and Turkey. There were existing arrangements which satisfied the procedural/ documentary requirements for goods entering the EC Member States via Turkey. Against this background, derogation from the free circulation of goods was possible and was, in fact, foreseen by Decision No.1/95 of the EC-Turkey Association Council implementing the final phase of the Turkey-EC customs union, e.g.:

1. Equivalent but independent anti-dumping legislation was maintained vis-�-vis third countries. The customs authorities of each party ensured that their own anti-dumping measures were not circumvented by checking the origin of the products imported into their territory from the other party.
2. The EC customs authorities checked, at the border between the European Communities and Turkey, the origin of vehicles imported into the European Communities via Turkey. EC imports of Japanese vehicles via Turkey were treated as direct EC imports for the purpose of the ceilings laid down in the 1991 EC-Japan Agreement relating to trade in motor vehicles, mentioned in the Annex to the WTO Agreement on Safeguards.
18. Since derogation from free circulation of goods was to a certain extent permitted within a customs union, Hong Kong, China doubted whether Turkey�s measures were a necessary precondition for the implementation of the Turkey-EC customs union. Hong Kong, China's view was that a temporary certificate of origin system on textile and clothing products not originating in Turkey, until quotas were phased out altogether by the end of 2004, was a viable alternative to QRs. This meant a different import regime for regulating the circulation from Turkey to the European Communities of products not originating in Turkey. However, it could hardly be construed as excluding a major sector of trade from the customs union, nor would it require the suspension of the free circulation of textile and clothing products originating in Turkey, which need not be affected.
19. Hong Kong, China concluded from its analysis that Turkey�s measures were inconsistent with Article 2.4 of the ATC (Article XI of GATT was violated ipso facto) and Article XIII of GATT, and that they were not justified by Article XXIV of GATT. Hong Kong, China requested the Panel to pronounce on the inconsistency of Turkey's measures with Article 2.4 of the ATC and Articles XI and XIII of GATT, and to recommend that Turkey brings its measures into conformity with its obligations under the WTO.

B Japan

1. General

20. Japan submitted that, being a country which was not a party to any RTA and was greatly benefiting from the multilateral trading system, it had a great interest in ensuring that RTAs were consistent with the WTO Agreement and that such agreements did not lead to forming trade blocs. Japan�s trade interests would be severely affected, if any measure similar to Turkey�s import quota on textiles and clothing should be introduced as a consequence of the establishment of similar customs unions. As this panel is to address the systemic issue of consistency of the automatic application of restrictive measures at the institution of a customs union with WTO principles, Japan has a substantial interest in this case.
21. Japan considered that RTAs derogated inherently from the MFN principle and could bring discriminatory treatment to third countries. RTAs, therefore, might run the risk of weakening the open multilateral trading system. In this context, in accordance with Article XXIV of GATT, it was necessary to avoid their negative effects upon the trade of third countries, a point Members reaffirmed in the preamble of the Understanding on Article XXIV. ¹⁷⁸ In the Singapore Ministerial Declaration, Ministers also reaffirmed the primacy of the multilateral trading system and renewed their commitment to ensure RTAs' complementarity with it and consistency with its rules.
22. In Japan's view, RTAs were governed by Article XXIV of GATT, but the parties to RTAs, as WTO Members, should also abide by the MFN principle and other provisions of the WTO Agreement. Close scrutiny of RTAs was called for and the provisions of Article XXIV of GATT were to be interpreted strictly in the light of the purposes of the multilateral trading system, to ensure and strengthen it. Article XXIV had to be interpreted in good faith, in the context of and in the light of the object and purpose of the WTO Agreement as a whole, ¹⁷⁹ and with due consideration given to its overall spirit and basic principles.

2. Arguments

23. Japan submitted that the introduction of new QRs by Turkey was inconsistent with Turkey�s obligation under Article XI of GATT and Article 2.4 of the ATC, unless Turkey demonstrated that it fulfilled the conditions for invoking Article XXIV of GATT. In the US - Underwear case, the need for strict interpretation of the provisions for exception clauses was demonstrated by the panel concluding that the parties invoking the exception bore the burden of proof that the conditions for invoking the exception had been fulfilled. ¹⁸⁰
24. Japan believed that the claims by Turkey that Article XXIV:5 or XXIV:8 of GATT were applicable to the current case and that it was entitled to the exception to the general rule stipulated in Article XI of GATT and Article 2.4 of the ATC, could not be justified.
25. In Japan's view, the requirement contained in Article XXIV:8(a)(ii) of GATT, that a member of a customs union apply "substantially" the same duties and other regulations of commerce vis-�-vis third parties, did not mean that "exactly" the same regulations of commerce were necessarily to be applied. ¹⁸¹ The issue then lied in whether there were any specific types of regulations of commerce whose very nature did not merit uniform application by the members of the customs union. What needed examination was whether a measure had minimized the adverse effect on third countries, and in light of the relevant WTO provisions and their intent.
26. Japan submitted that consideration of both Article XXIV:8 and other relevant WTO provisions led to the conclusion that Article XXIV:8(a)(ii) should not be interpreted so as to give the parties the right to introduce new restrictive measures, including QRs and anti-dumping and safeguard measures which had not been allowed prior to their signing the RTA. Article XXIV:8(a)(ii) did not call for the parties to take any measures inconsistent with other provisions of the WTO Agreement in order to apply "substantially the same duties and other regulations of commerce" and could thus not be invoked as a "relevant GATT 1994 provision" under which "new restrictions" could be exceptionally introduced, as provided in Article 2.4 of the ATC. Japan therefore believed that the introduction of new QRs by Turkey, which was inconsistent with Turkey�s obligation under Article XI of GATT and Article 2.4 of the ATC, could not be justified by Article XXIV:8(a)(ii) of GATT.
27. Japan noted further that it was important to interpret provisions in Article XXIV:5 of GATT in the light of the purpose of a customs union or of a free-trade area, as contained in Article XXIV:4. Japan also recalled the provisions in paragraph 2 of the Understanding on Article XXIV with respect to the overall assessment of weighted average tariff rates and of customs duties collected and the recognition contained therein 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" might be required. In this regard, it noted the difficulty to numerically assess the effect of QRs, let alone make judgments as to whether QRs in conjunction with the duties and other regulations of commerce imposed at the same time was "on the whole higher or more restrictive than the general incidence of the duties and regulations of commerce �", as required in Article XXIV:5(a).
28. In Japan's view, the individual regulations of Turkey needed to be examined in order to verify that they did not constitute more restrictive measures vis-�-vis third countries. In this context, the introduction of GATT-inconsistent measures (in this case, those inconsistent with Article XI of GATT and Article 2.4 of the ATC) should be first presumed as "more restrictive" in the sense of Article XXIV:5 of GATT.

C. The Philippines

1. General

29. The Philippines noted that the preamble of the Understanding on Article XXIV recognized that customs unions and free-trade areas had "greatly increased in number and importance since the establishment of GATT 1947" and covered "a significant proportion of world trade". The formation of such RTAs could contribute to the attainment of the objectives of the WTO Agreement. However, if interpreted and invoked erroneously, or abused, WTO provisions authorizing the formation of customs unions and free-trade areas could likewise easily lead to the entrenchment of practices which were in subversion of those objectives.
30. Panels in disputes involving Article XXIV of GATT 1947 and of GATT 1994, for various reasons, did not rule squarely on issues similar to those raised in this dispute. Contracting Parties to GATT 1947 and WTO Members had expressed various views on some of such issues in the relevant bodies, but those views remained as such. The Philippines considered that, short of an authoritative interpretation by the Members themselves, this was a timely opportunity for a rules-based analysis of the relevant provisions of Article XXIV of GATT. ¹⁸²
31. The Philippines had opted to participate as a third party primarily on the basis of its legitimate trade interest in exports of textile and clothing products to Turkey. In addition, the Philippines realized that the broader systemic implications of the issues raised were indeed far-reaching and delved into core principles which were the very foundation of the WTO itself.

2. Articles XI and XIII of GATT and Article 2 of the ATC

32. The Philippines submitted that the promulgation and imposition of the QRs established by Turkey as of 1 January 1996 on imports into its territory of a broad range of textile and clothing products, applicable only on imports of some Members, including India and the Philippines, were prima facie violations of Articles XI:1 and XIII:1 of GATT since:

1. the restrictions were in the nature of proscribed "prohibitions and restrictions" in the sense of Article XI:1 of GATT;
2. Turkey did not cite the existence of any of the situations specified in Article XI:2 of GATT under which the prohibitions and restrictions otherwise proscribed under Article XI:1 may be imposed; neither did it attempt to establish that it had complied with any of the conditions specified thereunder; and
3. Turkey did not attempt to establish that the restrictions were applicable to imports of textile and clothing products from all Members, in accordance with provisions in Article XIII:1 of GATT; on the contrary, as part of its affirmative defense, it confirmed that the restrictions were not applied against the importation of like products from, at the very least, the EC Member States.
33. The Philippines also considered that, since Turkey had no restrictions in force as of 1 January 1995 and thus did not so notify under Article 2.1 of the ATC, Turkey's quantitative limitations on imports of textile and clothing products were proscribed "new restrictions", for purposes of Article 2.4 of the ATC. In the context of Article 2.4 of the ATC, Turkey did not attempt to establish that its restrictions were imposed under ATC provisions within the exceptions provided for, but invoked Article XXIV of GATT as a "relevant GATT 1994 provision" justifying its restrictions.
34. The Philippines submitted that Article XXIV was not a "relevant GATT 1994 provision" for purposes of Article 2.4 of the ATC. "Relevant" qualified "GATT 1994 provisions". Based on the succeeding discussion, Article XXIV was not a "relevant" GATT provision. Article XXIV neither permitted Turkey to promulgate the measure nor to impose the restrictions. The "relevant" GATT provision was, and remained to be, Article XI, under which Turkey did not attempt to justify the restrictions.
35. Therefore, the promulgation of the measures and the imposition of the restrictions were conclusively in violation of Article 2.4 of the ATC. The Philippines noted that Turkey's defense was in the nature of an affirmative defense: Turkey admitted the violation of Articles XI and XIII of GATT and of Article 2.4 of the ATC, but attempted to exonerate itself on the basis of Article XXIV.

3. Article XXIV of GATT

(a) Customs unions in context

36. The Philippines viewed a customs union as a paradox in the context of the WTO Agreement. When parties eliminated duties and other restrictive regulations of commerce on trade between their respective territories, "substantial reduction of tariffs and other barriers to trade" was achieved. However, this subverted the underlying contractual intent of "elimination of discriminatory treatment in international trade relations". ¹⁸³ Non-discrimination was a core principle of the WTO Agreement, implemented in GATT through the twin rules of MFN and national treatment. Nevertheless, Article XXIV allowed the formation of customs unions and, as an exception to MFN, tolerated the resultant discrimination, but subject to compliance with certain conditions. Article XXIV could therefore only be construed strictly and narrowly, and all doubt resolved against the perpetuation of discrimination. A Member invoking Article XXIV had the burden of establishing strict compliance with the terms and conditions stated thereunder.
37. The Philippines noted that, in the examination of an arrangement purporting to be a customs union, it was pivotal to establish the specific date when it qualified, if at all, as a customs union. An agreement might have some of the features of a customs union as of any given date, but unless it fully qualified as such, the parties could not implement the (permitted) discriminatory aspects of the customs union without according the same treatment to third parties. The most that such an arrangement could be, if at all, was an agreement necessary for the formation of a customs union (a "leading-to agreement"). Without delving into whether or not a similar requirement was imposed on a full-fledged customs union, a leading-to agreement could not be implemented without the approval of third parties and without according them the opportunity to examine the arrangement and to make recommendations to the parties.
38. The Philippines recalled the provisions in Article XXIV:5 and XXIV:7 of GATT relating to the distinct requirements with respect to leading-to agreements. Referring to Article XXIV:10, the Philippines noted that the phrase "proposals which do not fully comply with the requirements of paragraphs 5 to 9" applied by definition to leading-to agreements, thereby expressly made subject to the approval of two-thirds of the Members; in the process of such approval, Members were to find that "such proposals lead to the formation of a customs union" in the sense of Article XXIV.
39. The Philippines argued that the letter and context of those provisions prohibited parties from implementing a leading-to agreement unless they had (i) notified the third parties; (ii) consulted them in a manner consistent with their substantive right to make recommendations and (iii) modified the leading-to agreement in accordance with such recommendations. ¹⁸⁴ Aside from the letter and context of the relevant provisions, the broader context likewise supported the conclusion that parties could not implement a leading-to agreement without giving due regard to the right of third parties to be consulted. The Philippines noted that in a leading-to agreement, the union was not complete, there was no single customs territory, and the trade-off situation for permitting the resultant otherwise prohibited discrimination was not in place. To allow parties to implement discriminatory measures under such circumstances subverted the WTO Agreement. All doubts had to be resolved against the perpetuation of discrimination. Policy reasons would also support such a rule. Otherwise, while the core principle of non-discrimination was allegedly being pursued, a back-door for its subversion would be left wide open. The system, in effect, would be working against itself.
40. The Philippines therefore considered that in the present dispute it was vital to determine the exact status of the arrangement between Turkey and the European Communities as of 1 January 1996, when Turkey's measures took effect. ¹⁸⁵ For purposes of determining such status, what might have transpired thereafter was not relevant.

To continue with Article XXIV:4

¹⁷⁵ WT/REG22/6.

¹⁷⁶ Appellate Body Report on US - Shirts and Blouses, p. 16.

¹⁷⁷ This was the view of the European Communities stated in the Working Party on the Accession of Portugal and Spain to the EC (see BISD 35S/318, para. 45).

¹⁷⁸ Members reaffirmed "that the purpose of such agreements should be to facilitate trade � and not to raise barriers � and that � the parties to them should to the greatest possible extent avoid creating adverse effects on the trade of other Members".

¹⁷⁹ Panel Report on United States - Import Prohibition of Certain Shrimp and Shrimp Products, adopted on 6 November 1998, WT/DS58/R ("US - Shrimp"), para. 7.35.

¹⁸⁰ Panel Report on US - Underwear, para. 7.16.

¹⁸¹ For example, it would not be necessary or adequate that an anti-dumping measure of a member of the customs union be introduced automatically in the other members simply because they formed a customs union.

¹⁸² At present, in essence, WTO Members were still going through the process of acclimatising themselves from a pragmatic, diplomacy-based multilateral trading system to one avowedly rules-based. However, today, in the context of a rules-based system, pragmatism and diplomacy could have a proper role after, and only after, subsisting rules had been clarified.

¹⁸³ See third paragraph of the preamble of the WTO Agreement.

¹⁸⁴ The word "maintain" in relation to the phrase "as the case may be" in the last sentence of Article XXIV:7(a) should be taken in the context of Article XXIV:7(c). Thus, once a leading-to agreement had passed scrutiny of third parties, the parties might not introduce a substantial change in the plan or schedule without again respecting the right of the former to be consulted.

¹⁸⁵ On 22 December 1995, barely a few days prior to its entry into force, Turkey and the EC informed the Members that "the final phase of the Customs Union between Turkey and the EC will enter into force on 1 January 1996, following the decision of the EC-Turkey Association Council of 22 December 1995" (document WT/REG22/N/1). Thus, it took the parties more than nine months to notify other Members, on a date within the holiday season. The text of the Decision was circulated to the Members on 13 February 1996 (document WT/REG22/1), more than one month after its entry into force. Turkey and the EC thus presented other Members with a fait accompli, a fact that might not be coincidental in light of the requirement of prior approval of a leading-to agreement.