Turkey - Restrictions on Imports of Textile and Clothing Products
Report of the Panel
(Continued)
2. Overview of Article XXIV of GATT
- In examining of Article XXIV, we are well aware that regional trade
agreements have greatly increased in number and importance since the
establishment of GATT 1947 and today cover a significant proportion of
world trade. 329 We have
also undertaken a detailed analysis of the negotiating history of
Article XXIV. We note that the wording of Article XXIV is of
sub-optimal clarity and has been the object of various, sometimes
opposing, views among individual contracting parties and Members and
in the literature. We are also aware that the economic and political
realities that prevailed when Article XXIV was drafted, have evolved
and that the scope of regional trade agreements is now much broader
than it was in 1948. Pursuant to the Vienna Convention on the Law of
Treaties, we begin our analysis of the terms of Article XXIV together
with those of GATT 1947, GATT 1994, the 1994 Understanding on Article
XXIV in their context and in the light of the object and purpose of
the WTO Agreement, GATT, the ATC and the relevant provisions on
regional trade agreements.
- As a means of increasing freedom of trade, Article XXIV recognizes
that, subject to certain conditions, customs unions and free-trade
areas between WTO Members are desirable. To this end Article XXIV
provides for the possibility that Members forming a customs union may
depart, as to the trade between themselves, from the most-favoured
nation principle, in conformity with the conditions of Article XXIV. 330
There are a number of indications of the broad desirability of Article
XXIV agreements as a means of increasing freedom of trade. For
example, paragraph 4 of Article XXIV provides that:
"The Members recognize the desirability of increasing freedom
of trade by the development, through voluntary agreements, of closer
integration between economies of the countries parties to such
agreements."
- Similarly, the preamble of the GATT 1994 Understanding on Article
XXIV, which was added to GATT 1994 as a result of the Uruguay Round,
reiterates that:
"such contribution to the expansion of world trade may be made
by closer integration between the economies of the parties to such
agreements".
- This is also reflected in paragraph 7 of the Singapore Ministerial
Decision: 331
"7. We note that trade relations of WTO Members are being
increasingly influenced by regional trade agreements, which have
expanded vastly in number, scope and coverage. Such initiatives can
promote further liberalization and may assist least-developed,
developing and transition economies in integrating into the
international trading system."
- This recognition of the desirability of regional trade agreements is
not without qualification, however. Article XXIV:4 appears also to
recognize that some of these agreements may have detrimental effects
and therefore the rest of paragraph 4 of Article XXIV provides:
"They also recognize that the purpose of a customs union and a
free-trade area should be to facilitate trade between constituent
territories and not to raise barriers to the trade of other Members
with such territories." (emphasis added)
- This is reiterated in the preamble of the GATT 1994 Understanding on
Article XXIV which provides that:
"Reaffirming that the purpose of such 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;" (emphasis added)
- The terms of Article XXIV thus confirm that WTO Members have a
right, albeit conditional, to conclude regional trade agreements.
- In this regard, Article XXIV:5 provides that:
"Accordingly, the provisions of this Agreement [GATT 1994]
shall not prevent, as between the territories of Members, the
formation of a customs union or of a free-trade area or the adoption
of an interim agreement necessary for the formation of a customs union
or of a free-trade area; Provided that � :"
- We note that, at the very beginning of Article XXIV:5, the use of
the word "Accordingly" indicates that the conditional right
to form a regional trade agreement has to be understood and
interpreted within the parameters set out in paragraph 4, since the
word "Accordingly" refers back to that paragraph, which is
the only paragraph addressing customs unions and free-trade areas in
Article XXIV that precedes paragraph 5. Thus, the purpose of such a
regional trade agreement "should be to facilitate trade between
constituent territories and not to raise barriers to the trade of
other Members with such territories" (emphasis added). In
addition, we note that paragraphs 5 (in its proviso), 6 and 8, in
particular, contain requirements that such agreements must meet. We
consider these requirements in more detail later.
- With the intent of enabling Members as a whole to monitor the
formation of such regional trade agreements, Article XXIV:7 provides
that:
"(a) Any Member deciding to enter into a customs union
or free-trade area, or an interim agreement leading to the formation
of such a union or area, shall promptly notify the Members and shall
make available to them such information regarding the proposed
union or area as will enable them to make such reports and
recommendations to Members as they may deem appropriate." 332
(emphasis added)
Paragraph 7 of the GATT 1994 Understanding on Article XXIV provides
that:
"Review of Customs Unions and Free-Trade Areas
7. All notifications made under paragraph 7(a) of Article XXIV
shall be examined by a working party in the light of the relevant
provisions of GATT 1994 and of paragraph 1 of this Understanding. The
working party shall submit a report to the Council for Trade in Goods
on its findings in this regard. The Council for Trade in Goods may
make such recommendations to Members as it deems appropriate."
- Traditionally in GATT, regional trade agreements were examined by
working parties. In the WTO, such agreements are now examined by the
Committee on Regional Trade Agreements (CRTA). 333
In the history of GATT, except in the case of the 1994 customs union
between the Czech Republic and the Slovak Republic, the CONTRACTING
PARTIES were never able to conclude whether or not a regional trade
agreement was fully compatible with GATT. Today, under the WTO,
Members have yet to conclude that a regional trade agreement is in
full compliance with the WTO Agreement. In short, virtually all
working party reports on regional trade agreements have been
inconclusive. 334
- We note also that Article XXIV:10 of GATT provides for the
possibility of an approval by WTO Members of a regional trade
agreement that would not be fully compatible with the provisions of
Article XXIV, if such a proposed regional trade agreement respects the
key provisions of Article XXIV ("provided that such proposals
lead to the formation of a customs union or a free-trade area in the
sense of this Article").
3. Article XXIV:5(a)
(a) Arguments of the parties
- Turkey claims that Article XXIV:5 of GATT 1994 authorizes the
formation of a customs union, as defined by Article XXIV:8(a),
provided that the conditions of Article XXIV:5(a) are met. Turkey
argues that the 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. Turkey claims that
the overall incidence of duties and other regulations of commerce of
the constituent members of the Turkey-EC customs union is not higher
or more restrictive after the completion of the customs union than
before.
- In Turkey's view, the fact that Article XXIV does not prohibit
Members from introducing new restrictions is confirmed in the last
sentence of paragraph 2 of the GATT 1994 Understanding on Article
XXIV, which states, 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".
- For Turkey, if it had been the intention of Members to ban the
imposition of new quantitative restrictions whenever a customs union
was being instituted, the reference to "other regulations of
commerce" in Article XXIV:5 would have been a redundant
provision.
- Turkey further argues that the derogation envisaged by Article
XXIV:5 is not limited to a particular GATT rule, but encompasses all
those rules from which a derogation is necessary to permit the
formation of customs unions. In support of this argument, Turkey notes
that the opening clause of Article XXIV:5 is drafted in language
similar to the language used in the opening clause of Article XX:
"the provisions of this Agreement shall not prevent the formation
of customs unions provided that �". For Turkey, this wording
demonstrates that the derogation refers to all the provisions of the
GATT, and not just to those contained in Article II, which are more
specifically mentioned in Article XXIV:6. 335
- For India, the terms of Article XXIV:5 do not provide a legal basis
for measures otherwise incompatible with GATT/WTO rules. This
provision merely authorizes the formation of a customs union or
free-trade area, nothing else. Its terms consequently exempt from the
other obligations under the GATT only measures inherent in the
formation of a customs union or a free-trade area. 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 clearly provides a justification therefor. However,
customs unions and free-trade areas could be formed without the
introduction of new quantitative restrictions on imports from third
Members inconsistent with Article XI of GATT. There is, in particular,
nothing that requires Members forming a customs union to impose new
restrictions on imports from one particular third Member,
inconsistently with Articles XI and XIII of GATT and Article 2.4 of
the ATC.
- India also refers the Panel to Article XXIV:6, as part of the
context of paragraph 5, which recognizes that on the occasion of the
creation of a customs union, tariff bindings may be increased. India
argues that there is no corresponding mechanism for renegotiation and
compensation for Members affected by the introduction or increase of
quantitative restrictions which are otherwise WTO incompatible. For
India, this is a logical consequence of the principle that increasing
tariffs is not as such WTO incompatible, as tariffs are negotiable
(and renegotiable under Article XXVIII), whereas quantitative
restrictions are in general prohibited and may only be imposed in
circumstances narrowly defined in the WTO agreements. Given that rules
governing quantitative restrictions are fundamentally different from
the rules governing tariffs, there is no basis to apply Article XXIV:6
by analogy to quantitative restrictions. Moreover, for India,
paragraph 4 of the GATT 1994 Understanding on Article XXIV makes it
explicit that paragraph 6 of Article XXIV establishes the procedures
to be followed when a Member forming a custom union proposes to
increase a bound rate of duty. Had the Uruguay Round negotiators meant
to extend Article XXIV:6 to quantitative restrictions, they would have
formulated this provision accordingly.
- According to Turkey, it could not be inferred from the fact that
Article XXIV:6 only refers to increases of customs duty rates that the
intention behind Article XXIV:5(a) is to prohibit the introduction of
restrictive measures as part of a common regulation of commerce of a
customs union. For Turkey, such an interpretation would be difficult
to reconcile with Article XXIV:5(a), which provides a test for the
GATT consistency of a customs union requiring, inter alia, that
regulations of commerce of a customs union shall not on the whole be
more restrictive than the regulations of commerce applicable in the
constituent territories prior to the formation of the customs union.
For Turkey, it would make little sense to provide for an evaluation of
the overall incidence of regulations of commerce if, as India asserts,
the regulations of commerce of the Turkey-EC customs union cannot be
determined by pre-existing restrictive measures applied by the
European Communities.
(b) Analysis of Article XXIV:5(a)
(i) Ordinary meaning of the terms of
Article XXIV:5(a)
- Article XXIV:5(a) provides as follows:
"5. Accordingly, the provisions of this Agreement shall not
prevent, as between the territories of contracting parties, the
formation of a customs union or of a free-trade area or the
adoption of an interim agreement necessary for the formation of a
customs union or of a free-trade area; Provided that:
(a) with respect to a customs union, or an interim
agreement leading to a formation of a customs union, the duties and
other regulations of commerce imposed at the institution of any such
union or interim agreement in respect of trade with contracting
parties not parties to such union or agreement shall not on the
whole be higher or more restrictive than the general incidence of
the duties and regulations of commerce applicable in the constituent
territories prior to the formation of such union or the adoption of
such interim agreement, as the case may be;" (emphasis added)
- With respect to tariffs, paragraph 2 of the GATT 1994 Understanding
on Article XXIV makes it clear that it is the level of the
"applied duties" that are to be taken into account by
Members in their "evaluation under paragraph 5(a) of Article
XXIV":
"For this purpose the duties and charges to be taken into
consideration shall be the applied rates".
- By requiring an examination of changes in applied duties, the
provisions of Article XXIV:5(a) are made unambiguously distinct from
those in Article XXIV:6, since the level of applied duties, unlike
bound tariffs, is not regulated in the WTO framework of rights and
obligations. Since the analysis of applied duties is a basic tool in
appraising the impact of actual border barriers on trade
opportunities, we consider that the requirement of an overall
assessment of the incidence of duties based on applied duties clearly
points at the economic nature of the assessment under paragraph 5(a).
- The same conclusion is applicable in relation to the overall
assessment of the incidence of other (non-tariff) regulations of
commerce, in respect of which paragraph 2 of the Understanding on
Article XXIV provides:
"� It is recognized 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."
- Thus, the terms of paragraph 5(a) of Article XXIV, as elaborated
upon and clarified by the GATT 1994 Understanding on Article XXIV,
provide for an "economic" test for assessing whether a
specific customs union is compatible with Article XXIV. In the context
of the overall assessment of the potential trade impact of any such
customs union, (a task envisaged to be performed by the WTO membership
through the CRTA336),
duties and all regulations which existed in one or more of the
constituent members and/or form part of the customs union treaty must
be taken into account. While there is no agreed definition between
Members as to the scope of this concept of "other regulations of
commerce", for our purposes, it is clear that this concept
includes quantitative restrictions. More broadly, the ordinary meaning
of the terms "other regulations of commerce" could be
understood to include any regulation having an impact on trade (such
as measures in the fields covered by WTO rules, e.g. sanitary and
phytosanitary, customs valuation, anti-dumping, technical barriers to
trade; as well as any other trade-related domestic regulation, e.g.
environmental standards, export credit schemes). Given the dynamic
nature of regional trade agreements, we consider that this is an
evolving concept.
- We note that the language of paragraph 5(a) of Article XXIV is
general and not prescriptive. While it authorizes the formation of
customs unions, it does not contain any provision that either
authorizes or prohibits, on the occasion of the formation of a customs
union, the adoption of import restrictions otherwise GATT/WTO
incompatible, by any of the parties forming this customs union. For
example, the terms of paragraph 5(a) do not permit or prohibit or
otherwise regulate increases of bound tariffs, which is an issue dealt
with in paragraph 6 of Article XXIV. Rather, paragraph 5(a) provides
for an economic assessment (to be performed by the WTO membership as a
whole) of the overall effect of the applied tariffs and other
regulations of commerce resulting from the formation of the customs
union. 337 While the
wording of paragraph 5(a) assumes that, as a result of a customs
union, some (applied) duties may be higher, and/or other regulations
of commerce may be more restrictive than before, it does not specify
whether such a situation may occur only through GATT/WTO consistent
actions or may occur through GATT/WTO inconsistent actions. What
paragraph 5(a) provides, in short, is that the effects of the
resulting trade measures and policies of the new regional agreement
shall not be more trade restrictive, overall, than were the
constituent countries' previous trade policies.
- In other words, we consider that the terms of paragraph 5(a) do not
address the GATT/WTO compatibility of specific measures that may be
adopted on the occasion of the formation of a new customs union. We
note that the standard terms of reference used by the CRTA for the
examination of regional trade agreements confirm that the CRTA, in its
overall assessment, shall not determine the WTO compatibility of
specific measures. 338
The terms of Article XXIV:5(a) only provide that, for a customs union
to be compatible with Article XXIV of GATT and the 1994 GATT
Understanding on Article XXIV, the overall impact of the applied
tariffs and other regulations of commerce resulting from the formation
of the customs union must not be more restrictive than that of its
constituent members prior to its formation.
- It is important to emphasize that this interpretation does not
render paragraph 5(a) a nullity, 339
as suggested by Turkey. In terms of our reading of paragraph 5(a), it
continues to play an important role in ensuring that the occasion of
the formation of a customs union is not used to increase trade
barriers overall, even if the parties' previous concessions allowed
such an increase (e.g., in the case of increased applied rates below
tariff levels bound by all parties). Indeed, that purpose is in fact
emphasized by the focus on "applied", and not on bound,
tariff rates.
To continue with The immediate context of Article
XXIV:5(a)
329 We refer to our
discussion in paras. 2.2 to 2.9 above.
330 We note in this
context the statement of the Appellate Body in EC - Bananas III,
para. 191: "Non-discrimination obligations apply to all imports of
like products, except when these obligations are specifically waived or
are otherwise not applicable as a result of the operation of specific
provisions of the GATT 1994, such as Article XXIV".
331 See
WT/MIN(96)/DEC.
332 The rest of
paragraph 7 reads: "(b) If, after having studied the plan and
schedule included in an interim agreement referred to in paragraph 5 in
consultation with the parties to that agreement and taking due account of
the information made available in accordance with the provisions of
sub-paragraph (a), the Members find that such agreement is not likely to
result in the formation of a customs union or of a free-trade area within
the period contemplated by the parties to the agreement or that such
period is not a reasonable one, the Members shall make recommendations to
the parties to the agreement. The parties shall not maintain or put into
force, as the case may be, such agreement if they are not prepared to
modify it in accordance with these recommendations."
333 The examination of
regional trade agreements is subject to the same law and similar
modalities as they were under GATT; see para. 2.7 above.
334 This is in part
due to the GATT/WTO practice of decision-making by consensus whereby the
consensus of contracting parties (including the parties to the regional
trade agreement) was needed for a recommendation to be made in terms of
Article XXIV:7(a). The impossibility for GATT CONTRACTING PARTIES and
still today, WTO Members, to reach any such conclusion is also due, inter
alia, to disagreement on the interpretation of Article XXIV.
335 In this context,
Turkey recalls that it had offered to enter into negotiations to address
India�s concerns with regard to the change in its external trade regime,
but that India had not wished to participate in such negotiations.
336 In this respect we
note the standard terms of reference used by the Council for Goods for
examining regional trade agreements, as set out in WT/REG3/1.
337 The assessment,
with respect to applied tariffs, is based on two comparable trade-weighted
averages of applied tariffs, calculated by the Secretariat in accordance
with the methodology described in paragraph 2 of the Understanding: (a) an
average representing the pre-customs union situation; and (b) another
average reflecting the situation just after the formation of the customs
union. To compute the figure under (a), all applied tariffs (by tariff
line) of all parties to the customs union are averaged using - as weights
- the corresponding values of their imports from non-preferential origins;
the figure under (b) is obtained by averaging the tariffs (to be) applied
by the customs union, using the same values as trade weights.
338 "This implies
that a working party established to examine a notification under paragraph
7(a) of Article XXIV has the mandate to examine the incidence and
restrictiveness of all duties and regulations of commerce, in
particular those governed by the provisions of the Agreements contained in
Annex 1A of the WTO Agreement. However, it should be kept in mind that
the purpose of an examination in the light of paragraph 5(a) of Article
XXIV would not be to determine whether each individual duty or
regulation existing or introduced on the occasion of the formation of a
customs union is consistent with all provisions of the WTO Agreement;
it would be to ascertain whether on the whole the general incidence of the
duties and other regulations of commerce has increased or become more
restrictive.", Understanding read out by the Chairman of the Council
for Trade in Goods - 20 February 1995, WT/REG3/1 (emphasis added).
339 See our discussion
on the general rule of effective interpretation in para. 9.96 above.
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