香港留學生法律課程essay-RTAs’ impact on Multilateralism of WTO

 

 

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區域一體化運動開始在20世紀40年代到50年代。即使世界貿易組織（WTO）成立以來，WTO并不妨礙締約雙方簽訂的區域貿易協定（RTAs），而是建立在區域貿易協定委員會（CRTA）于1996年2月6日，專注于研究區域組，評估是否符合WTO規則或不；CRTA還研究了區域貿易協定會影響多邊貿易機制，以及RTAs與多邊貿易體制之間的關系，從而進一步提高審查機制，加強對區域貿易協定的WTO的約束機制。

 

1. Introduction

 

Regional Integration Campaigns began in the 1940s to 1950s. Even if the World Trade Organization (WTO) had been established, WTO did not prevent contracting parties from signing Regional Trade Agreements (RTAs), instead it founded Committee on Regional Trade Agreements (CRTA) on February 6th, 1996, to specialize in examining regional groups and evaluating whether they comply with the WTO rules or not; the CRTA also examines how the RTAs would affect the multilateral trading mechanism, as well as the relationship between RTAs and multilateral trading mechanism, so as to further improve the review mechanism and to strengthen the WTO’s constraint mechanism on RTAs.  

 

 

Many scholars did a lot of researches on a topic that whether the RTAs would help to prompt the development progress of multilateral trading mechanism of the world or not. So far, it has not formed a complete and orderly theoretical framework with determinate conclusion. On the one hand, RTAs brings the amalgamation of regional economies, the European Union (EU), the Association of Southeast Asian Nations (ASEAN), the North America Free Trade Agreement (NAFTA), the Asia-Pacific Economic Cooperation (APEC) and other economic integration organizations’ development and the strong vitality of their performance are concrete examples. On the other hand, because in different regions there are different RTAs, and these RTAs’ Tariff Schedules and Rules of Origin differ with each other, it makes the supervision of customs of various countries become more complicated and it increases the trading cost. In recent years, the signing of RTAs formed a huge challenge of the WTO multilateral trading mechanism. Further and deeper researches on this subject are of important theoretical and realistic significance. This essay will discuss the Article XXIV of GATT, studying its explanation and the inherent problems of WTO rules and RTAs; it also tries to draw useful conclusions through case study. #p#分頁標題#e#

 

 

2. Case study regarding Article XXIV and challenges of RTAs

 

2.1 Overview of Article XXIV GATT

 

General Agreement on Tariffs and Trade (GATT) regulates and controls the RTAs mainly through Article XXIV of GATT 1994 and Understanding of Article XXIV of the General Agreement on Tariffs and Trade 1994 (hereinafter “Understanding”) and Article V of General Agreement on Trade in Services (GATS), to examine and control the establishment of regional trade organizations. Article XXIV of GATT 1994 specifically regulates the Territorial Application, Frontier Traffic, Customs Unions and Free-trade Areas; it also clears that RTAs is not stumbling blocks of WTO multilateral trading mechanism, but some building blocks for that mechanism. As paragraph 4 of Article XXIV indicates, any regional arrangements are in order to promote the liberalization of trading, rather than increase trading barriers and improve trading cost artificially. Therefore, as a discriminatory preferential trading arrangement, RTAs combine trading liberalism with protectionism, which constitutes an important exception for the Most Favored Nation (MFN) treatment established by Article I paragraph 1 of GATT 1994. Article XXIV admits the legitimacy of regional trades’ development on the basis of multilateralism and nondiscrimination conditionally, which allows various countries to strengthen economic cooperation through multilateral trading negotiations, as well as regional trading arrangements, to realize the liberalization of trading and eventually improve the human welfare. 

 

 

That is to say, GATT accepts the two paths of common regional economic integration through the estimate of pros and cons, namely Customs Union (CU) and Free Trade Area (FTA). In the CU and FTA, GATT allows the members of those two kinds of economic integration to get the exception of MFN treatment and non-discriminatory principle; the main spirits are reflected in Article XXIV, embodying connections of the CU and FTA and multilateral trading mechanism in the basic law relationship.  At the same time, when GATT/WTO gives these two kinds of regional economic integration the exception of MFN treatment, it asks for to satisfy the legal requirements of GATT/WTO, which are the main legal constraints of the multilateral trading mechanism to the RTAs. 

 

 

2.2 Case study: Turkey Textile 

 

The case of Turkey Textile happened in 1999, which was considered the first case related to Article XXIV directly after the establishment of WTO. 

 

 

Turkey applied to join the European Economic Community (now European Union, EU) formally in 1987, for that purpose, these two parties specially established the Turkey-EC Customs Union Joint Committee. According to the Statement released by the Committee in March 1995, from the January 1st 1996, in order to join the EC, Turkey would adopt the textiles import restrictions of EC to impose quantitative restrictions on 19 textile products from India and other countries. India alleged these restrictions disobeyed Article XI and Article XIII of GATT. While Turkey argued that, these restrictions were adopted to keep consistent with the safeguard mechanism of EC, if Turkey didn’t put these new quantitative restrictions, the textiles and clothing products exported to EC (which accounted for 40% of gross volume of Turkey’s exports to EC) would be expelled from the CU established by Turkey and EC, and it would make Turkey take a risk: that is, the Turkey-EC Customs Union cannot comply with the requirements of Article XXIV paragraph 8 (a), namely the Customs Union must cover substantially all the trade. On May 31, 1999, the Panel of WTO submitted the final report of that case; on October 22, the same year, the Appellate Body submitted the final report; on November 19 of the same year, the report of Appellate Body had been got through. So far, the trial of that case had come to an end. #p#分頁標題#e#

 

 

In the final report, WTO Appellate Body fully agreed with the Panel’s decision, it thought, Turkey can adopt a reasonable alternative solution, such as the origin certification mechanism, to solve the problems related to trading diversion effect resulted from the establishment of Turkey-EC Customs Union; meanwhile that solution can also satisfy with the requirements of Article XXIV paragraph 8(a) of GATT. However the Appellate Body also indicated that, they have already noticed Turkey and EC seem to accept the AB’s suggestions regarding using the rules of origin to solve problems of trade diversion effect and from the Order released by Turkey-EC Joint Committee, the basis of the implementation of the alternative measures had already existed.  So in addition to slightly fix the Panel’s insufficiency and neglect of the reasoning, the conclusions of the Appellate Body and the Panel are completely the same. From the Appellate Body, paragraph 4 and paragraph 5 of Article XXIV have a should be relationship, that is, conditions and requirements stated in paragraph 4 must be implemented and executed in paragraph 5, while both of the Appellate Body and Panel emphasized that, the goals of regional trading integration is to prompt the progress of GATT/WTO trading integration, rather than use the RTAs as excuses to set up some new trade barriers or even become a haven avoiding prohibitive provisions of GATT/WTO. The Appellate Body and the Panel once again confirmed the nature of WTO agreement, which is, as a single undertaking that forbids be dividing and misinterpreting. 

 

 

2.3 Challenges of RTAs to Multilateralism of WTO

In the Turkey Textile Case, the Appellate Body of WTO publicly expressed its point; it proposed that the premise of RTAs co-exists with multilateral trading is that, the regional economic arrangements must comply with the constraints of multilateral mechanism. The exclusive policy of internal freedom and external discrimination of RTAs is not consistent with the purpose of non-discrimination and free trading principle of multilateralism of WTO. Although WTO made some legal regulations on the means and methods of cooperation for regional economic integration, in some specific condition, the multilateral trading mechanism took tolerant attitude for the illegal actions of some regional economic integration organizations, which resulted in challenges to the laws and regulations of multilateral mechanism. In this section, this essay will combine the Turkey Textile Case with the regulations of Article XXIV GATT, to discuss the challenges brought by RTAs to the multilateral trade mechanism of WTO.

 

 

2.3.1 Rules of origin may result in trade barriers

Article XXIV paragraph 5 requires that in a moment of forming a new CU, the designated common external tariff and other trade measures should “not on the whole higher or more restrictive” than the average tariff previously formed. After the formation of CU, if common external tariff makes their contracting parties increase the binding tariff of schedule of GATT, then in accordance with the regulations of Article XXIV paragraph 6, the affected third party could adopt procedures regulated by Article XXVIII to require the modification of previous tariff concession, or require appropriate compensation. This rule also applies to the Free Trade Area (FTA) and eventually leads to the interim agreement for formation of CU and FTA. #p#分頁標題#e#

 

 

In the case of Turkey Textile, the Appellate Body pointed that Turkey could use the rules of origin as the alternative measures to avoid the influence on India’s exports to Turkey. However, from recent trading situation, rules of origin of FTA challenges the regulations of “not on the whole higher or more restrictive” of Article XXIV, which may produce new trade barriers. 

 

 

Rules of origin of FTA are mainly used to determine whether or not, the final products made from intermediate products imported from the third countries could enjoy the preferential treatment of FTA. Rules of origin of FTA may produce new barriers to the external third countries’ products that intend to enter into the FTA. At present, most FTAs have their own rules of origin, and the contents of these rules are different and disunity, some of them produces severe trade barriers for the importation of the third countries’ intermediate products; these situations resulted in the strong exclusiveness of FTA.  

 

 

2.3.2 Obscure clause of “substantially all trade”

 

In accordance with the Article XXIV paragraph 8 of GATT, CU and FTA which could get MFN treatment and obligation must cancel their tariffs and other restrictive business management measures of substantially all trade between their adjacent tariff areas. But what the “substantially all trade” means, there was not a clear meaning defined by GATT/WTO. It could be considered that all the sectors embodied into liberalization should cancel all the trade barriers; or cancel all the trade barriers regardless of sectors. 

 

 

“Substantially all trade” essentially requires all the contracting parties’ governments to take a careful attitude to establish regional group, avoiding the punishment took by other contracting members due to the violation of Article XXIV, or avoiding the opposition of some domestic interest group because of the liberalization for all trade.  Therefore, only when all the members have prepared well enough to establish regional group and carefully eliminate the barriers for “substantially all trade” among them, can in a very real sense establish CU and FTA which could meet the requirements of Article XXIV. 

 

 

However, because Article XXIV does not define the clause of “substantially all trade” clearly, then all the economic integration organizations can make explanations for their own sake. For example, regional group that wants to expel agricultural products from regional economic integration, intend to explain the “substantially all trade” as eliminate all the trade barriers on the basis of trade volume, rather than eliminate the barriers for all the products or industry sectors; while contracting parties holding the opposite position intend to different interpretation. Because of the conflict of these different explanations, there are not enough materials for the multilateral mechanism to judge the definition, which ultimately leads to an uncertain situation. #p#分頁標題#e#

 

 

2.4 Mutual promotion of multilateralism and RTAs

 

The emergence of RTAs is a developmental stage of integration progress of the national and regional economy and world economy. RTAs not only result from the trend of world trade liberalization, but also prompt the world trade liberalization. So in the long run, the RTAs are consistent with the multilateral liberal trade progress. The mutual promotion of multilateralism and RTAs mainly reflects in the testing ground provided by RTAs for WTO, which is helpful to realize the purpose of trade liberalization of WTO; also, WTO can supervise the regional economic integration organizations, and prompts the efficiency of RTAs. 

 

 

First of all, the development of RTAs can set a corresponding example for the promotion of multilateral trade liberalization. All the innovations of RTAs can provide references for the new areas creations of WTO, providing innovation space for WTO multilateral negotiations and testing ground in order to further open up and promote the multilateral trade liberalization.

 

 

Secondly, the aims of WTO is to enhance the living standards of contracting members, guarantee the fully employment and the increase of incomes, to expand goods and services trading, protecting the environment and realizing positive sustainable development. Though these aims are accepted by all the contracting parties, in the multilateral negotiations it still has al lot of contradictions and it is hard to coordinate the interest of all parties. In that situation, for the contracting members of RTAs, it is relatively easily to coordinate their interest, intra-group frictions is less that the external area. Through the efficient resources allocation within the group, it can form a scale effect, prompt the economic growth of the member countries, improve the economic competitiveness of the FTA, and enhance its ability to participate in the progress of world economic liberalization. 

 

 

3. Summaries and Prospects

 

Through the discussion of this essay, it is evident that the development of FTA is a necessary trend. Generally speaking, it could prompt the development of multilateralism. Due to the differences of all the countries, the RTAs may result in some trading disputes in some specific industries, which may hinder the development of world multilateralism. However, if the WTO can guide and cooperate properly, the conflicts can be solved and the multilateral liberal trade can be realized. That’s why it is important to study Article XXIV of GATT. 

 

 

In terms of the overall situation, RTAs is a constituent part of world economy globalization; in the long run, FTA is a developmental stage of world economy globalization. In a world, the progress of RTAs is a key stage; its development will definitely promote the progress of world economy. #p#分頁標題#e#

 

 

References

Analytical index of the GATT: article xxiv-frontier traffic, customs unions and free 

trade areas, at 767-768. 

Appellate Body Report of Turkey-Textiles, at para. 48.

James H. Mathis, ‘SYSTEMIC ISSUES IN THE CRTA’ (2002) Regional Trade 

Agreements in the GATT/WTO, ASSER Press. p. 151

ohn H. Jackson, Legal Problems of International Economical Relations (1986), West Publishing Co., 2nd ed., pp. 540-541

Michael J. Trebilcock and Robert Howse, The Regulation of International Trade (1999), London & New York, Routledge, 2nd ed., pp. 230-231.