D. Scope of the Dispute

45. We note that, at least initially, both parties argued explicitly that the Panel should not assess the compatibility of the Turkey-EC regional trade agreement with the provisions of Article XXIV. In its second submission, however, Turkey argues that the Panel cannot assess the WTO compatibility of any specific measure adopted in the context of the formation of a regional trade agreement, separately and in isolation from an assessment of the overall compatibility of this regional trade agreement with Article XXIV of GATT.
46. Turkey's main defense to India's claims of discriminatory quantitative restrictions is that the measures at issue were adopted as a consequence of its regional trade agreement with the European Communities which, it argues, is a fully complete customs union explicitly authorized and favoured by Article XXIV of GATT. For Turkey, Article XXIV of GATT, in allowing the formation of customs unions, necessarily authorizes measures such as those adopted by Turkey and challenged by India. For Turkey, the alignment of its textiles and trade policy with that of the European Communities is not only an integral part of such Turkey-EC customs union but is inherent and necessary for its formation in view of the important share of the textile and clothing sector in its trade with the European Communities. Turkey argues that the WTO compatibility of an Article XXIV type agreement, and all its related measures, is to be determined exclusively with reference to Article XXIV of GATT (and the 1994 Understanding on Article XXIV) and not by any other provisions of the WTO Agreement.
47. In response to Turkey's defense, India argues that the provisions of Article XXIV do not constitute a waiver from other WTO obligations, including the general prohibition against discriminatory import restrictions contained in Articles XI and XIII of GATT and Article 2.4 of the ATC.
48. Turkey's argument has both procedural and substantive aspects. Firstly, we must decide whether the WTO dispute settlement proceedings can be used to challenge measures adopted by one or more Members on the occasion of the formation of a customs union in which it (or they) participate. Secondly, if so, we must consider the extent to which a panel is authorized or needs to examine the overall consistency of the customs union with WTO provisions. Finally, we must determine whether the test for assessing the WTO compatibility of these specific measures is provided for in the provisions of Article XXIV only. If this is not the case, we will then need to examine the meaning of the provisions of Article XXIV to assess whether Article XXIV authorizes measures like those under examination. We deal with this final determination later in Section G below.
49. As to the first issue of whether the WTO dispute settlement procedures can be invoked to challenge a measure adopted on the occasion of the formation of a customs union, we note paragraph 12 of the Understanding on Article XXIV of GATT 1994 which provides:

"12. The provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute Settlement Understanding may be invoked with respect to any matters arising from the application of those provisions of Article XXIV relating to customs unions, free-trade areas or interim agreement leading to the formation of a customs union or free-trade area." (Emphasis added.)

50. We understand from the wording of paragraph 12 of the WTO Understanding on Article XXIV, that panels have jurisdiction to examine "any matters 'arising from' the application of those provisions of Article XXIV". For us, this confirms that a panel can examine the WTO compatibility of one or several measures "arising from" Article XXIV types of agreement, as also argued by the United States in its third-party submission. ²⁷⁷ This indicates that, although the right of WTO Members to form regional trade arrangements is "an integral part" of the set of multilateral disciplines of GATT and now WTO, ²⁷⁸ the DSU procedures can be used to obtain a ruling by a panel on the WTO compatibility of any matters arising from such regional trade arrangements. For us, the term "any matters" clearly includes specific measures adopted on the occasion of the formation of a customs union or in the ambit of a customs union.
51. Thus, we consider that a panel can assess the WTO compatibility of any specific measure adopted by WTO Members at any time and we cannot find anything in the DSU, Article XXIV or the 1994 GATT Understanding on Article XXIV that would suspend or condition the right of Members to challenge measures adopted on the occasion of the formation of a custom union.
52. As to the second question of how far-reaching a panel's examination should be of the regional trade agreement underlying the challenged measure, we note that the Committee on Regional Trade Agreements (CRTA) has been established, inter alia, to assess the GATT/WTO compatibility of regional trade agreements entered into by Members, a very complex undertaking which involves consideration by the CRTA, from the economic, legal and political perspectives of different Members, of the numerous facets of a regional trade agreement in relation to the provisions of the WTO. ²⁷⁹ It appears to us that the issue regarding the GATT/WTO compatibility of a customs union, as such, is generally a matter for the CRTA since, as noted above, it involves a broad multilateral assessment of any such custom union, i.e. a matter which concerns the WTO membership as a whole.
53. As to whether panels also have the jurisdiction to assess the overall WTO compatibility of a customs union, we recall that the Appellate Body stated ²⁸⁰ that the terms of reference of panels must refer explicitly to the "measures" to be examined by panels. We consider that regional trade agreements may contain numerous measures, all of which could potentially be examined by panels, before, during or after the CRTA examination, if the requirements laid down in the DSU are met. However, it is arguable that a customs union (or a free-trade area) as a whole would logically not be a "measure" as such, subject to challenge under the DSU. ²⁸¹
54. We consider that the question of whether panels have the jurisdiction to assess the overall compatibility of a customs union is not in any event an issue on which it is necessary for us to reach a decision in this case; we reach this conclusion in light of paragraphs 9.51 to 9.53 above and in recognition of the principle of judicial economy, as initially developed in the US � Wool Shirts ²⁸² case and qualified by the Appellate Body in the recent Australia � Salmon case, ²⁸³ under which panels do not need to address all the claims and arguments raised by the parties to the dispute. We recall the distinction between claims and arguments (EC � Hormones²⁸⁴) and understand that some latitude is left to panels to address only arguments that they consider are relevant to resolve the dispute between the parties, which is the main purpose of DSU proceedings. Accordingly, we find that, in order to address the claims of India, it will not be necessary for us to assess the compatibility of the Turkey-EC customs union agreement with Article XXIV as such (in the sense of addressing all aspects of the customs union and all the measures adopted by Turkey and the European Communities in the context of their customs union agreement).
55. In our view, it will be sufficient for us to address the relationship between the provisions of Article XXIV and those of Articles XI and XIII of GATT and Article 2.4 of the ATC. We shall have to do so as India's claims are based on an alleged violation of those articles, and Turkey's defense is based on the application, and, in its view, the "primacy", of Article XXIV over those provisions. Our examination will be limited to the question whether in this case, on the occasion of the formation of the Turkey-EC customs union, Turkey is permitted to introduce WTO incompatible quantitative restrictions against imports from a third country, assuming arguendo that the customs union in question is otherwise compatible with Article XXIV of GATT. We shall thus limit ourselves to addressing the parties' arguments submitted in this context only and refrain from any discussion as to how an overall compatibility assessment of a customs union should be performed. Our analysis of Article XXIV is limited to defining, in particular, its relationship with Articles XI and XIII of GATT (and Article 2.4 of the ATC) and to ensuring that our interpretation of the WTO provisions applicable to the present dispute, does not prevent Turkey from exercising its right to form a customs union.
56. We reject therefore Turkey 's argument, in paragraph 9.45 above, to the extent that it would oblige us to assess the GATT/WTO compatibility of the Turkey-EC customs union in order to assess the compatibility of the specific measures at issue. ²⁸⁵

E. Burden of Proof

57. The rules on burden of proof are now well established in the WTO and can be summed up as follows:

(a) it is for the complaining party to establish the violation it alleges;

(b) it is for the party invoking an exception or an affirmative defense to prove that the conditions contained therein are met; and

(c) it is for the party asserting a fact to prove it. ²⁸⁶

58. It is therefore for India to demonstrate prima facie that Turkey's measures violate the provisions of Articles XI and XIII of GATT and Article 2.4 of the ATC. Turkey does not deny the existence of quantitative restrictions but submits an affirmative defense based on the application of Article XXIV of GATT. In response to a direct question by the Panel, Turkey stated that it does not invoke any defense other than that based on Article XXIV in support of its claim that it is not violating Articles XI or XIII of GATT, or Article 2.4 of the ATC. We note in this context that Hong Kong, China has argued that since Article XXIV was an exception invoked by Turkey, it was for Turkey to bear the burden of proof. ²⁸⁷
59. Accordingly, we will first examine India's claims and the GATT/WTO treatment of import restrictions generally, and then more specifically in the sector of textiles and clothing. Secondly, we shall examine the applicability of Article XXIV and Turkey's defense based, in particular, on paragraphs 4, 5(a) and 8(a)(ii) of Article XXIV of GATT.

F. Claims under Articles XI and XIII of GATT and Article 2.4 of the ATC

60. India claims that the Turkish measures violate the provisions of Articles XI and XIII of GATT and Article 2.4 of the ATC. Turkey claims that its rights pursuant to Article XXIV of GATT prevail over any obligations contained in Articles XI and XIII of GATT and Article 2.4 of the ATC, and therefore India's claims should be rejected.

1. Articles XI and XIII of GATT

61. The wording of Articles XI and XIII is clear. Article XI provides that as a general rule (we note the wording of the title of Article XI: "General Elimination of Quantitative Restrictions"), WTO Members shall not use quantitative restrictions against imports or exports.

"Article XI

General Elimination of Quantitative Restrictions

1. No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any Member on the importation of any product of the territory of any other Member or on the exportation or sale for export of any product destined for the territory of any other Member."

62. Article XIII provides that if and when quantitative restrictions are allowed by the GATT/WTO, they must, in addition, be imposed on a non-discriminatory basis.

"Article XIII

Non-discriminatory Administration of Quantitative Restrictions

1. No prohibition or restriction shall be applied by any Member on the importation of any product of the territory of any other Member or on the exportation of any product destined for the territory of any other Member, unless the importation of the like product of all third countries or the exportation of the like product to all third countries is similarly prohibited or restricted."

63. The prohibition on the use of quantitative restrictions forms one of the cornerstones of the GATT system. A basic principle of the GATT system is that tariffs are the preferred and acceptable form of protection. Tariffs, to be reduced through reciprocal concessions, ought to be applied in a non-discriminatory manner independent of the origin of the goods (the "most-favoured-nation" (MFN) clause). Article I, which requires MFN treatment, and Article II, which specifies that tariffs must not exceed bound rates, constitute Part I of GATT. Part II contains other related obligations, inter alia to ensure that Members do not evade the obligations of Part I. Two fundamental obligations contained in Part II are the national treatment clause and the prohibition against quantitative restrictions. The prohibition against quantitative restrictions is a reflection that tariffs are GATT's border protection "of choice". Quantitative restrictions impose absolute limits on imports, while tariffs do not. In contrast to MFN tariffs which permit the most efficient competitor to supply imports, quantitative restrictions usually have a trade distorting effect, their allocation can be problematic and their administration may not be transparent.
64. Notwithstanding this broad prohibition against quantitative restrictions, GATT contracting parties over many years failed to respect completely this obligation. From early in the GATT, in sectors such as agriculture, quantitative restrictions were maintained and even increased to the extent that the need to restrict their use became central to the Uruguay Round negotiations. In the sector of textiles and clothing, quantitative restrictions were maintained under the Multifibre Agreement (further discussed below). Certain contracting parties were even of the view that quantitative restrictions had gradually been tolerated and accepted as negotiable and that Article XI could not be and had never been considered to be, a provision prohibiting such restrictions irrespective of the circumstances specific to each case. This argument was, however, rejected in an adopted panel report EEC � Imports from Hong Kong. ²⁸⁸
65. Participants in the Uruguay Round recognized the overall detrimental effects of non-tariff border restrictions (whether applied to imports or exports) and the need to favour more transparent price-based, i.e. tariff-based, measures; to this end they devised mechanisms to phase-out quantitative restrictions in the sectors of agriculture and textiles and clothing. This recognition is reflected in the GATT 1994 Understanding on Balance-of-Payments Provisions, ²⁸⁹ the Agreement on Safeguards, ²⁹⁰ the Agreement on Agriculture where quantitative restrictions were eliminated ²⁹¹ and the Agreement on Textiles and Clothing (further discussed below) where MFA derived restrictions are to be completely eliminated by 2005.
66. The measures at issue, on their face, impose quantitative restrictions on imports and are applicable only to India. ²⁹² We consider that, given the absence of a defense by Turkey (other than its defense based on Article XXIV of GATT) to India's claims that discriminatory import restrictions have been imposed, India has made a prima facie case of violation of Articles XI ²⁹³ and XIII of GATT.

2. Article 2.4 of the ATC²⁹⁴

67. India claims that the measures under examination violate Article 2.4 of the ATC, in that they constitute new measures not authorized by the ATC and for which there is no GATT justification. Turkey claims that the measures under examination are not new, since the European Communities had similar restrictions in place when Turkey and the European Communities formed their customs union, and such restrictions are justified by Article XXIV of GATT.

(a) Regulatory framework of the ATC

68. The ATC provides for a maximum transitional period of ten years for the integration of all remaining quantitative restrictions in the sector of textiles and clothing that had been maintained under the old Multifibre Arrangement ("MFA"). Article 2 is the core of the ATC ²⁹⁵ and contains two key requirements for the transitional process that leads to the re-integration of the textiles and clothing sector into the general rules of GATT 1994. Paragraph 1 of Article 2 of the ATC requires that all former MFA or MFA-type restraints be notified to the TMB in order to be carried over into the ATC. Article 2.6 to 2.11, sets out the procedures for the progressive integration of the products covered by the ATC into GATT 1994 rules and disciplines. The ATC provides therefore exceptions to the general prohibitions contained in Articles XI and XIII against discriminatory quantitative restrictions in allowing some Members (those who had MFA restrictions in place and who have notified the TMB within 60 days of the entry into force of the WTO Agreement) to maintain such restrictions for a maximum period of 10 years. In that sense the MFA defined the reach of the general prohibition against quantitative restrictions in the area of textiles and clothing.
69. The lists of restrictions notified pursuant to Article 2.1 set the starting point for the treatment of the restraints carried over from the former MFA regime. Four WTO Members notified the TMB pursuant to Article 2.1 of the ATC: Canada, the European Communities, Norway and the United States. We consider that the notification requirement of 60 days referred to in Article 2.1 of the ATC is mandatory both for formal and substantive reasons. The wording of Article 2.1 is unequivocal with the use of the term "shall". Moreover, since the purpose of the ATC is to provide exceptions to the general application of Articles XI and XIII of GATT during an integration period to be completed by 1 January 2005, these exceptions should be interpreted narrowly. ²⁹⁶ Stemming from this provision, only the four Members above had the right to and did notify measures which allowed them to maintain MFA-derived quantitative restrictions for a maximum period of 10 years during which import quotas must increase annually until the products they cover are integrated into GATT. In the absence of an exception under the ATC or a justification under GATT, no new quantitative restrictions introduced by a Member can benefit from the exceptions provided for in Article 2.1 of the ATC after this 60 day period.
70. Article 2.4 of the ATC provides that:

"4. The restrictions notified under paragraph 1 shall be deemed to constitute the totality of such restrictions applied by the respective Members on the day before the entry into force of the WTO Agreement. No new restrictions in terms of products or Members shall be introduced except under the provisions of this Agreement or relevant GATT 1994 provisions. ²⁹⁷ Restrictions not notified within 60 days of the date of entry into force of the WTO Agreement shall be terminated forthwith."

71. The prohibition on "new restrictions" must be interpreted taking into account the preceding sentence: "The restrictions notified under paragraph 1 shall be deemed to constitutes the totality of such restrictions applied by the respective Members on the day before the entry into force of the WTO Agreement". The ordinary meaning of the words indicates that WTO Members intended that as of 1 January 1995, the incidence of restrictions under the ATC could only be reduced. We are of the view that any legal fiction whereby an existing restriction could simply be increased and not constitute a "new restriction", would defeat the clear purpose of the ATC which is to reduce the scope of such restrictions, starting from 1 January 1995 (but for the exceptional situations referred to in Article 2.4 of the ATC). Thus, we consider that, setting aside the possibility of exceptions and justifications mentioned in Article 2.4 of the ATC, any increase of an ATC compatible quantitative restriction notified under Article 2.1 of the ATC, constitutes a "new" restriction.
72. On 28 February 1995 (therefore within the 60 day period of Article 2.1 of the ATC), the European Communities notified its previous restrictions maintained under the MFA. ²⁹⁸ This notification referred to restrictions applicable only to EC territory. After the period of 60 days (under Article 2 of the ATC) the European Communities is prohibited from notifying any new restrictions or changes to existing and notified restrictions, except adopted in compliance with the ATC or any other provisions of GATT 1994. Apart from these special cases the European Communities is not entitled to notify any increase of its MFA derived restrictions. Immediately before the date of the entry into force of the ATC, Turkey was a member of the Multifibre Arrangement (as an exporting country) and did not maintain any restrictions pursuant to Article 4 of the MFA or notified under Article 7 or 8 of the MFA in force on the day before the entry into force of the WTO Agreement. Since Turkey did not have any MFA restrictions in place, it could therefore not make any notification pursuant to Article 2.1 of the ATC. Accordingly, any restrictions on textiles and clothing applied by Turkey appear on their face to be "new", as defined in Article 2.4 of the ATC with reference to those countries who had MFA restrictions and notified them within 60 days.

To continue with Quantitative restrictions permitted under the ATC

²⁷⁷ See paras. 7.116 to 7.118 above.

²⁷⁸ See a similar parallel drawn by the Appellate Body in United States � Measures Affecting Imports of Woven Wool Shirts and Blouses from India, adopted on 23 May 1997, WT/DS33/AB/R ("US � Shirts and Blouses") at page 16, concerning the right to use transitional safeguard measures under the ATC.

²⁷⁹ The mandate of the CRTA can be found in WT/L/127. See para. 2.7 above.

²⁸⁰ Appellate Body Report on Guatemala � Anti-Dumping Investigation regarding Portland Cement From Mexico, adopted on 25 November 1998, WT/DS60/AB/R ("Guatemala � Cement"), paras. 76, 86.

²⁸¹ We are aware of the EC proposal contained in MTN.TNC/W/125 and the report of the 36^th Meeting of the Trade Negotiating Committee MTN.TNC/40.

²⁸² Appellate Body Report on US � Shirts and Blouses, page 17.

²⁸³ Appellate Body Report on Australia � Measures Affecting Importation of Salmon, adopted on 6 November 1998, WT/DS18/AB/R, para 223: "The principle of judicial economy has to be applied keeping in mind the aim of the dispute settlement system. This aim is to resolve the matter at issue and "to secure a positive solution to a dispute". To provide only a partial resolution of the matter at issue would be false judicial economy. A panel has to address those claims on which a finding is necessary in order to enable the DSB to make sufficiently precise recommendations and rulings so as to allow for prompt compliance by a Member with those recommendations and rulings "in order to ensure effective resolution of disputes to the benefit of all Members." (emphasis added).

²⁸⁴ Appellate Body Report on European Communities � Measures Concerning Meat and Meat Products ("EC � Hormones"), adopted on 13 February 1998, WT/DS26, 48/AB/R, paras. 155-156; see also the Appellate Body Report on EC - Bananas III, paras. 145-147.

²⁸⁵ We consider that this Turkey-EC regional trade agreement falls under the ambit of Article XXIV for the purpose of the CRTA's examination. We are of the view that, for our purposes, we do not have to assess the precise relationship of the Turkey-EC agreement with Article XXIV, e.g. whether it is a free-trade agreement or a customs union or an interim agreement leading to a free-trade area or customs union. We recall that in this report, we shall refer to the Turkey-EC customs union without any assessment of the WTO nature of this Article XXIV type of arrangement.

²⁸⁶ Panel Report on Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items, adopted on 22 April 1998, WT/DS56/R, paras. 6.34 - 6.40.

²⁸⁷ See para. 7.7 above. We note that Japan, Thailand and the Philippines also identified Article XXIV as an exception: see Japan's arguments in para. 7.23, Thailand's arguments in para. 7.100 and the Philippines' arguments in para. 7.36 above.

²⁸⁸ Panel Report on EEC � Quantitative Restrictions Against Imports of Certain Products from Hong Kong, adopted on 12 July 1983, BISD 30S/129, ("EEC � Imports from Hong Kong").

²⁸⁹ See for instance paras. 2 and 3 of the GATT 1994 Understanding on the Balance-of-Payments Provisions which provide that Members shall seek to avoid the imposition of new quantitative restrictions for balance-of-payments purposes.

²⁹⁰ The Agreement on Safeguards also evidences a preference for the use of tariffs. Article 6 provides that provisional safeguard measures "should take the form of tariff increases" and Article 11 prohibits the use of voluntary export restraints.

²⁹¹ Under the Agreement on Agriculture, notwithstanding the fact that contracting parties, for over 48 years, had been relying a great deal on import restrictions and other non-tariff measures, the use of quantitative restrictions and other non-tariff measures was prohibited and Members had to proceed to a "tariffication" exercise to transform quantitative restrictions into tariff based measures.

²⁹² We note, however, that Turkey maintains other quantitative restrictions against textiles and clothing imports from other countries on the same and/or other products; see para. 6.12 above. See also WT/REG22/7.

²⁹³ We note that the measures at issue do not qualify for any of the exceptions under Article XI of GATT.

²⁹⁴ In interpreting the ATC and its importance in the WTO Agreement, it should also be clear from the object and purpose of the ATC, and from the well-known circumstances of the conclusion of the Uruguay Round, that the phasing out of the textile and clothing restrictions was a fundamental component of the WTO Agreement for developing countries.

²⁹⁵ As discussed in paras. 2.25 to 2.30 above, trade in this sector of textile and clothing products was governed by special regimes outside the normal GATT rules: the Short Term Arrangement Regarding International Trade in Cotton Textiles (STA) in 1961, the Long Term Arrangement Regarding International Trade in Cotton Textiles (LTA) from 1962 to 1973 and the Arrangement Regarding International Trade in Textiles, also known as the Multifibre Arrangement or MFA, from 1974 to 1994. These special regimes essentially allowed for an extensive and complex system of bilateral import and export restrictions. The ATC provides for a set of rules, the purpose of which is that through a transitional process, embodied in the ATC, this sector is to be fully integrated into WTO rules by 1 January 2005. The two main avenues used by the ATC are 1) mandatory annual level increases of remaining quantitative restriction and 2) and an integration process by stages of all textile and clothing products into the general GATT rules.

²⁹⁶ See for instance in Panel Report on Indonesia � Certain Measures Affecting the Automobile Industry, adopted 23 July 1998, WT/DS54, 55, 59 and 64/R, ("Indonesia � Autos") (Not appealed), para. 14.92, where the period allowed for notification to the TRIMS Committee under Article 5 of the TRIMS Agreement, in order for a Member to benefit from the transition provisions of the TRIMS Agreement, was considered mandatory.

²⁹⁷ [Footnote original]The relevant GATT 1994 provisions shall not include Article XIX in respect of products not yet integrated into GATT 1994, except as specifically provided in paragraph 3 of the Annex.

²⁹⁸ G/TMB/N/60.