As a threshold issue, any preferential trade agreement (PTA) – FTA or customs union –

by Member countries of the WTO will have to observe the requirements imposed by
GATT Article XXIV and GATS Article V.
GATT Articles XXIV:4 to XXIV:10 (as clarified in the Understanding on the
Interpretation of Article XXIV of the GATT 1994) govern the formation and operation of
customs unions and free trade areas covering trade in goods.
These internal and external trade requirements which Article XXIV:4 imposes set out the
formal legal aims of customs unions and free trade areas.
Article XXIV:5 provides the legal basis for forming such customs unions and free trade
areas, or to adopt interim agreements to that effect. Such agreements would otherwise be
inconsistent with the GATT 1994 namely, with the MFN requirement under GATT
Article 1. GATT Article XXIV:8(b) then goes on to define the internal trade requirement;
namely, the ‘substantially all trade’ requirement that has been the source of so much
doctrinal uncertainty.
In addition to this internal trade requirement concerning the coverage of substantially all
trade between the parties to the preferential trading agreement, an external requirement
exists. This is to be found in GATT Article XXIV:5(b), which imposes the ‘shall not be
higher or more restrictive’ standard
In this regard, the WTO Understanding on Interpretation of Article XXIV states, in
paragraph 2, that
[t]he evaluation under paragraph 5(a) of Article XXIV of the general inci- dence of the
duties and other regulations of commerce applicable before and after the formation of a
customs union shall in respect of duties and charges be based upon an overall assessment
of weighted average tariff rates and of customs duties collected. (Emphasis added)
None of these requirements has yet proven particularly difficult in practice and may even
be viewed by trade lawyers as essentially ‘political’ questions that, in reality, involve
Geneva representatives and delegations working on the CRTA process. Indeed, prior to
the Appellate Body report in Turkey – Textiles, the view of Turkey and the European
Communities, as well as of some other WTO Members, appeared to be that Article XXIV
of the GATT 1994 was simply non-justiciable. Be that as it may, if the present trend
towards more and more FTAs continues, the interpretation of these provisions can be
expected to be driven by the mutual interest of WTO Members in being party to one or
more such agreements, in partic- ular with respect to those agreement in which
compliance with these internal and external trade questions may be questionable.
Nonetheless,
sharp doctrinal questions could still arise as in the Turkey – Textiles case. As such, it is
somewhat problematic to simply assume that differences on these questions will likely be
resolved through diplomatic efforts (as opposed to WTO litigation), because the
reciprocal ‘allowances’ and flexibility between the Members in negotiations could be
based on a mutually acceptable practice gradually evolving over time. While that
approach may work in the context of surveillance or enforcement under the CRTA
procedure (the so-called ‘Track I’ enforcement procedure) – excepting FTAs made under
the Enabling Clause7 – there would be less room for reciprocity and political
accommodation under the ‘Track II’ enforcement procedure, namely that of submitting a
dispute based on the interpretation of the above requirements to formal dispute settlement
(for example, with respect to MFN violations). The disciplines imposed by the reverse
consensus rule for the approval of panel and Appellate Body reports essentially allows
any one Member State to trigger an Appellate Body ruling that could upset the whole
doctrinal applecart in relation to the interpretation of the requirements under Article
XXIV of the GATT 1994 or Article V of the GATS.
The CEPT only applies to goods originating within ASEAN. The general rule is that local
ASEAN content must be at least 40% of the FOB value of the good. The local ASEAN
content can be cumulative, that is, the value of inputs from various ASEAN members can
be combined to meet the 40% requirement. The following formula is applied:
( Raw material cost
+ Direct labour cost
+ Direct overhead cost
+ Profit
+ Inland transport cost )
x 100 % FOB value
However, for certain products, special rules apply:
• Change in Chapter Rule for Wheat Flour;
• Change of Tariff Sub-Heading for Wood-Based Products;
• Change in Tariff Classification for Certain Aluminum and Articles thereof.
The exporter must obtain a “Form D” certification from its national government attesting
that the good has met the 40% requirement. The Form D must be presented to the
customs authority of the importing government to qualify for the CEPT rate. Difficulties
have sometimes arisen regarding the evidentiary proof to support the claim, as well as
how ASEAN national customs authorities can verify Form D submissions. These
difficulties arise because each ASEAN national customs authority interprets and
implements the Form D requirements without much co-ordination.
To finalize the harmonization work programme, The WCO and the WTO have
established an overall architectural design. The architecture will set out the principles
under which the various rules are applied and will result in the final results for applying
those rules to specific cases.
This encompasses
• Definitions
• General Rules
• Two Appendices
Appendix 1: Definitions of Wholly Obtained Goods
This Appendix sets forth the definitions of the goods that are to be considered as being
wholly obtained in one country. It provides for the origin determination of live animals
born and raised in that country, and plants and minerals harvested or taken in that
country.
Appendix 2: Product Specific Rules of Origin
This Appendix sets forth rules for determining the country of origin of a good when the
origin of the good is not determined under Appendix 1. It will provide for the rules
necessary for origin determination, including the primary rule and residual rule and their
application.
In Appendix 2, Rules for the application of Appendix 2 are followed by the matrix rules
covering goods classified in Chapters 1 to 97 of the Harmonized System. At the
beginning of each Chapter, the negative standard, the primary rules, the residual rules and
definitions may be set out.
There are still differing opinions concerning the concept of the minims, intermediate
materials, fungible goods and putting up in sets.
there is emerging literature on the economic effects of Asian FTAs.1 Issues and concerns
highlighted in the new literature include low FTA preference utilization, a “noodle bowl”
problem of criss-crossing agreements that potentially distort trade toward bilateral
channels, excessive exclusions and special treatment in FTAs, and the possibility that the
multilateral trading system may be progressively eroded (Baldwin 2006, Tumbarello
2007,
World Bank 2007, Bhagwati 2008). FTAs are a relatively new phenomenon in Asia and
a dearth of empirical evidence, particularly with respect to patterns of Asian FTAs and
business impacts, has made it difficult to verify the validity of these concerns. With the
availability of new data, the time is ripe for an evidence-based assessment of Asian
FTAs.
FTA-led regionalism seems here to stay in Asia for three reasons. First, the large
economies of Northeast Asia—the People’s Republic of China (PRC), Japan, and the
Republic of Korea—are at the forefront of efforts to use FTAs to pursue their respective
regional and global trade strategies. Meanwhile, ASEAN members are increasingly
entering into FTAs as a means to expand trade and increase their participation in
Asia’s advanced production networks. Second, the stalled World Trade Organization
(WTO) Doha Round of trade negotiations means that FTAs are a vehicle to support the
deepening of production networks through trade and investment liberalization. And
finally, even if the Doha Round were to be concluded in 2011, FTA activity would
continue as many of the “new age” agreements go well beyond what is on the
negotiating table and deal with investment, competition, intellectual property, and public
procurement (the
so-called Singapore issues). Accordingly, business will need to learn to export more
effectively under a regional trade regime anchored on FTAs. The focus for policy makers
is how best to minimize the costs of Asian FTAs (e.g., transactions and administrative
costs) while maximizing their benefits (e.g., preferential tariffs, better market access, and
new business opportunities).
Adopting a pragmatic perspective, this paper examines trends, prospects and challenges
in Asian FTAs with a view to making suggestions. Section II summarizes Asia’s
emergence as the global factory through outward-oriented development strategies and
highlights the region’s recent emphasis on FTAs. It charts major trends in Asian FTAs
since 2000, including growth, activity intensity, cross-regional orientation, and trade
coverage. Section III analyzes five key challenges posed by Asian FTAs: (i) improving
firm-level use of FTAs, (ii) tackling the Asian noodle bowl problem, (iii) promoting
comprehensive coverage of agricultural trade, (iv) increasing “WTO-plus” elements, and
(v) forming a regionwide FTA. New evidence from analysis of FTAs, firm surveys, and
computable general equilibrium (CGE) models is used to address these challenges. In
response to increasing interest in forming a regionwide agreement, Section IV explores
political economy issues as they relate to FTA consolidation in Asia and its
potential connection with North America and Europe. In conclusion, Section V advocates
strengthening the support system for regional production networks, forging
comprehensive WTO-plus agreements, and encouraging an East Asia-wide FTA. A
bottom-up approach to a WTO Doha Round Agreement emerges from the analysis.