Bilateral free trade agreement a critical assement and WTO regulatory reform proposal

Legal Studies Research Paper Series Research Paper No 08-070 September 2008 BILATERAL FREE TRADE AGREEMENTS: A CRITICAL ASSESSMENT AND WTO REGULATORY REFORM PROPOSAL Ralph H Folsom This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/abstract=1262872 Electronic Electroniccopy copyavailable availableat: at:https://ssrn.com/abstract=1262872 http://ssrn.com/abstract=1262872 BILATERAL FREE TRADE AGREEMENTS: A CRITICAL ASSESSMENT AND WTO REGULATORY REFORM PROPOSAL Published by Prof Ralph H Folsom, © 2008 * At this writing, most-favored-nation (MFN) principles notwithstanding, every nation save Mongolia has entered into at least one bilateral or regional free trade agreement The European Union, for example, is so heavily engaged in bilateral deals that it has MFN trade relations with only seven countries Hundreds of bilaterals have been negotiated since the early 1990s The apparent failure of the Doha Round virtually guarantees their dominance of international trade law and policy This article reviews the history of bilateral and regional free trade agreements (“bilaterals”), failed attempts at their regulation under the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO), and critically assesses the significance of their proliferation for international trade law and policy Reform of WTO jurisdiction over bilaterals concentrated in the Dispute Settlement Understanding (DSU) is proposed Specifically, abandonment of all WTO regulation except for a Revised Transparency Mechanism (text attached) operating in conjunction with expanded DSU opportunities is suggested A word on nomenclature: This article utilizes the term “bilateral(s)” because it best characterizes the free trade agreements that are presently sweeping the seas Generally in * Professor of Law, USD Law School Prof Folsom thanks the University of San Diego for a Summer Research Grant in support of this publication Electronic Electroniccopy copyavailable availableat: at:https://ssrn.com/abstract=1262872 http://ssrn.com/abstract=1262872 GATT/WTO parlance, “regional trade agreements” (RTA) has been and continues to be employed Those words, in my opinion, are not the best descriptors of what is happening when, for example, China and Chile, Japan and Mexico, the United States and Oman, and the European Union and South Africa agree on free trade Why Bilaterals? A variety of factors help explain why bilaterals have become the leading edge of international trade law and policy Difficulties encountered in the Uruguay, “Seattle” and Doha Rounds of multilateral trade negotiations are certainly crucial GATT/WTO regulatory failures regarding bilaterals have also fueled this reality Yet these “negatives” not fully explain the feeding frenzy of bilaterals A range of attractions to bilaterals are also at work For example, bilaterals often extend to subject matters beyond WTO competence Foreign investment law is a prime example,1 and many bilaterals serve as investment magnets Government procurement, optional at the WTO level, is often included in bilaterals.2 Competition policy3 and labor and environmental matters absent from the WTO are sometimes covered in bilaterals.4 In addition, bilaterals can reach beyond the scope of existing WTO agreements Services is one “WTO-plus” area where this is clearly true.5 Intellectual property rights are also being “WTO-plussed” in bilateral free trade agreements.6 Whether this amounts to competitive trade liberalization or competitive trade imperialism has been provocatively explored by Prof Bhala.7 Further, bilaterals are politically and economically selective In other words they avoid not only global most-favored-nation principles, but also domestically “sensitive” areas of national politics and economics For example, Singapore’s absence of farm exports helped make Electronic Electroniccopy copyavailable availableat: at:https://ssrn.com/abstract=1262872 http://ssrn.com/abstract=1262872 it an ideal U.S and Japanese free trade partner The micro-sized economy of Chile contributed to its attraction as a free trade partner with Mexico, China, the European Union, the United States and others U.S free trade deals with Jordan, Bahrain and Oman fit economically in a similar fashion, not to mention national security objectives.8 Like it or not, the “spaghetti-bowl”9 maze of bilaterals is driven by powerful negative and positive forces It is not only the preferred trade medium of today, but very likely the future Already more than half of world trade is conducted under bilaterals.10 While international trade lawyers may celebrate full employment, it bears remembering that bilaterals are discriminatory They could render MFN the least favored status in world trade Such an outcome would be especially harmful to the world’s poorest nations, those with whom few WTO partners seek a bilateral agreement Most-Favored-Nation Freer Trade Principles When the United States and its allies emerged victorious after WWII, they faced a basic question What should be the international economic order in the post-war era? A return to trade protectionism, globally rampant in the 1930s, was unthinkable (unless you like economic depression) But what about widespread trade-inhibiting national laws, for example the U.S Smoot-Hawley Tariff Act of 1930?11 The answer came to be embodied in the General Agreement on Tariffs and Trade of 1947 (GATT 1947).12 Ironically this agreement was not intended to be more than a temporary stopgap pending creation of the broadly conceived International Trade Organization (ITO).13 When ratification of the ITO failed in the U.S Congress,14 GATT 1947 became by default the anchor of post-war international trade law Electronic copy available at: https://ssrn.com/abstract=1262872 GATT 1947 was never about free trade, merely freer trade This it achieved over decades through tariff-reducing multilateral trade negotiations (known as “negotiating rounds”)15 and ever an expanding membership.16 At its core, GATT 1947 and its successor GATT 1994 embrace the principle of general most-favored-nation (MFN) trading This principle is essentially one of nondiscrimination, that is to say a rejection of discriminatory tariff and trade preferences Article of the GATT (1947) and (1994) spells out the golden rules of MFN trading: With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed on the international transfer of payments for imports or exports, and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraphs and of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other contracting parties (emphasis added) GATT Article 24 The origins of Article 24 have long remained obscure Happily, Professor Kerry Chase has recently illuminated those origins, emphasizing that a secret Canada-US free trade agreement (never realized) explains much of its content.17 Primarily for this reason, Article 24 of the GATT (1947 and 1994) permits members to enter into “free trade area” and “customs union” agreements of a fixed or interim character, provided tariff compensation is given to nonparticipants in customs unions.18 This permission constitutes a major exception to nondiscriminatory MFN trade Instead, such agreements embody trade preferences which simultaneously create trade among their signatories and divert trade between those signatories and the rest of the world.19 These effects are easily evident when customs unions are created Electronic copy available at: https://ssrn.com/abstract=1262872 because such agreements contain common external tariff and trade law provisions.20 With free trade agreements, diversionary trade effects are usually not distinct because of the absence of a common tariff and trade wall against outsiders Trade diversion nonetheless occurs “Rules of origin” in free trade area treaties keep third-party imports from seeking the lowest tariff or highest quota state and then exploiting trade advantages within a free trade area Under typically complex rules of origin, free trade areas are “free” only for goods substantially originating therein This causes member state goods to be preferred over goods from other states, the essence of trade diversion.21 Article 24 of the GATT attempts to manage the internal trade-creating and external tradediverting effects of bilaterals Under its terms, free trade area and custom union proposals should be notified “promptly,”22 although most agreements have been notified after their conclusion.23 Once notified, bilaterals should run the gauntlet of formal review and report procedures during which recommendations are possible to bring them into conformity with Article 24.24 Prior to the WTO, GATT “working parties” conducted these procedures Since 1995, the WTO Committee on Regional Trade Agreements (CRTA) reviews Article 24 notifications Conformity recommendations might, for example, deal with Article 24 requirements for the elimination of internal tariffs and other restrictive regulations of commerce on “substantially all” products originating in a customs union or free trade area.25 Or they might concern Article 24 requirements that tariffs and other regulations of commerce not be “higher or more restrictive” than before creation of the free trade area or customs union.26 Whether the term “regulations of commerce” includes rules of origin is critically unclear.27 The broad purpose of Article 24, acknowledged therein, is to facilitate trade among the GATT/WTO parties and not to raise trade Electronic copy available at: https://ssrn.com/abstract=1262872 barriers.28 Early Regulatory Failure The inadequacy of Article 24 as a regulatory mechanism quickly became apparent This was perhaps most noticeable regarding the politically and economically significant customs union treaties of western Europe With the European Coal and Steel Community (1951) only two products were involved Clearly no case could be made for its compliance with the requirement of elimination of internal trade barriers on “substantially all” products Hence the GATT members, passing over Article 24's own waiver proviso for proposals leading to a customs union or a free trade area “in the sense of Article 24,”29 reverted to Article 25 That article allows a two-thirds vote by the contracting parties to waive any GATT obligation In reviewing the European Economic Community Treaty (1957), many “violations” of the letter and spirit of Article 24 were cited For example, the derivation of the EEC common external tariff by arithmetically averaging existing national tariffs was challenged as more restrictive of trade than previous arrangements Such averaging on a given product fails to take account of differing national import volumes If a product was faced originally with a lower than average national tariff and a larger than average national demand, the new average tariff is clearly more “restrictive” of imports than before Averaging in high tariffs of countries of low demand quite plausibly created more restrictions on third-party trade If so, the letter and spirit of Article 24 were breached.30 The economic association of Overseas Territories (mainly former French, Dutch, and Belgian colonies) with the EEC also raised considerable difficulty under Article 24 The Community argued that these “association” agreements were free trade areas in the long run, Electronic copy available at: https://ssrn.com/abstract=1262872 while GATT officials viewed them as rather open efforts at purely preferential tariff status.31 Similar problems arose later in GATT review of the multitude of “interim” EEC free trade area treaties with Mediterranean nations.32 In 1975, the openly preferential and discriminatory Lomé Convention negotiated between the European Community and forty-six African, Pacific and Caribbean nations (including many former colonies) challenged the interim character of Community “free trade areas” with developing states.33 Once again it was the GATT and not the European Community that gave way Despite these and other arguments, the 1957 EEC Treaty passed through GATT study and review committees without final resolution of its status under Article 24 Postponement of these issues became permanent GATT attempts through the lawyer-like conditions of Article 24 to maximize trade creation and minimize trade diversion must be seen in the context of European integration as generally inadequate Treaty terms became negotiable demands that were not accepted This regulatory failure is representative of 60 years of GATT/WTO practice As several notable commentators have observed, Article 24 standards for bilaterals are deceptively ambiguous, make little economic sense, and in application have proved a dismal experience “if not a fiasco.”34 Developing Nation Bilaterals Developing nations in Africa, the Caribbean, Central America, South America and Southeast Asia (among others) had free trade and customs union agreements in place as early as the 1960s.35 In 1979, under what is commonly called the Enabling Clause,36 the GATT parties decided to permit developing nations to enter into differential and more favorable bilateral, regional or global arrangements among themselves to reduce or eliminate tariffs and nontariff Electronic copy available at: https://ssrn.com/abstract=1262872 barriers applicable to trade in goods Like Article 24, the Enabling Clause constitutes an exception to MFN trade principles It has generally been construed to authorize third world free trade area and customs union agreements Whether the Enabling Clause was intended to take such agreements out of Article 24 and its requirements, or be construed in conjunction therewith, is unclear However, the creation of alternative notification and review procedures for Enabling Clause arrangements suggests Article 24 is inapplicable Notification to GATT of Enabling Clause arrangements is mandatory.37 Since 1995, the WTO Committee on Trade and Development (CTD) is the forum where such notifications are reviewed, but in practice not examined in depth.38 Enabling Clause arrangements should be designed to promote the trade of developing countries and not raise external trade barriers or undue trade difficulties.39 Consultations with individual GATT members experiencing such difficulties must be undertaken, and these consultations may be expanded to all GATT members if requested.40 Unlike GATT Article 24, neither compensation to nonparticipants nor formal reporting on the consistency with the Enabling Clause of developing nation arrangements is anticipated Despite these relaxed procedures, the Enabling Clause of 1979 did not trigger a rush of third world bilaterals.41 More recently, the ASEAN-China (2004), India-Sri Lanka (2002), and “revived” Economic Community of West African States (ECOWAS 2005) agreements illustrate notified but unexamined preferential arrangements sheltered by the Enabling Clause.42 Regulatory Reform: Interpreting Article 24 The early regulatory failure of Article 24 and the limited requirements of the Enabling Clause arguably created an incentive to reach free trade area and customs union agreements as a means to avoid MFN trade principles In the 1960s, 1970s and into the 1980s, a goodly number Electronic copy available at: https://ssrn.com/abstract=1262872 of bilaterals were established, especially in the developing world.43 Yet there was no avalanche of agreements, in part because of a steady stream of MFN successes in GATT negotiating rounds.44 The turning point came when major delays and perceptions of possible failure in the Uruguay Round (1986-1994) accelerated the creation of bilaterals, most visibly the Canada-U.S FTA of 1989 and NAFTA (1994) The emergence, also, of export-driven (not import substituting) developing economies, such as Mexico and Chile,45 also contributed to this acceleration The Uruguay Round, which created the World Trade Organization, presented an opportunity to come to grips with the regulatory failure of Article 24 and the implications of the Enabling Clause Agreement was reached in 1994 on an “Understanding on the Interpretation of Article 24,”46 which presently binds the roughly 150 member nations of the WTO This Interpretation reaffirms that free trade area and customs union agreements must satisfy the provisions of Article 24,47 clarifies the manner in which before and after evaluations of common external tariffs are to be undertaken,48 limits in most cases interim agreements to 10 years,49 and details Article 24 notification, report and recommendation duties and processes.50 Most importantly, the 1994 Understanding on Interpretation expressly permits invocation of standard WTO dispute settlement procedures (DSU) regarding any Article 24 matters.51 That said, the 1994 Understanding did not come to grips with the systemic ambiguities that led to Article 24's early and ongoing regulatory failure.52 Integrated Services’ Agreements DSU procedures may also be invoked since 1995 regarding “economic integration agreements” (EIAs) covering services under Article of the General Agreement on Trade in Electronic copy available at: https://ssrn.com/abstract=1262872 remedies in WTO Dispute Settlement is more likely to result in member state compliance with the law of bilaterals Greater compliance in turn may reduce the feeding frenzy, promote successful multilateral negotiations and minimize the loss to MFN principles 14 Electronic copy available at: https://ssrn.com/abstract=1262872 TRANSPARENCY MECHANISM FOR REGIONAL TRADE AGREEMENTS A Revised Proposal by Professor Ralph Folsom The General Council, Having regard to paragraph of Article IX of the Marrakesh Agreement Establishing the World Trade Organization ("WTO Agreement"); Conducting the functions of the Ministerial Conference in the interval between meetings pursuant to paragraph of Article IV of the WTO Agreement; Noting that trade agreements of a mutually preferential nature ("regional trade agreements" or "RTAs") have greatly increased in number and have become an important element in Members' trade policies and developmental strategies; Convinced that enhancing transparency in, and understanding of, RTAs and their effects is of systemic interest and will be of benefit to all Members; Having regard also to the transparency provisions of Article XXIV of GATT 1994, the Understanding on the Interpretation of Article XXIV of GATT 1994 ("GATT Understanding"), Article V of GATS and the 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries ("Enabling Clause"); Recognizing the resource and technical constraints of developing country Members; Recalling that in the negotiations pursued under the terms of the Doha Ministerial Declaration**, in accordance with paragraph 47 of that Declaration, agreements reached at an early stage may be implemented on a provisional basis; Decides: ** W T/MIN(01)/DEC/1 15 Electronic copy available at: https://ssrn.com/abstract=1262872 A Early Announcement Without prejudging the substance and the timing of the notification required under Article XXIV of the GATT 1994, Article V of the GATS or the Enabling Clause, nor affecting Members' rights and obligations under the WTO agreements in any way: (a) Members participating in new negotiations aimed at the conclusion of an RTA shall endeavour to so inform the WTO (b) Members parties to a newly signed RTA shall convey to the WTO, in so far as and when it is publicly available, information on the RTA, including its official name, scope and date of signature, any foreseen timetable for its entry into force or provisional application, relevant contact points and/or website addresses, and any other relevant unrestricted information The information referred to in paragraph above is to be forwarded to the WTO Secretariat, which will post it on the WTO website and will periodically provide Members with a synopsis of the communications received B Notification The required notification of an RTA by Members that are party to it shall take place as early as possible As a rule, it will occur no later than directly following the parties' ratification of the RTA or any party's decision on application of the relevant parts of an agreement, and before the application of preferential treatment between the parties In notifying their RTA, the parties shall specify under which provision(s) of the WTO agreements it is notified They will also provide the full text of the RTA (or those parts they have decided to apply) and any related schedules, annexes and protocols, in one of the WTO official languages; if available, these shall also be submitted in an electronically exploitable format Reference to related official Internet links shall also be supplied C Procedures to Enhance Transparency *** D Subsequent Notification and Reporting The required notification of changes affecting the implementation of an RTA, or the operation of an already implemented RTA, shall take place as soon as possible after the changes occur Changes to be notified include, inter alia, modifications to the preferential treatment between the parties and to the RTA's disciplines The parties shall provide a summary of the changes made, as well as any related texts, schedules, annexes and protocols, in one of the WTO official languages 16 Electronic copy available at: https://ssrn.com/abstract=1262872 and, if available, in electronically exploitable format.*** At the end of the RTA's implementation period, the parties shall submit to the WTO a short written report on the realization of the liberalization commitments in the RTA as originally notified Upon request, the relevant WTO body shall provide an adequate opportunity for an exchange of views on the communications submitted under paragraphs 14 and 15 The communications submitted under paragraphs 14 and 15 will be promptly made available on the WTO website and a synopsis will be periodically circulated by the WTO Secretariat to Members E Bodies Entrusted with the Implementation of the Mechanism *** F Technical Support for Developing Countries Upon request, the WTO Secretariat shall provide technical support to developing country Members, and especially least-developed countries, in the implementation of this Transparency Mechanism, in particular – but not limited to - with respect to the preparation of RTA-related data and other information to be submitted to the WTO Secretariat G Other Provisions 10 Any Member may, at any time, bring to the attention of the relevant WTO body information on any RTA that it considers ought to have been submitted to Members in the framework of this Transparency Mechanism 11 The WTO Secretariat shall establish and maintain an updated electronic database on individual RTAs This database shall include relevant tariff and trade-related information, and give access to all written material related to announced or notified RTAs available at the WTO The RTA database should be structured so as to be easily accessible to the public H Provisional Application of the Transparency Mechanism 12 This Decision shall apply, on a provisional basis, to all RTAs *** I Reappraisal of the Mechanism *** *** In their notification, Members may refer to official Internet links related to the agreement where the relevant information can be consulted in full, in one of the W TO official languages 17 Electronic copy available at: https://ssrn.com/abstract=1262872 J Presumption of Nonconformity (New) Any failure to fulfil the notification and reporting duties specified in this Transparency Mechanism shall create a rebuttable presumption that the RTA in question is not in conformity with WTO rules K Dispute Settlement (New) The WTO Dispute Settlement Understanding may be invoked with respect to any matters concerning GATT Article 24, GATS Article or the Enabling Clause, including failure to fulfil the notification or reporting duties specified in this Transparency Mechanism and the WTO Agreement on Rules of Origin (1994), Annex 2, Common Declaration with Respect to Preferential Rules of Origin 18 Electronic copy available at: https://ssrn.com/abstract=1262872 ANNEX Submission of Data by RTA Parties RTA parties shall not be expected to make available the information required below if the corresponding data has already been submitted to the Integrated Data Base (IDB),**** or has otherwise been provided to the Secretariat in an adequate format.***** For the goods aspects in RTAs, the parties shall submit the following data, at the tariff-line level:****** (a) (b) Tariff concessions under the agreement: (i) a full listing of each party's preferential duties applied in the year of entry into force of the agreement; and (ii) when the agreement is to be implemented by stages, a full listing of each party's preferential duties to be applied over the transition period MFN duty rates: (i) a full tariff listing of each RTA party's MFN duties applied on the year of entry into force of the agreement;******* and (ii) a full tariff listing of each RTA party's MFN duties applied on the year preceding the entry into force of the agreement ( c) Where applicable, other data (e.g., preferential margins, tariff-rate quotas, seasonal restrictions, special safeguards and, if available, ad valorem equivalents for non-ad valorem duties) (d) Product-specific preferential rules of origin as defined in the agreement (e) Import statistics, for the most recent three years preceding the notification **** Trade and tariff data submissions in the context of an RTA notification can subsequently be included in the IDB, provided that their key features are appropriate In this respect, see document G/MA/IDB/W /6 (dated 15 June 2000) for the Guidelines for Supplying PC IDB Submissions and documents G/MA/115 (dated 17 June 2002) and G/MA/115/Add.5 (dated 13 January 2005) for WTO Policy regarding the dissemination of IDB data ***** Data submissions can be furnished in PC database formats, spreadsheet formats, or text-delimited formats; the use of word-processing formats should be avoided, if possible ****** References to "tariff-line level" shall be understood to mean the detailed breakdown of the national customs nomenclature (HS codes with, for example, 8, 10 or more digits) It is crucial that all data elements supplied use the same national customs nomenclature or are associated with corresponding conversion tables ******* In the case of a customs union, the MFN applied common external tariff 19 Electronic copy available at: https://ssrn.com/abstract=1262872 for which they are available: (i) each party's imports from each of the other parties, in value; and (ii) each party's imports from the rest of the world, broken down by country of origin, in value For the services aspects in RTAs, the parties shall submit the following data, if available, for the three most recent years preceding the notification: trade or balance of payments statistics (by services sector/subsector and partner), gross domestic product data or production statistics (by services sector/subsector), and relevant statistics on foreign direct investment and on movement of natural persons (by country and, if possible, by services sector/subsector) For RTAs involving only developing countries, in particular when these comprise leastdeveloped countries, the data requirements specified above will take into account the technical constraints of the parties to the agreement 20 Electronic copy available at: https://ssrn.com/abstract=1262872 For example, virtually all U.S bilaterals cover foreign investment, including controversial investor-state claims’ arbitrations See R Folsom, NAFTA and Free Trade in the Americas, Chapter WTO coverage of foreign investment law is very narrow Compare the WTO Agreement on Trade-Related Investment Measures (TRIMs) (1994) Id Compare inclusion of procurement in U.S bilaterals with the WTO Agreement on Government Procurement (1994) See R Folsom, M Gordon and J A Spanogle, International Trade and Economics Relations (2004), Chapters and Notably the competition policy of the European Union, see R Folsom, Principles of European Union Law(2005), Chapter Id These areas were the subject of “side agreements” to NAFTA U.S bilaterals since NAFTA include coverage of labor and the environment See R Folsom, NAFTA and Free Trade in the Americas (2004), Chapters and 10 See “Services Liberalization in New Generation of Preferential Trade Agreements (PTAs): How Much Further Than the GATS?” (WTO Working Paper, 2006) See Bhala, “Competitive Liberalization, Competitive Imperialism, and Intellectual Property,” (2007) Liverpool Law Review 28:77 - 105 Id See Folsom, “Trading for National Security? United States Free Trade Agreement in the Middle East and North Africa,” San Diego Legal Studies Paper No 07-113, http://SSRN.com/abstract=1013372 (Sept 2007) See J Bhogwati, A Stream of Windows: Unsettling Reflections on Trade, Immigration and Democracy (1998) at 290-91 10 See “Lamy Welcomes WTO Agreement on Regional Trade Agreements,” WTO 2006 News Items (July 10, 2006) 11 Ch 497, 46 Stat 590 (1930) 12 55 U.N.T.S 194 13 Protocol of Provisional Application to the GATT, Oct 30, 1947, 61 Stat pts 5, 6, TIAS No 1700, 55 U.N.T.S 308 14 See J H Jackson, World Trade and the Law of GATT (1969) at § 2.5 15 Geneva Round (1947), Annecy Round (1948), Torquay Round (1950), Geneva Round (1956), “Dillon Round (1960-61), “Kennedy Round” (1964-67), Tokyo Round (1973-79), Uruguay Round (1986-1994) 21 Electronic copy available at: https://ssrn.com/abstract=1262872 16 The GATT 1947 had 22 signatories By 1960, there were 45 contracting parties, by 1973 a total of 99 parties, and by 1986 approximately 120 signatories 17 Chase, “Multilateralism compromised: the mysterious origins of GATT Article XXIV,” (2006) World Trade Rev 18 GATT Article 24(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 the 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; (b) with respect to a free-trade area, or an interim agreement leading to the formation of a free-trade area, the duties and other regulations of commerce maintained in each of the constituent territories and applicable at the formation of such free-trade area or the adoption of such interim agreement to the trade of contracting parties not included in such area or not parties to such agreement shall not be higher or more restrictive than the corresponding duties and other regulations of commerce existing in the same constituent territories prior to the formation of the free-trade area, or interim agreement, as the case may be; and (c) any interim agreement referred to in sub paragraphs (a) and (b) shall include a plan and schedule for the formation of such a customs union or of such a free-trade area within a reasonable length of time GATT Article 24(6): If, in fulfilling the requirements of sub-paragraph 5(1), a contracting party proposes to increase any rate of duty inconsistently with the provisions of Article II, the procedure set forth in Article XXVIII shall apply In providing for compensatory adjustment, due account shall be taken of the compensation already afforded by the reductions brought about in the corresponding duty of the other constituents of the union 22 Electronic copy available at: https://ssrn.com/abstract=1262872 GATT Article 24(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 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; (b) A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (except, where necessary, those permitted under Article XI, XII, XIII, XIV, XV and XX) are eliminated on substantially all the trade between the constituent territories in products originating in such territories 19 See generally, The World Bank, Trade, Regionalism and Development (2005) 20 See generally, J Viner, The Customs Union Issue (1950) 21 See generally, R Folsom, Principles of European Union Law (2005) at § 1.4 22 GATT Article 24(7)(a) 23 See “Regional Trade Agreements Notified to the GATT/WTO” at www.wto.org 24 GATT Article 24(7) 25 GATT Article 24(8) See note 18, supra “Where necessary,” exceptions permitted by GATT Articles 11, 12, 13, 14, 15 and 20 apply 26 GATT Article 24(5) For customs unions, but not free trade areas, the test is whether “on the whole” such duties and regulations are higher or more restrictive See note 18, supra 27 See Rivas, “Do Rules of Origin in Free Trade Agreements Comply with Article XXIV GATT,” Chapter in L Bartels and F Ortino (eds), Regional Trade Agreements and the WTO 23 Electronic copy available at: https://ssrn.com/abstract=1262872 Legal Systems (2006) 28 GATT Article 24(4) 29 GATT Article 24(10) 30 See R Folsom, Principles of European Union Law (2005) at § 1.4 31 Id 32 Id at § 6.9 33 Id at § 6.10 This challenge is being revisited as the EU-ACP “Cotonou Agreement” is implemented See J Mathis, Regional Trade Agreements in the GATT/WTO (2002), Chapter 13 and Desta, “EC-ACP Economic Partnership Agreements and WTO Compatibility: An Experiment in North-South Inter-Regional Agreements,” 43 Common Mkt.L.Rev 1343 (2006) 34 Dam, The GATT (1970) at 275-76 See Bhala, “The Forgotten Mercy: GATT Article XXIV:11 and Trade on the Subcontinent,” 2002 N.Z Law Rev 301 (2002); Lamy Calls for Integration of Regional, Bilateral Trade Deals Into WTO System, 24 BNA ITR (9-13-07) at page 1274, suggesting creation of “best practices” WTO guidelines 35 For example, the Economic and Customs Union of Central Africa (1966), the East African Community (1967), the Economic Community of West African States (1975), the Caribbean Community (1973), the Central American Common Market (1958), the Latin American Free Trade Assn (1961), the Andean Community (1969), and ASEAN (1967) See R Folsom, M Gordon and J.A Spanogle, International Trade and Economic Relations (2004), Chapter 36 GATT Decision of November 28, 1979 (L/4903) (hereafter “Enabling Clause”) 37 Enabling Clause Article 4(a) 38 See “Work of the Committee on Regional Trade Agreements” at www.wto.org 39 Id Article 40 Id Article 4(b) 41 LAFTA became the Latin American Integration Assn in 1981 The (Persian) Gulf Cooperation Council was created in 1981 The OAS-based African Economic Community was established in 1991 along with MERCOSUR (Brazil, Argentina, Paraguay and Uruguay) See R Folsom, M Gordon and J.A Spanogle, International Trade and Economic Relations (2004) Chapter By special arrangement, MERCOSUR was examined under the Enabling Clause and GATT Article 24 WT/COMTD/5/Rev (Oct 25, 1995) 24 Electronic copy available at: https://ssrn.com/abstract=1262872 42 See “Regional Trade Agreements Notified to the GATT/WTO and in Force,” at www.wto.org 43 See R Folsom, M Gordon and J.A Spanogle, International Trade and Economic Relations (2004), Chapter 44 See note 15, supra 45 Chile has free trade agreements with China, Korea, Costa Rica, El Salvador, Canada, Mexico, the United States, and the European Union among others Mexico has free trade agreements with Japan, the European Union, Costa Rica, Guatemala, Honduras, Nicaragua, Colombia, Peru and Uruguay, among others See R Folsom, NAFTA and Free Trade in the Americas (2004), Chapters and 11 46 Hereafter “Article 24 Understanding” 47 Article 24 Understanding, Article 48 Id., Article 49 Id., Article 50 Id., Articles 7-11 51 Id., Article 12 See Turkey – Textiles, WT/DS34/AB/R (Nov 19, 1999) (Turkey’s invocation of Article 24 customs union “defense” to Article 11 and 13 GATT quota violations rejected by Appellate Body; Turkey bears burden of proof of compliance with Article 24); Canada – Certain Measures Affecting the Automotive Industry, WT/DS 139/R, WT/DS 1442/R (June 19, 2000) (Article 24 defense rejected by WTO Panel) See generally, Hafez, “Weak Discipline: GATT Article XXIV and the Emerging WTO Jurisprudence on RTAs,” 78 North Dak.L.Rev 879 (2003) 52 See text at note 29, supra 53 GATS Article 5(1)(a) 54 Id., Article 5(1)(b) 55 Id., Article 5(4) 56 GATS Article 5(3) 57 GATS Article 5(5) 58 See “Regional Trade Agreements Notified to the GATT/WTO and in Force,” at www.wto.org 25 Electronic copy available at: https://ssrn.com/abstract=1262872 59 See “Regional Trade Agreements Notified to the GATT/WTO and Force” and “Regionalism: Friends or Rivals?” (Understanding the WTO), at www.wto.org 60 See “WTO Synopsis of ‘Systemic’ Issues Related to Regional Trade Agreements,” WT/REG/W/37 (March 2, 2000); M Godel and J Gage (eds), Multilateralism and Bilateralism after Cancun: Challenges and Opportunities of Regionalism (2004) 61 Id 62 See WTO Analytical Index – Guide to WTO Law and Practice: GATT (1994), Article 24 63 Id 64 See “Lamy Welcomes WTO Agreement on Regional Trade Agreements,” WTO 2006 News Items (July 10, 2006) 65 Transparency Mechanism for Regional Trade Agreements (2006), Part A and Annex (Submission of Data by RTA Parties) 66 Id., Article 67 Id., Part A 68 Id., Article 69 WTO Agreement on Rules of Origin (1994), Annex 2, Common Declaration with Respect to Preferential Rules of Origin: Recognizing that some Members apply preferential rules of origin, distinct from non-preferential rules of origin, the Members hereby agree as follows For the purposes of this Common Declaration, preferential rules of origin shall be defined as those laws, regulations and administrative determinations of general application applied by any Member to determine whether goods qualify for preferential treatment under contractual or autonomous trade regimes leading to the granting of tariff preferences going beyond the application of paragraph of Article I of GATT 1994 The Members agree to ensure that: (a) when they issue administrative determinations of general application, the requirements to be fulfilled are clearly defined In particular: (i) in cases where the criterion of change of tariff classification is applied, such a preferential rule of origin, and any exceptions to the rule, must clearly specify the subheadings or headings within the tariff 26 Electronic copy available at: https://ssrn.com/abstract=1262872 nomenclature that are addressed by the rule; (ii) in cases where the ad valorem percentage criterion is applied, the method for calculating this percentage shall also be indicated in the preferential rules of origin; (iii) in cases where the criterion of manufacturing or processing operation is prescribed, the operation that confers preferential origin shall be precisely specified; (b) their preferential rules of origin are based on a positive standard Preferential rules of origin that state what does not confer preferential origin (negative standard) are permissible as part of a clarification of a positive standard or in individual cases where a positive determination of preferential origin is not necessary; (c) their laws, regulations, judicial decisions and administrative rulings of general application relating to preferential rules of origin are published as if they were subject to, and in accordance with, the provisions of paragraph of Article X of GATT 1994; (d) upon request of an exporter, importer or any person with a justifiable cause, assessments of the preferential origin they would accord to a good are issued as soon as possible but no later than 150 days after a request for such an assessment provided that all necessary elements have been submitted Requests for such assessments shall be accepted before trade in the good concerned begins and may be accepted at any later point in time Such assessments shall remain valid for three years provided that the facts and conditions, including the preferential rules of origin, under which they have been made remain comparable Provided that the parties concerned are informed in advance, such assessments will no longer be valid when a decision contrary to the assessment is made in a review as referred to in subparagraph (f) Such assessments shall be made publicly available subject to the provisions of subparagraph (g); (e) when introducing changes to their preferential rules of origin or new preferential rules of origin, they shall not apply such changes retroactively as defined in, and without prejudice to, their laws or regulations; (f) any administrative action which they take in relation to the determination of preferential origin is reviewable promptly by judicial, arbitral or administrative tribunals or procedures, independent of the authority issuing the determination, which can effect the modification or reversal of the determination; 27 Electronic copy available at: https://ssrn.com/abstract=1262872 (g) all information that is by nature confidential or that is provided on a confidential basis for the purpose of the application of preferential rules of origin is treated as strictly confidential by the authorities concerned, which shall not disclose it without the specific permission of the person or government providing such information, except to the extent that it may be required to be disclosed in the context of judicial proceedings Members agree to provide to the Secretariat promptly their preferential rules of origin, including a listing of the preferential arrangements to which they apply, judicial decisions, and administrative rulings of general application relating to their preferential rules of origin in effect on the date of entry into force of the WTO Agreement for the Member concerned Furthermore, Members agree to provide any modifications to their preferential rules of origin or new preferential rules of origin as soon as possible to the Secretariat Lists of information received and available with the Secretariat shall be circulated to the Members by the Secretariat 70 Id., Article 71 Id., Article 72 Id., See www.wto.org/english/tratop_e/region_e/factual_abstracts_e.htm 73 Id., Article 10 74 Id., Articles 12 and 13 75 Id., Article 11 76 See Davey, “The WTO Dispute Settlement System: The First Ten Years” (2005) J.Int’l Econ.L 17 and R Folsom, M Gordon and J.A Spanogle, International Trade and Economic Relations (2004), Chapter 77 See note 51, supra See also WTO Appellate Body rejection of Article 24 defenses to exclusion of bilateral partners from international trade safeguards (escape clause proceedings), e.g., U.S – Safeguard Measures on Imports of Wheat Gluten from EC, WT/DS166/AB/R (Dec 22, 2000) 78 Id 79 Picker, “Regional Trade Agreements v the WTO: A Proposal for Reform of Article XXIV to Counter This Institutional Threat,” 26 U.Pa.J.Int’l Econ.L 267 (2005) Prof Picker is also concerned about how bilaterals drain states’ enthusiasm for multilateral trade negotiations 28 Electronic copy available at: https://ssrn.com/abstract=1262872 ... database on individual RTAs This database shall include relevant tariff and trade- related information, and give access to all written material related to announced or notified RTAs available at... Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) , and critically assesses the significance of their proliferation for international trade law and policy Reform of WTO jurisdiction... international trade law and policy This article reviews the history of bilateral and regional free trade agreements (“bilaterals”), failed attempts at their regulation under the General Agreement