World Trade Law: Lecture 4

Exceptions and

Regional Trade Agreements

Serafino Marchese
”Virtual” Visiting Lecturer, Foreign Trade University, Hanoi
former WTO staff member
 Basic Principles & Exceptions

 Exceptions The Test

– General exceptions
– Security exceptions
– Safeguards
– Balance of Payments
– Infant Industry

asure
 Derogations and Preferences
– Waivers
– Regional Integration
vernment
– Special and Differential Treatment
olation of a BP
 “Unfair” Trade
ception
– Antidumping Measures
– Subsidies and Countervailing Duties
 Exceptions: Members’ rights

Members “may” use

• General Exceptions

GATT Article XX
• Security Exception

GATT Article XXI

• Other Exceptions
 Art. XX – General Exceptions
• Underlying principle: In certain specific situations, and under
certain conditions, the WTO rules and obligations shall not
prevent Members from taking certain measures (which
otherwise would be illegal) in order to pursue legitimate
non-trade policy objectives.
• Role of the Article XX:
• Trade liberalization, market access and non-discrimination rules may
conflict with other important societal values and interests
• Article XX reconciles trade liberalization, market access and non-
discrimination rules with the need to protect and promote societal
values and interests
 Art. XX: Chapeau

Subject to the requirement that such measures are

not applied in a manner which would constitute a means of
arbitrary or unjustifiable discrimination between countries
where the same conditions prevail, or a disguised
restriction on international trade,
nothing in this Agreement shall be construed to prevent
the adoption or enforcement by any Member of
measures ...:
 Art. XX: Sub-paragraphs (1)

(a) necessary to protect public morals;

(b) necessary to protect human, animal or plant life
or health;
(c) relating to the importation or exportations of
gold or silver;
(d) necessary to secure compliance with laws not
inconsistent with GATT provisions;
(e) relating to products of prison labour;
(f) imposed for the protection of national treasures
(artistic, historic or archaeological);
 Art. XX: Sub-paragraphs (2)

(g) relating to conservation of exhaustible natural

resources if such measures are made effective
in conjunction with restrictions on domestic
production or consumption;
(h) undertaken in pursuance of an intergovernmental
commodity agreement;
(i) materials necessary to ensure essential quantities
to a domestic processing industry;
(j) essential to the acquisition or distribution of
products in general or local short supply.
 Art. XX: how to use it

• Nature of the exception

• Conditional – invocation is conditional upon a violation
of an obligation under the GATT;
• Limited – the exceptions concern a closed list of policy
objectives

• Two tiered test

• Does the measure fall within one of the exceptions
listed in Article XX (a)-(j)?
• If yes, does it satisfy the “chapeau”?
• arbitrary or unjustifiable discrimination
• disguised restriction on international trade
Article XX(b) – First tier of the test -
“necessary” (1)

 Does the measure pursue the objective of

protecting human, animal or plant life or health?
 Is the measure necessary to achieve the
objective that it pursues

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Article XX(b) – First tier of the test -
“necessary” (2)

 Examples of measures that pursue a public

health objective
 Measures to reduce smoking
 Measures to reduce air pollution
 Measures to reduce risks arising from the
accumulation of waste tyres

10
Article XX(b) – First tier of the test -
“necessary” (3)
• “Necessity”– involves weighing and balancing a
series of factors that prominently include:
• importance of the societal value pursued
• the measure’s contribution to achieving the value
• trade-restrictive impact of the measure, and
• reasonably-available alternatives

 Some relevant disputes: US – Shrimp, Brazil –

Retreaded Tyres, China – Audiovisuals
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 Article XX – Second tier of the test

 If the measure falls within the scope of the regulatory

interests protected under Article XX, then it must also
satisfy the requirements of the chapeau to Article XX
 Not constitute a means of “arbitrary or unjustifiable
discrimination” between countries where the same
conditions prevail
 Not constitute a “disguised restriction on trade”

 Sample relevant disputes: US – Gasoline,

US – Shrimp
12
 Article XX – Second tier of the test

 Arbitrary or unjustifiable discrimination – 3 elements

 The application of the measure at issue must result in
discrimination;
 The discrimination must be arbitrary or unjustifiable in
character;
 The discrimination must occur between countries where
the same conditions prevail

Appellate Body Report, US – Shrimp

13
 Security Exceptions
 GATT Article XXI - Security exception
Nothing in this Agreement shall be construed:
(a) to require any contracting party to furnish any information the disclosure of which
it considers contrary to its essential security interests; or
(b) to prevent any contracting party from taking any action which it considers
necessary for the protection of its essential security interests
(i) relating to fissionable materials or the derived materials;
(ii) relating to the traffic in arms, ammunition and implements of war and to
such traffic in other goods and materials as is carried on directly or indirectly
for the purpose of supplying a military establishment;
(iii) taken in time of war or other emergency in international relations; or
(c) to prevent any contracting party from taking any action in pursuance of its
obligations under the United Nations Charter for the maintenance of international
peace and security.
 Some Other Exceptions

• Waivers

• RTAs

• S&D
 Waivers (1)

Marrakesh Agreement, Art. IX:3

In exceptional circumstances, the Ministerial

Conference may decide to waive an obligation
imposed on a Member by this Agreement or any
of the Multilateral Trade Agreements...
 Waivers (2)
• Decision by consensus (WTO Agreement, Art. IX:1)
• The decision must specify (WTO Agreement, Art. IX:4):
• The exceptional circumstances;
• the terms and conditions;
• the date on which the waiver expires;
• annual review of the waiver

• Examples of waivers:
• Cotonou Agreement, AGOA, Kimberly, etc.
 Exceptions: RTAs (1)

RTAs: what kind of exception?

• The WTO provides for a series of conditional exceptions
which Members can invoke when concluding RTAs. Such
agreements departing from the basic principles underlying
the WTO system:
• Since 1947 → Article XXIV of the GATT (FTAs &CU)
• Since 1979 → “Enabling Clause" (regional arrangements
among developing countries)
• Since 1995 → Understanding on GATT Article XXIV
• Since 1995 → GATS Article V (EIAs)
 Exceptions: RTAs (2)

The RTA exceptions are based on common

principles*:
1. The purpose of an RTA is to facilitate trade among the
parties to the agreement
2. An RTA must not raise barriers towards third parties
higher than those existing before the formation of the
RTA
3. An RTA must provide for mutual/reciprocal trade
concessions
*GATT Art. XXIV:4; “Enabling Clause” para. 3(a); GATS Art. V:4
 Exceptions: RTAs (3)

What are the conditions?

• GATT Article XXIV + the Understanding
Establishes two conditions with which RTA parties must
comply in order to benefit from the exception provided

1. Substantial trade liberalization among the parties to

the agreement (Article XXIV:8)

2. Neutrality vis-à-vis other WTO Members not party to

the agreement (Article XXIV:5)
 GATT Article XXIV

• Provides for two types of RTA:

• Free Trade Area (FTA)
• Customs Union (CU)
(or interim agreements leading to one or the other. An interim
agreement should be established within 10 years unless
exceptional circumstances prevail.)

• What’s the difference between an FTA and CU ?

 GATT Article XXIV
Provides for internal trade liberalization (Art. XXIV:8)

• Tariffs and other restrictive regulations of commerce

(ORRCs) are to be eliminated on substantially all
(originating) trade among the parties (FTA and customs
union)

• Tariffs and other trade measures are substantially

harmonized among the parties (customs union)
 GATT Article XXIV

Some questions about internal liberalization

• What is the meaning of “substantially”?

• What if a sector(s) is excluded from liberalization?

• What if tariffs are reduced rather than eliminated?

• Are RTA parties permitted to use trade defence measures on

intra-trade? (Article XIX is not listed
as an exception in XXIV:8)
 GATT Article XXIV

External trade condition (Art. XXIV:5)

• In the case of a customs union, the general incidence* of

duties and other regulations of commerce should not be
higher or more restrictive than prior to its formation

*the general incidence of duties is based on an overall assessment of weighted

average tariff rates and customs duties collected
 GATT Article XXIV
External trade conditions

Parties to a customs union are permitted to increase tariffs in the

process of establishing the CET (Art. XXIV:6 and
Understanding), (but must still comply with general incidence
criterion)

• If a break in bindings occurs, parties are to follow the

procedure in GATT Article XXVIII.

• Procedural details regarding renegotiation of bindings are

contained in paras. 4-6 of the Understanding
GATT Article XXIV & Understanding

Para. 12 of the Understanding specifies that:

WTO dispute settlement provisions “may be

invoked with respect to any matters arising
from the application of those provisions of
Article XXIV...”

Any disputes involving Article XXIV?

GATT Article XXIV & Understanding

• GATT inconsistent measures can be “covered”

Turkey- under Art. XXIV provisions if the RTA is found
Textiles
in conformity with these provisions, and the
(DS34)
measures are necessary to the RTA’s formation.
• Burden of proof is with Member using Art. XXIV
as a defence.
Argentina-
Footwear • “Parallelism” in safeguard actions
(DS121)

Peru-
Guatemala • An RTA cannot be used to interpret WTO rules.
(DS457)

No RTA has been challenged as such!

 RTAs: Enabling Clause

Paragraph 2(c) provides for:

1. Preferential regional or global arrangements among
developing countries;
2. Containing mutual trade concessions;
3. Regarding reduction or elimination of duties;
4. And non-tariff measures (subject to WTO guidelines)
 Enabling Clause vs Art. XXIV

 Common aspects
1. Goods only
2. Reciprocity
3. Neutrality criterion

 Differences
1. Enabling Clause: option available only to developing countries
2. Reduction OR elimination of tariffs (Enabling Clause) vs.
elimination of duties (GATT XXIV)...
3. ...and reduction OR elimination of NTBs vs. elimination of ORRCs
 S&D Treatment

 The main instruments of special and differential

treatment in the current framework:
• GATT, Article XVIII
• Part IV of the GATT – Trade and development
• Enabling Clause - Differential treatment and
non-reciprocity
• The Uruguay Round
• Specific provisions (S&D)
• Decision on LDCs
 S&D: Enabling Clause (1)
 Decision on Differential and More Favourable Treatment,
Reciprocity and Fuller Participation of Developing Countries -
''Enabling Clause “ (Decision of 1979)

• Tariff preferences (unilateral) granted by developed countries in favour

of developing countries (Generalized System of Preferences - GSP)

• More favourable treatment in respect of non-tariff measures

• Regional arrangements between developing countries (reduction /

elimination of customs duties and other restrictive trade regulations)

• Special treatment for least developed countries (LDCs)

 S&D: Enabling Clause (2)
• Notwithstanding the provisions of Article I of the General Agreement,
contracting parties may accord differential and more favourable
treatment to developing countries, without according such treatment to
other contracting parties.

• The provisions of paragraph 1 apply to the following:

(a) Preferential tariff treatment accorded by developed contracting parties
to products originating in developing countries in accordance with the
Generalized System of Preferences (GSP)*

• Footnote 3 of the Enabling Clause

As described in the Decision of the CONTRACTING PARTIES of 25 June 1971,
relating to the establishment of "generalized, non-reciprocal and non
discriminatory preferences beneficial to the developing countries" (BISD 18S/24)
 Other Exceptions (1)

• Safeguards
Article XIX of the GATT 1994 and Uruguay Round Agreement on
Safeguards
• Balance of Payments
Art XII and Art XVIII:B + Uruguay Round Understanding on Balance-of-
Payments Provisions of GATT 1994
• Infant Industry
Art XVIII of GATT 1994
• Sector Specific Safeguards
Art 5 of the Agreement on Agriculture
 Other Exceptions (2)

“Unfair” Trade
• Antidumping Duties
Art VI of GATT 1994 and the Uruguay Round Agreement on the
Implementation of Article VI of the GATT 1994 (Antidumping
Agreement)

• Subsidies and Countervailing Duties

Art VI and XVI of GATT 1994 and the Uruguay Round Agreement on
Subsidies and Countervailing Duties
CHARACTERISTICS OF RTAs

and

TRANSPARENCY MECHANSM
 What is an RTA?
Types of preferential trade liberalization:

Concessions Members Examples RTA?

Reciprocal Selective EU, NAFTA

Unilateral Selective AGOA

Unilateral Generalized GSP

 Typology of RTAs
a group of two or more customs territories that
have eliminated all or most tariff and non-tariff
measures affecting trade among themselves.
Participating countries continue to apply their
existing tariffs on external goods.

Free Trade Area

Partial
Scope
 Formation of a FTA
Country A and B sign a FTA
Country A
 Tariffs are eliminated on Uniform MFN tariff of 6%
most goods
 Each party maintains its
tariff structure A
 A RoO regime is put in place
0% duties
Other common features
 Reciprocal concessions
(possible asymmetrical B
implementation)
 Negative list approach
Country B
 Beyond tariff concessions
Variable MFN tariff 0–30 %
 Typology of RTAs
A group of two or more customs territories that have
eliminated all or most tariff and non-tariff measures
affecting trade among themselves. Participating
countries replace their individual MFN tariffs with a
single tariff applied to third countries.

Customs Union

Free Trade Area

Partial
Scope
 Formation of a CU
Country A & B sign a CU Country A
 Tariffs are eliminated on Uniform MFN tariff of 6%
most goods
 A common external tariff is
adopted A

CET 5 – 10 %
 A mechanism to share
customs revenues is devised 0%
 A temporary Roo regime duties
may be put in place
 Compensation is paid to
B
third countries if bound MFN
rates are raised
Country B
Variable MFN tariff 0–30 %
 Typology of RTAs

Economic Union

Common Market

Customs Union

n
tio
e g ic
l i om
ra
Free Trade Area

ica on
nt
lit ec
Partial

po ore
Scope

an M
WTO Legal
Provisions d
Features of RTA market access

Timing and types of commitments

1. “big bang”
• Example: Singapore-New Zealand, EFTA’s FTAs

2. Linear or specific reductions

3. Frontloading vs backloading, e.g. EC-CARIFORUM
4. Asymmetric transition periods & liberalization
commitments e.g. Japan-Thailand
 Measuring market access in goods

 % duty-free lines (fully liberalized)

 % imports at duty-free rates

 Reduced rates - Margin of Preference

 Treatment of Agricultural products versus Industrial

products

 Incidence of TRQs

 Tariff Peaks

 Products excluded from tariff liberalization

 Tradeable/Traded goods
 % fully liberalized tariff lines - tradeable goods

 % imports at duty-free rates - traded goods

China’s commitments in China-New Zealand FTA

 Margins of preference
China’s concessions to New Zealand in China-New Zealand FTA
Industrial versus agricultural
products
China: Tariff elimination under the China-NZ FTA, by HS Section
 Coverage & Transition Periods
in RTAs
 Results for 115 RTAs subject to the TM
100

80
Tariff lines liberalized (%)

60
Total Products
40 WTO Agricultural Prods.
WTO Non-agricultural
Prods.
20

0
0 1-6 7-10 11-20 20+
(9) (25) (24) (55) (2)
Length of the Transition Period
 Trade Creation
Trade creation
domestic production of a product is displaced by imports from a
RTA partner where the good is produced at lower cost

Production prices MFN tariff on ovens = 30%

Made in A - $240 Price of imports of ovens into A
Made in B - $220
Made in A Made in B ROW
Made in ROW - $200
$240 $286 $260
A and B form an RTA. A will No imports into A
apply zero tariff to its imports of
ovens from B
Post-RTA - Price of imports into A
Net gain (consumer) = $20 Made in A Made in B Made in ROW
$240 $220 $260
Trade creation A imports from B
 Trade Diversion
Trade diversion:
imports from a low cost country outside the RTA are displaced by
imports from a higher cost RTA partner

Production prices MFN tariff on computers=40%

No domestic production
Price of computer imports into A
Made in B - $400
Made in ROW - $300 Made in A Made in B Made in ROW
-------- $560 $420
A and B form an RTA. A will A imports from ROW
apply zero tariff to its imports of
computers from B
Post-RTA - Price of imports into A
Net loss = $100 Made in A Made in B Made ROW
(consumer +$20 Revenue -$120) -------- $400 $420
Trade diversion A imports from B
 Trade Creation/Diversion
How can the risk of trade diversion be minimized?
 Unilaterally reduce tariffs - the lower the margin of preference
granted under an RTA, the lower the risk of trade diversion
 Analyze your RTA partners’ competitiveness

Production prices MFN tariff on computers=10%

No domestic production
Price of computer imports into A
Made in B - $400
Made in ROW - $300 Made in A Made in B Made in ROW
-------- $440 $330
A and B form an RTA. A will A imports from ROW
apply zero tariff to its imports of
computers from B
Post-RTA - Price of imports into A
No change in import sourcing Made in A Made in B Made ROW
-------- $400 $330
 Rules of Origin and market access
RoO are an essential feature of virtually all RTAs to avoid
trade deflection, i.e. trans-shipment of goods through the
Member with the lowest MFN tariff to the Member with a
higher MFN tariff
However:
 Production costs may increase due to technical
requirements or need to source from intra-RTA
partners
 Administrative costs may rise due to certification
requirements, both for exporter and customs officials
 Restrictive RoO may result in trade diversion even if
extra-RTA inputs are cheaper.
 RoO and trade diversion
Country A
MFN rate on
RTA bicycles is RTA
0% on bicycles 30% 0% on bicycles

MFN Price per

$130 bicycle: $104

RoOs applied to both

Country B RTAs: Country C
Highly protected: Open economy
 $100 x bicycle
Value of non-originating $80 x bicycle:
 all domestic materials on bicycles $40 imported
production should not exceed 40 %, $40 domestic
i.e. domestic content
must be 60% or more
 RTA Transparency Mechanism

 Provisions regarding the notification of RTAs are not new.

GATT Art. XXIV, the Enabling Clause and GATS Art. V contain such
provisions but:
 Provisions are vague with respect to timing and procedures
 Examination was not systematic for all RTAs
 Examination process could last several rounds and drag on for years

 Lack of transparency:
 Failure to comply with notification obligations
 Inadequate information provided by RTA parties (particularly statistics)

 Institutional deadlock:
 No effective WTO surveillance mechanism of RTAs
 Impossible to reach consensus in the CRTA on compatibility of RTAs with
legal provisions 53
 TM: Objectives and
characteristics
 Objectives
 Increase transparency on RTAs
 clarifies and strengthens the notification obligation of WTO Members

 New elements in the TM:

 Introduces concept of “Early Notification”
 Specifies timing for RTAs’ consideration
 Specifies the type of data to be provided by the Parties
 Foresees the preparation of a factual presentation by the WTO
Secretariat for all RTAs notified
 Creation of an RTA database
54
 TM: The steps

1 year

Obligation

Early Consideration Subsequent

announcement Notification
Process Reporting

• If negotiating an • When? and How ? • Data gathering • If changes

agreement • Factual • Implementation
• RTA signature Presentation (FP) reports
preparation
• Circulation FP
• Consideration in
CRTA or CTD
55
 Notification: how and when?

Parties to an RTA have the obligation to notify an agreement

 the latest, just after ratification

When? As soon as possible
 Before the application of preferences

 )
Legal Provision Responsible Body
Which Goods: GATT Article XXIV CRTA
Enabling Clause CTD
provision? Services: GATS Article V CRTA

What to Full text of the RTA, including annexes, protocols and

provide? Schedules plus data as specified in Annex to TM

56
Notification Form: WT/REG/16

NOTIFICATION OF REGIONAL TRADE AGREEMENT

1. Member(s) notifying:

2. Date of notification:

3. Notification pursuant to:

[ ] Article XXIV:7(a) of GATT 1994
[ ] Article V:7(a) of GATS
[ ] Paragraph 4(a) of the Enabling Clause

WT/REG/16 4. Parties to the Agreement:

5. Date of signature:

6. Date(s) of entry into Force:

7. Brief description of the Agreement:

8. Text and related schedules, annexes and protocols are:

[ ] submitted to the WTO Secretariat (electronic format)
[ ] available from the following official Internet link(s):

__________
57
TM: The Consideration Process

10 weeks/ 20* weeks

Depends, but in
(*RTAs developing
12 wks practice 8 wks
countries) 10 wks

Preparation
Data FP Meeting
Notification Factual
submission Circulation CRTA or CTD
Presentation

by the parties by WTO Secretariat

4 wks 3 days
Schedules, trade Draft sent Written
and tariff data, to Parties questions Q&R Doc.
RoO, etc. circulated
4 wks 6 wks

Comments Written
from Parties answers

58
 TM: The Consideration Process

 Factual presentation (FP):

 FP prepared by the Secretariat, under its own responsibility and in full
consultation with the Parties
 FP is to assist Members in their consideration of the RTA
 FP cannot contain any value judgement, nor be used as the basis for dispute
settlement

 Consideration of the RTA in the meeting

 Each notified RTA is considered in a single meeting of the CRTA or CTD.
 Any additional exchange of information takes place in a written form.
 All written material, as well as the minutes of the meeting are circulated in
all WTO official languages and published on the WTO website.

59
 Nairobi Ministerial Declaration
(2015)
We reaffirm the need to ensure that Regional Trade Agreements (RTAs)
remain complementary to, not a substitute for, the multilateral trading system.
In this regard, we instruct the Committee on Regional Trade Agreements
(CRTA) to discuss the systemic implications of RTAs for the multilateral trading
system and their relationship with WTO rules. With a view to enhancing
transparency in, and understanding of, RTAs and their effects, we agree to
work towards the transformation of the current provisional Transparency
Mechanism into a permanent mechanism in accordance with the General
Council Decision of 14 December 2006, without prejudice to questions related
to notification requirements

(para. 28)
60
 TM Achievements: Tracking
RTAs/PTAs
 The RTA database:

http://rtais.wto.org/

 The Preferential Trade Arrangements: PTA database

http://ptadb.wto.org/

61
Thank you