Turkey - Restrictions on Imports of Textile and Clothing Products
Report of the Panel
(Continued)
(b) Analysis of Article XXIV:8(a)
- We note Turkey's arguments that if it wants to exercise its right to
form a customs union with the European Communities, it has no
alternative but to adopt exactly the same external trade policy as
that of the European Communities and consequently, if need be, it is
authorized by the provisions of Article XXIV:8(a)(ii) to violate the
prohibition of Articles XI and XIII of GATT (and Article 2.4 of the
ATC). We shall first examine the wording of Article XXIV:8(a)(i) and
XXIV:8(a)(ii) and consider whether these provisions require Turkey to
do what it claims to be required to do, namely to violate Articles XI
and XIII of GATT and Article 2.4 of the ATC. In this context we shall
discuss the relationship between Article XXIV and Article XI of GATT.
Finally, we will examine whether our interpretation of Article XXIV in
the present case would prevent Turkey from exercising its right to
form a customs union.
(i) The terms of paragraph 8(a)
- Paragraph 8(a) of Article XXIV reads as follows:
"8. For the purposes of this Agreement:
(a) A customs union shall be understood to mean the
substitution of a single customs territory for two or more customs
territories, so that
(i) duties and other restrictive regulations of commerce (except,
where necessary, those permitted under Articles XI, XII, XIII, XIV,
XV and XX) are eliminated with respect to substantially all the
trade between the constituent territories of the union or at least
with respect to substantially all the trade in products originating
in such territories, and,
(ii) subject to the provisions of paragraph 9, substantially the
same duties and other regulations of commerce are applied by each of
the members of the union to the trade of territories not included in
the union;"
It is accepted that quantitative restrictions, such as the measures
at issue in this case, are "restrictive regulations of
commerce" for the purposes of Article XXIV:8(a).
- We note the definition of a customs union as being "the
substitution of a single customs territory for two or more customs
territories". The term "customs territory" is defined
in paragraph 2 of Article XXIV as being:
"For the purposes of this Agreement a customs territory shall
be understood to mean any territory with respect to which separate
tariffs or other regulations of commerce are maintained for a
substantial part of the trade of such territory with other
territories."
- With regard to the external dimension of any such customs union, the
implied ultimate (and ideal) situation is that a complete single
common foreign trade regime is adopted by the constituent members of
the customs union.
- We note that sub-paragraph 8(a)(i) of Article XXIV governs the
internal trade between constituent members of a customs union.
Sub-paragraph 8(a)(ii) governs the trade of the constituent members
with third countries, and not the trade between the constituent
members themselves.
- The terms of sub-paragraph 8(a)(i) offer some flexibility to the
constituent members of a customs union as also noted by Hong Kong,
China. 347 The standard is
that "substantially all the trade between the constituent
territories" must be fully liberalized among the constituent
Members. This, in practice, can be accomplished only by providing
preferential treatment to goods originating in the constituent
territories. 348 We are
mindful that sub-paragraph 8(a)(i) is not directly relevant to this
case, as India's claims do not concern any preferential treatment
accorded by Turkey and the European Communities to each other as part
of their customs union, but rather with the treatment of their trade
with non-members of the customs union, i.e. Turkey's imposition of
quantitative restrictions on Indian textiles and clothing. 349
This is an issue mainly for consideration in light of Article
XXIV:8(a)(ii), and the relationship between the two sub-paragraphs
8(a)(i) and 8(a)(ii).
- In considering Turkey's Article XXIV:8(a) defense, we are mindful of
the need to interpret Article XXIV in a manner to avoid conflicts with
other WTO provisions (see paragraph 9.95 above). The issue we must
consider now is whether Articles XI (and XIII) of GATT, on the one
hand, and Article XXIV:8(a)(ii), on the other hand, may be interpreted
so as to avoid a conflict requiring that one provision yields to the
other. For the reasons explained below, we believe that, in this case,
the flexibility inherent in sub-paragraph 8(a)(ii) allows for
harmonious interpretation. That interpretation is in accordance with
the context of the sub-paragraph 8(a)(ii) and the object and purpose
of the WTO Agreement, and, at the same time, fully respects Turkey's
right to enter into a customs union with other Members.
- As Japan and Hong Kong, China stressed, 350
we note at the outset that the terms of sub-paragraph 8(a)(ii) do not
explicitly authorize Members of a customs union to violate GATT rules
in their relations with non-constituent members. Nor do they
implicitly require such a result. Indeed, the terms of sub-paragraph
8(a)(ii) allow for flexibility in the creation of a common commercial
policy, as the standard used is that "substantially the same
duties and other regulations of commerce are [to be] applied by each
of the members of the [customs] union". We are aware that GATT
CONTRACTING PARTIES and WTO Members have never reached agreement on
the interpretation of the term "substantially" in the
context of Article XXIV:8. The ordinary meaning of the term
"substantially" in the context of sub-paragraph 8(a) appears
to provide for both qualitative and quantitative components. The
expression "substantially the same duties and other regulations
of commerce are applied by each of the Members of the [customs]
union" would appear to encompass both quantitative and
qualitative elements, the
quantitative aspect more
emphasized in relation to duties. 351
- We note also that sub-paragraphs 8(a)(i) and 8(a)(ii) address
distinct but inter-linked policies. Therefore, the inclusion of a
sector within the coverage of a customs union, i.e. the removal of all
trade barriers in respect of products of that sector between the
constituent members of the customs union, does not necessarily imply
that those constituent members must apply identical barriers or
barriers having similar effects to imports of the same products from
third countries.
- We note, however, in the terms of sub-paragraph 8(a)(i), the
possibility for parties to a customs union to maintain certain
restrictions of commerce on their trade with each other, including
quantitative restrictions ("�where necessary, those permitted
under Articles XI, XII, XIII, XIV, XV and XX"). This implies that
even for "substantially all trade originating in the constituent
countries" to be covered (here, for instance, textile and
clothing products), certain WTO compatible restrictions can be
maintained. This implies that internal quantitative restrictions can
be used in the event that only one of the constituent territories has
in place a restriction on imports from third countries. If such
pre-existing import restrictions were WTO compatible, the maintenance
of an internal import restriction between the two constituent
countries would ensure that the protection afforded by the original
WTO compatible quota would not be circumvented. The maintenance of
such an internal restriction can obviate the need for identical
external trade policies. We note also that the plain meaning of the
wording used in these two sub-paragraphs implies a difference in
approach between efforts at internal trade liberalization among
constituent members of a customs union where the maintenance of some
quantitative restrictions (as restrictive regulations of commerce) is
explicitly permitted (see paragraph 8(a)(i)), and their respective
external policies with third countries where paragraph 8(a)(ii)
contains no specific authorization relating to the maintenance of
quantitative restrictions.
- Having said this, and recognizing such flexibility, many questions
remain unanswered. We consider, however, that if the ideal situation
were to be one where the policies of the constituent members are
identical, there is nevertheless a wide range of possibilities left
for Members to identify how they can form their customs union and to
what extent and how, they should put in place their internal trade and
their common foreign trade polices. Considering this wide range of
possibilities, we are of the view that, as a general rule, a situation
where constituent members have "comparable" trade
regulations having similar effects with respect to the trade with
third countries, would generally meet the qualitative dimension of the
requirements of sub-paragraph 8(a)(ii). The possibility also exists of
convergence across a very wide range of policy areas but with distinct
exceptions in limited areas. The greater the degree of policy
divergence, the lower the flexibility as to the areas in which this
can occur; and vice-versa. In our view, our interpretation of
sub-paragraph 8(a)(ii) allows Members to form a customs union, as in
this case, where one constituent member is entitled to impose
quantitative restrictions under a special transitional regime and the
other constituent member is not. 352
- This interpretation seems to be confirmed by the effective practice
of the Turkey-EC customs union. We note that in some sectors such as
those relating to agriculture, steel etc, identical trade policies are
not being applied by the constituent members. We note also that
Decision 1/95 envisages that the European Communities may continue to
apply its system of certificates of origin should Turkey fail to
conclude agreements with third countries, similar to the agreements
already in place between those countries and the European Communities.
353 Thus, there are
administrative means, as stated by the United States, 354
available to the European Communities and Turkey, and in particular
rules of origin, as suggested by Hong Kong, China, 355
in order to ensure that no trade diversion occurs, while respecting
the parameters of sub-paragraph 8(a)(i) and at the same time of
sub-paragraph 8(a)(ii), recalling that the two sets of policies under
sub-paragraphs 8(a)(i) and 8(a)(ii) are distinct and the relationship
between them is a flexible one.
- Our interpretation of Article XXIV:8(a) is not such as to render
Turkey's right to form a customs union a nullity. We note that
Turkey's exports of textiles and clothing to the European Communities
represent 40 per cent of its total exports to the European
Communities. If Turkey wants to cover such trade and to ensure that it
benefits from the advantages of the customs union, it can do so and
comply with sub-paragraph 8(a)(i). In its discussion of the
interpretation and application of sub-paragraph 8(a)(ii), Turkey's
reference to the fact that textiles and clothing represents 40 per
cent of its trade with the European Communities, is therefore of no
relevance. With regard to its external trade policies, calculations
based on import statistics provided by Turkey to the Panel show that,
in 1995, 1996 and 1997, (a) textile and clothing imports from all
non-EC countries (including WTO Members and non-Members) into Turkey
represented between 8 and 9 per cent of Turkey's total imports from
those countries; 356
(b) imports from non-EC countries of the products covered by all
categories under restriction by Turkey represented 4.5 per cent of
Turkey's total imports from those countries; 357
and (c) imports from non-EC countries of the products covered by the
19 categories under restriction from India represented less than 3 per
cent of Turkey's total imports from those countries. 358
It should be noted that the figures in (b) and (c) above, include both
imports from WTO Members and non-Members. Thus, a variation in policy
relevant to WTO Members on at most 4.5 per cent of Turkey's external
trade, in any event of a temporary nature, 359
could not be considered in this case to jeopardise the requirement of
Article XXIV:8(a)(ii) that substantially the same regulations of
commerce are to be applied by Turkey and the European Communities to
third countries. The fact that this proportion of trade is regulated
in a different way by Turkey, cannot be seen to contradict the
requirements of Article XXIV:8(a)(ii). As noted above, we consider
that it is for the CRTA to assess the GATT/WTO compatibility of
customs unions such as the Turkey-EC customs union and that in any
case our terms of reference do not request us to do so. We, for our
part, have endeavoured to ensure that our interpretation is not such
as to prevent Turkey from exercising its WTO right to form a customs
union.
- Independently of the fact that constituent members could agree that
some of their foreign trade policies may not be identical, we consider
that the terms of sub-paragraph 8(a)(ii) do not address the issue of
whether an otherwise WTO incompatible import restriction could be
introduced among the identical or different trade policies on
formation of a customs union. In our view, the terms of Article
XXIV:8(a)(ii) do not provide any authorization for Members forming a
customs union to violate the prescriptions of Articles XI and XIII of
GATT or Article 2.4 of the ATC.
(ii) Immediate context
- The conclusion that Article XXIV:8(a)(ii) should be read as not
authorizing the violation of Articles XI and XIII of GATT or Article
2.4 of the ATC in the circumstances of this case is supported by the
same contextual analysis that we developed relating to paragraph 5(a)
(see paragraphs 9.124 to 9.133 above), and in particular, our analysis
of paragraphs 4 and 6 of Article XXIV.
(iii) Conclusion
- We conclude, based on the ordinary meaning of its terms and their
immediate context, that Article XXIV:8(a) does not address explicitly
the issue of the GATT/WTO compatibility of the measures adopted by
constituent members of a customs union in their effort to align
substantially all their duties and regulations of commerce vis-�-vis
third countries. In any case, we consider that, in this case, Article
XXIV:8(a)(ii) does not authorize Turkey, in forming a customs union
with the European Communities, to introduce quantitative restrictions
on textile and clothing products that would be otherwise incompatible
with GATT/WTO, nor does it require that Turkey introduce restrictions
on imports of textiles and clothing which would be inconsistent with
other provisions of the WTO Agreement.
(c) The wider context of Article XXIV:5
and 8 and the object and purpose of the agreements
- We consider that the wider context of sub-paragraphs 5(a) and 8(a)
and Article XXIV generally, as well as the object and purpose of the
WTO Agreement, and GATT 1994, including the GATT 1994 Understanding on
Article XXIV, are also relevant to the interpretation of Article XXIV
and confirm our interpretation of the provisions of sub-paragraphs
5(a) and 8(a) of Article XXIV.
- We note that the Preamble to the GATT 1947 (now GATT 1994) provides
that:
"Recognizing that their relations in the field of trade
�should be conducted with a view to � and expanding the
production and exchange of goods," (emphasis added)
- Such language suggests that a global objective of GATT 1947 was, and
of GATT 1994 is, to increase trade by reducing (making less
restrictive) tariffs and lowering non-tariff barriers. It is a dynamic
objective. The use of regional trade agreements to achieve that
objective is legitimized by the first sentence of Article XXIV:4:
"The contracting parties recognize the desirability of increasing
freedom of trade by the development, through voluntary agreements,
of closer integration between the economies of the countries parties
to such agreements." (emphasis added)
- Already then it was clear to CONTRACTING PARTIES that the overall
objective of GATT and for that matter, regional trade agreements,
should not be to raise barriers to trade. This is also noted in the
Philippines' submission. 360
This is reflected in the wording of the second sentence of paragraph 4
of Article XXIV:
"They also recognize that the purpose of a customs union or of
a free-trade area should be to facilitate trade between the
constituent territories and not to raise barriers to the trade of
other contracting parties with such territories." (emphasis
added)
and in the Preamble to GATT 1947:
"Being desirous of contributing to these objectives by
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 �"(emphasis added)
- At the conclusion of the Uruguay Round Members reiterated the same
general objective and principles in the GATT 1994 Understanding on
Article XXIV:
"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;"
and in the Preamble to the WTO Agreement:
"Being desirous of contributing to these objectives by
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 �" (emphasis added)
- We also recall the Singapore Ministerial Declaration:
"7. � We reaffirm the primacy of the multilateral trading
system, which includes a framework for the development of regional
trade agreements, and we renew our commitment to ensure that regional
trade agreements are complementary to it and consistent with its
rules"
- From the above cited provisions, 361
we draw two general conclusions for the present case. Firstly, the
objectives of regional trade agreements and those of the GATT and the
WTO have always been complementary, and therefore should be
interpreted consistently with one another, with a view to increasing
trade and not to raising barriers to trade, thereby arguing against an
interpretation that would allow, on the occasion of the formation of a
customs union, for the introduction of quantitative restrictions.
Secondly, we read in these parallel objectives a recognition that the
provisions of Article XXIV (together with those of the GATT 1994
Understanding on Article XXIV) do not constitute a shield from other
GATT/WTO prohibitions, or a justification for the introduction of
measures which are considered generally to be ipso facto
incompatible with GATT/WTO. In our view the provisions of Article XXIV
on regional trade agreements cannot be considered to exempt
constituent members of a customs union from the primacy of the WTO
rules. In this context we also note the Singapore Ministerial
Declaration where Members stated: "We reaffirm the primacy of the
multilateral trading system�".
To continue with GATT/WTO practice
347 See para. 7.15
above.
348 Thus, in our view,
sub-paragraph 8(a)(i) authorizes, for example, the members of a customs
union to grant each other treatment notwithstanding the provisions of
Article I:1 of GATT. 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". This was also
recognized in a prior non-adopted Panel Report on EEC � Member
States' Import Regimes for Bananas, DS32/R, para. 358: " � it
[Article XXIV] merely provides them [contracting parties] with a
justification for not applying to imports originating in such a union or
area the restrictive import measures that they were permitted to impose
under other provisions of the General Agreement".
349 We are aware of
the statement of the Appellate Body in the EC � Computer Equipment
which should be understood in the context of the internal market of the EC
: "96.�. However, the European Communities constitutes a customs
union, and as such, once goods are imported into any Member State, they
circulate freely within the territory of the entire customs union. The
export market, therefore, is the European Communities, not an individual
Member State." This Appellate Body statement referred to the
"constant prior practice" of the European Communities. However,
we are not addressing the situation of the internal market of the European
Communities or the trade relations between the European Communities and
Turkey.
350 See Japan's
argument in para. 7.25 and Hong Kong, China's argument in para. 7.16
above.
351 We have also
examined the French and Spanish versions of Article XXIV which confirm
that flexibility is left to the constituent members.
352 Our discussion of
the flexibility offered by Article XXIV:8(a) is without prejudice to the
further flexibility that may exist during the transition period of an
interim agreement leading to a customs union.
353 Article 12 of
Decision 1/95 (WT/REG22/1) provides that: "2. In conformity with the
requirements of Article XXIV of the GATT Turkey will apply as from the
entry into force of this Decision, substantially the same commercial
policy as the Community in the textile sector including the agreements or
arrangements on trade in textile and clothing. The Community will make
available to Turkey the cooperation necessary for this objective to be
reached. 3.Until Turkey has concluded these arrangements, the present
system of certificates of origin for the exports of textile and clothing
from Turkey into the Community will remain in force and such products not
originating from Turkey will remain subject to the application of the
Communities Commercial Policy in relation to the third countries in
question� In the absence of such modalities, the Community reserves the
right to take, in respect of imports into its territory, any measure
rendered necessary by the application of the said Arrangement."
354 See the United
States' argument in para. 7.112 above
355 See Hong Kong,
China's argument in para. 7.18 above.
356 See Table II.2
above.
357 See paras. 2.41
and 2.42 above.
358 This results from
the fact that, Turkey as an important clothing manufacturer, imports
mainly textile products and these are only partially represented in the
restricted categories (only 6, out of the 19 categories, refer to textile
yarn or fabrics). (See para. 2.46 above and Annex to this report, Appendix
1.)
359 The European
Communities' MFA-derived quantitative restrictions must be eliminated by 1
January 2005.
360 See para. 7.41
above.
361 We note that the
wording of Article V of GATS refers to the same concepts.
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